Good afternoon, welcome to Bank Millennium SA two quarters results call. Very happy to be starting the earnings season for Polish banks at such a strong high note given that we reported record high results. With us we have Mr. Joao Bras Jorge, our CEO and Chairman of the Board, and Mr. Fernando Bicho, Deputy Chairman of the Board and our CFO. As usual, Mr. Bicho will start with presentation of the results and after we'll be ready to open your questions to answer your questions. Thank you very much.
Thank you. Good afternoon to all. Thank you very much for joining this call. As usual, we will go quickly through the presentation and we would like to start from page number five, which summarizes the main financial achievements in the first half of the year. First of all, we closed the semester with a net profit of PLN 511 million, which means 43% above the level of one year ago. In particular, we had a very strong reported net profit in the second quarter of PLN 331 million, 45% higher than one year ago. If we would exclude all the costs connected with FX mortgage legal risk, the net profit would have been PLN 1.6 billion, a growth of 7% year on year.
The reported return on equity stood at 13.8% and the results were supported by a resilient net interest income despite the gradual decrease of the interest rates. NII was higher by 13% year on year on a reported basis, or 5% if we exclude the impact of the credit holidays provisions that we created in the second quarter of 2024. The net interest margin was at 4.18%, down 13 basis points year on year, despite the fact that, as I mentioned, interest rates already started to go down. Cost-to-income ratio on an adjusted basis at 34%. Also on the positive side, we should stress the extraordinarily low level of cost of credit risk during the first half of the year at 21 basis points over total loans, which was supported by sale of NPLs in the second quarter.
Also very important is the further reduction in the NPL ratio to 4.2%, also supported by the mentioned sale of NPLs. Last but not least, the fact that the NPL coverage ratio by total credit risk provisions further increased during this quarter. On the capital, liquidity, and MREL side, we continue to show very solid levels of capital ratios, with total capital ratio at 15.6% and tier 1 ratio and core tier one ratio at 13.8%. The capital ratios are temporarily lower due to further recognition of operational risk charges in accordance with latest EBA draft on operational risk. I will elaborate more later on in the presentation. Regarding this, I should stress that if we would include the net profit of the first half of the year in our own funds, the tier 1 ratio would be at 15%.
We continue to show very solid buffers over the minimum required requirements regarding MREL and in terms of long-term funding ratio we continue to be on track to achieve the targeted level by the end of 2026. Last but not the least significant surplus of liquidity, which translates into relatively low loan-to-deposit ratio of 61%, which shows also the capacity that we have to accelerate lending in future periods. On page 6 and 7, we have summary of key profit and loss items and other indicators, which we will go through the next pages of the presentation. I would skip to page number. This is a page that we started to show in recent quarters in order to present the status of the implementation of the strategy for 2025-2028 regarding the main business goals and financial and risk goals.
Of course, we are still in the very beginning of the implementation of the strategy, but already with several positive signs regarding some of the key assumptions for the future, namely the already visible growth on the corporate loans side and on the other side keeping positive trends from the past, namely in terms of growth of the customer base on the hotel s ide.
Going now through the P&L and looking at page number nine, a very strong second quarter profit at PLN 331 million despite the fact of still relatively high costs connected with FX mortgage and also a combination of positive and negative significant items during the second quarter that we presented in a detailed way in the financial report that was issued today, which still, even if we would eliminate, let's say, extraordinary items, we continue to show a very solid operational result. When we look on the right top graph of page 9, it is visible that excluding extraordinary items, which are described below, the net profit of the second quarter would be PLN 886 million year on year. On the first half of the year, the growth was 7%. On page 10, we see the resilience of the net interest income.
The net interest income excluding the impact of the credit holidays was higher by 5% year on year, and in the second quarter it went up by 2%. To a large extent, this is the effect of the difference of the number of days of the second quarter versus the first quarter. Excluding this effect, actually the NII is in line with the first quarter, but still at a high level. We had some drop in the average cumulation of loans, but also a drop in the average cost of the loan deposits. This, together with some increase in the remuneration from the bond portfolio, contributed to the resilience of the level of the NII. Already in a context where the interest rates were cut during the second quarter to 5.25% and then, as you know, in the beginning of July to 5%.
On the net fee and commission income, already a small rebound versus the relatively low first quarter, so a growth of 3%, although year on year we still have a drop of 5%, mainly as a result of a downturn in bancassurance fees, which is already to a large extent offset by other fees, namely coming from investment funds and from cards. On the operating costs side, as expected, still a double-digit growth this year, operating costs grew by 15% year on year. If we exclude the costs connected with contributions to Banking Guarantee Funds, so Resolution Fund and Deposit Guarantee Fund, the total operating costs are higher by 11% year on year and particularly other admin costs are up already single digit, 7% year on year.
