Earnings Call: Q2 2021

Aug 4, 2021

Dear, ladies and gentlemen, welcome to the consolidated report of FICO as a Capital Group for Q2 2021. At our customers' request, this conference will be recorded. May I now hand over to Ms. Reimer, who will release you through this conference. Please go ahead. Good afternoon, good morning. Welcome, everyone, to Bank Presentation. The presentation will be held by CEO of the bank, Lezhek Skiba CFO, Tomasz Kubiak and Chief Macroeconomist, Ernest Petlarczyk will start from the presentation summarizing our key achievements and financial performance. Then we will continue with Q and A session. Now I will pass over to CEO of the bank, Lej Skiva to kick off the presentation. Good afternoon, Onno. Before I start, I will outline our agenda for today. I will summarize our performance and key achievement in the second quarter and the half of twenty twenty one. Next, I will hand over to Ernest Miltarczek and Tomek Kubiak that will present our macro outlook and detail of our financial Performance. This second quarter and the half of twenty twenty one was Very good year for Pacal. On this slide, you can see main four issues that I would like to stress. It was the quarter of high earnings above pre COVID levels despite Low interest rate environment and recurring ROE in the second quarter At 9%. We are proud of this number because it's important for us to achieve 10% within this period of strategy. The second issue is that we return to Dividend distribution is one of the few banks in Poland now. And we will pay out 75% of earnings in the second half of this year. 3rd issue is that we see that there is acceleration in business activity in Poland. And this is a wave we would like to use to grow and to see Growth in loans in all sectors in whole banks. The 4th issue is we maintain our credit policy risk And we keep this under control the costs under control. Cost of risk is on the level Key achievements, it is the number And that's why I'd like to stress is the €850,000,000 is the profits Generated in the first half of this year is the this number is higher than in 2019. It means that this is higher than in the time of pre COVID times. This is important to growth in next quarters and it's very important for us. ROE at 9%. It is the sign for us that This target for that we pledged in strategy It can be achieved within this strategic period. This is the time of good performance in the economy. It is that what is important for us that even within this low interest rate Framework. We maintain improvement in fees and commission income. And this is also the time when we see Decline in credit provisions, of course, thanks to good asset qualities, but this Cost of risk level is lower than 50% lower than we assessed before for 20 '21. On the next slide, you can see how important is dividend policy for us. On the left, you can see that between 2017 2019, half Of all, dividend paid by Polish sector was paid by Pical. And in now, in this year 2021, Almost 70% of dividend is paid now by us. It means that we are the leader In dividend policy in Poland, not only the highest level Of money payouts in this year, but the share is also impressive And we are proud and this is how this is the stress how important is to be dividend Financial institution in Poland. Of course, it is based on the assumption that 75% of earnings will be still Paid within this strategy period, but what we communicate is that this range is between €50,000,000 €75,000,000 and it Also depends on the level of capital and the growth of assets. On the next slide, you can see that the last stress test Organized by EBA was very important for us because it's the we are the 2nd Most resilient bank in Poland. It shows that The policy is very conservative, but the negative Scenario can lead to the decline of core equity Tier 1, 5 times less in terms of comparing to the average in the European Banking sector. On the next slide, you can see that this is the 4 main pillars of our strategy: customer growth, efficiency and responsibility. And according to this model, you can see that in terms of growth In the last quarter, in the Q2 of 2021, we saw impressive growth in new sales of mortgage loans, Also new sales of cash loans and more than 30% of SME Loans sales in the second quarter and comparing to the Q1. This time, we see that this is Strong growth of demand of credit and what is important for us to grow according to this demand. Also regarding efficiency, we see that is Still decline in the number of branches. We would like to be more efficient. That is why You can see the growth of ratio of assets to FTE by almost 30% comparing to 2019. And cost to income ratio It's lower by 2 percentage points and reached the level of 45% in the Q2 of 2021, this is one of the important KPI for our strategy to reach the 42% in 2024. Regarding customer, you can see that the steel And also impressive growth in number of active mobile banking customer by almost 20% Comparing the first half of twenty twenty one to the first half of twenty twenty. Also digitalization rate is one of the important KPI of our strategy. It shows Which process can be done in remote channels? Now It's 40%, 45%. The target is to have 100% of Almost all processes for digital for customers that can access via And also there is a growth and this is important for us of our Consumer loans, digital sales in digital channel. This growth this digital channel is important for our to be done in digital channel Consumer loans. On this slide, you can see our this is shortly about Digital transformation, our app Powerpay 5 4 is will be launched Within a few