ING Bank Slaski

gentlemen at the Preliminary Business and Financial Results Conference for Q4 2020 at ANG Bank Śląski. As every quarter, we have Brunan Bartkiewicz, the President of the Management Board with us, Vice President and CFO Bożena Graczyk, and Rafał Benecki, Chief Economist of the Bank. Apart from the panelists, we have representative of investor relation and press office. I warmly encourage you to ask your questions throughout the conference. You can use a special tool available at our website, or you can email us at investor relations email. Brunnen, the floor is yours. Welcome, ladies and gentlemen. Thank you, Isa. We're presenting flash results a little bit with a slight delay, as you can see, but I think it's not a major surprise for you. So it's my main obligation to welcome you and to deliver the the introduction speech, I expect that these results, they don't come as a surprise to you. They look quite boring and they're quite predictable, but now when I'm looking out the window, I can see the snow is melting, the spring is coming, and I think that this is a good prognostic for the future that we are entering into the spring and we will find solutions to the problems bothering us for last few months because pandemic was all about health and safety. It is quite difficult to talk about this at the time of the day when we are talking about entering into the third wave of pandemic. We have gone through hard times in October and November, where we had a lot of people tested positive in terms of COVID-19. Now the situation stabilized, but we are far from totally safe moment where we could say for us and for our employees that we are safe, but we did everything we could in that respect. A lot of our employees who were tested positive. It's over 762 people in total, so that is a reason for us to feel bad But the situation has been stabilising and in the readings, when it comes to active COVID-19 people, this is only 19 people among our staff. But thanks to all that we did last year and this year to protect our health and the health of our employees, this is the result of all these actions taken. we are doing well in that respect and we will continue to do so. Despite the fact it was quite an extraordinary year, we could expect the banking activity to drop, but the reality goes as it goes, and versus the underlying period in the previous year, we cannot see any major change in terms of the major financial streams. So not a lot of disturbances on the market, but the bank always wanted to be a stable bank, no matter what, no matter the circumstances. And I think that 2020 proved that we delivered on that promise to be a stable bank. So our first and major challenge was to recruit and attract new consumers and customers and increase their banking activity with us. And when it comes to retail customers, a gross number of retail customers, we recorded over 360,000, more net 190,000. So it's not far away from the trends that we defined and the strategy that we defined years before. We could see an increase in business and corporate customers when it comes to entrepreneurs. It was about 25,000 net and about 8,000 net for businesses. So we are still not far away from the strategy defined. We were quite active in 2020 and we hope And we plan that in 2021 to present, to offer such solutions which were appreciated by our customers. So as you are aware of the situation, all these activities were concentrated at the end of the second and third quarters. So we have already had an opportunity to talk about it on page six. of our presentation, so you will find the elements of your interest, so PNL result, and let me indicate the most important results, so key elements showing some irregularities in the bank activity and result. Of course, we had to do with an element of interest rate cuts and reaction to that. We have announced P&L, the impact of unforeseen interest rate cuts on our interest result. The cost didn't change. Of course, the bank levy reacted to lower than expected increase in assets, but we still recorded an increase in assets, and the cost went up significantly. When it comes to the cost of risk, we can see an effect of macroeconomic assumptions which affected us during the first and second quarter, but I think that Rafa will discuss it and will show how they got translated into our results, all these macroeconomic readings and the cost of risk. And last but not least, the aspect that infected our minds as a market at the end of the last quarter and the first quarter this year, the CHF mortgage loans, which cost that we included in our model scenarios based on arrangements proposed by the KNF head and we adopted it as a base case scenario for our operations. So we will, of course, answer all questions. On my part, I would like to stress once again that CHF mortgage loan is a very important issue and it's an important element of uncertainty and uncertainty plans of the financial sector for last few years and for the coming years so I know and I'm convinced that the elements of uncertainty should be limited as well as their effects that's why we adopt some cautionary approach to that issue as this issue hasn't been possible to resolve yet. We think that the arrangements proposed by the president of the KNF is heading in the same direction. We can see that the market, as at 25 of March, From our perspective, it's another postponing of finding resolution to this problem, but we would like to eliminate or to limit this, to eliminate this element from our risk map at ING. So, that is why we are preparing ourselves and we are already well prepared to face the situation if such circumstances materialise