U.S. Markets closed

Edited Transcript of BZW.WA earnings conference call or presentation 29-Jan-20 10:00am GMT

Full Year 2019 Santander Bank Polska SA Earnings Call (Unaudited)

Warsaw Feb 8, 2020 (Thomson StreetEvents) -- Edited Transcript of Santander Bank Polska SA earnings conference call or presentation Wednesday, January 29, 2020 at 10:00:00am GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Agnieszka Dowzycka

Santander Bank Polska S.A. - IR Director

* Maciej Reluga

Santander Bank Polska S.A. - CFO, Chief Economist & Member of Management Board

* Michal Gajewski

Santander Bank Polska S.A. - President of the Management Board & CEO

================================================================================

Presentation

--------------------------------------------------------------------------------

Agnieszka Dowzycka, Santander Bank Polska S.A. - IR Director [1]

--------------------------------------------------------------------------------

Ladies and gentlemen, welcome to the presentation of preliminary results for 2019. I'm here with the CEO, Michal Gajewski; the CFO, Maciej Reluga; Financial Controller, Carlos Polaino-Izquierdo; and Wojciech Skalski from Financial Reporting.

My name is Agnieszka Dowzycka, and I'm in charge of Investor Relations. Please use your microphones before you ask any questions.

--------------------------------------------------------------------------------

Michal Gajewski, Santander Bank Polska S.A. - President of the Management Board & CEO [2]

--------------------------------------------------------------------------------

Hello, ladies and gentlemen, welcome to the first press conference this year, where we'll be presenting the preliminary unaudited results for 2019. We will be releasing audited information on the 20th of February.

2019 was marked by a number of important market events. In quarter 4, we managed to integrate our investment activity in 1 entity, that is Santander Securities. And thanks to that, our customers gained access to a wider array of products and services. We will soon be offering foreign cash markets, a mobile platform and more stock exchange-related products to our investors. We are testing open banking. As I said before, we want to launch the account aggregation service in quarter 2, 2020.

We opened a novel branch format. That is a combination of a traditional bank outlet, a coffee house and co-working space for customers and noncustomers, Santander Work Café in Warsaw. We want to be present in all the channels to give our customers a chance to contact us the way they want at our branch's helpline mobile application and through electronic banking. Our efforts were recognized by our customers in a number of occasions in 2019. We won the prestigious Golden Bank award, Newsweek's Friendly Bank ranking, and we were the runner-up in the Friendliest Business Bank ranking by Forbes.

Our responsible banking agenda assumes we are part of the change, and we truly are. We want to support the sustainable development of the Polish energy sector. Last year, we were the first on the Polish market to sign an ESG-linked agreement that is used to incentivize borrowers' commitment to sustainability. The first loan of this sort signed on the Polish market. We want to continue that this year.

We were the first bank in Poland to release information on the legal provisions linked to the Swiss franc mortgage portfolio. We did that in January. The decision to set the provisions was underpinned by our risk analysis on the Swiss franc loan book. We talk to our auditor and built a model. We will be elaborating on that later in the presentation.

Before I move to the financials, let me talk a bit about the situation around the Swiss franc mortgage lawsuits. A lot of myths around the landmark ruling of the EU's top courts. There seem to be a lot of legal experts at the moment. But we believe there is no clear legal practice and -- legal ruling practice, and we may not say until loan agreement should be invalidated. There are different legal circumstances that come up with each case and require new analysis.

Let's move to the presentation. Slide #5. Gross loans up 5% to PLN 148.6 billion, deposits up 5%, assets PLN 209.5 billion. Market share gross loans 11.8%, deposits 11.7%. We have 4.4 million customers with access to electronic banking and 2.5 million active users. 1.6 million use our mobile banking services. We operate 515 branches and 134 partner outlets. And we have a new distribution channel we acquired through the merger with DB, and this is the network of agents.

Let's move on to Slide 6. Net interest income 15% higher year-on-year to reach PLN 6.58 billion. And this was possible thanks to a larger net interest-bearing assets base. Some changes to the group's balance sheet structure, more primarily the low-cost bearing current funds from individual customers and cash loans. And this growth was also the effect of flexible management of pricing. Fee income over PLN 2 billion, up 3.4%. I will be talking later in details. Gross income up 9% to reach PLN 9.5 billion. The attributable profit, profit attributable to shareholders was impacted by the ECJ's ruling. If we don't include those one-offs, it's 9% lower, but underlying profit is up by almost 20%.

