ING Bank Slaski SA
WSE:ING
Earnings Call Analysis
Q4-2023 Analysis
ING Bank Slaski SA
As we evaluate ING Bank Slaski's performance in the last year, we see a bank navigating through a period marked by modest market activity in the broader economy. The bank experienced considerable deposit growth, adding nearly PLN 13 billion to its balance sheet. However, there was a less robust expansion in credit and loans, which increased by just under PLN 2 billion. The deposit growth significantly outpaced the loan growth, leading to a shift in the bank's balance sheet dynamics. The CEO, Brunon Bartkiewicz, pointed out changes in the loan to deposit ratio and a concern over the low credit to GDP ratio which declined by a worrying 33%. These numbers indicate that the bank may need to seek new strategies to stimulate loan growth or adjust to a new balance sheet composition centered more on deposits than on loans.
Looking forward, 2024 appears to be a year poised for improvement but not without challenges. The bank anticipates a slight decline in growth, mirrored in consumer trends with a notable absence of a consumption boom. Instead, a modest 3% consumer spending increase is predicted, down from the drop of 1% seen in 2023. There's hope for a rebound in investment, expected to grow by 3%, although this is still lower than the previous year. It's evident the economy faces pressure from low exports linked to the German economic struggles, high energy costs, and a cautious consumer savings trend.
The future of interest rates warrants investor attention. Inflation in Poland is projected to fluctuate, with a drop to 2.5% early in the year before climbing to 5-6% by year's end, averaging around 4.5-5%. The National Bank of Poland is expected to reduce interest rates, but the reductions are seen as merely symbolic—a tepid 25 basis points. The backdrop to this is a broader European trend of declining interest rates and an ongoing need for the banking sector to invest in green energy to alleviate high operational costs imposed by emission rights, which currently stand at 1.8% of GDP.
The bank also reported on its risk costs, highlighting a PLN 617 million cost of risk for 2023, a notable decrease from the previous year. This reduction is partly attributable to adjustments in both macroeconomic provisions and currency-related provisions concerning the Swiss Franc (CHF) portfolio. Moreover, ING Bank Slaski maintains a solid capital adequacy profile, having satisfied all Minimum Requirement for own funds and Eligible Liabilities (MREL) with plans to propose a dividend payout of 75% of its 2023 net profits. This decision reflects a capital surplus engendered by lower than anticipated lending activity. Furthermore, the bank reassures that the quality of its loan portfolio remains stable, with a growing coverage ratio for non-performing loans.
In a substantial move, the management board intends to recommend a 75% dividend payout from the net profit of 2023, coupled with an additional payout from past profits amounting to PLN 1 billion. This reflects confidence in the bank's capital position and the surplus generated by lower loan disbursement. It is a clear indication that the bank is in a strong enough financial position to return value to its shareholders while still upholding operational integrity and regulatory requirements.
The bank keeps its focus on strategic growth areas, including loan growth campaigns tailored for local governments and leveraging EU funding to spur corporate loan improvements. For 2024, conservative estimates show consumer loans increasing by 1 basis point, with a more robust pickup expected in the latter half of the year. Corporate loans are expected to improve in the second half of 2024 as EU funding starts to take effect. As we project two years down the line, there's an anticipation that deposit and loan growth will eventually balance out by 2025, suggesting a normalization in the bank's deposit to loan ratio after a marked depositor surge in recent times.
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Good morning. A very warm welcome to our conference in the course of which we are going to be summarizing 2023 and the fourth quarter. Brunon Bartkiewicz, the CEO of ING Bank Slaski; Bozena Graczyk, our Vice President responsible for finances, CFO; Rafal Benecki, the Director of the Macro Economical Analysis; and I am joined by Iza Rokicka, responsible for Investor Relations, Market Analysis and ESG.Bruno -- Brunon, excuse me, please, take the floor.
