Good afternoon, ladies and gentlemen. Let me welcome you in the follow-up call following presentation of PKO BP 1Q 2023 and Q4 2023 results. We have Piotr Mazur, our Chief Risk Officer; Jakub Niesluchowski , Finance Director; Piotr Bujak, our Chief Economist; Marcin Eckert , Iwona Duda.
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I see Michał Konarski was the first one. Michał, the floor is yours.
Yes. Hello. Thank you for the call, for the follow-up call. I've got actually a couple of questions. Maybe the first part will be on net interest income. I would like to learn about your forecast for 2024. Actually, where do you see I mean, not even net interest margin, but net interest income going forward? Is this the level, of course, adjusted for 4Q? Should we expect it stable going forward? This is the first thing. I've noticed also that you are still expecting 50 bps rate cut in 2024. And actually, how would your forecast change if the rates would remain flattish this year? So this is second. Third, actually, I would like to ask, what do you think how the interest expense is going to look like in 2024? I mean, particularly looking at the deposits.
If the rate will stay for longer in 2024, I was wondering if consumers will change their behavior and maybe save a little bit more and once again turn to deposits. So this is the first, let's say, part of my question. I've got also the second one. Maybe I will ask it right now and maybe repeat it if this will be a trouble later on. But I was just wondering, what is currently the situation regarding this litigation concerning the free credit sanction? We saw some notes in the annual report, but I was wondering how those cases inflow during the year. Was there a lot of the inflow in the Q4, or was it spread across the year? Do you see any more intensive action after one of the law firms announced that it will sue banks against it? Yeah? I've got that all from me.
Okay. So I will take then the first three questions. Maybe Piotr also will add something about the rate and our current view about it. But all right. So concerning the NII, so what we also communicated, we expected that actually, on the one hand, NIM will be not lower than the NIM which we had in the Q3 of 2023. On the other hand, we expect some volume growth on our side, which implies then higher NII. And there's the factors which we actually see on our book, which actually help us even if there will be some rate cuts. On the asset side, we already have over 30% of our mortgage book based on initial fixed rates for five years. Year-end, it was around 28%. We grew to around 32%. That's one point.
We also expect that the average currency rates, like euro, will be higher this year than 2023. Here, important average rates during the year, which also should support our NIM and NII, as we have around PLN 20 billion equivalents in our loan book in Europe. That's one point. On the interest expense side, what we already observed, quarter-to-quarter, we decreased the cost of deposits. Although there are increases in the deposits volume, it's due to the fact that we did deposit rate cuts starting September 2023, and then we had the following cuts. We also did, on our side, in February, on the one hand, rate cuts on the deposits. On the other hand, we withdrew the offer for a new money, as we call it, deposits, which usually have higher rates. So we withdrew this from our offer in February.
Going from this point to the interest expense side, also having lower hedging costs, which also will support our NIM and NII. It's also visible in the Q4. If you compare Q4 with the Q3, we get around PLN 270 million less in hedging costs. This cost will decrease in 2024. So combining cuts on the deposit side and also lower cost of hedging, we should optimize our interest expense in 2024. Of course, what can support and you also asked about it, the assumed 50 basis points rate cuts. Just to remind, we assume in our actually previous forecast, we will have cuts in March and then in November. So we estimate that the impact of this, assuming there will be no such cuts, will be PLN 200million-300 million plus to our NII. I think, Piotr—
Yeah. Of course, it is including the lastly that I think the NBP will stay unchanged throughout 2024, possibly also well into 2025, supporting for our incomes. When we adopted the view that there will be some financing rate cuts this year up to 50 basis points, it was late 2023. We wanted to be on the conservative safe side as to cut assumptions for rates. And back then, the market was pricing in as much as to over 100 basis points cuts this year. So it was quite a reasonable approach. But now, looking at what is going on in the economy, we expect and given also the changing direction function of the Polish MPC, it is increasingly likely or maybe even obvious that NBP rates will stay unchanged throughout this year.