weeks, it is the revolution not only in terms of new Functionalities for our clients, but in terms of structural technical revolution what is inside And that will be much easier to add new functionalities for our customers. This is the important milestone for our development. Also you can see on this slide that our corporate side, you see the growth, SMEs and middle income companies loans Grew in the Q2 of 2021. And we are Proud to be with our customers and this was a time when we issued Green bonds for all and other companies, we are very active in this sector. And of course, cost of risk. It is our responsibility to keep cost of risk under control. And this is maybe a little surprise, but this cost of risk level is on the same Level as in pre COVID time, even we see still this COVID is not over, But it is very helpful. And of course, we have the provisions And that are enough to be prudent and be safe even We will see negative scenario within next quarters. Scholz, review of our strategy. Now you can see ROE on the level of 9%. The target is 10%. That is why we see that this is Quite close, but of course, this year is not over. Cost of cost to income ratio 45,000,000 the target is 42,000,000 Active mobile Banking customers more than €2,000,000 The target is more than €3,000,000 This is still important to For our digital transformation, ESG strategy was published in the 2nd quarter And dividend payout on the level of 75% Will be it is important for us in the Q3. I will pass over to Let me start with a brief summary of most recent developments and also Short term forecast for the Polish economy. To start with, the economy is basically fully reopened and probably Vast majority of economic indicators are already hovering around or above last year's level, pre pandemic level. We are monitoring some battlegrounds with respect to the pandemic development. So far, the Conclusions are pretty positive. It looks like the link between infections, hospitalization as well as Mobility and economic activity has been severely weakened. So that's why We as I mentioned, we expect the 4th wave of pandemic to materialize in Poland as well as our baseline scenario. But We also think that the economic impact of Potential restrictions should be minimal. That's why we stick to our 5.5% Of GDP growth for the whole 2021. Turning to mid term perspective. We should assess the mid term perspective as being very favorable for banking business. We have, as I mentioned, very positive macroeconomic momentum. We should also notice that the policy mix and developments, which lie ahead, By and large, very stimulating. It feels very stimulating. So to start with, We witnessed excess savings in the policy economy, which is a legacy of both pandemic era Support programs, but also very high level of hibernation of the labor market in Poland. We should expect the inflow of EU funds. Some changes in tax and transfer The system in Poland, which are already announced, are very likely to stimulate consumption going forward. We also should expect the public investment finance from local sources, which is part of a so called Polish new deals to materially impact economic trajectory going forward. Last but not least, we should expect Minimum wage hikes, which should translate into nominal growth of Minimum wage at a level of 15% per annum. So this should stimulate Especially this should stimulate the GDP growth, but we should focus here on Nominal GDP, which should definitely growing much above pre pandemic trend. All this should Definitely result in a kind of reaction from Monetary Policy Council. So here we point to The possibility of monetary tightening in 2022, this Should definitely translate into more favorable conditions for banking business. Let me conclude that Rere rates will stay much below 0 for the foreseeable future. It's not only Polish phenomena, it will affect it will be the case in all developed economies and it will affect Our thinking and also the actions of economic agents. Thank you. Good Morning, ladies and gentlemen. 2nd quarter was very good in terms of delivery of bottom line 50% or 150% almost quarter over quarter and Cumulative profit also 50% above last year and also above 2019. Key highlights from those numbers. 1st of all, as it was raised by Lecek, rebound in customer activity And sales, that's I think the first very good sign. 2nd of all, you can see this already in the fees and commissions number. And this is something we've been also highlighting that we expect recovery here and that very strong recovery. And third is, of course, cost of risk, which returned to pro COVID levels. So those are the 3, I would say most important things that drive those results. Starting from gross operating Profit, I would like to concentrate your attention on the quarter over quarter dynamics because they are the ones actually most comparable While year over year, of course, you have both COVID and IDEA. So gross operating profit Increased by 25%. Of course, in the Q1, we had some restructuring costs, but even with those costs And the increase would be double digit 10%. That's coming from revenues. Revenues increased by 130 €1,000,000 and that's primary as a function of both fees and commission and other income. Other income means sales of bonds, investment Investment sales and dividends and things like that. I would start then from net interest income, slightly up, €5,000,000 quarter over quarter, and we managed to keep the net interest margin Flat quarter over quarter. Now that second quarter was, of course, very challenging from the accounting point of view Because we had to we finalized the so