Santander Bank Polska Sa

I would like to welcome you at the presentation of financial results, preliminary non-audited financial results for 2021. Today's presentation will be given by our CEO Michał Gajewski Maciej Luga, the CFO, is present with us, as well as Wojciech Skalski, who is in charge of the financial accounting area. President, over to you in a minute. But let me just tell you that you can send your question to my email address, or if you use the audio webcast to the link, that leads to the question side.

CEO, over to you. Thank you, Agnieszka. Good morning once again. Let me welcome you at the summary of our non-audited financial results for 2021.

From the point of view of the Management Board, we can say that Our last year was really good in terms of core banking business. Of course, the pandemic impacted our performance as the group, though, to a lesser extent than last year.

We responded to that development on the market. Of course, there were also some sector-wide challenges. And we, of course, took relevant actions in that case. We hope that upcoming months will fuel business growth and that the credit volumes will gain the momentum, that the demand for loans will be higher than last year.

Now let me move to our performance.

Let's start with slide number eight.

Numbers of clients. We service more than 7 million clients, 5.4 million of which in Santander Bank Polska. Together with consumer, we have more than 3.2 million digital clients, which is a growth by 10% year on year. When it comes to active mobile users, we have 20% more of these clients. because we have nearly 2.4 million of such clients now. Deposits. The deposit portfolio was higher than 185 billion slots, increasing 8% year-on-year. Growth loans increased by 4% up to 154 billion slots. Assets grew by 7% up to 245 billion slots, and customer funds increased by 8% to 2%. 103 billion slots. Slide number nine. Let me briefly comment on our performance in CROSS 2021 first. The group earned the net profit of 1.1 billion slots, and the net profit increased 7%. Having stripped off non-recurring items, this has grown by 36%. Any details when it comes to the comparability of data is available in the report and in the presentation. Total income at the end of December was $9 billion, increasing by 7%. Net interest income, $5.9 billion, increasing by 1%. Net fee income, nearly $2.5 billion, growing by 16% year-on-year. Cost of credit risk, $1.1 billion loss. decreasing by 36% compared to the last year. Costs overall were driven by provisions for legal risk attached to FX mortgage loans and increased by 22% year-on-year. I will tell you more about it later on. Of course, I will also discuss in more detail the performance in quarter four later, but now let me highlight the key items. In quarter four alone, the group earned the net profit of 193 million zlots. In that quarter, we also raised provision for legal risk attached to FX mortgage loans of 561 million zlots. And we informed the market about that in our current report. Net interest income 1.7 billion dollars, increasing by 20% compared to quarter three. And of course that was driven by interest rate hikes. Net fee income increased by 1% compared to the previous excellent quarter. and it stood at 641 million slots. Total income, 2.5 billion, increasing by 13% compared to quarter three. Coming back to our annual performance ROE, 4.7%. On a comparative basis, 9.3%. Let me remind you that we have this significant capital surplus of 10 billion plus roughly, that impacts that ratio. Our tier one at the end of December was 16.63% PCR, 18.38%. These ratios reduced as compared to what we saw at the end of quarter three, but that was driven by changes in the valuation of our own funds driven by changed market of instruments, paralleled by growth in risk-weighted assets as a result of lending growth. So, these two elements impacted the reduction of our capital ratios, both on the consolidated and send-alone basis by 1.8 and 2.4 percentage points, respectively.

Okay, let us move on. Despite that fact, we still have very strong capital position and capital surplus. So we can be certain as to our future safe operations. Let us move now to slide number 11. A little bit more about clients.

3 million active clients in digital channels. 2.7 million of these clients are retail ones. SME digital clients increased by 7%, and for corporate companies, that was the growth by 4%. Also, the number of mobile application users is growing. In retail segment, this is the growth by 18%. And also we have growth in other segments. When it comes to the number of transactions in the mobile banking, we had more than 160 million transactions in retail and 13.6 million transactions in the SME segment. And this is nearly 50% more than last year in both segments.

