Morning. It is my pleasure to welcome you at the conference, during which we present the results of ING Bank Śląski for the third quarter. The presentation will be delivered by Brunon Bartkiewicz, CEO, and Bożena Graczyk, Deputy CEO in charge of finances. My name is Piotr Utrata, and I'm working in the press department.
Ladies and gentlemen, good morning. Third quarter results. I would love to start my presentation by saying that this quarter was similar to the two previous ones. However, unfortunately, I cannot start. I cannot open the conference with these words. I think it's not nice for the head of a listed company to announce losses. Therefore, my duty today is not pleasant at all. Of course, you are all aware of the reasons why we do not report good results for this quarter. The times are difficult.
Of course, you know us, and you're aware that our tension is not generated by the result, because the result is just a result. The current situation is quite unexpected. It's something that we were not able to foresee last year. In a nutshell, the whole business sector has become less predictable. I have in mind not only our institution, but the entire sector. Our business model as a bank is based on a stable and predictive growth. The current macroeconomic situation and the regulations that are in force generate a lot of instability. This has been going on for the last year. One of the source of our worries is the retail loan portfolio, which is not growing. It's not growing because the production level is relatively low. Moreover, we have a high level of overpayments and repayments.
We understand the situation quite well. However, it is difficult to predict anything about the fourth quarter and the coming years. Making any predictions is quite difficult. It is difficult because the cost of retail loans is going up. We also have a difficult situation on the housing market. Moreover, the loan moratoria or the suspension of mortgage repayment have taken its toll because they may affect our results. Taking all that into account, I would like to stress a few things. The first is that a model that is based on a very fragmented retail portfolio gives us quite a stable situation in terms of lending and assets in our balance sheet. The same applies to our deposits. We're present in various parts of the market which have varying dynamics. Thanks to that, our bank is more stable despite the generally unpredictable situation.
Therefore, I believe that our bank is able to continue to grow and develop its business model. We can still focus on our clients' needs and on improving the quality of our relationship with the clients. This means that the transactions and the sales procedures that we offer to our clients are as transparent and clear for them as possible so that we can contribute to our clients' success. I don't know what you are most interested in. I will hand over to Bożena Graczyk in a moment. She will give you the details of our results in the third quarter and over the last nine months. I'll just say that this quarter was quite unusual, but we can still remain on a stable trajectory of development, and we can still achieve our goals. Maybe this quarter has not been ideal.
Nevertheless, our tactics and modus operandi remains the same. Yet we operate in a slightly less predictable environment. This affects our results, of course, but they are secondary to our general business model. Now I'll hand over to Bożena.
Good morning, ladies and gentlemen. That's true that it's much more difficult to talk about Q3 reports when we need to report a loss. It was PLN 317 million this year, and this is the first for 14 years loss recorded in the history of ING Bank Śląski. Of course, as it has been said before, and in relation to our current report of July, the main reason behind this loss is, of course, the effect of loan repayment suspension and repayment holiday, which affected our net interest income. This adjustment has been included, as you perfectly know from our quarterly report. The impact of the repayment holiday is PLN 1.3263 billion, and it is in accordance with our preliminary forecast, where we assumed average 70% participation of customers and repayment holidays.
In Q3, this participation amounted to 62%. When talking about our forecast for the future, still, we assume similar predictions as the ones which were presented at the early stage. End result, after nine months of 2022, our net profit was PLN 1.40 billion, which represents a loss by 36%. I think that from the perspective of what happened to our PLN and what happened in 2022 in relation to the reality, financial reality and economic reality in 2021, that shows the situation. Of course, I'd like to comment our net interest income. On slide number 12, you can see our presentation with regard to net interest income, which has been adjusted on purpose by credit moratoria. It's difficult to talk about any trends and portfolio behaviors.
Maybe before I move on to explanation of this position, let me tell you that in this quarter we reclassified the position between the net interest income and net provision. This is a reclassification that we get from provision securing our IFRS transactions in micro-hedge in order to reflect the real character that affected the net interest income. The net interest income is PLN 155 million. The second quarter, it was PLN 130 million, and in the first, PLN 27 million. We wanted to reflect the nature of this position, taking into account increasing materiality of this position in our balance sheet. What is worth mentioning at this point is that in Q3, our net interest income was PLN 1.8 billion.