Good morning. A very warm welcome to you, ladies and gentlemen. Welcome to this marvelous 2024. May it bring more success to all of us than 2023. Why am I saying that? A word of introduction, 2023 was a year that obviously triggers a number of emotions. Nonetheless, as I see it, that was a year where we actually had a relatively low market activity, in general, in the economy, that is a relative thing. Rafal is going to comment on it in his presentation in [ his part ] of the meeting. It was a very specific year. Why? Because it is yet another year of relatively weak loan activity driven by demand. This is something that is worth emphasizing, a low propensity for crediting and considerable turbulence of aggregate market flows.All of that has translated into considerable turbulence to balance sheet statistics, which in itself generated new challenges and needs for adjustment. It was also a year where we had a yet another phenomenon of considerable risk factor that is legal, and regulatory instability with regard to the economy as such, but also the banking sector. In all probability, banks have been affected to the greatest extent with such schemas.I believe that this was a year where -- when a lot happened in terms of regulation, but mainly in the form of announcements and deliberations and negotiations, something that in [ no way ] supported the situation of the banks or preparations of what the Polish economy needs, that is a pull forward.To illustrate the overall situation in large aggregates, we have been repeating what we had been going through. Overall the deposits submitted with the banking sector totaled PLN 575 billion. I'm going to let that sink in, PLN 575 billion given the -- in comparison with the individual deposits, PLN 35 billion, and business is PLN 66 billion.Now, with regard to the full year accrual, should we deduct from that the deposits involved with the social security authority and local government and other nonbanking institutions, that accrual totals PLN 13 billion. The accrual of deposits was colossal. The accrual of credits or loans has been captured to the bare minimum, which obviously has its consequences. They changed the overall profile of banking, sector balance sheets and loan to depo ratio is dropping. The banks have been truly dependent on derivatives and other financial instruments used to generate funds on National Bank of Poland accounts.As a result, we are ending up with something that I'm truly bothered by, a relatively low ratio of credit to GDP dropped by 20 percentage points. At the end of last year, it was approximately -- the drop actually in total 33%. That is the amount of credit to the nonfinancial sector to GDP. And that obviously is worrisome, and it translates into the overall situation of the bank and the necessity of the bank making adaptations or adjustments. Obviously, all these changes are of great importance.Now, the deposits with our bank have grown by PLN 13 billion -- nearly PLN 13 billion. Thank God, the stock exchange and investment fund market was very attractive. We recorded nearly PLN 4 billion in accrual, including different values. Credits and loans grew by just under PLN 2 billion.Those are statistics that we actually do not want to get used to because they are far from desirable. [ But ] obviously, drives our great optimism and expectations of 2024. I hope that Rafal will be able to convince you that we do have sound basis for optimism.Now, there is another thing I would like to point to. The year 2023 has truly shown a pickup in the technological development tempo affecting different areas of life, financial services included. We obviously all associate that [ where ] the phrase of the 2023 -- and it is repeated so often that it is -- actually has been [ out ] of proportion in terms of the artificiality or intelligence indeed. Nonetheless, 2023 has shown that despite all challenges, regulatory uncertainties included, we do not have the time to wait for the technological debt to pick up.We have to introduce changes, both with regard to IT foundation, so to speak, and freeing up organizational structures of material impediments. To put it in a very general term, we have to truly cloudize our operations, so to speak, and we are about to proceed to changes in our distributional channels. Yes, it goes without saying that the old waves are still there. They are being slowly shut down, as proven by cash transactions closed in our branches. But the new is on our threshold, and this is something we have to prepare for. This is something that was truly important to our 2023 operations.Now, with regard to our performance, you can read, and I'm sure you have read all that was prepared for you. Bozena is going to introduce you to details. I know that the provisions for credit risk may trigger your doubt. Nonetheless, I wish to assure you that we have been planning no great change. We are remaining conservative and traditional.Safety and calmness. I do understand that you may have found it as something of a surprise in terms of our decisions concerning the dividend, Bozena is going to comment on that as well. Obviously, we have had a gap in terms of the accrual of financial activities' dynamics and hence, our dividend-related decisions.Now we are going to move to macroeconomics, the overall trends. We are going to, obviously, listen to what our excellent macroeconomic analysis bureau is telling us, with Rafal at its helm. Bozena is going to be talking about our performance -- our financial performance with a specific pivotal focus on issues that might be of particular interest to you.
Thank you very much for this introduction. Now, with regard to the predicted trends in 2024, we have -- well, the year of a slowdown followed by a pickup is behind us. Now the tempo dropped slightly in the fourth quarter. We saw that the -- well, the fourth quarter data has shown us that consumption is not really growing. We are definitely in the midst of investment, which was a bright spot for the year 2023. Nonetheless, the weakness of export has been apparent, connected to what was going on in the German economy, and we are not in a great -- at a great place at this time.2024 is a year of more opportunity, but we have to count on ourselves to put things bluntly. German economy is going through cyclic and structural difficulties. Cyclic, for example, the lack of possibility of generating a fiscal impulse and with regard to structural issues that ties in with expensive energy and the automotive market.So we, obviously, have to understand that this is reflected in the loan market, which ties in with income. Certain statistics are not very popular with the society. Nonetheless, there are foundations to improve consumption in terms of income and general [ mood ]. The potential is there, albeit it has not yet happened.Now we do know that consumers are cautiously optimistic. Nonetheless, we -- they have a propensity for saving. I believe that affordability and prices of certain commodities and services may be behind it. We have to be aware that certain frozen accounts may be actually unfrozen. We do know that [ war ] is still at hand. So the society is –-- has -- showing a high propensity for savings, or saving in general, as Brunon told you. We should not expect any kind of consumption boom in 2024. We can be cautiously optimistic, predicting