Santander Bank Polska Sa

I think we're all here and we can start. It's 11.30. My name is Agnieszka Zbawrzycka. I'm in charge of investor relations. Welcome everyone to the presentation of preliminary financial results of Santander Bank Gold for 2022. I am here with Michał Gajewski, the CEO, Maciej Reluga, the CFO, and Wojciech Skalski, responsible for financial accounting. I encourage you to listen to the presentation during which you can send your question. You can send it via the link or send them to my email address. Mr. President, I give the floor to you. Ladies and gentlemen, welcome to the presentation of preliminary financial, unaudited financial results. It was a tough year for the entire banking sector, full of unprecedented geopolitical and economic challenge. In such harsh conditions, it was difficult to build enough capital base to become a key driver for the economy or strategic projects such as the energy transformation project. I need to highlight, however, that Santander Bank Opioid Group managed those challenges quite well. And at many levels, we proved that our business model is robust and well-performing. Last year, we generated $4,353,000,000 of gross profits. The tax levies were $2,125,000,000. The additional regulatory charge was $2,429,000,000. And despite this high strain, we closed the year with a solid net profit of $2,799,000,000. Let us move forward to slide number seven. with the general operational data. A few words about our customers. As a group, we provide services to 7.4 million customers, out of which 3.5 are digital customers. Santander Bank Polska alone provides services to 5.7 million customers, including 3.2 million digital customers. Year on year, We registered growth in this respect of 10%, and we have 12% more mobile customers. Deposits now worth over $196 billion. This is up 6% year-on-year. Growth loans up 4% year-on-year. Assets 7% year-on-year with customer funds. now worth $209 billion. This is an increase of 3% year-on-year. We're moving to slide 8 with financial highlights. Net profit $2,799,000,000. In fourth quarter alone, that was over $903 million. Net interest income $9,652,000,000. Net fee and commission up 3% year-on-year to 2,366,000,000. Total income, 12.4 billion. Return on equity, 12.1%. Despite the... And in the denominator, we had quite a large... which is over $10 billion for the group. GCR for the group, 19.27%. Tier 1, 17.54%. I want to highlight our robust capital position and ratio well beyond regulatory level. This proves we're well prepared to further growth and to respond to any risk that could materialize in the future. This is a solid result, very good performance, and we are ready to share profit with our shareholders. I will be talking about it in detail later. Slide 10. our customers' numbers. As I said, we have 3.2 million digitally active customers. In retail, that's almost 3 million customers, 10% up year-on-year. In SME, that's 340,000 customers. That's up 9%. In business and corporate banking, that's over 21%. customers. That's up 3% year-on-year. I've mentioned we have more and more mobile app users at the moment. That's 2.4 million. That's up by 12% in retail, 11% in SMEs, and 10% in corporate banking. This, of course, impacts the number of mobile transactions. In four quarters long, we had 64 million of such transactions. Very good performance here, both in retail and SMEs. We have rolled out a new mobile app, which we're working on at the moment. We're working on the final functionality. It is now in trial version, and it will be rolled out to our customers this year. Slides 11 and 12. You see information about the new product in our offer. So just the highlights here, we've managed to introduce a digital process for sending our repayment schedule to our cash and mortgage borrower. In SMEs, we have new solutions where Business owners can turn their smartphones or tablets into payment terminals. For larger businesses, we implemented the qualified signature. We also have a new agreement framework following the plain language rules. Slide number 13. In quarter four, we sold mortgage loans worth $653 million. We know the situation in the market at the moment that sales are going down for mortgages. Cash loans, sales worth $2.3 billion. Year-on-year, that's up 15%. We maintain high sales of cash loans also through digital channels. Quarter over quarter, total sales is more or less the same, with a minor decrease. TFI net sales, we had a lot of redemptions, but we see those are slowing down in December. The whole year was not great for this branch of business. And we know the regions, the uncertainty in the market and the outbreak of the war in Ukraine. SME, high sales of business accounts, 17,000 accounts, high levels in digital channels and e-commerce, high growth year on year. In terms of loans products, in Q4, sales went down 5% year-on-year. 2% quarter-over-quarter, sales reached $1.2 billion. Year-on-year, we see an increase by 1.1%. Business banking, loans products, up 14% year-on-year, and income from EFX platform up by 28%. CIB, substantial increase from transactional banking and financial markets as well as treasury services. Slide 15 now, growth funds. we see an increase at consolidated level by 4% to over 158 billion. BCB, this product up 10%, CIB loans up 9%. We see that this market and sales here are noting significant growth. Leasing growth up 9% year-on-year, positive trend here. Net value of sales, that's 6.8 billion for leasing. Factoring portfolio, the portfolio shrank, but the revenues increased by 13% year-on-year. Slide 16, customer funds, customer deposits up 9%. 6% year-on-year to reach $196 billion at the end of December. Year-on-year, deposits went up by over $11 billion. We see growth in term deposits by $31 billion. We see a decrease in current deposits by $3.7 billion. Share in turn deposits increased to 29% at the end of December. To sum up, we have excellent liquidity position. LCR was 177.3% at the end of December for the bank, a loan that was 163, over 163%. Now let's move to slide 17.