To remind, this year we not only have had a higher contribution to the Resolution Fund, but also the restart of the charges for the Deposits Guarantee Fund since the first quarter. On the asset quality side, we had sales of NPLs in the second quarter, which had a positive impact in terms of P&L, a gross impact of PLN 85 million, and on the other side a reduction of the NPL ratio to 4.2%. Also important is that despite the sale of the NPLs, which tend to be of course totally provisioned, we still had a further increase in the coverage ratio of NPLs by provisions for credit risk to 76%.
On page 13 regarding the capital ratios, as I mentioned before, we still keep very solid and comfortable surplus of capital ratios over the minimum requirements, although we had temporarily lower capital ratios in the second quarter, also anticipating some of the questions that could come. The decrease was connected to the implementation of the CRR3, namely taking into consideration the latest draft of Technical Standards for Operational Risk that were published by EBA in June. This latest draft is still not the final, but we anticipate that there will be no further changes. It translates into a more negative scenario than the one that had already been considered at the end of the first quarter connected with operational risk charge.
Here the downside was brought by the need to consider all the costs connected with FX mortgage legal risk, including the cost of the settlements that we had in previous years to the operational risk charge. As a consequence, we had an impact in the quarter of almost 1 percentage point in terms of the capital ratios. Having said that, we should stress two important things. One is that the capital ratios at the end of June still do not include the result generated in the first half of the year. If we would include the net profit of the first half of the year in our own funds, the capital ratios would improve by approximately 1.25 percentage points, which means that we would bring back the core tier one and tier one ratio to 15%.
As a reminder, we are targeting for the next years to keep a tier one ratio around 15%. This is the first comment. The second comment is also to point out that the operational risk charges, especially in this part connected with the cost connected with FX mortgage legal risk, are based on a three-year average, which means that part of this additional charge that we are facing today will tend to disappear in the next two years. Just to remind, the peak of the costs connected with FX mortgage legal risk took place in 2023. The numbers that we are using today are based on the average between 2022 and 2024, and at the beginning of each year we have a holding average. It means that on January 1, 2027, the 2023 costs that reached its peak will no longer be taken into consideration.
Part of this impact is, let's say, temporary. If everything else would not move, at least this part we know that through time will tend to decrease. We need to treat this downside as, let's say, a temporary impact from the implementation of the CRR3 in this specific topic on page 14, significant surplus of morale over the minimum required levels. Additionally, also in the second quarter we had a reduction of the morale requirements, as expected. Moving now to FX mortgage on page 15, the outstanding portfolio continues to decrease at a fast pace year on year, a decrease of 31% as a consequence of repayments, negotiations and settlements, and also execution of the verdicts. On a gross basis, actually this portfolio is completely marginal in the total gross loan portfolio.
The provisions for legal risk in the second quarter reached PLN 509 million, bringing the total of the semester to PLN 520 million. They were a little bit higher than the first quarter. Still, year on year, in the first half of this year, total provisions for legal risk are lower by 10% versus the previous year and total costs. Not only the provisions but also other related costs are down by 25% versus the previous year. We continue to show a gradual downward trend of total costs connected with the legal risks. The total provisions represented 142% of the loan outstanding as of the end of June. In terms of statistics of the second quarter on page 16, we had a continuation of the downward trend of new court cases which stood slightly above 1,000 and was the lowest of the last four years.
At the same time, we managed to have another quarter where the number of settlements was above the number of the inflow of court cases and stood at 1,087. Moving now to the second part of the presentation regarding business results, on page 18 we highlight the main points, namely the growth of the total deposits by 4% year on year, the growth of the consumer loan portfolio by 5%, the already visible growth of corporate loans including leasing and factoring by 6% year on year, the significant growth of investment funds by 34% and the large commercial liquidity surplus that translates into a loan to deposit ratio of 61%. On the other side, we keep a solid pace of customer acquisition and the total number of active retail clients reached 3,193,000 at the end of June, of which 93% are decent digitally active.
In terms of origination, different trends: cash loan sales higher by 2% year on year, corporate loans by 151%, factoring by 8% while leasing had a small reduction of 2%. On page 19, we see some more details about the evolution of the loans and of the deposits. The combination of the growth of consumer loans and corporate loans and some contraction in the PLN mortgage portfolio and also the significant reduction in the FX mortgage portfolio brought as a consequence a reduction of the total net loans by 1% year on year. This would, excluding FX mortgage, have represented a growth of 1% versus one year ago.
