It's 2:02 P.M., so I think we can start. Hello, everyone. Thank you for joining the conference call regarding third quarter financial results of Bank Handlowy w Warszawie S.A. I'm Maciej Krywoniuk. I'm responsible for investor relations and strategy in the bank. We've got with us Natalia Bożek, the CFO of the bank. I hand over to Natalia to walk you through the presentation, and then we are open for questions. Natalia, the floor is yours.
Thank you very much. Good day to everyone. It's clearly a pleasure to talk about the third quarter financials for Bank Handlowy, especially in a very difficult environment which we saw for our competitors. Clearly, Bank Handlowy financials proved to be a strong and solid one, and it's clearly visible in the couple of numbers. It's not only the net profit, not only the growth in the strategic areas of the bank, but also in the return on equity as well as a very strong capital position of the bank. Going through the pages, maybe just a couple of highlights in terms of the financial results for the third quarter.
Clearly, revenues for the quarter had been impacted by a number of changes which we saw in the third quarter. As far as volatility in the financial markets is concerned, at the same time, the government shield or protection for the mortgage borrowers has been reflected in the financials of the bank, as well as the financial sector. You are probably aware of the strong losses, which has been absorbed by banking sector in relation to so-called credit holidays. Bank Handlowy also took its portion. However, the impact of that was fairly low. It was PLN 63 million, impacting the third quarter financials in the consumer business space.
More to that, I would say that actually looking from the perspective of the significant volatility of the interest rate environment and at the same time looking from the pressure, which basically was put on the valuation of our AFS portfolio and at the same time some trading positions. Basically, the bank decided to reposition the portfolio, AFS portfolio and decided to sell debt securities available for sale with a loss which resulted in the net loss for the quarter in terms of the sale of the AFS portfolio of PLN 200 million. All in all, these two significant factors impacted revenue for the bank by PLN 260 million.
That is clearly visible in the decline in revenues as compared to the prior quarter. However, if we look at some other factors, it's fair to say that actually in terms of the year-on-year dynamics, bank continues to do well in the loans space, primarily in the ICG loans. Overall loans improved by 4% compared to last year, and basically it is primarily driven by our small and medium enterprises. Deposits are growing by 7% year-on-year, and the growth is visible in the ICG, but more in the consumer business space, especially in the wealth management segment, where we saw the growth in the number of new Citigold clients.
Total capital ratio improved by 10 basis points compared to the prior quarter, and this is extremely important given the fact that yields on investment securities and valuation of those puts a pressure on a bank's capital position. Yet, we managed to improve our total capital ratio by 10 basis points this quarter. When we look at the customer FX, it's another consecutive quarter of constant growth. This is visible in the growth of volumes and as well as in the revenue. The FX transactions are visible predominantly in the corporate business side, but also it's visible in the transactions being done in the wealth management segment of consumer business, wealthy clients.
In terms of the consumer banking, we saw the decrease by 23% quarter-on-quarter, but this is very much in relation to the credit holidays booked in this quarter. If we adjust the net interest income by the impact of credit holidays, we would see the growth in net interest income quarter-on-quarter. The growth on the year-on-year is clearly visible. Credit cards business performed very well in consumer business. It's very much driven by the high transaction volume, which basically came back to the pre-pandemic levels. When we look at the business activities, clearly just a couple of items.
Clearly, we continue to support our clients, even in the difficult times, and in the times where basically there is a strong liquidity on the market. We took basically a part in two significant transactions in terms of the syndicated loans, and also we basically participated and continued participating in digital sector. For the ninth time in a row, we've been nominated as number one in the cash management ranking, being considered the market leader. When we look at the volumes, page number five, just clearly had to say that the loans volumes are declining quarter-on-quarter, and this is visible in all business segments in ICG space.