in order to reduce this uncertainty. We are finishing year 2020 with a result which is almost 19% lower versus the previous year, and we think that our net profit at the level of 1,333 million, I'm not ashamed of it. I think it's a great result. and that it's an evidence that our bank is stable and we are delivering on our promise in any circumstances and the fact that we had to face that pandemic this year. Every year there are some turbulences on the market which affect our operation. We have banking, taxes, we have some economic events, so we have to deal in the environment full of traps and uncertainties and we're doing our best to cope with that. The balance sheet is a bit different, our depot rate, LTD, is a bit lower, so we took a step back in terms of of development our deposit base is based on core deposits which are stable and linked to relationships which we develop with our corporate and retail customers and both groups showed their stability so this strategic assumption proved true, so the concentration and a lot of triggers affecting withdrawal of deposits, but we know that this year some streams were not as effective this year, some were more effective when it comes to typical loans for households. We couldn't expect much in that respect if we had public aid which flooded banks account. On the other hand we had our leasing activity and our mortgage loans which were functioning and were at the full swing. So all these components, all these items causing that our bank is stable and it's operating well and it's going through all these waves and unfriendly winds, it helped us to go through 2020 safe doesn't mean that we will always do as good with all dangers. We will do our best. When it comes to our competitive position, page eight, our market share was increasing at the same page. It is not a race in order to speed up. It's hard work. long and tedious and the machinery is working well and we think that we're going in the right direction. So we can be proud of this year, 2020. I'm proud of my people, of all the employees. I think that they showed their stamina and they showed how agile they are. Hopefully, I'm keeping my fingers crossed that the number of ill people will drop. We are speeding up with vaccination. Rafał will say something about it. Hopefully, the spring will come as soon as possible. But when spring comes in autumn or winter, we will be also glad. And now the floor is to Rafał Benecki. If you would like to share your views, please do it.

Yes, I'd like to say and wrap up 2020 in the economy and pose a diagnosis about the Polish and world economy and how we coped with the pandemic. And we would like to share some conclusions in the context of 2021. And before I move on 2021, I'd like to make a comment on that. epidemiological situation and the number of vaccinations. I'd like to tell you about how the Polish and global economies have been responding to different lockdowns and waves. And I would like to end with my comments on GDPs and interest rates. So let me begin with a diagnosis of 2020, the pandemic. that the Polish economy recorded the first recession since 1991. And importantly, this recession was by one-third shallower than originally expected. And it was by around four BPS shallower than in the Euro average in our trade partners and the Czech Republic. The main driver of the economy was consumption. When the economy was opening up, investments were not that strong, and the Polish economy and the global economy got public aid, and it was one of the largest in the EU. Importantly, in the context of 2021, is that over time, with the autumn and winter waves, The sensitivity of our economy to the pandemic was declining. That means that there was increasing resistance and resilience. And the number of new COVID cases was a multiple of the Q2 number of cases. And this was about one quarter less painful. And a quarter to quarter decline of the GDP was 113 in comparison of Q2. The orange line is the economy freeze index. The lower is the worse. And you can clearly see that in Q4, the freezing was more shallow and GDP, the grey line, was declining even less, which is really important when we look at the prospects for 2021. And we noticed this feature of the economy quite early on. And starting from summer, we started adjusting our forecasts. We first thought that the GDP would fall by around 4%. And then starting with September, we thought this would be 2.9, 2.8. And in January, when the Statistics Poland published the data, it was minus 2.8%. So this is how the forecast changed. Why is the economy so resistant? And why has it become more resistant over time? Thanks to the strong industrial position worldwide. And our Polish economy relies heavily on exports and industry. So resilience also stems from the shifts of consumption from services to goods. and that supports our region, including Poland. And another important factor is strong fiscal support, Poland and abroad, and the structure of the economy, which we have commented on for some time. A low share of tourism, low share of the automotive sector and services. So there's declining sensitivity to the pandemic in Poland. You can see that in the lower right corner, In the quarter four, the changes were far less significant than originally. So this important conclusion is going to be important in the context of 2021. Before I move on to 2021 forecasts, let me tell you about the epidemiological situation. We have seen a serious decline of morbidity rates, especially until the peak that we saw in the U.S., and in the UK, less so in Europe and our region. So we have seen a rebound, and the situation is not very favorable in the