When we looked at the changes of the so-called free credits within customer credit area, as you said, we made this total financial statement. Number is still limited, quite limited compared with the size of the bank, which is also important in vast majority of cases where we need. We observed some slight acceleration in Q4, but again, with emphasis on the slight. So it's not like that it was almost nothing before and sudden wave after this started to be publicized by the lawyers. But clearly, somewhat higher rates of new cases appear, but slight. To again reiterate, from one side, we are treating this very seriously. So we are looking at this with all respect and diligence. But from the other side, the scale is small. Looking at statistics, we are winning in vast majority of cases.
Okay. Perfect. Thank you so much.
Yeah. I think now I would ask Łukasz Janczak. I think you are on the queue, please.
Yeah. Thank you very much. I had two questions. One was on net interest margin, but I think it's all clear here. So the second question is on dividend, but dividend from the undistributed profits from previous years. I know that we are waiting for the management board to be completed, but in general, what the bank will take into account when thinking about potential payment from undistributed profits? You had, if I'm correct, above PLN 3 billion surplus over MREL requirements and much higher surplus over regular capital requirements. So the question is, what will be the main trigger and what could be the, let's say, potential scale of this dividend if you could quantify at this stage? Thank you.
So on this part, which is undistributed, so for now, it's actually hard to from our point of view, hard to guide you because one point, you know the rules for payment from 2023 profit on the one hand. On the other hand, we have the situation in which the total amount of payments will be, assuming the maximum which was pointed out by Polish FSA, which means around 66% of 2023 profit plus 1.6% of the advance dividend which we paid in February. Then adding these two numbers, we will reach the total net income of the bank standalone in 2023. Then we go to the Article 129 of Banking Law that it's not consultation with Polish FSA, but we need a formal approval if we want to pay more than this one.
And in our informal discussions with Polish FSA, they said that this advance dividend, you should add to the payment in the context of the article of this article of Banking Law . So we haven't discussed yet with Polish FSA if they will be even willing to go with higher dividend than in total, the advance dividend plus the payment from, let's say, regular dividend above this number. So it's really, for now, hard to declare because it will purely depend then on approval of Polish FSA.
Yeah. But I would say that to be fair, the questions should be asked when the new management board will be established and then the guidelines will be provided. So because today, it's critical to think about the article, what will be the strategy for the undistributed profit.
Understood. To be understood well. We do not assume that there will be changes in our approach to our dividend. We do not assume this. But at the same time, it's also difficult for us to speak in the names of the new management which will be selected within a few days or a few weeks. Please understand this.
Sure. Understand. Thank you.
Pawel?
Yes. Hi. Thank you for taking my questions. Can you walk us through how the hedging works right now and how do you expect the hedging costs to evolve from this PLN 50-60 million you reported in Q4? Another question, we'll be on the Swiss franc litigation, if you could give us a sense of the trends of the people who repaid their loans coming back to sue the banks. Thank you.
All right. So I will start with the hedging. So on the one hand, when you look from the nominal size of our total hedging, higher rate but also cross-currency interest rate swaps, they decreased during this year by around PLN 30 billion. And this allows us to add the large share of this transaction. They were concluded in 2020, 2021, and 2021. And we look at lower yields. So with this.
I'm sorry. I'm sorry. I dropped off. Can you just repeat the last point? Sorry, my line was cut.
Okay. So if you compare the 2022 with 2023, the total amount from the nominal point of view, nominal volume point of view, the hedging decreased by around PLN 30 billion. Majority of this hedging or large share of this hedging, we actually entered in 2020, 2021, and 2022 at lower yields than we have today. So with the maturity of this hedging, of course, our costs are lower. And this also, which I pointed out, if you look from the quarter perspective, the cost of hedging between third and Q4 was lower by PLN 270 million. And going forward, we do have around PLN 14.5 billion maturities of interest rate swap hedging, which is our main instrument, maturity in 2024 and around PLN 18 billion in 2025. This transaction are actually locked at the rate between 2%-2.5%, which naturally Between 2% and 2.5%.
Okay. Thank you.
So it will actually decrease in 2024 the cost of hedging, which will also support NII and NIM.
To what extent, please? What is the interest on the new? So, is it just that it matured and kind of disappeared, or are you opening any new SWAP?