Our capital position. We're on Slide 7. It's beyond the regulatory requirement. Our efficiency ratios are, of course, impacted by the legal provisions and higher regulatory contributions which affect the entire sector. Those contributions include the banking tax. It went up 28%. They include the BFG contributions, the KNF contributions. Our -- the corporate income tax went up 10%. So those items definitely impact our overall results.

Return on equity 9.7% and return on assets 1%, underlying results would be 11.2% and 1.2%, respectively. We have a solid liquidity position as we do every year.

On the following slides, that's Slide 8, 9 and 10, and those are business-related slides. Retail banking. We have 1.78 million customers that use our Account As I Want It accounted -- Account As I want It, that's up 65% year-on-year. Very good results in terms of cash loans, sales PLN 8.5 billion worth of sales throughout the year. We generate good sales in digital channels. Sales of insurance going up. The premium allocation up 43% year-on-year. Amount wise, that was PLN 148 million. That's in the fourth quarter alone. And at the end of December, that was PLN 552 million. And we managed to reverse the negative trend in investment fund sales. In 2019, net sales was PLN 1.6 billion and the assets managed by our TFI was up by 12%.

Digital channels. We have 4.4 million customers with access to Internet and mobile banking, 2.5 million active digital users, that's up by 7% year-on-year. The number of transactions going up. We had 74.5 million transactions. That's an increase of 80% year-on-year. We have 834,000 cards in digital wallets and the number of transaction was 150% higher. We see higher sales in digital channels, entire sales of personal accounts, increase of 12.5%. Business account sales through digital channels up 25%. 1/4 of all cash loans are sold -- no, sorry, 25% more cash loans are sold through digital channels. I have mentioned the agents network. They're an important part of our overall sales. They will be selling personal accounts and POS terminals starting from this year.

This year was good for SME -- for SME segment companies with turnover up to PLN 8 million, especially good for our smart loans, very good result generated in December. Financing to SMEs went up 10% year-on-year to reach PLN 13.4 billion.

We have some new products, an additional module, electronic accounting, 13,500 new users were added to that module.

Business and Corporate banking. The assets -- performing assets at PLN 33 billion. We continue to focus on selected sectors, strategic sectors, where we generate double-digit growth. We continue to support the polish companies expansions abroad using and taking advantage of our global network and the global presence of Santander Group.

Corporate and Investment banking, here we have revenues from trade finance up by 29%. And when it comes to cash management services, we also have 2-digit growth of 34%. In 2019, we carried out the biggest tender offer on the Polish market for many years, and we were acting as an exclusive financial adviser in one of the biggest M&As in Poland. So this was a very successful year for this business line.

And now I will hand over to Maciej to cover the macroeconomic environment.

--------------------------------------------------------------------------------

Maciej Reluga, Santander Bank Polska S.A. - CFO, Chief Economist & Member of Management Board [3]

--------------------------------------------------------------------------------

So when it comes to macro environment, we all know that we are dealing with a slowdown. There is a moment of the year when everybody publishes their outlook for the next year. We did that before Christmas last year. And over several weeks, we have observed some of surprises. Recently, there was the flash GDP data. Our expectation was 4.2%. The chart shows 4.0%. I will not comment on all the data in greater detail, but I will just say that the investment is doing fine and this is a surprise. In the fourth quarter, this is some 7%. So this is some decent figure.

The end of 2019 is worse than we had expected. This is some 3%. But when it comes to 2020, I think that what is more important than the focus for 2020 is the path of growth. So whether in 2020 we will see a continuing slowdown quarter-by-quarter or maybe we will reach a trough and we will see a rebound for 2021. As you can see on the slide, we opt for the second scenario because we are expecting a faster growth than in 2020. Behind that, there is also the pace of the GDP forecast worldwide, and we are expecting the second half of the year to be better. We also are aware of all the risk factors. When it comes to the structure of the growth, we increased our consumption growth at some 4% and no investment increase. And behind that, there was the slowdown, not truly a slowdown, but the deceleration of the public sector. If we see the data for the fourth quarter, it may turn out that the investment will be better, but it may turn out that the consumption will be different than we had expected.