Czech Republic and Slovakia. In Poland, we saw a rebound from around 20 or 30 of cases per thousand. So this is around half of what we saw in November. So the third wave is coming closer and coming back. So it is really important to watch closely the progress of vaccination programs. This is an important assumption in forecast for this year. The leaders in vaccinations are small countries such as Israel, but also UK and the US. And the UK has vaccinated almost a quarter of its population in the US, around 15%. The EU, 5% to 6%. And Poland, around 6% to 7% of population. Countries that are quick to vaccinate their populations reduce the risk of hospitalizations and deaths and new cases, and they can open up more easily. So the progress of vaccinations is very important and forecasts in the EU, the progress is slower than in the U.S. or U.K., And we are aware of that and we have been following it, tracking it very closely. And we do see that the EU and the European Commission are doing their utmost to increase their supply of vaccinations. New contracts are being signed with current suppliers, new suppliers. And we believe that starting from April... The supply of vaccinations will significantly increase, and so will the rate of vaccinations. And the new contracts have shown that the number of doses can be twice as high as the population. And then the pace of vaccinations will be similar to that of the U.S. and the U.K., and this will help economies to open up, and it will increase. bring a rebound of GDP. Importantly, we have seen research from Israel, Scotland, all of the UK, that shows that vaccines are an effective tool to curb the number of hospitalisations. And some research has shown that the number of new cases has been declining and some trade partners of Poland in the UK will be opening up in Q2 and other European countries in the west continental Europe are going to probably open up in the course of the second quarter so the supply of vaccinations we assume will be growing and the continental Europe economies will be opening as much as the UK. So how does that relate to projections for 2021? In January, we sent our report with forecasts and we thought about two things that were far from a consensus. A higher inflation rate. We talked differently than the consensus. We thought about 3.1, the consensus was 2.5, so we were 0.6 percentage point higher. We're also saying 4.5, and consensus was 4.2 inflation. So we are on the target. The January data has shown this, and I think the average inflation will exceed 3% this year. As for GDP, we are a little bit more cautious here, and we have signalled the risk on the lower side. And earlier on, we were saying that the growth could be 4.5% or higher. GDP throughout 2021. And now we're saying it could be 4.5 to 4 with the risk on the lower side. But numerically, we've been sticking to our forecast for a number of reasons. Firstly, we have estimated how the economies of Western Europe and Poland have been responding to the long lockdowns. And we have assessed activity indices for the Eurozone, for North... part of the Eurozone and for Poland. And those indices show to our mind that Poland's economy has been resisting the downturn visible in Germany, which is quite significant. It means that we again in Poland and our economy has been faring better than our trade partners. The entire zone has been resisting the prolonged lockdown with Germany being in a less favourable position. Given the delays and vaccinations, the rebound of GDP will be delayed, but it will come and it will be dynamic. and it's being shifted towards the end of the second quarter and the second half of 2021. It will be more delayed but more dynamic, like I said, and we assume that vaccinations will speed up and economies will open up again as what we see in the UK. We have also followed the situation in global industry and the third wave of COVID has slightly affected the situation in global industry, which is really relevant for Poland and Poland's industry because end-of-year data showed that this was a strength of our economic standing. As I said, we have maintained our forecasts and projections with the risk on the lower side. But numerically, we are not changing them. And we have also noted that, of course, there is a risk of the third wave of COVID. and a rather slow launch of reconstruction funds. But in any case, the main factors that will make the consumption more dynamic will be a rebound of the economic standing. Some delayed consumption will... also make the economic standing more dynamic, also powerful export figures given the situation with our trade partners and industry. So these trends will become visible starting in Q2 in the second half of 2021 as well. As for the fiscal part and the support for the economy, in terms of the budget policy, government policy, this year the support will be far lower and the new so-called shields or protective shields will be one third of what the economy received in 2020. However, the effects of that support programme still persist. And we draw attention to the structure of these protective shields. And as a green bank, we comment by saying that the fiscal support was very general without clearly defined investment goals and long-term objectives. Not all countries did the same thing. Some countries addressed long-term challenges, and we assume that the support for energy transformation and digitalisation and structural investments will receive more support from the reconstruction fund that will be launched towards the end of 2021 and 2021. in 2022, and then the result from EU funds will be more visible. As for interest rates, the Polish central bank is much closer to the benign policy of ECB rather than the central banks in the region. We're very far from the Czech central bank that has been talking about two interest rate rises this year, NBP in Poland, we believe will maintain the interest rates unchanged at least by the end of 2022, even if the inflation rate grows up. We have heard signals of a strong Polish lotto exchange rate, so NBP is going to maintain its soft policy as opposed to the check back. So NBP is going to be very cautious about tightening its policies despite rising inflation and inflation will stay with us in 2021 and 22 whereas in 2022 the inflation might recede so that rebound will be shifted late for later but i think it will be significant this year and that's all from me for now thank you very much

