Santander Bank Polska Sa

Hello everyone, Agnieszka Dobrzycka speaking. I'm responsible for investor relations in Santander Bank Poland. I'd like to welcome you at the presentation of the financial results after Q1 2023. Together with me we have Michał Gajewski, our CEO, Maciej Reluga, our CFO, Wojciech Skalski, the head of financial accounting area, Feel free to ask questions during our presentation so that we could answer them after the presentation is over. And you can ask questions via the link provided to you or by sending the questions directly to me via email. And now let me hand over to our CEO, Michał Gajewski. Good morning. Michał Gajewski speaking. Welcome at the presentation of the financial results after the first quarter of the year. We can be optimistic after that period, but we should remember that economic, geopolitical and systemic risks still remain with us. And as a sector, we must focus on building our capital that could be used for development of the economy and financing key projects like those connected with energy transformation. Despite the challenges, I'd like to highlight that we conduct our business based on sound foundations, effectively delivering our mission of helping our customers prosper. We have proved on many levels that our business model works well and brings the desired effects, which is visible in our performance after quarter one. At the end of March, we recorded the growth profit of $1,656,000,000. At the same time, the tax burden was $635,000,000, whereas the total regulatory cost amounted to an additional $48,000,000. We closed Q1 with a solid net profit of $1,192,000,000. So let's go to slide seven. As a group, we provide services to over 7.4 million customers, out of which over 4 million are digital customers. The bank itself has 5.7 million customers, out of which 3.4 are digital customers. Year on year, the number of digital customers grew by over 7% and mobile customers by 10%. Customer deposits totaled 197 billion slots and grew by 5% year-on-year. The gross loans portfolio grew by 3% to over 161 billion slots. Assets grew by 5% year-on-year. Customer funds totaled 211 billion slots, growing by 5% year-on-year as well. In slide eight, we can see a few pieces of information about key financial results. I'd like to highlight the key items. The net profit after quarter one was $1,192,000,000. Net interest income was $3,092,000,000. Net fee income was $662,000,000 and remained at a similar level when compared to the previous year. total income was 3.7 billion zlots pcr for the group was over 21 percent p1 was 19.39 percent those are retrospective indicators meaning they are showed in line with the eba reporting standards the return on equity for the group was 12.4 percent our capital position is very The surplus at the bank level is 14 billion zlotys. This allows us to continue our growth and address different risk factors that could occur in the quarters to come.

In slide 10, I will briefly present

figures about customers. We have 3.4 million active digital customers. We recorded growth in every segment.

Currently, we have over 2.5 million digital customers.

The number of customers also translates into the growth in mobile banking transactions in quarter one we had almost 64 million transactions in retail this means a growth by 31% year-on-year we are developing our product proposal you can see that in slides 11 and 12 we also support education of our customers and the key highlights from those slides for individual customers we introduced a fully remote process of applying for a mortgage and providing mortgage statements for SMEs we implemented an option of checking the cost of photovoltaic investments at a dedicated website and we introduced new functions in the CLP lending tool for corporate customers

Let's now go to slide 13. The growth in lending.

Let's start with retail banking. In quarter one, we saw the mortgage loans worth 780 million zlots. When compared to the previous quarter, this means a significant growth by 20%.

And especially since March, we have seen a rebound in the market. Cash loan sales totaled 2.3 billion zlots on an annual basis. This translates to an increase by 8%.

We can see a growing popularity of remote channels. In quarter one alone, the remote channels accounted for 63% of sales.

We recorded some activity in terms of investment funds.