All in all, we think that we should be moderately optimistic when it comes to 2020, taking into consideration that the GDP growth is more or less about the potential. In normal terms, the slowdown will not be that big because we have bigger and higher inflation. December was higher. The peak we had assumed is about 4%. And I think it will materialize because some factors may contribute to a decrease of inflation. But whatever the peak is, we see it as the temporary factor. I think that in the medium-term, inflation will be within the targets so that we assume that the interest rates, according to the assumption of the Central Bank, will stay flat. The economy is well balanced. The surplus of current turnover will be maintained or will even grow. Export was impacted by the slowdown worldwide. But there, we also see an improvement for 2020. In domestic terms, there was less demand than in the past. When it comes to the impact of the macro environment on loans and deposits, let us talk about the past first.

Loans grew by some 5%. At the end of the year, the slowdown was noticed in the corporate sector mainly to the level of 3%, and it is reflected in the balance sheet of ours, which we'll elaborate on in a while. Retail loans, for households, still decent. Cash loans 8%, mortgages 2 digit. And I think that some increases of this kind should be assumed for 2020. The trend has maintained in deposits. They have grown decently, especially current deposits. Term loans on decrease. Households, up. And that this is a good harbinger for the liquidity in this sector. This was reflected in the fourth quarter, and I think that this will continue because the deposits growth is still solid with a decent structure.

So now let us comment to the main elements of our balance sheet.

--------------------------------------------------------------------------------

Michal Gajewski, Santander Bank Polska S.A. - President of the Management Board & CEO [4]

--------------------------------------------------------------------------------

Okay. So as I have said, loans up by -- gross loans up by 5% year-on-year to the level of PLN 148.6 billion. When it comes to the structure of that, mortgages up by 4% year-on-year. Of course, Swiss franc mortgages down by 8% year-on-year. Very good dynamic increase of cash loans, year-on-year, which was 23% up. And in Santander Consumer Bank, we reported an increase by 11% year-on-year. Mortgages down. In Santander Bank Polska, mortgages up by 4%. In Santander Consumer Bank, mortgages down by 8%. If we exclude that in Santander Consumer Bank, we would have reported an increase by as much as 16% year-on-year.

Customer funds. Now let us look on the Slide #19. Customer funds up by 5% year-on-year. I was already mentioning the mutual funds. Quarterly, this is an increase by 4%.

Net sales, PLN 505 million of net sales. It is worth mentioning that we have reported a very good increase in online sales.

In terms of deposits, in general, up by 5% year-on-year, both retail and corporate ones, 4% and 5%, respectively, and we see a continuation of increase in term deposits and migration of term deposits onto current deposits and saving accounts.

How did it translate into net interest income and net interest margin? Net interest income up by 15% year-on-year, mainly thanks to the net interest-bearing assets. And if we take a look at NIM, this is, of course, influenced by the European Courts of Justice. And if we exclude the impact of that, NIM in the fourth quarter would have been higher. So this is when it comes to net interest income and net interest margin.

Fee income, 3% up year-on-year. We mentioned that there are several lines that are very dynamic in terms of growth. This is credit fees, 14% up year-on-year and 16% up quarter-on-quarter. Credit cards up by 7% up year-on-year and 8% up quarter-on-quarter. Insurance fees up by 11% year-on-year and stable quarter-on-quarter. And we also reported an improvement in terms of capital market fees. Of course, this is still under pressure, but there was an increase of 8% quarter-on-quarter. SCB, in terms of fees, up by 18% quarter-on-quarter and 3% up year-on-year.

Gross income, up 9%. Underlying gross income, up 15% year-on-year. The business transformation also impacted the gross income, constituting a one-off, the sale -- the profit on sale of investment services of PLN 59 million booked in 2019. So we see good dynamics in gross income through organic growth and the merger with Deutsche Bank.

Maciej will continue now about the expenses.

--------------------------------------------------------------------------------

Maciej Reluga, Santander Bank Polska S.A. - CFO, Chief Economist & Member of Management Board [5]

--------------------------------------------------------------------------------

There a number of elements that are worth mentioning in operating expenses. I want to underline -- I want to start by analyzing the cost of merger and cost of synergies. About 6 months ago, we showed you a slide with the estimates. And so the cost connected to the acquisition in terms of layoffs, they amounted to PLN 182 million, as you see on the slide, that's PLN 16 million lower than planned. And cost synergies, including the effect of group redundancies, amounted to PLN 112 million and PLN 101 million was planned. In December 2017, we were talking about the merger, and we're presenting the planned expenses and the target level for 2021 was at PLN 129 million. So we're not far from this.

We see that 2019 was, in fact, better than we had estimated. The actual world results were better than we had estimated.

