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Edited Transcript of MIL.WA earnings conference call or presentation 3-Feb-20 1:00pm GMT

Preliminary 2019 Bank Millennium SA Earnings Call

Warsaw Feb 6, 2020 (Thomson StreetEvents) -- Edited Transcript of Bank Millennium SA earnings conference call or presentation Monday, February 3, 2020 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* 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

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Conference Call Participants

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* Kamil Stolarski

Santander Brokerage Poland, Research Division - Head of Equity Research

* Marta Jezewska-Wasilewska

Wood & Company Financial Services, a.s., Research Division - Co-Head of Research & Head of Research Poland

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Presentation

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

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So good afternoon, ladies and gentlemen. Welcome to Bank Millennium Group conference with 2019 results. As usual, we have members of Management Board in person of Chief Executive Officer, Mr. Joao Bras Jorge; and Chief Financial Officer, Mr. Fernando Bicho.

So I give the floor to Mr. Fernando Bicho.

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

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Good afternoon. Thank you for your presence, and thank you for those that are watching us through the webcast. Before I go to the presentation, just also an introduction to Dariusz Górski that is sitting with us here today. So after 17 years almost that Artur Kulesza has been the Head of Investor Relations in Bank Millennium, he's taking another function within the group. And until the end of February, he will be replaced by Dariusz Górski as Head of Investor Relations Officer of Bank Millennium. So I would like to use the occasion to express my deeply thanks and gratitude to Artur for the cooperation for so long time, in good and bad times. And also to welcome Dariusz Górski to the new function until the end of February, and Dariusz will take on this role for the future.

So we will start the presentation by making a quick summary of the status of the acquisition of Euro Bank. Just a reminder, we performed one of the fastest and smoothest mergers on the Polish banking market by finishing on the 11th of November, the operational merger of Euro Bank. So just to remind, we -- in the period of 1 year, we signed the transaction agreement and announced it on the 5th of November of 2018, we closed the transaction on the 31st of May 2019 with the purchase of the shares of Euro Bank. We performed the legal merger on the 1st of October, and finally, the operational merger on the 11th of November. Since that day, we have one legal entity, one brand, one system and all the clients of Bank Millennium and ex-Euro Bank being served under a single IT platform and digital platform with a common set of products available to all.

Page 6 illustrates some numbers about what is Bank Millennium after this acquisition and the margin. We reached 2.6 million active customers in retail, 1.8 million digital customers. Total assets of PLN 98 billion and consumer loans of -- portfolio of PLN 15.1 billion. These were the -- let's say, the numbers that we would like to highlight of very significant growth that is a result of the acquisition of Euro Bank, but also of the organic growth that the bank managed to achieve during the year of 2019. It was a very complex year because not -- at the same time that we were performing the acquisition and the merger, we managed to continue the pace of organic growth, and as we will show later on in the presentation.

As you can see on Page #6, after the merger, we significantly expanded the geographical presence of Bank Millennium and also the number of branches. We finished the year with 602 own branches, and additionally, 228 franchise branches.

On Page 7, we illustrate the fact that after this acquisition and merger, we are a stronger and more competitive bank. We significantly enlarged the customer base. The profile of the acquired bank and portfolio is more focused on lending products. We developed our operating model by combining a traditional branch network with the franchise model. And also, we achieved a higher scale, which we believe will be important for the future in order to continue to support the investments that need to be done on the digital front, but also to compete with the larger players and to also improve our own position in terms of the cooperation conditions with key partners.

This merger allows us to expand geographically in addition of 200 towns in Poland, which gives us a better base also for the growth of other products such as mortgage loans and not only consumer loans. We continue the investments in digital. And this wider customer base also allows us to grow faster the sales through digital channels and to cross-sell additional products to the acquired customer base. And in terms of value proposition, we also expanded the range of areas where we were present, and especially by also incorporating the POS business that has been developed by Euro Bank. And at the same time, also giving some visible steps in terms of the increase of our presence in the micro business segment.

Moving to Page 8. This is a summary of the impacts so far resulting from the acquisition of Euro Bank. So in terms of integration costs, in 2019, we booked through P&L PLN 116.3 million, of which PLN 52 million in the fourth quarter. Additionally, we booked the so-called Day 1 provisions over the acquired Euro Bank loan portfolio, which totaled between the second and third quarter, PLN 89 million. So we can say that during the year of 2019, the total gross negative impact deriving from these one-off impacts from the acquisition reached PLN 205 million gross or PLN 166 million net. And this, of course, is reflected in the final results of the year 2019.

On the other side, we would like to reaffirm that based on our current estimations, the total integration costs connected with the transaction will finally be clearly below the originally planned. We had initially communicated to the markets the total integration expenses between OpEx, CapEx of over -- of PLN 350 million. We -- based on our current estimations, the total amount will be below PLN 300 million. And for 2020, we are estimating that through -- that we will have PLN 80 million of expenses to be incurred as integration costs. On the other side, 2020 will also already show visible benefits from the transaction, and we are already counting with above PLN 100 million of synergies from the deal.

Moving now to Page 10. As usually, once a year, when we close the year, we show a snapshot of the evolution of the performance of the bank during the last 5 years. And so here, of course, 2019 was marked by several extraordinary events, which we will explain in a few minutes. But if we exclude those extraordinary impacts, we have a solid improvement of the recurrent net profit of the group at around 12%, 13% annual average growth. And the result of 2019, which in accounting terms was PLN 561 million, excluding the extraordinary items, would have reached PLN 889 million. This was supported by a solid growth of core income, which in 2019 was already partially supported by the consolidation of Euro Bank, bringing the ROE, excluding extraordinary items, to above 10% in 2019. Also the incorporation of Euro Bank already brought a visible improvement in terms of the net interest margin to 2.83% in 2019.

