Santander Bank Polska SA

WSE:SPL

Earnings Call Transcript 2021-Q4

[Agnieszka Dowzycka, executive]

It's 11, we can start. My name is Agnieszka Dowzycka. I'm Head of Investor Relations in Santander Bank Polska S.A. I would like to welcome you at the presentation of financial results, preliminary non-audited financial results for 2021.

Today's presentation will be given our CEO, Michal Gajewski; Maciej Reluga, the CFO, who's present with us; as well as Wojciech Skalski, who is in charge of the financial accounting area.

President, over to you in a minute. But let me just tell you that you can send your question to my e-mail address. Or if you use the audio webcast to the link, that leads to the question site. CEO, over to you.

[Michal Gajewski, executive]

Thank you, Agnieszka. Good morning, once again. Let me welcome you at the summary of our non-audited financial results for 2021.

From the point of view of the management board, we can say that our last year was really good in terms of core banking business. Of course, the pandemic impacted our performance as a group, though to a lesser extent than the last year.

We responded to the development on the market. Of course, there were also some sector-wide change. And we, of course, took relevant actions in that case. We hope that upcoming months will fuel business growth and that the credit volumes will gain the momentum that the demand for loans will be higher than last year.

Now let me move to our performance. Let's start with Slide #8, numbers of clients. We service more than 7 million clients, 5.4 million of which in Santander Bank Polska. Together with consumer, we have more than 3.2 million digital clients, which is a growth by 10% year-on-year. When it comes to active mobile users, we have 20% more of these clients because we have nearly 2.4 million of such clients now.

Deposits. The deposit portfolio was higher than PLN 185 billion, increasing 8% year-on-year. Gross loans increased by 4%, up to PLN 154 billion. Assets grew by 7%, up to PLN 245 billion, and customer funds increased by 8% to PLN 203 billion.

Slide #9. Next, we briefly comment on our performance across 2021 first. The group earned a net profit also PLN 1.1 billion. And that -- the net profit increased 7%. Having stripped off nonrecurring items, this is growth by 36%. Any details when it comes to the comparability of data is available in the report and in the presentation.

Total income at the end of December was PLN 9 billion, increasing by 7%. Net interest income, PLN 5.9 billion, increasing by 1%. The fee income nearly PLN 2.5 billion, growing by 16% year-on-year.

Cost of credit risk, PLN 1.1 billion, decreasing by 36% compared to the last year. Costs, overall, were driven by provisions for legal risk attached to FX mortgage loan and increased by 22% year-on-year. I will tell more you -- I will tell you more about it later on.

Of course, I will also discuss in more detail the performance in quarter 4 later, but now let me highlight the key items. In quarter 4 alone, the group earned a net profit of PLN 193 million. In that quarter, we also raised provisions for legal risks attached to FX mortgage loans of PLN 561 million, and we informed the market about that in our current report.

Net interest income, PLN 1.7 billion, increasing by 20% compared to quarter 3. And of course, that was driven by interest rate hikes. Net fee income increased by 1% compared to the previous excellent quarter, and it stood at PLN 641 million. Corporate income, PLN 2.5 billion, increasing by 13% compared to quarter 3.

Coming back to our annual performance ROE, 4.7%. On a comparative basis, 9.3%. Let me remind you that we have this significant capital surplus of PLN 10 billion roughly. That impacts up ratio. Our Tier 1 at the end of December was 16.63%; TCR, 18.58%. These ratios reduced as compared to what we saw at the end of quarter 3, but that was driven by changes in the valuation of our own fund driven by changed mark-to-market of instruments, partnered of -- by growth in risk-weighted assets as a result of lending growth. So these 2 elements impacted the reduction in our capital ratios both on the consolidated and stand-alone basis by 1.8 and 2.4 percentage points, respectively.

Okay. Let us move on. Despite that start, we still have a very strong capital position and capital surplus, so we can be certain as to our future sales operations.