Op, we see the administration costs down. Those related to IT and consulting. Staff costs up 2%. And there were a number of one-offs impacting the expenses last year and that included the higher BFG contribution and legal provision linked to the Swiss -- the FX mortgage loan portfolio and the future reimbursements of the fees -- partial fees on consumer loans. We reported that already in one of our current reports. Excluding those one-offs, expenses went up 10%. Cost to income, underlying down 2 percentage points.

The quality of the loan book and provisions. The cost of risk, 85 basis points. Quarter 4 was good in terms of provisions across the business line. We saw fewer downgrades to nonperforming portfolios, improvement in SMEs, and the nominal values reflect the structure of sales and the structure of the overall portfolio. In terms of higher NPL, this was the result of the denominator that decreased, especially in the corporate book. Change of model parameters in quarter 4, it had a neutral impact -- overall impact for the bank.

NPL sales, we had some in quarter 4 in SCB. The impact on P&L was PLN 26 million as you see on the following slide.

The last table that we present, 2019 compared to 2018, we see that underlying results that are presented in detail in the report. We have gross income up 16%, net profit up almost 20%, expenses highly impacted by the regulatory contributions. On the expense side, we see continued focus on the synergies and efficiencies that are better than we had planned. The credit provisions are going up because of the changing structure of the portfolio. So 85 basis points at the end of the year. I think this is a good harbinger for the following quarters.

Michal, would you like to summarize?

--------------------------------------------------------------------------------

Michal Gajewski, Santander Bank Polska S.A. - President of the Management Board & CEO [6]

--------------------------------------------------------------------------------

Yes. So we continued our strategy of organic growth. We continued to review of our business lines, continued our business strategy. We looked at what should be continued, what could be outsourced, and this is, in fact, what happened with the investment services center and we see the effects of those in the results -- in the increasing results from our core operations and the higher net interest income and fee income. So the strategy was to continue with this transformation, also the digital transformation so that our customers could have access to services -- products and services online, and of course, the cost of such services for us is lower. There is a one-off. The landmark ruling of the US top court, which impacted the result as well as the contributions for BFG, the banking levy; the KNF premiums. This impacted the results.

We'll be happy to take any questions you may have.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Unidentified Analyst, [1]

--------------------------------------------------------------------------------

I have several questions. I would like to start from the provisions for FX mortgages. I'd like to ask for an explanation for the 3-year time horizon. What does it mean? Does it mean that you had assumed the number of final abiding rulings over 3 years' time? And this is how you raise the provision? Or maybe the 3-year period will take into account the subsequent future rulings?

--------------------------------------------------------------------------------

Maciej Reluga, Santander Bank Polska S.A. - CFO, Chief Economist & Member of Management Board [2]

--------------------------------------------------------------------------------

The 3-year time horizon is not about the number of rulings, but the number of lawsuits. So on the basis of the trend in the recent months, we are estimating the number of rulings over the next 3 years and then we attach the probability of winning or losing a lawsuit. And then this probability is assigned a given scenario that you are presented here on this slide. So this 3-year time horizon means the number of lawsuits filed over the 3-year time.

--------------------------------------------------------------------------------

Unidentified Analyst, [3]

--------------------------------------------------------------------------------

Can I ask another question related to that. Do the provisions include the legal costs -- legal services costs -- the legal costs, I mean, are they included in the provisions?

--------------------------------------------------------------------------------

Maciej Reluga, Santander Bank Polska S.A. - CFO, Chief Economist & Member of Management Board [4]

--------------------------------------------------------------------------------

They have been included, but we do not publish the details. But you can imagine that, bearing in mind the total amount, these are insignificant.

--------------------------------------------------------------------------------

Unidentified Analyst, [5]

--------------------------------------------------------------------------------

I have a question whether you're going to share any data that you took into account in that model?

--------------------------------------------------------------------------------

Maciej Reluga, Santander Bank Polska S.A. - CFO, Chief Economist & Member of Management Board [6]

--------------------------------------------------------------------------------

So the number of lawsuits are the number of different baskets of FX loans you have identified within your portfolio. Because on the basis of the market discussions, we know that each bank distinguish different baskets. Each agreement carry different risks because we have denominated and indexed agreements. And when it comes to the number of losses, I think that in the previous quarters, we were quite transparent. And we showed the number of lawsuits at the end of the period, both at the level of the group and at the level of the bank. So we'll continue this transparency. But if your question is whether we are going to see -- to show all the previous -- all the data and all the probability, do not expect that, please.

