Santander Bank Polska Sa

Good morning. It's 11 o'clock already. My name is Agnieszka Dowrzycka. I am head of investor relations in Santander Bank Polska. I'd like to welcome you all at the presentation of the financial results of Santander Bank Polska Group after the first half of 2023. Today with me we have Michał Gajewski, our CEO, Maciej Reluga, our CFO, Wojciech Skalski, head of financial accounting area. So let me give the floor to our CEO, Michał Gajewski. Good morning. Welcome at the presentation of the results after the first half of the year. As Santander, we want to consistently and consequently help our customers and our business model works well. we are performing against our targets as planned, but as we said in the previous quarter, we must bear in mind all the external factors that affect our performance. At the end of June, we generated 3.2 billion slots of gross profit. At the same time, the tax levies were 1.2 billion slots, while the total regulatory costs amounted to additional 194 million slots. We closed the first half with a solid net profit of 2.3 billion. In slide 7, we can see general operational data. So let's move on to this slide. As a group, we provide services to over 7.5 million customers, out of which over 4.2 million are digital customers. In Santander Bank Polska itself, we have 5.8 million customers, of which 3.4 million are digital customers. Year-on-year, the number of digital customers grew by 7%, and the number of mobile app users grew by nearly 14%. Customer deposits totaled 201 billion zlotys and grew by 9% year-on-year. The gross loans portfolio year-on-year grew by 3% to 163 billion zlot. Our assets grew by 7% to 264 billion zlot, and customer funds alone totaled 216 billion zlot, which is also a material growth year-on-year by 10%. And now slide A8. I will discuss the results in detail in further slides. Now let me highlight the key items. So as I said, 2.3 billion zlot of the group's net profit for the first half of the year, net interest income was 6.3 billion zlot, net fee income was 1 billion, 340 million, an increase by 5% year-on-year. The total income was 7.6 billion and this means a growth by 17% year-on-year. The PCR for the group was over 20.77% and return on equity was 14.3%. Our capital position, in my opinion, allows us to generate further growth and address all the risk factors that could occur in the future. And in our assessment, it also allows us to share the profit with our shareholders. Now, slide 10. Our customers. As I said, And in slide seven, 3.4 million active digital customers, including 3 million retail customers, which means a growth by 7% year on year, 356,000 SME customers, a material growth in this segment as well by 8%. And in terms of large businesses, we had over 21,000 such customers. the number of mobile application users is also growing currently it's almost 2.6 million customers in retail by 13 and in smes by 24 the number of transactions in mobile banking also grew We have already made over 70 million transactions in the retail segment, 29% more in Europe, and 2.2 million transactions in the SME segment, a growth by 34%. In slides 11 and 12, you can see our new products and services and our customer support activities. Let me mention just a few key highlights, new products and services, for example, For retail customers, we prepared a refreshed account and debit card offering. On the 1st of July, we launched Santander account, Santander Max account, and Santander on the Go package. For SME customers, we improved the lending process and reduced the time to yes. For corporate customers, we introduced more improvements in iBusiness platform. an option of executing transactions at a future date in the ESX module and simplifications of electronic services parameterization. In slide 13, we have some business data. For example, we have 5.7 million accounts for individual customers an increase by 6% year-on-year, which translates into 322,000 more accounts year-on-year. Accounts in Polish Slotia grew by 4%, foreign currency accounts grew by 12%. We also opened more accounts for foreigners. In this area, we recorded a growth of 18%. In quarter two, we sold mortgage loans worth 1.6 billion Zloty, This is a double growth versus quarter one this year. And in total, in the first half of the year, we sold 2.4 billion slots worth of mortgage loans. When it comes to cash loans, the cash loan sales in quarter two totaled 2.5 billion slots. On an annual basis, this is an increase by 3% and by 6% quarterly. Our sales in remote channels has been also growing 67% in quarter two. And in quarter four last year, 57% of accounts were open and loans were given in digital channels. In the first half of the year, we sold 4.8 billion of cash loans. Next sales of TFI investment funds totaled 1.2 billion lot. Our fund under TFI assets totaled 15.2 billion lot and its market share was over 10%. We are very happy about that. And in total, In the first half of the year, net sales of investment funds totaled $1.9 billion. In the SME segment in quarter two, we opened 16.5 thousand business accounts, out of which 52% were sold or opened in digital channels, including 31% of that in e-commerce.