On the cost-to-income side, the year of 2019 were a year -- was a year where we had to incur integration costs and some other costs, and so of course, the cost to income did not improve. Excluding extraordinary items, it stood at 47.4%. The cost of risk remains stable. Excluding Day 1 provisions, it was at 57 basis points of our total net loans comparing with 48 in the year before, which is natural if we take into consideration that the acquisition of Euro Bank brought an increase of the share of consumer loans in the total loan portfolio. The capital adequacy ratio continues to be very strong with the total ratio above 20% in the end of 2019, despite the fact that we consume significant amount of capital with the acquisition of Euro Bank.

On Page 11, a snapshot on the business side. The main numbers are that during these last 5 years, we had an increase of 1.2 million active customers in retail, bringing the total to almost 2.6 million. We had a growth of almost 1 million online active customers and over 1 million mobile customers, bringing the total already to 1.4 million. And very strong growth, both in deposits, 11% annual average growth; retail loans from which the consumer lending portfolio was the one that grew faster due to the acquisition of Euro Bank, almost 30% average annual growth. On the corporate side, which was not influenced by the transaction, we had an average annual growth of loans to companies of 7.5%.

So moving now to the explanation of the results of the year 2019. As I said, the year was marked by several extraordinary events of -- and as a consequence, the net profit reached PLN 561 million, which means a 26% drop versus the previous year or a 17% growth if excluding these extraordinary events, which are detailed in the footnote of the page. Of those extraordinary events, the most relevant ones were the impacts connected with the acquisition of Euro Bank, which I already mentioned before; and also the provision for the FX mortgage legal risks, which finally reached PLN 223 million, an amount which is higher than the initially estimation that we provided on the 16th of January, which was PLN 150 million. As a consequence of this extraordinary provision, the fourth quarter net profit was at PLN 27 million. If we adjust by this one-off, it would be at PLN 274 million.

The overall growth of income and costs during the year, of course, was strongly influenced by the acquisition and consolidation of Euro Bank. Operating income grew 27% year-on-year, and also 27% was the growth of operating costs if excluding the integration costs. We also, in the -- between third and fourth quarter, we made a reserve for returns of cash loan fees of PLN 66 million. The asset quality remained strong and stable with an impaired loan ratio at 4.6%, cost of risk at 57 basis points of our total net loans and the loan-to-deposit ratio at 86% despite the acquisition of Euro Bank. And on the capital side, apart from the strong capital ratios that I already mentioned, we would highlight the decrease in the fourth quarter of the Pillar II buffer to 4.9%. And also, we will like to confirm the expectation that we had already mentioned in previous meetings that we will recommend to the shareholders' meeting the full retention of the 2019 net profit.

So now we will go through some more details about the results. So in Page 13, the net profit reported was at PLN 561 million, which represents an ROE of 6.4% reported or 10.2% if adjusted for extraordinary items, and this compares with 9.6% ROE in 2018. In terms of operating income, apart from the growth of 27% yearly, we also should refer that on a quarterly basis, operating income was flat versus the previous quarter.

On the cost side, on Page 14, we had this significant growth, of course, which was influenced by the integration costs. As I said, without integration costs, the total operating costs grew 27%. But also, it is important to mention that in the fourth quarter, the costs, excluding integration costs, were virtually flat versus the previous quarter. In terms of the drivers of the cost growth, we continued to have the same trends from the previous quarters, which means year-on-year, we had a stronger growth of personnel costs, which, excluding Euro Bank acquisition, was somewhere between 11% and 12%. And much lower growth of other admin costs if excluding the extraordinary costs connected with the integration.

We -- this year, we have the plan of optimizing the branch network as -- after the merger that was performed last year. And so we have an initial plan to consolidate 60 branches in 2020 and to reduce the number of employees by 260 in the first quarter. On the other side, as we mentioned, the synergies will start to be visible already in 2020, and we estimate at least PLN 100 million of synergies to be captured already in the current year.

Moving to net interest income and commissions. On a quarterly basis, net interest income grew just below 1%. On a yearly basis, it grew 33%. In the fourth quarter, we would highlight the improvement, again, of the average cost of deposits by 2 basis points to 1.07%. And on the other side, a slight decrease on the average interest on loans, which is the consequence of fully neutralizing the impact of the cash loan fees returns in the NII. So in the fourth quarter, the NII is no longer influenced by the positive impact from the past of booking commissions from cash loan fees.

On the commission income, we had the growth year-on-year of almost 6% and the growth in the quarter of 2.4%. The trends were more or less the same as the ones that came from previous quarters. Overall, in the year, we have relevant improvements coming from loans fees, cards and insurance, which were partially offset by a drop of commissions coming from investment products and capital markets. The net interest margin, just to finish, in the fourth quarter was at 2.94%. And our expectation is that on a normalized basis, the NIM should be somewhere between 2.9% and 3%.

Asset quality remained stable, as I mentioned. So in the fourth quarter, we had a positive evolution, in fact, of the overall cost of risk with total provisions reaching PLN 73 million. So we believe that we are trending to some normalization after some volatility created by the acquisition of the Euro Bank portfolio.

In terms of liquidity, very strong, so still with a lot of excess liquidity, which is invested mainly in Polish government bonds. And in the capital ratios, the capital ratios are -- were stable versus the previous quarter and total capital ratio was at 20.1%.

Now moving to the explanation about the provisions that were done for legal risks connected with FX mortgage on Page 17. So we took into consideration the increased legal risk, especially after the European Court of Justice answers to the questions of the Polish court in the beginning of October, and we finally decided to create a provision of PLN 223 million for the legal risks connected with the FX mortgage loans. During this closing of the year, we worked on the methodology for calculation of the provisions, incorporating an approach that considers not only the cases that are already in court, but also consideration of potential future cases, so-called portfolio approach, as recommended by the external auditors. So in a simple way, we can say that the methodology takes into consideration, on one hand, the number of current cases; the second, the potential -- a number of future court cases during a specific time horizon; and then, of course, probabilities of -- and amounts of outflow of funds in the case of specific court judgments. Also we should -- we would -- in our particular case, we also should remind that we have this additional capital buffer connected with FX mortgage portfolio. At the end of the year, this Pillar II buffer was at 4.95 percentage points, which in terms of capital represents a buffer of around PLN 1.85 billion. This capital buffer also incorporates a part which is connected with FX mortgage operational legal risk.

