BNP Paribas Bank Polska SA

F:82MA

Earnings Call Transcript

[Przemyslaw Gdanski, executive]

Good morning, and welcome to our next meeting presenting the Q1 2024 results. The speakers are as usual, the Board members who I will not be presenting in great detail. So let's move now to the presentation. May I have the remote for the slides. This is our agenda as usual. Let me start with a brief wrap-up of Q1, let me start with the profit. Our net profit in Q1 was PLN 591 million, which was up significantly by more than 20% year-on-year. Our revenue increased significantly 6% up quarter-on-quarter and 12% year-on-year. As regards the volumes, our loan volumes remained flattish quarter-on-quarter. Our expenses represent cumulative inflation and depreciation resulting from our consistently pursued investment policy and increased regulatory costs compared to the previous year. If you look at our 3 pillars under this strategy, I will not discuss each and every one of these bullet points, but let me stop briefly and discuss the strategy and transformation pillar. What is new in the market and quite successful is our new tennis card with the support of [indiscernible], who has been very successful. I hope she will win in Rome and then in Paris, which should have a significant impact on our image and recognition as a bank. Regarding our business activity, we saw solid growth in investment product sales, including our investment fund company and structured investment products for retail clients. Remote channels are being used even more extensively by our customers, which is good, and we also see the value that is generated by our branch network on top of that.Moving on to the part at the bottom on financial results, noninterest income increased, and I will, of course, elaborate on that later on this very generic comment. NIM stabilized, which we think, quite a positive outcome. Cost of risk remained normalized. We are after the period of negative cost of risk in several quarters of previous year, but we still believe that the quality of our loan book remains very positive and safe. Two important highlights, events in Q1 and in Q2. First, an ABB deal where BNP Pariba S.A. Group reduced its stake in the bank and free float increased to 18.7% as a result, which is a positive outcome, growing liquidity of our stock should boost the stock price of our bank. The other important news, the dividend paid out to the shareholders on the 10th of May, last Friday, the first dividend we've paid. The dividend yield was 50%, and the management of the bank intends the bank to remain a dividend-paying institution. One final comment on in this introductory part, the impact of the risk of Swiss franc loans remained low at PLN 20 million in Q1 after significant provisions we had set out last year. Q1 showed a much smaller charge.Moving on to our pillars under the strategy, again, I will not read out all the text in the slide. What is important is that we remain a very active bank in financing the energy transition in Poland. We know that it is critical indeed and this is where we have developed massive competencies. We are keen. We are skillful. We are willing. So in Q1, we invested a total of PLN 1.3 billion in renewable energy sources, and we will keep up on this trajectory. We have rebuilt our corporate branch network with a focus on specific customer segments, this will improve our efficiency and customer service and customer relationships, which is another upside. We are working hard to use AI in the bank. We are piloting a solution called Genius, a chatbot, which helps our people identify the relevant applicable internal regulations by clicking on the keyboard, just once, which saves the time and improves the efficiency. Importantly, we've also offered behavioral protection for all our customers. In this [indiscernible], cybercrime is ramped, becoming another increasing threat. So our behavioral projection mitigates the risk of illegal abuse of communication channels with the bank by unauthorized people, which we believe will strengthen the sense of security among our customers. Well, that will be for me at this point.Moving on to a graphic presentation of some of our parameters, as I've said, we reported an increase in the number of customers using our digital channels by 2% quarter-on-quarter, which is quite good. The number of users of our mobile banking is growing even faster to mobile. I recommended it's really slick, reliable and the number of transactions with BLIK has also increased like being a great solution. And I do believe this growth will continue with this solution being expanded and developed both in Poland and beyond.Let me share some more graphic charts of our growth pace. Starting with investment products, solid growth above the market quarter-on-quarter and year-on-year, we are happy to note that we have improved the personal account sales quarter-on-quarter, although our acquisition targets for both retail and corporate clients and SME customers are very ambitious. I do hope we will step up the process in the coming quarters. A bit more about