Good afternoon, ladies and gentlemen. Let me welcome you at the follow-up call after presentation of Q1 2024 results. We do it especially for our English-speaking analysts and investors to facilitate the meeting. From our side, we have today our CFO, Krzysztof Dresler, our Chief Risk Officer, Piotr Mazur.
Hello.
and our Finance Director, Jakub Niesłuchowski, Chief Economist, Piotr Bujak, and IR team, myself, Dariusz Choryło, and Joanna Wilk, and Dorota Pszczółkowska. As usual, we suggest to go straight to Q&A session, and I see that some of them were quite quick. So Nida, please, we are ready for your questions. Nida? We do not hear you. In such case, Michał, floor is yours. Hopefully, Nida will rejoin us.
Hi there. Thank you very much for the meeting, and actually, I've got one question regarding capital adequacy ratios. Maybe it is a bit of, you know, like, a few questions put together, because we've heard during the conference call, the first one, that the priority is for the bank growth, not necessarily, you know, the payout from the surplus capital.
My question would be: What would be the comfortable, you know, like, capital adequacy ratios level, I mean, surplus, in percentage points above the minimal requirements from the Polish FSA, as we know, that the minimal requirements are going to grow, so it is hard to maybe present as, you know, like, a precise figure, but maybe, I don't know, one percentage point above the minimum, two percentage points above the minimum, given that probably you have an idea about the growth of your risk-weighted assets going forward. Yes, so, yeah, that would be my question.
So maybe I will comment on it concerning our capital adequacy as both MREL requirements, because we are looking on these two requirements altogether, to be honest. So, of course, we want to have, based on our strategy, and I believe will not change it, that we should be able to pay our dividend, so have this capacity to pay our dividends. So we are looking not at the... Of course, we are looking at the minimum requirements, but we're looking on the dividend requirement. And, on the one hand, they fall down as Polish FSA withdraw the additional three percentage points buffer, on the one hand, but on the other hand, we are aware that countercyclical buffer will come in the coming years.
This is included in the strategy published already by a Financial Stability Committee, that we can expect two percentage points of this countercyclical buffer. So what we are also looking going forward in this context, on the one hand, on the other hand, when we discuss the surplus, we still are analyzing the impact, potential impact of CRR III requirements, which will be starting 1 January 2025. So this is, I would say, next to growth and next to payout of dividends, the third point which we are looking at when we look on our capital surpluses.
Looking from the buffer point of view, we see one percentage point as a kind of buffer, a monitoring buffer for us, in the context of dividend levels and also on the MREL side.
So I would say, yeah, that for sure, we have more comfort in relation to the capital. We have a little bit less comfort in relation to the MREL requirements. So the buffer what we see today in the capital looks, I would say, okay and give us comfort. However, in relation to the MREL, we think so that we'll have to, I would say, issue some papers in the coming quarters.
But so, to add a little to this, currently, our buffer at the end of first quarter to 2024, above the MREL in relationship to total risk exposure amount, is two percentage points. So it's pretty comfortable. But here, Piotr refers also to the fact that we expect some capital requirements growth due to CRR III requirements. That's why, we see for this year, we will be again present on the market, because as you know, we already had two transactions in the first quarter.
Right. Right. To sum it up, just to want to be clear on that: So if we see that the minimal requirement right now is somewhere, I saw it on the slide, 12%, 12.5, then probably we should add to it this countercyclical buffer, which will go up by two percentage points. We don't know still about the systemic risk buffer, yes, so it will be 14.5. Plus, you would like to keep this one extra percentage point above the minimum, just in case, yeah? So, the level that you would not like to bridge is currently 15.5. Am I right in terms of the CR?
... So when we look from the pure math perspective, so on the group level, on the bank, and on the group level, so they're slightly different due to different levels of P2G buffers in the context on dividend policy. But the dividend levels are on around 13%. So 13.02 on the group- on the bank level, and 12.96 on the level of the group. And yes, looking from perspective of countercyclical buffers, so this target level 2%, then we are talking about context of 16% - sorry, 15%, and then adding 1 point, then we are around 16, 16%.
Okay, thank you so much. Now, that's all from me.
And please also remember that this is small as the level, which we had, before the last movement of the KNF. This is quite strange situation for us to have the minimum requirement, practically almost at the same level as the dividend one for 75%. Nida, please.
Hi, can you hear me now?
Yes, we do.