a 3% increase rather than a 1% drop in 2023.Now with regard to investments in 2024, we have recorded a 3% growth, slightly below [ 1.5% ] than what we had recorded last year. The structure of investments may change. In 2023, we were dominated by the energy sector and transport, mainly the gas pipe infrastructure.Now investments focused on a very narrow community of companies, mainly managed by the State Treasury. We do hope that the situation will improve in 2024. We are obviously also taking the EU funding into account. The graph in the bottom left part of the page shows the EU funding. And 1.3% of GDP is going to be fed to Poland. Without the National Recovery Plan that would be [indiscernible].Nonetheless, if we add the green bar there too, the net balance of grants and loans will total 2.7% GDP compared to 2.1% in 2023. There is an improvement there. Funds are going to be coming in December, followed by April and October. So we are truly hoping on the effects -- the multiplication effects to bring some kind of effect.So we also hope that not only large companies and state-owned companies, but also the medium-sized companies are going to take advantage of it. We do hope that the Polish economy is -- potentially is going to be unblocked. The share of investment in GDP had been dropping. In 2023, it was very low, approximately 17%.And apart from national investments, domestic investments, we also see a potential for a growth in foreign direct investment. We have been talking to investor from external companies. Yes, we are definitely perceived as #1 in terms of investment sharing, but we are also preparing for a new European and global deal.I know that some countries want to have their manufacturing processes closer to the borders. I know that many investors had been waiting for the result of Polish elections. They are definitely going to be moving their manufacturing processes here, but in all probability only in the second half of the year. So in all probability, we will have to wait for that.Now in terms of interest rates and inflation rates, now we are expecting that the -- we are going to go down to 2.5% in terms of the minimum. We know that disinflation signals are there. We already have seen that the inflation -- base inflation has been dropping. The shocks of last years have been dissipating, that also translates into our base inflation rates.That, plus the propensity for saving, probably we can assume that inflation in Poland will drop to 2.5% in the first quarter, but then it is going to grow to 5% or 6% towards the end of the year because some of the inflation factors have been frozen, such as, for example, the VAT on food. So we may expect a net effect of inflation of 4.5% to 5%. Yes, the cost of labor and the minimum remuneration, minimum wages are definitely going to be affecting the inflation rate, keeping it high.Now, what will the monetary policy council do? Now the reactions have already changed. In the U.S., for example, you may actually expect a decrease of 100, 150 basis points, in Romania 150, a similar effect in the Czech Republic. So we are going to be reducing the rates by 25 percentage points, which is absolutely symbolic. And last but not least, energy investments of great importance to our bank as well. We took a look at the cost of emission of so-called high energy and high emissions in the -- on the Polish market, that's on the left.Today, Polish companies are spending 1.8% of GDP on the emission rights. We are purchasing some of our emission rights outside and 8% from our own government. Now -- Poland is now spending 1% of GDP on green project, very little. So we are spending very little on green investment, very -- a large sum of money, excuse me -- on emission rights, which means that ETS is actually penalizing us for the slowdown of energy conversion over last years.Now, the Czech Republic is in a similar situation. They are actually purchasing a specific percentage of emission rights outside their own borders. How do we get out of that? We have to keep investing in green energy. Until the end of this decade you can actually use PLN 45 billion in loans and PLN 35 billion grants from the EU to support green investments. So you can support each and every investment with a loan, which means that we can get out of the situation that we have placed in by high energy costs.
Good morning. Let me say a few words about what was going on in our financial performance in the fourth quarter and 2023 in general. A lot has been going on. So, starting at the top. Our net profit in the fourth quarter totaled PLN 1.27 billion, and commentaries have proven that this has been the effect of changes to certain expectations and the low cost of risk. I'm going to talk about it shortly. PLN 109 million, that was our increase 9% quarter-to-quarter on quarter. And should we segment the growth, I would like to primarily point out that this -- in that particular quarter, we had reversed the correction for amendments we made to interest rates as introduced in the third quarter, PLN 190 million quarter-on-quarter.As said before, we draw -- our cost of risk dropped by PLN 85 million quarter-on-quarter. That is the effect of changes to macroeconomic decisions concerning our provisions and sales of our [ irregular ] portfolios that allowed us to generate PLN 24 million in net profit. [Foreign Language]Portfolio related risks. Also, our general cost in the P&L grew by PLN 126 million, with a major contribution from the restructuring provision amounting to PLN 66 million.If we look at the dynamics of our results across 2023, it's a record-breaking result for -- [Foreign Language] from credit vacation. If we adjust for that, the growth was 13% year-on-year, which was mainly due to higher volumes and better interest margin.I do believe that it's worthwhile to mention what happened in our remaining income. We had a historic result of PLN 343 million annually. It's mainly due to our trading income. In 2023, it was subject to high volatility in terms of interest rates and FX and all that allowed us to generate such a high trading result.Well, of course, in this P&L year-on-year, we had a significant drop of regulatory costs by 41%. You might remember last year, we had the cost of [indiscernible] and the higher regulatory costs, which decreased by 35% this year. And again, about the risk costs, lower by 40%. In our case, the trend is a bit different to what you might have seen in other banks. Last year, we booked a provision for CHF denominated loans because we anticipated what happened with the ECJ -- UCJ decisions at the beginning of this year. That's why the change in that provision for CHF loans.And I mentioned positive recalculations of risk costs and macroeconomic assumptions related to back testing our models. All in all, our accumulated ROE adjusted by macro cash flow hedge result amounts to nearly 23%, which is nearly 2 percentage points higher quarter-on-quarter.Now, about the interest income, in Q4 it was PLN 2.2 billion, which was better by 4% quarter-on-quarter. Our quarterly interest margin stayed virtually unchanged at 3.7%. The annual result being PLN 8.2 billion, which was 13% growth year-on-year if we adjusted by the effect of credit vacation.As a result, our accumulated interest margin went better by 7 bps with 3.63% at present. It is also a result of higher