loans, mortgages and cash loans, both these product groups report an increase cash loans starting from a solid base. So it's a qualitative growth. However, mortgage loans started from a very low base. And the bank will be back in the mortgage market and become more active in this segment, still remaining selective, but more present with a bigger footprint than over the past few quarters when we decided to be very, very selective. So these numbers were low.Now the loan and deposit volumes, I've mentioned the loans, which remained flattish quarter-on-quarter, reporting a moderate increase in corporate loans and a moderate drop in retail loans with little activity in mortgages, which played a significant control. We haven't yet seen a significant rebound of market demand from corporates. However, we have seen some early signs of recovery, which should take place in Q2 or Q3, hard to tell, but the positive macroeconomics, the inflow of EU funds and large investment needs, all suggest that the segment will grow. So we are optimistic deposits. The volume of retail deposits increased moderately, which is fine, and the deposit volumes of institutional clients dropped modestly, which is also okay. We are optimizing our deposit base in order to maximize the net interest margin. The number of customers remained stable. The mix of our customer base continued to improve with more customers in the more attractive segments. As I've mentioned, our plans for the upcoming quarters include improving the acquisition of new customer relationships.I've already mentioned most of the numbers in this slide, growing revenue quite solid and good ground for optimism. I've mentioned expenses, low cost of Swiss franc loans, which doesn't mean that this story is over for our bank. So this risk persists, although we are very active in closing settlements and trying to mitigate or eliminate this risk. And the net profit in Q1 was pretty solid.Let's have a look at the key financial ratios. The cost income ratio increased modestly with a growing cost base. No surprise there. Stable NIM, net interest margin, which we believe is a positive trend, [indiscernible]. We reported an increase normalized cost of risk and return on equity of 18% above the cost of capital.That's all in this introductory part. Let's now move on to the macroeconomics, which I somehow wanted to start with today. Thank you, [indiscernible], and good morning. The economy is now in a recovery, but to be honest the recovery is still being fuelled by one single driver being consumer spending, especially of households. After a very good year 2023 for investments, at this point, we are seeing some stagnation, if not drop. But exports are unlikely to improve until the economies of our main trading partners pickup. By that time, consumer will remain king, if I may say so, as regards the generation of Poland's GDP, this is propped out by fast-growing incomes, including wages and salaries and social transfers and the households are probably very happy to see very low inflation, which still is driven by mostly following commodity prices and the position of the Polish zloty, but it does lessen the inflation pressures across the economy. What is of some concern, especially to the Central Bank is the probable likely increase of salary and demand pressures, which has not materialized so far driving up inflation. If you look at the monthly numbers, the prices of services, including consumer services are, however, picking up.When it comes to the outlook for inflation, the VAT increase has not yet had a major impact as the Central Bank or other analysts expected, but it's not the end of the year. Energy prices are likely to grow in the second half of the year and so inflation will probably be higher at the year's end than it is now. And this uncertainty when it comes to the inflation trajectory in the coming quarters is the main reason why the rates have remained unchanged since October last. The most recent conference of the governor of the National Bank of Poland seems to suggest that this year, the rates will most likely remain unchanged, but we'll see what happens after the summer and at the end of the year based on actual inflation numbers and in a likely lower rate environment, at least in the euro zone. The tight monetary policy supports the appreciation the strength of this logic. The real rates are definitely positive at this point in time, which justifies or explains the strong position of the logic. Last but not least, the banking industry and the trends early in the year, it seems right to note that the leveraging of the private sector is happening less fast, mainly due to lower deposit growth and probably with improved demand for lending.In retail segments, including housing and consumer loans, we can see a continuation of the trends first noted in the late last year. However, recent numbers, especially from March in the corporate sector also give reason to be moderately optimistic when it comes to the growth of lending in the corporate segment in the coming months. That's all for me. Thank you very much.