In terms of statistics of litigations. At the end of 2019, we have 2010 individual litigations -- 2010 loan agreements under individual litigations concerning indexation clauses, but a very small number of finally decided cases. So in fact, as of the end of the year, we have only 19 cases finally resolved. The vast majority in line with the bank's interests, only 2 were lost and even those 2 were still under appeal. Additionally, we have the class action that we have been informing the market for more than -- for the last 5 years, in fact, still before the first hearing. And also, we would like to refer to the mitigation actions that we have been taken already for quite a long time. So we have been trying for several years to mitigate the risks stemming from the FX mortgage portfolio by showing a very constructive approach in terms of negotiations, often on a case-by-case basis, of conditions for customers to early repay the loans, partially or totally or to convert the loans to zlotys. At the same time, of course, the bank is protecting its interests in the courts, and then we will use, of course, all the available instruments to protect our interests. But even in those cases that are in the court, we are open for potential settlements with the customers under reasonable conditions. And the same constructive approach we have been expressing to different authorities.

So moving now to the next part of the presentation with the business results. We think that we had a very good year in terms of business performance, despite the complex situation that we had to face by acquiring and merging Euro Bank. So the organic growth was still very strong. We finished the year with 2.6 million active clients in retail, which is more 40% year-on-year, thanks to the combination of the customers that came from Euro Bank and also to a very strong organic growth. We had 28% growth of deposits, 10% -- or 10% without Euro Bank and 44% growth of loans or 12% without Euro Bank. We had sales of cash loans and mortgage above PLN 4 billion during the year. Of course, we -- in the fourth quarter, we had lower sales of cash loans, which were influenced by the operational merger that we performed during the fourth quarter, in which we have to merge the client bases to establish the new risk appetite for the combined customer base and also some product changes and price changes that we already made during the fourth quarter, also partially related with this new environment regarding returns of cash loan fees.

We also had improvement in the performance on the micro business segment with doubling the pace of the acquisition of new accounts. And on the corporate side, we finished the year with the growth of current accounts deposits by 19%, loans to companies grew 7%. And so we -- of course, as I mentioned, this business was not affected by the transaction. The overall growth is slightly lower than our initial expectations, but still above market growth. So we think it was still a very good result in the full year.

On Page 20, we can see some more details about the evolution of loans and deposits. In terms of loans, we had an overall growth of 32% year-on-year of the whole loan portfolio or 8% excluding Euro Bank with the growth driven mainly by retail loans. In customer deposits, we had overall growth of 23%, of which 10% without Euro Bank. And in retail, 28% growth or 10% excluding Euro Bank. We finished the year with a market share of 6% in deposits, of which 7.2% in retail deposits and 4% in deposits from companies. The structure of the loan portfolio has continued to change. We fell -- the market share -- sorry, the share of FX mortgage of Bank Millennium in total loans fell to 19.2%, excluding FX mortgage from Euro Bank. On the other side, we have cash loan share increasing to almost 20% and PLN mortgage at 30%. In investment products, despite the fact that it was not a good year for investment products, we still closed the year with a 4.3% growth of volumes versus 1 year before.

On Page 21. Retail loans was the driver of loan growth last year. So here you can see the growth with and without Euro Bank in consumer lending. The growth -- the portfolio doubled virtually. Still without Euro Bank, total consumer loans, so including cash loans, cards and overdrafts, grew 17% year-on-year. And the PLN mortgage grew 20% year-on-year, excluding Euro Bank. FX mortgage fell 7.5% in currency or 5% in zlotys. We finished the year with an 8.2% market share in consumer loans. In retail customer funds, 24% overall growth. And below in the slide, you can see the significant growth in sales of mortgage, 26% year-on-year and cash flows 28%.

Page 22, significant growth of active customers in retail. I would remind that in September, still without Euro Bank, we crossed the threshold of 2 million active customers in retail. End of the year, we are almost -- we are closer to 2.6 million. So we start to see in the horizon, the next milestone, which will be to reach 3 million active customers in retail, which is within reach in the next few years.

In micro business, we also are accelerating the pace of acquisition, reaching 89,000 as of the end of December. And these numbers are followed by significant growth, both in current accounts, which grew, what, by more than 1 million in the year; and the cards, which grew more than 800,000.

In digital, the growth is also impressive growth -- overall growth of active digital customers of 32% in the year to more than 1.8 million and mobile to more than 1.4 million. A share of sales of cash loans through digital, above 50% in the fourth quarter. And also digital is starting to be relevant for accounts opened by micro business segment.

Page 24 illustrates, again, the increase of the usage of online products and services. I will not go through all these details. This continues -- the trends coming from previous quarters. And moving to corporate. Overall growth of deposits of 10% year-on-year, but driven by the growth of current accounts of 19%, which shows that our clients are really using more the current accounts and the transactions associated with the current account. On loans to companies. In 2019, we had a stronger growth of loans to companies than leasing and factoring, which is a little bit the opposite to what happened in some of the previous years. But as I said, still, this allowed us to grow at faster-than-market pace, allowing us to reach a market share of 4%. The weaker year of leasing and factoring is shown on Page 26. So the leasing sales were almost at the same level of the previous year, but still the factoring turnover grew 6.5% versus the previous year.

So these are the most important highlights of our 2019 results, and so now we are open for questions. Thank you.

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Questions and Answers

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

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So we invite to ask questions. Here from the room to start, I have -- Yes, Marta.