interest rates in 2023 against the backdrop of the previous periods.Well, looking at what Brunon said before, let's look at our LTD ratio at the beginning of -- at the end of Q4, it was one of the lowest recently. Last time we had 90% LTD, was at the end of 2019. So it might not be the best level possible and the situation is even worse in the banking sector. [ Mind you, ] based on the 69% level across the sector, we might say that it's the lowest within the last 2 decades. This clearly shows the need to generate demand on loans.Speaking of fees and commissions, our result in Q4 was the highest recently with 1% quarter-on-quarter growth. But if we look at the year-on-year result, it is indeed a 9% growth in fees and commissions income. All in all, we can see a very positive trend of higher activity of our clients across all areas of our operations. Looking at annual, not so much quarterly result, we can speak about 8% growth on the financing. It's a result of the credit activity of our customers in 2022.We had a very positive card result, 16%, a very solid insurance growth and a very solid result on FX transactions. It's very much [ after ] expectations in this area. Speaking of costs, our Q4 cost amounted to PLN 1.143 billion, growing by PLN 126 million throughout the quarter. With a strong contribution of restructuring provision amounting to PLN 86 million, but based on quarterly and annual results, we can see a snowball effect of the inflation we've been facing for the last years, which [ ups ] the cost across the board.Speaking of the cost of risk now, in the previous quarter, a write-off amounted to PLN 177 million, with PLN 151 million in the preceding quarter. Let's walk you through it step by step. In this quarter, we had [ PLN 105 million ] [ Swiss franc ] denominated loan provisions, which is 109% portfolio coverage. In this quarter, we also have a slightly negative impact from costs related to changing macroeconomic forecast. We've seen a different corporate trend with a growth of PLN 26 million, resulting from the adjustments by the GDP trends and a very positive trend in the Retail segment with PLN 17 million change.And we've seen a very positive contribution from changing unemployment rates. Like I mentioned, in Q4 we had a large irregular loan sales deal with a very positive impact on the Retail segment amounting to PLN 24 million.Now about the Corporate segment, because it have a slightly more complex dynamics. If we compare Q3 and Q4, you cannot [ hear ] but see a growth of PLN 87 million resulting from macroeconomic changes. Because in Q3, we had the release amounting to PLN 144 million and in the previous quarter -- and this quarter, we set up more provisions, like I said before.And this is the backdrop of the change of provision costs. And this quarter, the remaining effect is from the performance of our loan portfolio, which I'm going to dwell upon in a minute. And it's a normal trend in the corporate loan portfolios against the backdrop of the overall macroeconomic trends. In the Retail segment, if we leave out the effect of CHF loan provisions, we could see considerable provision release. On the one hand, we could see a very strong effect of our mortgage loans.But like we mentioned before, we had some back testing of our models in Q4, which released the provisions amounting to about PLN 100 million. We already said that whenever we speak about the cost of risks, quarterly situation won't tell you much. It's better to watch longer time periods. So if you look at the whole year, you might get a better picture of what happened in the cost of risks and why it happened.So in 2023, if we -- our annual cost of PLN 613 million, which was PLN 417 million less than in the preceding year. Half of this net difference was due to changing CHF provisions. And the other half, PLN 260 million, was due to changing costs related to macroeconomic models.Last year, we have set up PLN 217 million macro provision, whereas in this year we released the provisions amounting to PLN 42 million. If you look at the macroeconomic parameters, you can see why it happened. And it clearly shows the way IFRS 9 model operates, where the macro effect precedes the real growth of the risk cost. That's why in the previous year the major contribution was macro changes. And in this year, we saw some macro adjustment and individual cost of risk springing up, replacing some of the latter.If we leave out the macro effects and the effect from CHF loans, our aggregated margin and the aggregated cost of risk in 2023 was 35 bps and in 2022, 34 bps, which shows quite a stability in our cost of risk, and which is a good explanation of how to follow the dynamics of cost of risk, because quarterly situation is not a good indicator.Now, about the quality of our portfolio, you can see large stability and the share of irregular loans across all segments. I should mention steady growth of the coverage provisioning ratio at Stage 3, despite the sales of [ irregular ] loans.Speaking of capital adequacy, we have a considerable surplus with a positive trend due to Tier 1 adjustments and revaluation reserve and pricing of capital elements and debentures being part of our fair value and hedge strategy. We are up to all MREL requirements. We already reported the MREL loan amounting to EUR 1.5 billion last December, which buffers us to meet all MREL requirements.Now about our intention to pay out the dividend. Today, we reported to the market that the intention of the management board is to recommend it to the general assembly to pay out the dividend amounting to 75% of the net profit for 2023, mainly due to the capital surplus generated with lower lending we've witnessed this past year.On the other hand, we already reported it in our December report, the KNF had no reservations as to the possibility to pay out the dividend for the past years amounting to PLN 1 billion. So this is the decision we want to recommend to general assembly to be paid out together with the profits for 2023.So much for [ my ] comments. We are open to questions.
So let's have the Q&A session now. First, we'll handle questions from the audience, if there are any. And then we'll move on to questions from our online participants.
I'm Adam [indiscernible] from [indiscernible]. I'd like to ask about your forecast when it comes to the interest -- net interest margin against the backdrop of what you said, a slight drop in the interest rates?
Please bear in mind that we are not commenting upon future events, but considering what Rafal said, if we had such a scenario, I don't think we should expect major change in this area. But what can have an impact here is the form and the operation on the market, a broad increase of lending in the investment segment and subsidized instruments, in particular, the housing loan program announced by the government for Q3. But bearing all that in mind, we shouldn't expect major changes in that area.
[indiscernible], I have the following question. With regard to this conference, if I understood you well, you were talking about the coverage for the Swiss franc portfolio through the tune of 109% by provisions. I would like to ask what the explanation is? Why did you decide to exceed the 100%? And what is the ceiling value? What is the cap, so to speak? What is the limit, [ PLN 109 million ], [ PLN 190 million ] or less?
