U.S. Markets close in 2 hrs

Edited Transcript of MIL.WA earnings conference call or presentation 29-Jul-19 12:00pm GMT

Half Year 2019 Bank Millennium SA Earnings Call

Warsaw Aug 1, 2019 (Thomson StreetEvents) -- Edited Transcript of Bank Millennium SA earnings conference call or presentation Monday, July 29, 2019 at 12:00:00pm GMT

TEXT version of Transcript

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

Corporate Participants

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

* Artur Kulesza

Bank Millennium S.A. - Head of IR

* Fernando Maria Cardoso Rodrigues Bicho

Bank Millennium S.A. - Deputy Chairman of the Management Board & CFO

* Joao Nuno Lima Bras Jorge

Bank Millennium S.A. - Chairman of the Management Board

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

Conference Call Participants

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

* Kamil Stolarski

Santander Brokerage Poland, Research Division - Head of Equity Research

* Marta Czajkowska-Baldyga

Haitong Bank S.A., Research Division - Equity Research Analyst

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

Presentation

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

Artur Kulesza, Bank Millennium S.A. - Head of IR [1]

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

Good morning, ladies and gentlemen. Welcome to Bank Millenium conference presenting second quarter results, in which we, for the first time, consolidates Euro Bank, which we purchased at the end of May.

Management Board is represented today by Chief Executive Officer, Mr. Joao Bras Jorge; and Chief Financial Officer, Mr. Fernando Bicho. We have also with us, Chief Economist, Grzegorz Maliszewski. My name is Artur Kulesza. I'm Head of IR.

Traditionally, we start with short presentation followed by Q&A session. So I give the floor to CFO, Fernando Bicho.

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

Fernando Maria Cardoso Rodrigues Bicho, Bank Millennium S.A. - Deputy Chairman of the Management Board & CFO [2]

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

Thank you. Good afternoon. Thank you for coming. Thank you for attending this presentation. Today, we start this presentation with the first part dedicated to the acquisition of Euro Bank. We will provide some explanation in order to better understand the results of the second quarter of the year.

So I would start with Page #4, where we are reminding on the schedule of the transaction. So as you remember, we signed the share purchase agreement regarding the Euro Bank on the 5th of November 2018. Then we filed the request for the approval of the takeover of the bank with local regulators. And finally, after the permissions that were granted in May, we closed the transaction on the 31st of May. So it means that since -- in the second quarter, we have already the impact of 1 month of the results of Euro Bank.

Immediately after this Day 1, as we call it, the acquisition date, we -- both management boards of the 2 banks, approved the merger plan that was submitted on the 7th of June to KNF and to the court, and we are in the middle of this process. We still expect to be able to perform the legal merger in the beginning of October, more concretely on the 1st of October. As I said, the process is on track. Last Friday, we already published the agenda of the shareholders' meeting that was called for the 27th of August in order to approve the merger of the 2 banks. On that day, we are planning 2 shareholders' meetings of Bank Millenium and of Euro Bank.

And then the third important step, which we call Day 3, will be the operational merger that we are targeting to be done during the month of November. This will be the moment in which, apart from having a merged entity, we'll also have a merged brand and merged systems. So for the time being, the process is on track.

Of course, the transaction had relevant impact in the balance sheet and P&L of the bank already in the second quarter. Under Page #5, we illustrate 2 important impacts of the transaction. The first one is regarding the initial the fair value that was done of the assets and liabilities acquired, which -- and also some preliminary price adjustments, which translated into total goodwill booked in the second quarter of PLN 136 million. So this is one impact.

And the second one is this initial IFRS 9 provisions calculated over the fair value of the acquired stage 1 and stage 2 portfolios of Euro Bank, something that you already saw in previous transactions performed in 2018 and which, in our case, represented PLN 80.6 million of gross provisions with a net impact on P&L during the second quarter of PLN 15.4 million, meaning Day 1 net impact of PLN 65.2 million. The other relevant impact in terms of volumes you will see throughout the presentation.

Of course, the overall growth is inflated by the acquisition of Euro Bank. I would skip for now these tables on Page 7 and 8, which summarize the main numbers, and I would refer to them later on when explaining specific pages of the presentation. So I would suggest jumping to Slide #9.

We had a net profit in the first half of the year of PLN 334 million, already after the PLN 65 million net impact of Day 1 provisions. If we would normalize the net profit, it would reach PLN 411 million, and this would represent a 12% yearly growth and to which -- which would correspond to a normalized ROE of 9.7% and a cost to income of 46%.

The improvement of the profitability is supported on very solid growth of net interest income, which grew 21.5% year-on-year for the combined entity. Without Euro Bank, the growth was 14.7% year-on-year and almost 5% quarter-on-quarter. Net commissions were flat year-on-year, but grew 7.3% on a quarterly basis. Operating costs also had relevant growth by almost 20% year-on-year. If we would exclude the Euro Bank June costs and also so the normalization of BFG fees, the costs would have grown by 10.9% year-on-year.