called purchase price allocation of the idea bank, which was impacting a lot NII and this is why you have quarter over quarter the minus 2 basis points coming from Ideabank Assets, which on cumulative terms is close to 4 basis points and this 4 basis points I think It's a number that is a good approximation looking forward. So the purchase price allocation mechanism just in 2 words, It's about the fact that you're taking over assets at actual market value and not book value and then amortizing the potential Plus of deficit in the NII. So we were actually pricing deposits above book value as well as Performing loans on deposits that has a positive impact and on loans on the negative, which made Some changes in the numbers, but from the pure business perspective, I like always to concentrate on something what we are showing as Commercial activity and this is the effect actually of excluding all those, let's say, One offs are cumulative things and this since the beginning of the year is rising by 8 basis points, A big move in the Q1, but another 2 basis points brought in this 2nd quarter. 2nd is volumes that is driving NII. Retail volumes are 3% up, Corporate, including Ideabank, are 10% up, corporate including, of course, micro loans. So the net growth is 7%, but even without idea that would be a positive growth. Retail is driven, Of course, by mortgages, almost 6% growth in the stock. Consumer loans, which were dropping during the crisis are now Being flat, so the current sales are not yet allowing for the portfolio to grow, but we think this will improve in the next And we will get the rebound in the volume of consumer loans, which is at the end of the day very important for us delivering the 2024 strategy. On corporate, the growth is very distinguished between the small sectors and you were seeing Record high sales of SMEs and the very large growth in mid corporate. Those are our key segments and they are growing. On the corporate side, we don't have yet the pickup in investments transferred into the volumes. So those volumes are slightly dropping. The record sales on mortgages are not yet reflected that much in the dynamics of the volume. So this is More an element of the 3rd and 4th quarter where we will see an acceleration in the volumes in mortgages as well. On deposits, we are working a lot on mutual fund business as you can see and 23% dynamic in the stock of mutual funds It's something very good, great Q1. 2nd quarter also positive. So those good numbers Generally working on price still on corporate deposits, that's normal fluctuations. And retail It's still growing with optimizing deposits from taken over from IDEA Bank, especially the ones driven by price, fuel. Fees and commissions, that was a magnificent Quarter fees and commissions, meaning a dynamic. I think it's a sustainable level, but the dynamic I think is impressive. 1st quarter was not yet what we expected and we were highlighting this in the presentation last quarter that we expect the dynamic fees To actually report return to levels visible on the quarter, so almost 20% year over year dynamic and almost 10% quarter Over quarter, practically all categories or fees are growing. I think very positive trends coming Also from the economy, but also from the regular the repricing actions and the pricing that we are doing, we were mentioning that there is Still some moves to be made in the last quarters of the year. Cost dynamics. Now Nominal cost dynamics is 8% coming from mainly acquisition of the Ideabank. Of course, in the Q2, we have taken over some one of costs. And For me, the Q2 was is a little bit too high in terms of costs, meaning there are a lot of One off costs. Some of them will be still taken in the second and third quarter and that's generally The costs coming from the integration of IDR Bank, we year over year have also higher costs related To the motivation systems where bonuses were cut last year and they are returning to better levels now. And of course, amortization is a second line, which is also growing. But excluding all those one offs that we have incurred in the second quarter, The cost dynamics in comparable basis without all those restructuring things is still well below inflation And that cost efficiency is something that you know that we are famous for and will be Continuing. Capital. Now Q1, 16.5 dropped a little bit quarter over quarter, But that's a result of Gavi's repricing, so yields went up due to those this inflation Pressure that was mentioned by also Adenas and waiting for the interest rate scenarios With really open arms, let's put it like this. Liquidity very strong and as Lasik was mentioning dividend, The only actually Polish bank that and that is regularly paying dividends and giving That return to investors. We are very proud of such consistency coming from also responsible approach To our business. Cost of risk. Cost of risk went back to pre COVID levels. We were saying 50 basis points through the cycle and benchmarking maybe for those levels For 2021, this Q1 was 41, 2nd was 45 with some methodological changes, But they are even they were more negative than positive and we are not using any COVID provisions practically Yet for those levels. So and you can see this also looking at the numbers, at the coverage ratios or at the NPL ratios, which are practically flat year over year, We show for your comparison the numbers excluding GIDEA Bank just to have this comparability year over year. But So far so good. On the cost of risk, of course, that's an element that you can never fully predict. But at least looking at the numbers so far, we We are optimistic. So