We are using model components, and we are also referencing whatever is going on, on the market. You have already noticed that this particular ratio, this index is not super accurate. It considers the provisions to the active portfolio -- active current portfolio. I would like to also point out that any disputes might arise with regard to closed portfolios. So this is a certain model that may in 2023 have been affected by the [ EUCJ ] decisions and the actual FX value. That is something that we are very much aware of. We are trying to adjust to what is going on, on the market. Should you take a look at, in other words, indices or other financial institutions, you will find that this is the way taken by the market.As time passes, the share of paid off loans is growing with regard to the value of outstanding loans. And our financial flow requires us for provisions to be transferred from balance sheet to non-balance sheet positions, which is very much visible once you take a look at our liabilities, where we are showing the provisions -- non-balance sheet provisions for paid off loans. This is a natural phenomenon that is definitely going to be expanding as time passes.On the other hand, we are also reviewing and verifying assumptions concerning disputes for outstanding and paid off loans. And as a result, the [ sum ] of provisions for the active portfolio in the banking sector -- in the banking system is growing. According to data filed with the bank, we now have 85% of provision coverage at the -- in the fourth quarter. It actually grew in 2023 as a result of the aforementioned decisions. We have -- PLN 170 million had been actually set up in provisions throughout 2023.Now I do not wish to predict the future. Yet again, we are making an effort to set up provisions for Swiss franc loans to avoid debt. Whatever we have to set up, we set up. That is -- this is as far as I will go with regard to how -- with regard to predicting the future. But we are not the first bank to actually -- to have exceeded the 100% threshold. I believe that the group of such banks will be growing also as time passes.
I see no questions from the floor. Web questions. Let's start with the loan campaign in the sector. What does the bank wants to do with regard to campaigns, specifically when it comes to financing local governments? That is a question coming from [indiscernible], and we also have a question from [indiscernible].Given the forecast concerning inflation rate, as presented by Mr. Benecki, the -- should the loan campaign be more intense as -- the share along with its performance with regard to forecast of depos and loans, with regard to what Brunon said, indeed, over the next 2 years, 2024, 2025, we are probably going to be balancing out the depo to loan index. In 2024, the depos will be growing by approximately PLN 60 billion, half of which [ in ] loans. In 2025, the -- probably the growth in depos and loans is going to even out.With regard to consumer loans, this year -- we are quite cautious with regard to this year. In 2024, consumer loans will in all probability be growing by 1 bp given -- well, probably by the end of 2024 -- well, by the end of 2024, consumption will grow by 3% rather than by 5% to 6%, as we saw during the previous years. The society has a propensity for saving and this is how everything translates onto the overall dynamics of consumer loans.In 2023, we have noticed a gradual improvement of corporate loans in the second half of the year as EU funding began trickling in. In the first half of the year, the dynamic was an inoperability will be negative in the first half of the year to then grow to 2% in the second half of the year.The big picture is that the large production of deposits will be slowly but surely [ featuring ] out. And it will take loans approximately 2 years to catch up in order for the -- both to even out by 2025.Well, I am oversensitive here. And I would like to emphasize yet again with regard to that particular question. The poor activity of financing the economy is a result of the poor demand rather than barriers in the banking system. I would like to reemphasize that the banking community truly needs a dynamic loan campaign. The economy needs such a loan campaign as well. The banks are something of a reflection, a mirror, a conduit. What we need is the growth in activity, or to begin with financing.So it's all about demand. I know that the market believes that we don't get loans because banks are not giving us loans. That is not true. That -- such beliefs are not reflected in statistics. The most recent report by the National Bank of Poland proves that phenomenon as well. Whereas, during previous periods, the National Bank of Poland had been in some doubt whether that had not been due to certain barriers and procedures in all probability to improve overall ROE indices.But this is not the case today. You also have to bear in mind that individual banks have little to say in terms of the overall market condition. The competition is there. The institutions will be competing. The competition is rather fierce on -- in the banking sector. But if there is no demand, there is nothing to compete for. I hope that you, ladies and gentlemen of the press, understand it.
This is something I wanted to say with regard to that particular underlying question. I also have other questions concerning the dividend. Another question. The generous proposition of the dividend, is that a rather generous position tying in with the loan performance?
Well, that is a combination of our current equity position and our predictions. We are definitely very much optimistic with regards to loan campaigns, but let us understand and make no mistake, our equity is our basis for any kind of loan campaigns and our mission that we carry with regard to the economy. In other words, if we plan for an increase in the loan campaign to the tune of what Rafal was talking about, can we assume that things are going to get better, although there is a limit to that too.We are proposing the payment of a dividend through the tune of an amount that will not affect our performance. We are definitely expecting lower demand for demand -- than our capacity actually is. And we are not taking a 1 year perspective here. It's an annual average perspective. Equity capital are there to fund to finance. We are a bank that generates equity capital for our growth and growth is our priority because this is what the economy needs and we are there to support the economy, such as our mission.I would not want to conclude that we are predicting something bad in the economy. The reverse is true. As Rafal said, we are actually predicting a growth in the loan campaign for companies to the tune of 10%. We always want to grow faster than the market.