The other indicators you will see more detail in the next pages. I will go to Page # 10. So as we -- as I already mentioned, the net profit growth of 11.2% is normalized, what we call normalized growth, so adjusting for the full year, the BFG charges that were booked in the first quarter, and also some other one-offs that we have during the year and also not counting with these initial Day 1 provisions. On a reported basis, we have a decrease of the net profit by 4.1%.

Operating income had a solid growth, supported by core income, which grew by 16% year-on-year and 14% quarter-on-quarter. Already -- and we -- excluding Euro Bank, the core income grew by 10.5% year-on-year.

On the cost side, total costs on a reported basis grew 19.6%. But excluding the June costs already consolidated from Euro Bank and this normalization of BFG, the total cost growth was 10.9%. And also a decrease versus the previous quarter.

The consolidation of Euro Bank added more than 2,400 employees to the total number of employees and also 465 branches. And the cost to income already normalized, stayed at a similar level of the previous year at 46%.

On Page 11, the net interest income had a very solid growth, 14.7% year-on-year excluding Euro Bank, 21.5% including Euro Bank. And on a quarterly basis also without Euro Bank, a growth of almost 5%.

What we would highlight as most positive from this quarter was the fact that excluding Euro Bank, the cost of deposits fell by 5 basis points to 1.06%. This is one of the lowest-ever average cost of deposits that we have shown on a single quarter And additionally illustrates what we have already said 3 months ago, by the time we said that we were fully prepared to cover this -- the transaction of Euro Bank and namely the -- also these repayment of the external funding that Euro Bank had from Societe Generale. And so in our situation, we did not have an increase of the cost of deposits during this quarter to fund the transaction. On the opposite side, we managed even to decrease the average cost of our customer deposits.

And this fact, together with also a small improvement in the average yield for loans, translated into a relevant increase of the net interest margin. Here, what you see on this Page 11 is 2.8% is the NIM already after incorporation of Euro Bank. If we would exclude these impacts, still, the NIM would have grown to 2.58%.

On the commissions, the impact of the consolidation of Euro Bank is smaller. And so as a total net fee and commission income stood at similar level of the previous year. And here, we still have the negative influence of the commissions from investment products during the second quarter of the year.

On asset quality on Page 12. The impaired loan ratio decreased to 4.3%. Here, we must remind that the portfolio of Euro Bank was booked at fair value, and in this -- and also the stage 3 portfolio of Euro Bank was booked for its net value, not for its gross less provisions but by its net value. And as a consequence, it's also supported the continuation of the improvement of the overall impaired loan ratio.

The cost of risks excluding Euro Bank was at -- within the levels that we were expecting, so slightly above 50 basis points over total net loans excluding these Day 1 provisions of PLN 80.6 million.

Liquidity, clearly, better than our expectations. So we finished the quarter with a loan-to-deposit ratio below 90%, so 88%.

And in terms of capital ratios, we had the impact that we were already expecting when we presented the transaction in November with an impact on capital of around 5 percentage points, both in TCR and the Tier 1 capital. And this is exactly as more or less in line with what we have projected.

Moving now to the business part of the presentation, starting with some highlights. On Page 14, the retail business highlights are shown without impact of Euro Bank, just to allow the possibility to keep tracking the -- what we have been able to achieve organically. So we crossed 1.9 million active customers in retail. We have currently a growth of 233,000 net growth year-on-year, more than 1.5 million active customers using digital channels. We had a very strong quarter in terms of sales of loans. In fact, new cash loans was the best-ever quarter with PLN 1.1 billion sales -- PLN 1.1 billion of new cash loan sales, a growth of 34% year-on-year. And also we had the best quarter of origination of mortgage loans since 2010 with more than PLN 1 billion of origination and a yearly growth of retail deposits by 14.4%

On the corporate side, which was not affected by Euro Bank transaction, we continued to show a solid growth of loans to companies by 11.5% year-on-year and of deposits by 16% year-on-year.

Looking into more detail on the evolution of volumes on Page 15, where we also show the relevance of the impacts of the acquisition of Euro Bank. So first of all, the loan portfolio grew by 35% year-on-year or 10% excluding Euro Bank, visible these impacts on the consumer lending portfolio which grew -- which more than doubled. The impact -- the growth without Euro Bank is still is very strong, above 20%. And so as a consequence, we saw a change in the structure of the loan portfolio of the group with a dilution of the FX mortgage portfolio. So the FX mortgage from Bank Millenium fell to 20.1%. Additionally, we have 1.5% FX mortgage from Euro Bank, which is covered by the indemnity and guarantee from Societe Generale. We had an increase of the share of PLN mortgages to almost 31%, also very strong increase of the share of other retail loans to 22% and a dilution of the share of loans to companies and factoring and leasing to 27%.