Net interest income and margin. The net interest income was 9.7 billion Zl. And the year-end and the quarter-end loan, it was 2.8 billion Zl. We should remember about one of non-recurring items when we compare quarter to quarter. And they were as follows. That is the cost of payment holidays in quarter three it was $1,357,000,000. In Q4, it was $186,000,000. Overall in the year, it was $1,544,000,000. Another factor was the adjustment of $78,000,000 posted by Santander Bank Polska related to the reimbursement of bridging fees. Having stripped off those items, the net interest income declined by 1.5% compared to Q3. As you can see, the annualized net interest margin in Q4 was 4.94%. On an electrolyte basis, 28%. What were the drivers? One of them was the posting of those non-recurring events to the net interest income. All the details are presented in the presentation. Another driver was the growth in its interest expense. Let me remind you that 10 times since the beginning of the year, we increased interest rates on our deposits. responding to the needs of our customers and tracking what is happening on the market. In Q4, we had a very attractive proposition, a special offer for personal customers at 8%. The annual net interest margin was impacted by the acceleration of cash flow sales and corporate loans, but also by the higher yields

on securities. Next, the income, slide number 18. The growth by 3% year-on-year. It was 2.6 billion slots.

But as I said, it was an increase of 3% against 2021. We viewed a robust performance given the market landscape, especially as the fee expense in quarter four included a number of non-recurring items. In quota for a loan, the net fee income was 619 million RON and shrank by 7% quota on quota.

We can see here what was the impact of the lower loan sales on the level of credit fees.

but what was on the upside was that the FX fees and brokerage fees increased and performed really well. FX fees increased 27% year-on-year, insurance fees by 9%, and the same goes for debit cards. It was 12% growth. In Santander Consumer Bank, quarter-on-quarter, the net fee income was higher by 21%. Year-on-year, it was lower by 9% primarily driven by credit card lines and fee expense. Slide number 19, total income. It was 12.4 billion lots, 3.5 billion of that was recorded in quarter four alone. Having excluded the posted cost of payment holidays, income was flat on quarter three 2022. Lower income on other operations was driven primarily by what was happening in the financial market. In the year, they stood at 163 million blocks, driven by lower trading and revaluation, negative gains on other financial instruments, and by lower income from dividends, given that we sold our stakes in Aviva companies. Slide number 20 outlines operating costs. They increased to 2021 by 17.8%. Of course, the key drivers were the regulatory levies, but also inflation and salary increases that we provided to our staff. Having stripped of the obligatory contributions to VFG, contributions to institutional protection scheme and borrower support fund, The group's costs increased by 5.1% year-on-year, driven primarily by high cost of using IT systems. On the like-for-like basis, having stripped off the restructuring provision of 36 million that we created for the completed employment optimization program, the staff costs increased by 10% year-on-year. In Santander Consumer Bank, the operating cost stood at 476 million zlot, declining by 6%. And the staff cost in SCB also declined by 1% year-on-year. The cost-to-in-town ratio is really good, below 30%. And we would like to keep our effectiveness of operations in this year. Of course, they are challenges related to inflation, pressure on administration expenses and stock costs, but definitely we can view ourselves as a leader when it comes to our effectiveness. Provisions, slide 21. In the whole year, the net balance of provisions was 895 million on consolidated basis, which is 20% lower year-on-year. For quotes for a loan, it was $324 million, which represents a growth of 80% year-on-year. Of course, we can see the slowing down credit market. We can see our customers spending deteriorating. This is driven by the macroeconomic landscape. So the pace of growth in the loan book is slowing down, and we can see the growing cost of credit. for individual portfolios. This cost of credit still in September was 0.55%, while at the end of December it was 0.59%. The key drivers of the net balance of provisions are as follows. In the personal or customer's portfolio, you can see a number of downgrades and growth in the downgrades to the MPL portfolio. In the case of the mortgage-owned portfolio, this risk is present. in part mitigated by support funds. In SMU, you can see the growth in delinquencies and downgrade to the NPL. In corporate portfolio, we saw one downgrade, significant one to the NPL. The net balance of provisions was also impacted by new management adjustment of 79 million altogether. We also saw part of our NPL portfolio in the bank. It was 150 million with the positive impact on our bottom line of 16 million. In some consumer, it was 231 million with the positive impact of 33 million on their bottom line. The provision coverage ratio is safe at 57.4%, while the NPL ratio at the end of the year

was below 5%. Slide number 22.