It is visible already some change in the structure of the loan portfolio as you can see on the bottom left graph with some dilution of the weight of PLN mortgages in total to 47%, important share of consumer loans and other retail, and also a gradual increase in the share of loans to companies, factoring, and leasing. On the customer deposit side, overall a growth of 4% year on year with the growth especially in retail offset by some drop in companies deposits and in investment projects. As I mentioned, the growth of 34% of which a growth of 42% in Millennium TFI funds.
On page 20, apart from what I already mentioned in terms of growth of loans and deposits in retail and apart from the growth of 2% of cash loan sales, we had a significant drop in the origination of mortgage loans by 59% year on year, which will probably be gradually reversed in the future quarters. This also contributed to the dilution that I mentioned before of the mortgage portfolio in total loans. On page 21, regarding other metrics for retail, a solid growth of the number of active retail customers on a net basis: 31,000 growth in the second quarter, 132,000 year on year. Continuation of the solid pace of growth of micro business clients, 5% in 5,000 in the quarter, 17,000 year on year.
As a consequence of the growth of the number of customers, there is significant growth in terms of number of current accounts and number of cards. On page 22, the number of mobile-only users already accounts for 70% of all active digital users. We have 2.76 million active mobile users, which represents a growth of 8% year on year, and also we have a growth of 11% in BLIK users in the first half of the year versus last year. Digital channels are getting more and more important in terms of sales. On page 23, we would highlight the 86% digital share in cash loan sales, the 50% digital share in current account acquisition.
Page 24 illustrates the continuation of the effort to build our competitive advantage through a user-friendly app with further implementations of the quarter, and the same is shown on page 25, also with special focus on convenience but also security. On page 26, our Millennium Goody platform continues its development. We would highlight this time the launch of a product price comparison tool, the continued growth in Goody cashback and gift card sales. On page 27, moving now to the corporate business, we start to see the first results of the stronger focus on the corporate side, visible in the growth of loans to companies with an overall growth of 7% versus one year ago, 3% quarter on quarter, driven mainly by direct loans to companies, but also a growth of 4% in leasing portfolio and 3% in factoring.
At the same time, deposits show a drop by 8% year on year, especially due to the measures that we already have taken last year of a tighter price management of time deposits, also due to the significant excess of liquidity that the bank is currently showing. On page 28, some additional figures regarding corporate business with a small drop of leasing sales by 2% year on year in the first half of this year. At the same time, growth of factoring turnover by 8% year on year. On page 29, to support the development of the strategy on the corporate lending side, we are expanding the financing offer and supporting sustainable projects with different guarantees that are being provided to our customer base. In a summarized way, these are the main points of the performance of the bank and of the group during the first half of the year.
Now we will try to answer your questions. Thank you.
Thank you very much, Fernando. As usual, it's an interesting presentation. I hope, in case you haven't read it yet, gentlemen, I'm supposed to be a bad cop, but I'm an easygoing cop. We have a choice. Where would you like to start? We have questions on results, a bit of guidance, volumes, interest rate sensitivity, capital Swisses, and other. Let's keep Joao a bit more busy. Let's talk about volumes first. What do you think? The first set of questions that relates to volumes is basically two subjects of interest to our audience. First is mortgages. What caused the decline in new sales of mortgages in the second quarter? What are the bank's expectations for the second half of the year? When do you expect the mortgage market to become attractive again?
Can you talk us through what is happening in this segment, meaning retail mortgage, and your expectations for the coming quarter and so on and so forth? Then there's a second question that I will ask you afterwards. It's mortgage in PLN.
We are below our initial expectations for the mortgage production. Our plans were to produce less than in the past, with a bigger concentration on corporate as it was in strategy and having some normalization in terms of market share and our presence in the mortgage market. There is not a specific reason why this quarter or even these recent quarters we are below our initial expectations. We didn't change the credit policy. It's not a specific p osition.
Of course we are concerned about vivo. Of course we are concerned about risks. Of course we are concerned about the lack of the definition of the problem is going to be solved. This is clear. It's something that is with us for a while. It's not the justification for this. We were more involved in other areas. It's not anything specific. We believe that we will see some revamp in the next quarters. We should not expect much higher market share of the bank in mortgage market and in the other areas of retail, as we saw some years ago. The bank, our bank, will become more and more normalized. We explained in our strategy that we will not always only have the ambition of customer acquisition that went very well again this quarter and the quarter before.
