Santander Bank Polska Sa

Good morning, Agnieszka Dorzycka speaking. It's 11 o'clock, so I think that we can start. I'd like to welcome you all at the conference to present the financial results after Q3 2022. Today, we will present Santander Bank Polska financial results after Q3 this year. Together with us today, we have Michał Gajewski, our CEO, Maciere Luga, CFO, Wojciech Skalski, responsible for the financial accounting area, and myself, Agnieszka Dobrzycka, head of investor relations at Santander Bank Polska. Throughout the conference, you can ask questions by writing an email or sending those questions to at the link that you've been provided with. So you can ask questions throughout the conference. And now let me give the floor to our CEO. Thank you, Agnieszka. Good morning. Once again, welcome at the presentation of the financial results after the three quarters of the year. The recent ones have been difficult and dynamic, but during that time we've always been close to our customers and in line in our mission, we help them prosper. Recently, it has been a more difficult task because the situation in the Polish economy has been very volatile, as you may know. Our product proposal and value we bring to our customers goes in the right direction. We can see that in our profit and loss account and in the balance sheet. However, our profitability has been still affected by many levies that materially impacted our results. If it were not for those additional levies, we could be more optimistic today. Ahead of us, Our economic challenges, economic growth slowed down significantly, inflation has been growing, and some fiscal measures have been taken, on the other hand, that do not help reduce the pressure on inflation. Between January and September, we generated the gross profit of 3 billion, 4 million lots. After nine months, the tax levies for the group were 1.5 billion slots, including 942 million of corporate income tax and 570 million of the banking tax. Moreover, we had regulatory costs, 269 million for BGF, 446 million for IPF, and 165 million for the borrower's support fund. Altogether, this totals 880 million slots. So the total levies after three quarters were 2,380,000,000 slots. In quarter three, our P&O was additionally burdened with the cost of the payment holidays. Initially, we estimated that cost in the group at 1,358,000,000 slots. And as we have written in the report, at the end of quarter four, we will analyze once again the customer's participation in the program and consider an adjustment of its impact on our net interest income. And now let's discuss the details starting from slide 7. We have over 7.3 million customers, out of which over 3.5 million are digital customers. The bank itself has 5.7 million customers, out of which 3.2 million are digital customers. The annual number of digital customers grew by 11% and mobile customers by 13%. Customer deposits total 189 billion zlotys and grew by 7%. The gross loans portfolio year-on-year also grew by 6% to over 160 billion zlotys. Assets grew by 13% year-on-year to 263 billion zlotys. And customer funds totaled 202 billion zlotys, growing by 3% year-on-year. Slide eight. I will discuss the results in detail in further slides, but now let me highlight the key items. The group delivered the net profit of 1,896,000,000 zlot after three quarters, and in quarter three alone, it was over 279,000,000 zlot. The net interest income was 6,819,000,000 zlot, the fee income. was 1 billion 950 million slots growing by 5% year-on-year and the total income grew by 35% year-on-year and totaled 8.9 billion slots. The ROAE was 9.1% This ratio was affected by one of the events that I've mentioned and in the denominator it was impacted by a capital surplus that for the group was over 10 billion plots already. The TCR for the group was 18.93% and Pier 1 was at 17% and let me stress that our capital position is very strong and our capital ratios are significantly higher than the regulatory minimum. Slide 10, our customers. I already mentioned while discussing slide seven that we have over 3.2 million active digital customers, and growth by 11% in the retail segment, growth by 9% in SMEs. The number of mobile application users is also growing. Currently, it is almost 2.4 million customers. And this number grows both in the retail segment by 13% and in SMEs by 12%. And the number of transactions in mobile banking also grew materially. In retail, we had 57 million transactions. And on September 7, we had a record high number of logins to the mobile application. namely 241,000 logins in a single hour. And now a few words about our new products and educational activities addressed to our customers, slides 11 and 12. We are developing our offering. We launched a motor insurance comparison engine. We implemented a BGK-guaranteed home loan without down payment. And for SMEs customers, we also have a special offering for loans, and we started an online business account campaign. Moreover, we are the only financial institution on the market that introduced automatically renewed bleak checks for business customers. service was also used to help refugees from Ukraine. We prepared a special solution together with the United Nations High Commissioner for Refugees, and the refugees could pay out special aid using bleak checks. When it comes to sales, in the retail segment we sold 1.2 billion slots worth of mortgage loans. This is a significant decrease both when compared to the previous year and when compared to Q2 this year, a drop by 50%. Cash loan sales totaled 2.3 billion slots. This means an increase by 19% year-on-year and a slight decrease versus the previous quarter. we are selling a lot through retail channels, 55% of sales, of cash loan sales. Net sales of investment funds was negative. This results, of course, from volatility and uncertainty on the market. And this also results from the war in Ukraine. In the SME segment, We can boast a good level of sales of business accounts, 17,000. 