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Edited Transcript of ING.WA earnings conference call or presentation 31-Oct-19 10:00am GMT

Q3 2019 ING Bank Slaski SA Earnings Call

Katowice Nov 13, 2019 (Thomson StreetEvents) -- Edited Transcript of ING Bank Slaski SA earnings conference call or presentation Thursday, October 31, 2019 at 10:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Bozena Graczyk

ING Bank Slaski S.A. - VP of the Management Board & CFO

* Brunon Cezary Bartkiewicz

ING Bank Slaski S.A. - President of the Management Board & CEO

* Piotr Utrata

ING Bank Slaski S.A. - Head of Media Relations

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Presentation

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Piotr Utrata, ING Bank Slaski S.A. - Head of Media Relations [1]

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Ladies and gentlemen, let me welcome you to the conference announcing Q3 performance. Let me present Brunon Bartkiewicz, CEO; Bozena Graczyk, Vice President, responsible for Financial Division; and Iza Rokicka, Chief of Investor Relations.

My name is Piotr Utrata, I'm responsible for relationships with ING.

Brunon, let's start.

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Brunon Cezary Bartkiewicz, ING Bank Slaski S.A. - President of the Management Board & CEO [2]

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Small thing, but makes us happy. May I? Okay. Let's continue. No feedback any more. Okay. So welcome wholeheartedly to this announcement of performance. Q3 is quite stable and calm usually, but that wasn't like that. That's why we decided we'll present, and that we will do our best to leave you as much time for Q&A session as possible because we are convinced that there will be a lot of questions.

So I will not go through my slides one by one, I will try to wrap up key elements of Q3. Bozena, as every quarter, she surely will dispel your doubts when it comes to other deviations in our balance sheet and profit and loss account, and then we will move over to questions.

So let me start. That was another strong quarter in terms of our operations. Gross growth of the number of customers is record. When it comes to number of retail customers, it's an increase of 450,000 year-on-year, much faster than last year. The number of businesses, an increase of 13,000, so a lot more than in the underlying period.

When it comes to figures, probably you will not see them, you will see net figures. We announced and disclosed gross and net, but it's not easy to read. Yes, I confirm that we are running -- we've been running an action of complementing data in customer register, which is related to legal regulations. And high expectations in that respect, mostly Central Credit Bureau and KNF as well, and we are obliged to follow all instructions and recommendations of regulators. So if customer doesn't react to our request and doesn't complete their data, we have to close registers. We close more customers' registers than customer accounts because there are such situations like, for example, we have inactive customers who doesn't react to our requests and remain inactive on their accounts, and sometimes, we start with closing account and then the file with the string -- the string of correspondence. So as you can imagine, we have a lot of such cases.

This year, it's -- we closed about up to now 13,000 of closed customer files. Secondly, activity and size of our customers, they grow at a similar pace. From that perspective, I think that the indicator that you should remember, this is the number of transactions. It is more or less increased to 2 or 3x higher activity over last 5 years, so we doubled our activity in terms of customers' number, in time, lower than 5 years, shorter than 5 years. Of course, that relates to all digital and online forms of corporation. Of course, it doesn't apply to cash transactions, which, in principle, we have an increase of activity. In that respect, for example, withdrawals, cash withdrawals and cash deposits made through cash registers over last 5 years, they dropped by half.

When it comes to withdrawals, they dropped by about 30%. This size doubled, and it's visible also by our lending activity. At the moment, we exceed the number of PLN 116 million more or less in terms of customers' exposure. At the end of 2018, it was PLN 58.5 million, so there is a great chance to double the objective. The result at the end of the fourth quarter, we grow at a similar pace like the -- in the underlying period last year, it's about PLN 16 billion increase in lending activity in loans.

The exposures for retail customers are growing fast. For business customers, we've been suggesting for some time that we will apply more selective credit sanctioning policy due to coming recession and downturn of the business cycle and lack of balance, which is visible in our economy. So for that reason, because of the risk security and appropriate allocation of capital, we're taking a closer look at exposures and sanctioning new loans as well as expanding our lending activity towards businesses.

Of course, they are still growing at significant pace, but if the credit exposure grow at 20% for business, it's about 10% year-on-year. We see higher engagement coming -- exposure of retail customers, in particular mortgage loan. We are the second supplier of mortgages on the markets.

You usually ask --very often ask that, and if that becomes more and more common, I will not keep it secret, it comes as a surprise that we give loans and fixed interest rate about 19%, so 1 in every fifth sanctioned mortgage loan, sanctioned by our and is based on fixed interest rates, so we are developing in that respect.

