ING Bank Slaski

Good morning. Let me welcome you to our conference summarising the quarter three results. Today they are going to be presented by our CEO, Brunon Bartkewicz, Vice President Bożena Graczuk in charge of finance. We also have Iza Rokicka for investor relations and Maciej Kowalski also investor relations. My name is Piotr Otrata and I'm the spokesperson for the bank. Brunon. So if you don't mind, please go ahead with your presentation. Thank you very much Piotr. Hello and good morning. Welcome to this press conference and we do hope that you are in excellent health. Let me tell you and begin like I do every quarter by saying that the quarter was relatively boring and another quarter where we just completed and pursued our vision and our attitude towards creating our bank but this quarter I have a bit of a problem with this statement because this quarter was certainly not boring, but at the same time, we managed to achieve what we had planned while still having our long-term and medium-term tasks in perspective. So when preparing to this press conference, we thought that many questions would concern behaviors of our customers and this main topic. of whether digitization and automation in customer behavior is going to stay with us for longer. So presumably at this moment, there are some topics and are questions that are more pressing, but I suppose you have already talked to many banks about them because many banks have already presented their Q3 results. So you have probably heard quite a lot about that. So let me go back to the main topic in order to bear in mind all the structural topics. Cyclicality and predictability are an element and have always been part of the banking business and they will stay. in the times to come. So whether or not we have a recession or a growth cycle, we need to go through it in a painful way. And the element that sets our direction is mostly our customers. So I'm not going to take up too much of your time. I know we're pressed for time. So let me go back to customer behavior. Let me reiterate one more time, and I think the figures will be there for you to analyse, that we have been dealing with an acceleration. The COVID-19 pandemic has been an enzyme and catalyst of all the changes that we have witnessed for many years. Nevertheless, the rate of reduction of branch visits and cash transactions has really stepped up. What we have seen are the changes that we've been talking about for many years, the transition to automation, the number of people who feel comfortable in electronic banking channels. So this year, 2020, and the first month, the first half of the year of the pandemic, actually accelerated the pace and provoked changes. Another thing that is quite widely visible is the ever more widespread formula on mobile banking. So a growing number of people have been able to do most of the banking via the phones, which indicates that there were some elements that provoked a smile a few years ago. How can I do all my banking on this little screen? Now, things are moving in a direction that we had expected them to move, and the pace is much faster than so far. So on this point, let me draw your attention to the fact that the processes that we have been reporting and discussing are very much an element of constant transformation and transition and our adaptation to these effects. So if you ask how the accelerated digitization translates into the reduction of what we often refer to as traditional branch banking, So let us look at page five. There are some changes that we have seen in the last four years and the adaptation of the number of branches has been going on for about 10 years at our bank. So in this connection, let me tell you that these elements of unpredictability and cyclicality, it is very important to know the main trends and to build a resilient, I don't want to speak of an anti-fragile organization, to really move on with the times. And this responds to one of the essential questions that are pressing here. Are we planning any radical revolutionary changes in relation to the pandemic? So the answer is no, because we make changes every time, in every quarter, in every year. So I believe there is no need for that in this respect. And we will continue to follow in a customer's footsteps. And my last comment in this part, which is, please take a look at page six. When we talk about automation and changes in customer behavior patterns, we try to refer to retail customers, individual customers. But let me remind you that the same behavioral pattern of changing behaviors is observed in business banking from the smallest to the largest businesses, including a very clear increase in the number of people. And now we're talking people representing those entities using all the facilities provided by the banks. such as the possibility of making transactions, approving transactions, applying for transactions or different elements of banking. And they do it via mobile devices. So I think this is really worth highlighting. And let me reiterate that in our strategy, digitization and automation span across all of our segments and also our internal processes. Moving on to our quarter three results in the nine months. Let me say the following. This year, of course, has been a year where the radical uncertainty has come into being. the occurrence of the pandemic, which is a tragic development, and also the reactions to the pandemic, such as the slashing of interest rates, such as the aid programs. This has radically changed the balance sheet and PLNA this year. As you have heard, we