It's a 5% drop quarter-to-quarter, and our quarterly net interest income is at the level of PLN 353. It's a drop by 19 basis points versus the previous quarter. The main reason behind that is, of course, the rising cost pressure and funding cost pressure and increasing interest of customers' deposits. As you perfectly know, during Q2, we increased the interest rate savings account from 5 basis points to 1%. The interest rate on our accounts in this position is 1.5%. When it comes to net commission income, quarterly income is PLN 531. 2% increase quarter-to-quarter. From the aggregated perspective is PLN 1 billion, 16% increase year-on-year.
It's worth mentioning that, in this quarter, our FX transaction income went back up by 6%, card transactions. This is a result of a material increase of the number of transactions and the value of individual transactions, which translates into such volumes. Of course, on the other hand, we experienced a slight decrease quarter-on-quarter related to the capital market. It's a natural consequence of the situation on the market and commissions which are related to handling customer accounts. This is an effect of the changes that we introduced under the cancellation of a commission on a high balance account.
When it comes to total costs, you got accustomed to the presentation, including the bank levy, to present you the influence of broadly understood regulatory costs on the level of costs that we need to incur. Our operating costs including the banking tax went up to PLN 986 million. They increased by 19% year-on-year, and that means that our costs for nine months 2022 represent PLN 3.323 billion, and they went up by 32%. Last quarter, we had some one-off incidents. It was the Commercial Banks Protection System and creation of that. The cost was PLN 430 million. This quarter, this was an additional contribution at the level of PLN 41 million, which increased the burden, and burdened the position this quarter.
We had no Deposit Guarantee Fund. There was only an amount of PLN 39 million that we incurred in the first quarter this year. It's worth mentioning that payment to Commercial Banks Protection System fund, they represent tax deductible. I will use this opportunity to refer to the Bank Guarantee Fund decision taken recently. They increased the DGF commission from PLN 2 billion to PLN 502 million, which is a result of the decision. Taking into account the current level of assets credited to this account, which is PLN 1.83 billion, and the target value, that means that we do not expect any charge of contribution to DGF.
Apart from that, apart from all these additional costs to the so-called Commercial Banks Protection System, the banking sector contributed the credit support fund. In third quarter, we had PLN 25 million of cost, including 7 million for contribution for Q3 out of 400 million as total contribution. 80 million, this is our estimated impact resulting from this contribution at the sectoral level of PLN 1 billion. This cost has already been deposited and included in Q3 results. When we take a look at the total regulatory costs that we incur as similar phenomena are experienced by other banks, together with the banking tax in Q3, we incurred PLN 231 million of costs. That means an increase of 39% year-on-year.
After nine months, it's worth mentioning regulatory cost is PLN 1.2 billion, and that means an increase by 9% year-on-year. This is a significant factor and element of our cost increase at ING this year. Additionally, regulatory cost represents 36% of the total bank cost. When it comes to our own costs, they amounted to PLN 752 million in Q3, and they are practically stable quarter-on-quarter. When we take a look at an increase of cost year-on-year, they went up by 13% mainly due to the effects of soaring inflation and related increase of employee costs and, as a consequence of, pay raises that we announced in April this year.
When it comes to the cost of risk, as you can see this quarter, the cost of risk was PLN 206 million, including, on the one hand, PLN 132 million of cost with regard to the change of macroeconomic landscape. You can read from our presentation, this cost was related mostly to the corporate client segment. It is directly related to change of GDP index. We also released some provisions at the level of PLN 73 million with regard to the sales of loan from stage three, mostly in the retail segment. I think the two phenomena explain our quarterly cost of risk, which this year, due to all these changes and the normal behavior of credit portfolio, amounted to 53 basis points.
Well, if I were to comment the quality of our loan portfolio, I think it's worth mentioning that it is stable and on a good level. In stage three, we the participation, the share of this loans went down by 15 basis points. It is related to the sales of stage three loans, both in the retail segment and in the corporate segment as well. You might be interested of what you can read from this slide at the bottom, so the reasons behind the increase of a share of stage one in our gross portfolio. Here, let me provide you with an explanation. This is due to our modeling changes related to normal revision of our model approach to identification of stage two.
What happened in Q2 2022 means a change of premises. Two important premises related to reclassification of stage one loans as stage two. We accepted a methodological change consisting in the fact that threefold increase of PD when the loan is sanctioned, it results in reclassification to stage two. This is one of the effects. On the other hand, we assumed that loans on the observation list get to stage two. As a result of that, you can observe that the share of loans in stage two went up, but on the other hand, you can see that together with this reclassification, the provision coverage ratio didn't change. We can see that reclassification to stage one was marginal, had a marginal impact on the cost of provisions. Here you...