Santander TFI assets totaled 13.4 billion slots. In the SME segment, we sold over 19,000 business accounts, and the majority was sold via digital channels. Quarter-on-quarter loan sales grew by 13%, but year-on-year, uh loan sales dropped by one percent in business banking we had very good performance in factoring and trade finance and we also recorded a significant growth in credit women's sales and efx platform and in corporate and investment banking we recorded a material growth of income from transactions in credit markets, and income from trade finance services. Let's go to slide 15, gross loans. As I said, we recorded a growth by 3%. On a standard basis in the bank, it grew by 2%, and in some tender consumers, it grew by 5%. I have already mentioned retail and SME segments, and in business banking, loans grew by 6%, while in the Largest company segments, the loans grew by 11% year-on-year. The lease portfolio grew by 10%, a very good level. The value of net sales was 1.8 billion zlots. We recorded a good performance in factoring. Our factoring subsidiary recorded a growth in the turnover by 21%. Customer deposits grew by 5% year-on-year and totaled over 197 billion slots. Year-on-year deposits grew by almost 10 billion slots. We can see a growth in term deposits and a decrease in current deposits, but overall, we are recording a growth. The group can still boast excellent liquidity the consolidated LCR was over 190% at the end of March. So, very strong liquidity position.

Slide number 17, net interest income and margins. The net interest income in quarter one was 3.1 billion dollars, 9% better than in the previous quarter. But let us remember that there were some one-off factors included. First of all, the cost of payment holidays in quarter four of 186 million dollars. Dripping off these one-offs, the net interest income in quarter one increased by 2.4% compared to quarter four 2022. As you can see on the slide, the reported annualized interest margin in quarter one was 5.4%, growing by 12 basis points compared to the adjusted margin for quarter four, adjusted by those one-offs that I mentioned. And the key factors that impacted the net interest margin were, first of all, the posting of one-offs and the growth of interest income by 7% quarter-on-quarter and our growth in interest expense by 3%.

Now let's talk about fees.

Slide number 18. The net fee income, $662 million, just like a year ago. Year-on-year, we had really good growth in fees, especially in credit fees, up 21%, debit card fees up 35%, and credit card fees 3% up year-on-year. So compared to the previous quarter, the net fee income increased by 7%. Some consumer banks saw the decline in the fee income compared to the previous quarter and year. And this was primarily driven by the credit card line and the introduction of a new non-interest plan. Line number 19, total income, grow by 20%. 5% year-on-year, 7% quarter-on-quarter. Of course, this was determined by really good performance under interest and fee income lines. When it comes to income on other operations, we had lower outturn because we were posting the cost of settlements with customers. And in quarter one, this was the cost of 186 million slots. Of course, these were the settlements with customers who had FX mortgage loans. Stripping it off, other incomes stood at $175 million and were driven by the good trading result and revaluation that increased thanks to our higher activity on the international markets, interbank markets, sorry. And this was also driven by higher gains on other financial instruments and other operating costs. other operating income and no cost total cost year-on-year increased by six percent driven primarily by the estimated cost of contributions to the revolution fund and we posted 184.5 million as a group for that purpose in quarter one 2022 it was 222 million slots Without those levies, the cost of operations for the group increased by 20%, driven primarily by the cost of using IT systems, third-party services, and high inflation. Staff costs increased by 24% year-on-year, driven by the salary adjustments and the bonuses we paid for good performance recorded in 2022. the overall operating costs grew by 3% year-on-year and 12% quarter-on-quarter. And this was driven primarily by the costs of telecommunication fees, IT costs, and third-party services. In Santander Consumer Bank, operating costs in quarter one stood at $148 million, growing by 4% year-on-year and 31% quarter-on-quarter. Staff costs in Santander Consumer increased by 7% year-on-year and by 13% quarter-on-quarter. The cost of operations in Santander Consumer Bank decreased by 2%. The costs paid to BFG by Santander Consumer Bank totaled 22 million. In the first quarter last year, it was nearly 30 million slots. But of course, we know that we are aware of what is happening on the market. We know what's the impact on the inflation, and we realize that this will continue to exert pressure on administrative expenses and staff costs. Of course, we would like to keep our cost-income ratios at sound levels, but also to offer our people competitive pay and to attract the best talent. Let us move to slide number 21, provisions. In quarter one, the net balance of provisions on consolidated level was $233 million. And it was nearly twice as high as in quarter one, 2022. Compared to quarter four, 2022, the net balance of provision decreased by 28%. Amid high interest rates, environment, and high inflation, we saw the... the impact on that on our customer sending. In quarter one, we observed further slowdown in the growth of the loan portfolio and the growing cost of risk in individual portfolios. When it comes to the retail customer's portfolio, we saw the growth in past due payments compared to the previous quarter. In the mortgage portfolio, the risk of new entries to the NPLs was in mitigated by the available support to the customers. Additionally, we updated the LTV parameter for mortgage loans, which had a positive impact on the net balance of provisions of $5.5 million. When it comes to the SME portfolio, we had the stable level of past due payments and downgrades to the NPLs. In the corporate portfolio, there were no major downgrades to the NPL portfolio, but we were gradually topping our provisions because of the deteriorating ratings and risk parameters in the performing portfolio. We sold the NPL portfolio worth $279 million loss in principle which had a positive impact on our bottom line at 39 million. And in sometimes the consumer bank, we sold the portfolio worth 195 million with positive impact of 40 million slots. We have a safe NPL coverage ratio, which is 58%, while the NPL level at the end of March was 4.8%. Slide number 22, I probably mentioned the banking tax and regulatory costs. Well, $634 million in tax burden in quarter one, $439 million of that is corporate income tax, and $195 million in banking tax. Regulatory costs, $198 million lost.