We also have to point out that we have quite an equity surplus there, and there is the element, the component of equity effectiveness in terms of balance sheet structure management. Hence, the extraordinary proposition of dividend payout. There is one other thing that is worth mentioning, i.e., that is the management's proposal that has to be confirmed by the general assembly, but also it has to be approved by the supervision authority. And we have not yet received that approval.
One other question, what is your equity surplus at the end of 2023? And how about an estimate of how the dividend payout is going to actually affect the adequacy indices?
Our liquidity index does not account for 2023 performance. That had not been made part of our equity calculations. In other words, should we pay a dividend of 75%. As a result, 25% is going to be [ accumulated ] in equities, and that's approximately PLN 1 billion. In other words, roughly equal to the undivided profit for previous years. So I think that this proves to you that we are going to be safeguarding our equity stability despite what has been going on for one. And another thing is, according to this particular slide, we are showing you nominal values above the minimum requirements.Now with regard to TCR, because that is what we have to account for, we are now declaring that our overall liquidity ratio has exceeded 6%, 6% above minimum requirement levels. And that is a truly important or significant amount.Now, in terms of what is going to happen pre and after the dividend, well, our interim performance had not been accounted for in equity, which means that the overall performance is going quite neutral.
Is the bank planning for AT1 instrument emissions in 2024?
No, we are not planning for any emissions of the kind. We don't need them.
There is also a question concerning the CRR and CRD new requirements on your equity performance.
I believe that this is really an interesting topic to be discussed throughout 2024. Yes, the [ CRC ] changes are definitely going to bring advantages and disadvantages changes. Now, since we are not using advanced methods for retail portfolios, the impact will not be detrimental, will not be hugely negative. It is rather going to be -- it is going to be neutral.
And to close the equity motive, I have the question concerning the cost of our MREL and how will it affect us.
We have taken out a loan for 4 years. It is an intercompany transaction, which means that by definition, it is based on market margins, based on market benchmarks. But we are not in the habit of disclosing the margin.
I have other questions here at hand concerning the governmental programs regarding housing campaigns or governmental plans concerning housing programs. Do you tend to partake?
As you know, we did not join the previous program. We also told you why. The formula of resolving the housing issue by supporting demand is by no means a miraculous remedy that we are in any way willing to support. Now, given what is going on now, well, given the fact that it is meant -- it will be designed as a perpetual long-term and stable program, we are somewhat inclined to join the program, to join the campaign. I would like to emphasize that even in the case of governmental programs, the bank does not want to expose the clients to confusion and any kind of misunderstandings of principles, both long and short-term, long-term, in particular. And that will be the baseline for our partaking or not.We are not today aware of all the relevant details of the program. But on this day -- as of this date, we are rather positively inclined to join the program and participate in the process of distributing subsidized funding. But obviously, we are very much aware and somewhat concerned about the pricing performance or pricing consequences.
We also have a question from Bloomberg concerning frank credits. Your portfolio of 11.9% of outstanding loans, will these clients be offered any kind of conciliation? If yes, what kind of conciliation are we talking about?
As said before, the non-balance sheet provisions for paid off credits includes provisions that had been set up for outstanding loans as well, which means that the this index ought to be perceived as such. I believe that in principle, we have to be very much aware that there is a certain proportionality of provisions for paid off credits in the context of disputes that have been filed and submitted. Importantly, the paid off credit or paid off loan portfolio has its own closed off value based on the FX differences as taking out of the difference of the date when the loan had been launched and paid off, respectively, which means that the scale of risk for that portfolio is considerably lower than in case of the portfolio of outstanding loans.So there is definitely a certain proportionality at stake also arising from the specificity of disputed cases. Given the potential of "profit" for the clients, obviously, the potential profit for the clients who had already paid off the loan is considerably lower.In terms of conciliation agreements, there is no reason for which a conciliation should not be offered for paid off loans specifically if cases are taken before courts of law.
I can see no further questions from the audience. Or there is one.
Yes, I'd like to ask about WIRON. I'm not sure whether it is largely forgotten or not so much. What's your general volume of loans at WIRON with special focus on mortgages?
This indicator was adjusted in January. So somebody paid their installment some time. At WIRON, let's say, the adjustment was [ 4% ]. And the installments should have been paid at the level of [ 3.2% ] or [ 4.8% ]. It can be either.
So do you have any claims from that client, or are there any [ back ] claims? So what happens after the adjustment? I've got some further questions prepared as well.