Even in the year on year basis we are still having organic growth of the net active customers at a very high level. We explained that to capture the full value we will also be engaging the primacy of that customers. This is a view of more having full relation with the customer than a specific product. There is not a specific reason. We also would like to have done a little bit more, but also for whereas it's not so relevant as it looks for the market. We will reflect about the number of questions that we had about that and the comments from the analysts. As you know, in terms of profitability this is not so impactful.
As you now w e need to have long-term financing on 40% of this portfolio. There are also some costs related to serving this portfolio, and some embedded risks also connected with this portfolio. Morgan, this idea of 10 years ago that this is a wonderful product, a basic product of retail banking, I think this is of the old times, it is not from the new times anymore.
If you allow me just to be a little bit provocative because I need to say this. I just want to remind that when we had the credit holidays in 2022, we were penalized because of having higher than average exposure to mortgage in the total balance sheet and others. When the long term funding ratio was presented, it was visible that we had a bigger, one of the higher gaps to fulfill in terms of medium term funding than others because of the overrepresentation of mortgage loans in zlotys in our balance sheet. Each time that questions about VBON and there is always this perception that also we are more exposed in case there would be a problem than others.
It's a little bit ironic, I would say, that at the same time when the production decreases, we have so many questions about the production of mortgage, but this is more a little bit of provocation.
An interesting and right observation. Thank you. Sticking or staying within the volumes, our followers have noticed the strong performance of the corporate portfolio, and the question is what type of loans is behind the growth of the corporate portfolio in the second quarter.
We believe that this is the most important point of our presentation. At the end of last year, in the third quarter presentation, we presented also the strength. There were a lot of questions about, okay, but you are so strong in retail and executed so well. Why are you looking for corporate and why do you think that you would have competitive advantage to do something in this mid corporate SME market? We explained that we had the competencies, but we didn't have the capital. It was a question of time and now is the time to show it. This area is going to be a long process. It is going to have, besides higher intensity of the commercial areas, also work in terms of a new workflow process. There are going to be new deployments in terms of digital banking to support all of that area.
This is a strategy for four years. It is not just a highlight of the next quarters to present. Of course, it is extremely important when we present already strong activity in that area. We believe that we are going to present also in the next quarters. If I'm not mistaken, and I think I'm not, for example, in the last month the biggest ticket that we issued was PLN 80 million. We are talking about EUR 20 million. It means that we are really making on the segment that we want. SME, we are a bank that is present across Poland. Of course, we will do some bigger transactions. We want to participate in the energy transformation and the big projects of the country, of course. Our competitive advantage is relation with the customers, to offer quality and digital services, to be close to our customers.
This is the advantage that we have in the retail market and that we also are now presenting in the SME market, which we feel very comfortable. We believe that we have good risk models. We have the same team on the risk side, the same processes on the risk side, the policies and everything. We are just doing what we could not have done without the capital that we have today. We are really, really happy and proud to present these numbers already.
Final questions on volume, an analyst is asking if we think that our balance sheet value of mortgages will increase in subsequent quarters or they will continue to decline.
I think we would answer in the following way. There is going to be a rebound in origination of mortgage loans. It means that sooner or later the new origination will more than offset the amortization and repayments of the portfolio. It is difficult to say if it's going to happen already in the third quarter or in the fourth quarter. It is a matter of time that the new origination will start to offset the repayments and then the portfolio will start to grow again. It will not grow at a very fast pace. Right. This is not the plan, but it will stop to drop. We are not able to be very precise, but it will stop to drop and will start again to grow.
Thank you very much. I suggest we get the FX mortgage related questions out of the way. There's a handful of them only. First group of questions is about the risk, legal risk charge. What level of CHF mortgage provisions should we expect in the second half of 2025? What are your expectations for 2026? Will 2025 be the final year of material provisions for the CHF mortgage portfolio? What is the run rate and so on and so forth.
I think we keep what we already said in previous meeting regarding the trend. We believe that the trend is going down, not necessarily every single quarter, but we were always clear that we are not guiding that every single quarter of legal risk provisions will be lower than the previous one because it's not possible to do such a statement. We know that the trend is going down unless something extraordinary not currently assumed happens. Our expectation is that the average of the second half costs will be lower than the average of the first half. First half costs, how much lower we are not able to say. What we know is that it will still be relevant. We cannot say how much lower, but even if lower it will still be relevant. This is the first thing.
The second thing is that if nothing extraordinary will happen, we still keep the view that this year should be the last year with very significant impact of legal risk related costs, provisions and related costs. We still keep this view unless something extraordinary happens. Regarding what else.
