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Edited Transcript of MIL.WA earnings conference call or presentation 25-Apr-17 12:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 Bank Millennium SA Earnings Call

Warsaw Apr 25, 2017 (Thomson StreetEvents) -- Edited Transcript of Bank Millennium SA earnings conference call or presentation Tuesday, April 25, 2017 at 12:00:00pm 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 Bicho

Bank Millennium S.A. - Deputy Chairman Management Board

* Joao Jorge

Bank Millennium S.A. - Chairman Management Board

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Conference Call Participants

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* Dariusz Gorski

BZ WBK Brokerage - Analyst

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Presentation

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

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Good afternoon, ladies and gentlemen. Welcome to Bank Millennium conference with first-quarter results. I believe these results prove that we have a very good beginning of 2017 years, but the details will be provided by representatives of Management Board. The Chairman, Mr. Joao Bras Jorge, is with us, and Deputy Chairman and CFO Mr. Fernando Bicho, who will start traditionally the conference. Thank you.

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Fernando Bicho, Bank Millennium S.A. - Deputy Chairman Management Board [2]

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Thank you. Good afternoon, all, and thank you for coming or for attending this presentation.

So as Artur mentioned, we had a very good start of the year. On pages four and five of the presentation, we are illustrating some of the key numbers, especially the ones that we circled in those two pages.

But we can say that on one hand we had improved financial results solidly anchored on core activity, also with strong cost control and a good cost of risk. And on the other side, we also had good business results and good development of our business. In some items, this is continuation of trends that were already observed in previous quarters, such as the ones connected with the significant increase in the number of customers in retail, also the significant growth in online and mobile customers, the growth of deposits from individuals, and the growth of the market share in this segment, also the double-digit growth of the consumer loan portfolio, and last but not least, also the growth of investment products.

But also in other business areas where in recent quarters the performance was not so strong, we also had a significant improvement and we will highlight the significant growth in the sales of mortgage loans during the first quarter, also the increase in the portfolio of corporate loans. And so, altogether we had the continuation of the good strengths that were already coming from previous quarters, but also a rebound in some others where the performance had not been so positive.

And as you can see from these pages four and five, this translates into very solid growth of our core income, a growth of the net profit despite the adverse impacts that we faced during the first quarter and that I will explain later on. And also, further improvement of the interest margin, improvement of the cost to income ratio, and, as I said, a number of other numbers that prove strong business growth.

So if we can now go to the financial highlights of the quarter on page number six, we had in the first quarter a consolidated net profit of PLN140.5 million, which is almost 7% higher than the previous quarter and 2.4% higher year on year.

As I mentioned, we faced adverse impacts of higher regulatory charges during these first quarters versus one year ago. Namely, we booked a preliminary estimation of the yearly contribution to the resolution fund of PLN44 million in the first quarter on the top of the quarterly contribution to the deposits guarantee fund of PLN30 million, both of them non-tax-deductible. And additionally, we had one more month of banking tax when compared with one year ago, which translated into another negative impact of PLN15 million versus one year ago, so we considered from these two items we had a negative combined impact of PLN53 million year on year.

But despite that, we managed to grow the net profit by 2.4%, and if we calculate net profit on a like-for-like basis, it grew 30% year on year.

Return on equity stood at 8.1%. We remind that, according to the decision of shareholders' meeting, the full net profit of last year was retained in on funds. And the cost to income ratio already below 47% is in line with the strategic target that we had defined for this ratio more than two years ago.

For this performance contributed an excellent growth of core income, which combined grew by 15.7% year on year, supported by strong growth of net interest income by 12.7% and a much higher growth of net commission income by 23.6%.

We further improved our capital position. We closed the quarter with a total capital ratio of 18%, a Tier 1 ratio of 17.9%, and in liquidity nothing new, loan to deposit ratio at 83% and stable asset quality with an impaired loan ratio of 4.5% and a cost of risk at 51 basis points over total net loans annualized.