In the first half of the year, we opened over

35,000 customers, 35,000 accounts for SMEs. Social loan sales grew by 3% quarter-on-quarter and totaled 1.4 billion slots. In business banking, so in larger company segments, we recorded good performance in terms of lending and we've been recording a growth in both loan and deposit balances. We have also increased our income on transactional banking and 12% growth in income from the EFX platform. In corporate and investment banking, we recorded a growth in income from transactions in credit markets and trade finance services. Now slide 15, as I said, growth loans. grew year-on-year by 3% to $163 billion. I have already mentioned sales in the retail and SME segments. In business banking, loans grew by 3%, while in the largest company segments loans grew by 15% year-on-year. The lease portfolio grew by 10% to over $13 billion, and the value of net sales was $3.8 billion. Our factoring subsidiary has been also developing. It has grown by 7% by the turnover, which is very crucial for this segment. During that time, it grew by over 14%.

Slide 16, customer funds. The losses grew by 9% year-on-year and exceeded more than 200 billion dollars at the end of June. Quarter-on-quarter, they grew by 2%. Comparing year-on-year, the reporters, they grew by 17.1 billion slots. The growth of 10.6 billion of that was recorded in the corporate segment and 6.5 billion in retail. We can see some growth in term deposits and the decline in current accounts, which is natural given the interest rate environment. The group can boast excellent liquidity with the consolidated LCR at 205% at the end of June. Slide number 13, net interest margin and net interest income. Net interest income in quarter two was 3.2 billion volts, which is a growth of 3.5% quarter on quarter. Across six months, it was 6.3 billion volts, growing by 22% year on year. The negative adjustment of net interest income in view of recognizing the impact of payment holidays was $44 million. This is the result of updating our estimates to date, which was driven by the higher growth in deferred payments in 2023. As you can see on the slide, the reported annualized interest margin, net interest margin in 2022 was 5.37 percent whereas it was flat on the previous quarter slide 18 is net fee and commission income we saw here the growth as well by five percent year on year as the generated fee income was $1.3 billion. We saw really good fees, especially in credit fees, which grew by 14%, debit card fees by 26%, insurance fees grew by 8%, and growth in credit card fees by 4%. In Q2, the net income was $578 million, growing by 2% quarter-on-quarter. Quarter-on-quarter, we saw a good growth in ethics fees and fees for funds management, which saw the growth by 23%. Slide number 19, income, $7.6 billion, growing by 17% year-on-year, and growth by 4% quarter-on-quarter. Lower income and other operations year-on-year are the results from our activities aimed at making supplements with customers, as ex-mortgage holders. So the cost of that was $267.5 million for six months, and in total alone it was $82 million. At the end of June, we signed 6.7 thousand settlements, of which 1.2 thousand were signed in quarters to a loan. Sticking it off, the other non-interest and non-fee income totalled $232 million and $72 million in quarters to a loan. Overall costs, slide number 20. They increased by 9% year-on-year. This was the result of lower liabilities rising from the contributions to the Banking Guarantee Fund, and from the fact that the fees for the institutional protection schemes posted in Q2 2022 were lower, at 407 million. So, stripping of these values, the cost overall increased by 16% year-on-year, driven by inflation, salary increases, IT costs, and building maintenance. We adhere to our cost discipline. Administrative expenses on the same basis actually declined by 1% quarter-on-quarter. That cost grew by 21% year-on-year as we actually revised the salaries in September 2022 and because we increased the variable component of the total pay. in the first six months the cost of income ratio for the group was 30.4 percent improving to what we recorded a year before when it was nearly 39 percent plan number 21 net balance of provisions in the first six months was 590 million euros This is a growth year-on-year, which resulted from the low allowances we posted in the previous year and the observed impact of the economic landscape on the condition of our customer's portfolio. The cost of risk on an annualized basis after Q2 is 80 basis points. The NPL coverage ratio is saved at 58%. while the NPL ratio at the end of June stood at 4.9%.