A question a bit technical about settlements. What is the reason behind your lower level of settlement costs versus already low first queue, which is probably not quite a true observation.
First, just to clarify, we have in the total number of settlements, settlements inside the court and settlements outside of the court. The settlements inside the court are embedded in the methodology to calculate the costs connected with legal proceedings. The settlements outside of the court, when we closed the year 2024, inside the total stock of the provisions, we had a provision dedicated to settlements for out of court customers that has been utilized for the settlements that were done during the first half of the year. We are still incurring in costs of settlements, but they were covered already by provisions that were outstanding as of the end of 2024, and that's why it became not so much visible in the results.
What hopes do you have related to the expected CHF Bill? First question, second, do you think the most recent Supreme Court verdict on two convictions is a game changer?
First of all, I'm not enough informed that I think the question is the opposite way. It's more the expectations of the European Court decision. Of course, it was more about the consumer, but in terms of having the balanced theory. Anyhow, we don't expect anything with the new law. We will see if there is a new law or not. Also, in our methodology, we are reducing the times for a court decision, which means that with the decision of a law that would speed up the courts, the impact will be in a very big way mitigated. We have our position since the beginning that we want to solve the situations fully.
It means that it's agreements, amicable agreements before the court or in the court, and that close the situation before that or when it is a court decision to have compensation agreement or offset that also secures the capital. Close completely the situation and don't stay here with one part of the court decision executed and then the bank claim still elsewhere. We have a view that when we have this type of topics, we need to close. We are closing on an agreement in the court or outside of the court, and then inside of the agreement we close everything. When we have a court decision, we also want to close everything between the settlement of the customer claim, but also the settlement of the bank claim and have an agreement on that. We have been working on that.
If the courts decide faster, we will have from one side some costs that will occur faster, but also some statutory interest rates lower. I don't know if it is better or worse anymore. We have decisions now, especially from the European Court of Justice, that should be also incorporated on that in terms of balanced theory and not just already these two claims theory, but we're not yet. Sometimes it takes some time to have embedded in the Polish courts the decisions of European Court of Justice. Although, as Fernando Bicho said, we believe that we are reaching the end. If it is this year or in mid next year, we will see the end, or at least the end of these extremely high impacts in terms of costs for the bank in operational level is still a long way to go.
We have thousands and thousands and thousands of court processes that we need operationally to close. We still have a very large and engaged team addressing all of these topics. We will have in the next years, even if everything stops, by far, we are far away from operationally finishing all of this work.
Thank you. We only have one question on capital, so allow me to read it. Could you kindly explain how we should think of the phase up of CRR impact on your capital? 1/3 per year when CHF provisions reduce is a reasonable assumption.
Yes. The easiest way is exactly to look at the costs incurred in each year between provisions and other related costs, costs which by the way we were disclosing in the past. It's easy to get them from all our reports. In each year we are using the average of the previous three. As I said during the presentation, in this year 2025 we are using the average of the costs incurred between 2022 and 2024. On January 1 to start 2026, we will switch to the cost between 2023 and 2025 immediately. The question can be, okay, what is the difference between the cost of 2025 and the cost of 2022? This is a legitimate question that could come immediately. If the trends will confirm our expectation, the total cost for 2025 should be a little bit lower than the cost of 2022.
There will be a small positive impact but not very significant. The biggest change will happen on January 1, 2027 when for the calculation the 2023 will be dropped where we had the peak of the costs. This is the easiest way to look at this. Of course, we are focusing on this because now we had this extraordinary impact. There are other things that will happen in the future like other charges that will increase because of growth of credit risk or because of other reasons behind operational risks. We are just trying to isolate this impact and to show that this one connected with legal risk is by nature temporary. This is what we wanted to s tress.
And we are at the peak of the impact
And we are at the peak.
Important to stress. Thank you very much. Now let's move to results and a little bit of guidance related questions. Let's start from an easy one. What are consumer protection related costs mentioned in the second quarter report?
This is explained in detail in our semiannual report that we published today on pages 71 and 1972 of the English version. It's connected with proceedings run by the Consumer Protection Authority regarding the handling of unauthorized transactions. The proceeding is still open. It's already going on for some time. We have reported about it in previous reports and in the second quarter. We i n connection with these proceedings, we have recognized the provision of PLN 37 million based on an estimated outflow of funds connected with this. The detailed description is in the report, but this is connected with the consequences of this concrete proceeding.