The customer deposits overall grew 28% year-on-year or 14% excluding Euro Bank, and the deposits from individuals grew 33% or 14% without Euro Bank.

On the non-deposit investment products side, we still face negative evolution, a fall of 6.8% year-on-year. But on a quarterly basis, the volumes remained virtually flat.

More details about retail business from deposits and accounts. The structure of deposits, still when incorporating Euro Bank, we accelerated the growth of current accounts and savings account, 37% year-on-year versus a growth of 26% of time (sic) [term] deposits.

Active retail customers continue to have a solid pace of growth. And we are approaching the threshold of 2 million active customers in retail in Bank Millenium excluding Euro Bank, and this number is still possible to be achieved before the end of the third quarter.

This growth of the customer base is solidly anchored on the significant growth of the number of current accounts, which grew by more than 300,000 year-on-year, and also followed by significant growth of the number of cards by almost 370,000 versus last year with a market share in credit cards transactions above 8%.

We continue to show very good numbers in terms of digital channels with a significant growth in the number of active digital and mobile customers. So we already crossed 1.5 million active digital customers, more than 1.1 million active mobile customers.

And also, the structure of sales continues to change. During the first half of the year, we had already have more than 50% of the number of cash loans done digitally, and this is followed by other numbers that were already shown before, like the share of time deposits through digital at 90% and also a very strong share of current accounts opened online, above 20%.

The solutions that we continue to implement in our Internet and mobile platforms continue to drive significant usage from the size of customers. We implemented during the second quarter on a gradual basis this new digital experience in Internet and mobile and also, more recently, the innovation of paying for motorways through the mobile app.

And also, the success of the registration for these 500+ and 300+ programs is shown on Page 20 with the statistics about usage of this possibility by our customer base. So more than 18% of our Internet bank users use our platform to register for the 500+, more than 12% for the 300+, which gives a market share of 8.5% and 10% through this channel, which is clearly above our [natural] market share in the retail market.

And so all the numbers that we are providing continue to illustrate the solid pace at which we are providing new solutions and also at which level they are being used by our customer base.

Goodie is another example on Page 21 with more the 1.2 million downloads since this smartshopping platform was launched.

On Page 22, we can see the breakdown of the evolution of the retail loans. On a gross basis, overall gross of 45% year-on-year or 9% excluding Euro Bank with more than doubling the volumes of consumer loans and at the same time, significantly growing the portfolio of PLN mortgages and diluting the portfolio of FX mortgages.

The sales of the second quarter were very strong. So we reached almost PLN 1.1 billion of cash loan sales in the second quarter, which is a growth of 11% versus the previous quarter, and we crossed PLN 2 billion in the first half of the year. And just for the record, on top of that, Euro Bank originated in this first half of the year almost PLN 1.2 billion of cash loan sales.

In mortgages, I have mentioned the strongest quarter of the last 10 years -- 9 years with more than PLN 1 billion of origination, 21% above the previous quarter.

The corporate business was not affected by the transaction of Euro Bank as Euro Bank was exclusively focused on the retail business, but still, the numbers are very strong. We grew the current accounts portfolio by 14%. Total deposits grew by 16% year-on-year.

And on the lending side, we continue to have overall double-digit growth with 11% growth year-on-year, mainly supported by corporate loans with 14% growth.

And leasing and factoring also contributing to support the growth of corporate, although this time with lower speed than in the past with a growth of total sales of leasing by 6% year-on-year and factoring turnover by 8% year-on-year.

So these are the most important highlights of our first half results. Now we are available for questions. Thank you.

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

Questions and Answers

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

Artur Kulesza, Bank Millennium S.A. - Head of IR [1]

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

So who wants to start?

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

Marta Czajkowska-Baldyga, Haitong Bank S.A., Research Division - Equity Research Analyst [2]

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

It's Marta Czajkowska-Baldyga from Haitong. Can you explain the difference between PLN 2,027 million (sic) [PLN 227 million] of net profit that you show here for the net profit without Euro Bank and the one that you show as a stand-alone 2000 -- PLN 205 million net profit?

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

Fernando Maria Cardoso Rodrigues Bicho, Bank Millennium S.A. - Deputy Chairman of the Management Board & CFO [3]

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

You asked [indiscernible] PLN 411 million without one-offs in the first half.

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

Marta Czajkowska-Baldyga, Haitong Bank S.A., Research Division - Equity Research Analyst [4]

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

I'm referring to the Slide #10, and this first chart with [PLN 2,027] (sic) [PLN 227 million] net profit without Euro Bank that you show and the one that you show in the stand-alone financial data.

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

Fernando Maria Cardoso Rodrigues Bicho, Bank Millennium S.A. - Deputy Chairman of the Management Board & CFO [5]

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

You mean net quarterly, net profit.

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

Marta Czajkowska-Baldyga, Haitong Bank S.A., Research Division - Equity Research Analyst [6]

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

Yes.