have had a great inflow of funds into mostly business bank accounts from the PFR Polish aid funds and also the government SHIB programs. So these funds have been deposited on those business accounts. And on the other hand, those entities that have seen such a huge inflow of liquidity from the government programs are less likely to take out new loans and they have a higher propensity to repay loans. Investment activities of private individuals is very low. This should come as no surprise because the reduction of financial costs shouldn't prompt businesses to take risky decisions at this level of uncertainty that we have now. Let me remark, however, that we are concerned because the process of slowing investments in the private sectors or the delayed investments is not just a phenomenon related to the pandemic. It had occurred much earlier. You may remember our conferences presenting our results. We drew your attention to that on multiple occasions. So there was a loss of the opportunity to use this leverage, this growth to build our competitive advantages. So the chances for recovery would have to rely on government aid funds and the way of utilization of all those funds and the funds that have a will flow in under transformation programs. This will certainly determine the size and the quality of competitiveness of the Polish economy for many years to come. This is a fairly important element and we all realise the importance of this element and all of the decisions that we are going to make. Our bank has been actively involved in those aid programmes. You know it very well that our share in the transfer of these funds, especially from PFR, has been quite considerable, which is also related to our share on the business market, because this is mostly where it happened. On page 10, You have been probably analysing it since the early morning. No major elements here or no major surprises in terms of our key P&L aggregates. But I suppose you're going to have questions about the costs and revenues as well. And on the revenue side, we have the expected blow onto interest income. Alongside the regulations, the reaction to interest rate decreases is delayed on the passive side and quite fast on the active side. This is quite understandable, especially in retail when we are obliged to notify any changes in advance. The cost of funding at our bank has always been based on core deposits. That means liquid deposits, mostly current accounts and savings accounts, and to a far lower extent on acquisition and retention instruments of future securities. So this takes more time because of that, because we do not have such a quick rotation pattern based on quick fixed time deposits. But on the other hand, it is fairly stable. So within what we have always talked about, a similar situation. can be found in the lending production. We've always talked about a broad diversification over lending. That means that our portfolio has been behaving quite well in terms of dynamics. We have low dynamics in some areas, in some others we have higher dynamics. So all this taken together builds a relatively stable approach towards a balance sheet. You have probably attached a lot of importance to credit moratoria. On page 11, we have essential information that I suppose Bożena Graczyk will discuss that later on. So just let me give you a brief introduction. The essential elements are as follows. Credit moratoria, the non-statutory ones mostly, but also the statutory ones for the time being. At our bank, they have the following character. So they're relatively low versus our portfolio, but they are relatively long term because the vast majority of the moratorium that were mostly applied for by our customers in March, April and May. So they were largely for six months. So respectively, in September, October and November, they will mature or have been maturing. maybe not that much in September, which we have observed and reporting today, but in October we have seen an increasing interest in credit moratoria and the rollover of moratoria from non-statutory to statutory ones. That distorts the application process a bit. But with regard to the quality of the portfolio and the credit moratoria that are being applied for as of today, something that we saw mostly in quarters free, These figures are quite different. So if you wanted me to talk about the future, something that I tend to avoid, it seems quite natural that we will see an increase in the credit moratorium and applications for statutory moratorium all throughout the market. But even if that happens, the main Times of moratorium will be the ones that are maturing now. Under the contract between the banking sector, the banks have banded together to do that. As for the moratorium that have matured, The quality is too early to assess. We will certainly know more in the next quarter. Most of them will mature in quarter four and they will transition into statutory monetary, but we see no major risks here. But nevertheless, with a conservative approach, we are creating corresponding provisions to be ready for the future. As for the balance sheet structure, we can see all the rapid changes that took place in quarter three, a huge inflow of deposit funding and smaller increases in lending, the need to invest in highly liquid instruments and if not liquid, then at least very secure instruments. Our bank has made such investments in order to obtain a stable and well-structured balance sheet and, of course, When we think about our revenue assets, the securities with a lower margin play a larger role and