Let us move now to Slide #11. A little bit more about clients. 3 million active clients in digital channels, 2.7 million of these kinds of retail ones SME. Digital clients increased by 7%. And for corporate companies, that was the growth by 4%. Also, the number of mobile application users is growing. In retail segment, this is the growth by 18%. And also, we have growth in other segments.

When it comes into the number of transactions in the mobile banking, we had more than 160 million transactions in retail and 13.6 million transactions in the SME segment, and this is maybe 50% more than last year in both segments.

On Slide 12 and 13, we present information about our new products and services introduced in quarter 4 and about our educational activity supported by our bank. So as you know, we enabled BLIK contactless payment solution and ECO cash flow, where we reimburse clients for the fees if they allocate funds from the loan for the assembly or purchase of a green product. We also supported our SME clients in digital transformation. We conducted webinars together with Google. We have cybersecurity campaign, and we have some special offers supporting online shops.

We actively supported large corporations. We, for example, streamlined the lending process. We introduced pre-limits and made some solutions for iBiznes24 like biometrics in mobile signature and some solutions for managing standing orders.

Now let's move on to what happened in the business lag in the sales. Let's start with the retail, that's Slide #14. About mortgages, we had a very dynamic quarter. Throughout the entire year, we sold mortgage loans worth of PLN 9.6 billion in quarter 4 alone, that was PLN 3.2 billion. As compared to quarter 4 2020, that was 1.5x mortgages sold. And quarter-on-quarter that's 13% growth. December 2021 was record high because we sold almost PLN 1.2 billion worth of mortgage loans, and that was the best monthly result in history of our bank and the best result on the market in December.

Now cash flows. Throughout the year, we sold PLN 7.4 billion worth of cash flows. In quarter 4 alone, that was over PLN 2 billion. And so far, that was sales peak since quarter 2 2020. With that level of sales in quarter 4, we are very close to our pre-pandemic volumes. And we hope that soon, we will reach those levels again. On a year-on-year basis, that's a growth by 49% and 3% growth quarter-on-quarter.

And please note that we increased sales by our remote channels in 2021. That sales through remote exceeded 44%. We sold PLN 1.1 billion worth of net investment fund. And PFI assets at the end of the quarter 4, represented almost PLN 18 billion.

In SME segment, we achieved excellent performance in the leasing lag. In quarter 4, the sales grew by 36% as compared to quarter 4 2020. And that leasing sales was PLN 978 million. Quarter-on-quarter, that's 10% growth. And year-on-year growth of leasing sales is 36% and, in figures, that's PLN 3.6 billion.

In quarter 4, also the sale of credit facilities to SME segment remained similarly high as in previous quarter. In the entire 2021, the growth of SME loans was 7%, and the sales was worth PLN 5 billion.

In the business banking, the loans grew 2% year-on-year, and the sales of credit limits grew by 32% year-on-year. We had excellent results in our services to exporters. The turnover on the FX platform grew by 38% year-on-year, and the use of trade finance limits grew by 25%. And also, our transactional banking fees grew by 38% year-on-year.

In the corporate and investment banking, we noted -- witnessed a growth of income on the capital market, and we also increased income from mergers and acquisition advisory. We also support a [indiscernible] transformation by financing photovoltaic and [ wind farms ].

And now to Slide 16, where we present gross loans. In Santander Bank Polska, [indiscernible]. And in Santander Consumer Bank, the portfolio shrank by 3% year-on-year. So in effect, in total, on the consolidated basis, we have 4% growth year-on-year up to over PLN 154 billion.

In the retail and SME segment, the sales were presented before. When it comes to large corporations grew 10% year-on-year. And that's one of the [indiscernible] based results in [ retail ]. And [indiscernible] [ demand ] for those short- and long-term loans, especially for large corporations, will continue to grow.

The leasing portfolio, excellent performance. The portfolio grew year-on-year to almost PLN 12 billion. [indiscernible] company recorded growth of turnover. They grew by 18% year-on-year, and its portfolio increased by 23% to PLN 7.6 billion.