I've already mentioned that banking tax regulatory levies, there's 4.3 billion of gross profit charged with levies of 2.1 billion slots. and the regulatory levies of $2 billion and $420 million.

So, coming up, slide number 23.

Referring to the previous slide, this is heavily burdened by regulatory and fiscal levies. But on the other hand, we have to say that our bottom line was positively impacted by interest rate hikes. You can see in the profit and loss that there is also a provision for legal risk attached to mortgage loans. And after four quarters, this provision $1,739,000,000 In Q4 alone, it was $659 million. In closing notes, let me emphasize that our core business goes really well. We are pursuing our strategy and mission of helping our customers prosper. We are gaining new customers. Despite huge challenges driven by the current economic and macroeconomic situation, It does not make us optimistic. We proved in 2022 that our business model works well and brings the expected deals.

So the floor is yours now for questions and answers.

So the questions are coming in.

We have a question about the issuance. There are a few questions relating to that subject. Are we planning to issue bonds to comply with morale this year? What will be the value? When will there be the first issuance within the new program? We've just released the current report. What type of Securities will there be? Is bank planning to buy back tier one bonds? Let me start just to remind you. We've seen this in the performance for the last quarter and we will see it in the annual report. We will be publishing it by the end of February. Now we only have available the report based on unaudited data. We comply with MRO and TLAC criteria. And we have quite a large buffer. But both in TLAC and in the securities that will allow us to comply with the regulatory levels, we have securities and bonds that mature this year. Maybe they don't mature this year, but they will not be eligible for MREL or TLAC. And in such a situation, we will be applying the call option and we will have to substitute those securities with different issuance, hence the new current report and the planned issuance. We have securities in Euro, but the program we've just announced is in PLM because we want to first issue in the Polish market. We haven't yet determined the value, but The total value of issuance in 2023 is several billion. That's about four or five billion worth of issuance. To substitute the paper, the securities that we're currently holding. This is related to the buyback of the bonds. But even if we enter This particular amortization period, when we have securities with maturities of above one year, it's still eligible for TILAC. So it's about comparing the costs of the securities. Even if we have a T2 security, we have to compare the prices and compare it to senior securities. But that's still ahead of us. and we still need to make decisions. I hope I've answered your questions.

Let me answer the question about the level of NPL. The NPL level coming out close to 5% is not a threat to the dividend payment. It is below 5%, and it's much better in the bank than in some consumer banks. In my opinion, we manage well the NPS both in the bank and in some consumer. We are also selling off our non-performing debts, and that's good news because you can see that this has positive impact on our debt and life. The market still provides good prices for non-performing portfolios, so we will be leveraging that. And in my opinion, there is no risk that next year, this year, this level will be exceeded. When it comes to the previous year, it's clearly said that it's 5%. We are below that level. So the question about the expected regulatory changes. Apart from the extension of payment holiday solution, My only comment here is that I will not refer to press speculations. There were different statements made on them, but we will finally see what is going to be the decision. When it comes to other factors, we don't really know what is going to happen. But as I said, our model, this is always so resilient. that when you can see it is resulting to large expands to what is happening to the unknown. And it's difficult for us to speculate when it comes to any other changes in upstream regulations or any other upstream developments that might take place. And that is in the year 2023. There is another question about issuances. Are we planning on 81 issuances if there is an opportunity? We can't see any need for this. There are also questions about the dividend outlook from... As I said, our result was solid enough in our opinion, plus we need all

the conditions and the criteria for dividend payment in our opinion.

But in our view, we think we can pay out the dividend, but we have not received an official letter from the KNF. We are talking to the regulator and once we get the letter from them with their approval, we will be able to issue a recommendation. I am looking forward to that, and I'm optimistic. But still, we need to get the decision. There's one more question. After the results of 424, can you confirm that the K1 dividend has been met? And can the bank increase their level of payout? Miha, I think the CFO answered the question just a moment ago. When it comes to this very criterion, I understand that this refers to the share of FX home mortgages for households in the total portfolio of liabilities to non-financial entities. Let's take a look at page 27, the Polish version of the report.