Thank you. Question on NII, NII guidance update please. First half 2025 NII running at 5% year on year. Last quarter you guided on flattish NII development in 2025. Does this guidance still hold? What about 2026? Can you grow on 2025, this despite rate pressure?
Very interesting question of course. First of all, starting with our expectations regarding the interest rate trajectory, we have now interest rates at 5%, intervention rate of central bank at 5%. Our expectation is that until the end of this year interest rates will be cut to 4.5% and during the next year that they will be further cut to 3.5%. We still continue to assume that 3.5% is a kind of terminal level for the NBP reference rate. Of course, it is difficult to guess the speed and the timing of each of the cuts, but I'm just stating what are our expectations, which by the way are in line with the expectations that we already formulated in the fourth quarter of 2024 when we presented the strategy for the next 40 years.
This is still, despite all the volatility that we have faced, these are still the same figures. This is one thing. The second thing is that the NII has shown resilience. We expect that in the second half of the year we still can to a large extent keep the resilience of the NII. I would say that the trend is for the NII to be flattish or slightly up year on year. This is supported by the fact that we have relatively low sensitivity for interest rate cuts, as we are also disclosing. We have a sensitivity for a 12 months time calculated as of the end of June a little bit below 2%. We believe that of course this is not just a matter of interest rates, it's also a matter of volumes. It also depends if the volumes will grow in line with some of our expectations.
It's supported also by the bond portfolio that we have invested in, which we have invested the excess of the liquidity during the recent years. Here I think that the picture is easier to guess regarding 2026, where we expect further cuts of the interest rates. I think it will depend partially on capturing the volume growth that we are pursuing. It is obvious that if the portfolio would not grow and if the deposits growth would continue, we would need to continue to invest all the excess of the liquidity in bonds. Of course, this would not be so much accretive. We have to rely on the assumption that next year there will be some acceleration of the loan growth in line with the implementation of the strategy. This can help to mitigate at least partially the lower interest rate environment. We are still in July.
It's still too early to give more concrete guidance for the year 2026. We are still even before preparing the budget for the next year. I would not like now to elaborate too much on that. What I can say is that we have tried to the maximum possible extent to protect for the maximum, for the longest possible period, the protection of the levels of the NII within the regulatory limits framework that we have to comply with.
Needless to say that we have as usual plenty of room on the funding cost side, especially on the deposits. If there's a decision to cut, then we'll save going down the P&L. What is the outlook for net fees and commissions in upcoming quarters?
I think our expectation is that there will be a gradual recovery of fee and commission income, but it will not be spectacular. It's going to be gradual. We think that we face the downturn especially in bancassurance fees. Probably from now on there will be a slight rebound and also we still have some contraction of loan fees when we compare year on year. This is due to the fact that we are still affected by past periods where we were more contained in terms of lending activity. We expect that this acceleration of loan growth will also translate in some additional fees that will come not only from lending but also from related products. We have some expectations that there will be a gradual increase in fee and commission income, but it will be single digit. We are not inflating expectations regarding this line.
Cost of risk. Could you please explain why you booked write backs this quarter? Were there any one offs, and what is the guidance for the full year? Cost of risk.
This is connected with the sale of NPLs that we have performed. Typically, as we show in the presentations, we are very transparent about these. We usually make two sales of NPLs per year. We did another one this year in the second quarter. It was larger than usual, and also the gross result was higher than usual. We had a positive result of PLN 85 million. Usually, the loans that are sold are 100% provision. It means that if we sell them, we have some write backs. The reason was this. The reason was the sale of NPLs, actually.
Thank you. Could you kindly walk us through the trading gains and what do you expect for the rest of the year? I think this is a very wobbly position in Romanovs. Right.
Yes, in our report of today we highlight a number of, how to say, a number of substantial P&L items that influenced the first, the second quarter result. Among them we had a revaluation of a stake that we have in a company in one of our investments of PLN 55 million, which explains this extraordinary high level of trading gains in the second quarter. This is the reason behind the result in this line in the second quarter.
There is also a question about our cost of wages. Indirectly, the question goes, did you have compensation increase in first half? 25.
Yes, we have. We have a process in the bank that twice a year we reassess people. This does not mean that anybody has to have a salary increase twice a year, but it means that everybody is reassessed twice a year, some are raised. We have a normal process for already several years on that.
Additionally, we have a provision that we created in the second quarter connected with unused holidays of the year of PLN 14 million, which inflated the staff cost of the first half of the year. This tends to be largely, largely, how to say, dissolved or utilized during the second half of the year. There is some inflation, let's say, all the staff costs in the first half of the year that probably will be decreased in the second half.