26% were sold in the digital channel. Business deposits grew by 4% in the SME segment. But lending activity decreased by 5% year-on-year and 11% quarter-on-quarter. And in the corporate banking, we have a high level of credit limit sales and income from ESX platform also grew quite significantly by 32%. In the corporate and investment banking, transactional banking income grew materially. as well as the income from transactions on financial markets, treasury services and trade finance. And now slide 15. So let's talk about the balance sheet. As I said, gross loans portfolio grew by 6% year-on-year to over 160 billion zlot. But we can see that the sales is lower, especially in the SME segment. In business banking loans grew by 12% year-on-year while in the largest corporate segment loans grew by 30%. The lease portfolio grew by 10% year-on-year. The net sales table but dropped a bit. Factoring subsidiary recorded higher turnover by 17% and its portfolio increased by 9%. Slide 16, customer Deposits grew by 7% and totaled almost 190 billion zlot. Quarter-on-quarter deposits grew by 3%. And year-on-year deposits grew by over 12 billion zlot. We can see growth mainly in term deposits and some decreases in current deposits. Term deposits are mainly negotiated deposits, and the share of term deposits and total deposits grew to 24% at the end of September. The group can still boast excellent liquidity. The LCR was over 173% for the group, and for the bank alone, it was over 159%. And as I said, investment fund assets dropped due to negative net sale.

Slide number 17, profit and loss. Let us start with the net interest income. After three quarters, it stood at 6.8 billion zlots. In quarter three alone, It was 1.6 billion slots, lower quarter on quarter, and I'll tell you about the reasons. One of them were payment holidays, as well as the adjustments of 72 million that we posted given the need to return the bridging margin as well as fees in the case of prepaid home loans. Having stripped that off, the net interest income would have grown by 5% quarter-in-quarter. Of course, all those factors also had an impact on our net interest margin on a quarterly basis. It declined Let me remind you that in quarter two it was at 5.24% and now it decreased to 3.06%. But for those non-recurring items, it would have grown. You have this very well described in our presentation and in the report. All those Factors also were fueled by the growth in interest rates. But there was also growth in interest expense quarter on quarter. Let me remind you that since the beginning of the year, we increased the deposit rate seven times. And in the second half of the year, we actually increased the interest rate on the mobile deposit and on the saving account. So we are responding to what competitors do. The net interest margin was also impacted by the acceleration of cash loans and corporate loans in previous quarters, but also by higher yields on securities. Net fee income. We can be very proud of our performance here because we earned $666 million, growing by 7.3% quarter-on-quarter. This was an organic growth because we did not do anything with our fees in the schedule or fees and charges. So this was fueled by the growth in business purely. And this is well visible when it comes to credit fees, debit card fees and credit card fees. We can see that reflected in the year-on-year growth. The net fee income in Santander Consumer Bank was higher by 21% quarter-on-quarter, yet year-on-year is 15% lower, driven primarily by the credit cards line. To recap on income slide number 19, they totaled $8.9 billion loss, $2.3 billion loss of which was earned in quarter-free alone. This was driven primarily by the cost of the payment holidays opposed to our net interest income. Other operating income was lower because we also sold Aviva and we received lower dividends, but also it was driven by lower output and under the trading and valuation line and negative gains on other financial instruments. Cost, slide number 20. Year-on-year, they increased by 29% driven by regulatory levies, contributions to BGF, institutional protection fund, borrowers protections fund inflation, and the pay increases. Having stripped off those extraordinary items, the underlying cost would have grown by 6.8% year-on-year. definitely below the inflation. Staff costs. We introduced salary increases, so these costs increased by 10% year-on-year with the concurrent decline in the hand count by 1%. In some consumer banks, the operating costs stood at 364 million, so declining by 3% year-on-year. This was also driven by pay increases. So the staff costs increase year-on-year by 3% in