For all we know, the RFR or WIRON reform is going on and going strong. So if you ever heard any rumors about its end, they are largely exaggerated. So the reform is ongoing. Late last year, we had typical reports on the adjustments volume. Also, quite importantly, there were reports about the update of the road map. The reform is, of course, very important because of the current share of variable rate based loans and the share in our economy. So I believe there will be more information to expect about the adjustment.As for the [ EMEA ] adjustment report, the administrator told us that the adjustments volume wasn't really huge and it wasn't necessary. And all adjustments are unidirectional. So after the adjustment at every [ quoting ] day, historically, WIRON was higher than the one before the accrual adjustment.To that end, on every interest accrual day, it's something different. But even if, then it could be better for the customer than the bank. Well, of course, the administrator said that these were adjustments, but not material enough to be included in the further talks. And the bank does not and will -- does not intend and will never intend to go out to the clients and "demand" anything based on that from them.Well, of course, you're right. It's a lucky coincidence that over that period all adjustments were directional, because they didn't have to be. Well, of course, we wish there are no adjustments, but it's impossible. There will be some, but we wish for as small ones as possible.As you perfectly know, as of 1st June, we extend mortgage loans based on variable rates on WIRON, because that was the assumption of our working groups that will -- we would increase their production. We are aware that their production out there on the market has not been growing. So we are like the last month standing here. We feel [ stranded ] here, but we'll go on.I'm not sure we are revealing our exposure here. But as you might guess, the loan production in the second half of last year, those based on the variable rate, was not huge as compared to the previous periods. So the aggregated WIRON variable rate value is relatively small as well.Well, you can see in our presentations that in Q3, which was the first quarter where WIRON reports, 80% of our production was fixed rates. And Q4, we had 76% production at fixed rates. So the volumes are appearing, but they are not material, not yet. So the production was relatively low in the second half of the year and with the highest share of fixed rate loans.We start getting at 30% of fixed rate share when it comes to our PLN denominated mortgage loans. And this is where we are going. In 2023, we celebrated 5 years since we actively started selling fixed rate mortgage loans. This is still the dominant form of loans extended not only in our bank.It's worth mentioning that the borrowers, which started taking out fixed rate loans 5 years ago, contributed a lot to what the model is now. So the mortgage lending model in Poland should be largely based on fixed rate products. We are strong proponents of fixed rate mortgage loans.We are trying to do our utmost to pave the way to higher exposure and higher awareness of them. This is what we do, because -- well, if we want to make a change, you should always start with the -- [ number ]. So we've seen considerable growth in the share of those products across the board on the mortgage market. And there's a larger offer of strong secured loans based on fixed rate as well.
Just to continue, I've got some more questions. You had a deal with PKO BP for derivatives to secure. Well, to hedge this WIRON variable rate, what can you say about this market? Is it just you and PKO? Or are there any other institutions joining the picture? What's the scale of that market?
KNF promised to give us data for that next year because now they are giving data for 2022. They reported 2022 and next year they'll report 2023. And this is when it all started. This is what we [ learned ].
What's the volume of the market? And where is it settled here in London -- or London, so the volumes, the market, the number of entities?
Let me handle this one. The deal you are talking about between us and PKO BP, which was also covered. And the context of the reform was a test deal, trying to show the possibility to [ draw ] such deals out further. This is, by the way, one of the milestones to change this indicator creating the derivative market. It's a very important element of growing this market. But for this market to be really relevant, we need loans. It's like communicating vessels. But the first thing you need is the cash market to arrive at the derivative market. So like we said before, this is just the beginning of the lending. And we still have too few entities offering cash products based on WIRON.And after we arrive at a certain volume of these products, we will be able to talk about state-of-the-art market. So we still have to wait for more WIRON-based instruments to come, to start talking about the active derivative market.We are talking a bit about changing the indicator. But what we are talking about really is creating a new market. It's very relevant. It is very difficult reform, because of the scale of the -- of using variable rate products in the Polish economy. We want to decrease the dependence of the Polish consumer on the variability. But we are also shaping the market along with new participants.We are trying to create a market through production. We never wanted to be [ alone ] on this market. We are still optimistic. And we hope that WIRON-based production will become more ubiquitous and the market will grow faster, leading to more stability.KNF also has certain oversight expectations of this market. When they adjusted the road map and extended the transition period, they voiced the oversight expectation that in midyear this year, the new loan production be WIRON-based. And this is where we are. We are talking about mid-2024.And this is when banks should switch to WIRON-based production. And it was very closely related to the steering committee's decision to extend the road map.
[ Andre ] had a question.
I've got a question about your expectations of capital requirements, because we are slowly but steadily starting a debate on the possible anti-cyclic buffer or coming back to the systemic risk buffer?
I think we all have the same level of knowledge here. It's the financial stability -- committee decision. There are comments bringing up here and there. But so far, we haven't had any decision coming. So it's hard to talk about any expectations. Frankly, speaking of the systemic risk buffer, in particular, when it's there, it will be like it is on other markets. We won't talk about a single indicator of 3% like we had before. There will be multiple levels, but we still have to wait for decisions to come.Although in capital planning, we should factor that in as well. Similarly to the Central Bank, from the perspective of the banking overall, we cannot see any major durations. In Poland, the banking sector is pretty stable. There aren't any serious risks materializing in the next future, we think, but you're right.We start talking about it. But we are not going to participate in this discussion because of purely governance.
Some further online questions. There are questions pertaining to the restructuring provision. What are the main factors to reduce the headcount by 17%? What are the banking areas with more or less reduction? What is the restructuring effect we should expect in the years to come? Is there any pressure on growing wages?