Okay. Our tax line also attracted attention because this is the first time we started to use ETR. What tax rate do you expect for 2025, 2026? Could you please give us a few guidelines on how to model the tax line going forward? What are the main non-taxable deductible items in the P&L?
A very good question. Not easy to answer. Not easy to answer. I will start with the easiest part. In Poland there are several costs that are not tax deductible. Most important are the contributions to the Resolution Fund and to the Deposit Guarantee Fund. The contributions to the Banking Guarantee Fund by definition are not tax deductible. This is one thing, this is easier to predict. We have the costs connected with the FX mortgage that are much more difficult to predict because some are tax deductible and others not. That's why it's not possible to give clear guidance regarding what will happen because as long as we will still have this sizable cost connected with FX mortgage, it's very difficult to be very precise regarding the guidance.
What you see for 2025 in this tax rate of 34% was an estimate of what could be the average tax rate for the full year, also taking into consideration what is expected that could be booked and the structure of what is expected to be booked in the second half of the year. It's the best estimate that is possible to be then at the middle of the year for the full year. I think that for now we should take this rate as the best estimate for 2025. For 2026, if the costs connected with the FX mortgage will drop in a relevant way, of course we could get more certainty about what would be the tax rate. I'm not able now because, you know, we are still before all the preparation of the results of the 2026 budget.
I still, I'm not able to elaborate now on what will be the average that could be legitimately expected for 2026. What we expect is that this share of costs that are not tax deductible would decrease versus the overall. Again, I'm sorry, there's another element that is also which is the banking tax, right? Of course, the banking tax is also not tax deductible. I forgot to mention the banking tax. This is the picture. For 2025, the best estimate is the one that we disclosed today. For 2026, if nothing would change, could be a little bit lower. It's too early to elaborate on that.
Thank you. Now, moving to the subject of interest rate sensitivity. What is the current sensitivity of net interest income to 100 basis points decrease in interest rates?
We also disclosed this in our financial report, page 46, sensitivity of NII for all currencies at the level of minus 1.43% in a scenario of parallel move of 100 basis points down of the yield curve. This is the estimation. It's a little bit higher than what we showed at the end of March because the sensitivity also changes depending on the starting level of the interest rates to make the calculation. At the end of March, we have interest rates at the level of 5.75% in terms of NBP rate. At the end of June, the starting point is 5.25%. The lower we will go, there is a trend. There is a tendency to increase the sensitivity because the lower we will go, there is less space to adjust the cost, the funding cost actually, especially the interest rate on the deposit side.
That's why this is not a threat. It's not. The level of sensitivity also depends on the absolute level of interest rates that we face at the end of each period. Still, having said this, minus 1.4% is still a relatively low level of sensitivity, even historically. Looking back at our performance, there is an additional question.
What is the reason for the more cautious approach to changes in deposit prices mentioned in the report in the bank's current sensitivity to interest rate changes?
It's exactly what I said just now. We need to look at the different components of assets and liabilities to assess to which extent they will be repriced when this shock of 100 basis points takes place. As I said, there are some things that are straightforward, like for example, all the loans that are directly indexed to WIBOR or Euribor or whatever. Of course, this is easy, it's straightforward. Regarding the deposits which are not directly indexed to anything, it implies an assessment of what is the expected decisions that the bank will take when such a scenario of interest rates decrease will materialize. As I said, when interest rates are at 5.75%, we have space to do a specific number of actions. When the interest rates are already lower, the space is not exactly the same.
This is the reason why when comparing end of March with end of June, we looked back at the structure of our non-maturity deposits and we had to make adjustments in the expectations, taking into consideration not only this flexibility that is lower, but also actual decisions that were already taken in the meantime.
Final question on this. I'm not sure if we, okay, what is the share of lower yielding bonds meanwhile in your securities portfolios within the context of sensitivity.
It's residual. I think most of the bonds bought in the past with low yields were already amortized. What remains, I don't say that it is zero, but it's much less significant than what we had already.
Okay, I have great news. We have three more questions to go. Gentlemen, Joao, question to you. M&A. What are your thoughts on any domestic M&A with Bank Millennium either as a target or as an acquirer?
I don't have any thoughts about it. I think it's. We are still in our ship about how to deliver the strategy. Truly what we want is to. Usually we don't comment much about what we are going to do. When we had a recovery plan we were a little bit more clear, saying that our expectation is around two years to get out. After two years we were out. Also, in this strategy we explained that it is our ambition, if authorized by the regulator, to deliver the dividends of 2026 in 2027. This is what we are focused at the moment to do. We don't see also transactions in the markets, so there is no thoughts about that. We are very much focusing our organic development that we propose and that we want to deliver.