that influences the total weighted margin or total assets. On page 11, a stable picture of growing shares in specific market elements. If we recall our share of the corporate loan market altogether, You will not be surprised to see a share of 15% to 16% in PFR funding within the pool for smaller businesses. And with other elements, we have what we have always sought, stability and a nearly linear growth of our share, which looks good. As for business development, the pandemic and this period has always focused on continuing to serve our customers. And even within the second wave of pandemic that is so daunting and tyrannizing us because the figures are really steep, So nevertheless, we cannot see any panic among our customers. We did see some cash panic in March until mid April. This is not happening at all at the moment. But as for our business, the main concern is to look after our own personnel, to make sure that they can operate smoothly and live smoothly under the psychological burden related to remote work, to the constant updates about the threats. So this is our main concern, and our employees, we do hope, will continue to make our customers feel comfortable and safe as a result, and the customers will hopefully find answers to their questions from us. As this process continues, we are not taking any rapid turns And as we said, after quarter two, we don't think this is the best moment to make any restructuring steps. The level of fear is too high anyway among our staff and throughout the country. But we do continue our development or growth. And we haven't seen any distortion in the implementation of solutions for our customers that we mentioned on subsequent pages. These processes have been really running smoothly remotely. And vis-a-vis the plans, we... We don't have too many deferrals or too many delays. So the bank has been kind of working within this track of delivering new solutions to improve our customer service. So I think we are really keeping on track. and we're delivering whatever we had decided to deliver. Let me just stop at that because this is my introduction and I can imagine that you will be much more interested in figures and results. So this part will probably attract more of your attention. Leave it to Bozena and we'll ask Bozena to try to catch up so that we have a lot of time for questions. Thank you. Hello and a very good morning to you. In these dynamic times, let me summarize the dynamic changes in our financial performance for quarter three. and explain where these changes come from. So, very briefly, in Q3, our net profit amounted to £440 million, which is 6% higher than one year ago. After nine months, our net profit is £1.24 billion, dropping by 15% vis-à-vis the comparable period of previous year. And I think what is really worth noting is what we had that before, despite a considerable decline in interest rates and the regulatory costs that were particularly perceptible in previous years, our results before the reserves has been higher by 6% year on year. As you have seen from our results, this has been driven by a rising income. Our profitability since the beginning of 2020 has been under heavy pressure from risk costs. In this quarter, very much as in all other quarters, we have seen the impact of macroeconomic forecasts that are embedded in our models and IRFS 9. In this quarter, there has been an increase by 43 million slotties. Since the beginning of the year, the macro impact is 33%. 337 million zlotys. That's the cost of risk for nine months of this year. And let me take this opportunity to say that in this quarter, we increased our provisions against Swiss franc mortgage loans by 20 million zlotys. So the total provision is 75 million Polish zlotys, which is 80% of our Swiss franc portfolio. Looking at our financial performance, let me emphasise high operational performance, which in adjusted cost to revenue ratio amounted to 44.7%. According to the trend that we have observed since the beginning of this year, our ROA has been declining. Our ROA adjusted by MCFH is 10.6%, which is by 2.6% lower than one year ago. interest margin or interest income has changed a lot during this quarter in terms of amounts and trends. So our interest performance has been influenced by the dramatic cut on interest rates this year. It has improved by 3% quarter-to-quarter thanks to lower interest costs. They declined by 31% quarter-to-quarter. It's £64 million this quarter. And as you know very well, this is a consequence of the declining interest our co-account percentage interest rates for this bank account. So in the first step we declined it from 50 to 25 basis points and starting from the 1st of September to five basis points. Looking at interest income, they declined by 2% this quarter. And this decline took place despite the fact that interest on customer dues remained unchanged and our credit portfolio rose by 2% quarter to quarter. So the declining interest income is due to interest on securities. So on the one hand, you see that the share of securities in a balance sheet has been rising, even though interest on securities dropped by 10%, despite the fact that quarter to quarter, our portfolio rose by 6%. This is related to the fact that the share in securities The balance sheet has been rising, but it's relatively lower in terms of the profitability of the portfolio vis-à-vis loans, and there is a declining profitability of those investments because securities that we purchase with higher rates are coming to maturity and they're being rolled over to securities with lower percentages