So moving now to more details on page number seven, so as I mentioned we had a solid growth of net profit by almost 7% versus the previous quarter, supported by solid improvements of the core income. Total operating income grew 7.4% year on year. Of course, the number is lower than core income due to the fact that total operating income was negative influenced by these contributions to the resolution fund.

By the way, this contribution to the resolution fund as I mentioned was based on an estimation, so we booked PLN44 million. Just today we received the final value of the contribution, which is slightly higher, slightly above PLN46 million, so it means the final adjustment of this two point something million will be done during the second quarter. So the estimate was very close to the final value.

Another positive aspect of the results in the first quarter was the strong cost control, which translated into net reduction of costs by 4% versus the previous quarter and 0.5% versus the first quarter last year. We have basically the same trends, the growth of personnel costs offset by lower admin and depreciation costs. And as a consequence of these trends, we further improved the cost to income ratio to 46.7% in the first quarter, within the targeted 45% to 47% ratio.

Moving now to net interest income, a continuation of a trend that was already coming from previous quarters of gradual reduction of the cost of deposits with a further decrease of four basis points during the first quarter, which helps, together with [relatively] stable interest of loans, to increase the net interest income by 12.7% year on year and almost 1% quarter on quarter, which is good if we remember that first quarter has less two days than the fourth quarter.

Net interest margin further improved three basis points in the quarter to 2.47%, so gradually we are coming back to levels close to the ones that existed before the interest-rate cuts that happened 1-1/2, two years ago.

We also had good news from commissions, which had a strong increase by 23.6% year on year and 16% quarter on quarter. But on a yearly basis, of course, the biggest contribution comes from significantly higher commissions from investment products in capital markets and also from insurance. While on a quarterly comparison versus the previous quarter, we also have a positive evolution of loan fees.

Moving to page nine, asset quality remains stable, impaired loan ratio at 4.5%, one of the lowest in the Polish banking system and helping to maintain the cost of risk within the levels that we have been showing during the last five years. This quarter, we have the annualized cost of risk of 51 basis points over total net loans. Total provisions reached PLN60 million, clearly below the fourth quarter, higher than one year ago, but one year ago in the first quarter I remind that we had the sale of NPLs and also some extraordinary recoveries of NPLs in corporate segment.

The capital position of the bank is very strong. Total capital ratio at 18%, Tier 1 ratio at 17.9% very much above the capital regulatory thresholds imposed by [kynif]. On liquidity, nothing new, loan to deposit ratio at around 83%.

So moving now to the second part of the presentation, on business results, so we have a combination of good results in strategic areas both in retail and in Company's business and also with a strong contribution from electronic channels. In retail, we continued the strong pace of customer acquisition. We added 136,000 active customers in retail on a net basis during the last 12 months. We already crossed 1.5 million active customers in retail.

Retail deposits cost PLN41 billion, with a strong growth of 13% year on year. We had an acceleration of sales of mortgage loans to PLN427 million and also a rebound in cash loan sales versus previous quarter to PLN558 million.

On the corporate side, we had a rebound in corporate lending, which grew by 5% quarter on quarter, bringing the total portfolio to PLN14.5 billion. We had the best quarter, in fact, during 2015 with a turnover of PLN3.7 billion and also strong leasing sales of PLN690 million in the first quarter.

Innovation and quality is a recurrent feature of our presentations. We continue to be an innovator in the Polish market and always on the forefront of new developments. We have 1 million active customers of electronic banking, of which over 600,000 are using mobile applications. We continue to be awarded in terms of quality -- of service and quality of products, in this case regarding current accounts as well. And also, we are leading in net promoter score surveys.

As you can see on page 12, the numbers from electronic channels are strong. These thresholds of 1 million retail active clients in mobile and online and 600,000 in mobile were already crossed, and the share of these channels in sales and in services is growing, especially we would highlight the share in the sale of new cash loans and also in overdrafts.

The bank has been trying to maximize the interaction with its customer base, trying to follow the daily needs of the customer base. On page 13, you can see illustrations of innovation, convenience, and simplicity, developments which are, in our opinion, very important to build long-term relationships with our customer base through electronic channels.

