Santander Bank Polska Sa

of Santander Bank Polska for the first quarter of 2024. My name is Agnieszka Dorobrzycka. I'm in charge of investor relations at the bank. This presentation will be led by Michał Gajewski, CEO, Maciej Reluga, CFO and board member. Wojciech Skalski, financial controller and also a board member. After the presentation, we'll have a Q&A, but you can ask your questions throughout the presentation. You can send them to my email, agnieszka.dogdyska at santander.pl. We will answer those questions after the presentation. Michał, over to you. Hi, ladies and gentlemen. Welcome back. to the presentation. I'll be talking about the slides I have in front of you. I'll give you the numbers so that you can follow. So again, welcome to the presentation of our results after the first three months of 2024. We have generated a solid net profit and this allows us to be fully optimistic about the year going forward. This is the beginning of the journey we have embarked upon. We want to help you achieve more. I am positive that thanks to the strategy, 2024 will be a great year for our people, our customers, and our shareholders. And I mean the social and financial dimension, despite the recurring systemic challenges in the sector. So let's start with the result. In the last quarter, we generated 2,100,000,000 gross profit. At that time, the tax burden amounted to 697,000,000. The regulatory cost totaled 280,000,000 on top of that. So in total, we had almost 950,000,000 worth of charges. In quarter one, we generated a net profit of $1,565,000. I'm moving now to slide seven with the highlights. As a group, we serve over 7.5 million customers, of which over 5 million are digital customers. At 700 Bank of Cologne, we have 5.9 million customers, and this includes 6.3 million 3.6 million digital customers, and we see those numbers going up nicely, and that includes also the number of our application users. Deposits up 7% year-on-year to reach $210 billion. Gross loan portfolio increased by 5% year-on-year to $168 billion. Assets up by 9%. to $280 million. Customer funds amounted to $230 billion. That's up by 10%. Slide eight with key financial results. I will be talking about the details later in my presentation, but I'm now presenting the highlights. Net profit 1 billion, 565 million, net interest income up 10%, fee income 729 million, that's up 10% year-on-year, up 3% quarter-over-quarter. Total income Income, 4.2 billion, that's up by 11%. TCR for the group, 17.81%. Return on equity for the group is above 20%. Our capital position remains solid. We're moving now to slide 10 to 12. We see the novelties in our offer. for our customers. So let's fast forward to slide 13, where we're presenting selected business data. Retail banking. We maintain 5.9 million accounts for individual customers. This is 5% more than a year ago. In quarter one, we opened 121,000 personal customers. Year on year, PLN accounts increased by 3.8%. FX accounts by 12.9%. Loans, mortgage loans up 52% to reach a total of 4.4 billion. That's 52% up, as I said, compared to the previous quarter and five times more than in the same period of 2023. What's worth mentioning, vast majority of those loans were granted based on fixed 97% of those loans were based on fixed interest rates. In the first quarter, we granted cash notes worth 2.5 billion, that's more than in the previous quarter, by 3.8% and more than in the same quarter of 2023. We still observe higher loan sales through remote channels. In quarter one, it was 71% of all loans. In terms of investment funds, we're observing higher numbers too. SMEs, In quarter one, we opened nearly 17.1 thousand business accounts, so more than in the previous quarter. The SME loans, they total 1.3 billion, so similar to the same period last year. Business banking, double-digit growth is from FX, trade finance, also incredibly credit and leasing income, we see very good performance. Corporate and investment banking, growth in capital markets, advisors for MAA and trade finance, all those lines going up nicely. Slide 15, we're moving on to the balance sheet. I've talked about the growth in loans. We have an annual growth of 5%, 2%, quarter over quarter. Leasing recorded a 10% increase. Customer funds, the pulse is going up by 13.1%. Billions year over year. Most of the growth we see on the retail part. The group enjoys an excellent liquidity with LCI much above 200%.

