ING Bank Slaski SA

WSE:ING

Earnings Call Transcript

[Piotr Utrata, executive]

Good morning, ladies and gentlemen. Welcome to this conference in the course of which we are going to be discussing the financial performance for the second quarter. Brunon Bartkiewicz, the CEO of ING Bank; Bozena Graczyk, Deputy CFO; and Rafal Benecki, our expert for macroeconomic analysis. My name is Piotr Utrata. I am the press spokesperson.

Now over to Brunon.

[Brunon Bartkiewicz, executive]

Good morning, ladies and gentlemen. Since we are quite predictable, it is quite weird that we are holding a press conference because the media have already been published in commentaries. Now we are only clarifying topics requiring explanation, not that many. I would like to point to certain components that have not been commented on today morning in today morning's press. The bank has been growing in terms of client volumes. Those are not really the accruals from the phenomenal times of 5 years ago. Nonetheless, the growth year-on-year in terms of individual clients over 60,000, also 10,000 small and medium-size enterprises or economic units or economic entities. This is all about changes between banks. Not to mention 100,000 new primary clients, individual clients, individual customers that we consider the bank to be their primary bank and this has been indicated by their moves.

Those are statistics that bring us great joy, they are not greatly visible. Nonetheless, our bank strategy is all about stable growth and that growth has actually been retained in today's rather dormant times. Now the other aspect I would like to draw your attention to is all about the over-liquidity in the market, a new wave of over-liquidity. Given what has been going on in the first 6 months of the year, it has become apparent that throughout the banking sector, the accrual or the growth of deposits of PLN 154 billion on the overall market. Whereas including assets at PLN 180 billion were the credit campaign of PLN 160 billion, which means that we have been contributing such statistics to the process of growth. Loan to depo is quite low. Today, loan to depo is 75.6%. The market 68.7% in comparison. That, ladies and gentlemen, is something that we consider a part of the financial stability or correlated risk.

This also shows the relative weakness of the Polish banking sector in comparison or against GDP, Rafal will be commenting on it, which ultimately means that we have had a reduced activity given the relative good use of operational assets. The noninvestment in entities, this is something I have been talking about over the last 6 or 7 years; Rafal, am I right or not; and that is the topic that we have been commenting on. It is also very important that the banking sector is being pushed out of the overall crediting market or funding market because there are other sources, including the state budget and EU funding sources. As a result, the credit campaign volumes over the span of 6 months have not been exactly rosy because of the constantly growing over-liquidity. Now if we take a close look at banks, we are going to find out that there is a market difference between the behaviors of these aggregates over this first and second quarters as if a watershed were just about to happen.

In our banks, it all boils down to the fact that in the second quarter of this year we have experienced a greater growth or accrual of loan related rather than deposit related liabilities. Obviously over this scale over the last years, it is quite regular. On the other hand, this means that we are overstretching. On the one hand, we have been experiencing a growth in credits or loans. The statistics are not mind boggling. Nonetheless, we are now starting to exceed GDP, which ultimately means that those signals are becoming a certain source of optimism given the nonoptimistic waves because the component of the rather moderate economic growth is going to be commented on by Rafal. This is why we have decided to ask him for a commentary. This is a good moment to observe. This ultimately means that our bank, as you have yourselves noticed, will be retaining its market share.

And with regard to the aggregates that have given rise to the greatest nonbalancing of individual items, the share in the market has ultimately been growing both in the private or individual and corporate client segment. Now we do have the rate [ reactivity ] period, which we have been using for purposes of improving effectiveness and improving efficiencies in terms of effectiveness targeting projects. We used to be talking about digitization. That is no longer the case. We are just improving our efficiency. Digitization is a word that has overall lost its meaning, which means that we are going to be focusing on transactions with the transactions that we emphasize. Transactions engaged in by clients with the use of banking staff are actually dropping, the volume is dropping. I am not going to be talking about cash operations here.

