Good afternoon, everyone. Welcome to Bank Milan, New First Quarter 2021 Results Call. With us, we have on the scene the usual actors of the stars, Mr. Joao Bradorj, Mr. Fernando Vichon.
We'll be very brief this time. We'll now be competing for our time with other events, unfortunately. Quick and technical remark, you have a presentation on your screen. If you're using the webcast, remember to click on it to change pages. If you want to ask questions, please use the bar at the bottom of the page.
Gentlemen, the floor is yours.
Thank you. Good afternoon. Thank you for attending this Q1 results presentation. Let me start highlighting, just as a reminder, what we are showing on Page number 5. 2021 is a transition year where we are focused in recovering the business volumes and the profitability that was affected by the pandemic and especially by the significant cuts of the interest rates.
It's a year where we expect to be able to show strong growth, particularly in mortgage loans and also increase in the sales of consumer loans. And on the other side, an improvement in the operational efficiency, which will ultimately translate into expected improvement of the cost to income ratio to from 49% last year to around 47% this year. Also, we continue the process of full digitalization with clear targets, very ambitious targets of having more than 80% of digital clients in the total active customer base by the end of 2021 and also to have a large proportion of end to end sales processes covered on the digital platform. Pages 67 show a snapshot of key profit and loss items and balance sheet and business items, which we will go through the presentation in more detail. But just as main points would highlight the significant improvement on the cost side with a clear reduction of costs versus 1 year ago.
Also the very good performance in terms of cost of risk with much lower cost of risk also when compared with 1 year ago and showing a decreasing trend in the recent quarters. And on the other side, an improvement of cost to income ratio already visible versus the Q1 of last year. And also, the capacity of the bank to generate profits before these extraordinary times of creation of provisions for FX Mortgage Litigations. And so this capacity is translated into a net profit before FX Mortgage Litigation provisions above PLN 200,000,000 in the first quarter. And on Page 7 also to highlight the solid growth of customer funds approaching the PLN 100,000,000,000 bar and also the significant increase in the number of online and mobile customers.
On Page 8, we can see the evolution of the results of the bank during the last 5 quarters. And we can see that excluding the provisions for FX Mortgage Litigation, the bank had a net result of PLN 209,000,000, which is a growth of 48% versus the Q1 of last year. And then this was more than offset by the negative impact of the provisions for FX mortgage litigation issues, which increased in the Q1 and were above PLN500,000,000. And as a consequence, we booked a net loss of PLN 311,000,000 in the quarter. As we see on the right side of the page right, on a quarterly basis, we also had an improvement versus the previous quarter of the net profit without extraordinary items.
And operating income, when compared with the pre pandemic quarter of the Q1 of last year, only fell 6%. On Page 9, a snapshot of the most important financial highlights. So on an adjusted basis, the result net profit grew 48%. The net interest income was stable in the quarter, and the net interest margin increased by 3 basis points. We had the solid growth of fee and commission income by 6% quarter on quarter.
Adjusted ROE, which means ROE without FX mortgage provisions, reached 9.3%. Costs were lower by 17% year on year, and the coverage of past due loans by provisions increases also to 120%. On Page 10, net interest income stabilized in the Q1 despite being a shorter quarter and was still 10% below year as a consequence of significant interest rate cuts that took place between March May last year. We were still able to achieve further reduction on the average cost of deposits, which fell 3 basis points in the quarter to 0.08 percent, while at the same time slightly improving the yield on the loan side by 3 basis points to 3.25%. We also, again, gave another step in terms of improvement of net interest margin by 3 basis points to 2.56%.
On the fee and commission side, both on a year on year and quarter on quarter basis, we showed a solid growth of 5% 6%, respectively, in this quarter with a strong contribution from the fees from the accounts services. On Page 11, moving to the cost side. Strong decrease of costs On a reported basis, a reduction of 17%. Excluding BFG costs, a cut of 14% and with reduction coming both from staff costs and from other admin costs. As a consequence, the cost to income ratio improved year on year from 48% to 46%, assuming annualization of the PFG contributions.