rates to follow the change in interest rates. So these two factors are largely behind our lower profitability of our interest income. And you have our quarterly interest margin dropping by two basis points, hitting 2.84% at the end of the quarter. In the context of our previous comments, you shouldn't be surprised to know that there is this loan-to-deposit ratio, which dropped vis-à-vis second quarter only slightly, 79.4%. But take a look at the year-on-year dynamics. This ratio declined by 12.6 percentage points. If we are looking at major... changes then the corporate deposits rose by 38% and retail deposits by 14% and during the same time the credit portfolio rose by 7% so this clearly explains the behaviour of this factor which reached a historical low and a few words of comment about the result on commissions this year this rose by 14%, 50 million zlotys quarter to quarter. What is particularly visible is increased income in the corporate sector, an increase by 15% this year. The retail segment also went up at a similar rate, 14% up, although nominally speaking it's 15 million zlotys and half of that refers to the card results. The increasing performance when we're looking at the components on customer accounts and currency exchange transactions, there are two main factors. First of all, it's the effect of our customers being more active and prefer carrying out more transactions during this quarter and higher fees for bank accounts and also a result of different changes in the fees for high account balances. The quarterly improvement on our card results is a higher level of transactions in the retail segment. Let me just tell you that the number of card transactions in this quarter rose by 35% quarter to quarter. The number of cash withdrawals rose by 29% in other ATMs. and our own ATMs, it has risen by 16% quarter to quarter. So there is a bounce back effect, a rebound effect after the lockdown, which ended at the end of June. When we talk about retail customers, we should really mention the brokerage activities, a result which improved by 12%, thanks to a 7% increase in the number of brokerage accounts and a high increase of in the assets accumulated on brokerage accounts. And here I would like to mention the 12% of increase of inflows with participation units. And we achieved the level of last year after three quarters of this year. When we think about the fees and commissions, it was the result of the second quarter that was mostly negatively burdened by the effects. of lockdown which translated into lower revenues in quarter three looking at our performance and the structure of different fees and commissions at our bank we see that we have rebounded in this quarter and please take a look at what has been happening for the nine months since year beginning because these figures show a trend in the changes of fees. They have risen by 9%, and I think virtually in each category of these revenues there are two-digit increases, with the exception of card payments or card fees, but this is related to the one of settlement with our partners last year, which is not happening in 2020. And a word of comment about our operational costs are those costs rose by 4% this quarter and 10% since the beginning, reaching a magical figure of 666 million zloty. And what I think needs to be commented on in anticipation of your questions is, of course, that 21 million up in costs personal costs and there are a number of reasons behind that increase, especially the more real provisions against our annual salaries and also increase in employment. When you look at these data on the slide, this quarter we increased our employment by over 100%, over by 100 people, or FTAs, sorry, not percent. And looking at the structure of our employees, we had a declining share of our employees in our distribution network in favour of our headquarters staff, mostly IT employees. and all kinds of regulatory projects. As for other cost items, let me draw your attention to the increasing costs related to marketing and promotion. In quarter three, we had a marketing campaign that drove those costs. And a word of comment in order to understand the growth. And I would like to say that the costs have been generally increasing. And when we look at the cost drivers, please do notice that the regulatory costs have risen by 30% year on year, and our own costs have risen by 7% year on year. And they are in line with increasing revenues And a word of comment, which I also shared last quarter. So the pandemic, of course, has caused a lot of turbulence to our profitability and the profitability of the banking sector as a whole. But we have not halted our projects. Our projects are development-oriented, regulatory-oriented projects. And we have tried to adapt to the situation. We sometimes change the pace of the projects, but never the coverage. As for cost of risk, I remember in the comments, there were some conclusions that our cost of risk in this quarter seem to be low. So a few comments on that for you to get a better understanding. The quarterly cost is £145 million. £43 million is an additional write-off related to our macroeconomic assumptions. And this year we created £339 million million of additional provisions related to the pandemic. Looking at the structure and segments, then 56 million is the retail segment and 283 million is a corporate segment. As you remember very well, our quarterly process is the revision of macroeconomic scenarios. We revise them and review them every quarter. So as for those forecasts, we made an adjustment to the unemployment