On slide 12 and 13, We present information about our new products and services introduced in Q4 and about our educational activity supported by our bank. So, as you know, we enabled BLEAK contactless payment solution and eco-cash loan where we reimburse clients for the fees if they allocate funds from the loan for the assembly or purchase of a green product. We also supported our SME clients in digital transformation. We conducted webinars together with Google. We had cybersecurity campaign, and we had some special offers supporting online shops. We actively supported large corporations. We, for example, streamlined the lending process. We introduced Prelimits. and made some solutions for iBusiness24 like a biometrics in mobile signature and some solutions for managing standing orders. Now let's move on to what happened in the business lag in the sales. Let's start with the retail, that's slide number 14. About mortgages, we had very dynamic quarter. Throughout the entire year, we sold mortgage loans worth of $9.6 billion. In quarter four alone, that was $3.2 billion. As compared to quarter four 2020, that was 1.5 times more mortgages sold. And quarter on quarter, that's 13% growth. December 2021 was record high because we sold almost 1.2 billion slots worth of mortgage loans, and that was the best monthly result in history of our bank and the best result on the market in December. Now, cash loans. Throughout the year, we sold 7.4 billion worth of cash loans. In quarter four alone, that was over 2 billion. And so far, that was sales peak since quarter two 2020. With that level of sales in quarter four, we are very close to our pre-pandemic volumes, and we hope that soon we will reach those levels again. On a year-on-year basis, that's a growth by 49% and 3% growth quarter on quarter. And please note that we increase sales via remote channels. In 2021, that sales through remote exceeded 44%. We sold 1.1 billion worth of net investment funds and TFI assets at the end of quarter four represented almost 18 billion slots.

In SME segment, we achieved excellent performance in the leasing leg.

In quarter four, the sales grew by 36% as compared to quarter four 2020. and that leasing sales was 978 million. Quarter-on-quarter, that's 10% growth, and year-on-year growth of leasing sales is 36%, and in figures, that's 3.6 billion. In quarter four, also the sale of credit facilities to SME segment remained similarly high as in previous quarter, In the entire 2021, the growth of FME loans was 7% and the sales was worth 5 billion lots. In the business banking, the loans grew 2% year-on-year and the sales of credit limits grew by 32% year-on-year. We had excellent results in our services to exporters, The turnover on the FX platform grew by 38% year on year, and the use of trade finance limits grew by 25%. And also our transactional banking fees grew by 38% year on year. In the corporate and investment banking, we noted, witnessed growth of income on the capital market, And we also increased income from mergers and acquisition advisory. We also... Transformation by financing photovoltaic and... On now to slide number 16, where we present gross loans in Santander Bank Polska. 100%. And in sometimes the consumer banks, the portfolio shrank by 3% year-on-year. So in effect, in total, on the consolidated basis, we have 4% growth year-on-year up to over 154 billion lots. In the retail and SME segment, the sales were presented before.

When it comes to large corporations, grew 10% year-on-year. And that's one of the

high results in the years, and the demand for those short and long-term loans, especially for large corporations, will continue to grow. The leasing portfolio, excellent performance.

The portfolio grew year on year to almost 12 billion. The next table is the leasing companies.

recorded growth of turnover. They grew by 18% year-on-year, and its portfolio increased by 23% to 7.6 billion lots.

Our macro outlook assumes that in terms of total loans, 2022 will bring the growth of almost 7.5%, including two-digit growth for enterprises and by 5% for individual clients. Our plans are very ambitious.

We plan to outpace the market, and we hope that demand for loans will grow. Let us move to slide number 17. Deposits. We can see the growth by 8% year on year.

At the end of December, that was more than 185 billion slots. Retail and business deposits grew by 8% year on year. On a quarterly basis, they grew by 4% and 5% respectively. When we compare year to year, the deposits increased by nearly 14 billion slots. We can see, first of all, the growth in saving accounts and in current accounts.

Yet, this was powered by the decline in term deposits.