Sign number 22, taxes and the regulatory costs.

I've already mentioned that after six months out of the profit of 3.2 billion that we earned on the growth basis, we had to assign $1.2 billion to taxation levies and $194 million to regulatory costs, including contributions to the Banking Guarantee Fund of $175 million. Summary. We can see that we are improving our performance quarter on quarter. Our sales volume grew significantly, and this shows that our business performance in quarter two was better than what we saw in the solid quarter one. Of course, we are focusing on our overarching aim that is to help our customers prosper. Our effort has been appreciated because we were awarded the title of the best bank in Poland by Euromoney. That's all in presentation and now let's switch to the questions and answers.

Quite a lot of questions.

So maybe let's start with the one that has been repeated a few times, the outlook for the dividend. When do we expect the formal letter from the KNF on dividend distribution of what's the probability of dividend? distribution especially after the last recent negative opinion about BKLBP so let me answer this question first of all we received the official letter and it said it referred to the European Court of Justice judgment being the condition

in a way for dividend distribution. And as I mentioned to you already, our capital position, our performance actually allows us to share the profit, to pay the dividend, and also to cover all the risks that could appear in the next quarters

So we will uphold our recommendation, and we want to get back to the discussion with the KNF about that. And we will try to convince the KNF that given our capital position and our current performance and the situation of our bank,

we will try to convince the canada that we would be able to pay the dividend but we will not give you the probability of that happening but in my opinion we have very strong arguments supporting our recommendation okay now the outlook for interest rates and what's the sensitivity, what's the outlook on NIM?

But we thought for a longer period of time that this is not the landscape for interest rate cuts, given that we have the inflation and the inflation targets in place, and what the NDP projections show when it comes to inflation. Nonetheless, the guidance of the NDP governor that we actually heard in July states clearly the conditions and outlines the landscape for interest rate cuts in the coming future. the inflation might hit one digit in September or August. Well, we'll see, but then the inflation might decline further. We expect that maybe not as much as the inflation target, but then it might trigger interest rate cuts. So it is very likely that we might see some cuts in October or maybe already in September. Then it seems to us that there will be some break in the cutting cycle, but then in 2024, we'll have the continuation of that. We do not envisage such cuts because the market is really aggressive in pricing in this potential cut.

But if this was to happen, well, of course, the reality is that we will see some cuts.

and for the time being we've been facing some stabilization and this is in line what we've been saying at previous conferences if interest rates keep falling clearly it will be difficult to keep our name as it is but of course that will depend on the series of new loan situation in the sector. The sensitivity of men's interest income to the interest rate changes, we do not provide it clearly in the report. We just actually provide you the sensitivity in line with the model. But as you know, our sensitivity to the interest rate was quite high when the interest rate hike cycle started. But in recent quarters, it was contained. And when we think about two years ago, about the share of variable interest loans in the total month, it was 95%. Now, the fixed rate loans represent one fourth of our portfolio. And this is a result of higher sales of fixed rate loans and the fact that we had part of our balance sheet with swap transactions. There's also a very specific question referring which part of the book is hedged and in what segments. The segments primarily refer to mortgage loans. And I can say that on average, this is a hedge from four to five years for the PIRAN book. And when it comes to the new sales, to show you the tendencies, the fixed rate loans accounted for nearly 80% of sales in quarter two. And at the beginning of the quarter, it was 72, and it grew to more than 80% at the end of June. So these two trends really led us to decrease the sensitivity.

Okay, and our next group of questions refers to Swiss trunks issue.

What are the assumptions for creating provisions? Is there a bigger interest after the European Court's judgment? Are there any changes in customer behavior?

Let me answer this.