--------------------------------------------------------------------------------

Unidentified Analyst, [7]

--------------------------------------------------------------------------------

No, what I mean -- my question is, how many lawsuits you are expecting over this -- these 3 years? Are you going to update this model on a quarterly basis or 6-month basis? Or do you -- and do you have any plan for the number of lawsuits? Of course, I'm giving some fictional figures here. For instance, imagine that over the next 6 months, you are going to receive 500 lawsuits and the model had assumed 600. Does this imply that you are going to verify and update the model on a quarterly basis or are you going to verify it after 3 years?

--------------------------------------------------------------------------------

Maciej Reluga, Santander Bank Polska S.A. - CFO, Chief Economist & Member of Management Board [8]

--------------------------------------------------------------------------------

Of course, we will have a periodical review, at least once per annum or even more frequently. But of course, depending on the situation, there might be some material changes against the model. But we can also imagine some not material changes.

Coming back to your question, the number of lawsuits assumed by us in the 3-year time horizon. Well, if -- and then within the next 6 months, it turns out that it will be materially different, this will influence the provisions. Of course, the provisions will be also influenced if some rolling practice will be shaped. If this is different from what we had assumed, regardless of whether we win or lose the case, we will adjust it. Winning or losing the case may trigger different implications and all this may influence the level of provisions. So a periodical review will be conducted.

--------------------------------------------------------------------------------

Unidentified Analyst, [9]

--------------------------------------------------------------------------------

I would like to relate to the amounts of provisions spread between different banks. In Santander, you assumed PLN 149 million. So this is 1.5% of the provision -- of the portfolio. And in SCB, this is less. And when analyzing the number of ruling steps were final and binding, SCB was losing more cases. So why these discrepancies? We would expect that SCB would raise higher provision. So have you assumed that in SCB, customer would be more reluctant to file lawsuits or why?

--------------------------------------------------------------------------------

Maciej Reluga, Santander Bank Polska S.A. - CFO, Chief Economist & Member of Management Board [10]

--------------------------------------------------------------------------------

The amounts that are presented in the current report that are presented on the slide relates to the fourth quarter. In SCB, there was additional provision of PLN 20 million, so that's earlier.

--------------------------------------------------------------------------------

Unidentified Analyst, [11]

--------------------------------------------------------------------------------

So at the level, we -- you had over PLN 76 million at the end of the third quarter and I assume that PLN 20 million of that belongs to SCB, Santander Consumer Bank, right? That PLN 20 million was presented by Santander Consumer Bank as an element of the portfolio provisions. But you, at the end of the quarter 3, in your financial statement included the number of lawsuits and the level of provisions that have been raised.

--------------------------------------------------------------------------------

Unidentified Company Representative, [12]

--------------------------------------------------------------------------------

All right. So this was about individual cases, PLN 70 million was for individual cases. Okay. So that note that you included in the financial statements related to the group, yes. So we have to add PLN 76 million to '20 when it comes to the provisions that we had been previously raised. Unfortunately, the booth is not receiving. Okay. So either we create a provision on a portfolio basis or another way around, this will be a single provision at some moment, right?

--------------------------------------------------------------------------------

Unidentified Analyst, [13]

--------------------------------------------------------------------------------

Okay. And what was the impact -- I would like to ask a question, what was the impact of the net profit in your flash results? Was it included when it comes to the impact of provisions on to the net profit?

--------------------------------------------------------------------------------

Unidentified Company Representative, [14]

--------------------------------------------------------------------------------

So the easiest answer is that we do not include a full tax efficiency when it comes to the influence on these provisions. We do that only partly. The booth is not receiving.

--------------------------------------------------------------------------------

Unidentified Analyst, [15]

--------------------------------------------------------------------------------

I'd like to ask about CIT. This is your assumption right now, right? And the talks are still underway, and the full picture will be visible in the annual report, right?

--------------------------------------------------------------------------------

Unidentified Company Representative, [16]

--------------------------------------------------------------------------------

Yes, the only comment I can make here is that this is our best knowledge and understanding of the situation. The audit has not been completed yet. This will be completed within the next 3 weeks. So we cannot rule out that the auditor will have some challenges to the presentation.

--------------------------------------------------------------------------------

Unidentified Analyst, [17]

--------------------------------------------------------------------------------

And when it comes to savings on administrative services, IT and third-party funds, is it one-off? Or is it recurrent?