We think that we are particularly well positioned to leverage on this proximity to customers, due to the innovative aspect of our solutions. And also, we see these translating into willingness of our customers to recommend us to the new customers, and as a consequence we launched this member get member program, builds on the motto Like it? Share it! in app and Millenet. And through this, we expect to further support the program of acquisition of new customers, which is already going very well, but can further enunciate and create long-term relationships with new customers that we are acquiring.

Illustration of this recognition of the quality of the services and products provided by the bank is this indicator of net promotion score, which is shown on page 14, where we ranked the highest among commercial banks in Poland in the fourth quarter of 2016, which, as I mentioned, creates solid ground for this new recommendation program, which was launched very recently, in March, which is available in all channels and which, as I mentioned, can help to accelerate the customer acquisition. And we see the increasing importance of recommendation among the criteria of customers to select their main bank.

Moving now to some more numerical results from our business, on page 15, we had an overall growth of the loan portfolio by 2% year on year, but stronger growth in the areas that we selected as more strategic, consumer loans overall growing at 9% year on year, loans to companies at 7.7%. This is net loan growth. While customer deposits continued to grow at a faster pace, 8.4% year on year, but especially driven by the growth of retail deposits of 13% year on year, which is helping to bring our market share in deposits from individuals close to our target of 6%. We are currently close to 5.9%.

The structure of the loan portfolio continues to change. It is visible. The continuation of the decrease of the share FX mortgage in the total loan portfolio, this time to 35.5%, and the increase of the share of other retail loans and overall loans to companies and leasing.

This quarter was also very important for the growth of non-deposit investment products, which had a strong growth of 7.4% quarter on quarter and 15% year on year, of course supported also by good market conditions in the first quarter, and this is supporting as a consequence the fees that we are getting from these investment products.

Moving to page 16, apart from the overall growth of 13% of retail deposits, also very important is the change of the structure of the deposit base in which current accounts and savings accounts continue to grow at a much faster pace, 39% year on year. And this is also helping the effort to decrease the overall cost of the deposit base. Current accounts and savings accounts already represent 60% of all retail deposits.

The growth of active customers in retail continues at a solid pace. This quarter, we added on a net basis 31,000, so clearly in line with the target of growing at least 120,000 net during the current year and so bringing this medium-term target of growing 300,000 in three years clearly within -- almost for sure to be achieved, we think this way. And this is being supported by also solid growth of current accounts and especially our flagship current accounts 360 in which we already crossed 700,000.

On the loan side in retail, we continue also to change the mix, so decrease of FX mortgage, growth of PLN mortgages by almost 5% year on year, and the growth of the consumer loan portfolio. This time here, we show the numbers on a gross basis.

The cash loan sales rebounded in the first quarter of the year versus the previous quarters by 15% and reached PLN558 million. And also, we had a significant increase in mortgage loan sales, which more than doubled versus the previous quarter and brought our market-share origination to 5.6%, so for the first time in several years we came back to our, let's call it, natural market share also in mortgage loan sales.

Moving now to the corporate side, corporate deposits dropped year on year by 2.6%. This is driven by the very large excessive liquidity that the bank has and so we have not been especially aggressive regarding corporate time deposits. So what is important here is to see the trend of growth of current accounts of companies because it is a good indicator of the increased level of transactionality with corporate customers, and the balances of current accounts in corporate segment increased by more than 8% year on year. And, of course, this is also beneficial for the overall cost of deposits.

Loans to companies rebounded. So on a gross basis, they grew 6% year on year, and apart from the traditional strong growth of leasing and factoring respectively 9% and 11% growth year on year, we also had a good growth of other corporate loans during this first quarter, which can be a good indicator for the rest of the year.

On page 19, we illustrated specifically the strong sales of specialized financing, leasing sales growing by 8.5% year on year, factoring turnover growing by 8.2% year on year. Also, the volume of FX transactions, another indicator of the close relationship with our corporate customers, increased by 27% year on year and so this is also supporting the improvement of the overall profitability of the corporate business.