And this was supported by the optimization of the branch network on one side, which we have already been showing in recent quarters. So we had a reduction of 121 branches year on year, partially as a consequence of the merger with Eurobank and also by the accelerated optimization of the branch network following these pandemic times. And on the other side, also by the reduction in the number of employees, which was above 1100 in the last 12 months. On Page 12, we continue to show a strong asset quality with an impaired loan ratio below 5% and with a trend of decreasing cost of risk since the Q2 of last year. So finally, in the Q1 of this year, we had a cost of risk of 39 basis points over total loans, which is much better than what, in fact, we would be expecting just 3 or 6 months ago with significant good performance on the retail side, also supported by another sale of NPLs, which are the contribution of €13,000,000 pretax to the level of provisions.
The asset quality is also supported by the good quality of the loans that were under loan moratorium that in the meantime was finished. The current amounts under loan moratorium are completely residual. They represent only 0 point 1% of total loans as of the end of March. And the quality of the portfolio that was in the past under credit moratoria is very good as we are showing on the bottom right side. Only a small fraction of those loans were nonperforming as of the end of March.
Moving to Page 15, strong liquidity position, loan to deposit ratio back to 85% and keeping also very strong capital ratios with the surplus over the minimum requirements of more than 5 percentage points. Moving to the second part of our presentation on business development and with the main highlights on Page 17. We have a good momentum in terms of business growth as shown by a loan growth of 5% year on year. Record sales of mortgage loans in the Q1 of PLN2.2 billion with a market share above 14%. Cash loan sales higher 24% quarter on quarter and getting very close to the pre pandemic levels.
Investment products And customer deposits growing 6% year on year. And customer deposits growing 6% year on year. Moving to more details on Page 18. On the loan portfolio side, the driver of the loan growth has been mortgage loans, which on a combined manner grew 9%, so total market loan portfolio, while loans consumer loans grew 2%. And we still year on year have a small contraction of loans to companies as a result of clear lower demand.
The structure of the loan portfolio continues to change with the dilution of the FX Mortgage portfolio in which the portfolio originated by the bank was already below 17% of total loans as of the end
of March.
On the deposit side, clearly bound from the end of the year and bringing the total growth year on year to 6%. And in Investment Products also, a growth of 5% versus the end of the previous quarter. On the digital side, we continue to show very strong numbers with continued growth in the number of digital users and logins and high share of electronic channels in the sale of products translated into 61% digital share of cash loans dispersed in digital channels and 28% share of current accounts opened online during the Q1. The number of active mobile customers is already above 1 point 7,000,000, growing 16% year on year. Page 20, just a reminder of the support that we have been providing to our clients and employees during the pandemic.
I will not go through the details. It's just a reminder that we continue this process in order to provide to our customers possibilities to do all the transactional and service needs in safe conditions. Page 21, also important to stress that customer satisfaction, loyalty and the quality of service have remained stable despite these challenging times as shown by external surveys. And the level of recommendations and sections scores have been kept stable. On Page 22, very high transaction rates in online and mobile payments.
We are showing 66% increase in Internet payment transactions year on year, 45% growth in contactless mobile payments, 98% growth in e commerce transactions through Bouygues. So these are numbers that really illustrate the level of active engagement of our usage of our digital platform. And on Page 23, also illustration of the number of recent solutions and innovations that have been implemented in which we would highlight the further developments on the cash flow digital sales process for retail clients, new digital options for mortgage loan management and also further developments of investment products, sales process and digital platform. And last but not least, on Page 24, continuation of the growth of Goody with 140 3,000 app downloads just in the first quarter. On Page 25 with some more details about retail business evolution.
So a strong growth of retail loans, 8% year on year, driven by 25% growth of 1,000,000,000 mortgage loans and 3% growth in consumer loans, with at the same time a decrease of the FX mortgage loans by more than 12% year on year. And if we would look at the overall retail loan growth without FX Mortgage, in fact, the loan growth was 16%. For this growth contributed, 1st of all, the strong growth of mortgage loan sales, which has been a trend since the Q1 of last year, but reached a record high of €2,200,000,000 in the Q1 of 2021, a growth of 5% quarter on quarter and 64% year on year, and with a market share of origination of 14.5% in the Q1. Also, we have shown solid performance in terms of new sales of cash amounts, which grew 24% quarter on quarter and were just 2% below the Q1 of 2020 and allowing us to have a market share of 10 point 5%. Retail Customer Funds grew 4% year on year with a stronger growth of investment products by 29%.
