Earnings Call: Q2 2021

Aug 4, 2021

Dear ladies and gentlemen, welcome to the conference consolidated report of Pekao S.A. Capital Group for Q2 2021. At our customer's request, this conference will be recorded. As a reminder, all participants will be in a listen-only mode. After the presentation, there will be an opportunity to ask questions. If any participant has difficulties hearing the conference, please press star key followed by the 0 on your telephone for an operator assistant. May I now hand over to Ms. Reimer, who will lead you through this conference. Please go ahead. Good afternoon, good morning. Welcome everyone to Bank Pekao quarterly result presentation. The presentation will be held by CEO of the bank, Leszek Skiba, CFO, Tomasz Kubiak, and Chief Macroeconomist, Ernest Pytlarczyk. We'll start from the presentation summarizing our key achievements and financial performance. We will continue with Q&A session. I will pass over to CEO of the bank, Leszek Skiba, to kick off the presentation. Good afternoon. 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 2021. I will hand over to Ernest Pytlarczyk and Tomek Kubiak that will present our macro outlook and detail of our financial performance. This second quarter and the half of 2021 was very good year for Pekao. 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 as one of the few banks in Poland now, and we will pay out 75% of earnings in the second half of this year. Third 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 fourth issue is we maintain our credit policy risk, and we keep the costs under control. Cost of risk is on the level of pre-COVID levels. Key achievements. The number that I'd like to stress is the PLN 850 million is the profits generated in the first half of this year. This number is higher than in 2019. It means that it is higher than in the pre-COVID times. This is important to grow in next quarters, and it is very important for us. ROE at 9%, it is the sign for us that this target that we pledged in strategy can be achieved within this strategic period. This is the time of good performance in the economy. What is important for us, that even within this low interest rate framework, we maintain improvement in fees and commission income. It is also the time when we see a 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 2021. On the next slide, you can see how important is dividend policy for us. On the left, you can see that between 2017 and 2019, the half of all dividend paid by Polish sector was paid by Pekao. 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 payout in this year, but the share is also impressive and we are proud and this 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% and 75%, 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 we are the 2nd most resilient bank in Poland. It shows that the policy is very conservative at the negative scenario, can lead to the decline of core equity Tier 1 five 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 four main pillars of our strategy: customer, growth, efficiency, and responsibility. According to this model, you can see that in terms of growth in the last quarter, in the second quarter 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 comparing to the first quarter. This time, we see that this is strong growth of demand for credit and what is important for us to grow according to this demand. Regarding efficiency, we see that it's 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. Cost to income ratio is lower by two percentage point and reached the level of 45% in the second quarter of 2021. This is one of the important KPI for our strategy to reach the 42% in 2024. Regarding customer, you can see that still and also impressive growth in number of active mobile banking customer by almost 20%, comparing the first half of 2021 to the first half of 2020. Digitalization rate is one of the important KPI of our strategy. It shows which processes can be done in remote channels. Now it's 45%. The target is to have 100% of almost all processes for digital, for customers that can access via remote channels. Also there is growth, and this is important for us of our consumer loans digital sales in digital channel. Yes, this growth, this digital channel is important to be done in digital channel consumer loans. On this slide, you can see our shortly about digital transformation. Our app, PeoPay 5.4, will be launched within 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 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 second quarter of 2021. We are proud to be with our customers. This was a time when we issued green bonds for Orlen and other companies. We are very active in this sector. Of course, cost of risk. It is our responsibility to keep cost of risk under control. 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. It is very helpful and of course, we have the provisions that are enough to be presented, be safe, even we will see negative scenario within next quarters. Short 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. Of course, this year is not over. Cost to income ratio, 45%, the target is 42%. Active mobile banking customers, more than 2 million, the target is more than 3 million. This is still important for our digital transformation. ESG strategy was published in the second quarter, dividend payout on the level of 75% it is important for us in the third quarter. I will pass over to Ernest. Let me start with a brief summary of most recent developments and also short-term forecast for the Polish economy. 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. That's why we, as I mentioned, we expect the fourth wave of pandemic to materialize in Poland as well as our baseline scenario. 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 midterm perspective. We should assess the midterm perspectives 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 are by and large, very stimulative. To start with, we witness excess savings in the Polish economy, which is a legacy of both pandemic-era support programs, but also a 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 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 Deal 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. 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. 