So these are the most important highlights of our quarterly results and now we are available for questions. Thank you.

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Questions and Answers

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Dariusz Gorski, BZ WBK Brokerage - Analyst [1]

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Congratulations. Obviously, the results are so good it's difficult to find a negative spot in them or something to sink your teeth into, but still, first of all, the very strong growth in corporate lending, where did it come from, the drivers behind it? Secondly, a similar question with regards to mortgages. Your origination has picked up considerably. Was it driven by the well-known scheme [of genesis] volume or was it driven by non-subsidized business?

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Joao Jorge, Bank Millennium S.A. - Chairman Management Board [2]

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Let's start from mortgage. Although we do good numbers in subsidized schemes, the house for young people, it was not that reason. So this year we decided to do a little bit more and the reaction is very fast in the banks. So the banks have still embedded in the network a lot of knowledge about the process. We were using, I would say even, a forced break of not selling mortgage and this year we decided to do a little bit more.

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Dariusz Gorski, BZ WBK Brokerage - Analyst [3]

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(inaudible - microphone inaccessible)

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Joao Jorge, Bank Millennium S.A. - Chairman Management Board [4]

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More, yes. So we allowed people to sell. So we were [blocking] people to sell, I would say, so we were saying that, of course, we offer a mortgage loan to a customer when they want a mortgage loan, but we do not want to have a normal sales process for sales and now we have it.

And this is very easy. If you have zero incentive, for example, and you know a pay note is a mortgage process, immediately people will just sell it to the customers that they know whether they wanted to do it. As soon as we put some incentive to have a sales force working in mortgage, people are selling it.

So it was -- however, I don't know what is the percentage, but it's always very big, especially in beginning of the year. Then the subsidy runs out. But this is a trend that we've seen that we will have, so we are pointing to (inaudible) to the end of the year in mortgage production and I think we are going to do it.

In corporate loans, there is not a special reason. I think that there is some seasonality here, so we closed a lot of things this quarter that we were not expecting too much. Also when we see year on year the beginning of last year was weak, but not -- but I must say that in corporate we grew with the market, so it was not a gain of market share. At least our expectation is that the market was very strong.

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Dariusz Gorski, BZ WBK Brokerage - Analyst [5]

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Maybe a follow-up question. What was the reason for the change in the strategy for selling mortgages?

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Joao Jorge, Bank Millennium S.A. - Chairman Management Board [6]

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You are seeing our deposits, so we were having a policy and balancing the price of deposits. We had then a second strategy of almost reducing the corporate deposits, the excessive liquidity, having places in bonds, and now we feel more comfortable to have mortgage.

It's still not a huge percentage, but we were diluting a little bit the excessive portfolio that we had from the past, and as time goes by and the portfolio is amortizing, we are seeing our market share in terms of mortgage coming down in stock, so we can start to be close to -- also, our [initiative] in terms of natural market share is changing. We used to call ourselves a 5% bank and now we are calling a 6% bank, so allow us to produce a little bit more in mortgage.

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Dariusz Gorski, BZ WBK Brokerage - Analyst [7]

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The sustainability of your results is going to be now the key question, so have your thoughts on NIM changed? You had guided us that the improvement, if any, would be very slow, and this is what is happening. Your budget cuts, your deposit costs, how much more can you cut it? And also your lending margin is somewhat narrowing, so maybe comments on those two opposite trends and how they pan out for the rest of the year. And also, obviously, on the fees, which were very strong and surprised us all. So how much sustainable are they?

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Joao Jorge, Bank Millennium S.A. - Chairman Management Board [8]

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I'm thinking in terms of net interest margin we are having to be in this range between 2.5% and 2.6%, but I'm not sure if we are going to reach it in this second quarter or in the third quarter, but the trend is that we should go back.

Just as a reminder, before the rate cuts that happened, the first one on October 2014, we had a NIM in the quarter immediately before of 2.65%, if I am not mistaken. So still after all this effort, we still did not get back to the NIM that we had before the rate cuts, but we are getting closer to that.