The value of contracts, fixed rates, it's PLN 1.6 billion, so a significant item in our balance sheet. In terms of deposits, we don't see any turbulence. After interest rate decrease in August, we are still optimizing within business as usual, our loan to depot indicator. So if loans grow by 16%, deposits by 15%, so gradually, this indicator is shifting north.

Taking into account the situation on the market, I may say that the assets under management performed great. They grew by PLN 1.5 billion year-on-year. And not only among the most affluent customers of our bank, but together with systematic saving the share of them is still growing. We've been cooperating with national and other lending investment partner as we became co-owner of it, and we are quite satisfied with that result.

I think that a lot has happened in terms of improvements and better customer service for our customers during Q3. This quarter was quite active in that respect. You probably discussed it, and you could see it in media that Apple Pay was launched by corporate customers. There are -- the reason there will be more and more such activities together with the implementation of PSD2 on 14th of September, it's natural that some things became -- were disclosed and that caused some media interest. We are happy with that because for the group of customers who expected such solutions, it -- that was the right move. We -- our customers thank us that through their bank account in ING, customers can have a look at their balance statement in other banks. Before, it was not possible to analyze that from one single point, and that's very important for us to become the agent in delivering such services.

We are implementing another improvement in terms of identity and authentication, some improvements related to payment of routine -- to making routine payments. You could see our campaign, our summer campaign, we suggested the title of transfers, we created an aggregate for UDB, which is being launched at the moment, and all these elements aim at making the life of our customers easier and supporting them. Should you have any questions in that respect, we'll be happy to answer.

And going back to important facts and figures. So some small -- this ruling of the Tribunal of Justice, we have a small provision for that purpose. But since 11th of September, we have been paying. So after 11th of September, if a customer decides for early repayment of their loan or a credit since 11th of September as the ruling was issued, we return the cost in line with the instructions in leaner manner. We do not exaggerate our predictions in terms of standards and the interpretation of the ruling, whether it will be a clear daily leaner scheme or if whether it will be in line with other schemes that may be suggested and which are under heated debate now.

However, we think that, first and foremost, we've been settling these loans in leaner terms in terms -- in case of complaints, we post it as soon as possible. We do it in leaner manner because it's the fastest and the most efficient. But what will be the standard on the market, we -- it's here -- remain to be seen.

Great Tribunal of Justice ruling, to keep it simple, you should be aware that after the opening balance, we have shifted a CHF portfolio and provisions are being raised for and -- created for that purpose. We are looking for rulings in that respect. Together with us these lawsuits are placed, we are constantly raising provisions for that. We have -- in our reports, it is disclosed that we have 130 such litigations underway, 130 to be precise.

Provisions at the end of September reached PLN 23 million based on exposure which was disclosed in the lawsuit, so this is -- that shows the scale of the phenomenon. In October -- after October, there are 4 lawsuits more, 1 ruling has been issued to our benefit, but we still wait -- we're still waiting for it to become final. We are still waiting for some standards to be worked out. We are in direct contact with auditors who contact with other banks, who are in contact with regulators. And regulators with the auditors, so there is -- the standard will be worked out soon. And during next quarters, we will -- may popularize this new standard. So I will not judge now that what we have in our balance sheet or in our NPL is everything that should be done in that respect. We are still waiting for a decision, and I think that it will be decided during the fourth quarter this year.

The topics that emerge and may be subject to the impairment update or other, we do it every 6 months, and we will do it next quarter in line with the principals. There is no need to merge anything or to implement any automation in that respect. We route it through our capital, through our assets, so it's not a sensitive issue for us.

What else? Cost of risk. Of course, cost of risk are quite significant as we disclosed. They have -- are specific in nature, which stems from the fact that we are observing things that happen on the market. Maybe we are oversensitive, but the slowdown in economic growth affects our decisions. We do not predict any turbulence or any crisis, just natural slowdown. But each slowdown affects the trajectory of behaviors. And of course, it will affect our risk -- our decisions in terms of risk. So there is some excessive activity on risk portfolio, which stemmed from IFRS 9 and from the economic situation and some symptoms occurring on the market. However, once again, let me stress that we do not see any evidence stress in any sector that could make us think that this recession becomes something more serious, in any respect.

Is that all in terms of all basic topics? Did I exhaust the topic? Iza? Okay. So that's all in terms of introduction. And now over to Bozena. So she'll give you more details about the financial outcomes.

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Bozena Graczyk, ING Bank Slaski S.A. - VP of the Management Board & CFO [3]

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Yes, Brunon has talked about most of the interesting stuff, so all that's left for me is statistics. Let me now summarize our interest income.