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Marta Jezewska-Wasilewska, Wood & Company Financial Services, a.s., Research Division - Co-Head of Research & Head of Research Poland [2]

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Good afternoon. Okay. Just now to start on the one-off front. You mentioned you want to decrease your branch network by 60 in the first quarter '20. But given the size of your branch network currently, how do you feel -- what is the optimal level of branch network you would like to have in, let's say, end of 2021?

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Joao Nuno Lima Bras Jorge, Bank Millennium S.A. - Chairman of the Management Board [3]

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The 60 is for the year of 2020, so it's not just for the first quarter. Although it's going to be [flat], but the 260 is the -- FTEs is the first quarter. The vision that we have is that between 120, 150 should be the reduction in 3 years. So in 2 years, probably something in the middle. But there is always a dynamic per se, we are a little bit surprised by the traffic that we are having at the moment because when we acquired a lot of customers then the customers also go to branches even if they are digital. So we need to mitigate this. Also, we don't want to reduce in any place that we -- with the acquisition of Euro Bank, we start to cover, so we need to balance these. But I would say that in the long run, although we are not -- it's also we need to watch how the -- how these customer service, how the traffic in branches is changing. Also the capability of when we close a branch and we migrate the customers to the branch nearby to serve, if there is space to make some increase in terms of FTEs to serve these. But I would say that between this -- around this 150 for 3 years, so I would say that 2020 should be between 40 to another 60.

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Marta Jezewska-Wasilewska, Wood & Company Financial Services, a.s., Research Division - Co-Head of Research & Head of Research Poland [4]

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And I understand that you were talking mostly about your own branch network, which is above 600 -- slightly above 600. How do you feel about the franchise concept because Euro Bank operated heavily on franchise concepts, Millennium, not so much? So...

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Joao Nuno Lima Bras Jorge, Bank Millennium S.A. - Chairman of the Management Board [5]

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Not at all. Not at all.

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Marta Jezewska-Wasilewska, Wood & Company Financial Services, a.s., Research Division - Co-Head of Research & Head of Research Poland [6]

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I wanted to be gentle on that front. Could you...

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Joao Nuno Lima Bras Jorge, Bank Millennium S.A. - Chairman of the Management Board [7]

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We had a couple of things since the beginning that we were sure during the transaction. One is that the brand would be Millennium. Second one that we will not mix-up the systems to keep efficiency. So the systems would be (inaudible) that we have from Millennium. But then also we had some very concrete ideas that -- and one of them is that we would preserve franchise. So we would not -- because when you are in a merger process, sometimes you start to act -- looking for efficiency, trying to migrate systems, not caring about anything. And we have in our idea that we want to preserve franchise, we want to learn franchise. And then -- and this is a given. So at the moment, we are exactly doing that.

We are positively surprised just to -- it's very visible, the decrease of consumer loans performance or selling in the last quarter. So it was expected, we always knew this. So it's -- if in a quarter, you are migrating, means that you are changing the systems of all the network of Euro Bank. You are training everybody in new systems, new products, new processes. Besides that, we decided to make a scheme of [bodies] to help this migration. So it means that there is a lot of people from branches of Millennium that we are moving to branches of Euro Bank to teach and to stay for at least 2 weeks. So all of this, we knew that there was some sacrifice in terms of sales, but that would -- shorter -- first of all, the customer experience would be better, and we will not have operational problems as we did not have. But also, we would speed up this integration that we have today having it. So today, we are already aligned, one brand, one network, one way of command. And it's very interesting that the franchise and the Millennium sold in January more than it sold as Euro Bank 1 year ago, even with the new system, new process, new risk. We tied up a little bit risk. Still when we were 2 brands separate, we get third parties, we get one level of risk. We tied up a little bit because it was also -- it tended to be a good decision because it was a risk level that was very dependent on high commissions. So far so good, we will see. But for the time being, for us, it was an add-on on the acquisition, the model of franchising was something that we were never able to do. But for the time being, we have been a very nice surprise.

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Marta Jezewska-Wasilewska, Wood & Company Financial Services, a.s., Research Division - Co-Head of Research & Head of Research Poland [8]

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Okay. And maybe another question on cost of risk guidance, you guided around 60 basis points for 2020. But if I could actually ask for slightly more granularity because we now have to understand the new portfolio, basically, the consumer loans inherited from Euro Bank. Could you perhaps share a little bit of light, what is the cost of risk for nonmortgage lending within this 60 basis points overall expectation? Where do you see your blended cost of risk on your unsecured retail portfolio? Is that something that we certainly don't have an experience with?

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

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First of all, historically, although the average cost of risk Euro Bank was a little bit higher than Bank Millennium, there was not a huge difference in terms of cost of risk. Now of course, we made uniform all the rules connected with the classifying and calculating the provisions. We're classifying the portfolio when we're calculating provisions, so of course, we have now a unified methodology that applies to the whole portfolio. And our expectation is that on a yearly basis, the cost of risk for cash loans will be in the ranges where we have been in the past, which means somewhere between 200, 250 basis points over the portfolio. So through time, sometimes it's a little bit closer to 200, even I remember there was a year that was below 200. There were years where it was closer to the 300. But I can say that this is more or less the expectation that we have about the cost of risk of the cash loans. For corporate, last year, in general, we still benefited from good performance in terms of cost of risk of corporate. So which -- I'm saying specifically corporate loans, excluding leasing, which was a little bit worse than in the past. And so, of course, in corporate, we understand that through time, we should count with the cost of risk on average somewhere closer to 50 basis points over the total portfolio. But so far, we do not see these levels at risk. In mortgage, we have been benefiting from very low cost of risk, but this has been consistent. And so for the time being, we don't see signs of the deterioration in the quality of the mortgage loan portfolio, means -- both portfolios, means the PLN and foreign currency.