Page 26, the growth of active customers naturally now is slower in this new environment, But we keep a solid growth also in terms of acquisition of new accounts and in the growth in the acquisition of the cards, both debit and credit cards. On the company side, Page 27, the corporate deposits rebounding significantly in the Q1 and were 18% higher year on year driven by current accounts because virtually almost we are almost with interest rates comes to 0 in time deposits. And on the loan side, we highlighted the strong growth of the factoring business with the growth of the portfolio by 8% year on year, which was offset by still contraction of the leasing and other loans to companies portfolio, bringing the total exposure to companies lower by 3% versus 1 year ago, but still with some signs of rebounding. Finally, on Page 28. Leasing new sales, which have been one of the activities more affected by the pandemic, grew 23% year on year to PLN762 1,000,000 and factoring turnover very strong growth of 25% year on year.
Now time for questions. As usual, we try to group them and then we'll service them as they come. Thank you very much for questions, especially those which deviate somewhat from the Swiss rank. The issue of Clarusita, there are many on this. Before we move to FX mortgages, questions related to results.
Do you think current high growth of period end mortgages is sustainable? Do you see regulators' interest in such growth? This is the first question.
One of the lessons from the past and connected even with the overexposure that we have in Swiss francs mortgage is that better the bank, more balance in the bank. So we will try to have also also some combination with the growth with mortgage, with the growth of other areas, even if this will mean some slowdown or slightly slowdown on the mortgage. So I think that the levels that we are talking about today, let's call it this, PLN 2,000,000,000 per quarter will be the comfortable level for us. So we would not mind even if to have a slightly lower in the next quarters, not at these levels. So we will not see next quarter EUR 2,500,000,000 and then EUR 3,000,000,000 and things like that.
So we're this €2,000,000,000 is the level that we feel comfortable. So we would leave and not be unhappy if we have 5 percent low production, for example, in the next quarter and to stay at this €2,000,000,000 level for a while.
We also still keep the project of launching the mortgage bank in the future. So we are expecting to receive the operational license that will allow the midterm funding to support the mortgage portfolio that we already have and that we will originate in the future.
Remaining within the subject of loan growth, next question is about corporate book. When do we expect growth to appear? And what is the general feel or expectations for lending growth this year for the book?
So it's a little bit following the comment that I said. Of course, we are not one thing is what we would like. Other thing is reacting to the market needs. And that market needs, there is more appetites to mortgage and a little bit more stable in consumer loans and a little bit less in terms of corporate. It's clear that we are SME, Corporate Bank.
So also if there is these extremely large big tickets, it's they will not have a major impact in our portfolio. We see clear good signs in terms of factoring is at record levels, leasing is recurring. But I would not forecast a major growth on corporate lending in Poland in the next year in this year, I would say so I would say that we would stay at this level with slightly increase. But I would not not because we don't like or not we would not like, but because I'm not seeing a major change for the time being in terms of companies. Although there is some leasing in terms of we see some higher activity in leasing, some reinvestment, renewal of equipments, but for the time being, we are not seeing a wave of investments that would support a major increase on corporate loan book.
Thank you. There's a couple of questions relating to net interest margin outlook and our expectations of you on interest rates this year. [SPEAKER IGNACIO CUENCA ARAMBARRI:]
So our view regarding interest rates is that for the nearest quarters, they will remain stable. As a consequence, we expect that the improvement of the net interest income will be driven by the continuation of the growth essentially of the loan book and also with the proper pricing of the new origination leading to a gradual increase into the average yields from the loan side. While on the other side, keeping the lower cost of the deposits that was already achieved in the Q1. So basically, we finished the exercise of repricing of deposits, which took place between the Q2 Q4 of last year, and it is fully shown now in the Q1 of this year. So there is nothing more relevant to appropriate there.
And now the improvement in net interest income will come from the continuation of the growth in a gradual way, but also not expecting for the time being any increase of the market interest rates, which, of course, would be supportive for a quicker improvement of the NII.
Two questions relating to asset quality. 1 is about the quality of assets after the expiry of state support measures. And second, about the growth of Stage 2 corporate bonds in the quarter?
I think we already we showed it on the page.
We
show clearly on Page 13 the status of the loan moratorium and also the quality of the portfolio that was under moratorium. So as you can see, at least for these numbers, the situation looks quite positive. As we said before in previous presentations, we were always cautious to say that we needed the moratoriums to finish and to wait several months to see if the customers would come back to normal servicing of the loans. So far, it is happening. And so we also see some positive signs coming from the economy and from the reopening of the economy.