As you can see, this is the M&A performance with PLN 1.208 million, which is a growth of 13% year-on-year. What is important for us is for the income growth to be higher than the cost growth, and this can be seen after 9 months. With revenues going up 11% and cost going up by 8% as a result of which, our cost-to-income ratio was 43%, which is 2.1 percentage points up, and this is in line with our expectations. ROE remains at significantly above 12%.

Now to add something about our provisions for the small CJEU ruling, PLN 17 million is the provision, as has been said before, and is based on the linear calculation with the -- this follows from an estimate, which is from our experience and estimations. And importantly, that provision has reduced our other revenue. And in terms of income, quarter-on-quarter, the change has been significant as you can see. And this is not the only change, PLN 17 million is the provision for the CJEU ruling. And under the same item, we have the sale of securities in Q3 of PLN 3.6 million only, whereas in the second quarter, it was PLN 16 million. So that also tells you why this particular item has gone down.

Importantly, for our effective levy rate of tax rate, we have created provisions for off-balance sheet items, which are not defined as a cost item. In other words, they can't be used to reduce our -- to increase our costs for the first tax and 28% is consequently this rate, even though it was 25.4% after the first half. Now for our interest performance. As I said, it's PLN 1.2 billion, which is 7% growth Q-on-Q and then 17% year-on-year. It was 1 day longer. And additionally, we have reduced our interest on retail savings accounts at the beginning of July and corporate savings accounts as of 1st of August.

The dynamics of our commercial performance, 92%, which is 2% higher than in Q3 of 2018 is this particular item. Now for income from fees and commissions, there are 2 words of commonality. It was PLN 340 million, which is 8% higher year-on-year. And in terms of quarterly drop of 5%, I'm sure you understand it. This results from a higher income in Q2 as a result of the yearly clearance of our accounts with the card issuers.

Now there have been growth in pretty much every item, except for the mutual funds and that we all understand why this is the case. But in Q3, this did go up by 2% compared to the previous quarter, so that again reflects the growth of volumes in terms of the participation units in mutual funds, which was up by PLN 1.5 billion.

Now for the costs. In Q3, it was PLN 604 million, and this was a growth of 5% year-on-year and 4% this quarter. And the costs are going up pretty much with every conference, what we tell you is that costs in the banking industry will be going up, and this includes our bank too. This particularly pertains to personnel costs with 11% annual growth and 8% in quarterly growth. So we are following the trend of the whole banking sector as we informed you before. One more word of comment, perhaps this was explained before I joined the bank. But in 2016, onwards, we've had our Fit for Future program in the bank, which is about the changing org structure in the bank. And recently, we decided to speed the project up as a result, of which in Q3, we raised additional provisions for personnel, and this is also seen here.

Now the cost of risk has gone up, and this is true. This is something you emphasized, but we've got to refer this to how the cost of risk worked in Q2. Back then, there were some one-offs that resulted from the change of the model, which cannot be seen this quarter so the cost of risk Q-on-Q has gone up. In terms of the whole group, it was PLN 180 million, and the quarterly margin was 63 basis points. Now cumulatively, in 4 quarters, it's 50 bps and rather stable. And as I said a moment ago, in Q2, we did see some model change in corporate portfolios and in retail portfolios as well, so these growths, in terms of quarterly growth, they haven't been particularly surprising. It's a matter of lower basis of foundation point, but we modified the threshold for CCAR, which is the significant change of risk, which moves a loan from Stage 1 to Stage 2. But for retail lending, our back testing and validating, we changed our approach to these indicators, as a result of which our cost of risk in the previous quarter was lower. Now if you look at the cost of risk in the 9 months and especially in Q3, comparing it to Q2 in 2018, you will see that we were not selling any nonperforming loan portfolios this year, which translates into different level of the cost of risk.

Now the quality of our lending portfolio, you can see that this is pretty stable. And also in terms of the nonperforming portfolio, it was down to 2.9% from over 3%. Our corporate and retail segments are both very stable in terms of NPL, and they are still much lower than is the average for the sector. Now for Stage 2 lending, as you can see these loans, this indicator improved from 9.2% to 8.8%, and this is a significant improvement in the corporate sector in particular. This change results, by and large, from a number of large loans, which changed the stage they belong to. Went back to Stage 1 as a result of the LPD being changed. And in terms of the provision coverage for Stage 1 and 2, that has gone up. The loans have been moved to Stage 1 from Stage 2, had very good risk parameters anyway and a low PD and LGD indicators, as a result of which covers that other cases is higher than it was before this change.

