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Edited Transcript of BZW.WA earnings conference call or presentation 23-Jul-19 9:30am GMT

Half Year 2019 Santander Bank Polska SA Earnings Call

Warsaw Jul 27, 2019 (Thomson StreetEvents) -- Edited Transcript of Santander Bank Polska SA earnings conference call or presentation Tuesday, July 23, 2019 at 9:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* 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

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Conference Call Participants

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* Lukasz Janczak

IPOPEMA Securities S.A., Research Division - Analyst

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Presentation

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

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Good morning. We are pleased to organize this conference in this group. Welcome to the presentation of the financial performance for the first half of the year of Santander Bank Polska Group. Together with me, there is the CEO, Michal Gajewski; CFO, Maciej Reluga; Financial Controller, Carlos Polaino; and Wojciech Skalski from Financial Accounting area.

My name is Agnieszka Dowzycka, and I'm responsible for Investor Relations. I will hand over to the CEO now.

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

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Good morning, ladies and gentlemen. Before we go on to the financial performance, I'd like to share with you the information about the most important events in the second quarter. We are continuing our actions related to the merger between the 2 separate entities, Santander Securities and Santander Brokerage Poland. As you know, in June, we agreed the divisional plan of Santander Securities, and this is the very first step to merging the 2 entities in the fourth quarter of this year. This is the continuation of our agenda, which we launched in the last year by merging with Deutsche Bank. We also -- we are also taking measures targeted at adjusting to PSD2. In June, we made available the production API, and we are also introducing some crucial changes in electronic banking and our regulations. We also adjusted the statute of our bank. We obtained the KNF approval to introduce the changes that are necessary in the bank's statutes. So we can say that at this stage, we are 100% in line with the PSD2 requirements.

Also, we made available access to our sandbox to the interested parties, and 78 entities are interested in that, and 14 of them filed the necessary documents and obtained the access to the testing environments. The 2 entities are testing the connection with the production environment already.

At the end of this year, our customers will have access and information related to their accounts held with other banks. Also, what we find important is what I told the shareholders at the AGM, where we announced our policy related to financing of investments that are environmental-friendly. And I also mentioned that as a bank, we have some internal initiatives regarding our switch to the renewable energy sources and switching of our car fleet into a hybrid one in 100%. So all these measures are taken within the spirit of CSR.

So now coming back to the financial performance of the bank. Let us look at Slide #5. Gross loans portfolio, up by 22% year-on-year. Customer funds, up by 19%. Assets, almost PLN 206 billion. And as a group, in terms of our market share in gross loans and deposits, it is almost 12%. We are providing services to almost 7 million of customers and 2.4 million of customers are digital ones. We need to underline the fact that we are continuing our strategy of optimization of our network. We decreased the number of branches by almost 80 units. You are aware of the fact that this is a huge investment that brings about a lot of expenses and the FX comes only later. Within them, within the strategy, we are changing our branches on to the franchise ones.

Now let us look at Slide #6. Net interest income, PLN 1.6 billion. Fee income of PLN 522 million. The net interest income, up by 16% and fee income is flat, and this is more or less what we reported in the last year and also quarter-on-quarter, we haven't recorded a major change. Net operating income year-on-year, up by 11% and here, we have almost PLN 4.6 million -- PLN 4.6 billion, I'm sorry. In the second quarter, the net operating income was PLN 2.4 million. The net profit, taking into consideration the one-offs in the form of a provision for collective dismissals and BFG costs, was PLN 958 million. Without these costs, it would have been slightly higher than last year.

Of course, here, we need to underline the fact what I commented on before, namely the expectations regarding the income synergies stemming from the merger with Deutsche Bank. Here, we decided to build long-term relationships with our customers because we want these customers to be loyal. And in the long-term perspective, we are expecting these income synergies to come up. They haven't appeared yet, but this was our conscious decision related to our customer-centric strategy and related to the fact that we want the NPS among ex-Deutsche customers to grow.

Now let us look at Slide #7. Capital position. As you can see, it is very strong. The ratios are above the KNF requirements. Return on equity, also above expectations; return on assets, 1.1%. And when it comes to the liquidity position, this is also very good and secure both at the level at Santander Bank Polska Group and Santander Bank Polska itself. When it comes to cost-to-income ratio after the first half of the year, it was 48.8%.

Now let us comment on the business segment and the situation in the second quarter and the first half of the year. Let me start from retail banking. We see significant growth in cash loan sales, up 63% to almost PLN 4 billion. What's important is the sales -- we see the sales growing in e-channels. At the same time, we see higher sales of insurance product both related and not related. We have an increase of 37% year-on-year. We also see higher sales of investment funds up 5% since the beginning of the year. It's important to highlight that in Q2, the increase was 3%. Most of the products are sold online.