Okay, thank you so much for the call, and congratulations on the great set of results. I have a few questions. Firstly, on loan growth. I thought the first quarter loan growth, up 2% quarter-over-quarter, was impressive. And then, you know, just thinking about the coming quarters, you'll also have the benefit of the new mortgage program into it as well. So how should we think about sequential growth from here? Do you expect this 2% growth to be maintained sequentially or actually trend up in the second half of the year? And just on the topic of loans, wanted to touch on the corporate loan growth opportunity from the RF funds. Of course, the opportunity is quite huge as we look out, but what do you think are the key risks here?
So that's my first question on loan growth. And then secondly, I wanted to ask about costs. So we did see lower than expected costs, and I just wanted to get a sense on how sustainable this this OpEx is. You've mentioned that it's been supported by a decline in inflation, but I think inflation is expected to pick up in the coming months as well. So just wanted your thoughts there. Thank you very much.
Maybe I would suggest, Piotr, if you give us macro color on the loan growth expected dynamic for the sector, and then we'll move further with the costs.
Okay. So, as regards outlook for corporate loans growth, we believe that at the moment, as regards the whole market, I'm not talking about our performance, but as regards the market, we are in some kind of a soft patch because we have the acceleration of investment activity in the economy, especially in the public sector at the moment, but also to some extent, in the private sector. We also have quite sharp disinflation that reduces demand for some kind of loans because simply nominal economic growth, nominal, the pace of economic activity is much weaker, so demand for some kind of loans in the corporate area is smaller. And we also have the stocking in the economy. In the previous years, in the Polish economy, we had a very strong, aggressive inventory buildup.
Now, it is being reversed, so we have a few factors negatively affecting lending activity in the corporate area. Anyway, our bank is doing better than the market, much better. But for the market, we see these negative factors, and such a negative, relatively negative trend should be maintained until middle of this year, maybe the third quarter, and then we should see pickup in lending activity in the corporate segment for the whole market. And of course, unblocked EU funds will play a role here, and all the structural factors like energy transition, that will be a really big story in Poland.
While we are quite conservative versus expectations of some other banks in Poland as regards corporate loan book growth this year, our forecast is just 4% something, versus some other banks expecting high single-digit growth at the end of this year. For the next two, three years, we believe in stronger, definitely much stronger growth in this area, at least high single digit, possibly double-digit growth of corporate loans in the Polish banking sector.
If I can add something, we really believe that recovery funds should accelerate the dynamic pace of development in terms of investment loans on corporate side. 46%, 48%, 46% of the total amount of recovery fund is allocated on climate change. We link this to energy transformation.
As you know, the mix of energy production in Poland versus the rest of Europe, especially Spain, Portugal, countries. Yeah, we have something to do. And from this perspective, a lot of our clients, companies really analyze how they can.
... adjust their cost base by reduction energy prices from PLN throughout this energy transition, using our funds for as banking funds, but also as a pillar recovery funds. And of course, our forecast in terms of the development of the pace of development is quite conservative. We also see single digit, but there's 48% on climate change, the climate change one aspect. The other aspect is 21% allocated on digitalization of of companies, what is also the challenge for companies based in Poland. This level of robotization is lower than the average in Germany and the average in western countries.
From this perspective, we are going to facilitate this expenditures using investment loan channel. And there is a deadline, as you know, for recovery funds. It's mid-2026. It's only two years to make a usage of these funds. Yeah, and we're gonna build our portfolio increase based on active role in supporting our clients in this energy and, let's say, digital and modern transformation. Our main risks-
Thank you very much.
Risks are connected with time, because as the lack of time, we are in delay in terms of utilizing these funds. I see this risk because we do not discuss about the need of energy transformation in the country and on the level of companies. There is no need to discuss and no doubt of that.
I would suggest, Kuba, if you could touch the cost question.
Sure. So, maybe just one addition to the volumes. Of course, from our perspective, when we look on the main product which we had in the first quarter, mortgages, as we said during our investor conference, still out of around PLN 8 billion loss, 4.6 were the new loans resulting from the Safe Loan 2%, which in current quarter will be, I would say, very limited impact. So as you can imagine, we expect lower sales this quarter concerning mortgages. So that's as a kind of addition to the point concerning volumes.