Slide 17, net interest income and margin. The net interest income was 3.4 billion, growing by 10% year on year. Quarter on quarter, the interest income increased by 7%, while interest expense increased by 1%. So as you can see on the slide, the net interest margin for quarter one annualized on a quarterly basis was 5.38%, and it's been stable over the recent few quarters. Now, slide number 18. Net fee and commission income, robust growth by 10% year-on-year and 3% quarter-on-quarter. Year-on-year, we really see good performance when it comes to asset management fees by 55%, the good growth in insurance fees by 30%, ethics fees by 14%, and account fees growing by 5%. Quarter on quarter, we also saw good results when it comes to credit fees and FX fees by 11.4% respectively. And we also saw the growth in fees on credit and debit cards, which reflects the activity levels of our customers. Now slide number 19, income, growth by 11% year-on-year up to $4.2 billion. Now slide number 20, cost. operating costs. In quarter one, these costs were $1.35 billion, so that's growing by 8%. And this is, among others, the result of the contribution to the resolution fund of $290 million, and that was higher than what we posted in quarter one, 2023, because it was $184 million. Let me also mention that we received a letter from the Banking Guarantee Fund, which was communicated to the market in our current report. And that was the letter on the final amount of that contribution. We received it only at the end of April. And we, as we said, we posted $202 million of funds And in quarter two, we will make the adjustments to match the requirement imposed by the Banking Guarantee Fund. And the adjustment will be roughly $48 million at the consolidated level. Excluding the Bank Guarantee Fund contributions, the costs overall would have grown by 7% year-on-year, primarily driven by inflation, salary reduced, and IT costs. And this is the cost of our digitization strategy. The stock cost increased by 6% year-on-year. Despite all those growth, the cost-to-income ratio of the group was low at 32.6%, and That's better what we saw in quarter one in the last year, which was over 50%. Site 21, provisions. The total provisions for expected credit losses at the consolidated level stood at 232 million dollars. And that was flat on what we saw in quarter one, 2023. the cost of credit risk was 0.70%. In quarter one, we did not witness any major one-off events that would impact the expected credit losses and provisions for that purpose. The key risk indicators, such as the cost of risk, the NPL assure, and the NPL coverage ratios, close to what we saw at the end of 2023. So we've been also observing the stabilization in delinquencies for individual credit portfolios. When it comes to slide number 22, let me reiterate. The banking tax and regulatory costs were huge, and they represent a heavy levy for us. and to our bottom line. On slide 20.23, when we are summing up our performance, we've already mentioned interest costs and revenue streams, but you can also see the costs related to legal risk. And in quarter one, these costs were $300 million, of which provisions of legal risk represented approximately $170 million loss. And there were also costs of settlements. And let me remind you, we signed nearly 10,000 settlements with regard to FX mortgage loans. And the cost of that was $9 million plus. And the legal costs, apart from that, other costs represented $126 million. So recapping, that was a good quarter. We actually maintained good net interest income and we increased our revenue stream. Our key income also increased. We can see that we have the business momentum. The sales volumes are robust, satisfactory, especially when it comes to mortgage loss. And when it comes to our business operations, I think, we think the whole quarter was really good. And now let's go to questions and answers.

Hi, this is Majira Luga. I hope you can hear me. Yes, we can. We have, we've got some questions already. Thank you for all of them. As usual, we will group them by subject. Some questions are related to Swiss francs, some to the cost of risk, other to capital, dividend, and the margin. Michal, can we start with Swiss francs? Yes, of course. I see three questions here. The outlook on provisions related to FX loans, Swiss franc loans. Are we now creating provisions? Are we in the cycle? What can potentially impact provisioning? Okay. Another question is similar. It relates to our expectations to provisions related to Swiss franc loans in 2024 and the modest approach. Third question related to the coverage. in 2023, the main assumptions incorporated into the level of coverage. So I've read all the questions. I'll let you start by answering the last one. In the annual report for 2023, we are indicating the assumptions behind the level. for the calculations, how we create, how we provision those loans, what scenarios we assume, what the sensitivity analysis behind the scenario is. In the first quarter of 2024, that model remained unchanged to a large extent. It was continued with the same assumptions. Of course, we have the development of last Thursday. It only happened at the end of the month. The decision of the Supreme Court. We are now analyzing this development. We have not received a justification in writing from the court. So, once We receive that once we have run the analysis of that justification. When we look deeper into the previous decisions in the same respect, the link between the two, we will then analyze our models and assumptions and verify how it impacts our assumptions, only then will we make the relevant adjustments. But in the first quarter of the year, we did not have to take that into consideration. So we used the same assumptions as in 2023. 78, no, it says here in the question, provision coverage over Swiss franc mortgages, no, it's 80%. On the portfolio, San San de Banco is 84. Slightly less coverage on San San de Consumer, just to be more specific. In terms of Kerry's other question, we're not giving you the guideline or the forecast. until the end of the year. The situation here is dynamic. We never actually provided any intensive wrist pranks. I think I have answered those questions. Martin? We have the fourth question in the meantime. The settlement, what are the terms and conditions of the settlement? Is it the KNF offer? Are you going to revisit the settlement terms and conditions? Well, the KNF offer is the starting point. We have an individual approach. We talk to customers. We treat them individually. We're talking to all the customers, those who have filed a lawsuit and those who haven't. We invite them to the negotiating table. Those are the negotiations between ourselves and the customers. So I can't disclose any more specific information. The KNF offer is the starting point.