It's worth mentioning, because for sure you would like to ask a question about this, that all these changes and all these reclassification changes from stage one to stage two, as I've said, these are purely modeling in their nature, and they don't affect our loan policy. I would like to make that clear. At the same time, let me share one more comment. As you can see, our provision coverage ratio in stage three decreased, and this is an impact of decrease of sales of receivables from this stage, which took place in Q3. A few comments when it comes to our capital adequacy. As you can see, TCR ratio is at a stable level, 14.4%. What happened? On the one hand, we included these results to our solvency ratio.
On the other hand, we can see improvement of tier one ratio, which affected our TCR. On the other hand, together with rising loan volumes mentioned by Brunon, especially in the corporate segment, which are covered with higher risk, this ratio went up proportionally to the volume of our loan portfolio. Before we start our Q&A session, I will refer to the comment about MREL. As you can see, last quarter, we informed that we can see a need of higher engagement, higher exposure in terms of minimum requirement for own funds and eligible liabilities. As you can see from the Bank Guarantee Fund, which was announced at the end of September, the principles and requirements with regard to MREL have changed.
Such requirements will be decreased in short perspective, and that means to us and that has its consequences on us and on the entire banking segment. Of course, following the voice of the Financial Stability Committee, we agree that MREL instruments should be tackled in a systemic manner. Knowing that we do not have such a need that we informed about before because of these internal targets that changed. Now we are in the middle of analysis in order to establish our short term within creation of our MREL buffer. The works are underway, and we will inform you as soon as such analysis are over. I think that I would wrap up my presentation, and I would like you to ask your questions.
Yes. Let us open the Q&A session. I have already received a few questions. Let us start with more general questions. The first one is from Interia. Why do business owners decide to take out loans given the current economic situation?
I think it's a very good question. Let me answer you in the following manner. Life goes on, and business owners take informed decisions. I think that it may be connected with preemptive action that business owners want to take, because they expect that in the future there will be higher costs to be borne for loans. The inflation in Poland is quite high, and also in Poland, we have a very widespread phenomenon of transferring the effects of inflation to the target customer. These loans also support, to a certain extent, investments. I think that also the business owners just cannot continue to put off certain business decisions. In our case, an increased activity in this segment is not connected with large infrastructure investments or projects, because I think other banks in Poland finance these types of endeavors.
In our case, this is a result of a regular activity of our clients. This concerns revolving loans and investment loans that are usually taken out by our clients. This is nothing out of ordinary.
We also have observed increased activity in renewable energy sources, in investment in these renewable energy sources and in energy efficiency investments, and we welcome this fact. Still, this is not the only answer that would account for an increased dynamics that we observe in this segment in small corporate loans. However, I'm unable to make any forecasts regarding the activity in that segment because there is a lot of uncertainty, and I think we all intuitively sense that this is the case.
Another question concerning the assets in the balance sheet. Interia. Another question from Interia. Do you intend to buy out more bonds in 2023 and to increase their share in the bank's assets?
Our main goal is supporting economic growth by offering direct support to our clients. This is our priority.
We give enough loans to provide funding to the market. This is our priority, not investing in state bonds.
There are a few questions regarding suspension of mortgage repayments. PAP. Did you analyze the decisions that your clients took with extra funds that stayed in their pockets due to the suspension of mortgage repayments? In other words, what do your clients do with the money they saved thanks to the suspension of mortgage repayments?
I'll be honest. It's difficult for us to make any deduction, like, to deduce anything about our clients' behavior. As you're probably aware that we have a complicated relationship with our clients who have taken out mortgage loans with us. The level of consumption that may have increased in connection with the suspension of mortgage repayment is difficult to estimate.
What is a source of concern for us and for the entire market is that this situation is not possible, is not stable. In the media and also among the decision-makers there were calls to use these funds to overpay or to repay mortgages. However, we haven't noted any additional repayments or overpayments. Nevertheless, we assume that there is a group of clients who save up the money from the suspension of mortgage repayments to make an overpayment or an early repayment of their mortgage. We haven't noticed this t ype of activity.
Bożena Graczyk. Please remember that for the time being, only two repayments out of the possible eight have been suspended, so it's too early to make any forecasts or estimates.
Brunon Bartkiewicz. Regardless of the suspension of mortgage repayment, we have noted an increase, we've noticed increased consumption among our clients and increased level of remuneration. Our observations are in line with the media reports. However, whether an increased consumption is the effect of neglecting inflation or quite the contrary, being worried about inflation, that we do not know. We do not know why we have observed increased consumption spending. Naturally, we're all excited with the current situation, but still, we cannot draw any definite conclusions from what we see because we do not have enough data.