Now for capital adequacy. You can see that our consolidated indicator was 15.4% at the end of the quarter, which is 43 basis points higher than in the previous quarter, which is mostly the result of the fact that some of the income from the first half of 2019 was now taken into account. And as you can see, we informed you about it in our report. On the 30th of September, we had EUR 250 million of subordinated loan. We're now in the process of getting the green light from the KNF to include this in our assets as part of our equity. But we should not reach very far-reaching conclusions, as a result of which, and we would ask you to do, to refrain from reaching far-fetched conclusions as a result of this.

If you think that EUR 250 million is a small amount, then congratulations to you, sir.

Right, so this is it for our performance in Q3, and we'll be happy to take your questions pertaining to anything we're able to reply to.(Operator Instructions)

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Questions and Answers

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Unidentified Analyst, [1]

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I would like to ask about the cost of risk. You said this was a good level, and that nothing bad was happening. What about the coming quarters? Are you expecting for it to remain at about 50 basis points as it was before?

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Bozena Graczyk, ING Bank Slaski S.A. - VP of the Management Board & CFO [2]

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Just like in any other conference, we cannot comment on any future risk factors. As we said before, we have a very selective attitude and approach to our corporate risk assessment, and we assume that the slowdown should not translate into cost of risk.

As for the remaining portfolios, we follow IFRS 9 rules with all the consequences that result from the portfolio structure and also the changing macroeconomic indicators, which will translate into our cost of risk, of course.

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Unidentified Analyst, [3]

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It is clear you have the small and foreign currency mortgage lending of your risk valuation, but it's different from other banks. Other banks use between 1/6 and 1/20 of the value of the loan, and you are using 1/2. As you have said that you're working -- you're hoping on a common model being worked out. So how is your take on this better than other banks? If other banks use your approach, then we would have a disaster. So how can this common model be worked out?

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Brunon Cezary Bartkiewicz, ING Bank Slaski S.A. - President of the Management Board & CEO [4]

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As far as risk is concerned, the model is about a certain minimum, so we have to agree on a common minimum. I wouldn't like for our formulas to be used as a model for all banks. They're not a standard, they are our take on this.

Now our approach, especially to the litigation, is that we raised the provisions if the probability of losing the case is more than 50%. Now for the Swiss franc, pretty much every case of litigation is like that. When we look at the rulings by judges, they all have a slightly different opinion about it. Now the Court of Justice of the EU ruling has not made things more clear. In fact, it has done the opposite, in many instances. Now we should have a common standard, and this is what is expected not just by the banks and analysts, but also by the regulators, especially now with the Court of Justice ruling, we have another round of meetings in trying to work out a common formula.

Now without trying to look in the crystal ball, I think that we'll have a more portfolio-based approach rather than looking at it on a case-by-case basis. And it seems we're moving towards a more conservative attitude, instead of just referencing a post facto action after litigation is brought. So this indicator that you mentioned with over 50%, this does not come as a surprise to us because this is how we operate. But I wouldn't say that this is the only solution for this. We believe it is well justified, other banks might not. So as a peripheral bank, we have no grounds to impose our standards on the others. Now whether I personally believe that the provisioning level is sufficient for our exposure, I would feel much more comfortable if you ask me the same question in about 6 months or maybe in about 3 months, we'll have a more clear picture by then.

But as you have seen, we did not have any additional element in the last quarter, so we've been operating the way we did before. The Court of Justice report doesn't have any significant impact on us. It will probably be different in Q4, so we will have to work out our own model, and then it'll be evaluated by an auditor in Q4 and then the regulator will evaluate it. I don't know how long that is going to take, and it's going to be a long topic. We've been doing it for several years now, so it will take some more time.

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Unidentified Analyst, [5]

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A portfolio-based approach is that a consensus in the business? Is it your idea? This seems to be the direction towards which the audit companies are moving.

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Bozena Graczyk, ING Bank Slaski S.A. - VP of the Management Board & CFO [6]

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Yes. The technical analysis, the auditors decided that given the Court of Justice ruling and the number of cases brought before courts, it will be good to have a portfolio based risk assessment. So you don't raise provisions for individual cases brought before court, but you're trying to assess the statistics so far, the Court of Justice ruling and what the Swiss franc customers may do in terms of litigation. And take all that into account to evaluate or to assess the losses we might incur throughout the portfolio in the banks.

And that's why we are having this discussion with the banks, with the Association of Polish Banks, the KNF, and it is difficult because it is a tough call to have any reliable evaluation of what the future is going to look like. We have got the CJEU ruling, which won't change much. And also what we're talking about is how we should be presenting this provision in our statements. And again, we haven't had the decision made yet.