Our macro outlook assumes that in terms of total loans, 2022 will bring the growth of almost 7.5%, including 2-digit growth by -- for enterprises and by 5% for individual clients. Our plans are very ambitious. We plan to outpace the market, and we hope that demand for loans will grow.

Let us move to Slide #17, deposits. We can see the growth by 8% year-on-year. At the end of December, that was more than PLN 185 billion. Retail and business deposits grew by 8% year-on-year. On a quarterly basis, they grew by 4% and 5%, respectively. When we compare year-to-year, the deposits increased by nearly PLN 14 billion.

We can see, first of all, the growth in saving accounts and in current accounts. Yet, this was [ paralleled ] by the decline in term deposits.

The offers and investment funds and our PFI increased by 9% year-on-year.

Now the profit and loss. Net interest margin and net interest income. In quarter 4 alone, the net interest income was PLN 1.7 billion and increased 23% year-on-year and 20% as compared to quarter 3. The annualized net interest margin increased by 33 basis points at the end of December up to 3.07%. And there were a few reasons for that.

First of all, the growth in interest rates, the low interest expense on deposits, the fact that we accelerated the sales of cash, mortgage and corporate loans. Another reason was the growth on yields on the securities. In upcoming quarters, we expect further improvement in NIM.

Looking at 2022, that the market expects further interest rate hikes. After the recent change, we published a current report in which we quoted the impact on net interest income of those recent changes, and these are major changes because it's from PLN 1.2 billion to PLN 1.33 billion for the bank. For Santander Consumer, it's from PLN 110 million to PLN 120 million. So this is a really huge impact.

Slide #19, net fee and commission and income. So we can actually brag about that a little bit because it is nearly PLN 2.5 billion, growing by 16% year-on-year. This was a result of growth in the business as well as changes that we made to our schedule of fees and charges already in December 2020.

In quarter 3 fee, the fees stood at PLN 641 million, growing by 1% on quarter 3, which was a really good one. And as you can see, we -- you can see that the growth was recorded under all lines, both in retail and in business banking.

If we look at quarter 4 alone, first of all, we can see the growth in comp fees, distribution fees and asset management fees.

Slide #20, income. Total income, PLN 9.2 billion, growing by 7% year-on-year and 14% quarter-on-quarter. Of course, the net fee income increased by 16% year-on-year. We also posted income from dividends, and that was PLN 113 million in 2021, much better than in 2020 when it was PLN 23 million. Total income in quarter 4 was PLN 2.6 billion, growing by 14% compared to quarter 3.

Operating expenses, Slide #21. Let me start with staff costs. They increased by 17%. This was driven, on the one hand, by the fact that our restructuring provision was created in Santander Consumer Bank. But another reason was the growth in pay in the bank that impacted the entire quarter 4. We also topped up the bonus accruals for 2021.

Administrative expenses increased as well because we had bigger business activity, but also that was a result of inflation and the pressure on costs in certain areas of operations, such as buildings, maintenance or third-party services. So as a result, the administrative expenses increased by 9% quarter-on-quarter.

Of course, the biggest impact was by -- was made by provisions for legal risk. And in quarter 4, we created these provisions in the amount of PLN 504 million -- PLN 559 million (sic) [ PLN 550 million ] on the consolidated basis. The provisions line was also impacted by FX differences, which impacted that by PLN 57 million. All in all, the total impact on these factors and other operating expenses was PLN 611 million. Of course, we do not change our approach to costs. We still drive to be cost-efficient.

Let's move on to the next slide, 22, which presents provisions. On a consolidated basis, last year, loan loss provisions were PLN 1.124 billion, and that shrank by 36% year-on-year. That change resulted from the fact that situations of our clients stabilized, and credit portfolio grew. And as you know, we also resigned from keeping the management provision for COVID-related risk above the figures deriving from our risk model. And -- but we told about that in previous quarters. At that time, we also spoke about a partial inclusion of the impact of COVID-related adjustments on the model parameters.