So on the one hand, what is happening on our balance sheet currently is sharp increase of initial fixed-rate mortgages. So it's also natural hedging of the balance sheet. By year-end, we got around PLN 28 billion of such mortgages. Currently, it's over PLN 32 billion of such mortgages. So from our point of view, it kind of substitutes for entering into hedging transactions because it's natural hedge. So we now are discussing to what extent we should renew the transaction, IRS transaction, then taking into account that we do have also natural hedging. One regulatory element which we also take into account is the new limit, which is not in place yet. It's a supervisory overlay test for net interest income sensitivity, which is the relationship between the sensitivity of the interest rates to their own funds. And this may trigger higher hedging needs on our side.
But it's not the case that what is maturing, we are automatically entering into new transactions. We are rather looking on the whole interest rate position on our side. And then if we have higher level of the natural hedging, then we simply do not enter into derivatives.
Got it. So what if a really fixed IRS value receives 2.5% interest and pay the floating like WIBOR, or is this how it works?
The average is around 2.5%.
The receipt fixed, yes?
Yes.
Okay. And you pay the floating, which is something like WIBOR?
Yes.
Okay. Understood. Thank you. And the NII tailwinds, any idea about the NII tailwinds in 2024 just from the hedges mortgages aside?
We do not share with such exact numbers. But in general, in 2024, we'll have positive in comparison to 2023, positive impact from the lower cost of hedges.
Yeah. Sounds pretty significant. Thank you. Maybe just the other question on the Swiss franc cases, please.
I understood, Paweł, that you asked how behaves the customer with its mortgage portfolio. Of course, the repayment rate is less than in Polish loans. However, most of them repay on time.
Sorry. What I meant was those who repay their Swiss franc loans earlier already, so they don't have an outstanding balance, are they coming to sue the banks? And if yes, maybe can you give us a sense of the magnitude, how many of those cases are there?
Today, only 4% of the customer is going to the court with their lawsuits. Compared to perhaps the a greement.
4% o n prepaid, compared with perhaps the 28% on still active portfolio.
And my final question, and sorry for so many questions, but how many of those clients do you have passive who already repaid, just to put the 4% in context?
Paweł, we have closures. So this 4%, it's roughly 3,500 cases.
Understood. Thank you so much.
Alan?
Hi. Hi. Thanks for taking my call. I think you made reference this morning, if I heard it correctly, that after the sort of PLN 11 billion of new sales on the mortgages in Q4, that it was actually higher than that to the end of February. Did that come through correctly? And I guess what I'm trying to get an idea of is that are we going to see just large numbers sitting in the balance sheet until, I guess, Q2, and then it just stops? And what do you think that means for the sort of underlying demand if there's nothing more, particularly given the fact that rate cuts aren't really coming? So I just wonder, are you going to do sort of all the mortgage production in the first half of the year?
And what do you think about the sort of the market outside of the subsidized lending? So a little bit of color on that would be helpful. And I also noticed in Q4 that while overall, I think the corporate book was up a little bit, it was pushed by sort of leasing and bonds, whereas the sort of corporate lending was actually still down a little bit. And perhaps you could sort of give us a little bit more color on the dynamics of demand on that area and where the demand was coming from in Q4 because clearly, the market expectations are lots of nice new EU money coming in to invest, but clearly, it's not there yet. So, I'd just like to get an understanding of what's going on there. That would also be very helpful. So thank you.
Okay. So as we asked volumes growth, we think that for some time, the PLN mortgage part would be weaker because we are in between the previous support program, and people now are waiting for a new one from the new government. So demand is free, fresh demand is free for the time being. But definitely, later in the year, it will revive when the new government implements a new program. Even if it is not very beneficial to customers, then we would simply see the fundamental demand that will appear regardless of any program. But simply when people will have clear view on what is available or not, right? So we expect that total PLN mortgages portfolio, I mean, for the market, total loan book of PLN mortgages will go up by over 10% at the end of this year, year-on-year, right?