On the 28th of May, Santander TFI was registered and launched 8 SAP funds as part of the employee capital plans. So retail banking business is growing. We have 1.5 million holders of our flagship product account, as I wanted.

I want to talk about the digital channels now. We have 4.2 million customers that are active that use the internet and mobile banking. That's up 20% year-on-year. We have 2.4 million active users, up by 13% year-on-year. We've got the volume of transactions. We have a very significant growth of 81% year-on-year. We are developing Santander One Pay FX, a solution powered by blockchain technology and provided in cooperation with Ripple. It enables payment to the U.K., with all the banks located in that country.

We launched a new website with new functionalities, new options. Customers may configure the account. If they want, they may set it up as they want it. This was a good quarter for SMEs also. SME is defined as those generating turnover of up to PLN 8 million per year. We see growth on the deposit and loan side. We sell the payment terminals and have launched a new lending process that's called smart loans. It's a simplified process that we see is appreciated by a customer.

Customer satisfaction in that process is much higher than it was before also because time to cash has been reduced to at least less 30 minutes.

Business and Corporate banking. Here, we had a portfolio reallocation, resegmentation. And despite all those actions, this segment has generated a 2-digit growth in assets, 20%; deposits, 12%. We still -- we continue to focus on the key sectors: food and agri, automotive, packaging, transport, logistics and furniture. We've got an increase here of 15% year-on-year. We also continue the strategy of supporting our customers operating in foreign markets, and we will continue to generate revenues on that, too.

CIB, corporate and investment banking. Trade finance, up by 39% year-on-year. Liquidity, managing -- management, up by 35%. We -- this segment has received the Euromoney Awards for Excellence for the Best Investment Bank in Poland.

Let me hand over to Maciej that will be talking about the macro environment.

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

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Hello, ladies and gentlemen. Welcome to the conference. In terms of the macro environment, if I were to talk about -- if I were to compare it to what we presented 3 months ago, the GDP forecast is slight -- is 3.3%. It may have seemed conservative some weeks ago. However, looking at the June data, it doesn't anymore looking at the uncertainty outside of Poland and the risk factors, the global risk factors. That's why we maintain the forecast of 4.3%.

In terms of CPI, we have an increase in forecast, 2.2% throughout the year, and we'll continue to increase in 2020. And the increase in 2020 is not temporary. The CPI will maintain at above 3%. And this forecast is conditional and depends on the energy prices, what happens to them at the beginning of next year. If they are released fully, then the CPI in next year may get as high as 4%. Core inflation is going up at the moment. And in short term, the forecast is slightly above 3%. However, despite all that, we think the interest rates will remain on hold because of the external environment. We're waiting for the message from ECB. From Fed, we're expecting some movements. And so in this environment, we don't think we will see any hikes in Poland.

The structure of the growth we think that after deceleration, the consumption will remain strong. The forecast is 4.5%. The investment is slightly slower this year with the changed structure because the public investments will be decreasing the dynamics. And the private investments, we can see that they are on the rise and we are expecting this trend to continue. We must remember that in 2019, we will see the peak of EU funds. In nominal terms, the increase will be lower. But anyway, we are expecting a peak. And this is why the pace of investments will decelerate. The general condition of economy is balanced. And the employment -- unemployment rate is quite low. There is a slight increase in current deposits, but still, this is quite a low level.

But before we go on to the financial performance, loans and deposits in the sector, we can see what is happening because yesterday, we got the fresh data for June, and our perspective is that deceleration visible in June is reflected in corporate sector. When it -- when we take into account the FX-adjusted rate, we have a deceleration of 1%, and we think this is quite temporary. The demand of the private sector for financing remains high. In terms of consumer loans, cash flows, mortgages are still on the rise quite fast, and we expect this trend to continue.

For deposits, here, we have a slight slowdown in this quarter, but still, we have an increased growth between 9% and 10%. And this is triggered mainly by deposits on demand. So the structure is adequate and correct here.

So in the situation of our bank now. Okay. So now a couple of slides about our balance sheet. Gross loans, up by 22%. And we need to underline the fact that here, this growth is fueled mainly by cash flows, 57% year-on-year. Mortgage is up by 32%. Corporate loans, 17% up year-on-year. Of course, we have the amortization of Swiss franc portfolio, 8% year-on-year. And if we take a look at what is happening at consumer bank, we have a growth of 8% of gross loans year-on-year, and we also have the amortization of Swiss franc portfolio there.