The office investment funds in our TFI increased by 9% year-on-year. Now, the profit and loss. Net interest margin and net interest income. In Q4, the net interest income was 1.7 billion and increased 23% year-on-year and 20% as compared to Q3. The annualized net interest margin increased by 33 basis points at the end of December, up to 3.07%. And there were a few reasons for that. First of all, the growth in interest rates the low interest expense on deposits, the fact that we accelerated the sales of cash, mortgage, and corporate loans. Another reason was the growth on yields on the securities. In upcoming quarters, we expect further improvement in NIM. Looking at 2022, the market expects further interest rate hikes. After the recent change, we published a current report in which we quoted the impact on net interest income of those recent changes. And these are major changes because it's from 1.2 billion to 1.33 billion slots for the bank. For Santander's consumer, it's from 110 to 120 million slots. So this is a really huge impact. Slide number 19, net fee and commission and income. Well, we can actually brag about that a little bit because it is nearly 2.5 billion slots growing by 60% year on year. This was a result of both growth in the business as well as changes that we made to our schedule of fees and charges already in December 2020. In Q3, the fees stood at 641 million slots, growing by 1% on Q3, which was a really good one. And as you can see, you can see that the growth was recorded under all lines, both in detail and in business banking. If we look at quarter four alone, first of all, we can see the growth in count fees, distribution fees, and asset management fees. Slide number 20, income. Total income, $9.2 billion loss, growing by 7% year-on-year and 14% quarter-on-quarter. Of course, the net fee income increased by 16% year-on-year. We also posted income from dividends, and that was $113 million in 2021, much better than in 2020 when it was $23 million. Total income in Q4 was $2.6 billion, growing by 14% compared to Q3. Operating expenses. Slide number 21. Let me start with staff costs. They increased by 17%. This was driven on the one hand by the fact that a restructuring provision was created in Santander Consumer Bank, but another reason was the growth in pay in the bank that impacted the entire quarter four. We also topped up the bonus accruals for 2021.

Administrative expenses increased as well.

because we had bigger business activity, but also that was a result of inflation and the pressure on costs in certain areas of operation, such as buildings maintenance or third-party services. So as a result, the administrative expenses increased by 9% quarter-on-quarter. Of course, the biggest impact was made by provisions for legal risk, And in quarter four, we created these provisions in the amount of 559 million slots on the consolidated basis. The provisions line was also impacted by ethics differences, which impacted data by 57 million slots. All in all, the total impact on these factors and other operating expenses was $611 million. Of course, we do not change our approach to cost.

We still strive to be cost-efficient. Let's move on to the next slide, 22, which presents provisions. On a consolidated basis,

Last year, loan loss provisions were 1.1 billion, 124 million, and that shrank by 36% year on year. That change resulted from the fact that situations of our clients stabilized, the credit portfolio grew. And as you know, we also resigned from keeping the management provisions for COVID-related risk above the figures deriving from our risk models. But we told about that in previous quarters. At that time, we also spoke about partial inclusion of the impact of COVID-related adjustments on the model's parameters. Last year, we topped up some single provisions for non-performing credit exposures. That happened in quarter one and repeated in quarter four. Last year, the net balance of provisions was impacted by the sale of non-performing loans in our bank and in Santander Consumer Bank, in total worth $1,407,000,000. So the total gross profit on the sales of this portfolio was $118,000,000. To compare, in 2020, we sold receivables worth of $1,000,000,000 and that brought us $30,000,000 of gross profit. In quarter four alone, the total net balance of provisions on the consolidated basis was high by 22% as compared to quarter three and was $274 million. Why that figure? Well, in the retail portfolio, we had a stable share of credit exposures with some payment arrears. and there was a low number of entries to the NPL portfolio. In the SME portfolio, we had a stable level of fast new payments, and in the corporate portfolio, the net balance of provisions for expected credit losses resulted mostly from the higher top-ups in the property segment and in the CIB segment by 20 and 30 million growth respectively. At the same time, we know that there are few entries to the non-performing portfolio. And in quarter four, we recorded significant repayments in the CIB segment. In quarter four last year, as I said, our group sold the portfolio of non-performing credits receivables in the retail and the business segments. In total, the impact on the net balance of provisions was around 441 million lots in principle. The NPL coverage ratio remained at the safe level of 60.4%, and NPL after quarter four was almost 5%. And obviously, we keep monitoring the impact of the growing interest rate environment. And we also monitor all the cases covered by the expiring financial shield programs related to COVID. Now let's move on to taxes and regulatory costs. They are very high. After four quarters, regulatory costs, so those including DFG, KNF, and National Depository of Securities, they total 294 million lots. And in quarter four alone, the costs grew by 34 million.

Banking tax charge was 614 million lots. In quarter four alone, the growth of the banking tax charge was 164 million in quarter three.

So the total income stack charge was over 1 billion in quarter four alone. That was a growth by 435 million. So wrapping up the entire year, I can say that overall, we feel it was a good year despite numerous challenges. We gained net profit of 1,112,000,000.

That was growth 7% year on year. Net interest income, we're very proud of that.

We received 5.9 billion plots and net fee income, 2.5 billion. That's growth 16% year on year.

So I can say that we continue to build our business with great determination and we look forward to increasing our momentum, especially in the credit area.