[Unknown Executive]

Good morning, ladies and gentlemen. If you permit, I would like to discuss briefly the financial data. Let us start with the balance sheet. What was going on with the bank's balance. In the first quarter, we had a year-to-year increase of the total assets. This was mostly driven by increase in customer deposits. We saw a significant growth dynamics combined with stabilization of the loan portfolio on a quarterly basis. Note less on an annual basis, there was a slight decrease. And therefore, the funds in investment activity kept accumulating. It is important if we look at the balance sheet structure and the interest rate trajectory, this explains what is going on in the income statement or profit and loss statement.In profit and loss, we see a clear increase in income from banking activity, mostly driven by net interest income and supported by good results in the area of fee and commission income. For trading results, the macroeconomic environment with reduced volatility and strong currency results in the fact that year-to-year, we have a decrease. Nonetheless, it is still a strong contribution to the first quarter results. Our expenses, we have already talked about expenses and during the previous meetings, we said that we expect inflationary pressure in the bank as well as the investment activity continued by the bank would result in an increase of expenses and the cost of activity. This has materialized, and you can see it in the results for the first quarter.As for the remaining elements of the profit and loss statement, we have the impact of Swiss franc portfolio after a major write-off in the fourth quarter of the previous year. In the first quarter of this year, we have indeed observed the change in dynamics. We did not have to introduce any model changes, so the write-offs are relatively low in the first quarter. As for write-offs for credit risk, we go back to standard levels that are observed, that are, so to say, expected levels for us. As for ratios, indicators, the most important one is the net in net interest income. This is the biggest share of the bank's income. We also have a very solid liquidity basis and that capital indicators have improved. In this context, I would like to say that we have closed a securitization transaction that has helped to strengthen our capital base and capital indicators.If we look at the loan portfolio now, maybe just one word of comment. If you look at the dynamics in the area of individual loans, customer loans, you see that this is the main area and to be more precise mortgage loans area that influences the portfolio dynamics. Corporate portfolios are growing somewhat, individual portfolio noted a slight decline. And as Mr. President said, the bank will be coming back to this market in a selected manner in order to address this development. Now if we zoom into currency mortgage loan portfolio, the main trends were maintained, major write-offs in the fourth quarter coverage ratio nearly 115% at the end of the first quarter in book values. The value of the portfolio is approximately PLN 700 million. So this is more or less it is. If we look at the deposits now, you can also see the mechanisms that the president had mentioned, continued increase in volume in retail banking and in corporate banking. We have also observed a slight decline. As we said, the bank works on keeping the net interest margin on a specific level, our situation is comfortable, so we can focus on that particular parameter.A few words about a phenomenon that we are observing and which is related to our liabilities or our clients' assets, you can see that very good dynamics continue with regard to increase in investment value. Year-on-year, it's almost 50% increase. Our clients choose the investment products offered by the bank and this allows us to manage the inflow of new funds into the bank, and we adopt the savings of proposals to the needs of the clients. Now if we look at this main income driver, which is net interest income. If we compare the fourth quarter to the first quarter, maybe a few words of comments are needed. In the fourth quarter, we were still rebounding from the loan vacation. So, it did have an impact on our dynamics. But in first quarter, like I've mentioned before, beginning of this year or the end of next year in order to meet MREL requirements, we have issued the MREL debt. It did have an impact on the cost of interest in the first quarter. Nonetheless, even given the additional encumbrances as we work with large volumes, the dynamics are still satisfactory.Fees and commissions, well, I believe that the main comment for me here would be that in the first quarter, we see a seasonal impact. It is a quarter during which all bonuses are calculated for payment institutions and so on. So it is observed in the results reported for the first quarter. It was the same last year. It is the same this year.As for trading and investment income, as I mentioned in the beginning in the client part, we are dealing with the situation. If you look at the data in the income statement of the profit and loss, you can see a certain pressure, you can see some problems. The economic environment results in demand for this kind of product decreasing. And as a result, we are seeing a market decline. We are happy, however, that despite the decline, as we compare ourselves to other colleagues in the industry, we seem to be falling at the slowest, the least of all of us.Now operating expenses, we have two main elements here. First of them is the inflationary pressure, which is formed with different dynamics at different periods, but it does have its impact on us through the pressure on wages that we feel. And the second element is the increase in cost of depreciation caused by investment activity. Our bank continues transformation, continuous investment in digitization processes in a broad understanding of the word, both in front office and back office of the bank. Hence, the increase in cost is not a surprise. This does not change the fact that as we operate, we are not in the following quarters. We are not going to undertake activities to reduce it.

[Unknown Executive]

Good morning. The first quarter in terms of cost of risk, I think we ended at a normal level of 44 bp. However, we should mention that almost 19 or slightly over 19 bp is attributable to a single exposure that is currently categorized as phase II. Is the exposure concerning large enterprises segment, chemical industry. The 44 bp seems a level looking forward, that is fairly normal, and we do not expect to repeat the situation of previous years when we had a positive cost of risk for almost 3 quarters. As for impaired loans, the level remains stable, both in terms of value and nominal of 3% in terms of percentages, PLN 2.6 million in terms of absolute values or in amounts. We believe that this is a desirable level, and this is where we would like to maintain our position with regard to the entire bank.As for shares of each stage in the long portfolio, the situation is stable as well. And a good thing is that the share of stage 2 in each portfolio is decreasing and the share of stage 3 does not increase. So stage 1 is still increasing. What is important is that coverage in stage 2 has increased, especially in the area of enterprises from 6.2% to 6.9%, but this is again related to this one single exposure for which PLN 42 million worth of provision was established in the fourth quarter, and this is stage 2. Coverage remains stable on the level of 60%, 65%, depending on which segment we are talking about. Coverage always decreases slightly when the portfolio is being sold and that happened in fourth quarter of 2024. This repeats every year now and goes back to the stable level when the portfolio is not sold, and additional provisions are established.