This is below 5% based on the data that we are showing now.

There is a question about the participation in payment holiday. So we had 54.3% of the mortgage portfolio. That's volume-wise. That's the average hit rate for the entire payment holiday scheme. And according to our observations, people, customers were in 2021 are those who applied for the program most. 47, 40, almost 40% of customers applied to have the payment extended for all the installments. According to the big data, our profile here and the data does not differ from the average parameters for the sectors. What is the exposure to agri-loans? Because there is a plan apparently, we don't know, to introduce payment holidays for that sector too. You will get the detailed information about exposure to different sectors in about two weeks when we will be releasing our full report. Two more questions. The media are quoting the CFO. Will you be able to mitigate the negative trend also relating to the interest rates? In terms of net interest margin and the trend, I talked about it before. In terms of the migration trend, it was stronger when we were increasing the interest rate. And let's remember that irrespective of the migration, we have an increase in current deposits. We have new customers. So even if the migration trend is continued, that doesn't mean that it has a substantially negative impact on our net interest. When I said stabilize, I didn't mean that we would be at the same level, but I meant that we would be at the current level. So my message really stays the same. I said the same thing about a quarter ago. On net interest margin, it is likely to go down. This is the trend we saw in quarter four. And I mean... the margin that excludes the one-off factor because we have a slight decrease that according to the projections, we have a delayed trend on the pricing of deposits. But through assets, the effect of higher interest rate is visible. So my message is, is not different to what we talked about a quarter back.

When it comes to the question about the provision coverage for the portfolio of mortgages in First France, at the end of December, 42.4% at the end of December, and in our opinion, this is an adequate level of provisions. When it comes to the verdict, the ruling from the European Court of Justice, we don't know what this is going to be.

But we know what the KNF chairman said in this respect and what is the opinion of the regulators on this issue.

Difficult to speculate. We will see what is the opinion of the ombudsman as well. But of course, we will be waiting for this ruling.

And then we will take adequate action. When it comes to deposits, OK, that's already been mentioned.

But we've mentioned deposits. We were talking about specific values in individual segments. You have that in presentation and in the report, we will not be quoting that here. The outlook for the cost of credit, the cost of risk and operating costs in 2022. The cost of credit, you might remember a quarter ago, I was saying that this environment of recession, there might be a moment when the cost of risk, the cost of credit will go even up to $100 billion. And if you look at the slide 21, 20, 21, when we are showing our figures, we could see a big difference how it looked. What were the provisions for credit losses in the first half of the year and in the past two? In the first half of this year, we do not expect anything better, maybe even worse. we might have some delayed effects of the growth in inflation, energy prices, gas prices, on the condition of our business performance. Even a simple exercise, when we imagine that in the middle of 2023, we have a situation where we don't have the same cost of credit, like in the second half of the second half of the only this would imply quite clear growth not up to 100 basis points but so quite a bit there is a lot of uncertainty but we rather expect that there will be a deterioration of that ratio but we'll see what will be the scale It's difficult to expect that with such a weak economic growth that we are going to see in the first six months with continuing high interest rates, with the growth in prices, it's difficult to expect that our condition of our customers continues as it was in the last year.

And when it comes to the operating costs in 2023, I think you've already mentioned that

I've already said that there is a pressure, and the cost might grow a little bit, but we always benchmark that against the provisions we have and our effectiveness ratios. We want to keep them, and we want to keep our cost-to-income ratio below 30%.

And I think this is really good.

We have a long question in English. We've answered partially in terms of the net interest margin, but there's a question about the volume. The main driver for growth in loans in 2022 was the business loans. Mortgage retailers were on a different side. What could happen... This year, we really expect similar trends to 2022. Not so much. The second part of the year, in retail, remaining retailers, well, we'll be looking on the balance sheet and on sales. because we had some early payment that impacted the balance sheet. You see in the annex that sales of cash flows was actually quite good, and it had a positive impact on our net interest margin. In terms of business loans and term loans, I wouldn't expect a rebound maybe towards the end of the year. And overdraft, we had decent growth here. This will not change because of the rising CPI and businesses need money to finance the day-to-day operations. Agnieszka, any more questions? No? No, we don't have any more questions coming in. That was our last question. Thank you very much. Ladies and gentlemen, have a good day.