So summing up our performance and slide number 23, I think that this is really good performance.

But of course, they are impacted by the costs related to legal risk attached to FX mortgage loans. Apart from the cost of settlements that I've already mentioned before, The burden related to legal risk for that portfolio was $287 million. But let me emphasize that our core business goes very well. It's really sound. We are pursuing our mission. We are gaining new customers, supporting the existing ones. And even though the current economic landscape does not make us overly optimistic, Our business model is working well and brings the expected results. So let's go to the questions and answer session.

Yes, we have some questions already. Does the bank take any actions to reduce sensitivity of net interest income before the interest rate cuts so let me share our view on interest rate cuts because the scale of interest rate cuts projections changes now it's even the curve even shows 150 basis points for two years so this is a relatively uh flat crop curve and we believe that this valuation is quite aggressive given the fact that the core inflation is as it is and at the end of the year we project it to be at around 10% so the projections for one digit inflation are not valid because the cumulative inflation in the first month is about 5% already. So we believe that the inflation will persist and there may be some slight economic revival during the year. So there is no headroom for inflation to drop. and no headroom for interest rate cuts. Nevertheless, we know that there is the risk of interest rate cuts. It will come sooner or later. And in the report for quarter four, we could see first activities in this area, and we continue hedging our balance sheet and reducing the sensitivity to interest rate cuts. And we believe that this strategy will be continued depending on the situation on the market.

There is a second question about the number of active home loan agreements talked to SwissFunds exchange rate but now we can answer that because we have 23.8 thousand agreements for the bank and 12.4 thousand for us to be so all together this is 36.2 thousand and 50 exactly and and the rest of the question or the other question is what is the volume of paid of a loan home loan agreement and what is the legal risk attached I don't think we provided that information earlier and what's the percentage of those agreements have been brought to court how many lawsuits we have Well, I'm not ready to tell you how many inactive agreements have been paid in Swiss francs. Thank you speaking, I cannot tell you. And in the meantime, we'll try to find out when we will be answering the subsequent questions. The number of losses is 9.6 thousand and how many of these refer to the loans that have been paid off. But, okay, we will look for the answer and we have another question. What is the outlook for the cost of risk across the year, across 2023? Well, let me start with the outlook that we provided to you before. indicated the gradual growth and the cost of risk across the year with the risk that it might even go up to 100 basis points after quarter one what is the situation we have a growth year on year that's quite obvious quarter on quarter we have a decline but let us remember that this was the effect of the sales of the NPL portfolio. And this impact was bigger than in the previous quarters. And the slides are presented in slide 2022. And we saw the bigger portfolio with the bigger impact on the bottom line. We keep our opinion that the delayed effects of the slowdown in the economy of high interest rates and high inflation that has been materializing, and as a result, there will be a growth in the cost of risk in the upcoming quarter, and that's our view. But the fact is that in quarter one, irrespective of the sales of the debt portfolios, we are So quite good situation, even though we entered recession. And taking into account the figures for the first quarter, we can actually reduce our indicative cost of risk. Probably it will not be 100 basis points, maybe closer to 90 bits. And we will see how it develops in quarter two. We've been monitoring it quite closely and we will see how other risks will materialize. So all in all, we expect some growth in the cost of credit risk, but its scale most likely is to be slower than we thought before.