--------------------------------------------------------------------------------

Unidentified Company Representative, [18]

--------------------------------------------------------------------------------

I think that third-party services and consultations, I think that here we can assume that this is recurrent. And IT and the amount of depreciation that will stem from IT in the future, I think that this will be on the rise.

--------------------------------------------------------------------------------

Unidentified Analyst, [19]

--------------------------------------------------------------------------------

Moving forward to the other ECJ's ruling about consumer loans, what was the methodology used to estimate the provisions in other operating income? And the adjustment of PLN 100 million in the net interest income, is that a one-off adjustment or recurring? So what was the methodology effective or the linear one?

--------------------------------------------------------------------------------

Maciej Reluga, Santander Bank Polska S.A. - CFO, Chief Economist & Member of Management Board [20]

--------------------------------------------------------------------------------

Similarly, we talked about it after the third quarter when we didn't make provisions. We talked about some estimates, and we said we're going to use the effective method. What has changed is the last item on Slide 30, because it shows you what was included in quarter 4.

--------------------------------------------------------------------------------

Unidentified Analyst, [21]

--------------------------------------------------------------------------------

So the PLN 100 million is a recurring impact of the ruling estimated based on the effective methodology?

--------------------------------------------------------------------------------

Maciej Reluga, Santander Bank Polska S.A. - CFO, Chief Economist & Member of Management Board [22]

--------------------------------------------------------------------------------

Net interest income -- it appears in net interest income. So it shows you impact on that line as a result of reimbursement. And other operating income includes the past reimbursements.

--------------------------------------------------------------------------------

Unidentified Analyst, [23]

--------------------------------------------------------------------------------

Did you estimate the impact on the net interest income of adjusting the model if the regulator or the auditor as they did for bank and said the bank is obliged to make the reimbursement in the linear methodology because then you would adjust the model and that would impact the net interest income and/or this difference is not significant?

--------------------------------------------------------------------------------

Maciej Reluga, Santander Bank Polska S.A. - CFO, Chief Economist & Member of Management Board [24]

--------------------------------------------------------------------------------

It would be significant, but we can't talk about it because we don't see that difference.

--------------------------------------------------------------------------------

Unidentified Analyst, [25]

--------------------------------------------------------------------------------

I have a question about the impact on the net interest income, PLN 101 million, and is that for quarter 4 or starting from the ruling on the 11th of September?

--------------------------------------------------------------------------------

Maciej Reluga, Santander Bank Polska S.A. - CFO, Chief Economist & Member of Management Board [26]

--------------------------------------------------------------------------------

Yes, starting from the 11th of September.

--------------------------------------------------------------------------------

Unidentified Analyst, [27]

--------------------------------------------------------------------------------

Following the press conference, I saw a headline that the bank is open to reach agreements with the customers, but the Swiss PLN is definitely out of question. Could you elaborate on this?

--------------------------------------------------------------------------------

Michal Gajewski, Santander Bank Polska S.A. - President of the Management Board & CEO [28]

--------------------------------------------------------------------------------

There is no ruling practice yet that will be clear. When we were merging with KB, we reached out to all KB customers, to all customers to -- about possible agreement, and we only got 6 responses. So of course, this situation is changing. It's very dynamic. We're thinking about different scenarios. Agreement is -- out-of-court agreement is a potential solution because we -- people see what happens in court houses. We have seen some -- what happened with some legal offices here in Poland that took care of the issue. So of course, we take it into consideration to reach an out-of-court agreement, but it's too early to say today. We are looking into what customers might be interested in because their expectations are so much different. We cannot have the same approach, the same agreement with all customers. We need to see a clear ruling practice to be able to draw conclusions, but definitely an out-of-court agreement is possible. But we're still waiting. We're, of course, estimating the potential impact on the bank's results. However, we're still looking into this.

--------------------------------------------------------------------------------

Unidentified Analyst, [29]

--------------------------------------------------------------------------------

I have a question in terms of your headcount and the restructuring process. In quarter 4, was there a provision release in that respect because it seems the headcount did not go down as planned?

--------------------------------------------------------------------------------

Michal Gajewski, Santander Bank Polska S.A. - President of the Management Board & CEO [30]

--------------------------------------------------------------------------------

You mean, when you say the headcount, we were talking about the restructuring?

--------------------------------------------------------------------------------

Maciej Reluga, Santander Bank Polska S.A. - CFO, Chief Economist & Member of Management Board [31]

--------------------------------------------------------------------------------

We did have the group layoffs. We do not expect provision release and headcount is over 1,300. That is a number that -- that's the reduction and the program assumed 1,400. So it was quite close to the assumption.