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

Fernando Maria Cardoso Rodrigues Bicho, Bank Millennium S.A. - Deputy Chairman of the Management Board & CFO [7]

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

So first of all, the biggest difference is that this Day 1 impact of creating provisions for the Euro Bank-acquired portfolio is only if you factor that consolidated level, not at solo level. So this PLN 80.6 million of provisions for the time being are only booked on the consolidated level, not on solo level.

So on solo level, that result is significantly higher than on consolidated level. In fact, at solo level, we had a net profit above PLN 400 million because it excludes this negative impact. Of course, at solo level, there were also other multiple effects, not all of which -- not all of -- visible at consolidated level. Because when we made the transaction, we replaced the funding that Societe Generale have to Euro Bank by our own funding. So at solo level, we started to finance directly Euro Bank with an amount of around PLN 3.7 billion, PLN 3.8 billion, which, to a large extent, was the deployment of the excess liquidity that previously was invested in the Polish government bonds.

Of course, at consolidated level, you don't see the results coming from the funding to Euro Bank because it appears in the consolidation -- in the consolidation process. At consolidated level, we have essentially -- in terms of negative impact on P&L, this Day 1 provisions. So the biggest difference between the 2 is this PLN 80.6 million of gross provisions.

Apart from that, when we are normalizing the -- what we call normalized net profit, basically, what we are doing is to adjust to the BFG resolution fund, dividing it in 4 quarters. It is the first important adjustment. And also, we are excluding some other one-offs, such as the PLN 27 million of release of tax provision that we made in the first quarter.

So these are essentially the biggest one-offs that we are taking out just to allow to understand what would have been our, let's say, normalized net profit if these extraordinary events would not have taken place.

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

Kamil Stolarski, Santander Brokerage Poland, Research Division - Head of Equity Research [8]

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

Kamil Stolarski, Santander. I have a question of Swiss francs. In the context of the interview today with the Head of BFG, in the context of what you have written in your financial statement about this, about the -- you wrote that this contingent liability when it comes to this potential negative verdict of the Supreme Court cannot be estimated. And my question would be how difficult were your internal discussions and discussions may be with auditor when it comes to the situation in which potentially you would book immaterial provisions. My question is are you considering booking provisions about Swiss franc mortgages at all or you are like [years] away from booking this, far, far away, and you don't -- this is not a topic for you at this stage.

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

Fernando Maria Cardoso Rodrigues Bicho, Bank Millennium S.A. - Deputy Chairman of the Management Board & CFO [9]

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

So first of all, I need to say I did not see the interview. So I'm not aware about this, so I cannot comment.

In the second quarter, the only thing new that's happened was this opinion. Opinion is not a verdict, first of all. So -- and even if it will go into that direction, still there are a number of question marks regarding what does it mean, and in which way it will translate to, what will be used by Polish courts which is at the end of the day, what will matter. So what matters is the judgments of the Polish courts. So for the time being, what we wrote is our best assessment of the situation.

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

Kamil Stolarski, Santander Brokerage Poland, Research Division - Head of Equity Research [10]

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

Because this statement is like, the possible negative consequences of this verdict cannot be reliably estimated. It means that you put out [service] estimations somewhere else or that you can't book anything because you cannot -- no one can estimate the consequences.

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

Joao Nuno Lima Bras Jorge, Bank Millennium S.A. - Chairman of the Management Board [11]

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

Come on, you are the -- in front of me are the experts on the market. You are analyst in banking for several years. You would be the best to estimate this. It's not this -- if there would be somebody that would be able to estimate, would be you. So the question is always a question of probability that you need to give and then expect loss. All of us, we know that if we just look for extreme scenario where, suddenly, everything will be applied to all the contracts and everything, it's -- we know that we are talking about billions. At least, what I read in press was billions, fine then.

Then question is how can we give this probability. The accounting rules for making provisions are very, very precise, especially when we talk about legal cases. So you need to first to forecast that you have more than 50% probability of losing. Then you can make the provision of the cases, the concrete cases. So this would be, of course, extremely small. So it would be even, I would say, a negative guidance that would [give].

You know very well that there is special buffers in terms of capital for these risks today. The [entire] in a big size, at least for -- in our case as well. Maybe technically, there will be a discussion one day if there would be -- or capital buffers or provisions. But I think it's [sad]. It's difficult, we already have situations that we have legal voting approved, so legal -- laws that were approved in parliament waiting to (inaudible). And even in that time, there was not an agreement of -- on the auditors to do provisions or not.

So I think it's -- I know that the press have always [heckled] that is different from the reality. But -- so if we talk about the -- a concrete scenario that you tell us, listen -- but what would [be the] concrete scenario? Everything is applied [in everything]. This is the scenario that we read in newspapers. But when we are making the disclosures, we need to give the most precise -- [but also] good information, also not to give the wrong guidance because there is, of course, a considerable risk. But also when there was a class action, there was vision about a way that class action can happen. But of course, this was a more Anglo-Saxonic vision for a class action. Then of course, that not work like that in the Polish law.