Last year, we topped up some single provisions for nonperforming credit exposures that happened in quarter 1 and repeated in quarter 4. Last year, the net balance of provisions was impacted by the sale of nonperforming loans in our bank and in Santander Consumer Bank, in total worth PLN 1.407 billion. So total gross profit on the sales of this portfolio was PLN 118 million. To compare, in 2020, we sold receivables worth of PLN 1 billion, and that brought us PLN 30 million of gross profit.

In quarter 4 alone, the total net balance of provisions on the consolidated basis was high by 22% as compared to the quarter 3 and was PLN 274 million. Why that figure? Well, in the retail portfolio, we had a stable share of credit exposures with some payment arrears, and there was a low number of entries to the NPL portfolio. In the SME portfolio, we had a stable level of past due payments. And in the corporate portfolio, the net balance of provisions for expected credit losses resulted mostly from the higher top-ups in the property segment and in the CIB segment by PLN 20 million and PLN 30 million growth, respectively.

At the same time, we know that there are few entries to the nonperforming portfolio. And in quarter 4, we recorded significant repayments in the CIB segment. In quarter 4 last year, as I said, our group sold the portfolio of nonperforming credit receivables in the retail and the business segments. In total, the impact on the net balance of provisions was around PLN 444 -- [ PLN 41 million ] in principle.

The NPL coverage ratio remained at the safe level of 60.4%, and NPL after quarter 4 was almost 5%. And obviously, we keep monitoring the impact of the growing interest rate environment, and we also monitor all the cases covered by the expiring financial shield programs related to COVID.

Now let's move on to taxes and regulatory costs. They are very high. After 4 quarters, regulatory costs, so those including BFG, KNF and national depository of securities, they totaled PLN 294 million. And in quarter 4 alone, the costs grew by PLN 34 million.

Banking tax charge was PLN 614 million. In quarter 4 alone, the growth of the banking tax charge was PLN 164 million in quarter 4. So the total income tax charge was over PLN 1 billion in quarter 4 alone. That was a growth by PLN 435 million.

So wrapping up the entire year, I'd say -- I can say that, overall, we feel it was a good year despite numerous challenges.

We gained net profit of PLN 1.112 billion, that was growth 7% year-on-year. Net interest income, we are very proud of that. We received PLN 5.9 billion. And net fee income, PLN 2.5 billion. That's growth 16% year-on-year. So I can say that we continue to build our business with great determination, and we look forward to increasing our momentum, especially in the credit area. I hope that our activity will benefit from that.

So thank you very much for listening to my presentation. Now you're welcome to ask your questions.

[Agnieszka Dowzycka, executive]

Now we already received a number of questions. Let me start. I will try to put those questions in group. There is a number of questions referring to net interest income with the relevant breakdown between Santander Bank Polska and consumer.

They asked if [ the growth ] in the net interest income actually implies that the current estimate of the interest rate impact has been too conservative and could be revised upwards.

[Unknown Executive]

Well, when we are showing our estimates, it's not -- that's not what we are actually -- what we are going to do, but this is based on specific assumptions. And of course, we assume the stable balance sheet. But because the balance sheet is not stable and we could see that the assets were growing quite well, we can say that this assumption was conservative because the whole new production that is a new rate brings us a better result and a better impact on net interest income.

The other assumption behind the stable balance sheet is that we are adopting some repricing of deposits to prevent the outflow of these deposits because we want to keep a stable balance sheet. Of course, it's theoretical because deposits keep actually outflowing. And in quarter 4, we can see that the repricing of deposits across the market will really moderate. So the assumptions behind the stable balance sheet was conservative. But the question is how -- the question is whether they could continue to be conservative going further.

And let me note that we want to grow quicker than the market so the balance sheet will not be stable. And when it comes to the changes in deposit prices, we want to see what the market will tell us, how the interest rates will be growing. Our assumption is that, of course, we watch the market and competitors. And our objective is to have -- continue to have a good investment saving proposition for all our customers across all segments. So I think that this will be -- it's difficult to say what the market is going to be in a 9- or 12-month period.