Clearly the growth is maintained when we look at the year-on-year dynamics. The growth is predominantly driven by our clients, global clients, so the relationship type of the banking, and at the same time, we continue to book quite an attractive number of new loans for the commercial business. When we look at the deposits are growing within almost all business segments, and this is visible dynamic not only quarter-on-quarter, but year-over-year. Transactional volumes in terms of the FX continue to be a very strong success story.
22% growth year-on-year and very good results in the transactional banking, which is supported by 7% growth in the number of cross-border money transfer, and at the same time, significant increase in the number of transactional volumes in corporate cards and some pickup in electronic banking as well. When we look at the consumer business, the following page, clearly the trend of declining loan volumes in terms of the unsecured lending is being visible, and this is something which is not a surprise given the current market condition, given the fact that we have tightened our credit policy just to make sure that we will not get ourselves into the troubles when the times will be more difficult in future.
We saw the significant impact of the inflation and high interest rate environment limiting ability for our customers for new loans to be granted. In terms of the mortgage loans, this is the quarter where we saw the negative dynamics, not only year-on-year, but also quarter-on-quarter. This is visible fact of first and foremost, lower mortgage volumes being booked due to the fact that the current market environment is not very favorable. At the same time, some of our clients decided to prepaid loans, given that the interest rate hike is still anticipated to continue. That was the case in the third quarter.
The most recent news, which we currently see in terms of the rates, they are not very much driving the interest rate hike. Basically the last decision of the policy makers was just to keep them flat. Maybe the trends will somehow improve in terms of the new loans volumes coming in the near future, but for the time being, we saw the decline driven by the repayments. Deposit volume, it's clearly a success story in consumer business space. This is very much driven by the fact that we are being perceived as a very safe harbor for our difficult times by our clients.
We saw the new flows of the new clients in the Citigold and Citigold Private Client space. More to that, we saw also inflow of the deposits from the current or existing clients who decided to place their money and move from the investment funds towards safer space of time deposits, especially given the current market offer in terms of the attractive pricing which we have for our wealth management segment. FX volumes is something which is attributed to the wealth management segment as well.
The full relationship with the clients pays off from the perspective of pay, I mean, having more deposits, paying more interest expense for this deposit, but at the same time seeing significant growth in terms of the FX volume and revenue from FX. Credit cards, as it had been mentioned, basically saw the increase year-over-year in terms of the transactional volume both domestic and foreign, which is very typical for the segments of our clients which we have. Wealth management, as I've mentioned, is a very competitive deposit offer.
We stay close with our clients, first and foremost, because this is strategic area of the consumer business, and this is one of the value propositions which we have for our clients to protect the value of the business. More from the perspective of supporting clients in the difficult times and helping them allocate the money into alternative channels of investments given that the current market is extremely unfavorable to place money into investment funds. We saw a significant devaluation not only on the Polish market, but also on foreign markets as well.
When we look at our social commitment, this is clearly an area where we focus a lot, and just the page is to visualize how close we are with the program to help activate and integrate migrants and refugees from Ukraine. We have a lot of programs which are supporting women, trying to keep them engaged and also activate their career path to some extent in a new reality. Financials. As mentioned, starting from revenue, just a few marks. Total revenue for the quarter declined by 25% compared to the prior quarter, but very much impacted by two one-offs. One is the repositioning of our portfolio and realizing the loss on AFS sale, but also impact of credit holidays.
Both of that were more than PLN 260 million, and this is primarily the key area of the decline in terms of the revenue quarter-on-quarter. Where the key fact, however, is just to underline a very strong income on FX. Basically, when we look at client dynamics year-on-year, it is another quarter of significant growth compared to the last year. This quarter, we recorded 15% growth over third quarter of 2021, which is very much driven by interest, client interest income, fees and commission, and obviously FX, which plays a significant role in the client revenue pool.
