Santander Bank Polska Sa

Good morning. Welcome at the presentation of financial results of Santander Bank Polska Group for the first half of 2024. My name is Agnieszka Dłuszczycka. I'm head of investor relations at Santander Bank Polska. Today, the results will be presented by our CEO, Michał Gajewski. Maciej Reluga, member of the management board responsible for finances and Wojciech Skalski, Head of Accounting and Financial Control Division. I'd like to encourage you to ask questions via the link available on the website or you can also send questions directly to me at dnieszka.dobrzycka at santander.pl. So let's start with the presentation and then we will hold a Q&A session. Good morning. Thank you, Agnieszka. My name is Michał Gajewski and we will start the presentation now. After the first half of the year, we have generated a good net profit and I am optimistic about the next quarters. I am convinced that this year will be satisfactory for our customers and shareholders. despite the persisting regulatory challenges. Briefly speaking, after the first half of 2024, we recorded the gross profit of $3.2 billion. In Q2 alone, we generated the net profit of $793 million. At the same time, the tax burden was $1.267 billion. while the total regulatory costs amounted to $272 million. So the total burden in the first half for our group amounted to $1,539,000,000. Let's move on to slide seven with general operational data. As a group, we provide services to over 7.5 million customers, out of which over 4.3 million are digital customers. Santander Bank Poland itself has 5.9 million customers, and the number of our digital customers grew year-on-year by 7%. We have 3.6 million of such customers. And in terms of mobile app users, we recorded a growth by over 13% year-on-year. Customers' deposits totaled 215 billion zlotys and grew by 7%. The gross loans portfolio also grew by 7% to over 174 billion lots, which means an increase in the market share by 50 basis points in one quarter only. Assets grew by 8% year-on-year up to 283 billion lots, and customer funds grew by 10% up to 237 billion lots. In slide 8, you can see the key financial results. I will discuss the results later. Now let me highlight the key items. The group's net profit was 2.4 billion zlot, net interest income was 6.7 billion zlot, customers' deposits total 1.7 billion zlot. On a comparable basis, both net interest income and fee income remained at a similar level as in the first quarter. Total income was $8.3 billion, growing by 9% year-on-year. TCR was 17.8%. Tier 1 was 16.7%. Our capital position remains high. Return on equity for the group was 19.1%. And the group can boast excellent liquidity. The consolidated LCR at the end of June was 200%. Slides 10 to 12 refer to new products for our customers. So maybe let's go straight to slide 13, selected business data. In retail banking, we have 6 million accounts for individual customers, up by 5% year-on-year. In quarter two, we opened 110,000 personal accounts in Polish Zloty. On an annual basis, accounts in Polish Zloty grew by 4%, while foreign currency accounts by 10%. In quarter two, we sold mortgage loans worth 2.7 billion Zloty, which is less than in the record-breaking quarter, the first quarter of this year, but The previous quarter was marked by a 2% safe mortgage loan program, and in quarter two, such loans accounted for only 23% of mortgage loans. That's why the sales dropped in this product line. In the second quarter, almost all of the portfolio was granted at an adjustable fixed rate, namely 95% of mortgage loans. Total share of loans with adjustable fixed rate for five years in the entire mortgage loan portfolio in PLN grew to nearly 37% at the end of June. Cash loan sales in quarter two totaled 3 billion lots, up by more than 16% versus the previous quarter. In the entire first half of the year, we granted 5.5 billion PLN of cash loans. Net investment fund sales was 900 million zlot. In the entire first half of the year, net sales reached 3.1 billion zlot. Retail assets of Santander TFI were 21.6 billion zlotys. Our market share has been growing. Now it's almost 11%. In the SME segment, we're also acquiring new customers. We're opening new accounts, nearly 15,000 new business accounts for SME customers. SME loan sales totaled 1.4 billion zlotys. up by almost 10% versus the previous quarter. In business and corporate banking, trade finance and leasing income increased by 10% year-on-year, and credit income also has risen. Credit limits grew, and types of new limits in factoring, leasing, and trade finance also have grown. We have higher income from M&A. consulting when it comes to corporate and investment banking, income from capital market services grew, and we have also a significant growth in trade finance services. Income on transactions in the institutional clients department increased by double digits, mainly 21%. Slide 15, I have already referred to gross loans at the consolidated level by 7% year on year, and four percent quarter on quarter we're growing faster than the market and we also recorded a nice growth in terms of leasing portfolio 2016 customer funds seven percent growth in customer deposits in the first half year and the daily deposits stood at 215 billion blocks