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 real rates will stay much below zero for the foreseeable future. It is not only a Polish phenomenon, it will be the case in all developed economies, and it will affect our thinking and also actions of economic agents. Thank you. Good morning, ladies and gentlemen. Second quarter was very good in terms of delivery of bottom line, 150% almost quarter-over-quarter, and cumulative profit also 50% above last year and also above 2019. Key highlights from those numbers. First of all, as it was raised by Leszek, rebound in customer activity and sales. That's I think the first very good sign. Second 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's a very strong recovery. Third is, of course, cost of risk, which returned to pre-COVID levels. Those are the three, 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 Bank. Gross operating profit increased by 25%. Of course, in the first quarter, 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 PLN 130 million, that's primarily as a function of both fees and commission and other income. Other income means sales of bonds, investment, and investment sales and dividends and things like that. I would start from net interest income, slightly up PLN 5 million quarter-over-quarter, 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 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 Idea Bank assets, which on cumulative terms is close to 4 basis points, and these 4 basis points, I think is a number that is a good approximation looking forward. 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 surplus of deficit in the NII. 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. 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 or cumulative things, and this, since the beginning of the year, is rising by 8 basis points. A big move in the first quarter, but another 2 basis points brought in this second quarter. Second is volumes that is driving NII. Retail volumes are 3% up. Corporate, including Idea Bank, are 10% up. Corporate including, of course, microloans. 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 quarter, 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. Those volumes are slightly dropping. The record sales of mortgages are not yet reflected that much in the dynamics of the volume. This is more an element of the third and fourth 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 is something very good. Great first quarter, second quarter also positive. Those good numbers. Generally working on price, still on corporate deposits. That's normal fluctuations, and retail is still growing with optimizing deposits taken over from Idea Bank, especially the ones driven by price fueling. Fees and commissions. That was a magnificent quarter in fees and commissions, meaning a dynamic. I think it's a sustainable level, but the dynamic, I think, is impressive. First quarter was not yet what we expected. We were highlighting this in the presentation last quarter, that we expect the dynamic fees to actually return to levels visible on the quarter. Almost 20% year-over-year dynamic and almost 10% quarter-over-quarter. Practically all categories of fees are growing. I think very positive trends coming also from the economy, but also from 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. Nominal cost by dynamics is 8% coming from mainly acquisition of the Idea Bank. Of course, in the second quarter, we have taken over some one-off costs. For me, this second quarter is a little bit too high in terms of cost, meaning there are a lot of one-off costs. Some of them will be still taken in the second and third quarter, that's generally the cost coming from the integration of Idea 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. Of course, amortization is the second line, which is also growing. 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. That cost efficiency is something that you know that we are famous for and will be continuing. Capital. Now, Tier 1, 16.5, dropped a little bit quarter-over-quarter, but that's a result of govies repricing. Yields went up due to this inflation pressure that was mentioned by also Ernest, and waiting for the interest rate scenarios with really open arms, let's put it like this. Liquidity, very strong. As Leszek was mentioning, dividend, the only actually Polish bank 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 first quarter was 41, second was 45 with some methodological changes, but even they were more negative than positive, and we are not using any COVID provisions practically yet for those levels. 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 Idea Bank just to have this comparability year-over-year. 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 are optimistic. Summarizing. Consistent policy allowed us to return to pre-COVID levels in terms of net profit and a very good second quarter results, which even had around a 9% ROE with BFG being spread throughout the whole year, so-called recurrent ROE. We return to dividend distribution, and after the KNF approval, 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, that's showing in P&L in the fees and commission lines, partly in the volumes, but especially now in sales, which will transform into those volumes. We maintain a good discipline in both credit risk and operational costs, as we are famous for. I think this consistent policy has also allowed us to consistently make one of the top 3 positions in the European stress test, which just to remind again, in 2018, we were number 3, now we are number 2 in the fully loaded Tier 1 stress test sensitivity. Thank you very much. Thank you very much. I would like now to open Q&A session. I would like to remind you that if you would like to ask a question, you can do this or directly if you already registered or using our online platform. I will pass the voice to the moderator to open up the gate for Q&A, for those who want to ask the question directly. Please. Thank you. We will now begin our question and answer session. If you have a question for our speaker, please press zero and one on your telephone keypad now to enter the queue. Once your name has been announced, you can ask a question. If you find your question has answered before it's your turn to speak, you can dial zero and two to cancel your question. If you are using speaker equipment today, please lift the handset before making your selection. One moment please, for the first question. As a reminder, if you want to ask a question, please press zero and one on your telephone. If there is no questions directly, I have a few questions coming from Internet. Maybe we'll start from the questions coming from PKO BP. 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 second quarter. In the other quarters, there was no particular reason. 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. 