Nonetheless, that is also quite an interesting moment where the average daily value of deposits generated by banking staff has dropped below 10,000. 10 years ago that was 7,500 or 7,700 a day. Not to mention payouts, cash payments. Cash payouts are associated with the cash desk operator. Well, it's 3,000 today whereas 14,500 or 14,700 daily 10 years ago. That does not necessarily mean that the cash payouts have been moved to ATMs. Nonetheless, simply people are no longer using cash because the number of transactions at point of sale and transactions in general are growing. Nonetheless, they are definitely becoming cashless reflecting the overall trend of improving efficiency. Now you're interested in cost, administrative cost included. As in any case of growing inflation environment, we have to consider the in-house cost and the cost of services provided by other entities. We are not really dependent on other growth factors.

Inflation obviously translates into a high remuneration rate, which in turn translates into high employee or employment costs and the high cost of services provided by third parties, which means that we are currently facing the trend. Not to mention IT expenses, which in all probability we would want to engage in faster. But for a number of reasons, the process is not as dynamic, which means that this is probably a good time for large-scale business investments in stable systems. This has been confirmed by the labor consuming rates not to mention the fact that we have actually noted a redundancy of 270 staff year-on-year. We are simply trying to adjust to the overall market conditions. Those are structural changes. We are not really applying any moves to match the overall market prosperity issues.

Now there is another issue that we ought to consider here. That is the low activity and the perspective of lower economic activity, which means that we are obviously experiencing certain island-based tensions in the corporate sector. Now once the cycle flattens out, once the curve flattens out or when the curve starts picking up, only then do we notice these isolated areas of threats to a number of entities. In terms of the loan repayment issues, all of repayment, we don't really see turbulence here. Whereas with regard to liquidity for a variety of corporate clients, the number is not that great. Nonetheless, those turbulences are there, which ultimately means that we are moving to the predictive phase of forecasting cost of risk despite the relatively good service quality. Hence, the blending in of the cost of risk with the dropping number of NPLs.

Now on the pages of our report that Bozena will comment on, we are supporting on the overall application process in recognition of risk factors and in recognition of the topic that was of particular interest to you, ladies and gentlemen, i.e., the additional provisions or commissioning for CHF related expenses. Additional components are there. The growth in income NAI among others related not to mention the growth in asset management and growth of revenue in other areas has already been noticed. Now with regard to the growth in expenses, the overheads among others and administrative cost has arisen from the outside world or third-party services and IT costs. So we have not increased our employment or head count. The cost of risk is definitely increased. And given what Rafal is about to say to you, these isolated islands, isolated areas of threat can definitely be a possibility and we are going to respond by establishing provisions.

There are no sector weaknesses we have noticed, no distinct trends. Those are isolated areas. Those are components that can be referred to as certain turbulences to corporate operations for overall market condition-related reasons or mismanagement because obviously difficult times require proper management. These times are difficult for a number of companies for the corporate sector. which ultimately means that we have actually noticed mismanagement not to mention overinvestment in comparison with the current demand, which ultimately means that sales generate liquidity tensions. That, however, is quite a normal or regular situation. Phase to phase we have not sold any NPLs, which obviously did not contribute to or did not generate -- excuse me, it did not alleviate the cost of risk.

This is all I would like to say at this point. In terms of the rest, do consult the first part of your conference kit. Now we are going to move to a fascinating hopefully story about how we i.e., our experts see the overall macroeconomic set of circumstances, the bitter sweet or salty and sour story of the environment that we are operating in. So Bozena will talk about it. Now over to Rafal.

[Rafal Benecki, executive]

Thank you very much. I just wanted to say a few words about the forecast for the Polish economy and investment and that's a very important component that impacts loans and the share of loans in GDP. Economy is in a revival stage. In the fourth quarter, GDP grew by 1%; early this year, 2%; second quarter, almost 3%. The main driver of this economic improvement is internal demand. The risks are mostly domestic as well. On the level of the country, we are hoping that the consumption dynamics will continue thanks to the high rate of growth of income since the '90s, the highest. We're quite afraid to look at investment. The forecasted investment is close to 0 at the risk of being negative. This is more to do with shift after the KPO update. I will talk about it in a minute. The threats are mainly external. There's a slowdown in China, Europe and also lately in America.