As to the corporate loans, here we see quite strong performance on investment loans because investments in the economy are doing surprisingly well. It should stay like that, at least in the private sector. In 2024, in the public sector, there will be some investment activity, but in the private sector, investments will be strong. Private investments is 80% of total investment activity. EU money, in our view, will boost overall investments in the country, also private ones, also reduce uncertainty regarding different issues in the country. So we expect that investment loans will be doing well. But at the same time, we have the stocking in the economy. It's likely to be continuous for some time given that this inflation is continued. So there is weaker demand for working capital. Total corporate loans book will be growing for the market like 4%, maybe 5%, but not stronger.
Okay. Okay. So what you're saying is that the areas like the leasing and bonds and so on in Q4 were being driven by greater investment. Is that fair? Is that what you're seeing?
To some extent, strong performance in the Q4 was driven by the end of the previous old multi-year financial framework of the EU. In our view, there was some transitory positive effect in the final quarter of last year related to this. But even without this, there is relatively strong underlying trend as regards investments. So if you look at national accounts data, the big data, big investments surprised on the positive side all the time over the last two years, and it should remain like that also this year. So we expect that investment loans will be doing relatively well.
Yes. And on the one hand, you also touch bonds because bonds is one of the sources of financing of local governments. So it's substitute of loans. So that's why you also see a pickup in the Q4 on the bond side, not on the loan side, on the one hand. On the other hand, what we increase significantly on the corporate side is a factoring in the Q4. With our big clients, we got a few pretty substantial agreements with big clients. So that's also the reason why we have a pickup in the Q4.
Concerning the mortgages on our side, I don't know if I caught my question correctly, but in the Q4, we sold PLN 11.5 billion, close to PLN 11.6 billion of mortgages, out of which PLN 9.4 billion was the Safe Loan 2% . In the Q1 of 2024, and what we commented in the split-year answer, because there was number PLN 16 billion, it was total amount of Safe Loan 2% sold in 2023 and 2024. By the end of February, we sold PLN 4.3 billion of Safe Loan 2% . I will expect taking into account that the registration of the applications ended at 7th of January, and we do see that the share when we compare January, February of the Safe Loan 2% is lower, which is natural. I don't know if you addressed that.
Yeah. Yeah. Yeah. It does that. That's clear. So thank you for clearing that up. That makes more sense. So that's great. Just one last question, if I may. When you were talking about costs this morning, you talked about provision. I heard it being called provisions for benefits in Q4 because of the level of activity in the bank, but it wasn't clear how much of those you'd be using. So what was that? I mean, I understand the variable compensation that was coming in in Q4, but you talked about something that was forward-looking. Could you just tell me? That's what it came across as in translation. So if you could just tell me what was being talked about there, that would be great.
Yes. So I was talking about kind of reserve or provisioning for the payout, actually, which will take place in this quarter for year-end results because we are actually, on the one hand, we will have a bonus payment for the year results for part of the staff and for the quarterly or semi-annual goals, which we set for Q4 or second half of the year. So taking into account good results of the bank because if you look on the business results of the bank, they are good. So our HR department recalculated that the payment of the bonuses might be higher. We don't know yet, but it was just preparation to actually accommodate these costs. But the payments will be in this year.
Okay. But it's—
But as a kind of settlement for the 2023 results.
Okay. Gotcha. That's very kind. Thank you.
Michal?
Yes. Hi. Actually, I've got two more questions. One follow-up on costs. What should we expect regarding the pace of the operating costs actually in 2024? Should we be somewhere at the mid-single-digit growth, somewhere similar to inflation, or maybe there will be some factors that will offset the growth? For example, I don't know, maybe reducing the number of agents, for example. So maybe this is the first question. And the second, about the cost of risk. Actually, for the last two years, we saw cost of risk at around 50 bps. And what should we expect actually in 2024? Because this higher-rate environment, it seems to persist, as we already talked. And actually, is there any risk that actually we will see more and more of the customers not bearing with this situation? And should we expect something more than 50 bps or maybe less? Yeah. That's the question.
I will take the first question because, okay, now it's hard to, of course, give you a precise guidance. But what I can comment that definitely 2024 will be still under inflationary pressure because we will have a substantial carryover effect from 2023, on the one hand. On the other hand, what I also mentioned during the conference, we made a verification of the remuneration starting 1st September 2023, which will have full impact in 2024. So, this is an additional element. So, we will still stay with pressure, which we had in 2023.