So at the moment, the statement [is exactly.] So it's -- in our vision, it's impossible to assess in a reasonable way what would be the impact, I would say. It's not -- but in our case, was not a problematic discussion, I think. In a regular basis, in all the committees of Supervisory Board, this question is followed, discussed, assessed, different trends, different risks.

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

Fernando Maria Cardoso Rodrigues Bicho, Bank Millennium S.A. - Deputy Chairman of the Management Board & CFO [12]

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

And again, this is an opinion. It's just -- this is an opinion. It's not a verdict.

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

Kamil Stolarski, Santander Brokerage Poland, Research Division - Head of Equity Research [13]

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

My second question -- because also what happened in the second quarter, I think, was this case, which was quite widely covered by the press, when Bank Millenium decided to pay out some certain amount of money. And my question would be could you walk us through -- let's say, if you have sort of a court case, at what stage do you book provisions? Do you book them at the moment when someone sue the bank? Or you...

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

Fernando Maria Cardoso Rodrigues Bicho, Bank Millennium S.A. - Deputy Chairman of the Management Board & CFO [14]

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

We book provisions when the probability of losing is higher than 50% or when we lose a case in a case that -- in case that probability was below and we had no provisions.

So we book provisions when the probability of losing the case is above 50%. This is one situation. We also book provisions, of course, when we lose a case in case it was not provisioned before.

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

Kamil Stolarski, Santander Brokerage Poland, Research Division - Head of Equity Research [15]

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

So maybe follow-up on this. You also informed that you have several question -- several FX loans sued by your clients. So are these cases already at least partially provisioned or not really, so whether the probability of losing these cases are above 50% right now or not?

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

Joao Nuno Lima Bras Jorge, Bank Millennium S.A. - Chairman of the Management Board [16]

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

All the cases, we assess case-by-case. So it's -- if you ask me a common rule, no. Common rule, no. There was a lot of advertising of this case. There not -- was not any advertising of the other 12 that we won. It's obvious. I cannot even comment this case. So if I could comment, I would say different things that is the information that you read. So it's always very uncomfortable, and so it's always difficult to have concrete cases comments like that.

But we treat as each case. So if there is somehow -- even with the -- all of the -- or the claims or the analysis we went back, in a certain way, the cases and all the credit process was very well-documented. So we never found at least that I remember. But for sure, there are because it's impossible to be perfect. But I don't remember a concrete case, but for sure, there are, that there was any mistake in the process or in the explanation to the customer. So if there would be a case like that, let's call it a [mis-selling] case, of course, we will do it. We even would settle before the -- before a court case. But each case is a case, I would say.

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

Kamil Stolarski, Santander Brokerage Poland, Research Division - Head of Equity Research [17]

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

And are also class action lawsuit also considered as a separate case -- or a single case or they are treated each case in that class action lawsuit?

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

Joao Nuno Lima Bras Jorge, Bank Millennium S.A. - Chairman of the Management Board [18]

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

It looks to us now -- but I am not a lawyer. So it looks to us now that a class action is not effective instrument in the Polish law, on the Polish court. So some of the people that were in the class action already made their own case because it's -- they were going nowhere. The class action not even initiated yet. So there is so many procedural, the rules, that it looks like it's not a good instrument under the Polish law. But I'm not a lawyer. So this is just my assessment as a manager.

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

Unidentified Analyst, [19]

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

And following on that, referring to your disclosure into financial statement, you said that excluding large one-off lawsuits and excluding class action, the value of other -- all other provision for litigation is PLN 456 million. And you mentioned in the comments that it is mainly on FX options and FX mortgages. And on my calculation, this amount of other provision, other legal provision in the same disclosure comparing to last year, this -- the growth in this value was about 100%. And my question is what was the driver of the growth in this other legal provision item line.

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

Fernando Maria Cardoso Rodrigues Bicho, Bank Millennium S.A. - Deputy Chairman of the Management Board & CFO [20]

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

It's not provision.

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

Unidentified Analyst, [21]

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

Sorry. Value of -- value of litigation, sorry.

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

Fernando Maria Cardoso Rodrigues Bicho, Bank Millennium S.A. - Deputy Chairman of the Management Board & CFO [22]

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

I cannot provide you the details. As it is said, it corresponds to both cases. So some of them are connected with FX mortgage, some are connected with other. And -- but we are not providing now the breakdown of individual case. So we have individual cases. We have already class action. The number of individual cases is substantially lower than the number of cases that are in the class action. So this is what we can say.

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

Unidentified Analyst, [23]

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

I have a question. What is number of cases that are now investigated by the courts against the bank? What is number of the cases? And what is the average age, if you have some data, concerning these cases? How old they are -- how long ago they were sent to the court by the clients and how long they are proceeded?