[Unknown Executive]

Well, in capital adequacy part, I believe the good summary would be to say that there were no major changes in the first quarter. The bank meets all the regulatory requirements. One event that was important for our corporate life was closing a synthetic securitization transaction with our partner in IFC. Additionally, as the President has mentioned, in this quarter, we have prepared the first dividend payment in our history and we have paid it out, I think, on Friday. I believe, it is in terms of capital part.Ladies and gentlemen, we are coming to an end of the presentation portion of our day. As I said, this should be a good year for Polish economy. We have a recovery demand for financing and we believe this will give us a growth impulse. We would like to focus more than last year on finding new or attracting new clients, and we will do that. We continue our transformation processes, investment processes, digitization with a major emphasis on internal processes; all that should translate into greater efficiency of the bank. Of course, one of important risk elements remains in the Swiss franc loans here, and this will be continued. The second quarter brought us the extension of the so-called credit holidays. It was the most unfortunate decision by the government, parliament, and president, and the entire sector has been trying to convince the authorities not to do that, not to take this decision to just use the existing infrastructure. This did not happen. So we have evaluated the cost of the credit holidays and we have booked PLN -203 million in the second quarter. Of course, we will monitor the level of take-up of the so-called credit holidays by our clients and make any needed adjustments.Capital management, this is of course, always important for us to manage our equity efficiently and maximize return on equity. We also have to, of course, work on quality of our work with our clients in every segment. This, I believe, it is for this segment. Thank you for your attention, and we can move on to questions and answers.

[Operator]

Good morning. The floor is open for questions. Any questions in the room, please?

[Unknown Analyst]

Several questions, if I may. The first is about the expenses. In Q1, net of the BFG contribution, did your expenses remain at a regular level with any extra expenses. On the slide, you talked about the cost of consultancy, was this an one-off or a recurring cost.

[Przemyslaw Gdanski, executive]

Let me put it this way. To be brief, Q1 seems to be a good measure or prognostic of our expenses, that goes to your first question. On your second question, the consulting expenses, well, consider it specific to Q1, part of the Q1 cost base.

[Unknown Analyst]

One follow-up question about long-term funding ratio. Would you be willing to share your estimate of the ratio at the end of Q1 according to the rules proposed by the KNF. And the second question, a broader question, what is your expected strategy to meet the requirements in the future if it kicks in.

[Przemyslaw Gdanski, executive]

Well, regarding estimates, I'm not ready to tell you. We are analyzing this. We are also in dialogue with partners in the Polish Bank Association. Well, the ratio is slightly controversial. The question is, what level it will be and whether it will be imposed hard to tell. In our case, such a ratio given our ownership structure would allow us, if necessary, to look for extra funding to meet the requirement of the ratio. And then, of course, we will go to our majority shareholder and partner. However, we will always make sure what the market has to offer. So when it comes to meeting the requirement, I'm not concerned. The main question, however, is what the expected or appropriate level of the ratio is? And what will be the additional cost on our mortgage loans, especially the new production of mortgage loans in the market. So it's a question of how much rather than or what the price should be rather than how much.

[Unknown Analyst]

And my last question, legal risk of consumer loans, however, could you share your estimates?

[Przemyslaw Gdanski, executive]

Number of legal actions regarding the so-called free loan sanction, the value of those claims and the case law expected. Well, this is not a major issue at the bank. I haven't heard of a single judgment that would be adverse to the bank.Well, if there are no further questions from the floor, let me share the questions announced online. Why did the KNF expenses grow to PLN 19 million compared to the amounts reported in the quarters of the previous years.Well, it's a matter of recognizing these costs. In previous periods, they were recognized on a monthly basis. This is the one-off recognition in Q1. That's the main difference concerning the growth if you compare the numbers.

[Unknown Analyst]

Looking at the growth of the bank's lending, are you a fan of the 0% loan program?