In a year, the deposit grew by $14.6 billion. $2.1 billion of that was the growth in business deposits, while $12.5 billion in retail deposits. Now let's talk about our real financial performance, net interest income and margin. The net interest income in Q2 was $3.2 billion. and declined by 3%, and that was driven by the impact of the short-payment holidays, which accounted for $134.5 million. If we trip it off, the net interest income grew by 1%. In the first six months, interest income grew at the pace of 4% year-on-year, while interest expense reduced by 2%. The net interest margin for the two quarters annualized on a quarterly basis was 5.8.7%. If we trip all the said treatment holidays, it is 5.28%. OK, then. Net fee income. It grew by 9% year-on-year. In the quarter two alone, it stayed flat on quarter one. Year on year, we saw really good performance when it comes to asset management fees, insurance fees, ethics fees, account fees. Quarter on quarter, we also saw good performance when it comes to ethics fees, insurance fees, and asset management fees. Summarizing our income lines by 19, in the first half year, total income stood at $8.3 billion, which has grown by 9%. If we adjusted that by the payment holidays, the income grew by 10%. Interest income grew by 6%, driven by interest rate changes, fee income, and fee income, which grew by 9% year-on-year. Income and other operations were actually driven by the actions taken in advance to make settlements. And the cost of those settlements in the first half year was $35 million. Now let's talk about cost, slide number 20. Total cost for the first six months totaled $2.6 billion. which is the draw by 11% year-on-year. And that was burdened by the Banking Guarantee Fund payments of 253 million zloty. Last year, it was 175 million zloty. If we strip off these costs, the total cost grew by 9% compared to the last year, driven primarily by inflation, salary adjustment, and IT costs. Staff costs, they increased by 7% year-on-year. And that reflects the adjustment of salaries in September last year. That also reflects the cost of the long-term incentive share-based program that we launched. In quarter two alone, the total cost decreased by 9% compared to quarter one. If we strip off the banking guarantee fund cost, That was $206 million. The costs grew by 3% quarter-on-quarter. The cost-to-income ratio for the group at 31.1% was really a sound one. Now provisions slide 21. The total provisions for the expected credit losses on a consolidated basis totaled 611 million slots for the first six months. And approximately 380 million worth of provisions was created in quarter two. The copy risk has been stable in the order of 70, but when the balance of provisions in the six months of this year was slightly higher than in the corresponding period last year. And there was the one-off factor. We introduced the triggers for cross-bank retail and SME exposures to stage two. And this is a change consistent with the practice applied on the Polish and European market and recommended by the European regulator. After that change, we are actually in the same market. The quality of our loan portfolios are good, in our opinion. We also observed stabilization or even some slight improvement when it comes to the key risk indicators such as the NPL-SURE, NPL coverage ratio, or the Lincoln Seat Rate, or the cost of risk. I've already discussed bank index and regulatory costs at the outset of our presentation. These levies are So very high for the whole sector. So summarizing our performance in the first six months, you can see that on slide 23, we already mentioned interest income and cost and our income line. But this slide also shows the cost attached to the legal risk that we faced. After two quarters, that was $1.5 billion. And then quarter two itself, it was $1,215,000,000. And that's what we had to put in place in provisions. Summing up, that's been a good six months for us. Another quarter in a row when we kept high net interest income and net fee income. When it comes to the business, I think it went well in the six months that we actually growing our customers. We've been growing organically. We've been recruiting new ones. And that's about 12 for the second half of this year. Thank you very much for listening to me. And now the floor is yours. Let's have the questions and answers session. Let's start with the questions we've already received on mailer, but let's suggest we go this way. I would suggest our CFO much easier look at parts with questions referring to our net interest income sensitivity. What is the sensitivity of the NIM to the move on the interest rate curve by 100 bps? What will be the sensitivity of NII due to new NII short limits? And the third thing is that the governor of the MVP recently made a statement on the interest rate cuts, and now that they should be expected in 2026. And we also have a higher outlook for inflation in 2025 than before. And the question is, what are the implications of this for the macro outlook for our NIMS and our OTEs? So, Maci, if you could answer these three questions. Can you hear me? Yes, we can hear you. There's no echo, but you've heard the questions, right? When it comes to net interest margin and sensitivity of the net interest income, it's in the order of 300 to 350 million euros. Of course, assuming that we have a constant balance sheet, but looking at the statistics, what part of the loan portfolio is based on the fixed rate or fixed rate that is hedged, it grows a few percentage points. In the middle of 2024, this gives us 40%. When it comes to the regulatory limit, NII SOC, We've already seen the change sensitivity. We are within the regulatory limits, so we don't have to do anything extra because of that. But depending on the market landscape, we are getting ready for the lower interest rate scenario. And that's about the third question. When it comes to expected interest rate cuts, We expect it to be 20% if it does not materialize, then what we have already done should be enough to fit into the net interest income stock limits. Our sensitivity should be okay. We do not give you any guidance for NIMS or ROTIS. It would be too far-fetched going to...