So I would say that the most likely scenario is that sooner or later we'll be in this range between 2.5% and 2.6%. How much -- the speed of the improvement is also strongly related with how much we can also do this change of the asset mix, because there were a few quarters last year in which the growth of consumer loans was slower than what we were forecasting and even expecting. This quarter was again a little bit better. If we will be able to keep the pace and continue to increase the share, of course this will be supportive for the improvement of the overall combination on the loan side.

But it's not possible to be absolutely sure about the speed, but this is the trend. We will continue to operate just changing the asset mix towards higher-yielding assets and this should be supportive for the NIM.

On the deposits, I think what is important is that we are making these gains sustainably, that it's not a one-quarter improvement. It's that step by step we are being able to lower the deposit costs, but of course we are not resigning from the deposits because a lot of the customer acquisition is bringing additional deposits, especially in retail. And, of course, this also has some costs that we are ready to pay, so -- but still we see some potential for still small improvements also on the cost of the deposits. So this is what I can say about the net interest margin.

Regarding commissions, when we compare on a yearly basis, of course the first quarter of last year was poor, especially on the insurance side, and also we were facing a downturn in the capital markets and stock exchange, which was affecting the commissions from the investment products. So the recent trends, which already started in the fourth quarter, were positive and supportive and this helped especially the commissions from investment products to grow significantly, but it's not only the price effect on the stock; it's also the fact that the net inflows were positive for the investment funds. Even not necessarily to the more aggressive funds, but they were overall positive and supportive.

Regarding loan fees, also we see that compared with one year ago there is clearly an improvement also in terms of the loan-related fees. Going forward, commissions are not an accrual thing like in several parts, like the net interest income, so we cannot say that each quarter is going to be the same strong.

But I think what is important is that we have a trend that is positive in several items, which we believe will bring this year finally a growth of net commission income, unlike what happened in the last two years where we were affected by specific, extraordinary events that decreased the overall size of commissions.

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Unidentified Participant [9]

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Because of the range of your guidance or hint of 50, 60, the question is, do you consider a plan a bit of upfront topping up your provision coverage before IFRS 9 so that we see a little bit of an uptick in subsequent quarters? So on top of your underlying customers, one of the smaller banks guided that they simply want to create provisions ahead of introduction of IFRS 9 so they don't have to make one-off adjustments in 4Q or 1Q 2018, nothing of this kind.

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Fernando Bicho, Bank Millennium S.A. - Deputy Chairman Management Board [10]

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We don't see too much sense in anticipating the impact of a regulatory event, so we are not going to change the methodologies of creating provisions just for two or three quarters; we are not going to do that.

What we are doing is to have a very thorough and deep work in terms of preparation for IFRS 9, which already started several months ago. The works are still going on, so what we are working [intensively] is in order to be well prepared to face the regulatory change. Of course, it's still too early to speak about the impacts, but we are not going to anticipate impacts whatsoever. When it will become the proper moment, there will be the disclosure about the impacts, but we are not planning to anticipate the --

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Joao Jorge, Bank Millennium S.A. - Chairman Management Board [11]

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Because if it to -- even because if it would be relevant, it would not be accepted by the auditors as well, so it will be a difficult exercise to do.

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Fernando Bicho, Bank Millennium S.A. - Deputy Chairman Management Board [12]

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So I think we will take the time to be well prepared for the standard, which is quite demanding and complex, and also I think it will require some digestion from the market about understanding how not only the initial impact, because I think the initial impact is one thing, but what I think is also very important is to anticipate what is the ongoing impact of the changed methodology for the future, because, of course, the standard for the future will be different, and so we may face some adjustments in the ongoing needs of provisions based on the new standard.

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Unidentified Participant [13]

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I've got two questions. The first one, could you comment on the additional income from the collection process that you booked in the first quarter in the other operating income? And the second question about any development of the Swiss franc mortgages horizon regarding spreads and/or code proceedings. What do you see? What do you expect in this respect? Thank you.