[Przemyslaw Gdanski, executive]

Well, generally speaking, I'm not a big fan of solutions that have nothing to do with market conditions. We did not participate in the 2% loan program, and we have not decided to get involved in the 0% loan program either.

[Unknown Analyst]

To follow up on mortgage loans, [indiscernible] could you remind me when the bank reduced its mortgage? What are the quarterly mortgage sales this year and next year? And a similar question from [indiscernible], when are you expecting to see bigger numbers of mortgage sales?

[Przemyslaw Gdanski, executive]

If I remember correctly, correct me if I'm wrong, the decision to restrict or other to follow a very tight selective policy of selling mortgages, that decision took place in 2022. Now you've asked a number of questions. I am not sharing my plans when it comes to the quarterly mortgage sales numbers. We do not share that. Looking at the numbers of credit applications, we can see that our customers are very interested in this product. But as I've said, we will remain very selective with this product, both in terms of credit risk and the capacity to build long-term transaction-based customer relationships. When will this be reflected on our balance sheet, we will be building out this portfolio steadily. It's already started, and we will see a reflection in Q2, though relatively small. But in the following quarters, this should be more of a figure.

[Unknown Analyst]

Another question, were there any increases in salaries in the first quarter of 2024.

[Unknown Executive]

Yes, there were raises like every year, starting from March and that is why in our results, we do see the impact of raises for 1 month. In the following quarters, this result will be more visible, fully visible.

[Unknown Analyst]

The mentioned securitization transaction, what was its impact on equity ratios and capital ratios in the first quarter.

[Unknown Executive]

17 bp for Tier 1.

[Unknown Analyst]

What impact in your capital ratios, do you expect from CRR I and CRD IV regulations?

[Unknown Executive]

Well, we are currently implementing a project that is expected to measure it precisely and at the same time, we will undertake activities that should help us to minimize any negative impact. It's difficult to name specific numbers right now.

[Unknown Analyst]

As we speak about equity, last Tier 1 assumed inclusion of 50% net profit from 2023.

[Unknown Executive]

No. In brief, no.

[Unknown Analyst]

What level of cost of risk we should expect throughout 2024. Is the beginning of the second quarter a good result.

[Unknown Executive]

Well, I do believe that the level of 40 bp is a pretty good benchmark and a good prediction of what could happen in the entire banking market, including our bank.

[Unknown Analyst]

Is the level of depreciation of the first quarter taken as run rate?

[Unknown Executive]

Well, depreciation in 2024 will be an important factor influencing the value of the costs. As I mentioned before, the bank did and does conduct investment activities. So we can expect it will be a significant factor shaping the cost dynamic.

[Unknown Analyst]

Did take up of the loan or borrower support fund increase.

[Unknown Executive]

Well, this is really a provocative question, but it's only one step from discussing the credit holidays, but I will not be provoked. No, the uptake of the borrower support fund remains low.Another question comes from Reuters. You have seen signs that the recovery of demand for financing should happen. Do you believe this is likely to happen in the second half of the year? And what kind of year-on-year dynamics are you expecting?Well, we know quite a lot and we see quite a lot based on our dialogue with the clients about potential transactions, potential investments, potentially higher needs of work capital financing. This has not materialized yet. We will see what is going to happen. If we look at the market as a whole, the corporate loans markets volume-wise have really not changed. So it's difficult to say whether it will happen in the second, third or fourth quarter. I personally would think it could happen in the second half of the year.The next question is from [indiscernible]. The Governor of the NBP analysis increases of anti-cyclical buffer to 2%. How do you assess this move, given the loan dynamics is still low. Aren't you afraid of systemic risk?Well, ladies and gentlemen, given the current capital situation of the sector, the MREL requirements, the enormous needs of Polish economy in terms of energy transition or defense, this move seems unjustified and unnecessary.

[Unknown Analyst]

Going back to credit-zero loan, speaking of the decision of joining the program, does it mean that you do not intend to participate in the program or that you have just not decided as yet?

[Unknown Executive]

Well, never say never. At this time, we have not decided to join. It cannot be excluded that we would at some point, although I would not bet a lot of money on that. We will be focusing on going back to the mortgage loans market, the real marketable market.This was the last question online. So if we don't have any more questions in the room, I think this is it for today. Maybe we should come down from 5 to 1, so that we give our guests room to ask questions in any channel. [Operator Instructions]. Thank you very much for participating in our meeting. Thank you for your attention. Thank you for questions, and see you next quarter.