In relation to the outlook for the cost of risk, actually, today, I don't see any negative information. Customer pay all the time. It's fair to say that in our mortgage portfolio, we have very, I would say, restricted stress tests related to the interest rates. So our customers are ready, I would say, to pay interest rates on this level. So I'm not worried about this portfolio. So we think a number of new defaults, it seems under control. We provide additional probably PLN 200 million in the Q4 to be more, I would say, conservative. So I still have concerns that the remaining in 2024 should be under control, and the 60 basis points should be, I would say, delivered.
From the macro perspective, please remember that balance sheet of households in Poland is very strong at the moment. Households have the leverage over the last eight years. At the moment, given the announced shape of extended credit holidays, according to our estimates of macro research, households' debt servicing costs in relation to GDP or households' income will be at the lowest level in 20 years. Nominal households' income is growing like crazy, double-digit level. With every month, with every quarter, financial situation of households is getting better and better, substantially better, and their ability to pay debts is increasing, is improving.
I wouldn't expect from looking from the macro perspective, I wouldn't expect a variation in quality of loan portfolio in the household, especially in the household segment. Even if rates stay unchanged, right? At least remember the rates have come down quite a bit by 100 basis points. So yeah, consideration is really comfortable.
It could be a little bit more, I would say, difficult in the corporate and SME segment. However, I feel very positively surprised how our SME segment is behaving. So we have very, very good repayment regime, no overdues, so it looks quite good.
Okay. Thank you so much.
And Marta?
Yes. Hello. Three questions, if I may. One is just follow-up on the cost guidance. I mean, I appreciate you kind of give a guidance, but just a sense whether one high single-digit growth rate is ambitious but possible or completely impossible in your view in 2024. The second question is on the outlook for the equity and Tier 1 ratio, considering changes in CRR, CRD IV indications. And the third one is if you could share how the provisioning for Swiss franc in Q4 was divided between settlement and court cases would be really much appreciated. Thank you very much.
I will take the first one. I would say looking from the impact of the remuneration verification, the impact of the increase of the minimum wage, which assume there will be twice this year, which will increase our costs on the one hand. I would say that single-digit would be too ambitious.
In relation to the headquarters, I would say we have still relatively high buffer in relation to the CET1. We have some, I would say, maybe not a problem, but in relation to MREL, we will have to provide some new bonds in relation to this. And we expect in 2025 some negative impact related to the CRR. However, it will not be material. We, I would say, still calculate how it will behave in relation to our off-balance exposure. And however, we don't see material impact for our equity.
Maybe I will add that from the TCR point of view and current dividend levels, it should not have impact, even though, of course, higher capital requirements will decrease our TCR. On the other hand, the balance sheet development and potentially impact of CRR might trigger following annual issuance on our side. As Piotr said, what we see from the CRR point of view, trading book requirements, operational risk, new requirements are pretty clear, but the word is actually not very clear as the additional requirement for the off-balance sheet exposures in the context of credit risk. We are still actually looking at it.
The last question was related to the provisioning for the mortgage portfolio. So for this part, which has the court, we have PLN 7.1 billion provisioning, and this one where we have a restructuring agreement, PLN 3.6 billion provisioning.
Okay. Thank you very much. Just to follow up on this MREL issue, MREL-related bond issues, how much do you think you need to issue in 2024?
Actually, we will adjust our plans in respect of, on the one hand, dividend payment, so the final decisions concerning dividend payment, development of the volumes. We expect, of course, some growth of volumes on our side and also the impact of CRR3. So, we expect to have at least one or two MREL transactions on the market, most probably in senior non-preferred format. So currently, actually, we are updating our prospects on our side after publication of the results to be ready with potential issue.
Okay. Thank you very much. Appreciate that.
I see no further questions. If anybody still have one, this is the moment. T hank you for participation and hope to see you on the next quarterly presentation of PKO BP. Thank you. Bye.
Thank you very much. You too. Bye.
Thank you.
Bye.
Bye.