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Brunon Cezary Bartkiewicz, ING Bank Slaski S.A. - President of the Management Board & CEO [7]

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We all thought that there will be an avalanche of new court cases after the CJEU ruling. We said we had 113 -- now as of end of September we have 130, and September was a heated moment. There was a lot of publicity about it, but we have not seen a significant growth of the number of cases. This is how it works for us. About the situation on the broader market, I suppose we have to wait a bit longer. September, October and November are not telling us too much yet. We've got to have to look at the overall number of cases. But as Bozena said, it seems this is a slightly different level of the actual number of cases.

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Bozena Graczyk, ING Bank Slaski S.A. - VP of the Management Board & CFO [8]

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And Q4 is not going to change these statistics so much as to make us reevaluate our assessments completely compared to what we said before.

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Brunon Cezary Bartkiewicz, ING Bank Slaski S.A. - President of the Management Board & CEO [9]

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And how the rulings will be what the courts are going to decide because the courts have very individual approach or individualized in that respect so it remains to be seen. So it will not depend on the lawsuits, but on the auditor's comments, nobody knows what will be the final form of it. I will refer to that once again, when we are analyzing portfolio, we're taking into account some parameters, so the risk is higher there when net capital -- net capital expenditures increased the assets. So what if -- what in such situations as you can think there are many scenarios. Of course, we can compare NPVs on nominal streams, which stem from application of a given model. So they will -- may be canceled in some form. So if we were to set some parameters, if we were to summarize it, we increased the provisions.

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Unidentified Analyst, [10]

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But when it comes to the effect of small CJEU as -- since 11 of September, the bank doesn't calculate this provision towards the income?

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Brunon Cezary Bartkiewicz, ING Bank Slaski S.A. - President of the Management Board & CEO [11]

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Yes. Bozena said that we estimate that we will lose about PLN 30 million per year.

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Bozena Graczyk, ING Bank Slaski S.A. - VP of the Management Board & CFO [12]

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But to understand it -- to have a full understanding of the situation, as we've said before, we are settling any excessive payments resulting from early repayments and return of fees, so we didn't have -- it wasn't necessary for us to raise additional provisions because of the excessive payments after the 11th of September.

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Brunon Cezary Bartkiewicz, ING Bank Slaski S.A. - President of the Management Board & CEO [13]

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What is going on after 11th of September? Let me point out that we are observing competition and all competitor banks stress that the situation requires the adjustment of the facilities profile. So our predictions that we shared with you, I would put some -- attach some disclaimer that we cannot expect the final result and what will be the market reaction. Of course, there will be some level of adjustment, it's beyond any doubt because many business models for some facilities, they're not -- don't make sense if it will take the form as the leaner form that we adopted. I know that many businesses will be forced to resign from their activity for the operations.

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Bozena Graczyk, ING Bank Slaski S.A. - VP of the Management Board & CFO [14]

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So in that context, if you compare the loss of annual income with the amount of provision raised as at 11th of September, I think that the adequacy of this reserve is totally different as you could think in the morning.

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Brunon Cezary Bartkiewicz, ING Bank Slaski S.A. - President of the Management Board & CEO [15]

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First and foremost, we raised PLN 17 million of provisions. Bozena explained that this is for previous events that we will be informed about, in form of complaints, but we were not obliged to raise any special provisions for events that occurred after 11th of September. So early repayments after 11th of September. And since 11th of September, any early repayments have been settled by us on a daily basis. So we have no -- we are not in areas with cases that happened after 11th of September, and we do it in the simplest, leaner form based on the number of days. We are not convinced that, that would make the final -- that would make the best form because some banks point out that there are some technical problems with that, but we put it. Clearly, if somebody wants -- decides to early repay loan after 11th of September, they -- the early repayment is automatically settled based on the number of days, so they don't have to place a complaint. And we don't have any technical problems with this manner of settling.

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Unidentified Analyst, [16]

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Let me go back to the issue of the cost of risk. Of course, I will not ask you for your predictions for Q4. However, I would like to ask whether you can see since 2 quarters because the cost of risk in other banks raised significantly. And do you treat it as one-off? Or we know that -- we already know that there are so many one-offs that they become -- they lost -- it's one of nature. However, let me ask what is the ceiling for you? Is it something which we should be afraid of? If -- do you expect any flattening in that respect?

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Brunon Cezary Bartkiewicz, ING Bank Slaski S.A. - President of the Management Board & CEO [17]

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Of course, it is very difficult to comment on that as we emphasized, every curve, every economic turn has its consequences. In the entity capacity running its business, it affects its financial standing, and it can affect its repayment capacity of loans sanctioned before.