outline the scenarios what might happen with our key indicators thank you okay so now maybe i will take over and i will answer questions about the front loans the first question was about provisions that exceeded 100 percent coverage level so Do we expect any comments from the regulator about the optimal coverage level? I have to say that we have never received any expectations from our regulators. Of course, our regulatory authorities monitor the situation in the banks, but We have never received any decisions taken at the external audit level. We have never received any comments or suggestions in that matter. I don't know what the situation in other banks, but we have never witnessed anything like that. Of course, in the second quarter, we topped up our provisions We now exceed 100% coverage level. We think that this reflects the situation on the market and this reflects the situation at court and behavior of our customers, both those that sign settlements with us and those that go to court. What's the number of foreign currency mortgage loans granted historically ever granted in Santander Bank Poland group. In total, in Santander Bank Polska, we had 62,000 such agreements. I would have to double-check that, but I think that's the right figure. In Santander Consumer Bank, 27,000. What's the proportion of active lawsuits concerns loans that have already been repaid. Those that are at court. When it comes to our bank, this is about 7%. When it comes to inactive customers, where about 7% of them went to court. In Santander Consumer Bank, I do not have the data. I will have to double check, but I don't want to express my opinion. I would rather check that first before telling you. Okay, so now let's move on to the next group of questions. Long-term funding ratio. There are two questions. How much is it according to your estimates and how do you plan to reach the required level? And what's the new long-term funding ratio at the end of June 2024? So I'd like to hand over those questions to Maciej. At the end of June, it was around 40%. So we are in line with the target, which was 38%. And in the future, well, it depends on many factors. First, how the mortgage loan portfolio grows, how our RWA grows, together with our entire loan portfolio, because this affects the capital and dividends. So depending on that, we will need certain issues for TILAC, MREL, and this will impact long-term funding ratio. And if it turns out at the end of the day that we will be below the level of 40%, 2.5 years from now, we will have to make additional issues.

Okay. We have a question referring to IT. Do the IT systems of Polish banks, that is both something like Polska and FCB are connected with the Spanish parent company? Are there Any plans to use a common IT platform are domestic banks vulnerable to an attack like the one carried out in Santander Group that resulted in the leak of customer data in Spain, Chile, or Uruguay, which was combined with the leak of front-line data. Did the problems with the site update affected the bank operation last week and how did they entail an additional cost? Now, let me tell you that we are very serious about security and cybersecurity of our employees and customers. And that's why any platforms that we have or that we share with our current company, All these platforms are subject to special surveillance. And of course, they are always modified or we always seek consent of the regulators for doing that. It's not that our transactional banking platforms are the same as the ones used by our parents. We use the ICBS system, so we don't have the same platform And for security reasons, we keep part of the data in Spain, but that's cybersecurity. That's about cybersecurity in the case of any hybrid attacks. If our data centers were threatened in Poland, so that's the first line of defense that These are not transactional systems. These are just the systems for keeping data from transactional systems, but they are not used for transactions. But the question, is the leak of data possible in our case? Of course, as I've been said, we made huge outlays to ensure security. And we have the processes compliant with the top standards. So I do believe that we won't see such a leak, but I don't want to provoke anybody. We meet all the standards and we keep investing in security. With the problems with the state update affected the bank's operation. Yes, we had some problems, but our processes actually worked very quickly and our teams reacted quickly. And we did it in consultation with the group as well. We particularly saw problems in our communication center. Some laptops of our employees and workstations were affected. They had to be reactivated on site, and the systems had to be recovered physically. But very quickly, all the transactional systems and the bank security systems were very quickly recovered. There were no additional costs related to that. And the only thing we did, we carry forward our release of the system to another date. OK. And now, maybe I'll ask Wojtek, our head of financial control, to discuss the tax, the effective tax rate, which is computed after having deducted the non-tax costs, it's usually around 90% and this time only 50. Why? Could you answer that question? Of course. Good morning, everybody. I do encourage you to take a look at the consolidated report. You will find there more details. For the bank on solid basis, the effective tax rate was 22.4%. And having stripped of the Swiss bank effect and the provision, it was 20.6 or 21.6. So that's normalized. It's not maybe, well, it's close to 19% on average. But This was also driven by some other costs like banking guarantee fund costs and other costs which were not tax deductible. But what has happened at the consolidated basis in order to having stripped off the Swiss francs effect, the effective interest rate would be 14.6%. But this item, the technical assets created by our subsidiaries and some consumer banks offers And this element drives down this effective rate so much. This is the requirement of IFRS 39 on interim reporting. If the rate is not naturally high or distorted, and that's what In this case, they can create these technical assets to normalize that rate to some extent. So that's why sometimes the consumer bank did it. And that's the whole comment. Okay, thank you. And the next question, of course, the next area of question are the spreads. What will be the change in the quantitative criteria for identifying a material increasing credit risk affect the level of provisions? And the second question is the outlook for the risk costs. Let me answer the first question relating to reclassification to stage two. As I said during