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Fernando Bicho, Bank Millennium S.A. - Deputy Chairman Management Board [14]

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So in mortgage, our information is your information, so we have been waiting the first quarter; now we are waiting to see any conclusions. The problem is it looks like also KSF is also waiting to see the legislative process, so there is no other information. Also in terms of courts and whatever, we don't have any additional information, so it's --

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Unidentified Participant [15]

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Maybe do you see the increased number of proceedings in courts or something like that?

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Joao Jorge, Bank Millennium S.A. - Chairman Management Board [16]

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Listen, I think it's always important also to understand the numbers, right? We underwrite or we disburse 100,000 mortgage loans. So, do we like to have 300 or whatever is the cases in court? Of course we don't. Every time that there is a claim of a customer, we don't like it, but I think we need to understand very well the numbers and to understand what we have.

We have mainly two cases. One case is in indexation, which is a smaller number of cases, and then we have cases of (inaudible) insurance, which is another thing. Also, here there are regulatory requirements about that because to have this insurance, we are authorized -- if we have these loans, we are authorized under this insurance. We have been working internally to find some solutions. Philosophically, we believe that the solution should be going through support to the borrowers if they have problems, so we are defending the solution of the Polish Bank Association, but we would like even to start a process that is called trying to help the ones that have more than 65% debt to income -- or installment to income is even more the right expression. But to start to work on these, we need to wait all of the other process to finish, and unfortunately they have been delayed.

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Fernando Bicho, Bank Millennium S.A. - Deputy Chairman Management Board [17]

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Regarding the question about -- I think you were asking about other operating income, so we have some additional other operating income for a few reasons. One of them was connected with a gain on the sale of real estate, close to PLN6 million. But last year we also had positive amounts, but there were a few factors. This was just one example of those, which, of course, is nonrecurrent, but it was PLN6 million.

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Unidentified Participant [18]

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I'll ask one question for me, about the changes in the shareholder structure of [VCP]. Is this somehow affecting (inaudible) in Poland because there was like [foursome] joining them and do you see some -- do you think that your [stage] might change a little bit or it's like at the moment (inaudible)?

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Joao Jorge, Bank Millennium S.A. - Chairman Management Board [19]

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There are, we think, two areas. So one area is this was very good news for VCP, so this allowed VCP to repay [state] (inaudible), so this is positive for us because we are now having a main shareholder to repay the state [tithe] and is free to give support to the strategy, whatever the strategy can be, so this is very good news, especially because you need to remember it was very painful and hard work that they have done there and it's not small when they repay the EUR3 billion that is their support, one point.

A second point is, how can we influence for us? Of course, this is indirect, so this is a major shareholder of the major shareholders, so it's, of course, a position indirect. For us, it could be interesting if we could leverage later on in trying to bank the flows between Poland and China. It could be interesting, of course; of course, there could be new opportunities there if the commercial relations also increase. It would be a natural position for us to have these and to open a Chinese desk and everything like that. Besides that, it's more difficult to forecast anything more.

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Artur Kulesza, Bank Millennium S.A. - Head of IR [20]

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We have here a few questions from the Internet, maybe before you decide to ask more from here. One is on dividends. It says, can you provide an update on your dividend policy from 2017 earnings onwards? Do you expect the kind of recommendation to remain unchanged versus last year?

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Joao Jorge, Bank Millennium S.A. - Chairman Management Board [21]

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Our policy is the same because our policy -- and we believe it should be this policy of 30% to 50% because it allows us to remunerate on the dividend the shareholders and to keep investing in development of the Company.

We always have the recommendations for specific time and the levers [in seen] just at the end of the year or even sometimes at the beginning of the next year. So we think that it will come new recommendations, and it's impossible to forecast and it's not even prudent because usually the recommendation has the reading of full year, not just the beginning of the year, so we don't know what happens after the end of the year; we need to wait for that. But every year we have new recommendations, new rules, even new philosophy behind the recommendations, so I think it's not prudent to forecast anything now.