So it's time for my summary. Let's start from slide 2020. In short, let me share an information that in Q4, our net income was 314 million. Thanks to this result for Q4, our total results for 2020 was 1,033 million. It's a slight drop versus said before in the context of challenges that we had to face as the banking sector in 2020. It's a decent result. I think that it's worth pointing out that despite this significant drop cuts in interest rates which affected heavily our financial results as well as high burden, regulatory burden that rose significantly in 2020, our results before the reserve balance is 5% higher and mainly we owe it to 7% increase of our revenues in this period. When we analyse our cost to income ratio, 44.3 in cumulative approach, so it's highly effective and good. Another thing which doesn't come as a surprise, we are observing this trend for several months. From the beginning of this year we can see decreasing ROE Our profitability of equity, which is adjusted by cash flow, a hedge amounted to 9.4%, is a drop by 3.5% versus the previous year, but it is still a high ratio. If I were to wrap up on our net commission income in 2020, interest income, we can see that interest rate cuts affected that result. As you can remember, we could see some interest rate cuts in the first half of 2020. In the last quarter, we can see how the net interest margin stabilised, and it's worth pointing out that As from the last interest rate cut, it's been already seven months. All our liabilities and assets have been depreciated and adjusted to this level of interest rates, so there are no shifts in that respect. When we analyse our net interest income on slide number 22. We can see that they achieved their minimum in the third quarter, and then they rebounded. We can see a 3% increase quarter on quarter. It's worth mentioning that Still, we can see our net income on securities is decreasing, decreased by 15%. As our securities mature, their average margin drops. We are replacing this portfolio with new securities with much lower margins. So this is another aspect that should be taken into account when analyzing and evaluating our net interest income. Another important thing, because you often ask about the effect of small CJEU, after 12 months we can say that our assumptions within the range of 30-40 million got confirmed and this effect was visible in 2020. When it comes to interest costs, We can see that in the fourth quarter we can see all effects of interest rates on deposits, so this result should be also analysed from that perspective. loan to deposit ratio. This ratio went up slightly at the end of 2020. It's 82.5%. We owe it to the fact that the loans went up by 1.7% while deposits went down by 2.3%. If I were to wrap up on net commission income in quarter four. It went up by 10%. It's a 38 million quarter on quarter. It's a great result and we owe it mainly to our result commission income in the corporate segment. We can see the result on cards. On credit card transactions from time to time there are some settlement periods where we have to settle accounts with our business partners and that happened in Q4, that's why we recorded 20 million increase in payment and credit cards. Quarter on quarter, we can see another increase of 20 million for operating bank accounts. This is, we owe it to fees and charges schedule amendment. Also, let me stress that we are very happy about our FX transactions result. This is an effect of higher transaction volumes. As you can see, the only category of commissions that behave in a different manner than others. These are brokerage operation commissions. We can see a decrease of 14 million quarter on quarter. It results from our activities taken after a failure of MACLED system at the beginning of December. To wrap up our performance in terms of fee and commission income for 2020, I think that this 14% increase is a good result and it's a sign that our sources of commission income are diversified. When we analyze our total expenses, as you can see in the quarter, the expenses amounted to 68,682 million, including a cost of staff, including 29 million of provision, which was raised for a project which is a multi-annual project related to the evolution of organizational structure. These are projects that we launched a few years ago, starting from 2016. In this context, we want to focus on development of our retail and reorganization of our retail chain. When it comes to overheads and the general administrative costs, you can see a drop quarter on quarter. It's an effect of cost optimization that we undertaken in 2020, and it's also a result of settlement of some development projects. When it comes to an increase of FTEs, so full-time employment, because surely you will ask for that. You can see that in Q4, the number of our staff increased by 213 employees. We owe it to an increase