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Marta Jezewska-Wasilewska, Wood & Company Financial Services, a.s., Research Division - Co-Head of Research & Head of Research Poland [10]

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You managed to achieve excellent fees and commission last year, probably the performance on that one was better than the peer group. Something that I have noticed, and I want to add additional question is on insurance fees, they were particularly strong, especially in the second half of the year. Is it something sustainable? Or was that related to how certain revenue streams were booked differently versus the Euro Bank? Because we can see a definite strength. And do you think you can actually consider the insurance fees sustainable and subject to growth along the business performance? Or was there something that was particularly strong and cannot be extrapolated for future?

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Fernando Maria Cardoso Rodrigues Bicho, Bank Millennium S.A. - Deputy Chairman of the Management Board & CFO [11]

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We did not change the way of booking insurance-related fees. So we -- again, as I said, now we are booking everything according to the same rules, regardless of what was done in the past. And of course, as the business grows, there is also a tendency of insurance fees to follow. But again, there is the -- a large part of insurance is -- depends on the -- if they are -- if the client buys them or not during the process of sales of different products. So it really depends on the capacity to sell those insurance together with other products, but which is not a mandatory thing, right? It depends on the will of the customers. But we see the insurance going along the overall growth of the business for the time being.

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Marta Jezewska-Wasilewska, Wood & Company Financial Services, a.s., Research Division - Co-Head of Research & Head of Research Poland [12]

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And is this insurance mostly sold along lending products? Or could you share a bit more light where the insurance selling growth was mostly noticeable?

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Joao Nuno Lima Bras Jorge, Bank Millennium S.A. - Chairman of the Management Board [13]

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The majority is -- connect with lending, yes.

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Marta Jezewska-Wasilewska, Wood & Company Financial Services, a.s., Research Division - Co-Head of Research & Head of Research Poland [14]

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The nonmortgage lending, yes?

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Fernando Maria Cardoso Rodrigues Bicho, Bank Millennium S.A. - Deputy Chairman of the Management Board & CFO [15]

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Everything.

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

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Everything.

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Fernando Maria Cardoso Rodrigues Bicho, Bank Millennium S.A. - Deputy Chairman of the Management Board & CFO [17]

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Everything.

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Kamil Stolarski, Santander Brokerage Poland, Research Division - Head of Equity Research [18]

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Maybe a technical question when it comes to the Swiss franc mortgages provisions. Did you use the same time, say, horizon like the PKO BP or Santander, like this 3 years' time horizon going into the future? And can you comment about the Soc Gen interaction? Do your book provisions for Soc Gen portfolio and then somehow offset it? Or you book no provisions for Soc Gen portfolio?

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Fernando Maria Cardoso Rodrigues Bicho, Bank Millennium S.A. - Deputy Chairman of the Management Board & CFO [19]

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So in this so-called portfolio approach, we -- as I said, we incorporated some, I cannot call it forecast, expectations or whatever we call it, of future court cases. So I must say that we were not exactly of the opinion that this should be done, that we should estimate future court cases. But at the end of the day, it became -- one after one, we saw that this was being adopted as a reference. And so we also adopted that approach, and we also took a time horizon of 3 years, as you are saying. Regarding the Euro Bank portfolio, for the time being, we did not book the provisions for legal risk connected with that portfolio.

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Marta Jezewska-Wasilewska, Wood & Company Financial Services, a.s., Research Division - Co-Head of Research & Head of Research Poland [20]

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But just to clarify, as Kamil asked, will you be the party that will be booking that and it will be reimbursed? Or I know it's a very technical one, but like, how do you how do you balance the fact...

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Fernando Maria Cardoso Rodrigues Bicho, Bank Millennium S.A. - Deputy Chairman of the Management Board & CFO [21]

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I would say that, through time, it should be neutral for the P&L.

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Marta Jezewska-Wasilewska, Wood & Company Financial Services, a.s., Research Division - Co-Head of Research & Head of Research Poland [22]

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But as I understand, you are now recognizing the revenues and costs of Euro Bank portfolio as if it was fully consolidated, and you have indemnities for the -- any kind of legal risks. But in terms of cost of risk and revenues and costs, this is all...

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Fernando Maria Cardoso Rodrigues Bicho, Bank Millennium S.A. - Deputy Chairman of the Management Board & CFO [23]

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Cost of risk, we are, in fact, booking 20% of the cost of risk.

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Marta Jezewska-Wasilewska, Wood & Company Financial Services, a.s., Research Division - Co-Head of Research & Head of Research Poland [24]

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And the rest you're...

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Fernando Maria Cardoso Rodrigues Bicho, Bank Millennium S.A. - Deputy Chairman of the Management Board & CFO [25]

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Because the 80% is covered, right? So there may be some technical fluctuations quarter-by-quarter, but this is completely not relevant. So in terms of cost of risk, credit risk, it's -- we book 20% of the cost of risk or, let's call it, defaults, let's say, that happened in a specific quarter. Or -- and in terms of legal risks, as I said, until now we did not create any provisions for that, but they benefit from 100% indemnity.

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Marta Jezewska-Wasilewska, Wood & Company Financial Services, a.s., Research Division - Co-Head of Research & Head of Research Poland [26]

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But you will be the one that one have to create a model on the FX mortgage portfolio. Or will they send the troops from -- that's...

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Fernando Maria Cardoso Rodrigues Bicho, Bank Millennium S.A. - Deputy Chairman of the Management Board & CFO [27]

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I think this is not relevant or the way we will do it. This is not relevant. What matters is that there is 100% indemnity for 20 years for legal risks. So it is a little bit irrelevant if we book on one side and have the offset on the other or if we net it. It's just more a kind of accounting issue than the P&L issue.

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Unidentified Analyst, [28]

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One follow-on question on the FX provisioning. Do you think that the Polish regulator will be willing to reduce the buffer by the end of the year in the future, given that the part of this legal risk already provisioned? Or will you apply for such reduction in the future in the -- by the end of this year?