When we look at the net fees and commission, this is clearly an area where we are seeing a sort of a declining trend, but very much driven by the sentiment of the market in relation to the lack of capital market transaction and very low sentiment of our clients to locate funds in the fee-based product, which are considered to be investment and insurance product. Net interest income, just a couple of highlights. Very good story for the net interest income. We positively surprised the market, increasing our net interest income by 10% quarter-on-quarter.
Clearly, I would say that the growth is visible in the consumer banking space by 6% if we exclude the impact of credit holidays, and also significant growth attributed to interest income on debt securities and hedging instruments. That basically, that growth in the professional market space is very much attributed to the continued focus of our professional markets experts to optimize the best returns on the liquidity which the bank has.
In terms of the institutional banking, we saw the decline of 5% quarter-on-quarter, and this is very much attributed to the higher cost of funds, which are visible primarily in the deposits from our multinational relationship clients. We improved net interest margin by additional almost 30 basis points, which is far above market level. Also when we look at the net interest margin and cost of financing, in terms of the client space, clearly the good story is also there. We improved net interest margin in both businesses, ICG and consumer business space.
At the same time, following the market practice and responding to the interest rate environment and the high demand and expectation of our clients, we also increased the cost of expense, paying more for the deposits, which we have. When we look at net fees and commission, just to highlight clearly that the one area which is visible is a decline in investment and insurance products in the consumer banking space. This area of the fee revenue is generated by investment and insurance and is accounted for 17% in the total revenue of the consumer banking and is declining 40% year-on-year, and the continued decline quarter-on-quarter is also visible.
When we look at the ICG business, clearly the custody is declining year-on-year, more quarter-on-quarter, but that decline quarter-on-quarter is very much driven by the seasonality. Second quarter was a very good quarter from fee perspective attributed to the dividends time which custody business had in second quarter. Treasury activity are extremely significant volatility in the third quarter. On one hand, bank recognized a growth of the interest income on debt securities by PLN 120 million quarter-on-quarter, which partially offset the income on investment financial assets, where we realized a loss of PLN 200 million on the sale of the bond portfolio.
At the same time, trading and FX was, however, the FX itself was a very good story growing quarter-on-quarter and year-on-year, and on the back of the spreads and volumes. The trading saw the softer activity in the third quarter, driven by the significant volatility and the couple of significant reshuffles in the bond yields. When we look at the treasury activity, it improved over three quarters of this year compared to the last year. Still, it generated 39% growth compared to the ninth month of 2021.
Also by the repositioning of the portfolio, we managed to improve our TCR ratio by 10 basis points and also remove a bit of a pressure from revaluation reserve visible in our capital position. Expenses are growing. 2% growth in the third quarter compared to the last quarter is a response of the bank, or the costs are associated with inflation and higher energy. Clearly, this is visible in our general expenses, which are growing 8% quarter-on-quarter, and they are very much attributed to the cost of premises in the space of energy and also in the space of rental costs for the branches.
In terms of the staff expenses, they are declining this quarter by 3%, driven by the utilization of the holiday accrual. The depreciation is also this quarter declining on the back of some systems being fully amortized. Nonetheless, when we look at the three quarters of this year, expenses are growing by 11%. First and foremost, they are reflecting growth in the regulatory space. Basically, our expenses, and especially higher contribution to resolution fund, resulted in the 62% year-on-year growth in the space of regulatory expenses. It was the highest contribution since for the bank since the implementation of that fund.
When we look at the cost of staff, so the expenses, the employee expenses, staff expenses are growing 11%, and basically the significant growth was visible in the beginning of this year, where we basically included the higher TIR for the employees reflecting the inflation. We continue to focus on the technology in our strategic areas of our bank, one being the transactional banking in ICG and an investment in CitiDirect, the other being investment in cybersecurity of the bank. Those factors were driving growth of the expenses in the first nine months of this year. Fair to say that our cost-to-income ratio remains at the very attractive level. Third quarter itself, 40%.