Well, thank you. It seems to me that we are done with this fund issue. Of course, if you want to ask anything, you still have a chance. Let's move to the next group of questions. There have been a few questions about the net interest margin, for example. Can we assume a stable NIM for the rest of the year, provided there are no interest cuts? This question was asked twice. There is a question about the cost of the deposit after the clear decline in quarter one. And there is a question about the scale of hedging and its impact on the net interest margin in 2024 and the years beyond. Well, let me answer. Being short, the outlook when it comes to men that we showed a quarter ago has not changed. And what we've been saying in previous quarters, we are saying that we try to keep it high and stable, and that's the case if you look at the previous quarters. Of course, Well, this is also our basic assumption that there will be no interest rate hikes in 2024. Of course, there were some slight declines, but the market priced up in at a much higher level. But we think that the cuts are rather likely only in 2025. Of course, there are many unknowns and different scenarios. So if there are no interest cuts, you know we've been increasing our hedging level against the interest rate fluctuations and in order to decrease our sensitivity to interest rate movements. So we've been active in that. And I'm telling you each quarter what part of our balance sheet loans is unhedged but we do it depending on market conditions. At the end of quarter one, the share of loans with a fixed rate increased by another few percentage points, and now they account for 35%. When I'm talking about the fixed rate, I'm talking about the effect of the higher sale of such loans because our CFO already mentioned how it looks in quarter one. This primarily refers to mortgage loans, which are now sanctioned with a temporary fixed rate. But we were quite sensitive to interest rate movements because the vast majority of our old mortgage portfolio was based on floating rates. So then we started to hedge it intensively. But nonetheless, we've been operating in the world of uncertainties. That's why we decided to hedge our portfolio against interest rates. The clients want their interest rates peaked. So then in the upcoming quarter, on the asset side, we'll depend primarily primarily on the asset mix in the new production. Most likely, it should be close to what we saw in quarter one, though we are counting on the rebound in corporate loans. We would like to grow even faster than what we saw, faster than the market. It's probably a bit lower than what we expected before because we were thinking about even two-digit growth. But quarter one was not that dynamic. But if there is a rebound, we hope it is also going to happen in the SME segment. And that will impact the mix of our loans and have a positive impact on our margin. When it comes to the cost of deposits, we've been We've been operating, trying to reach threefold objectives. That is the good liquidity of the bank, with TCR over 200%. We would like to offer also good rates to our customers when it comes to the whole mix of saving and investment products, and I think we managed to achieve it. And, of course, we want to keep low cost of deposits overall. And I think that we've been successful in that in quarter one. I told you quite a lot, but it boils down to the question, to the answer to the basic question, that most likely the cost of deposits will be quite stable. But of course, there are many impacts, many things that have an impact on that. And the other question that I will answer, the cost of credit risk. The outlook for the cost of risk, it is realistic to assume that it will be 70 BEPs in upcoming periods. Well, I think that the result is the same, The output does not change. We are showing the cost of credit risk from $70 to $90. So that's been our guidance for longer term. This $70 to $90 is quite a wide band but of course that depends on the economic cycle. The cycle looks quite good now. We are actually rebounding the Sending of our customers is quite good. When it comes to corporate customers, that, of course, depends whether they operate in the country or abroad. And the prices, of course, are influenced by the domestic demand. While abroad, the demand is not growing quickly. And I think the Polish economy will contribute to the performance of those operating on the Polish market. When it comes to the cost of credit risk, well, we have quite a boring ratio, stable NPL, stable NPL share, coverage stable, no new NPLs. And these were the drivers of the 70-bets. And we will be actually rather closer to 70% higher. That's shortly about the cost of risk.