When it comes to the differences between Santander Bank Polska and Santander Consumer Bank, we should start with volumes. We can see the growth in volumes in the bank, not necessarily in the consumer. Quarter 4 was quite difficult, so they did not have the effect of the big volumes of new assets.

On the liability side, we also know that the market -- well, the deposit side in Santander Consumer Bank is totally different than in Santander Bank Polska. So the changes and dependence on the market and consumer is much bigger, and now I'm talking about the wholesale market.

In this context, there were also quite a few questions about the mix of the portfolio and the time needed for the pricing of the portfolio. Let me share with you some statistics, which part of the portfolio is based on the fixed and floating rate.

[Agnieszka Dowzycka, executive]

There was also a detailed question about mortgages. I don't have the data at hand here, but maybe what I will tell you will give you an insight into the key things.

Now first, splitting the balance sheet but excluding bonds. About 50% of bonds are sold in bonds and the rest are fixed rate bonds.

And referring to one more question that emerged, the effects of the bond repricing and its implications for capital. Well, the growth in the bond portfolio and this share of fixed rate bond portfolio, plus the fact that the major part of that portfolio is in how to collect and sell [ model ] than -- this impacts all of that.

But coming back, well, so for bonds, it's 30-70. For the rest of the portfolio, we can say that the fixed rate portfolio is really small, just a few percent. While the vast majority of the portfolio, more than 90%, 95% roughly. It's at a close increase.

And looking at the floating rate. Within this floating rate, we should really check the [ LIBOR ] tenors under the pricing then. More than 50% of the floating rate is 3 months of [ LIBOR ]. More than 30% is based on shorter tenors and 3 months, and the longer tenors account only for a few percent of the whole portfolio. So we can see that the repricing will be quite quick.

So I think that -- saying that, I addressed already a couple of questions.

[indiscernible] also a question about the settlement for Swiss franc borrowers. Here, we are all the time at the stage of testing solutions, both those proposed by KNF and our own in-house ones. We have not taken a final decision. We are tracking the market. We keep talking to our customers about it. We are getting the reaction to different proposals, the conversions to zloty and so on. Of course, an important element here is what the EU Court of Justice will tell in adjustments on the reimbursement of the cost of capital.

So given all that and the fact that there is no decision on the common settlement program, well, I think that I mentioned the staff costs in the presentation. So that refers to other questions. I think that the other questions refer to a couple of things. FX differences, that was already explained. Well, of course, legal provisions are higher, and this is the effect of FX differences, roughly PLN 60 million, and this is actually [ vesting ] other lines because that's hedged, and there are some more one-off factors that emerged. Nearly PLN 55 million is from the adjustment of rental costs. There is also a few million driven by changes in other assets. So FX differences, plus these 2 adjustments actually explain the difference of PLN 100 million.

The question is what the bank expects when it comes to the amount for different types of loans. We think that loans, overall, will grow by 7.5% in -- for individual clients, 5% for businesses. This was going to be a 2-digit growth, and we want to grow quicker than the market here.

Can you share your thoughts on the sensitivity of the cost of risk and the higher interest rate environment?

[Michal Gajewski, executive]

As Maciej said -- well, maybe let me answer that. Well, the same questions were asked the quarter before, and we told you that we will come back to that. We actually estimated the impact on higher interest rates on what the market is now pricing in, but it's a 4%. And we combine that with the effect of higher cost of maintenance, which are especially important for businesses, what I mean are higher energy and gas prices. So taking in the account all those factors, we are concluding that the cost of credit risk in 2022 might be similar to what we saw in 2021.

As a result of that exercise, we identified the most vulnerable clients, and we start talking to them, and we try to minimize the risk of the situation deteriorating. So when we are talking about the cost of credit risk, a similar level is in 2020, we already take into account all those effects, and this might be estimated at PLN 100 million. We will not be wrong if we split that 50-50 between the result of higher costs and higher interest rates. But for high inflation and a higher rate, most likely, the cost of credit risk in 2022 would be lower than in '21.