summarizing, consistent policy And allowed us to return to pre COVID levels in terms of not net profit and a very Good second quarter results, which even had around the 9% ROE with PFG being spread throughout the whole year, so called recurrent ROE. We return to dividend distribution. And after the KNF approval, the dividend the conditional dividend Decision of the GSM of 75% payment is now unconditional, meaning it's a 75% payout. We see strong acceleration in our business activity and that's showing in P and L and the fees and commission lines, Partly in the volumes, but especially now in sales, which will transform into those volumes. And we maintain a good Discipline in both credit risk and operational costs as we are famous for. And I think this consistent policy Has also allowed us to consistently make one of the top three positions in the European Stress test, which just to remind again, in 2018, we were number 3. Now we are number 2 And the fully loaded Tier 1 stress test sensitivity. Thank you very much. So thank you very much. So I would like now To open Q and A session, I would like to remind you that if you would like to ask a question, you can do this all directly if you already registered Or using our online platform. So I will pass the voice to the moderator to open up the gate for Q and A. For those who want to ask the question directly. So please. Thank you. We will now begin our question and answer session. Once your name has been announced, you can ask a question. If you find your question is answered before it's your turn to speak, you can dial 0 and 2 to cancel your question. If there is no questions directly, so I have a few questions coming from Internet. So maybe we'll start From the question is coming from Picao BPE. What was the reason for drop in corporate deposit? That's generally a seasonal drop and the fluctuation in corporate deposits is something that We have observed also in the Q2. There was in the other quarters, there was not no particular reasons. Maybe it's a first sign of potential investments coming into done by the corporate and let's hope that, but there was not Any specific reason for that? So the next question, what was the reason for a quarter over quarter growth in fees related To accounts and loans, was it retail, SME, corporate segment? Majority of that is attributed to corporate In terms of lending fees, you could see record high sales In both SME and corporate, but also a lot of activities on debt capital market by large corporate. So All divisions or segments contributed to that. So it's maybe not always direct lending. It's It's sometimes debt, simply transactions that you can see in this line. So even originate and distribute model allows for this. In terms of current account fees, it's also majority of that is Related to corporate, it comes from 2 elements, so activity of customers, but also from the repricing that We did. So the next question, could you elaborate on quarter over quarter growth of non personnel cost? Was it IT Marketing or Other? The main reason of the increase in I'm excluding amortization in that because amortization is a matter Of investments that have been done and are being done in the especially in the, let's say, digital path of the world. But if you look at typical OpEx type of things without HR, that's mainly integration costs. So the fact that we are bearing some additional IT costs And project management costs in order to quickly finalize the integration of Ideabank In 2021, which is our target. But those costs generally will repeat in the 3rd and Q4 or some part of those costs should repeat. And then they will be not present In 2021, so that's a typical migration and that's something that is fully in line with the business case that we have been doing when preparing for that transaction. So we have also a few questions coming from Santander. So the First question related to costs, but this time personnel costs. Could you comment on 9% year over year growth on personnel costs? There are 2 elements coming from this. First of all, it's Ideavank Takeovers, so simply a larger number of FTEs that is there and that's Probably explaining 2 thirds of that dynamic. And then the remaining part is what I have been mentioning, meaning The bonuses system, which if you remember Pekao in 2020, and I think it's worth to remind, was The bank was the strongest cost optimization during COVID times. On comparable basis, it was more than 3% Cut in the total costs. So some of those costs, of course, are rebounding, although not too much, meaning the motivation systems Are the ones that have been rebinding. And the overall costs of the of HR are, I think, well under control. We are restructuring the bank, which is also offsetting the element of inflation and raises in salaries. So the question related to dividend. Why do you pay only EUR 75,000,000 of profits in dividend if EBA shows You as a second more resilient bank and also CANF allows you to pay 100%. Well, I think the dividend policy has been very much addressed In our strategy and we have been always a bank which has been Consistently delivering value to our shareholders. And this also remains with dividend. We really prefer to be regularly there for you in good and bad times And not just in good times with high dividends. We have a capital plan, which is also taking into account growth elements. We could, of course, pay a large dividend now and even increase ROE to Probably 8.5 percent even, but then moving from 8.5% to 10% would not be That's good without capital. So that's easy. And we believe we have a good idea of how to deliver the 10% Through