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Fernando Maria Cardoso Rodrigues Bicho, Bank Millennium S.A. - Deputy Chairman of the Management Board & CFO [29]

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We did not have any direct discussion or interaction about this. So regardless of that, we know that this Pillar II buffer is updated once a year, at least once a year, usually in the fourth quarter, based on information that is collected by the regulator during the year and includes several components. There is a methodology that I think is relatively well known. In our case, the size of this Pillar 2 buffer is influenced by the fact that we are an IRB bank, so -- because we do not have a risk weight of 150% as other banks in these scenarios, most we have due to compensation, let's call it, of that in the Pillar II buffer. As we mentioned, in that Pillar II buffer, there is a component connected with operational risk or legal risk, which is -- for which also there is a specific methodology and also -- has also as a component if there are or not provisions associated with that portfolio. It's difficult for us to say what will be the impact of having the provisions in the final outcome regarding the Pillar II buffer.

Our expectation, regardless of that is that if nothing will change in terms of main aspects of the methodology, that through time, the size of this Pillar II buffer should be decreasing due to the fact that we will have a reduction of the -- in absolute terms and in relative terms of this portfolio in total loans. And second, of course, there is this provisions that we started to do for these legal risks, which may also contribute or not, it's still difficult to anticipate several quarters in advance, which may also contribute to a decrease. But our expectations through time -- doesn't matter if there will be some volatilities, that through time, this buffer should decrease. We are highlighting the size of the buffer just to allow investors to have the full picture about the -- what we have versus the risks of FX mortgage, legal risk. Just because in our case, I think that market should take into consideration that we have the provisions that were today announced, PLN 223 million. At the same time, we have an additional capital buffer, which also I believe it's important to take into consideration.

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Unidentified Analyst, [30]

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Maybe just a technical question. So those provisions are reducing the net value of FX mortgages on your balance sheet or not?

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Fernando Maria Cardoso Rodrigues Bicho, Bank Millennium S.A. - Deputy Chairman of the Management Board & CFO [31]

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No, no. They are in the liabilities side.

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Artur Kulesza, Bank Millennium S.A. - Head of IR [32]

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Liabilities that maybe could stay as reserve.

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Fernando Maria Cardoso Rodrigues Bicho, Bank Millennium S.A. - Deputy Chairman of the Management Board & CFO [33]

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Yes. So they are not -- let's say, they are not done through IFRS 9, let's say, that will -- like if there will be credit risk provisions, and so they are not deducting to the outstanding of the loan, which I think is your question, right?

Also, we did not treat them as tax deductible for the time being. So in fact, the impact, gross and net, that we booked in the fourth quarter is exactly the same. Just for clarity because I saw also some confusion about this, so just to be clear, the impact on net terms was also PLN 223 million. This does not mean that at the end of the day, the losses will be or not tax deductible. This is a separate discussion. I'm just saying that this provision that we made, we did not treat it as tax deductible for the time being.

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Kamil Stolarski, Santander Brokerage Poland, Research Division - Head of Equity Research [34]

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Some other banks, I'm commenting on Swiss franc mortgages provisions, said that they have divided the Swiss franc portfolio into separate other portfolios, like the nominated index and then so on of acquired acquisitions. And I wonder, how should we think about your, let's say, Swiss franc portfolio? Is it really homogeneous, like very similar? Or do you think that you have some -- or it's like you have some separate groups of Swiss franc...

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Fernando Maria Cardoso Rodrigues Bicho, Bank Millennium S.A. - Deputy Chairman of the Management Board & CFO [35]

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I would -- from the indexed -- from indexation versus the nominated point of view, it's homogeneous because we have indexed loans, a huge majority. So it's -- so from this point of view, it's homogeneous. If you are asking if the client base is homogeneous, no. There are -- we have all types of customers inside, so we cannot treat the customer base as homogeneous.

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Kamil Stolarski, Santander Brokerage Poland, Research Division - Head of Equity Research [36]

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(inaudible) the way you built your provisioning model.

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Fernando Maria Cardoso Rodrigues Bicho, Bank Millennium S.A. - Deputy Chairman of the Management Board & CFO [37]

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We had to create this methodology with not much statistical data, right? Because from factual point of view, I said this -- we said this today also in the morning in the conference -- in the press conference, we made PLN 223 million of provisions for legal risks having lost 2 cases, okay? And just to put the things in the proper place, we are not saying if we are going to lose more or less, it's not what we are saying. We are just saying that we created a provision of PLN 223 million, when until now we lost 2 cases, which are still under appeal. The number of decisions of second instance until the end of the year was only in 19. So as you can imagine, we don't call this a model because I think that this is not -- so this is a methodology that we have implemented in order to reflect the number of cases that we have, the outcome of the court decisions that exist. And then that will change through time, depending on the evolution of the number of cases and the type of decisions that will happen in the Polish banking system. So this is what I can say. I mean we think that this is the reasonable solution for the closing of 2019. Through time, it will be probably possible to segment better the client base to understand exactly the litigation -- the nature of the litigations that we have and to reestablish better the potential losses that may come from these. This is a foreseen risk. We will have to continue to monitor the situation. I think that the problem is that even after the decision of the European Court of Justice of the 3rd of October, during these last 3 months, we saw completely different court decisions using the same justification. And as you can imagine, it's very difficult to establish and assess the risk when the same verdict, let's call it, is used to justify different verdicts. So we believe that there's still going to be a lot of steps that are going to happen until there will be more clarity about the outcome of the cases that are in the court, including new questions that will be submitted to the European Court of Justice, potential clarifications from the Supreme Court, clarifications about what are the consequences of invalidity of the contracts. There is a huge number of things that are completely not clear. And so -- but I think all the banks have to make an assessment now about the -- what will be the level of the provisions that should be there. So I think that we are more or less in line with what we saw also being communicated. Our provisions represent 1.6% of the total -- 1.6% of Bank Millennium FX mortgage portfolio because this should not be divided by the Bank Millennium portfolio plus Euro Bank portfolio. And sometimes I see this, but I would like to stress, this has to be assessed specifically dedicated to the former Bank Millennium FX mortgage portfolio.