In terms of cost, on the one hand, if we compare quarter to quarter, there are some costs which were limited or are kind of seasonal when you look from fourth quarter versus first quarter. So we had a lower cost of marketing, for example, and a lower cost of hedging. So, projects, as we had usually seasonality in the cost of projects when we have a peak in the fourth quarter, which we don't have in the first quarter. We see now a lower pressure concerning and resulting from the prices, energy prices. So here I refer to our administrative costs concerning our buildings, et cetera. But I would say the pressure might increase, let's say, resulting from steel.
We will be realizing our projects, so we expect that there will be unusual seasonality, and we'll have a peak in the fourth quarter. We're also in costs. Please remember, there are also costs concerning our legal services concerning CHF loans, so not only the provisioning. So the more settlements and the more cases we'll have, then the costs will grow also. So we see here a few factors which will still actually pressure our costs on our side. So indeed the dynamic between fourth and first quarter of this year looks not high, but we expect that the dynamic year-to-year will be higher.
Very helpful. Thank you very much.
Gabor, please.
Thank you. Hi, a few questions from me. Firstly, a quick clarification. Do we know that the 2 percentage point countercyclical buffer is kicking in from January 2025?
So, if I, my comments-
... So, no, no. So, so our expectation is, based on also, working discussion with Polish FSA, that at the, by the end of this year, what may appear is a resolution of Minister of Finance, which will introduce the countercyclical buffer. And the strategy is, as we understand, and is also stated in the strategy publicly published, as I already mentioned, is that the first step will be for 1 percentage point, and then second step will be 2 percentage points. So, so not, not 2 percentage points from the beginning. That's 1 point. And second point, according to regulations, there are going to be 12 months of grace period. So, so-
Mm-hmm.
Assuming that the resolution will be not only appear, but will be binding or come into force by the end of this year, then adding 12 months of grace period, then we are talking about of countercyclical buffer by the end of next year, when there will be binding.
The one percentage point or the two?
1 percentage points.
Okay. And then-
First-
For the-
And then 2%. However, it's not clear for us, and we do not have this information, when the regulators will start with 1%, then what will be the time span between this one and introduction of the 2%? This is what we don't know, actually.
Thank you.
If it will be half a year or year or other tenure.
Okay. And the Systemic Risk Buffer, are there any proposals out there about reintroducing that, and any ideas about the phase-in?
As we understand, the countercyclical buffer is a substitute for systemic risk buffer. And that's why, even in the strategy, they started to name it a kind of neutral countercyclical buffer, allowing them in some way to introduce. Although, if you look, for example, from the ratio, which is officially published by the NBP concerning the loans to GDP, which is kind of indicator if the countercyclical buffer should be implemented, is going down. So, different direction indicated that no countercyclical buffer should be implemented by starting to call it neutral. So meaning, okay, we are starting from neutral, 2%, the target, 2%.
But if then the ratio, for example, which is also mentioned in the regulations, loans to GDP will grow, then they might even increase it.
Got it.
Above 2%.
Thank you. Maybe just changing tack a bit to the credit holidays. I think you indicated less than PLN 500 million expected cost from this. I saw Pekao indicating a bit more than that, which I thought was weird, given that you have a bigger book. So maybe you can. I also seem to remember that you were guiding for somewhat more than that, PLN 800 million-PLN 900 million. Can you talk a bit about why you now expect less, and maybe the assumptions on participations?
So, if I may, yes, indeed, our initial estimate shows us between PLN 800-900 million of the potential impact. But now we have time to verify more, I would say, in detail, the data which we have on the basis which we have. We of course don't have all the data, and we also have done some assumptions in our model. But which customer would qualify for the income threshold? Which one will qualify for the number of kids? Et cetera. So from this, we had simply more time to verify it. And we made detailed analysis based on criteria which are in the regulations.
Also, kind of lower level than expected, it's also result from slightly lower also interest rates. So the discounting effect is slightly lower. So the previous credit holidays and calculation of the difference between the NPVs of the loans with and without change schedule were simply higher, the distance between these two. This actually-
What kind of participation, what kind of participation do you assume, just in rough, rough terms?
Twenty-four percent.
Twenty-four.
Maybe, Kuba, I will add a few additional aspects. First, remember that only loans which were granted till July 1, 2022, apply for these credit holidays. Which means that from maturity perspective, this time, average loan is two years shorter than in the case of the previous holidays. Then the portfolio itself is smaller, because simply we have two years of the same portfolio being repaid. And we speak about the period to some extent, of course, of acceleration repayments, also thanks to these credit holidays itself.
Mm-hmm.