consumer. Of course, we've been watching the market carefully as well as the inflation and the impact of those factors on our administrative and staff expenses in the near future. But our purpose, first of all, is to maintain our cost effectiveness. So we will continue along those lines as we've done before. Provisions, slide number 21. On the consolidated basis, the net balance of provisions was $571 million loss, which is 33% lower than a year ago. In Q3 alone, we posted provisions of $341 million loss, which is the growth year-on-year by 53%. And the drivers here are primarily the results by Santander Consumer Bank, which posted the net balance of provisions of 90 million zlots. And this was driven by the fact that they sold their debt portfolios in the previous quarters. The fact that we have high interest rates and record high prices of energy This has an impact on the spending of our clients. I mentioned already the slowdown in the sales of loans and the growing cost of credit in individual credit portfolios. The factors that impacted our net balance of provisions of Q3 are as follows. In the case of personal and SME customers, On a quarterly basis, this was actually driven by the slight growth in delinquencies driven by the lower risk assessment. After quite a big number of quiet months in mortgage loans, we had the growth of risk here, however mitigated by the support actions of the government. After the We also created management provisions for economic uncertainty. And we also raised additional provisions for exposures of those customers who avail of the borrower support fund of 18 million. We sold some NPL portfolios worth 168 million in capital, which had a positive impact on our performance of 30 million in gross terms. The coverage ratio is safe at 60% with the NPL ratio of the quota-free at 4.9%. Slide number 22, I've already mentioned that I outlined to you quite in detail the banking tax and other regulatory levies. And these are actually higher than our net profit for free quarters. So this really gives you a reflection of what is the situation of the banks in the moment. Slide number 23. To sum up our performance, let me tell you that apart from the levies, payment holidays, costs, we also had to oppose to our P&L the cost of risk attached to FX mortgages of 1.7 billion zlots. So recapping, let me emphasize, as you can see at the top line, our core business goes well. We perform decently. We keep acquiring new customers. we have a good net interest income and net fee income. But the current economic landscape makes us raise provisions. So these are the challenges that we will have to face also in quarter four. So thank you very much for your attention and let's go to questions and answers.

There are a few questions. Maybe let's start with the cost of credit. There are two questions. When can we expect the cost of credit at the level of 100 basis points and how long will it last? And there is a question about the reasons behind the increased cost of credit in retail, whereas in the corporate segment, this cost of credit is too low. Does it result from payment holidays or some other factors? So let me reiterate what I said at our press conference. The press may have cited that, but I repeated the guidance from the previous quarter. It does not change. so in the nearest quarters the cost of credits may grow but i cannot tell you when exactly will it happen will it be in the quarter two or three but because the uncertainty today is very high but given the economic slowdown that started quite visibly and the stagflation as well as high interest rates that are likely to grow. It is difficult to imagine that the situation of our borrowers will stay the same as in 2021. And we can see that already, so it shouldn't come as a big surprise. And yes, of course, we expect the increase in the cost of credit to about 100 basis points. In our scenario, we assume that the slowdown will be temporary and that 2023 will see some revival. And in quarter four 2023, we will see some changes some growth, but there are some risk factors, for example, the situation around the EU funds and so on. So we assume that at a certain point, we will witness some growth and the situation will improve together with the macroeconomic situation. So given our macroeconomic situation today, the uncertainty, as I said, is high. There was a question about the retail segment and the corporate segment. Michał discussed that while presenting the slides. He mentioned two things. The first one is credit provisions at Santander Consumer Bank because the last two quarters witnessed negative provisions. due to the sale of a portfolio. So from that one factor, we had an increase of 100 million slots. And as Michal said, the level of arrears is increasing. due to the increased cost of living, inflation, the situation of our borrowers and businesses also are affected by inflation, by higher cost of gas or energy. And the borrower's support fund, as Michał said, there is an additional provision of 18 million for customers who use the borrowers support fund. And those customers have to be downgraded to stage three. So it's a long-term area. They are in the performing loan portfolio, we are working on a certain solution of automated downgrades of customers to certain stages, but it will take some time.