Soft indicators imply that there is a small level of revival in the German industry, but also globally. The peril drawn to compare it to 2018 shows why it's happening. Other than the weakness of China, it is important to also recall that when the trade wars began just talking about customs translated into a detrimental impact on the economy. So like I said, this is visible in the German industry, but also globally. Now in the U.S., it doesn't seem that there is such a high risk of recession as might be visible. From the market reactions on Friday and Monday, there's a leap in unemployment, which is greatly linked to the influx of immigrants, which is quite considerable in America. But there's still quite a lot of demand for jobs and there's an increase of unemployment and a slowdown in the increase of remuneration, which is something we could only dream of in Poland.

It looks as though the American economy is going to have a soft landing rather than a hard recession. However, the projections have been less optimistic so we need to also revise downwards our projections of GDP. Right now the forecast says 2.5% to 3% growth, next year it's looking more like 3% or 3.6%. We have been able to avoid the heat wave of increasing forecast of GDP when other teams actually lifted them up. We are not trying to correct them nervously downwards, but we are seeing a deterioration of the situation and it's 3%, 3.6% next year, 2%, 2.5% this year. The main reason for that is delays in investment and a stalled development globally. In-depth comments about investment in Poland lately and a few words about forecasting here. We have lately developed quite a lot of research, 30 interviews with enterprises. We asked them about the raised investment plans, areas where they want to invest.

So first, some figures and then conclusions from the study. The share of investment in Poland's GDP has been decreasing since mid last decade. It used to be close to the EU average. Now the discrepancy is growing and it's almost 2 percentage points. If we break it down to entities, we have a downward trend especially in the enterprise investments vis-a-vis the EU average, but even more so vis-a-vis the region's average. Now public investments are close to the EU average, private even higher, but their share is the smallest. Now if you break it down to type of assets, we have a downward trend vis-a-vis the EU and the region in machinery and equipment; but also building, intellectual property, research and development as well; but we know here that this could have been impacted by tax reasons.

So in brief, it looks as though the decrease of share of investment in GDP vis-a-vis our neighbors and the EU average has impacted to a large extent enterprises and the sector of machinery and equipment. That's a very disturbing fact and there's quite a concern around it because 80% of GDP were -- we're talking more and more about the middle income trap and we need to redefine it and talk about high income trap, but we are still researching this topic. Now we'll go back to that. Now regarding the forecast of investments projections, we have studied the topic and analyzed the data and it looks as though the main barriers recently have been institutional, instability in law and unpredictable taxation. But going forwards, it looks as though the future investment cycle will be even more linked to EU funds because before the pandemic, there was a choice between EU grant and alone and inflation was low so the interest rates were not high.

And now it's either co-financed EU grant and KPO, the Polish national program grant, and then the inflation plays a role as well. So definitely the option of EU money is more favorable and it will be more and more linked with EU funding. Now we have updated our projections for EU funding that we can see here at the bottom of the slide of actually obtaining the funding. So the national KPO program will not really cover the gap in structural funding. The new update that appeared before the holiday shows that some of the funding has been shifted to 2025, 2026. So the balance is [ 1.9 versus 2.3 ]. So the investment projection should be very cautious. Our projection is around 0. Even there is a risk of this being in the negative. If we look at various sectors of the economy, we can see there are some public tenders in railway sector, road sectors stalled. Yes, infrastructural projects are going on, but it's not looking very good.