The biggest problem, I think, technical, which also may, to some extent, explain the differences between the banks, is assessment of the customer's income. As generally speaking, we do not have online information about what is our customer income at this moment, so we have to use the original provided by them at the moment of granting them the loan, and make assessment how it changed till today. Of course, you may do it on using different level of aggregation and different statistical data, and this may differ in results. That this is the one, the main reason why our original calculation was much more pessimistic than the one we have at this moment.
I think I may add that generally speaking, we assume that the customers who took the holiday during the first period, and who meet criteria at this moment to simply qualify for holidays, will do it again. We assume that some of the customers who did not take the mortgages at the beginning, and meet criteria, also, we are not giving the zero probability for them, we are giving much higher.
And I would say that, Darek, that in, in this case, compared to the last case, the risk profile will have impact how many customer will use this product. And because we see by the credit bureau that our risk profile is better than the average on the market, that we expected that we should have less customer who are able to use this, I would say, possibility, than average on the market.
Mm-hmm. Yeah, thank you for the color. It's useful. Just, I understand you will have this one-off coming in the second quarter, but maybe a broader question on NII. How would you expect... Can you give us any steer on how would you expect your NII to develop in the next few quarters?
Krzysztof, if you-
Okay. As you see, we increased net interest margin throughout the quarter versus end of last year. And, of course, being a bank with a huge deposit base, we taken advantage of high interest rates environment in Poland. Interest income is contributing positively. And previous expectations was that we should see interest rate cut in first half of this year, but we did not see up to now. Officially, Piotr, correct me if I'm wrong, we expect one interest rate cut end of year, but we don't really know whether we will see this cut or not. But even if the repricing of the asset base and the deposit base will not impact it negatively throughout the whole year.
That's why we can, let's say with quite moderate probability, that we will deliver what we promised before, that we will keep net interest margin at the level as previously declared, third quarter last year, that was 435 bps. And the current level is higher, and we will see. There are scenarios in which we can keep it, yeah. But of course, we also see black swans, and yeah, and as you know, we do not disclose forecasts. That's why... Yeah, but there is a difference. We have different scenarios in-house, and that's the main driver for us. For us, it's better the high interest rates environment than interest rate cut, for sure. That you now understand also.
Yeah, this should help to deliver the final result in the year.
Oh, okay. Supported by both, it seems. Thank you for all the comments.
Yeah, sure. And if I may-
Just add to a few points to that, of course. So when you look at what we are doing also, we are pretty effectively optimize the cost of deposit base, so that will support NII going forward. So that's one point. Second point, we also do have, as you saw, we gain market shares in terms of volumes on the loan side, so it also will support, and as we look at it, so we have on rate point of view, so we have a higher drop of deposit rates than on the asset side.
... so, combine, here I mean both loans and securities. So it also supports NII and NIM. So that's another point which I would like to highlight here. So optimization of deposit base and the cost of it and volume growth, which actually counterbalance in some way the rate cuts, which we had at the end of last year.
Okay, very helpful. Sorry, just a final one, because I noticed that your Swiss franc coverage is now close to 100%. Shall we model any additional charges for the rest of the year, or do you think you are kind of largely done here?
I guess, is this the question about whether those guys who repaid the loans are coming to see you, and is there a risk of extra, extra, charges coming from there? Thank you.
Piotr, if you may.
Okay, Gabor, I would say that this is a good question, but this is for our customer, how they will behave. Because if they will go to the court, for sure we'll have to provide additional provision. If they will use our voluntary agreement, we'll not have to provide additional provision. So today, it's very difficult to judge how they will behave. We believe that, you know, our offer is okay, but who know how they will behave?
Many thanks.
Mihail?
Hello, good day. Thank you very much for this call and for the conference earlier. I have a couple of questions. Firstly, continuing on NII and net interest margin, your hedging cost in interest expense has been sequentially declining, and now this quarter it was -PLN 500 million. Do you expect it to continue to decline, or it is more or less, you know, now stable level? Also, if you could comment here, like, at what level of rates do you start to benefit from hedges? Basically, what do you pay and receive on these hedges? And do you continue to increase your position on hedges, or it is stable so far? So that's the first question. And the second question is on dividend for 2023 and 2024.
So as far as we could see, last year, regulator allowed to pay dividend from the profits not included into their own funds. Essentially, for some banks it meant that the payout could be given for the entire year, 2023. And in case of PKO BP, the profits were already included from the first half of the year, so it essentially meant dividend from the profits of the second half of the year. So my question is, assuming that this ruling happens, this recommendation happens this year again, how accounting works that, well, in which case profits from the first half of the year will already be included into their own funds by that point of time?