my presentation, this change is consistent with the practices applied on the Polish market, but also on the European market. And that's also recommended by the European regulator. After changes, the stage two of the bank accounts is the same as the median of the market. The recommendation was to change it and to make the approach of the banks consistent. IFRS in this aspect leaves quite a lot of leeway to banks and how the criteria should be applied. So we think... So we are... So we don't expect any additional reactions from the health regulators to that. When it comes to the outlook on the cost of risk, we usually don't give any guidance here. I don't really remember whether we said anything about that earlier and about our outlook for the cost of risk. We were saying what we put in our strategy in the recent quarters showed that the stabilization at the level of around 60, 70 bps is okay. Of course, there are some customers that we actually take a look at in more detail because they're spending maybe some dollars, but I think the diagnosis is roughly 70 bps.

okay now loans the first question refers to the impact of the EU recovery funds that were unlocked for Poland and that will be gradually dispersed so the question is can we see any impact of this situation on growth in our bank and how can we as a bank benefit from this program? The second question is the increase in the corporate loan portfolio was 5.5% quarter on quarter. That's the largest increase in six years. And what's the reason behind that? Has there been such a high rebound in the demand for loans? And I have also seen one more question. Will the increase in corporate loans in quarter two, does the increase in corporate loans in quarter two result from higher investment activity? So I will start maybe answering those questions and then Maciej will add his comments. Okay, so let's move back. Yes, of course. This is great news for the Polish economy that EU recovery funds have been unlocked. We all know that now the projects are being identified and it has to be done quickly in order to use the funds. We do not have a lot of time uh, to, uh, to use the funds. So both the public and private side, um, are active in order to use the recovery funds to the largest extent possible. This is good for the economy and whatever is good for the economy is good for the bank and the banking sector. So, um, we want to participate in that, not only in terms of bridging loans, but also financing additional needs that may arise in connection with those EU programs. We are very happy and we are helping our customers in building their business plans so we will be also supporting them by financing those projects. I am very glad about the increase quarter on quarter. We have invested a lot in this business line last year. We invested both in the skills of our bankers, increasing customer service quality. In the financial report, we could see that we are the leader in terms of the skills of our bankers. So, First of all, we are growing on our existing customer base. We are providing our customers with both simple solutions such as Overdraft, but we are also financing our customers' trade activity and we work hand-in-hand with our customers to help them grow their business. But we are also acquiring new customers. We've been acquiring more and more new customers who appreciate our processes, how quick they are, and how skilled our employees and bankers are. Okay, so this is about loans. And last question. When it comes to loans, there is one more question about consumer loans. And in the context of corporate loans, has there been any change in pricing and risk appetite? No, we have not changed anything. So this growth that we are showing to you in quarter two, first of all, they proved that the growth in loans has been sustainable across all the lines consumer loans grew without changes in pricing and then corporate loans starting from SMEs up to middle medium companies and large corporates. We grew across all the lines and some areas in double digit. And as you may remember, we were quite optimistic at the beginning of the year when we presented the results for 2023 when it comes to lending activity growth. And we could see some pipeline, some demand for loans and it materialized in many areas and we outpaced the market because and the National Bank of Poland showed that the market grew by a little bit more than 0% and in our case it's 7% and we are expecting continuation of this trend depending on the macroeconomic situation but we believe that the economy should change or shift from consumption to investments, and we are optimistic about that. And when it comes to loans, there was a question about the impact of 2% safe loan program. So 23% of mortgage loans were connected with that program, I believe. Yes, it's 23%. I checked that. Okay, so 23% of new sales came from the safe loan program. So let's move on. Okay, so what's left, actually? The questions about cost. Okay, so Vojtek, could you answer those questions? Yes, of course. There was a question about our growth quarter on quarter by 100 million. Half of that growth is due to the one guarantee fund and the rest is connected with other components, so please read Note 13. You can see the details there. And in general, apart from inflation and record low unemployment, we should also bear in mind about a growth in minimum salary. Maybe this does not affect bank employees, but it affects the costs of our service providers. So, for example, cleaning services, transportation, those costs are growing in line with what happens on the labor market. And when it comes to the general comment on the cost, There was a question about the salary indexation that could be expected in the second half of the year. And the second question from Martha, who also asked the question, can one digit growth in staff costs be maintained? Well, this growth is better than in the sector. It results from the variable component, mainly the bonus. That is a significant component of our salary cost. And the indexation, the adjustment of salaries that was taken in quarter three, well, this year the management board also analyzes the budget and analyzes the market situation. At that moment, the decision has not been taken yet. So we should be patient about that. Can the growth of staff costs be maintained? Well, as I said, this depends on the decision of the management board. And the general guidance on the costs is that, bearing in mind all the stimulants of the cost, we should bear in mind that our growth in cost results from the market situation that may change. So we monitor the costs regularly and we should expect continuation of our cost discipline.