A question from Business Insider also about suspension of mortgage repayment. How does it affect the risk connected with mortgages? What would be the cost of risk if this government program had not been introduced?
Well, the quality of our mortgage portfolio is good as a rule. Taking into account the average risk level in that portfolio, I can say that we haven't noticed a direct relationship between the level of interest in the suspension of mortgage repayment and the risk level in principle. As you're aware, the decision to apply for a suspension of mortgage repayment does not affect the rating of a client. However, as a bank, of course, we carefully analyze our mortgage portfolio in order to be able to predict what may happen to our mortgage portfolio when the possibility of the suspension of mortgage repayment is over. For the time being, this has not affected our cost of risk and the risk level. I think I understand what is behind this question, and I'll answer it in the following manner.
Those clients who have been defaulting on their payments or have been repaying their mortgages irregularly before the moratorium was introduced, and now they do not have any irregularities in their repayments, we still adopt a conservative approach, and we treat them as quote-unquote, "problematic clients." On the other hand, those clients who have not shown any symptoms of difficulties with repaying their loans, we do not change our assessment of them because we are unable to assess or predict to what extent the moratorium affected them.
Trigon, have you observed any new areas of risks in the corporate segment? Is the bank benefiting from a growing demand for loans in that sector? And what about the solvency ratio?
That's a lot of questions. Our bank in the corporate sector has always had a conservative approach.
We're observing new risks and new threats. However, we are not, as a bank, modifying our policy in any significant manner. We haven't noted any major tendencies, new major tendencies forming. What we are observing is our early signs of decreasing activity in that area. However, this is not reason enough for us to change our ways.
Let me add that our portfolio of corporate loans is steadily growing, and we respect our values and our principles with regard to the corporate loan portfolio. No changes on our part.
Santander, how does ING assess its capital position? In TCR, the buffer is at 3%. If a systemic risk gets back to the level of 3%, ING would have no buffer with regards to TSR. How would you comment on that?
Our levels of solvency ratio, w e have provided enough buffers in our solvency ratio indicators. If a requirement for new buffer, for new buffers appear, we have a host of instruments that we can apply to make sure that our solvency ratio is in line with our strategy and risk-assessed assets. Therefore, we are not afraid of any negative impact of our adopted solvency ratio.
Let me add that we expect a certain equity surplus because the O-SII buffer will change, and it has not been reflected yet in our capital adequacy ratio because. 25 basis points is something that we expect in quarter four as a decrease of our minimal equity levels.
Time, please.
Effective capital management, main principle of it is not to lead to a situation of the shortage of capital, but overcapitalization is not a recommended state as well.
Another question from Santander about LCR. It's 132%. What is your target level in midterm?
Let me put it like this, adequate and safe, of course, and of course above our extended norms and limits, but it's not a bank practice to reveal the targets. It's not intentional, especially when we take a look at the shaping of this ratio. It was 200% last year, and that was the level at which it has been observed throughout the entire banking sectors.
Now for many reasons, and we have presented these reasons also recently, that the average ratio in the sector goes down. We manage our LCR adequately to our needs and to the market situation. Of course, we share your view that this is an important ratio from the point of view of monitoring and actions taken, so we confirm it.
Maybe let's talk about net interest margin. Can we expect further decrease of this margin? Do banks have adequate means to compensate that?
When it comes to the future, of course, we will not comment on the future. For the time being, we are restoring the element of predictability. The stability and the tranquility of the market, we are far away from such market conditions. We need to remember that on the solvency market and on the deposit market, the situation is a bit complex at the moment. Because we're dealing with with an unstable CPI and inflation, which is felt by customers, clients, and investors. It's much more, much above 18% that is announced. When it comes to the income generated by financial assets, of course, they are totally different. It goes beyond any doubt that they will not have any further impact.
When it comes to purely financial assets, banks are not competing only with themselves, with one another, but they compete with other forms of financial assets, also these which bring other level of yield. For that reason, the situation is very dynamic in that respect. We cannot observe it only in short-term perspective and only from the perspective of the banking sector, because the banking sector from the point of view of complex deposit, if you take a look at the results, it shows that this cake is not, it's not going, it's not increasing, it's not going any further. Our customers have higher revenues, but they spend more, and they do not retain capital in the form of assets.
Money which was to be earmarked, they were also kept in term deposits. This is something. Plus, there are some alternative forms of investment, and such an alternative form of investment is, of course, for example, investment facilities. What we can see, what's going on on the market, the market is shrinking, and there these might be real estate, but I think that this element has exhausted the dynamics. The share of real estate for cash, the potential exhausted. Of course, there are some retail bonds, but they are also losing their dynamics in this perspective. What will be their future? I don't know.