And let me remind you that we are analyzing such situations, and we try to adapt our policy to the state of affairs. After the second quarter, we announced that we analyzed entities which are heavily dependent on public procurement procedures for works, in particular construction works. And as we -- assuming that the level of payment inflation and the inflation on products, on input in this type of contract, that may affect their business model. And as we analyzed it 2 years ago, I thought it would become clear for you that we are very heavily engaged in analyzing and adjusting our policy to this type of entities.

Of course, there are some elements of insecurity. At that point, an element of insecurity was the time for how long the effect of aggregated entry in public procurement would remain because -- but -- so the accumulation of investment in 1 year or in a given period disturbs the economic cycle because investment should be the same every year, not to disturb the cycle. They should rise steadily. But the accumulation, the fact that there is few of them at one point, that affects the situation, and that causes that the micro business, so not the state, but entity even a big one, sometimes cannot -- can't stand that. So of course, we had to deal with a rapid power, energy price increase and so on and so forth. There are many factors. This is one form of approaching the cost of risk.

The cost of risk is not that we analyze the volume of provisions or the business volume, the pace of sanctioning such loans affects the situations because as many such loans are sanctioned in a small -- in a short period, it is not in line with -- it's not standard procedure, but it doesn't mean that we have the only right perspective on the situation because we shape the situation ourselves. The economic life is that the objective is to have many entities expressing their thoughts and their opinions, so we are not -- we don't feel we are the only one to be right in that respect.

As you know, because you're functioning on capital markets, you know that there are some turbulence anytime and that they are very often, they coincide with the recession slowdown. It is normal for any business and that, of course, affects loan repayment capacity. As sometimes it stems from the allocation of capital in wrong investments. So there are some areas burdened with risk. And if businesses decide to invest there, while being attracted to excessive margin, for sure they will feel the pain if our scenario proves true. If not, they will gain additional profit, and that is how the business cycle works.

So the opinion about the whole market, in terms of cost of risk, is just a general observation and very superficial observation, which has many elements embedded in that. So we are trying to predict macroeconomic indicators and adapt our pace to them, and we show you our high loan dynamics, with the lowest cost of risk and lowest profitability indicators. Whether it is the best strategy, the only one, which should be done for sure not, whether it translates into short-term results, not. In mid-term, maybe, it remains to be seen.

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Bozena Graczyk, ING Bank Slaski S.A. - VP of the Management Board & CFO [18]

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Of course, we should remember IFRS methodology. We are repeating that constantly. We have to include macroeconomic factors to risk models. They affect LGD and PD for each stage, and the modification of parameters under IFRS 9, that increases the cost of risk naturally. And in that respect, each and every bank applies different ratings. So if we assess inflation of unemployment rating through 2021 will be this and that. And another bank has different predictions that, of course, affects the cost of risk.

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Unidentified Analyst, [19]

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May I ask 1 question as significant bank on mortgage -- PLN mortgage loan banks, we see this increase as 49% year-on-year of new sales in the mortgage, 22% of increase in total volume of mortgage loans? Do you see any significant risk that this speculative bubble is growing on mortgages and that the KNF may implement some restrictions in that respect?

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Brunon Cezary Bartkiewicz, ING Bank Slaski S.A. - President of the Management Board & CEO [20]

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Up to now, not yet, but I will not answer directly, if I may. We are not financing construction development companies.

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Unidentified Analyst, [21]

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Okay, that's a good -- that was a direct answer. If, of course, I understand that, that ING is more cautious with...

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Brunon Cezary Bartkiewicz, ING Bank Slaski S.A. - President of the Management Board & CEO [22]

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No, we are not financing the element of purchase and assets for real estate market, so the [facet] is. So this bubble -- real estate bubble that you mentioned, of course, it takes different funds, but the most classic one is that we have the construction development company who is constructing a unit and cannot finish -- complete construction works because of some situation on the market. So at rising cost, they are not able to meet the requirements. So let me point out, at this point, that, of course, we're sure there will be some bubble that will occur in the market, but it's not the time for that yet. Development companies recently focused more on replacing, reconstructing the battlefield, and we are not digging holes.

Please check the statistics in terms of construction permits. So this is an element which stabilizes the situation with potential bubble. Of course, an element -- important element of risk assessment is loan to value factor as a key parameter. We are very conservative in terms of LTV on the market.

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Unidentified Analyst, [23]

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If I may, I would like to ask about 3 important facts. Firstly, do you see or you think that the retail consumer loan market has to adapt and modify its product offer? Did you -- have you done anything, or are you planning any modifications?

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Brunon Cezary Bartkiewicz, ING Bank Slaski S.A. - President of the Management Board & CEO [24]

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No. I just referred to the comments, which I hear from our competitors.