Okay, a bit of a forward-looking question. Also, do you expect intervention on the minimum reserve rate remuneration?
We don't expect anything. What will be will be. We saw comments on one side. We also saw comments about the special tax on the same amount. It is what will be decided by the authorities; we will manage. I think what Fernando also explained is as the interest rates go down, first of all, the deposits cannot be charged. When it goes to zero, it stays. Also, as soon as we are going to a certain amount, then we need to adjust for that amount a nd space to cut further because there are some amounts that we need to remunerate in whatever the interest rates are. We need to remunerate savings of the customers as well. I think it's, but also the non-remuneration of the reserves also has some policy, monetary policy impact. It should be assessed together. We will cope to whatever it is.
It's not, there is still a question about salary.
Yeah, this is the last question. I would call it a bonus for the employees of Bank Millennium who hold on to this conversation, to this Q and A until the last minute. Okay, the question goes. The average salary remained flat from 2020 to 2021, then doubled over the past four years. What's next?
It is true that during years of higher difficulty for the bank, Covid, first impacts of Swiss francs and everything like that, somehow we took longer to start to have salaries increase, at least in the beginning of the cycle of inflation. Something like that, and probably we are compensating now what some competitors did earlier. Sometimes I'm questioned about this, but I think even when we see the salary per capita in our bank, it is more competitive than some other banks. You need also to understand what is the component of retail versus a more large corporate investment banking. If we have younger talent versus other banks that have older population with maybe some accumulated increase across the professional life, we are more in-house talent developer versus acquisition outside. Some other colleagues from other banks, they acquire more from outside. Sometimes we have some discrepancies on these.
More retail, more in-house talent development, younger generation. Sometimes this is the reason for some differences. Anyhow, it is also normal that as things go better, we also compensate better the employees. Nobody should expect a radical change on that. It is obvious that there is a trend of increase of the HR costs in the bank, also compensating the good work that has been done up to now. Maybe now I can make a bridge for some conclusions. First of all, of course, we are happy about the good results. We are presenting very good results on the quarter, very good results of the half of the year, higher than expected, maybe a little bit in the cost of Swiss francs from another side, also higher than expected, extraordinary gains. Some, like the sales of NPL, are more reference, others was not.
We are quite happy with the results that we are presenting. This is clear. From another side, the faces that are here are the same. We need to remember that just this quarter we onboard the new Supervisory Board, we onboard the new Management Board, and even we onboard the new audit. Maybe even some changes here and there in small items, new auditor, new understanding in some small things. It is quite normal. The process was very smooth. It is not dramatic changes, not dramatic readjustments. Everything was quite smooth in these three changes that we have and pretty much align about what we want to do. We were very clear about the strategy. We are going to present this slide of the strategy milestones in every quarter for you to track as well.
If we are delivering what we promise and our plans, we are very committed to make this balance off in a quarterly basis, present good results at the same time that we are building the strategy for 2028. It is not going to make radical changes, but building block on top of b lock.
According to acquiring customers, digitalization, roadmap, developing the corporate business. It is also being confident that if the authorities allow us to pay also dividend in 2027 or 2026 and having this capacity of building capital. Of course, we had this adjustment that Fernando explains very well. These adjustments will by itself be incorrect or at least to be decreased as these more painful years are also being out of the average. Also, this capacity of the bank to be profitable also allow to build inorganic way capital that we can allocate later on in dividends, but also in new activities. We think we are quite confident about what we present and quite happy to already being so visible some of the changes that we were organizing for the bank. Namely this new front in SME myth corporate.
Gentlemen, thank you very much. We slightly extended over the usual hour, but we are the first so it's our time to shine. We used the opportunity obviously. Thank you very much again. Thank you to the audience for time and interest in us, and thank you for all the interesting questions. Our next presentation is on the 24th of October, which is very early and it's Friday, so we'll probably decide if you want to present it on Friday, maybe Monday. We'll see. We'll keep you posted. Otherwise, happy holidays and hopefully better weather. To tell you the truth, it kind of feels like 3Q results here today in Warsaw. It's kind of a strange feeling, but anyway, it's the middle of summer, so hopefully 3Q results will be in a very sunny and warm temperature environment.
Looking forward to meeting you next time at all the road shows and investor conferences that we have been invited to. Thank you very much again. Happy holidays and hope to speak to you soon. Thank you very much. Bye bye.