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Unidentified Analyst, [38]

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Maybe a question on your sales appetite for 2020. In terms of cash flows and mortgages. As far as I understand, the PLN 1 billion cash flows figure you shown on the slide is -- it includes Bank Millennium and Euro Bank starting from mid-November, yes?

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Joao Nuno Lima Bras Jorge, Bank Millennium S.A. - Chairman of the Management Board [39]

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So as I said, the last quarter, it was not the level that we think we should be. Our aspiration is to have the PLN 300 million of ex-Bank Millennium, plus PLN 200 million of ex-Euro Bank. So we have around PLN 500 million in normal basis. Also in December, we already changed the price mix to offset partially the -- this return of the fees. And of course, when you change the price, there is always some impact. It will not offset, of course, all the impact, but it will start to help. And what I can tell you is that we had around PLN 300 million in December. We had more than 500 -- PLN 450 million in January. And for sure, we will be in this normal speed of PLN 500 million per quarter, we hope in...

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

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Per month.

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Joao Nuno Lima Bras Jorge, Bank Millennium S.A. - Chairman of the Management Board [41]

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PLN 500 million per month, PLN 1.5 billion per quarter in cash loans production during 2020. Yes, of course, it's usually when you achieve the sales, then we fine tune a little bit the risk, then we go away, but this is what we want to do. In terms of mortgage, we are more seeing as a stable level, PLN 400 million. Here is more Bank Millennium standalone because Euro Bank was not doing a lot in this area. Of course, it will increase a little bit scope also where we can sell it. But so I would say that our normal production will be PLN 400 per month, so PLN 1.2 billion per quarter. These would be -- yes.

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Unidentified Analyst, [42]

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I'm going to the question about the integration cost. You expect PLN 80 million in 2020. And does it include the reserve for employees reduction in first quarter?

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

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Yes.

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Unidentified Analyst, [44]

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Yes. Okay. And did you book any profit from Visa shares revaluation in the fourth quarter?

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Fernando Maria Cardoso Rodrigues Bicho, Bank Millennium S.A. - Deputy Chairman of the Management Board & CFO [45]

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Every quarter, we performed the evaluation of the financial instruments that we have. And so if there is variations that are appropriate to do, of course, we reflect them. And so in the fourth quarter, we also performed update of the valuation of Visa shares.

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Unidentified Analyst, [46]

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And do you share the amount of that?

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Fernando Maria Cardoso Rodrigues Bicho, Bank Millennium S.A. - Deputy Chairman of the Management Board & CFO [47]

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If I'm not mistaken, it was in the area of around PLN 20-something million gross.

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Unidentified Analyst, [48]

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Sorry for one more question on FX mortgages. But I would like to clarify this PLN 223 million, it is only a portfolio provision? Or also it includes provision for already started lawsuits?

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Fernando Maria Cardoso Rodrigues Bicho, Bank Millennium S.A. - Deputy Chairman of the Management Board & CFO [49]

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So it's about -- it's not only for our portfolio, it covers everything. It covers individual existing cases, potential future cases and -- which is the portfolio. So it covers everything. And just for clarity, we did not have provisions in the end of the third quarter for this. So the PLN 223 million is the stock of provisions that we have now for these risks.

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Unidentified Analyst, [50]

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Sorry. And could you provide a breakdown between the past, already started litigations? Because other banks are doing it, and we can calculate provision coverage for already started litigations.

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Fernando Maria Cardoso Rodrigues Bicho, Bank Millennium S.A. - Deputy Chairman of the Management Board & CFO [51]

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We -- I mean we don't have exact numbers to provide also because this is a very initial assessment. But from what I could see, we are more or less in line with this -- what I saw from some other banks because we have -- we are making around 1/3 for portfolio and then the remaining is for the individual and transaction litigations that we have.

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Marta Jezewska-Wasilewska, Wood & Company Financial Services, a.s., Research Division - Co-Head of Research & Head of Research Poland [52]

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I have a question about early repaid consumer loans. How many clients that have repaid a loan in the past, so even exited your back book, have applied for the reimbursement? Can you share even a soft -- how -- asking differently, what is the scale of provision that you've used for actual reimbursement, those provisions that you've been making to other operating income? Is there any many -- are there many clients that apply for those reimbursements?

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Fernando Maria Cardoso Rodrigues Bicho, Bank Millennium S.A. - Deputy Chairman of the Management Board & CFO [53]

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Currently, of course, we are having more requests for returning of fees than what we had 3 months ago, obviously, right? Because the news were, especially, coming in the end of the third quarter. So obviously, now we are having more requests from customers to return fees, which covers these more recent months, previous months and so on. The -- anyway, as I said, we neutralized fully in the fourth quarter, the -- let's say, the returns that can be made for these customers. And since the beginning of December, we started to automatically return to the customers the fees. Also in the past, there was already partially positive decision of the bank in terms of return on fees based on individual decision. So it's not the case that before September, we were always projecting the claims from the customers. So there was already a part of the claims that was already being positively decided based on commercial reasons in the past, which, in our view, also reduces the litigation -- potential litigations that would come from those cases. We don't have exactly the statistics because for us, this is a normal thing. It's like we have customers coming, and we are simply processing the returns on an ongoing basis. So I don't have complete numbers to tell you about how many are coming.

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Marta Jezewska-Wasilewska, Wood & Company Financial Services, a.s., Research Division - Co-Head of Research & Head of Research Poland [54]

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No. My question is just simply to clarify the ratio, how much of the provisions that you made to other operating income. If I remember correctly, PLN 32 million were made against the other operating income in the third quarter. How much of that you have used? Because every single bank had to assess the scale of potential, it's not litigation, it's scale of potential and number of clients that will come and ask. Clearly, the provision made in the third quarter, maybe, I don't know, in this -- to the range of PLN 500 million at the sector level, if we put together all the individual losses. Like this is not a full paying level if every single client asked the bank to be reimbursed. Of course, we don't, like, expect all the clients to come and ask for those reimbursements for the old, very long repaid portfolio. So the question is simple, have you used a lot of this provision for the past? Because the future is something completely different.