And so we have no reasons to believe that there will be significant deterioration from the numbers that we are showing here on Page 13. So that's why asset quality remains solid. The quality of the loan portfolio is not being in a relevant way affected by the loans under regarding this. And we keep as I said, the objective always to keep the asset quality the impaired loan ratio below 5%. This has been, let's say, a trend for already many quarters, and we are sticking to that target.
And also this is translating into lower cost of risk, lower than we were initially expecting. And so if the trends will continue, of course, we will lower cost over this year than what we were initially expecting.
Thank you very much. And to complete the questions regarding our results in near future, it's a bit indiscrete question. Would we be interested in retail assets of City Hanover that were will be put up for sale?
I think we are now in the organic mood. So for the time being and before any clarification also in think about these kind of transactions. And just to comment also what was said, so one area that we are more optimistic is, of course, the consumer finance part. So as the economy is opening and as people start to travel and start to make their own projects and everything, so we are seeing good activity on the consumer credits part. And this is an area that also will support the 2nd part of the year for sure.
We are working already with last year, we made a big effort to combine the commissions with ISC insurance penetration to offset the decrease of maximum interest rate. Also, we had some tightening of the risk criteria also for that. And since we are working with this risk appetite and also this pricing scheme, we are seeing an acceleration of the type of consumers for this. So we are forecasting end of our second part of the year, 3 quarters of part of the year. Sometimes I have already the impression that we are already summer, but not yet.
But remain part of the year more active with people circulating, consumers starting to travel and starting to make their projects that they finance with consumer credits. There's also
a question about target level of branch network.
We don't have the specific target for that. We have been changing the size of the network adapting also to the consumer habits. And it's clear that with the changes so far with COVID and with digitalization, we start to have less traffic and less need of branches. We see that some readjustments and some consolidations of branches. For the time being, looks like we are in the right size.
10 branch is more, 10 branch is less, but looks like we are in the right size. But it's obvious that if the consumer habits change a lot in the future, we have space to some adjusting. One of the advantage of the acquisition of your bank was the franchise model. The franchise model will allow us to be in some markets that we would not establish a physical presence by ourselves, but with a light format, with the franchise, with a light presence in terms of employees and all of that. It's possible to be there.
So this is a good complement also with digitalization, so allow us to be a more rigor national coverage with a lower investment infrastructure. But so I would say that busy probably we are then in terms of reductions. But if we believe that digitalization is a process, the less physical presence will be something that will happen in the banks. And as time goes by, the need of physical presence will be also smaller.
Just not to leave and answer parts about the business. There's just 2 additional points. So one is the question about fee and commission income. So of course, in the Q1 of this year, we have the support of some fees, which are not recurrent every single quarter on deposits and accounts. But moving forward, we have been with different drivers, we have been gradually improving our fee and commission base.
And so we continue to expect a solid growth of fee and commission income during the current year. There was also another question about asset quality. Just to remind that, of course, we as I mentioned, we have been introducing in the past last year stricter definitions of classification of loans under the default in retail side, we did the same in corporate in the Q1 of this year. And as a consequence, sometimes have some reclassifications of loans between Stage 1 and Stage 2, especially explains also the one question, which is that there was an increase in Stage 2 loans in the Q1 of the year. But as you could see, this did not have a significant impact for the time being in terms of the needs in terms of the cost of risk.
And then we have a whole range of questions relating to Swiss mortgages. I think the easy way to start is the question about our intention to implement KNF's Chairman proposal and what Air's Chairman proposal and what do we have done and you said beyond that yet. So
we were invited to join the discussions in beginning of this year. And since then, in a prudent way, we explained that for us the timing for taking any decision, positive or negative, would be just the 2nd part of this year because we thought that we need to go by our own survey, our own assessment, our own real assurance about the proposition and all of that. Meanwhile, things went a little bit faster we even were forecasting. We ran the survey. The survey was positive.
We wanted to go in a very detailed survey with specific calculations per customer covering survey and all of that. Also assessing not only the customers increase on the installment and the balance. And also, we went to we decided to make a more, I would say, acid test, which would be also having with a smaller, of course, number of customers due to some limitations due to the COVID. But to assess the full documentation and how the customers will react to the full documentation package of the settlement and still is positive. By that, we now are in the period to assess by ourselves what this would mean for the bank and what would be the conditions for the bank.
And positive or negative, we believe that after some or let's call it August or something like that, we'll be ready to take a decision in this proposal. We believe that this is a good settlement. We believe that the decisions of European Court of Justice and of Friday, the panel of 7 judges was positive for the banks. And when the news are positive for the banks, this will make more probable a settlement. And so it gives a better chance for this solution to be viable.