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, also a lot of activities on debt capital market by large corporate. All divisions or segments contributed to that. It's maybe not always direct lending. It's sometimes debt, simply transactions that you can see in this line. Even the 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 two elements, so activity of customers, but also from the repricing that we did. The next question. Could you elaborate on quarter-over-quarter growth of non-personal cost? Was it IT, marketing or other? The main reason of the increase in I'm excluding amortization, because amortization is a matter of investments that have been done and are being done especially in the, let's say, digital path of the world. If you look at typical OPEX type of things without HR, that's mainly integration costs. The fact that we are bearing some additional IT costs and project management costs in order to quickly finalize the integration of Idea Bank in 2021, which is our target. Those costs generally will repeat in the third and fourth quarter or some part of those costs should repeat, then they will be not present in 2021. That's a typical migration, that's something that is fully in line with the business case that we have been doing when preparing for that transaction. We have also a few questions coming from Santander. The first question related to cost, but this time personnel cost. Could you comment on a 9% year-over-year growth on personnel cost? There are 2 elements coming from this. First of all, it's Idea Bank takeover. Simply a larger number of FTEs that is there, and that's probably explaining 2/3 of that dynamic. 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 with the strongest cost optimization during COVID times. On comparable basis, it was more than 3% cut in the total cost. Some of those costs of course, are rebounding, although not too much, meaning the motivation systems are the ones that have been rebounding, and the overall costs of HR are, I think, well under control. We are restructuring the bank, which is also offsetting the element of inflation and rises and such. The question related to dividend. Why do you pay only 75% of profits in dividend if EBA shows you as a second more resilient bank and also KNF 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. 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%. Moving from 8.5 to 10 would not be that good without capital. That easy. 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. It's a matter of strategy of 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. At this stage, the promise is between 50% and 75%, and that's what we want to stick to. We have a few questions related to Idea Bank, to the assets that we took over. Have you had any claims related to Idea Bank 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. The guarantee is working. The first settlement I think is going to be at the end of June data, if I remember well. It seems everything is going to be in line. No claims, and I think that the risk of claims is very much limited, has been being analyzed before. Societe Generale, what were the actual level of costs related to Idea integration in second quarter? How much we can expect in the future? How much in cost are one-offs? It's tens of PLN million, meaning PLN 15 million, PLN 16 million, PLN 17 million, maybe in this quarter, closer to PLN 20 million, we can expect those tens, below between PLN 10 million and PLN 20 million in the following questions. HR costs were also a little bit higher in the second quarter because we increased the provision for bonuses, expecting a little bit better result in 2021 than originally planned because good cost of risk and good business developments are here the positives that cost of this. The increase in this bonuses provision was actually covering the first and second quarter, which on linear basis, this would be a little bit lower. Those are the key elements that impacted those costs in this second quarter. Related to Idea Bank, what was the impact of Idea Bank on second quarter bottom line of Pekao S.A.? I must say I don't remember exactly the number. I would have to return to that. Yeah, give me a second. Maybe I'll sum it up somehow. Okay. The next question coming from Haitong. What is the sensitivity of net interest income to 100 basis points increase in market rates? Yeah, we were seeing around PLN 800 million higher NII, let's say 40 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? The net interest income today in this interest rate environment is a function of a loan portfolio growth. 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. That's the NII. 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 question was also related to net interest margin itself. 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. For this asset mix NIM to go up is, of course, consumer loans, microloans, 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 stands 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? Regarding mortgage, demand is the most important driver, I suppose, because what we saw is the slight change in credit policy, but it was more or less in the line what was seen amongst other banks. During 2020, during COVID-19 pandemic, you saw that majority of banks, it was timing of credit policy. I suppose that losing of our credit policy was more or less the same. That is why the main driver is our processes inside, our effort of our people, and demand. Yeah, I just looked a little bit on those numbers of Idea Bank impact. It was a few million PLN in this quarter in terms of the bottom line. Of course, higher NII, around, say, PLN 85 million, but then some restructuring costs and the cost of integration. The last question from website is coming from Bank of America. Could you share with us the sensitivity of Tier 1 ratio to Polish govies and also other papers? I think that the Tier 1, after the rise in interest rates that we had recently, went down around, I think, 20 basis points due to the govies increase that we recorded in the second quarter. That govies increase was like, 20, 30 basis points. This is more or less the sensitivity we are talking about. I would like to ask moderator if we have any other direct questions? At the moment, there are no further questions. Okay, perfect. Thank you very much for all the questions. Please feel free to contact me if you need any further information. It was a pleasure to host you here today. Next quarterly results we have in November. 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.