--------------------------------------------------------------------------------

Unidentified Analyst, [32]

--------------------------------------------------------------------------------

I have a question about net interest margin and the decrease. What is behind this that reflects the situation on the market?

--------------------------------------------------------------------------------

Maciej Reluga, Santander Bank Polska S.A. - CFO, Chief Economist & Member of Management Board [33]

--------------------------------------------------------------------------------

I was showing you that when I was talking on the overall market. Business loans were -- the growth was going down. And at the end of the year and the dynamics was only 3%. And in the entire -- in Q4, we saw a clear slowdown. Here at our bank, NBP shows 3%. Here, we see different tendencies depending on the segment. We have -- we see the decrease for corporate and investment segment, but for SMEs, the sales actually reached some very good levels. So for larger corporations, the decrease was reflecting the situation on the market. The guidance for risk-weighted assets and costs, in the morning, Santander reported, they expect 1% drop in risk-weighted assets.

In terms of volumes, we should expect the trend for 2019 to continue. The same applies to the structure -- to the segment and product structure. I would assume that the risk-weighted assets will go up, but to a lower extent than when it comes to loans. As a result of our actions, that will be continued in 2020 because we have some transactions that will optimize the risk-weighted assets in the pipeline. The guidance for costs, maximum to inflation and the inflation for 2020 is supposed to be very high. So it's probably below inflation.

We have a question from the -- that we got online that is similar. So let me take that. There was a question whether the cost synergy we mentioned in 2019 that they're better than planned, will that have be reflected in 2020 and 2021?

Yes, of course, it will because those synergies was spread over time. And of course, there will be even more impact. So in 2021, we will see the annualized effect of what will happen in 2020. So the fact that we have higher synergies already in 2019, it, of course, impact what we see in the following years.

--------------------------------------------------------------------------------

Unidentified Analyst, [34]

--------------------------------------------------------------------------------

I would like to ask you about the comment on the consumer loans market. We see the decrease quarter-on-quarter, whether this is the effect of European Court of Justice ruling?

--------------------------------------------------------------------------------

Michal Gajewski, Santander Bank Polska S.A. - President of the Management Board & CEO [35]

--------------------------------------------------------------------------------

The sales was lower in the fourth quarter because quarter 3 was record high, but still quarter 4 was second best in 2019. So we are rather expecting the trend to continue. We are expecting a rise, maybe not to record high levels, but still decent. You'll have this on the slide. The dynamics of growth was high. Quarter #3 was record high. Quarter 4 was still decent. I think that if at the beginning of the year, we would have told you that the sales would be PLN 2 million per quarter, everybody would have been surprised, I think. So quarter 4 was a decent quarter.

--------------------------------------------------------------------------------

Unidentified Analyst, [36]

--------------------------------------------------------------------------------

I'd like to ask about the performance in SCB in the fourth quarter because I think that they were record high, taking into consideration the provisions that the bank has raised. I think that the net profit was PLN 100-something million in this -- in the fourth quarter versus PLN 150 million in #3 and# 2. And the provision was some PLN 150 million in SCB. There was sales of NPL of PLN 20-something million. But I think that there was some major success in the fourth quarter that affected the results and contributed to an improvement. What was that?

--------------------------------------------------------------------------------

Unidentified Company Representative, [37]

--------------------------------------------------------------------------------

I -- the Slide #24, if we take a look at the provisions in SCB only, we have PLN 59 million in quarter 4 versus remaining quarters, PLN 80 million. Sales of NPL on the next slide, PLN 26 million. And let us remember that in the second and the third quarter in the context of net fees and moving the payment -- the fee payments to the second quarter that is not present in the fourth quarter. So this is the -- fourth quarter versus the remaining quarters, this is an improvement on a like-for-like basis. The second quarter was worse, but we mentioned that this was a nonrecurring event because this will be split over time. So we will avoid any -- avert any fluctuations. So in terms of business, I think that the growth was solid apart from the single events that I had already mentioned.

--------------------------------------------------------------------------------

Unidentified Analyst, [38]

--------------------------------------------------------------------------------

I'd like to ask a question about NIM. The adjusted one is below 3.6% in the fourth quarter. I think that last year, the management board was expecting some 3.8%. And the question is whether we may expect the acceleration of the improvement in the subsequent quarters?