But the only thing that we can say at the moment is that we see the things going through faster that we were even forecasting. And we believe that on the summer, we will be able to take a decision. And if positive on the Board, then to bring to supervisory Board and if positive in supervisory Board, to bring to the shareholders.
And in fact, we the other part of the questions, so one is regarding kind of proposal. Then we a second, which was our assessment of the European Court of Justice and Supreme Court that you already mentioned. And then we have 2 additional, let's say, groups questions connected with this issue, which is, first, the provisions that we have done in the Q1 and if this can be considered as the run rate for the future. And the second is about capital implications. So maybe I would start just to give you an explanation about so we showed in our Page 14 of the presentation the evolution of the portfolio and also the evolution of the provisions against the portfolio.
So in the Q1, we significantly increased the level of the provisions, taking into consideration on one side, negative trends in court decisions and second, the still the increased inflow of new court cases. We are not but for the future, for the next quarters, of course, we will be updating the level of provisions depending on the trends regarding inflows, regarding the nature of the court decisions, regarding also consequences of the decisions of the European Court of Justice and Supreme Court in practical rulings of local courts. And we are still before understanding and having evidence about what will be the implications of such rulings, although as it was said in our view, they are more positive in the sense of establishing some balance between borrowers and banks, which until now was completely not the case. And so we cannot we are not able to give exact guidance for each quarter. We as we wrote in our report and we have been writing in our report, we will be taking a conservative view and creating provisions.
And if the trends will continue, of course, we will continue to increase the amount of the provisions dedicated to the FX market litigations. On the other side, if in the future such settlement proposal would be implemented, this also would offset potentially the future flow of the court cases. So we also need to take that into consideration. And regarding capital consequences, we showed also in our Page 15 the status of our total capital ratio and Tier 1 ratio, which are very strong and much above the minimum required levels. And additionally, we are also highlighting the fact that we have an additional regulatory buffer connected with the FX mortgage risks, which is the pillar to buffer, which we have for some time, which now is 3.41% of in terms of total capital ratio.
And of course, what we know and what we have been always trying to achieve in the long run is a dilution of the portfolio in terms of total loans because we know that by decreasing the absolute and relative size of this portfolio, this will contribute to a gradual or faster or slower, it doesn't matter, reduction of this Pillar 2 buffer, which one day will simply disappear. And so we have a large capital buffer and which is quantifiable. I mean, we are putting all the numbers on the table. So it's very easy for you you to see how much surplus we have today. Plus, what would be the surplus if the Pillar 2 buffer would be eliminated in the future.
And this can give you also an idea of the capacity of the bank to absorb losses on one side. But also on the top of that, you need to take into consideration the capacity of the bank to originate net profits in a solid way without before FX mortgage provisions. As we've shown in the presentation, this quarter, we have more than PLN 200,000,000 of net profit excluding this extraordinary item, which means that on average for the future, we are speaking about close to on average SEK1 1,000,000,000 of net profit per year, excluding provisions for FX Mortgage, which is which shows the capacity of the bank to organically generate capital on the top of the buffers that already exist.
Thank you very much. I hope we answered all your questions. I mean, they obviously circulating about the capital impact in various put in various ways. As usual, thank you very much for your interest. And as usual, I strongly encourage you to contact us either by telephone, by email or by other means.
The IR team is at your service as usual. Gentlemen, thank you very much. Any concluding remarks?
Just to say that we are quite optimistic about the business terms and the future. And I know that because there was a specific question about corporate book and about mortgage, But we do believe we have a vision for the market that is positive reaction in economic terms and we prepare ourselves quite well for taking advantage of this. And so our forecasts in the for the next remain part of the year and the next year in terms of normal activity, it's quite positive. So of course, at the same time, we need to address this legacy issue. And also, we believe that 2021, 2022 are really the years of solving this legacy issue in Swiss francs.
So it's sometimes the problems cannot be solved in advance. They need to write environment. And we believe that we are close to this right environment. And at the same time, that also the gains in terms of efficiency that were already achieved and that they are being still going to be achieved due to increase of productivity and also the recovery in terms of economic productivity. They will or they make us quite optimistic for the activity of the bank for the next for the remainder of the year next year.
Thank you very much again. And hope to speak, I'll see you soon. Thank you very much.