At the same time, the growth which we are seeing in the income level, growth of the expenses is extremely, I would say efficient compared to the market and our key main competitors, which saw the growth sometimes three times higher than ours. Cost of risk. This quarter is clearly the quarter of the cost of risk, which is reflecting macroeconomic situation in Poland. I would say that in terms of the consumer business space, we got back to the normalized level, which are very much associated with the consumer business activity. PLN 19 million this quarter recorded in consumer business. Similar in the first quarter of this year and the third quarter of last year.
The last quarter, the second quarter, when we recorded net recovery in the consumer business space, was very much attributed to the sale of the non-performing loans portfolio. Which we basically do pretty permanently on an annual basis if market conditions allows, and clearly the second quarter was that moment in time when we sold the NPL portfolio in the consumer business segment. That impacted the net cost of credit in the second quarter and showed a net recovery, which now we are actually coming back to the normalized level.
When we look at the ICG space, I would say that the ICG on the level of PLN 15 million reflects the macroeconomic provision, statistical provision for the portfolio, including the macroeconomic scenario, which is currently presented by our economist. Meaning that we are expecting in the next year significant decline in the GDP from the level which was assumed two months ago on the level of around 3% next year to the level of less than 1%. Also the high inflation is continued to be factored, and also lower amount of foreign investments.
With all of that, the macroeconomic assumptions drove the increase in the statistical provision for the ICD portfolio and resulted in the overall cost of risk for the ICD on the level of PLN 15 million for the third quarter. When we look at the cost of risk, clearly from the overall total cost of risk perspective, it's more than the strategic assumption of the bank in terms of the level of 62 basis points. However, as mentioned, this includes macroeconomic reserves, and adjusted for that, we are actually on the level of 32 basis points, which is very much attributed to the normalized and strategic assumptions which Bank Handlowy maintains in that area.
Third quarter was also very strong and very good from the perspective of both capital ratio, coverage ratio, and non-performing loans portfolio, which both are consequently significantly better than the ones visible on the market. Just a couple of summary highlights on page 17. Maybe just two items. One is return on equity, which for third quarter is on the level of 18.8%. We also improved our return on assets to 180 basis points. We basically maintain a very strong, high, strong and high liquidity of the bank, with the loan-to-deposit ratio reaching 43%, this quarter.
Looking at the three quarters of this year, I would say that one thing which is extremely strong is that bank, for the first time ever, reached the level of or exceeded the level of PLN 1 billion in the net profit. Which is very much driven by the revenues growing by 43% year-over-year and recording PLN 2.6 billion for nine months of this year. It's very much driven by the operating expenses, which although are grown 11% year-over-year, are still very much well managed, keeping a very healthy operating efficiency ratio. The growth of balance sheet is quite substantial.
When we look at the assets, they are growing 19% year-over-year, with the loans growing 4% and deposits growing by 12%. With that, actually, I just wanted to pause saying that this extremely strong results are, I would say, very unique in the third quarter for the banking sector, which suffered a lot and saw the significant losses across the line. Thank you very much.
Thank you very much, Natalia. I think now it's the time to open for questions. If you've got any questions, please let us know. I have not received any questions by email, so once again, anybody would like to ask any questions?
Hello, can you hear me?
Yes, Peter. Yes, we can hear you.
I have a question regarding current quarter. Basically we have 1.5 months of Q4 passed. What can you say about the main trends in the sector this quarter? Do you pretty much see the continuance of the same trends that took place in Q3? Or is there anything extraordinary or changing in the market?
Look, I think that actually, when we look at our business, it's clearly more like continuation of this, what we saw in the third quarter in terms of the volume growth and in terms of the deposit story, I would say. We see the impact of credit holidays, which although had not been necessarily significant impact for us, they are putting a pressure on the bank's ability to grant loans. We see more clients, especially in the CCB space, coming to us as the new bank who could serve them. However, we are actually looking at this from a very, you know, selective perspective.