And as the CFO said a minute ago, in '21, we had a few big top-ups for the existing NPLs. And that took place in quarter 1 and in quarter 4. And so we were topping up those provisions. And of course, there might be a question, what's next? Is the interest rate increase not to 4% by 2 cycles, 6%?

It is difficult to answer because the biggest sensitivities would refer to mortgage loans, but we know that the mortgage loans are those which are paid back quite well because clients reduce other expenses and pay back these loans.

And the question is, what should be the assumption on the growth in remuneration that will neutralize the higher interest rates impact? And this is difficult really to make such estimates because we haven't seen such developments for a long time.

[Agnieszka Dowzycka, executive]

Okay. That's all about the cost of risk. There were a few questions about that, but I think that this addresses them.

I will now -- well, share of mortgage loans on fixed rate. The share in the balance sheet, maybe I'll talk about their share in the new sales because that's what we focus on. The new sales of mortgage loans, 20% of that was represented by fixed rate, previously 15%.

What else? Cost of risk, I've spoken about that.

Given the current interest rates, do you see or notice higher propensity of clients to repay loans?

[Unknown Executive]

Well, maybe not increased propensity but previously, they were -- those who are repaying were repaying. So the environment has impacted that to a very limited extent, I would say. We'll see what the future brings. Obviously, the first signals come from those segments where customers keep high savings.

[Agnieszka Dowzycka, executive]

What's the impact of higher fees for surplus deposits on monthly income?

[Unknown Executive]

I suppose that was several over PLN 10 million, so not that much. But in a different interest rate environment, the surplus of liquidity is less severe, I would say. So I suppose that they will be managed going forward.

[Agnieszka Dowzycka, executive]

There was a question about valuation of instrument, valuation of bonds. This 1.8 reduction and its impact on the capital ratio, 1.4 comes from valuation of bonds and rest are RWA.

What else? We have spoken about Santander Consumer Bank. There's a question about retained profits and about dividends.

Well, we have non-audited results. If the ratio maintained, then we should fully comply with the conditions. At the Swiss franc loan adjustment, it will be 30%, 50% of 2019, and we should consider the dividends already paid.

But answering the question on the potential payout of dividend, we keep talking to the regulator. So we know that KNF has not excluded the possibility that the banks could pay out the retained profits in the form of dividend. So we'll see what will be the final decision, but our policy remains the same. As you suppose, we will attempt to maximize dividends paid to shareholders while keeping the bank safe and secure in the challenging environment and while increasing our asset, obviously, in the light of potential risks that may emerge at a certain point.

In the meantime, I have sent you this question. What does the bank expect from -- when it comes to operating costs? Any actions to counteract the growing inflation?

[Unknown Executive]

As I said, we wanted to keep the cost discipline very tight, as I said before. So obviously, we know what's going on with the inflation rate, and we know how the cost of service grows, and we know the conditions of the labor market. But we monitor the situation on an ongoing basis. We gather information in this respect, and we compare our cost to the market [ Mediana ]. So when it comes to costs, it's not going to be an easy year for us definitely, but we'll keep doing our best.

We -- when it comes to costs, it's worth monitoring or analyzing 2021. And when comparing 2021 to 2020, we should select those items which we manage closely. So these include BFG costs and costs of legal provisions, and that will answer the questions concerning our cost discipline, assuming that the average annual inflation will be maybe 3% higher than the present one.

[Agnieszka Dowzycka, executive]

In the meantime, we received a question about reduction of the capital ratio. Is it negative other comprehensive income? And we said that, yes, these are connected.

[Unknown Executive]

Well, this seems to be over. Agnieszka, nothing else?

[Agnieszka Dowzycka, executive]

Let me confirm. I don't have any more questions, so this is all. If anything comes to mind later, of course, please contact us, especially that, in a few weeks' time, the full annual report is going to be published and maybe then some things we'll clarify or you might have more questions. Thank you very much for your attendance. Goodbye.

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