Let me take the next question about the participation in the payment holidays program. As we wrote in our communication, we assumed that Based on our customer surveys and research that we conducted beforehand, we assumed the participation rate at 50% for that period. At the moment, this ratio in Q3 was at this level. But of course, the period was shorter. Therefore, the question is, about the risk of higher participation rate and higher provisions for that purpose. We will see how it develops. We've done some research, some surveys, and we are in sync with what we found out in those surveys. But if customers really actually avail more of the program, we will have to revisit that But I don't think it will be any major growth of the participation rate in the program. And I don't think it should be a major item in our profit and loss in quarter four. If we thought the risk is there now, we would have done it. But because we think it's okay now. But once we get more data, we will decide whether to revise that or not. Can the bank notice a rebound in the sales of mortgages in recent months? Well, let me answer that. There is no rebound. We changed our proposition, adjusting it to the risks related to the sales of mortgage loans. But not all banks actually followed our tracks. I don't want to comment on that. We have some decline in mortgage sales, that's true. But undoubtedly, this is becoming the product burdened with high and high risk. And this has to be taken into account in its pricing. And we will see. Of course, there's also the question of strict requirements imposed by the regulators. So all these actions led to growing prices of mortgage lending and loans. Can the banks see that their corporate customers have been saturated with the use of their operating loans, working capital loans? Well, it's naturally that customers at times like today, every lawful working capital facilities, all the jobs, it's natural in such the economic situation. So the sales in area is really good especially among larger corporates. But is that well saturated market is difficult to assess that. I think that in Q4 these products will be on sale and will sell well. Can the management board see any risk of the deposit war in the sector mentioned by the CEO of PKO SA? Well, for me, the war is in Ukraine. I cannot envisage anything like that. But some banks, of course, increase deposit rates more aggressively. But I wouldn't share this view of the APK OCO. The adjusted results show that the growth of income will be only 17% quarter-in-quarter, while the cost of funding will grow by 88% quarter-in-quarter. I already talked about that. When do we expect the peak in interest margin? Well, probably that will depend on what is happening globally and in the country. Well, let me go back to what we said a quarter before when we signaled that given that part of the portfolio and assets has not been yet repriced, given the interest rate hikes and the pace that we expected for the deposits to change, We expected further growth in the net interest margin and this is true. It crystallized in quarter three. We are talking about 34 basis points, stripping off one of events and factors. Of course, there is always the impact of the payment holidays and quarter four While we did not have interest rate hike in October, the September one was not such a big one either. So probably there'll be some further growth in net interest income. But there is also the impact of the liability side. While the growth in income and the growth in the cost of funding, this will have its impact on the net interest margin. The impact is a bit delayed, but when we come towards the end of the interest rate hikes, the trend will reverse. But all of that depends, of course, on what the MPC will do in November, if they increase the rates and by how much, assuming theoretically that the interest rates will not grow anymore, then quarter four will be the time when we will see that peak. As I said a quarter before, but let's agree on that. There are many factors impacting this, so it is difficult to tell you when the peak is going to happen. Was there a change in the federal fees and charges especially when it comes to the fees for banking cards. We grew our net interest income quarter on quarter without increasing our fees organically, as I said. I would have to check if there were any changes in the banking card fees, but I will have that checked and come back to you. Does the management board maintain their outlook on core at 80 bets and a half? That's Marci. Marci has already outlined that. By the growth in NPL and banking portfolio, what was the reasons? We already mentioned that.

Well, how many? agreements are covered with payment holidays in terms of value, more or less at the level we assumed, but there is this period shorter than eight years in the If in terms of volume it's lower and in terms of value is higher, then it means that payment holidays are used by customers who have more money and they make early repayments with the funds from the payment holidays. But people with lower exposures do not use payment holidays. But we do not have the exact data about that in front of our eyes, so we cannot tell right now. Do we have any more questions? No? Those were all questions that we received. online or via email. So I think that's it. Okay. So thank you very much.