curve And when you look at the impact of the previous quarters there, the impact has been slighter vis-à-vis what we saw in the previous quarters of this year. Another important element that we would like to draw attention to and we do it occasionally, is that apart from quarterly changes, we continuously work on developing our models that we apply for risk management and also provisions calculation. Under our annual backtesting processes and validations of our models, as well as as a result of market changes, including, not surprisingly, changes in customer and consumer behaviour. We adapt our models, and this might, of course, influence the cost of risk. This quarter, we changed the retail segment within cash loans. We modified debt rates. SICRA threshold, which is a definition of a significant change of credit risks which drives loans from stage 1 to stage 2, the SICRA level went up and as a result we reduced the revaluation reserve write-offs by around 55 million. So the 145 million also includes the 55 million of decrees. And in this situation, and apart from the model and the model revisions, we are looking at our customers and their behaviours, and we're looking at different factors that we should include when we assess the adequate level of reserves. and provisions. And in this quarter, much like in the previous quarter, we decided to make a number of adjustments outside our models. Firstly, we created 62 million worth of provisions for loans under active non-statutory monetaries, of which 41 million is the retail segment and 21 corporate segment. And let me just tell you that this is not a new phenomenon, because the first adjustment What happened in quarter two, that was 13 million Polish zlotys. And secondly, and which is a new element of cost assessment, cost of risk assessment, we also made provisions against statutory moratoriums. And this quarter, we adopted a conservative stance on how to approach statutory moratoria. This is in response to the recent agreement during the supervisory and banking panel, following which the loans that are under statutory moratoria because of a factor involving job loss, this triggers reclassification of these loans into Stage 3. This is a very restrictive interpretation. However, by definition and in principle, we should put those loans into Stage 3 unless the bank has very detailed information that might help those exposures to remain in Stage 2. As a result of this change, we created 22 million of additional write-offs for a portfolio of around 60 million zlotys. And of course, in addition to that, the cost of risk also involves 20 million zlotys of provisions against FX loans and Swiss francs. And I think this gives you a foundation to understand what happened in the cost of risk at our bank. As regards the quality of the loan portfolio, you can see on the next slide that the share of Stage 3 loans has remained almost unchanged. We can only see some small shifts. in corporate banking segment and in this case, we have a slight improvement in this ratio by 8 basis points in this quarter. This change pertains to our largest clients. In retail, we have seen a slight increase of this ratio by 16 basis points and do remember, that the statutory moratoria and the treatment means that this ratio has gone up by 11 basis points. This is probably the main factor that accounts for what has happened to the portfolio. As for loans classified to stage two, in this quarter, you have seen significant change in the retail segment. And we see a decline by 2.1 percentage point, quarter to quarter to 5%. This is the result of the changing SICRA definition, as I mentioned earlier. As the provisioning coverage ratio for stage two and three, as a result of the migration of portfolios and changes to coverage ratios for working and not working loans, there has been an increase. And a short comment on the capital adequacy ratio. At the end of third quarter, this stands at 18.64%. And by way of explanation, let me say that starting from quarter two, As a result of EBA Q&A, we have been obliged to make retroactive adjustments to capital adequacy ratio. As of a balance sheet date, we include the events that happen after the balance sheet date. So what I want to say is that our indicator after quarter two was 17.48, and for quarter two, we report on 18.31. So a change of 83 basis points resulting from the effect that the quarter two result was posted to equity. And unlike in previous quarters, it's not the change of quarter three, but a retract of change to quarter two. because we had to make retroactive adjustments. And of course, there is a positive effect of the transitory period of IFRS 9. We have been consistent in applying that, and it has been growing in importance due to the increase of provisions, especially in stage two. As for the pure quarter three change in TCR, then it has gone up by 33 basis points, largely because of risk-weighted assets. And one quarter earlier, the SME supporting factor changed as well as an opportunity ease response to the COVID situation. So, this was my short comment and a summary of Q3 results and now we have quite a lot of time for Q&As. Yes, we have received quite a few questions, so let me begin. I will, as usual, try to group them into topics. And let us begin with a question by Konrad Krasuski related to the wave two of lockdown. What are the new anti-crisis efforts that you expect from the government? Any risk of interest rate cuts, credit stimulations, statutory morator? How is that going to affect banks?

I think this is a very broad topic.