We know that the CCB space is the space when in trouble can bring a lot of cost of credit. So we are looking at this very, very selectively, and we are trying to be very careful in terms of the onboarding of the new clients. I would say that the volatility which is seen on the market in terms of the yields. This is the volatility which basically is a sort of a, you know, up and down in terms of the trading activity. Also what we see is that this volatility brings a lot of volumes in terms of the FX. This continues to be the case.
The consumer business space is very much similar to the ones with the one caveat I would make. I mean, we see even less interest in the mortgage loans. We do see that the inflation really puts a significant pressure on the ability of our clients to absorb any new sort of the financing. As long as the appetite is there, the banking sector is willing to sell less unsecured lending. This is also the story of Bank Handlowy, which continues to keep a very conservative approach in terms of the unsecured lending portfolio, given the very unfavorable market conditions.
We see that actually appetite of our clients being limited by their creditworthiness, but at the same time, we do see ourselves looking very selectively from the perspective of unsecured lending. We see, however, that the space in the digital in terms of the digital and the space in the CCB segment, so the small and medium enterprises, is very active, and we are having a very good story in terms of the granting of new loans. I think that should continue even with our target market, we should continue to find the new spaces for growing the volumes of assets. Probably less than we saw in the beginning of this year, but that growth should be visible, and we do not assume it should stop.
This is what we see in the current 45 days of this quarter.
Okay. I have a question with regards to the Borrower Support Fund. Are your or the bank's clients also eligible for this support, or you are somehow left out?
No, no. We are not left out. They are also eligible for this credit holidays, and basically the bank took the provision for that in the amount of PLN 63 million in the third quarter, so significantly lower than what was observed on the market. But basically it is driven by still, I mean, less share which we have, lower share which we have compared to the market in terms of the mortgage loans. They were eligible, they were not excluded. The fund as such, as it was designed by the regulator, was to be offered to each and everyone who wanted to take it, irrespective of. There were no conditions simply saying.
Actually it was just to apply for that and everybody could took it. We didn't limit that in any way. More to say that actually we extended the time when our clients could come to us and ask for that solution. Basically, we were very open by saying that they can use or they can use this program. They actually did it. Our clients did it.
You mean this credit holiday?
Yes.
Yeah. Okay.
100%.
Let's say the Borrower Support Fund is also applicable, so both programs.
Borrowers, in what sense borrowers?
I mean, there is this, initially there was this PLN 600 million fund, which was made for the Swiss franc credit mortgage holders. I understand that now it was converted into a special kind of support fund, which is extended to not only CHF mortgage holders, but basically private clients in general. If they lose a job or the loan to income or the interest cost from the salary becomes too high share, then basically they can apply for this support from this Borrower Support Fund. I mean, in other banks, at least, the discussion has been that basically their contribution to this Borrower Support Fund is basically front-loading of cost of risk.
Correct. That's precisely correct. I think that actually given our target market and given our clients, especially in terms of mortgage borrowers or borrowers. We have a different target market. The impact is basically immaterial for us. Where we saw the impact definitely on the Swiss franc mortgages. Actually, I mean, given the current structure of our portfolio and the volumes, it's clearly less than it was visible on the market. Basically that's the story behind the borrowers. In terms of the. There was additional funds. The question is whether you might have been thinking about the fund or the contribution to the special fund helping one bank.
We were actually not a part.
No, this we discussed last time. Yes, I understood that you-
Yeah.
did not feel that this was applicable to you. Actually, the reason I'm asking is that whether thinking about cost of risk in retail segment, is it correct to assume that actually it will not be much elevated next year because your clients are also eligible to get any support from the Borrower Support Fund? Or basically, in your case, as soon as the credit quality deteriorates, then basically it will imply higher cost of risk, as there is no this buffer from Borrower Support Fund.