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Fernando Maria Cardoso Rodrigues Bicho, Bank Millennium S.A. - Deputy Chairman of the Management Board & CFO [55]

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No, we have -- until now we have used very small part. But again -- but we don't want also -- we don't want to run further conclusions when are 2 or 3 months after the event. So I think we need...

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Marta Jezewska-Wasilewska, Wood & Company Financial Services, a.s., Research Division - Co-Head of Research & Head of Research Poland [56]

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We will be asking this question every quarter.

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Fernando Maria Cardoso Rodrigues Bicho, Bank Millennium S.A. - Deputy Chairman of the Management Board & CFO [57]

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Sorry? No, no, I think that in a few quarters' time, it will be possible to assess if the provision was too big or too small, right? Because of course, we will do these. But currently, we believe that the current level of provision is the appropriate one. If there will be changes in terms of behavior or whatever, we need to reassess if it is -- and also, but what really matters is the flow. How many will come? And what are the amounts at stake? And we will be monitoring this in order to assess through time if the provision that we made is the appropriate one. For now we do not see a reason to change it. I think in a few quarters with the flow, we'll be able to come back and say, nothing to change or something to change. But also, we are not putting now -- just to be clear because sometimes also the way the communications are done is different. So just not to -- we made PLN 66 million, so we have an outstanding of -- or PLN 66 million. But this does not count already December when we started to return, okay? So because there are a few different ways of presenting the same number, you understand? So this is just to say that the level that we need for us seems to appropriate one for the time being.

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Artur Kulesza, Bank Millennium S.A. - Head of IR [58]

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I maybe ask now some questions from Internet, for instance, continuing the topic of so-called small (inaudible). One came from Jovan, do you stick to the effective interest rate method for calculating (inaudible) funds from early repaid consumer loans? And from Société Générale, from Anubhav, checking the impact from the cash loan fee rebate in the NII line in 4Q, what should be the ongoing impact in NII going ahead?

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Fernando Maria Cardoso Rodrigues Bicho, Bank Millennium S.A. - Deputy Chairman of the Management Board & CFO [59]

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Regarding the second part of the question, as a general guidance, we would say that this represents around 3% to 4% of NII, let's say, what we are, let's say, neutralizing in NII, 3% to 4%. Through time, this should decrease because as we already said, there were changes then to the product, in the pricing of the product and the components of the pricing. That through time will help to partially mitigate this impact. It will seen -- it will be seen through time. But for the time being, this is what we can say in terms of impact on NII. Which methods we are using? We are using the proportional methods, which was what we read from the decision of the European Court.

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Artur Kulesza, Bank Millennium S.A. - Head of IR [60]

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More questions, here in the room? If not, I may continue questions from Jovan. One is on BFG, Bank Guarantee Fund view on charge in 2020.

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Fernando Maria Cardoso Rodrigues Bicho, Bank Millennium S.A. - Deputy Chairman of the Management Board & CFO [61]

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I think here, the only thing that we know there is some public information from BFG, there is going to be, again, a shift to more contribution to deposit fund, less contribution to the resolution fund. It means in relative terms, of course, it's worse for us. So it means that, overall, in the year, we will have an increase in the contributions, a little bit above-market average.

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Artur Kulesza, Bank Millennium S.A. - Head of IR [62]

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Thank you. And there are 2 questions also from Jovan our restructuring activities. What is your normal OpEx guidance, having in mind synergies with Euro Bank? And also, do you plan further reductions of FTE?

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Joao Nuno Lima Bras Jorge, Bank Millennium S.A. - Chairman of the Management Board [63]

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So taking the last one. A lot of the reduction is being done just by normal attrition. Unfortunately, one of the areas that is more difficult to manage in Poland is recruitment processes and how to scope with the high turnover that we have. So mainly in retail, we are closing where we are already present. So we are -- except very specific cases. We are using all of the additional people from the branches that are being consolidated. But even in head office, we think that we will have always cases during the year with very specific areas that are already identified and that have a timing of phasing out different than the first quarter, but the vast majority, even by allocation of services that we did, we believe that in terms of big numbers, the processes than in first quarters.

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Fernando Maria Cardoso Rodrigues Bicho, Bank Millennium S.A. - Deputy Chairman of the Management Board & CFO [64]

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Regarding the operational costs. Of course, this year is still going to be in comparative terms a year where on one side -- I would like to remind, last year, we had 7 months of consolidation of Euro Bank costs. Of course, this year as a merged entity, we have 12 months, on one side. On the other side, we will have less integration costs, and we'll have already relevant synergies, especially from costs being appropriated. So I cannot provide an exact guidance for overall growth of the operating costs for the time being. But clearly, we tend to lower the overall cost base after finishing the integration process, after incurring all the integration costs and appropriating the value of the synergies.

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Artur Kulesza, Bank Millennium S.A. - Head of IR [65]

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Thank you. I think other questions from [Carlos] and to Jovan on FX mortgage issue were answered already. So I think there are no more questions unanswered from Internet. And here, are there more questions? If not, and if it's maybe -- if I may, if it could be my last conference in this role with you, I would like take opportunity to thank you for this nice and long cooperation with some of you maybe even entire 17 years. And now as CFO told, I will be still available for you at least till the end of February. And afterwards, I'm sure that you will be receiving the same quality or even better of service from Dariusz Górski. So I'm leaving IR position in very good hands. But I don't say goodbye, but see you as I feel that we've -- I have opportunity to meet with some of you in the future. So thank you again for participating in this conference. And maybe I already, as always, invite you to the next conference on first quarter, which is planned for 11th of May with the Board and Dariusz Górski onboard. Thank you. See you. Bye.