Or, is there a chance that they will not? Yeah, so that is the second question. Thank you.
Yeah, as far as the hedge accounting. Yeah, me?
Maybe suggest Kuba to go with hedging, and if you can take dividends.
Yeah, I can go, I can try to even answer this hedging, and Kuba will add probably something. Of course, we, that's the level of evaluation of this hedge accounting and results we see in the interest income is a function of a few parameters. One of them is connected with interior between short-term interest rates and long-term interest rates, and now is much more positive than that was previous quarters. We also recognize this effect in interest margin. Simply the difference between two, three years bonds yield is smaller versus short-term one-month WIBOR or three months WIBOR is simply lower than that was before.
That's an explanation of a reduction of this negative impact. You have to know that if hedging is not to speculate, hedging is to minimize different risks connected with sensitivity of interest income, interest margin. If you're gonna stabilize interest income on the level, predefined level, it means that you simply stabilize that. From this perspective, if you see the movement of interest rates on the market, your result should be same. But relatively speaking, you can recalculate potential loss that in the case that you don't have this hedge accounting in your book, and what would be the result? It's a different situation.
Now we are in a regime, as you know, a new requirement is called SOT NII, what means in the past the securities portfolios were calculated and covered by the regulator, SEC, by a risk thresholds or limits rather dedicated to BPV, means the evaluation sensitivity. But currently, they are rather willing to stabilize interest income.
... income. That's why they expect us simply to keep the sensitivity of interest income results quite stable. From this perspective, we will try to find a natural hedging position in the balance sheet, I mean, products, long-term fixed rate asset products. But for sure, to close the gap, to keep our exposure below the limit, we will close this gap using derivatives, interest rates IRS instruments also. Yeah. Dividend, Kuba, or?
So I can take the dividend. But just to add, and to the hedging, on the one hand, the main reason why the result, the cost is lower, is maturities of the transaction. So we already had around PLN 6.5 billion of maturities this year. In the first quarter, we expect around similar amount in the course of 2024. So answering your question, what we expect? We expect that the cost of hedging will be lower for this year than simply multiplying cost of first quarter by 4. So this are actually our expectation. And you also ask about the rate which we have of the fixed leg.
At the end of first quarter, it was 2.74%. That was the rate on the fixed lag. Coming to the dividends, you ask about accounting rule. Here is more the will be the decision of the management board, because it's not automatic. Meaning that if we want to account interim profit to their own funds, we have to formally send a motion application to the KNF and grant their approval. So we haven't decided yet about it, but it's not automatic. So it's not accounting rule, per se.
It's a formal process, which we actually, if you look, of course, on the few last years, we usually did it, meaning after the publication of interim profit, we actually send the application, motion to the KNF and grant approval. Here, it's still not decided what we will do on our side.
I also would add that at this moment, we have completely no knowledge whether these conditions set by the KNF this year, which was for the first time, and frankly speaking, quite surprising, whether this is something which will stay with us or whether this was just one-off for internal KNF reasons. I would add one thing, that even with these conditions, assuming that with our final decision of dividend, our shareholders on the meeting will follow 100% the KNF recommendation. If we add to this what we already paid in February as an advanced dividend, the distribution this year will equal 100% of last year unconsolidated profit, which I think is also shows you that the KNF, at the end of the day, is not as restrictive as it used to be.
Okay. Okay, that is clear. And just once again, on hedges, it is 2.75% fixed rate, which you receive in aggregate on hedges right now. Is it correct?
Yeah, it was at the end of first quarter this year.
Okay. Okay, thank you. And just one last question, if I may, coming back on Swiss mortgages. Could you... This question was asked on the conference, but once again, could you comment what the recent Supreme Court decision could bring to your assumptions? Does it change much, or you're already provisioned for that decision, for that incremental change?
Piotr, if you mind?
I would say we still analyze the situation. However, we don't expect that on the basis of today's knowledge, that it will have material impact for our provisioning line. Rather it will, you know, how our customers behave, it will have bigger impact than the straight, you know, the legal assessment of the court.
Okay, thank you very much. That is very clear. Thank you.
I see no other questions. So in such case, thank you for your time, and hope to see you next time on the Q2 presentation in August. Thank you and goodbye.
Thank you.
Thank you very much.
Bye.
Bye.