Of course, we can see a growth in customer interest in getting information about the credit history after this few judgments. And this is also the result of the intensified marketing actions taken by law firms dealing with this. It can but doesn't have to translate into the bigger number of lawsuits. This is already included in the model for expected cost of legal risk. We think that that provisions are adequate and they correspond to the model. That is the LIFA model that we have in place. Of course, the growth in provisions in focus is related to the update of the number of expected lawsuits.

And as I said, it reflects our expectations.

In the report, you can see the parameters that we are taking into account when building our model. We keep thinking that a settlement is a better solution than a lawsuit, and that is why we've been offering settlements to customers, and we are proactive in our actions in this respect. Actually, we covered the entire Swiss franc portfolio of access agreements with our settlement efforts. We started to talk to those customers. We are in the course of negotiations with them. And we could see that there were some expectations when it comes to the judgment, then there were different interpretations of this judgment. So that was the period before the judgment and just afterwards when there was some slowdown in the pace of signing the settlement. But now, but we can see that now we are coming back to the pace that we showed before and the customer's willingness is there. Of course, this is also driven by our marketing activities.

that we've taken together with other banks.

And all the time, we've been continuing our efforts. We are persuading the customers to go ahead with settlements. But of course, we have also some customers who want to repay the denominated Swiss bank loans or industry Swiss bank loans, and we respect their choices, of course.

So, you can read that in note 33 to the report. You can read there the assumptions, about the assumptions of the model and sensitivity to different scenarios.

Okay. Now we have a couple of questions about settlements. How many settlements have we signed? Are those settlements based on the KNF chairman conditions? And there are some out of court settlements.

There are some court settlements as well. We did not have the exact statistics, but we believe that each settlement is legally binding.

And what was the last question? Is it in line with the rules set forth by the KNS chairman?

Yes. those settlements are in line with the kind of chairman's proposal and what can we expect in the quarters to come well we have been negotiating settlements with customers and but we did not have any targets for that and the number of settlements in quarter two dropped due to the number of settlements made in quarter one And that's all about Swiss francs, I believe.

The cost of risk. There are a couple of questions about that.

I have just received a few questions about settlements as well. The cost of settlement drops strongly quarter on quarter, will the bank improve their offering to encourage more customers to make settlements?

We do not provide any values in the settlement scenario and we cannot give you those numbers because it is in DTA and deferred tax assets. So that's the answer to this question, actually.

The cost of risk, NPL, why such a growth in NPLs? Is it due to retail or business customers? This was due to retail customers, namely mortgage loans. There have been a certain number of customers who used the public support fund and

met all the conditions to be deemed NPL.

I believe that the 100 basis points has been revised two quarters ago because a quarter ago we said that the situation looks a bit better and the peak would be lower than 100 basis points and a quarter ago I would support what we said a quarter ago because it's in line with our expectations, namely an increase in the cost of risk that took place. But this results from how we calculate that because in 2022, we started off with low figures And quarter two of 2023 was more or less at the level of quarter three and four of 2022. So that's why we increase the ratio to 80 bits. And further on, we believe that this level should stabilize. And in the first half of the year, we had stagflation. The GDP was close to recession level with inflation still being high.

We do not give any guidance other than a quarter ago. And there is a question about the ESG.

Will the creation of a special unit dedicated to ESG affect ESG activities in the bank, increasing the eco-friendly conditions of buildings and so on. Well, the majority of our buildings meet actually ESG conditions, so there will be no pressure to increase costs for that. And we believe that the entire ESG agenda is, first of all, a great business opportunity for us.

And we are very active in

energy transformation we participate in many transactions we are the leaders in my opinion or in this area especially um in terms of the largest transactions that take place in the polish market so even if some costs would be triggered on the administrative side, we believe that business benefits will be much higher.

Will ESG shape remuneration policy

Well, we are benchmarking ourselves against the market. This is our approach. So we are looking at the market situation. We compare the salaries of our employees to the market and we adjust them accordingly.

And we want to pay in line with what market pays to employees. There was also a question.