Customer funds, growth of 19% year-on-year, and we are especially satisfied with the fact that funds net assets grew quarterly by 2%, year-to-date by 5%. So here we have a rebound. We were the leader in terms of sales in the second quarter. In the first half of the year, the total sales was 5 -- over 500 million, and the sales is generated mainly by the remote channels, so that the customers just decide to use these channels.

Deposits grew by 23%; mainly deposits in retail, up by 29%. Business was 13% up. And we need to underline the fact that in these areas, we have growth mainly in deposits on demand. We also decided to withdraw from some promotional offers for deposits and the first positive effects are already visible, and we reported them in the first weeks of July. How does it translate into net interest income and net interest margin? The margin in the first -- in the second quarter was 3.46%, and this was contributed mainly by the sales of high-margin facilities. And at the same time, we kept our high interests on deposits. As I said, we decided to no longer offer these promotional rates after the first half of the year. And this is why now we think that we will be observing the positive effects of that. In fact, we are already observing an improvement in net interest margin. We built a solid base of deposits, which are a base for selling the funds. We are hoping that the sales in the second quarter and the fact that the customers are prone to choosing our funds will continue, and we are also hoping that customers have a wide array of products available for their investment decisions.

The next slide, net fees. Here, we had PLN 522 million after the second quarter. So this was the result, which was already reported in the first quarter. There were some areas that had a 2-digit growth, especially FX fees, 16% up, and insurance fees as well with some decent sales and decent premiums up by 20% year-on-year. Credit cards, 5% up. Here, we had a one-off related to Santander Consumer bank because in the second quarter, we booked the costs of PLN 18 million. These costs were fee costs under intermediary services. Until that time, these costs were booked in the fourth quarter. And this time, we booked them in the second quarter, which again had some influence on the results.

Now the next slide, gross income, in general terms, up by 11% year-on-year and 7% up quarter-on-quarter. Income exceeded PLN 2.4 billion at the end of June. And this includes the interest income which, for the very first time, exceeded PLN 3 billion in the first half of the year, and this was the fifth quarter in a row where we have the income over PLN 2 billion, and we are targeting PLN 2.5 billion per quarter. As I said, this first half of the year finished with the income of PLN 958 million. And here, we had some one-offs contributing to this result. What I find especially important is the way how the business develops. As you can see in all business lines, there are significant increases, and we are taking some important decisions related to deposits, which is why this makes me feel optimistic when it comes to the performance for the next quarters.

Now the next slide, [merging]. Talking about the expenses, we have to consider some important elements to compare those on a like-for-like basis. In Q1, we had the BFG contribution. Apart from that, we had the PLN 80 million worth of provisions related to collective redundancies. You probably noticed in the report that in Q2, we have relatively small restructuring provision on the SCB side, and that's linked to the optimizing of operational processes at SCB. In terms of amortization and administration costs, the comparison may be distorted because of the impact of the IFRS 16. That's about PLN 50 million per quarter on a quarterly basis. So those are the most important elements, I think. On top of that, we have the amortization of the costs linked to the merger and the cost synergies. You probably remember we had quite a discussion 3 months back how we compare those, whether we compare apples-to-apples, and we considered which is a quite rational and therefore prepared a dedicated slide to compare those. And that's Slide 24, one-off cost and cost synergies. The figures you see, that's about PLN 118 million. That's in 2019, I think. Would that spread more or less equally, then we've got about 50 in 2020, 2021. And then we have the cost, the provision related to collective redundancies, and the provision is PLN 80 million. And the cost synergies on the right-hand side includes all of this, the cost synergies related to the merger and the cost synergies related to collective redundancies. So I hope this is so transparent now what should be included or excluded in the following year.

When it comes to 2019, in the first half of the year, we don't see the synergies. Those appear in the second part of the year because of the lower number of branches, as the CEO has mentioned. Costs may be increased at the beginning of the process of optimizing the branches. And also the full effect of collective redundancies, we'll see those in 2020. So now we see costs and we'll see some synergies later.