And to be honest, I highlighted the element of unpredictability. So this question is somewhat, you know, a closer question to the scale of the pandemic in our country. Nobody has an answer to that. And we all hope that the darkest scenario will not come into being. So for the time being, as for this situation, apart from, you know, highlighting the level of resilience that I hope our bank has been showing. So let me just reiterate the information that we have published. we can expect perhaps a deeper lockdown and further aid programs on the sectoral or even sub-segment level in this regard. So this is what we can expect from the government announcements and programmes. And this has also been part of the elements that ABANC has been invited to join. As for other elements, they are still fairly uncertain. As for elements of moratoria that wouldn't cause forbearance, as for non-statutory element, we do not have an EBA position on that, so... we wouldn't really have elements of slowing down from stage two to stage three. And whether or not we're going to have a change in the government moratorium programs, I cannot really answer that question. Thank you. Let us move on to questions around interest income. What is the current effect of the reimbursements interest income in this quarter. This is the so-called small judgment of Court of Justice of the EU. We already informed you about one year ago about the potential impact of that judgment on our performance and our interest income. We were talking about 30 to 40 million Polish lotties. Looking at the three quarters of 2020, we would support and reiterate this effect. This has been roughly that scale of results so you can actually make your assessment pro rata as for the third quarter question what is the your assessment of the impact of the interest rate cuts in spring the published assessment was 255 to 300 5 million. Was that pessimistic? I think it was quite adequate to the conditions that prevailed at that time. I think this would be probably the right answer, considering the assumptions regarding the rising volumes and the activities by our bank. to reduce interest rates and the curves that we saw at that time. So it was adequate for that moment. So it's really hard to really refer that back to the changing conditions. So we can safely say it is different now. But, well, we always make assumptions that would either come true or not. And I don't think we didn't miss the mark very much. This was quite credible and quite a solid, fair adjustment or assessment, sorry, that really served a purpose. But doing this kind of backtesting is not a good practice because you cannot really benchmark the reality against assumptions. That's not the best learning because that's probably not a point. And when we think about the multiplicity of assumptions, it's really hard to backtest adequacy of assumptions and the impact of all the different factors. I think the main factor is the volatility and the complexity of different volume elements that come into play. And a question about our interest margin for Q3. So a decline in the interest margin in Q3 is slower than in other comparable banks or other Polish banks. Why is that? And should we assume that the interest margin in Q3 has hit the lowest level? Ladies and gentlemen, I think it would be pretty awkward on our part to compare ourselves with other banks. This is not the point. This is actually your duty, not our duty. If you want me to give you a hint, please take a look at the cost of funding, the structure of deposits in that regard, something that I mentioned in my previous intervention. And also, the balance sheet structure for each bank is very different in terms of the dispersion or characteristics of their assets. And also the changes are quite diverse. In some banks, well, it depends on where we're looking. Just interest margin or just margin on loans, there are various elements. So there is the portfolio maturity and so on. There are so many different variables. So attaching too much importance to quarter-to-quarter observations in this respect or that respect, well, I do understand the analytical thinking behind that, but drawing conclusions based on a comparison of one bank to another based on one or two quarters and only figures, bare figures and margin levels, this is doomed to fail. Let me just add a word, trying to point you to thinking in that direction. Do notice that the most recent change of interest rates, we did it on the 1st of September, so this factor should also be taken into consideration if you compare quarter three and quarter four. A bank has a big structure of core deposits where we really plan ahead and when we change the rates on the 1st of September for a quarter that only lasts three months, then the change is dramatic. Thank you very much for these follow-up comments. And there is another question. Do we have any room for a reduction of cost of funding? But you have probably answered that question. Well, take a look at our cost of funding and the answer will be very simple. I don't think any comment on our part is necessary. And let me add... that our bank is firmly holding at a position that in Poland there is no room for negative interest rates on passive funds, for the time being there is no room for that. And one more question about interest margin in a different context of securities. What's your assessment of the sensitivity of interest margin to a reduction of the reference rate to zero? I don't think this is the right place and time for such speculations, forward-looking. So we're not going to give you this kind of information. This is all purely theoretical, considering that there haven't been any changes in reference rates. I personally pray that we shouldn't fall into the trap of an extended period of negative interest rates.