Do we plan any salary rises or actually each year we review salaries and we decide on that.

So this is our business as usual. We do not announce any salaries. This is a fixed element. of each year's salary review process so we will see what this process brings this year and uh what's the progress in the psp and bleak the first payment i do not want to answer to uh

answer this question, we will have a meeting with the shareholders soon, but we, I may say that we want to join this solution together with PSP and Bleak. We believe that the skills and especially in terms of customer experience that this company has is very strong.

That's why we are very strong supporters of this initiative.

And there are still questions.

What is the outlook when it comes to the net fee income in 2023? Well, I think that overall we expect the continuation of the trends and the growth in the order for mid-single digits. And that's what we should be continuing. What is the dynamics? in individual credit segments in your opinion do you envisage further growth in the sales of mortgages because now the interest has shifted towards the customers who offer the loan at two percent apart from that we see the growth in lending and it grew a lot in port of two even though we've heard that many people uh retrain from taking out loans waiting for the two percent loans but nonetheless we have a solid quarter And I think that the mortgage loans will continue growing. And the same is expected for cash loans. We can see the herdingers of increased demand for investment loans. We'll see if they are confirmed. So the scenario for 2023 and 2024 is the economic revival, which should actually stimulate the lending growth. We should start growing at a sound pace.

What else? I'm sorry.

We're trying to pull together the number of questions together, and we keep receiving new ones.

So, please excuse us for a second.

the level of repayments in the APEX portfolio compared to December, and I'm talking about the loans which were not subject to settlement. Now, if they were repaid, the balance is zero, but what you're asking, I understand, is what was the original value at the moment of sanction and the value of loans repaid. The response to the second part of the question is easier because I don't have figures to answer and the couple may have to answer the first part. But the payment ratio is really low. And the second question referring to this. Are there any issues brought with regard to the loans that were already referred? Well, we can say this is a marginal number. And there's also a question whether the bank asks for tax interpretation whether the cost of fixed-rank lawsuits could be viewed tax deductible. And if so, what categories of cost are viewed tax deductible? We can say that we ask for such interpretation, especially if we lose the lawsuits. and the interpretation received was negative that we cannot view it as non-tax as tax deductible but of course we will continue our efforts the question is also whether you are interested in acquisitions on the polish market because there is at least one button put on sale even though i think that we have huge skills in acquisitions and mergers At the moment, we are not interested in that. I mentioned that a number of times that our model is the one of organic growth and not the model of mergers and acquisitions as we used to see a number of years ago. received any losses concerning the sanctions of a free loan but we will have to have that checked but i think there have been very few such losses and another question do you think there will be any payments to the banking guarantee fund to the revolution fund we think that in by the year 2022-24 are neutral when it comes to BFG contributions. Of course, there are also payments, institutional payment protection schemes, and so we've already paid a lot and we don't need many more payments in the coming year, so I think it will be neutral. and the two percent loan so we have not discussed that yet do we envisage that we will offer that yes we will at the turn of quarter three and four and probably the last question what is the outfit for overall costs in 2023 well what can you say Actually, apart from the trends that you've seen that are going to be continuing, there is one element, a new one, and this is related to what the CEO has said, that is the review of salaries in the second half of the year. And this will have more impact on the cost in 2024 than in 2023. Apart from that, we do not expect any additional elements. And if we strip off such elements on a quarterly basis, if we look at comparable costs, then the dynamics is close to zero. And if we look only at the administrative expenses only quarter on quarter, we can see that our cost discipline is really sound.

And this is not going to change. Is there anything else?

What is the outlook for the growth in loans for this year, for us as the bank and the group, and for Poland?

But I already discussed that, I think. No, I don't have any more questions.

That was the last one. So thank you for your numerous questions. We hope that we answered all of them in a satisfactory manner, in quite an organized manner, given that there was a big number of them. If we have not answered any of your questions and you cannot find the answer in our report, of course we will be in touch. to join us at the next conference after we have . Thank you. Goodbye.