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Unidentified Analyst, [25]

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My question is, do you have any plans to modify the offer?

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Brunon Cezary Bartkiewicz, ING Bank Slaski S.A. - President of the Management Board & CEO [26]

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We haven't changed anything yet, up till now, apart for the early repayment scheme because that was an important modification.

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Unidentified Analyst, [27]

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But are you planning that loans will become more expensive or less available?

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Brunon Cezary Bartkiewicz, ING Bank Slaski S.A. - President of the Management Board & CEO [28]

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We are not commenting on future events. Let's talk about the past.

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Unidentified Analyst, [29]

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In another bank, I asked for statistics regarding the service for customers. Could you share your statistics? How it looks like in ING? How it looks like from this year-to-date?

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Brunon Cezary Bartkiewicz, ING Bank Slaski S.A. - President of the Management Board & CEO [30]

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No, we are not publishing the statistics. If we showed this data, you could see that we made a frog leap growth, an improvement in that respect. That results from a simple scheme that the number of interactions between ING and our customers is -- has been doubled in digital channel, 2.3x higher in the perspective of last 5 years. So that is translated into high indicators. So the feeling is bad, but the statistics looks great. So for sure, the number of hours of unavailability for customers, we calculated per customer, so per minute. So how many active customers, how many customers are active in every minute of a day, and how many customers are affected by system availability. So if nothing happens this year, maybe let's compare 3 quarters to 3 quarters. So this year, it's less than half. But now we're feeling is totally different because we had 1 major failure on day 8, and much shorter failure in 8 plus 1, so that made that bad impression.

So the availability is higher, and the number of customer hours is lower. The number of unavailability, the number of minutes, when we are unavailable is lower and the number of customer hours is -- has dropped by half. However, the feeling, the impression is totally different. It's obvious that we are not interested in 90, 92, 92, 93 parameters, we are aiming at 100, and there is no escape from that. So the system availability statistics doesn't show it. So we have to have failure-free systems, which is impossible and quite costly. So this is what we're preparing for.

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Unidentified Analyst, [31]

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Any equity surplus for any acquisitions, for example, any possibilities like that?

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Brunon Cezary Bartkiewicz, ING Bank Slaski S.A. - President of the Management Board & CEO [32]

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I have no idea what you're talking about.

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Unidentified Analyst, [33]

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In terms of the surplus?

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Brunon Cezary Bartkiewicz, ING Bank Slaski S.A. - President of the Management Board & CEO [34]

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Let me kill 2 birds with 1 stone. The subordinated loan and any potential dividend payments, we never comment on this, we never confirm, we never disprove, we do not comment on this about capital management. What you know now is not everything that is being done. Basel IV is coming up with all its consequences that will be quite severe, even for the Polish market and all the more so for other European markets.

So this fact is something that is already being implemented. So please remember that the calculation of all these factors and drawing any conclusions from the data you can see now for the future carries with it a significant calculation error, so I would not draw any far-reaching conclusions from the current numbers. You would have to be in 2023, I suppose. By then, Basel IV will probably have been implemented. Although perhaps Basel V will come -- appear by then. This is how fast these things are changing. But to be perfectly honest with you, we have no idea when a regulator will come and knock on our door because they will, but we don't know when.

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Unidentified Analyst, [35]

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You said it's a good thing when you can use the same app to see your different accounts. What are your thoughts about the scale of the banking business? And any synergy that should be easily achieved in the banking sector? This is a purely theoretical question, of course. Is it better to be getting the difference in the margin? How would you go about doing that?

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Brunon Cezary Bartkiewicz, ING Bank Slaski S.A. - President of the Management Board & CEO [36]

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Well, the finesse in how you have worded your question is noteworthy. Now without this intellectual brawling, let me say this. Let's say, there's a chain of restaurants. What makes a chain of restaurants successful in the medium long run? Well, people come there regularly, and they recommend the restaurants to other people, and this is what we call customer loyalty, and perhaps translates into any other business which provides any services. So buying a customer -- slavery was abolished a long time ago. You cannot purchase a customer. You can transfer a customer from one form of banking to another, but the customer exercises his or her freewill. And this is what we want. We would like for the customer to go wherever they like.

Now secondly, in acquisitions, you either buy the portfolio or the machine or a certain -- manufacturing machine I mean, or certain behavioral patterns. Now in banking, if your operational capability of the machine is similar, then buying an extra machine gives you cost synergy. In terms of production and manufacturing, you have 2 machines, one of them can take over from the other. So this is the sort of analysis you have to do when considering an acquisition. So with the portfolio, if you buy a portfolio, there is churn in every portfolio because slavery is no longer here. With the machine, you buy the machine and some of it has to be switched over. And then there's the so-called cultural element or the behavioral pattern, which tells you how expensive it is to switch over to the new machinery with a different portfolio and different habits of the customers, also your own employees and the production capability.