growth and that this growth and restructuring will bring ROE above the cost of capital and thanks to this achieving The overall. So it's a matter of strategy or regular. Of course, if we don't have growth opportunities in line Above cost of capital, then we will be in the position to pay out more. You know that we have undivided profit. But at this stage, the promise is between €50,000,000 €75,000,000 and that's what we want to stick to. We have a few questions related to Ideabank, to the assets that we took over. Have you had any claims related To Ideabank assets under the guarantee obtained from BFG. No, I don't remember any such claims that we had. Generally, I don't think there's anything surprising us. So the guarantee It's working. It's going to be the first settlement, I think, is going to be at the end of June Data, if I remember well. And it seems everything is going to be in line. No claims. And I think that the risk of claims is very much limited. It has been being analyzed before. Societe Generale, what were the actual level of costs related to IDA integration in Q2? How much we can expect in the future? How much in cost are one offs? So it's like tens of 1,000,000 meaning 15, 16, 17, maybe in this Quarter closer to 2020, we can expect, let's say, I mean, those teens, so below between 10 And 2020. In the following questions, HR costs We're also a little bit higher in the Q2 because we increased the provision for bonuses. I'm Expecting a little bit better result in 2021 than originally planned Good cost of risk and good business developments are here, the positives that cost of this. So the increase And this bonuses provision was actually covering the 1st and second quarter, which on linear basis, this would be A little bit slower, but so those are the key elements that impacted this Those costs in this Q2. Also related to Hidaabank, what was the impact of Hidaabank On Q2 bottom line of Pical? I must say, I don't remember Exactly the number, but I would have to return to that. Give me a second. I'll sum it up somehow. Okay. So the next question coming from Haitong. What was the what is the sensitivity of net interest income to 100 basis increase in market rates? Yes. We were saying around €800,000,000 higher NII, so that's, let's say, 4 gs basis points a little bit more maybe. Do you expect at least maintain second Quarter net interest margin in the future, when can we expect improvement in net interest margin And also net interest income. So the net interest income Today is a function in this interest rate environment is a function of a loan portfolio growth. And that's actually the key for NII to grow. There is no more space to cut Deposits anymore and probably not too much space to do optimization on other assets. Some may be small moves, but nothing impressive. And that's the NII. So I think that Those good sales, for example, on mortgages and on consumer loans will start transferring into The volumes itself and also in the NII in the next quarters. That's point number 1. Point number 2 is, of course, If interest rates will change, and that's a big game changer, which might push NII very nicely up. The third question the question was also related to net interest margin itself. And To improve further net interest margins, the asset mix would have to be a little bit better. We are still A little bit coming from the COVID times, the mortgage portfolio is now growing faster than the consumer loans portfolio, for example, Which does not, let's say, push the NIM up. So this asset mix so for this asset mix NIM to go up is, of course, and consumer loans, micro loans, SME loans, growth has to be Faster than the remaining part of the book, which is in line with our strategy and which we are working on. The next question related to sales. What stand behind the record high sales of mortgages Except for high demand, how did the bank change the offer in terms of margin and risk appetite? Well, it's regarding mortgage. Yes. Demand is the most important driver, I suppose, because of course, what we saw is the Slightly change in credit policy, but it was more or less in the line what was seen in amongst other banks. During 2020, during COVID-nineteen pandemic, You saw that majority of banks, it was timing of credit policy. And I suppose that our credit losing of our credit policy was more or less the same. That is why the main driver Is it our processes inside, our effort of our people and demand? Yes. I just looked a little bit on those numbers of idea impact. It was a few million As what in this quarter in terms of the bottom line, of course, higher NII around €85,000,000 and but then some restructuring costs and the cost for integration. And the last question from website is coming from Bank of America. So could You share with us the sensitivity of Tier 1 ratio to Polish Gavis and also other papers. So I think that the Tier 1 after the rise in interest It's that we had recently went down around, I think, 20 basis points due to The Gavis increase that we recorded in the second quarter, That CapEx increase was like 20, 30 basis points. So this is like more or less the sensitivity we are talking about. I would like to ask moderator if we have any other questions, direct questions. At the moment, there are no further questions. Okay, perfect. So thank you very much for all the questions. Please feel free to contact If you need any further information, it was a pleasure to host you here today. So next The quarterly results we have in November. So thank you for your time and have a good day. Thank you. Thank you. Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.