Well, let me put it this way. The bank is optimizing its cost base. It sounds very bureaucratic, doesn't it? But we are an evolution-based bank. We want to avoid technological and production debt, which means that we are trying to boost our productivity all the time constantly. What this comment is about, is physical access channels. And we've been working on it for decades already, and we'll keep working on it because there's still a space for it. We could follow the number of transactions in physical channels. And there is a certain trend -- a very clear trend showing that the contact points are no longer transaction points. But the point of talking to our clients about the decisions they will take about retirement plan or a possibility to buy some real estate. So, all these conversations are held in physical points of contact. And it takes different [ tools ] than 10 years ago. It's a dramatic change what happened.Secondly, along with the growth in self-service end-to-end [ and ] in the bank, we have persons working in transaction support, mainly in our operations division, including contact center and some ops employees, not many of them. But these are the areas we've been reducing employment for over a decade. We've been working on it constantly for over a decade.Well, there's growth and employment in regulatory areas because of KYC AML, if nothing else. That's why the drop in the headcount in the bank was less visible recently. And it's a secret either that we are constantly growing our tech headcount across all divisions in the bank, because you can find the data scientists anywhere, be it a CX expert or the finance division. They are everywhere. They have to be everywhere. So the trend is to increase productivity. And this is what's been going on for a decade. It's nothing new and it's not restructuring. So there are no abrupt changes.We're just continuing the process that has been going on for years. Speaking of areas, well, there is an area where we reduced employment in the physical channels or contact points, technology [ permitting ], and I already mentioned that. Also, we've been reducing employment in KYC AML where the regulatory situation made us hire more people and now we don't have to. We have more and more tools with AI and so on. We'll see an impact of it slowly in the years to come. We'll see it even more.The growth of our bank is also a factor. The net result will be a gross result of certain changes and increments and decreases. Well, like I said, it's nothing new. It's been going on for several years. During the pandemic and the war, it was hard to do anything huge.So understandably with all that and KYC AML, new regulations and new employment requirements, I understand where you're coming from. But otherwise, we are just continuing what we've been doing so far.
Please quote the main reasons for which we have noticed a drop of conciliations for CHF loans in the fourth quarter?
Well, the trend of dropping conciliation agreement volumes is a universal one. Probably you have been following the rulings of the [ EUCJ ] and that has been affecting the entire banking system. And in -- at our bank, that is -- the phenomenon is on a micro scale. Conciliation and mediation is always a very good solution for CHF loans and related issues for the banking system. Offering conciliation agreements is ubiquitous and has been performing. In order for a conciliation agreement to be entered into, you need more than the will of the bank. You also need clients willing to sign.I am still in favor of the statutory solution, but no new news there. No news there. The process is simply too long, too lengthy. And it is not healthy for economic education or economic awareness, both of which ought to be recognized as a foundation for a strong economy and strong state, the new wave that we definitely need.I will be sticking to my guns and I will ask you to bear with us. I will not let that slide. It is too important a moment for Polish economy for us to waste the historically important opportunity. We are actually putting it to waste. I believe that such waste may actually be to the detriment of the [ iron cast ] rule of sticking to contract rules.
Do you see a potential for the growing number of conciliations for PLN denominated loans?
My response will be similar. The low cost of entry emphasized by offices of law despite all the declarations of the regulators and the FSA. Well, the number of entities are really huge on the Polish market. Our cost of entry, as I said, are really low and the potential for profit is high. So I believe that is a -- that is simply an invitation for people to walk in and sign the deal. The regulator's position is non-ambiguous with regard to that particular phenomenon. Let us bear that in mind.
And we also have questions concerning the performance for the fourth quarter. How many NPLs did you sell in the fourth quarter?
We sold -- as the table shows you, we were selling retail and corporate loans and we have exceeded PLN 200 million in our balance sheet. The majority -- well, the retail loans accounted for a major share thereof.
And the second question, when is the high amortization [ indexed ] the fourth quarter?
It is due to 2 factors. We have to bear in mind, firstly, that our balance sheet values are growing for asset components that are subject to amortization, not to mention the fact that we are actually engaging an annual cycles of amortization of reviews. We performed a very similar exercise in 2023 with the specific results.
And we also have 2 questions concerning state treasury bonds, T-bonds in 2 different contexts. When will you introduce retail T-bonds to expand your offer?
Now that question crops up every quarter, why is the bank not joining the primary market? Let me explain. The bank wants to. The bank is not being taken account of. We are not considered by the -- [ how is it ] -- be -- it takes 2 to tango. We are now the [ supplicant ].
Now, the other question is how do you consider -- what do you think about the possibility of expanding your offer to include the T-bonds to expand the loan campaign?
Now, in the bank structure today, T-bonds account for 25% of our assets. So I'm going to wear my economist hat now. From the viewpoint of economy and from the viewpoint of the impediments through the balance sheet associated with the risk of focusing on a single financial instrument. As an economist, I do not really see the potential of that particular share of T-bonds growing. That share actually grows from 15% -- that share -- excuse me -- the share of that those financial instruments grew from 15% to 25%, which obviously means that we are -- we have increased our concentration of assets on that particular instrument.The NBP, the National Bank of Poland have been focusing on that particular risk. And it considers that risk to be moderate given the equity value and given the overall growth of interest rates. If memory serves the stability report of the bank, points to a 300% growth and that gives rise to 90% growth of potential risk.And I, as an economist, consider that to be huge risk. So if a 300 bp growth is going to bring us close to the margins of acceptable standards, I consider that a huge risk. But I have been the Head of Risk management for many years and I believe that this is what is shining through in my commentary here.And this is exactly the kind of signals we are giving out, that this potential has now been affected. Moving from 25% to 35%, for example, in T-bonds, will definitely generate a problem. I'm talking about the overall sector. And I'm talking about the entire banking sector, I said.And as such -- as the example of such banks has told us, some banks have already been engaging in it.
That is it in terms of the web-based questions. I see no questions from the floor. So I wish to thank you for today's attendance. And please do join us in May for our next session.