So that's all about costs when it comes to provisions and the quality of the credit portfolio. We should look at the second quarter compared to the first quarter. And on the chart, you see SCB, where we show you the difference of PLN 10 million, and that was triggered by the fact that in Q1, they did portfolio sales with a profit NPL sales with a profit, and this did not happen in Q2. And on the same slide, one of the elements that triggered higher provision was the NPL sales at Santander Bank Polska in the second quarter. That was the retail portfolio generated -- that process generated a loss of over PLN 20 million. Hence, the higher provisions. Another element that, in my opinion, is quite important, is the biannual review of our models that impacts the provisions, especially those in the retail segment. And it's not that the portfolio is deteriorating, but we don't see the improvement because if historically, the situation was that there was some correlation between the macro environment and the quality of the credit portfolio and the credit quality is not improving in view of the parameters, then if those parameters change with IFRS 9 forward-looking, then provisions must be topped up. And in the second quarter, we had a top-up of over PLN 20 million. On top of that, we see higher provisions on the leasing portfolio, and this increase is about PLN 10 million, and this results from the review of the models. And the fourth factor is the provision raised for 2 exposures in corporate banking from the commercial property sector and the provision is up over PLN 23 million. So the impact of provisions is quite high. We don't want to talk about the increase year-on-year because we're talking about a different scale of business and a different exposure. We could recall our guidance at the moment that the risk -- when we said the risk charge would be 80 basis points, and we were there in Q1. And in Q2, we're much above that. But we assume that the second half of the year, apart from a higher portfolio, from an increase in the portfolio, we think the second half -- in the second half of the year, we'll see a better quality portfolio. So in nominal terms, the provision should be lower. And at the end of 2019, the risk charge should be close to our guidance of 80 basis points. Well, this 80 basis points now looks more challenging than it was, but it's still glimmering in the horizon. And that's where we want to be at.

So we've mentioned the NPL sales and its impact on the portfolio. So with that said, let me sum up. If we exclude the elements related to the cost, we have an increase of [year-end] 1.6%. If I were to sum up everything, what the CEO said and I did on the income side, in the second -- we assume that the second half of the year will be better than the first half of the year. The cost -- this also relates to the cost of provisions and the risk charge.

So now we're opening the Q&A sessions.

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Questions and Answers

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Lukasz Janczak, IPOPEMA Securities S.A., Research Division - Analyst [1]

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Lukasz Janczak from IPOPEMA. I have a question about the outlook on interest margin, 3.10%, that was your guidance after the first quarter. What is it now?

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

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My answer will be similar as it was for the risk charge. It looks ambitious, this target level. The trend, I think, is obvious. What the CEO said that the beginning of the third quarter, once all the promotions close and that it looks better and I think the trend is clear, whether we'll get to 3.8% is difficult to say, but it's not impossible. The trend is upwards, and we'll see when we'll manage where we'll manage to get.

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Lukasz Janczak, IPOPEMA Securities S.A., Research Division - Analyst [3]

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I'd like to ask a more general question. During the last quarter, the CEO declared -- not really declared but promised, let's say, that you would try -- that this year's result should be higher than last year. Last year, we had a big positive one-off. And my question is, do you think that it is possible to improve these results still?

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

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One-off increased in fact. So the [bar] will increase to 419. But I have a very ambitious team, and of course, we are targeting a better result. As Maciej has said, taking into consideration our momentum in the business and the decision -- and the decisions we took at the end of the second quarter that are, of course, in line with the bank's strategy, we think that if we continue this trend especially bearing in mind the sales of cash loans and investment funds, where we still are maintaining decent margins, we want to improve their results, and we are doing our best.

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Lukasz Janczak, IPOPEMA Securities S.A., Research Division - Analyst [5]

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One more question concerning the provisions because this was visibly the stage #2. Have you changed your macro parameters? Or maybe let's put it in other words, what parameters changed, because there must be a number of parameters? Sometimes these are called macro.

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

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The macro scenario both the base one and the risk one have not changed, but there are some parameters.

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Lukasz Janczak, IPOPEMA Securities S.A., Research Division - Analyst [7]

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Let's put it in a simple way. In what way low unemployment rate translates into the quality of cash loans portfolio?

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Michal Gajewski, Santander Bank Polska S.A. - President of the Management Board & CEO [8]

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Historically speaking, with a given macro scenario, the quality of a loan portfolio should be something, and there is a parameter behind that. If in a given quarter, for instance, in the first half of 2019, the reality is different from what the parameter assumed, namely the situation should be better and in fact, it is stable. It means that in forward-looking, we should change the parameters of the model, and the change of the parameter implies that the forward-looking approach, it triggers an increase in provisions.