in employment related to regulatory project and IT project as well as a project which we launched in 2020 related to insourcing of external services. Of course, to sum up the cost for 2020, total expenses for 2020, let me say that if it hadn't been for the increase of regulatory costs that went up by 38% and they are responsible for our total expenses increase, other categories of costs went up only by 8% year on year and are comparable when it comes to our total increase in revenues. When it comes to the cost of risk, a lot happened in that respect in Q4 2020. In the last quarter, we have raised provision of $322 million. As you could see in our presentation, we included 240 million of legal provision related to CHF mortgage loans, and we resolved a reserve for our macroeconomic assumptions that we apply every quarter in order to evaluate our provisions. As you probably know, in 2020, at every conference, we repeated that we are reviewing our assumptions every quarter and we try to follow the market consensus and forecast what happened in Q4. Rafał mentioned that we could see upward revision of GDP. Unemployment rate projections also changed. That's why we could resolve a provision for macroeconomic assumptions. Why all that happened? If you analyze it through the prism of market consensus and evolution of market data, you could see at the beginning of the pandemic and in the second quarter as well, that the market sentiment to how the pandemic will affect GDP was more cautious than the one that we observed in the second half of 2020. And following that trend, macroeconomic forecasts were adjusted. And on slide 25, you can see how it affected our macroeconomic assumptions, especially in the corporate segment. which follow GDP projections. Independently of that, macroeconomic data costed us 242 million of cost of risk, which is 23% of the total cost of risk in 2020. So this is not an information or influence which is of minor nature, but we can see them decreasing. If I were to wrap up on the loan moratoria, as we announced a quarter before at the end of the year, We have a balance sheet of open and active moratoria. This is 240 million which were subject to active loan holidays. 200 million, this is retail segment and half of this amount, these are active credit holidays, so-called statutory credit holidays. When it comes to... money coming back from moratorium portfolios we are happy about them we can see that customers are going back to regular repayment of their loans but of course we can see some we still need some time in order to be able to evaluate the results of credit moratoria. Maybe after the first quarter, we will know precisely how these moratoria affected our result and mortgage loan portfolio. Once again, let me stress that starting from Q3 2020, and it was continued in Q4, The statutory credit holidays qualified for stage three and adequately we have raised provision for this stage. The topic of your interest, one of the hottest topics in the banking sector, legal risk of foreign currency mortgage loans. As you remember, in January we produced our current report in which we presented our approach to provision evaluation. From the perspective of legal risk in total, it is an amount of 240 million of provision in Q4. Total for 2020, the cost amounted to 270 million. As Brunon mentioned before, we have updated the scenario and included a scenario resulting from the KNF offer presented in December 2020 and this scenario is a base case scenario but of course we are taking into account other scenarios, including a scenario of termination and annulation of agreement. And because of that, we increased the forecast with regard to agreements which can be annulated, which can be cancelled. The total provision for illegal risk amounts to 312 million. And part of it, if I were to summarize briefly the quality of our portfolio and the amount of provisions and reserves, the share of loans qualifying for Stage 3 stood flat and stable. This is only an increase of six. beeps quarter on quarter, and in the context of the total year 2020, this tendency that we've been observing in our bank, it follows the general market trend in the banking sector, and it's a 31 percentage base point increase annually. So we can see an improvement of this ratio. We owe it to our wholesale banking customers, especially in the Q4. When it comes to retail segments, This ratio went up slightly by 24 base points and we owe it to the performance of cash loans. As I've mentioned before, as we have to be very cautious and rigorous when it comes to statutory loan moratoria and credit moratoria, can affect directly the level and share of irregular loans in the total loan portfolio in retail banking in particular, because moratoria are placed just there. When it comes to loans qualified for stage two, you can see from the chart on the slide on slide 27 that these ratios are dropping. It's another quarter we can see this drop is a consequence of an improvement of macroeconomic indices which cause that our PD ratio goes up. That's why loans are not transferred from stage 1 to stage 2 so often and in effect these ratios are improving. When it comes to our provisioning capital adequacy and our capital ratio, the consolidated total capital ratio is 18.72%. In the whole Q4, this ratio went up by eight base points, mainly due to the cumulative increase of total revenues because of better valuation of debt instruments and capital instruments and due to the amendment resulting from the EU regulations when it comes to different approach to intangible assets in a capital ratio evaluation. So all in all it gave us eight base points of increase.