Coverage by provision is nearly 50%. 48.4 and for the banks, for the bank alone, it is a little bit over 50. What happened with the cost of card fees in quarter one? And, Michal, I think that you referred to that while discussing the slide about fees. This is due to the SCB mainly. And those are all the questions I received. We have two more questions, so let me read them out.

Does the management board think that a provision for Swiss franc loans may be raised, one of, if the European Court of Justice takes a relevant decision and

does the bank expect another issue for MREL?

So far we have received the opinion of the Advocate General and this is not a binding opinion and the judgment made after that opinion in the case of getting shows that judges take a different approach than the one presented in the opinion of the Advocate General.

So, of course, this is a very theoretical thinking, because we cannot say that this non-binding opinion

will be followed by all judges.

So we cannot refer to that at that moment because it is too early.

The second question, as regards to the MREL issue, we have a surplus of over a dozen billion or so

not only in the case of M or EL, but also TLAC.

And this applies to the call option for securities that are rolled over sooner than in one year. We had 500 million euro and we exercised the call option and issuing senior non-preferred securities of 2 billion PLN at 990 basis points. This is quite a good result given the situation in the market. Another security that matures in November is 750 million euro and we will decide whether we will roll it over or not it depends on the balance sheet growth and what happens with the capital and so on but of course we are ready to do this issue and replace those securities with new ones

Outlook. Well.

Our margin, I think that was the same for quarters. If we stripped it off the effect of payment holidays, then we are. Within the band of 30 basis point fluctuations, whether the deposit basis was better and depending on the extent to which. we sell new portfolio or roll over cash loans at a higher rate. This is also driven by the level of rolling over the bonds which have been maturing at higher maturities. Somebody had a meeting with the journalist Claude called it a mean plateau and this is well of course the plateau is not just flat there are some ups and downs but so in the middle of the year we might see some peak but we can say that peak was in quarter three but we'll really see how it goes it will depend on two things the sales of new loan volumes and the situation on the sector and when it comes to deposits but our liquidity position lets us to stick to our strategy and active management of our reliability stuff and there is but let me go back to this question that was asked that we could not answer straightforward an inactive portfolio the information i will see there maybe it will not make you happy but If you look at the number of the lawsuits and it's provided in the report somewhat, the inactive portfolio accounts for some 10% of that. So we can say that the rate of suits for the other portfolio is very low.

Is Wojciech Skalski here?

Let me add that we have some information only from Santander Bank Polska with our Santander consumer, the number of such agreements, and this is indicative. You have to give us some room for tolerance, and 32,000 agreements are inactive. And that's the value of roughly 7 billion blocks. So to add to that, and as I said, this is just for Santander Bank Polska. The percentages, as I mentioned, were only referring to Santander Bank Polska. Thank you, Wojtek. Agnieszka, I can't see any other questions. Can you see any other? No. I don't think there are any more questions. And I think that we can close off. But of course, if there are any other questions, I'd encourage you to send us emails. So we will clarify and explain things as required on an ongoing basis. Thank you very much. Goodbye.