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Lukasz Janczak, IPOPEMA Securities S.A., Research Division - Analyst [9]

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Okay. So this -- so the first thing, is that what macro is? The second one, how macro translates into specific parameters? This is a very interesting comment because why do you think that on the basis of your customer base with such a good macro, there is no improvement? Is it any signal because consumption -- consumer loans are on the rise for some time and this is a facility which has been pushed on in the banking sector. So my question is, are there any signals that we should be concerned, and this is why you are saying what you're saying? Or maybe the quality of loans is so high that you can't improve that? What is the argument, the main argument behind your reasoning? You can't be any better or there are too many loans regarding the momentum, regarding the penetration of consumer loans? What is your opinion of that?

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Michal Gajewski, Santander Bank Polska S.A. - President of the Management Board & CEO [10]

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Well, our approach has always been prudential. We mainly sell to our customer base mainly on per limits, so that -- I think that we still have some potential for growth keeping the good quality.

Okay. Putting it in other words, it seems that risk/rewards from this facility is still attractive. And what we need to underline is that it is not like there is a difference between -- there is a difference between a deterioration of the portfolio among some customers and lack of improvement because it could improve in certain conditions. And taking into consideration certain conditions, we could potentially assume that there should be some improvement, and this is not happening. In fact, when I recall talking about our assumptions regarding risk charge in 2019 2 quarters ago, I -- when I was speaking about risks factors, I spoke about something else because there was some hope that in the individual sector, there should be some improvement. And there were some risks on the corporate side because there was the story with margin tightening, no translation of higher costs under higher prices and costs started to grow faster in some sectors, and we assumed some events there. But in the half of the year when we are seeing what is happening here, there was no retail improvement. And interestingly enough, on the corporate side, regardless of these one-offs that we mentioned, the situation is quite decent. And there, we can say that the quality of the loan portfolio is quite okay.

So yes, this is the situation. But there is no translation of good condition among, for instance, households on the subsequent quality portfolio improvement. But there is no deterioration. There is -- the situation is quite stable with some deterioration of some elements.

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Lukasz Janczak, IPOPEMA Securities S.A., Research Division - Analyst [11]

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One more question. The changes in the model is related to unsecured debt only or it influences the mortgages as well?

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Michal Gajewski, Santander Bank Polska S.A. - President of the Management Board & CEO [12]

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Yes, mainly the unsecured ones. What is the average amount of consumer loan? I can't answer this question like off the top of my head. We'll come back to you so we can continue with more questions, and we'll come back to yours, if that's okay.

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Lukasz Janczak, IPOPEMA Securities S.A., Research Division - Analyst [13]

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Out of the PLN 118 million cost of merger, how much of those were incurred in the first half of the year? And the restructuring provision at SCB, was that on tangible costs?

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Michal Gajewski, Santander Bank Polska S.A. - President of the Management Board & CEO [14]

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No, that was some personal costs at SCB in the second quarter. And the first question, PLN 118 million. As I said before, this could be spread equally throughout the year. That's more or less how it looked, what it looked like in the first half of the year. The average amount of cash loan, PLN 21,200. To compare, in 2018, it was about PLN 18,000. Come and get to your PLN 20,000, if you like. More questions?

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Unidentified Analyst, [15]

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I have a question about Swiss franc loans. If you could assess the probability of raising provisions over the entire portfolio if the ruling of the Court of Justice is maintained.

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Michal Gajewski, Santander Bank Polska S.A. - President of the Management Board & CEO [16]

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We had a conference for journalists in the beginning -- at the beginning -- in the morning. At the moment, we only have an opinion that relates to the indexed loan and the loan that was, in fact, sanctioned by a different bank. So it could be a one-off case. You know how many judges there are in Poland. And if more cases need to be reviewed individually, then it would take a lot of time, of course. And we're talking with our auditor. We're talking to our auditor about it. In the report and in the auditor's opinion in Page 55, 56 in the consolidated report, that's where we present our opinion. So I wouldn't like to speculate on what we will do if this opinion is confirmed. This -- what we have at the moment, the conversion and maintaining LIBOR, it's -- it could -- one would think of it as absurd even.

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Unidentified Analyst, [17]

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Could you tell us the percentage of FX -- of indexed FX loans and the number of lawsuits against the bank?

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Michal Gajewski, Santander Bank Polska S.A. - President of the Management Board & CEO [18]

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We have over 80% of -- so over 80% of our loans are in -- of FX loans are indexed loans. And as you probably know, they come -- they came from Credit Bank and SCB. We have 722 cases and 1 class action -- individual cases and 1 class action. So we had 16 ruling in favor of the bank and 1 against.

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Agnieszka Dowzycka, Santander Bank Polska S.A. - IR Director [19]

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Thank you very much, and let me now invite you to the offline part of the meeting. Thank you.

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