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

Fernando Maria Cardoso Rodrigues Bicho, Bank Millennium S.A. - Deputy Chairman of the Management Board & CFO [24]

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

We have cases for many years really. This only now became an issue because of this publicity around one case or because of this opinion of the General Council. We have individual court cases as far as I remember at least for 3 or 4 years on a regular basis. So we always [settle them]. It's nothing new, and especially there's nothing new in the third quarter -- in the second quarter. But what is coming was already coming in previous quarters, in previous years. So we just [delivered] -- the publicity is [retributed] now to this opinion and to 1 or 2 specific cases. But this is nothing new. It's public information by the way. Anybody -- everybody can -- knows what is going on in courts, in different actions in court.

We are just not contributing to more publicity around the case because, first of all, we cannot use the same argument. As the people that are putting us in court, first of all. We cannot disclose any information about the cases. So we are not going to give more publicity than what it already has. Here, we are not in the same situation, in an even situation.

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

Unidentified Analyst, [25]

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

Maybe changing the (inaudible) to coverage ratio after the acquisition of Euro Bank. I think that this coverage of date was [due above 90,] fell down and also the number of coverage fell down. I wondered what should we expect. Should this stay at this level? Or should we expect that this will, in time, go back to the level when Millenium was -- what -- at the levels reported by Millenium before?

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

Fernando Maria Cardoso Rodrigues Bicho, Bank Millennium S.A. - Deputy Chairman of the Management Board & CFO [26]

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

Thank you for raising the issue because, in fact, I forgot to mention it during the presentation. I wanted to mention it, because I mentioned the first explanation, which is we -- when we consolidated Euro Bank, we took the total loans of Euro Bank. And then the stage 3 part, we booked it at net value. So in our books now, the fair value of Euro Bank stage 3 loans is booked at net value, so like if they would not have any provisions. So we just took the gross amount deducted by the provisions that existed, took the net, and this is the amount that we added to the denominator. So the impact of the decrease from 76% to 62% that was from 73% in the previous quarter to 62% is an arithmetic impact of consolidating the loans of Euro Bank by their fair value, at net value.

So the flip side of this is what you saw on the impact loan ratio is that instead of increasing, as you would expect by consolidating a bank with much more consumer loans and as a consequence, higher impaired loan ratio, in fact, the ratio decreased from 4.4% to 4.3%.

So for now we don't -- if you would -- so for now we do not have a specific target for this coverage ratio. This is the new normal for the time being after consolidating Euro Bank. If time will go and we will continue to originate loans and create provisions associated to [debt] on one side and writing off the stage 3 loans of Euro Bank, we will find a new normalized level, which I -- which is -- in the short-term is difficult for me to provide guidance. But this fall is purely arithmetical. It's not structural, let's say.

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

Unidentified Analyst, [27]

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

So maybe what was the coverage ratio at Euro Bank before the consolidation?

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

Fernando Maria Cardoso Rodrigues Bicho, Bank Millennium S.A. - Deputy Chairman of the Management Board & CFO [28]

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

It was close -- it was between 75% to 80%.

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

Unidentified Analyst, [29]

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

Maybe about your capital position because this buffer above total capital ratio is 40 bps only, how do you expect this to develop? And is this any limitation to your growth? Or you think that this will...

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

Fernando Maria Cardoso Rodrigues Bicho, Bank Millennium S.A. - Deputy Chairman of the Management Board & CFO [30]

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

No. So this impact was expected. When -- so when we presented the transaction in November, we pointed what we would be the impact on Tier 1 capital.

So now during the next 12 to 18 months, we are going to, again, increase the surplus over the minimum. This is going to be done in several steps. So -- but first of all, by generation of organic capital. So we expect permission to incorporate the first half net profit in own funds of the bank. We expect this permission from KNF to come during the third quarter. This will add 7,200 basis points to the total [ratio, T1] ratio. So it's a relevant impact. Then we'll still have the second half generation of results. And also, we will see what -- where will be the Pillar II buffer in the fourth quarter because we have the overall (inaudible).

So what I can say is that in the next 12 to 18 months, our expectation is to rebuild not the total surplus, because of -- as you remember, we have -- we were 5 or 6 percentage points above the minimum, so -- which was also not efficient. But we expect to gradually to rebuild some buffers over the minimum required. But this is, we don't expect this to be a restriction to our normal growth.

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

Unidentified Analyst, [31]

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

Can you show us the integration costs that you booked in the second quarter?

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

Fernando Maria Cardoso Rodrigues Bicho, Bank Millennium S.A. - Deputy Chairman of the Management Board & CFO [32]

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

So overall, in the first half of the year, we booked almost PLN 20 million. Most of it was in the second quarter, around PLN 17 million, PLN 18 million. So this is still a small fraction of the overall integration costs that we announced that will be phased between 2019 and 2020. And obviously, as the time will pass, we will start booking more integration costs, especially -- probably already after the legal merger in the fourth quarter and then in the first half of next year.