The bank, beyond any doubt, and the bank's offer when it comes to acquisition and retention offer, we have the best offer on the market, but do not expect that it will have any material impact if there is no influx. The target net interest margin, it will depend on the interest rate. As you can see, there is a lot of turbulence and a lot of unpredictability on this market. On the other hand, there is a question, what will be the target level of interest rates and what will be the response of the banking sector in case of all macroeconomic challenges and potential changes of interest rates if they occur? It depends on many players. Not only banks are participating in this process.
Let's move over to question from PKB. What was the impact of so-called bridge margin and in which line of P&L it was posted?
When it comes to our policy in that respect, this impact was PLN 5 million, and it burdened the net interest income.
One more question when it comes to net interest income from Santander Bank Polska. Cash flow hedge had influence on net interest income, can it affect the current decision taken by the banks?
I think we have already explained this topic and our macro cash flow hedge strategy and this impact on the solvency ratio. There is no impact, in fact. With regard to that, from this perspective, our structures should be perceived in a long-term and throughout the cycle perspective.
From this perspective, we shouldn't combine and relate any short-term operating decisions to a long-term strategy and to the level of macro cash flow hedge, currently.
Of course, it can affect our operating decisions, but Bożena is totally right. The main element here is that our strategy and functioning and bank management boils down to management in long and mid-term, not in short-term tampering of results. In our understanding, that it will not pay off. Are we willing to maintain stability? We do not. If we count on stability, we do not see any reason for changes. Of course. Two years ago, we could see, or we were convinced that the impulse A will lead to result B.
Today, predictability is broken because these principles don't function anymore because of multitude of factors and turbulence in the macroeconomic landscape. This is the reason behind this unpredictability, but it doesn't mean that the impulses are wrong or the results are wrong, but the combination of both has changed. We need to go back to stability. I don't want to talk about crisis because we're not in crisis. We're in the situation when the customers' behaviors and market players are looking for new balance and as a result, the bank needs to react to that adequately also from the perspective of managing of our liabilities and assets and our net interest margin as well.
When it comes to operating costs, the fifth quarter in a row, the number of employees in ING is decreasing. Does it reflect the changes in the bank branches or in the headquarters as well?
The bank decreases the level of employment for 10 years consequently because we had to change the employment with regard to compliance, mainly anti-fraud, KYC and AML. These were reasons behind increasing employment, but the bank wants to be more and more efficient. This is the evolutionary change, and we in a revolutionary manner, we're decreasing the number of employees. The reduction and laying off anyone is not the result. It's a result of our increasing efficiency of operations, including implementation, ongoing implementation. I'm looking for a good Polish word. Ongoing processes.
I don't want to sound too highbrow. The increasing level of digitization of internal processes. Of course, the impact of the decreasing number of bank branches has its impact, but we're not decreasing bank branches for a year or two. We change their profile, and this is something which should be pointed out. It's not about closing bank branches, but over the last 10 years, we redefined our branches and something which we used to call a branch. Now it's a relations center. This is our approach to change. That change has been in place for 10 years. We started in 2010, I think, the entire reduction process, downsizing process, and it's underway. Another question with regards to CHF settlements.
The number of settlements has been reduced significantly, and what is the reason behind that? It results from the quality and the approach of the bank to settle as it remains unchanged, but our customers don't want that anymore. They don't want that because they think that maybe they will get a better offer ultimately. Lack of stability and lack of predictability affects the market players. Our approach and our willingness to generate settlements as soon as possible is really the same and at the same level. Both sides need to agree.
The last question from [inaudible]. How would you comment on the Moody's change of rating for the Polish banks?
Downgrading, actually.
I'll respond briefly. I am not surprised. I'm not sure if it requires a longer comment. It is what it is. That's what I would say. It has a lot to do with attitude. Polish, there was this saying that Polish banks are very modern but not profitable. I think this, combined with the situation in the year 2022, resulted in concern and worries of our partners from abroad. I am not surprised, but I'm also not happy about it. PLN 12 billion in suspension of mortgage repayments is one of the main factors that weakens the room for maneuver for banks in the long run. What I mean here are both balance sheet items and our possibility to grant loans in the future.
On that sad note, we are ending this press conference because we have run out of questions. I hope that this is the first and the last quarter in which we are reporting a loss in our financial results. Last time this happened was in Q3 2008. This was triggered by an event that we referred to later as the financial crisis. I hope that this will be no longer the case. I hope that after Q3 this year, we'll only have positive results to report. This is the positive note on which we would like to finish this conference.