--------------------------------------------------------------------------------

Maciej Reluga, Santander Bank Polska S.A. - CFO, Chief Economist & Member of Management Board [39]

--------------------------------------------------------------------------------

Well, so relating to 3.8%, yes, I agree that last year, we were mentioning 3.8%. But later on, we said that in the first half of the year, we decided to change the financing costs slightly later. And it happened like that. So we knew mid-year already that it would be difficult to reach 3.8% and we said that. Another element that contributed surprise that we need to take into account for 2019 that we'll reverse, I hope, in 2020 were far lower profitability of bonds. And we assume that this year, this will not happen.

For instance, we would have reported several basis points higher NIM in the fourth quarter if it was not for the low profitability of bonds that was followed by trade investments. When it comes to the future of NIM, let us not focus on the specific levels, but maybe rather on the trends that we are expecting for 2020 and I hope that they will be shaped in 2020.

On the liability side, when it comes to the balance sheet, we hope that the trends that we are observing right now or we will observe in the second half of the year, will continue. So the structure of deposits should positively influence NIM through major growth of current deposits. And we should have optimization of financing costs in term deposits. Of course, probably, we should have some issuances in 2020 that may influence NIM.

In assets, on the asset side, when it comes to loans, we should assume positive mix from the perspective of NIM and NII. So faster growth of cash loans for SME, more in SME than for corporate. So the structure of loans is positive. The structure of assets, in general, should be positive because we assume some growth in profitability versus last year. And I think that these are the major elements that I should take -- that we should take into consideration.

--------------------------------------------------------------------------------

Unidentified Analyst, [40]

--------------------------------------------------------------------------------

Have you implemented any changes for a consumer loan or maybe the mitigation of European Court of Justice rulings on the income side is possible?

--------------------------------------------------------------------------------

Maciej Reluga, Santander Bank Polska S.A. - CFO, Chief Economist & Member of Management Board [41]

--------------------------------------------------------------------------------

Well, this is an important thing because the starting point to get into this consideration what happened in the fourth quarter is important. And we need to mitigate the effect regarding the net interest income. And I think that we are working on a general offer that would take into account all the parameters of cash loans more on the income side rather than on the cost side.

--------------------------------------------------------------------------------

Unidentified Analyst, [42]

--------------------------------------------------------------------------------

I have a question about capital ratios. There was a significant improvement in quarter 4. Why was that? Did you take any profit to that? I couldn't hear the answer. The booth did not receive that. And my question regarding the dividend. What plans do you have?

--------------------------------------------------------------------------------

Michal Gajewski, Santander Bank Polska S.A. - President of the Management Board & CEO [43]

--------------------------------------------------------------------------------

Well, you see that we meet their requirements. We haven't made any final decisions yet, but we are not changing our dividend policy both in terms of paying the undivided profit from the last year. Of course, we need to disclose our proposal with the regulator, and we haven't taken any decision yet. But let us remember that we need to take into account that we need to make -- meet their requirements for the dividend payout at the moment of the dividend payout.

--------------------------------------------------------------------------------

Unidentified Analyst, [44]

--------------------------------------------------------------------------------

What were the integration costs for the fourth quarter and the VISA evaluation?

--------------------------------------------------------------------------------

Maciej Reluga, Santander Bank Polska S.A. - CFO, Chief Economist & Member of Management Board [45]

--------------------------------------------------------------------------------

VISA evaluation shown on the -- PLN 58 million. This is quarter 4. In quarter 4, we had PLN 18 million. And the cost of integration in the fourth quarter, I can't remember it from the top of my head. But we will get back to you. I think that after the third quarter, I gave you the total amount. And today, we will get back to you with that.

--------------------------------------------------------------------------------

Unidentified Analyst, [46]

--------------------------------------------------------------------------------

Last question regarding Slide 21, net fees. In the chart, Others is lower, why?

--------------------------------------------------------------------------------

Maciej Reluga, Santander Bank Polska S.A. - CFO, Chief Economist & Member of Management Board [47]

--------------------------------------------------------------------------------

These are the off-balance sheet guarantees. They were lower than in the previous quarters.

I'm coming back to the previous question, I'm sorry. The cost of integration in the fourth quarter was PLN 7.5 million -- sorry, PLN 13.5 million cost of integration, quarter 4.

I'm double checking this and I'm looking at the questions we got online. But I think we have answered most of them during the presentation. There's a question about BFG fees. Yes, we expect them to be higher. This was suggested by BFG itself, and we're awaiting formal letter.

Thank you very much.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]