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Artur Kulesza, Bank Millennium S.A. - Head of IR [22]

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It's unpredictable, basically.

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Joao Jorge, Bank Millennium S.A. - Chairman Management Board [23]

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It's unpredictable and not prudent.

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Artur Kulesza, Bank Millennium S.A. - Head of IR [24]

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Other question on investments, what is the magnitude of investment in IT digitalization you plan to make over the next few years?

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Joao Jorge, Bank Millennium S.A. - Chairman Management Board [25]

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Philosophically, we decided to make more internally, so it was a question of a strategic decision that we took a long time in the past because we believe that this is a core area for the bank. So it's not -- sometimes we would like also to provide -- like, okay, we are going to make the new application and it's PLN100 million, but it's complex because under the new application is done by developers here, and I even invite you, one of you, to visit one of these areas one of these days because you will find functions that you don't know that they exist from Web designers which are really designers to customer experience experts which are the people that study psychology and sociology and to a lot of other things, so it's -- we don't know a name.

We know that we separate the run the bank to develop the bank completely, and we don't have the same KPIs and in running the bank, we look for efficiency, and developing the bank, we don't, so sometimes we -- to be innovative, you need to have waste sometimes and to overinvest and these we are doing.

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Fernando Bicho, Bank Millennium S.A. - Deputy Chairman Management Board [26]

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I think we also can say without making jokes that we do not have projects of PLN100 million in [2019]; we don't have. When you look at our cost structure, and it is visible how much it costs in IT, especially if you look at the annual report. If you look at our fixed assets, you see how much -- how low are the fixed assets that we have. So we are in this respect, I think, very lean bank, very focused, and very selective in the projects that are developed, which is, of course, an obligation in order to keep the cost-to-income ratio at the proper level.

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Joao Jorge, Bank Millennium S.A. - Chairman Management Board [27]

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And (inaudible) the advantage of scale.

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Fernando Bicho, Bank Millennium S.A. - Deputy Chairman Management Board [28]

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Exactly, these advantages of scale.

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Artur Kulesza, Bank Millennium S.A. - Head of IR [29]

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Another question, on FX mortgage loans. Are you considering as well similar to PKO conversion of these loans into PLN? If yes, could you share with us the details of the plan? Who would be eligible, et cetera?

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Joao Jorge, Bank Millennium S.A. - Chairman Management Board [30]

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The plan is known. The plan has been the proposal that is support for the bank association, which we support as well. And the plan is to offer compensation or a reduction, let's call it like that, in the conversion to customers that have higher than 65% debt to installment -- installment to income, yes.

This is what we think that should be, then. Of course, the amount of money that we want to invest there in this conversion if it's going to be allocated to a return spread loan or to other (inaudible). So, first, we are waiting to see what are the legislative actions, plus the recommendations of KSF, and then we see if there is room to make this offer or not because this is what we defend.

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Artur Kulesza, Bank Millennium S.A. - Head of IR [31]

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More questions, we have here I heard the last from the Internet on asset quality, the NPL ratio for other retail segment has been increasing for the past four quarters. When and at what level could it reach the peak, assuming market conditions remain the same?

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Fernando Bicho, Bank Millennium S.A. - Deputy Chairman Management Board [32]

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I have to say that we are not targeting specifically a certain NPL ratio for consumer loans. What we are targeting is that the origination fulfills certain criteria in terms of categories that, in our view, will generate marginal positive contribution to the P&L of the bank.

And so, the ratio itself of NPLs for us does not mean too much, and also because it's highly dependent on the speed at which we make the write-offs of the NPLs or that we sell them when they are NPLs. But what we in fact are targeting, and this is done on a regular basis, is the quality of the origination that we are doing. And then, this translates into a certain average cost of risk, which, if you look back in recent quarters, has been hovering sometimes between a low 150 basis points, sometimes to a high of 300 basis points, but now in this first quarter was even below 200 basis points, the average cost of risk for the consumer loan portfolio, which is exactly in line with the expectations that we had when we are making this effort for the growth of the portfolio.