Maciej, let me now take a few questions about the interest, about the free loans. But let me talk about the settlement first. we offered settlements to almost all customers. And this is definitely a sign that we prefer settlements instead of going to court. We don't run business in court. So we definitely want to solve this case in an amicable manner. In terms of free loans, And the whole case related to this, it's called Sankcie Kreditu Darmowego. This refers to loans granted after 2011. And this instrument can be used wherever a certain element is not included in the agreement. We are the defendant in about 700 cases. We have 700 lawsuits. We have won over 30. We have lost only three. We have about 40 final unbinding decisions of the court. We see legal offices become more involved in the case. It's not the consumers that sue the bank. It's the legal offices that buy claims from consumers. So consumers, we could say, are used. In this case, the assignment agreement signed by the consumer gave the consumer very little profit. law was supposed to protect consumer and as a result the consumer is not protected and gets very little benefit from that. So was that the intention of the lawmakers? We must remember this is a national solution. We have not had any cases like this in the European Union. We have prejudiciary questions, about three, now sent to the Court of Justice of the European Union. Even a slight infringement gives grounds to file a lawsuit. So we are waiting for the decision of the Court of Justice of the European Union. To err on the side of caution, we have changed the terms and conditions of our loan agreement to reduce our exposure to potential lawsuits. We have a group of questions related to capital and dividend. We have a question, maybe two even. What impacted lower capital ratio in the first quarter? Well, nothing happened in the numerator, but in the denominator, we have higher risk-weighted assets, and this derives from the higher loans and higher credit risk. We've talked about it already. And we have also a higher number in terms of op risk. Now, dividends. Okay. Before we start with the dividends, there is another question related to sweet pranks and it relates to the loans that have already been cleared. How many of those customers that have cleared the loans, how many are going to court? Well, the increase is marginal. It's about 5%. So it's 5%. So it's mid-single digit. That's my take. Now, extended moratoria. Well, remember, this is a draft bill. This is a bill that needs to be signed by the president still. I can remind you what happened in the previous years. That was about $1.6 billion. Looking at what's underpinning the bill, well, I would say they're less detrimental to the banks. However... We're still running calculations. We're estimating the impact. The impact will definitely be lower than previously.

The Borough Support Fund, Utilization in quarter one increased. That was 1,900 loans that availed of that support based on the relaxed rules. Okay, now let's move to the dividends. But maybe let's close off with those legal issues, losses, and so on. What is it? questions related to the risk of viable billing challenged. But frankly speaking, there are no detailed, important issues to be commented on. We can see that publicly it's been said a lot that that a lot is said about the Viber and the attempts to challenge that rate. Obviously, this is a voice heard also in courts. But in none of those cases, no verdict unfavorable for our bank was issued. For some banks, their verdicts were unfavorable, but the vast majority of claims to safeguard such requests, they are turned down by courts. So it's appreciated that Viber is issued by a licensed entity and supervised by the Polish supervisor. So there is a clarity that it's in thing and compliant with the benchmark regulation. And let me highlight that the K&S, the Polish supervision authority, publicly confirmed in December 2022 and then in July 2023 that this benchmark is okay. And I think they actually learned that lesson from the Swiss franc case. So the public authorities say that this benchmark is fine. It's not only the KNF as the supervisor matches. Over to you. The capital and dividend. I've already explained why the capital ratio decreased. Now there's three questions referring to capital and the dividend. I think there are more questions to the regulator. The first one says that for the first time we were allowed to pay the dividend from the dividend reserve and the retained profits, and what were the reasons for paying the special dividend, and what will be the reasons for that going forward, and what is the chance for paying more than 75% in profits in upcoming years. And we also have the capital surplus of 300 points, when this is higher than average for the European Union, and what are we going to do with it? The first question should be really addressed to the Polish supervision authority. And of course, that will depend on what will be their guidance for the years to come. But for years, we've been reiterating that our capital surplus is big and sufficient to let us grow to share it with the shareholders. And for two years in a row, we paid out 100% of the profit. But we will see what the regulator says in the years to come. But there is nothing really against taking an individual approach. Different banks have different levels of surplus. And therefore, they cannot always afford their dividend payouts at the same level. Maybe it is worth stating that we've been consistently conducting the dialogue with the KNF. We've been presenting our stress tests. We are persuading them. And the payout has been quite high in recent years, and we hope that we will continue acting like that. And the result of our professional dialogue with the KNF actually is the level of payment that we make that we can pay out so much. There are two more questions, actually the same ones. they referred to the long-term financing indicator, what it would be at the end of the year and quarter one. Well, at the end of... We didn't have any indicators of the long-term financing, so we are not reporting it. But there is a process of consultations. Once it's completed, this ratio will be fully defined, and only then... we will be able to report it and to tell you what it might be or what it is. Agnieszka, is there anything else in question? I think we've exhausted all of them with this long-term financing ratio. I haven't received any other. Okay, then. Thank you very much, everybody. Thank you from me as well, and let's have a nice break now Thank you. See you next time. And thank you for all your questions. Just one more thing. There was just about the total absorption capacity TLAC. So take a look at page 29. But maybe there is something that is just not really Well, there we will check it out. There is a question also about what about the levels in the subsequent quarters. Well, the decisions on dividend payment are neutral to the capital ratios because then values paid out in the dividend will be the same. So it will be actually B squared with what we had this year. So it shouldn't have an impact on T like another capital ratio. So thank you very much once again.