This is never an easy process. Is it easier than in heavy industry? Well, it all depends on who the object of this transaction is. There is no simple formula to tell you. So what you said that the best formula to take over a bank is by an entity that is entering the market and they don't worry about synergy and switching over to different cultural patterns or machines. There is a lot of sense in this theory. But have you seen many entities willing to enter the Polish market, given the ROI levels and the levies on the Polish market? From a structural point of view, this is the most difficult banking market in Europe and perhaps in the world. Competition is fierce, competitive involvement is high and regulatory burden is the highest in the world, just to give you some food for thought.

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Unidentified Analyst, [37]

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You've been mentioning local analysis in terms of competition. But we have heard today that given what's happening in the Eurozone, it would be great to expand outside of the Eurozone. So you're looking at the mechanisms here, but the machine in the Eurozone is not working that well. So perhaps the headquarters will say, let's try to give it a shot. Would you say no to that?

That signal from your owner, how should that be interpreted? Maybe in a broader sense than just on the Polish market. Secondly, we're getting close to the end of the year and the level of corporate deposits is important when calculating your contribution to the Bank Guarantee Fund. Do you have any means of trying to reduce it? There are certain interest rates on your euro deposits. What else can be done to reduce that?

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Brunon Cezary Bartkiewicz, ING Bank Slaski S.A. - President of the Management Board & CEO [38]

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Now for question one. Well, leave it without any comments. Now drawing the conclusion from what I said that we reject acquisition as a means of growth, would be interpreting what I said too far. And on your second question, yes, we do have opinion on that. We do have an opinion on the control -- uncontrolled flow of deposits, and it's a future event. You are touching upon a very valid and important point.

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Unidentified Analyst, [39]

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You said you were -- are you satisfied with what you have done together on PPK?

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Brunon Cezary Bartkiewicz, ING Bank Slaski S.A. - President of the Management Board & CEO [40]

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In general, yes.

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Piotr Utrata, ING Bank Slaski S.A. - Head of Media Relations [41]

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And there are some questions from the Internet, two of them were about a small Court of Justice ruling, but they have already been answered.

One is a follow-up on Basel IV. Could you comment on Basel IV and its impact? And what we should pay attention to when analyzing these regulations?

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Brunon Cezary Bartkiewicz, ING Bank Slaski S.A. - President of the Management Board & CEO [42]

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It's a very broad topic with lots of ins and outs. Now what everybody should pay attention to, I think, is the new formulas for risk assessment and efficiency evaluation, the new definition of default, which is also part and parcel of the package, and these are 2 most important ones, I think.

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Bozena Graczyk, ING Bank Slaski S.A. - VP of the Management Board & CFO [43]

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As far as the European banking sector is concerned, Basel IV will have new equity requirements for the banks that use the advanced methods to measure its credited assets, and this is where the impact will be the biggest. In European statistics, there are countries where the scale of these advanced methods is very large.

And as you know, in Poland, we have a low share of those advanced methods, so the impact of Basel IV on Poland will be small, which means that the level of RWA to -- will be -- and this is a hidden element of the increase in capital requirements that no one seems to be paying attention to.

Polish banks are being hit from 2 sides. We cannot use the advanced methods, also [by] the indicators and the buffers that are used. And this is a large share of this regulatory burden that we've been pointing out for a long time. It's not just the banking levy, it's not just the amounts of the contributions to the Bank Guarantee Fund.

It's not so simple, this is not a country for old people, I wanted to say, to refer to the movie industry, which I have nothing to do with. But it's not a sandbox. This is advanced game for adult, grownup bankers. This is not your easy money market, where you can get your ROE easily.

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Piotr Utrata, ING Bank Slaski S.A. - Head of Media Relations [44]

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Could we get more information on the growth of your equities that's on Page 3?

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Bozena Graczyk, ING Bank Slaski S.A. - VP of the Management Board & CFO [45]

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Now about equity and income, what is important is that we have financial instruments that are valuated as a fair value. And in Q3, for macro cash flow hedge and for the securities that are valued through equity, these growth were significant and they resulted from fair value calculation. It was the other impact on these incomes.

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Piotr Utrata, ING Bank Slaski S.A. - Head of Media Relations [46]

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Are there any other questions from the floor?

If there are none, we'll wrap it up.

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Brunon Cezary Bartkiewicz, ING Bank Slaski S.A. - President of the Management Board & CEO [47]

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Thank you so much.

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