So as we mentioned in one of the meetings, we will divide the integration costs between this year and next year. We cannot -- we can arrange a 40% to 60% or 60% to 40%. And -- but of course, to -- this integration cost will start to be booked especially from the moment that the legal merger and especially the operational merger will be concluded. So that's why I say especially fourth quarter of this year and then first half of next year.

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

Unidentified Analyst, [33]

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

Given that we have no new information, can we assume that you just reiterate your guidance on synergies from the Euro Bank transaction?

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

Fernando Maria Cardoso Rodrigues Bicho, Bank Millennium S.A. - Deputy Chairman of the Management Board & CFO [34]

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

For the time being, we are not changing the projections.

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

Unidentified Analyst, [35]

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

Also, when it comes to the synergies because you expected PLN 33 million for this year and PLN 134 million for next year, it seems that the -- at least in my model, I keep postponing the moment...

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

Joao Nuno Lima Bras Jorge, Bank Millennium S.A. - Chairman of the Management Board [36]

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

On timing, you -- with timing, we are going to have a delay. So it's -- if you remember well between the signing and the approval, we have 7 months. Also, there was changes in the supervisory -- in supervision. So -- and these are -- there was a delay. So in that time, we were forecasting to make the transaction before and to make the integration also already somehow at the end of this year, and today, we are not. So we are still compressing this to a very short period because we are making -- between the closing that was in May, and we're still making the full integration in November, but synergies [to start] 2020 because it's -- the business case is the same, but we are very focused in speed up the process to not have -- you know that this process usually takes 2 years. So it's 1 year legal merger and then another year operational. We are trying to squeeze this to be more efficient, also to not have [the] cash numbers in the limbo that they are already in one bank that is 2 systems, 2 types of branches and all of that. But in a -- there in a -- I think, real (inaudible) date, synergies is 2020.

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

Unidentified Analyst, [37]

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

And can you give any guidance on net interest margin going forward? And how deep can you go for further cut in deposit rates?

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

Fernando Maria Cardoso Rodrigues Bicho, Bank Millennium S.A. - Deputy Chairman of the Management Board & CFO [38]

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

So I think the message from the second quarter is positive. So -- because I think we already discussed this several times, but it's like we have 1 or 2 quarters where the interest cost has slightly went up. I think it proved reasonable what we have done, which was to be very safe from the liquidity point of view in terms of preparation for the transaction and already being able to decrease the cost of the deposits during the quarter where we had the transaction, which is not so common.

If you ask about going forward, we still believe that there are possibilities to still continue to decrease the average cost of the deposits, also together with Euro Bank. Euro Bank is not paying excessively higher than us for the deposits of -- I mean so this is not -- so it's not that there is a huge potential there, because -- it's a little bit higher than our average costs but it's not substantially higher. But the trends in the market points to lower interest rates, in fact, and we see this also from competition. So this can also support some savings still to be achieved in terms of the average cost of the deposits in the next few quarters.

Of course, the NIM, that will benefit a lot from this integration of Euro Bank. Just 1 month has already a significant impact. And of course, as we will continue, of course, the NIM will benefit from this consolidation.

We still do not want -- because we are still in this first month of -- after acquisition, so we don't want already to provide very detailed guidance. I think it's -- we want first to fully understand all the details before starting to provide new guidance on this. But for the time being, we see clearly a positive benefit that will be fully appropriated during the third quarter from this consolidation. And then we will see from that whether -- what type of guidance we can provide. Of course, even excluding Euro Bank, of course, the NIM is also being supported by this growth of cash loans. And so -- of course...

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

Unidentified Analyst, [39]

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

What about guidance on cost of risk after consolidation of Euro Bank? Is the cost of risk of the consumer lending much higher than yours? Or...

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

Fernando Maria Cardoso Rodrigues Bicho, Bank Millennium S.A. - Deputy Chairman of the Management Board & CFO [40]

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

It's not much higher. Here, it's another complexity that, now we will have to apply our models of cost of risk to the Euro Bank portfolio. And so -- and also not to the nominal value of the loans but to the fair value of the loans, which is a second complexity. So we still -- and also, we made these provisions of PLN 80.6 million initially, right? But at the same time, we have the fair value of the portfolio. Now we still need to see for the next 3 or 6 months where the portfolio will, let's say, stabilize in terms of baskets because this also may determine higher or less provisions within the next 2 quarters. Of course, the cost of risk of Euro Bank is mainly driven by the cash loan portfolio. The cost of risk on a solo base is there. It's a little bit higher than ours, but also it's not hugely above ours.