I hope that our activity will benefit from that. So thank you very much for listening to my presentation. Now you're welcome to ask your questions.

Now we already received a number of questions.

Let me start. I will try to put those questions in groups.

There is a number of questions referring to net interest income with the relevant breakdowns between S&P and consumer. Does the high growth in the net interest income actually imply that implies that the current estimate of the interest rate impact has been too conservative and could be revised upwards. Well, what we are showing our estimates is not, that's not what we are actually, what we are going to do, but this is based on specific assumptions. And of course, we assume the stable balance sheet, but because the balance sheet is not stable and we could see that the assets were growing quite well, we can say that this assumption was conservative because the whole new production that is at new rates brings us a better result and better impact on net interest income. The other assumption behind the stable balance sheet is that we are adopting some repricing of deposits to prevent the outflow of these deposits because we want to keep a stable balance sheet. Of course, it's theoretical because deposits keep actually outflowing. And in quarter four, we can see that the pricing of deposits across the market was really moderate. So the assumptions behind the stable balance sheet were conservative. But the question is whether they could continue to be conservative going further. And as Miho said, we want to grow quicker than the market, so the balance sheet will not be stable. And when it comes to the changes in deposit prices, we want to see what the market will tell us, how the interest rates will be growing. Our assumption is that, of course, we watch the market and competitors And our objective is to continue to have a good investment saving proposition for all our customers across all segments. So I think that this will be, it's difficult to say what the market is going to be in this nine or 12 month period. When it comes to the differences between Santander Bank Polska and Santander Consumer Bank, we should start with volumes. We can see the growth in volumes in the bank, not necessarily in the consumer. Quarter fall was quite difficult, so they did not have the effect of the big volumes of new assets on the liabilities side. We also know that the market Well, the deposit side in Santander Consumer Bank is totally different than in Santander Bank Polska. So the changes and dependence on the market in consumer is much bigger. And I'm talking about the wholesale market. In this context, there were also quite a few questions about the mix of the portfolio. and the time needed for the pricing of the portfolio. Let me share with you some statistics. Which part of the portfolio is based on the fixed and floating rate? There was also a detailed question about mortgages. I don't have the data at hand here, but maybe what I will tell you will give you an insight into the key things. Now, first, splitting the balance sheet

but excluding bonds. About 50% of bonds are floating bonds. And the rest are fixed rate bonds.

And referring to one more question that emerged, the effect of the bonds repricing and its implications for capital. But the growth in the bonds portfolio And this share of fixed rate bonds portfolio, plus the fact that the major part of that portfolio is in the whole to collect and sell model, then this impacts all that. But coming back, so for bonds it's 30, 70.

For the rest of the portfolio, we can say,

that the fixed rate portfolio is really small, just a few percent, while the vast majority of the portfolio, more than 90%, 95% roughly, is at a floating rate. And looking at a floating rate, within this floating rate, we should really check the Viber panels and the pricing then, more than,

50% of the floating rate is three months by book.

More than 30% is based on shorter tenures than three months. And the longer tenures account only for a few percent of the whole portfolio. So we can see that the repricing will be quite quick. I think that saying that I addressed already a couple of questions. My question about the settlements and the Swiss bank borrowers. Here we are all the time at the stage of testing solutions. Both those proposed by KNF and our own in-house ones. We have not taken a final decision. We are tracking the market. We keep talking to our customers about it. We are testing the reactions to different proposals to conversions to Zloty and so on.

Of course, an important element here is

what the EU Court of Justice will tell in its judgments on the reimbursement of the cost of capital.

So, given all that, and the fact that there is no decision on the common settlement program,

Well, I think that I mentioned the staff costs in the presentation. Well, that refers to other questions. I think that the other questions refer to a couple of things, ethics differences that was already explained. Well, of course, legal provisions are higher, and this is the effect of ethics differences, roughly 60 million. And this is actually written in other lines because that's hedged. And there are some more one-off factors that emerged there.

Nearly $55 million is from the adjustment of rental costs.

There is also a few million driven by changes in other assets. So, ethics differences plus these two adjustments actually explain the difference of 100 million. The question is what the bank expects when it comes to the amount for different types of loans. We think that loans overall will grow by 7.5% for individual clients, for 5% for businesses, this was going to be a two-digit growth and we want to grow quicker than the market here. Can you share your thoughts on the sensitivity of the cost of risk in the higher interest rates environment?