That's absolutely correct. Our clients are eligible, and we do not assume that this will be. First and foremost, this is not material, but secondly, we do not assume that this will impact our cost of risk next year. That, that's correct. Our cost of risk should not elevate. The only thing which might happen in terms of the cost of risk is basically whenever the models for the statistical provision will reflect the new macroeconomic assumptions. At this point in time, the models are very, I would say, I mean, slow in the consumer business space, and this is the area where this takes time just to reflect any potential different behaviors in the consumer business space.
Currently, when we look at the historical behaviors, and obviously they were impacted by a number of different shields which were introduced during the pandemic time. Basically, this behavior of the clients is not something that we can actually clearly say that we have a full visibility how they would behave, if not that. After closing the shields from the COVID, we didn't see any sort of deterioration in the portfolio. We have basically the strong belief, proved by the number of stress tests which we perform on the portfolio, that our clients are basically from the.
I mean, first and foremost, they are different clients in terms of the target market, and therefore they are somehow better behaving in terms of the cost of credits. What can happen is that actually when the new macroeconomic assumptions such as longstanding inflation and unemployment rate would change, that would got reflected in the macroeconomic statistical provision, which would be taken. At this point in time, as far as the third quarter is concerned, that proved not to be the case. No need for any incremental provision to be taken. I would assume that if not that, I wouldn't expect elevating cost of risk in the next year on the back of the deteriorating our portfolio.
Okay. My final question is maybe not so much a question to you, but I'm checking your presentation slide 20, and here you have a forecast for the reference rate fixed by the National Bank of Poland. It seems to me that you are a bit kind of more aggressive in terms of the pivot the central bank is expected to make. You expect 6% by the end of 2023, whereas in terms of inflation, you still expect quite elevated numbers, 12.5% for the next year.
What is the assumption here, kind of, do you expect that at the very end of the year, the CPI is already on the downward trend and it is so low that central banks should actually already go into the mode of lowering the rates? Or maybe you just can add color on your expectations.
Of course, I will do my best just to meet your expectation. Let me say the following. I think that first and foremost, there is a significant volatility in the economist view. Basically it's changing pretty fast. I must say that I think that sometimes it's very difficult to, you know, to project what's gonna happen because the views are changing quite dramatically and quite fast, quite suddenly. When we look at the CPI and interest rate environment, it is fair to say that basically we assume that certain point of time the inflation will be going down. Now it is actually pretty elevated.
If there will be any change in terms of the shields which government introduced, that inflation will be even higher than the current close to 18% which we see. Basically, I mean 17 was in September. I think the October re-read was actually close to 18%. Basically I would say this is the story, that if the shields will be removed, which our government is planning, the inflation next year could be even higher. That would assume that the interest rate environment should be going up just to mitigate the impact of inflation. However, what we are seeing currently is that the last two decisions of the Monetary Policy Council proved not to be playing towards the usually known economics of today.
When we look at the inflation and the decision of keeping rates unchanged for the last two months, I think that it may not be so easy or intuitive or indicative to look at the correlation between inflation and interest rate increase. It might be the case that inflation will be higher than this 12.5% next year. At the same time, I would say that reference rate probably will stay at the low level, given the fact that we are in a year of election, and a lot of these decisions will be driven by the election year in November.
Okay. Thank you.
Thank you, Peter, for your questions. Any more questions from anyone? It seems that these are all the questions, so thank you very much for joining and for your time with us today. I'll hand over to Natalia for the last few words.
Thank you very much for being with us. Thank you very much for listening to our conference. It was clearly a very interesting quarter for the banking sector, to some extent, a little bit scary, but, on the other hand side, quite solid for the Bank Handlowy, which proved to be a very good bank in very difficult times, especially when we look from the perspective of the decisions which we made many years ago, consequently keeping, sticking to them for the next couple of years going forward, and then, proving to do the right thing in very difficult times. I must say that it was a very good quarter.
Thank you very much for being with us and have a lovely rest of the day and the rest of the week.