Okay, I can see two more questions. What is your opinion about the run rate in the winter holidays? That's the first question. And the second question, the growth in business loans. Do you think it's the beginning of a trend? Let me start with this, of course, payment holidays. I keep repeating that the state interference in a contractual relationship. Payment holidays is something different. This is the interference of the public authority into a contractual relationship whereby it's decided that one of the parties to the contract is not getting the remuneration due to them. And that's the definition of that. If you look at the run rate for the program, we relied on the hit rate for the previous edition of the program and for those who were entitled to avail of it. This is not even 11%. that the actual estimated is 14.9%. This uncertainty is gone that the customers who did not meet the requirements of the Act still applied for the aid under the program. But now the customer awareness is higher. And those who are not entitled do not file for this type of product. So the requests we receive are from those who meet the criteria of the program. We do not expect any additional provisions for that purpose. Margie, could you add to that? The provision is approximately 135 million and we take into account there was expected by the end of 2024. We took into account the runways for the target group during the previous program and the hit rate against the total loans is in the order of 15 percent. The CEO said that recent days that was 11%, but probably will reach that level of 15%. So the whole provision for that effect will be concerned. The changes will be possible if there were any drastic changes in customer behaviors in the second half of the year, which we do not expect. Business loans, we've already answered that question. Could it be the start of a longer trend? Yes. We want this trend to last for long. Last year, we were completely flat market. We outpaced the market by roughly 10%. The whole market now has started to move, but we are outpacing it at least by twice. So we have the appetite to win new customers. And we will continue acting in sync with that trend while the prospects for the Polish economy are positive. And we will be, of course, growing in a very safe way. Have we skipped any question, Agnieszka, if you could take a look and check? There was one question referring to deposits and the share of term deposits in total deposits. How do we see it in the context of potential interest rate cuts? Of course, there are different scenarios, but it's reasonable to assume that this ratio will behave in a stable way in the quarters to come. Yes. There were three questions from the internet. One refers to the internet, whether the growth in corporate loans in Q2 was driven by the growth in investment loans. And there were two other questions. TCR in FCB was 44%. Is there any idea to optimize the capital structure? And the next one, what was What do you think the new regulations like CRR and CRD will have on the requited assets and capital ratios? And these are all the questions that we received. Matthew, if you could answer about the capital ratios. Sure, I would have to check, but some loans that we sanctioned were investment loans. And that was part of the loans that accounted for the growth, but we will have that checked in detail and provide you with the answer in writing. And Maciej, if you could answer the question on capital ratios, CRD, CRR, at this stage, we will not share our preliminary estimates when it comes to the impact of these new regulations. No, when it comes to the surface, it will not result in any special pressure. I think that the morale part is more sensitive. Yes, but we are still analyzing the impact and we are considering the mitigants, so sharing the information at this early stage is not really sensible. On top of that, The best way would be to do it through dividend payment. But the business model of FCB is that they have relatively high NIN, but relatively high NPL. And the NPL has to be below 5% to be able to pay dividend, and that's quite a challenge. So that aspect will require further analysis and considerations. Let me add that we have taken into account the specific situation with the very high solvency ratio the bank is showing a loss for the first half of the year because of the sweet-crime issue. And this is difficult to say how things will develop at the end of the year. But one of the arguments that this bank does not require any resolution or recovery plans to be kicked off is that the capital base is very high. So as long as the situation is not clarified when it comes to sweet plants, this high buffer, capital buffer, has its advantage. okay i can't see any more questions okay then we can sum it up thank you very much for your questions the ones that we have not answered in full of course we will provide you with the answers in writing and we wish you a nice afternoon and a good day thank you very much goodbye