So I would say that we look much more on the quality of the vintages to be sure that what we are originating has an expected positive value throughout the life of the loan, rather than the specific target for the NPL ratio. And by the way, this ratio grew a little bit more than probably what was expected also because the portfolio grew a little bit less than what we were expecting.

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Unidentified Participant [33]

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On the Swiss Bank mortgage [specific] solution, would you be willing to comment what could be the cost of it for you, assuming that the public site meets your expectations when it comes to this (inaudible)? What could be the budget for the solution? I just wondered if you would be willing to comment.

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Joao Jorge, Bank Millennium S.A. - Chairman Management Board [34]

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What could be the cost of the solution that we propose?

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Unidentified Participant [35]

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Yes (inaudible)

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Joao Jorge, Bank Millennium S.A. - Chairman Management Board [36]

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There is nothing more to allocate. We don't have a precise calculation, or I say we don't share our estimation, because it's a little bit higher than people sometimes think, but it's a little bit lower than the press think (multiple speakers).

Let's imagine that a total system should be between PLN6 billion and PLN8 billion. It's very difficult to forecast because you cannot talk what were the salaries in the beginning of the loan and then put 3% or 4% per year and calculate what is the installment to income now. Because you know the average off a raise is nothing because a lot of people will raise 15%, a lot of people will raise zero, in average five, but it's not like that, right?

Also, we think it needs to be done, and also this is a conversion. Then you need to have the people that really want to convert anyhow or not. Of course, if the gain is very big, it's a no-brainer, but if the gain of debt reduction is very small and it's convert, maybe he decided not to convert.

We have a forecast for us that we share with our authorities, but we know that we are forecasting a little bit more than our colleagues. Maybe we are a little bit more conservative. Usually we are, but anyhow I think we are talking about this. There are some people more optimistic that talk about below these, which we are talking about PLN6 million to PLN8 million in average, I think.

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Unidentified Participant [37]

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On your restructuring and digitalization, your number of branches has been broadly stable. I understand that (multiple speakers)

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Fernando Bicho, Bank Millennium S.A. - Deputy Chairman Management Board [38]

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The number of branches was reduced by more than 10% year on year.

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Unidentified Participant [39]

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Okay, but I mean quarter on quarter. I understand this is a nonlinear process, so we should expect the drop --

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Fernando Bicho, Bank Millennium S.A. - Deputy Chairman Management Board [40]

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We think that for now we will stop. So as we told since the beginning, we were doing this not by cost allocation, so we did this -- or by cost purpose. We thought since the beginning, okay, we need to reshape the network to serve the customers. We saw that the network branches were empty. People were leaning more digital, so we said okay.

We decided which ones are going to stay, which ones are not going to stay. And they are being closed not a lot by the agreements. Sometimes we are able to -- we've learned to negotiate and to close a little bit earlier. Sometimes, there are branches that are open and we want to close it and we are waiting for a year to close it. This year on year, it was a little bit -- well, it was allotted. Also some of the openings, because we are opening in other places, are shopping centers that delay also the opening of the shopping center. But I would say that it will be -- the big movement was (inaudible), for the time being.

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Joao Jorge, Bank Millennium S.A. - Chairman Management Board [41]

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And, of course, this is also supported on the cost side, so part of the reduction in admin cost is exactly related with lower handle costs.

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Fernando Bicho, Bank Millennium S.A. - Deputy Chairman Management Board [42]

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What we would like now to do is to put more customers in same structures, so it's -- especially because for us we have a very -- a vision of a full bank with the customer. The impact of putting 100,000 customers each year, it's a little bit bigger than in the bank that works a little bit less cross-selling. So, of course, it is also more difficult, but this is what we think we will be able to do.

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Artur Kulesza, Bank Millennium S.A. - Head of IR [43]

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Any other questions here from the room? I don't see. Also, we have no more from Internet, so thank you very much for participating in this conference and to wish you a soon holiday (inaudible), and see you on the next conference in July. Thank you.