But as I said now, we need to make uniform -- we have to have, as we already did in June, application of uniform methodology to the loans. And so we don't want for now to also guide on the new blended cost of risk. I think in the third quarter, we will still be able to break ground between the 2 because the 2 entities will still operate separately. And then we'll see what new guidance we can provide. Of course, we should expect a growth versus the typical guidance that we have because of the fact -- and also because of the strength of the origination of cash flow also in Euro Bank side.

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

Unidentified Analyst, [41]

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

And maybe follow-up on this question. How do you see the current quality of the consumer loans? Recently, the Santander said that it sees now stabilization of its portfolio [while] its risk models assumed further improvement. And I wonder what is your current observation.

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

Joao Nuno Lima Bras Jorge, Bank Millennium S.A. - Chairman of the Management Board [42]

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

So at the moment, even with this increase of production, that we are very strong. So we have been -- in all of our meetings here, it's like we are moving up our aspiration in terms of production of cash loans before was 200, 250, then 300. So we are -- now we are already in 350 production on Millennial stand-alone and also a very healthy production in terms of Euro Bank or -- in this half year.

But for time being, we don't see any deterioration, and also we didn't change much. We didn't make the new model, a new -- so you know very well that also our [late successes] are very connected, with a special promotion that we are having, even to a little bit better customers with a lower price. So that we detect that they were making consumer loans elsewhere. So it's -- and so it's something that could be seen more in terms of profitability. But today, the excess of new sales are enough to compensate this promotional price but not so much in risk. So for time being, we don't see signals of deterioration. Also, improvement...

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

Fernando Maria Cardoso Rodrigues Bicho, Bank Millennium S.A. - Deputy Chairman of the Management Board & CFO [43]

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

No. I think we were not -- before, they're also expecting that -- I mean we are having a cost of risk for cash loans, which is within the levels more or less that we have been expecting, somewhere between 200, 230 basis points of our total loans. And to be honest, we were not expecting that suddenly -- also with the levels of production that we are doing, that this was -- that this would further decrease. So for us, we see normal scenario.

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

Artur Kulesza, Bank Millennium S.A. - Head of IR [44]

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

No more questions here from the room? Because I got from Internet, but I think we answered, from Anubhav from Societe Generale, that I think both the guidance on the NIM and [term] cost of risks, we covered what we can say for today. So I have no more questions from Internet. So last call here, yes?

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

Unidentified Analyst, [45]

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

Just about -- one question. Is the balance sheet that you have presented as of end of first half, is this like a sort of a final with the Euro Bank. Or do you still need to make some adjustment when it comes to loan to dep, or LCR? Or is this something [other?] Because I understand you have repaid the sellers, the funding [and you] get it of some of the excess liquidity. And I wondered if [also that point] LCR or like someone...

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

Fernando Maria Cardoso Rodrigues Bicho, Bank Millennium S.A. - Deputy Chairman of the Management Board & CFO [46]

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

There will be some fine-tunings of balance sheet, not in terms of these. But I mean what still can change? First, this fair value that we have done and this PPA adjustment is always -- it's the current estimation and still may change during the next 12 months. This is according to the accounting standards. So this is our best estimate now, but this is still subject to adjustment for the period of the 12 months. And if there would be any adjustments, the consequence would be the change of the amount of goodwill that we provisionally calculated. So this is one thing.

And -- but regarding other balance sheet components, I don't see substantially any other things. Of course, the next big moment is going to be the beginning of October after the legal merger because most of these effects then also will be translated at solo level in Bank Millenium. But we have to -- of course, that we are still going to try to still further optimize with the balance sheet because we had built some excess of liquidity upfront, to be on the safe side, which gradually will subside. And there are some optimizations that still can be achieved, but not substantially -- substantial differences versus what you already saw.

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

Unidentified Analyst, [47]

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

Can I just ask about the average value of your consumer loan products?

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

Fernando Maria Cardoso Rodrigues Bicho, Bank Millennium S.A. - Deputy Chairman of the Management Board & CFO [48]

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

Average?

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

Unidentified Analyst, [49]

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

Average value of the loans.

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

Fernando Maria Cardoso Rodrigues Bicho, Bank Millennium S.A. - Deputy Chairman of the Management Board & CFO [50]

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

In terms of origination, I think it's around PLN 15,000 or PLN 16,000 per loan currently.

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

Artur Kulesza, Bank Millennium S.A. - Head of IR [51]

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

More questions? If not, thank you for today's conference. Next conference, we invite you [already] after the merger but we, for the last time, show Euro Bank still as a separate entity. Then we hope that will be next -- in the next quarter after the merger.

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

Joao Nuno Lima Bras Jorge, Bank Millennium S.A. - Chairman of the Management Board [52]

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

And I hope that you are customers from one of the banks, better will be in both, and then you can witness how the merger is -- if in the designated [Monday], if everything is all [further.]

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

Artur Kulesza, Bank Millennium S.A. - Head of IR [53]

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

So (inaudible) and we wish you also nice holidays, and see you on next conference. Thank you very much.