As Maciej said, maybe let me answer that. The same questions were asked a quarter before, and we told you that we will come back to that.

We actually estimated the impact on higher interest rates what the market is now pricing in, that is the 4%. And we combine that with the effect of higher cost of maintenance, which are especially important for businesses. And what I mean are higher energy and gas prices. So taking into account all those factors, we are concluding that the cost of credit risk in 2022 might be similar to what we saw in 2021. As a result of that exercise, we identified the most vulnerable clients and we started talking to them. And we tried to minimize the risk of their situation deteriorating. So when we are talking about the cost of credit risk at similar levels in 2022, we already take into account all those effects. And this might be estimated at 100 million. Probably we will not be wrong if we split that 50-50 between the result of higher costs and higher interest rates. But for high inflation and higher rates, most likely the cost of credit risk in 2022 would be lower than in 21. And just as CFO said a minute ago, in 21, we had a few big top-ups for the existing NPLs. And that took place in quarter one and in quarter four.

And so we were topping up those provisions.

And of course, there might be a question, what next? Is the interest rate increase not to 4% by two, five or 6%? This is difficult to answer because the biggest sensitivities would refer to mortgage loans but we know that the mortgage loans are those which are paid back quite well because clients reduce other expenses and pay back these loans and the question is what should be the assumption on the growth and remuneration that will neutralize the higher interest rates impact And it is difficult really to make such estimates because we haven't seen such a development for a long time. Okay, that's all about the cost of risk. There were a few questions about that, but I think that this addresses them.

Now, the share of mortgage loans on fixed rate, the share in the balance sheet maybe, I'll talk about their share in the new sales, because that's what we focus on. The new sale of mortgage loans, 20% of that was represented by fixed rate, previously 15%.

What else? Cost of risk, I've spoken about that.

Given the current interest rates, do you see or notice higher propensity of clients to repay loans? Well, maybe not increased propensity, because previously those who were repaying were repaying. So the environment has impacted that to a very limited extent, I would say.

We'll see what the future brings. Obviously, the first signals come from those segments where customers keep higher savings. What's the impact of higher fees for surplus deposits on monthly income?

I suppose that was several over 10 million of slots, so not that much. In a different interest rate environment, the surplus of liquidity is less severe, I would say.

So I suppose that they will diminish going forward.

There was a question about valuation of instruments, valuation of bonds.

This 1.8 reduction

and its impact on the capital ratio. 1.4 comes from valuation of bonds and the rest is RWA.

What else? We have spoken about Santander Consumer Bank. There's a question about retained profit and about dividends. Well, we have non-audited results.

If the ratio is maintained, then we should fully comply with the conditions. After Swiss franc loan adjustment, it will be 30%.

50% of profit 2019. And we should consider these dividends already paid.

But answering the question on the potential payout of dividend, we keep talking to the regulator. So we know that KNF has not excluded the possibility that the banks could pay out the retained profits in the form of dividends. So we'll see what will be the final decision, but our policy remains the same as you suppose. We will attempt to maximize dividends paid to shareholders while keeping the banks safe and secure in the challenging environment and while increasing our assets, obviously.

in the light of potential risks that may emerge at a certain point. In the meantime, I have sent you this question.

What does the bank expect from when it comes to operating costs, any actions to counteract the growing inflation.

As I said, we want to keep the cost discipline very tight, as I said before. So obviously we know what's going on with the inflation rate and we know how the cost of service grows. And we know the conditions of the labor market.

But we monitor the situation on an ongoing basis. We gather information in this respect.

And we compare our costs to the market mediana. So when it comes to costs, it's not going to be an easy year for us, definitely. But we'll keep doing our best.

we when it comes to costs it's worth monitoring or analyzing 2021 and when comparing 2021 to 2020 we should select those items which we manage closely so these include bfg costs and costs of

legal provisions. And that will answer the questions concerning our cost discipline.

Assuming that the average annual inflation will be maybe 3% higher than the present one. In the meantime, we received a question about reduction of the capital ratio

Is it negative other comprehensive income? And we said that yes, these are connected.

This seems to be all. Agnieszka, anything else? Let me confirm, I don't have any more questions. So this is all. If anything comes to your mind later, of course, please contact us, especially that in a few weeks time the full annual report is going to be published and maybe then some things will clarify or you might have more questions. Thank you very much for your attendance. Goodbye.