Housing sector is in the red. We can see that there are, however, construction sites that are not being launched. So all in all, the projections for investment is 0 at the risk of it being negative, but next year we're looking at a potential growth of investment by about 7% to 8%. Let me go back to the topic of middle income trap or high income trap. The main reason for that lies in demographics. So availability of cheap labor is soon going to end. So there is a drop in the flexibility of our economy. And the experience of other Southern EU countries also seem to tell us a story that the growth is weaker than expected after the 80% of GDP is achieved. There is also the slowdown in Germany that's a factor. So the economy needs to be more capital intensive rather than labor intensive and we have been talking about this a lot. Now from the point of view of the banking sector business, it's a very important component leaving room for increase of loans.

But companies are being rather cautious and let's hope that the new cycle of EU funding will revive investment. We have lowered our projections actually 2 months ago and we can see that investment can be weaker this year. So overall investment projection 0 to pick up next year. A few words about inflation and interest rates. The lowest inflation is already in the past. It will jump to 4.5%, 5%. Peak is going to be March next year rather below 6%. One important factor was in July and the energy prices are slowly normalizing as well as gas, but this has added on another 1.3 percentage points. Tariff policy will tell us whether there will be a future leap in September. Right now the retail prices are about 30% higher than wholesale prices. We are hoping that the next leap will be slower than expected so we're assuming that peak is going to happen in March and it will be about 6%.

The baseline inflation will not drop, it stopped at 3.6% and that's the concern to the Central Bank. This is mainly caused by the prices in the service sector, but also the prices of merchandise is a factor here. It used to be stagnant and commodities prices used to even contribute to deflation, but it's not happening at the moment. Central banks around the world are now starting the cycle or it's more advanced throughout the region and in developing countries. We are looking at lowering the rates in the U.S. and additionally in Europe and we believe that there will be a decrease in the Czech Republic. The Central Bank will be delayed with that decrease. We're assuming that it will be 75 points next year. Discussing the issue of high income trap also impacts our interest rates debate, it should be 4% rather than 5% in Poland.

Whether this will be achieved in 2026, well, that depends on whether the NRP will generate an impulse for the inflation. But like I said, the midrange projection is 4% and we believe that discussing the lowering of that may happen in the second quarter of 2025 and the following months. That sums up my intervention. Just to wrap it up quickly. There is a slow pickup of the Polish economy, could be 1 of the better growths in the EU, but there are some risks on the side of investments NRP. But we don't believe that the situation is quite as bad as the market situation seems to be implying in the treasury bond sector, but we do see the risk for 2024, '25. We are hoping for a revival in 2025, then there will be some decreases, but rather delayed in the cycle. Thank you.

[Bozena Graczyk, executive]

Okay. I will try to summarize the financial performance of the bank for the second quarter. The net income PLN 965 million. That's 12% lower than last year. It goes without saying that the credit vacation or credit grace period definitely has an impact, PLN 221 million. That was the net worth of the vacation. Now we lowered that to PLN 170 million based on the current estimates. Now the share or the rate of usage of the grace period in June and July had an impact. Now should we correct our performance to recognize the aforementioned, then we would definitely have a similar performance to last year's. Now the 6-month performance PLN 1.98 billion. That's a 2% drop here. Should we eliminate the grace period effect, we would actually have a performance 4% higher than last year. Now it goes without saying that the performance for the first 6 months have been impacted by the high interest performance, 290% more, 7% growth.

The commission performance also of 9% year-on-year growth. On the other hand, this is something that Brunon told you, we have increased our operational costs by PLN 215 million, in general 2% year-on-year not to mention the overall performance of PLN 180 million. Now in terms of the overall performance, ROE also corrected to recognize the cash flow hedged at 21%. The cost to income is 44.6%. Now let us take a close look at the interest performance. It goes without saying that we have to recognize the credit vacation or grace period. Now should we correct the interest performance to recognize it? In terms of year-on-year 6-month growth, that's 12% and 12% increase over PLN 4.3 billion over that period. This is our performance for the 6 months. It is also worth mentioning that our accumulated interest margin in the second quarter was 2.64%. It remained at a comparable level in comparison with the previous quarters.

Whereas the interest rate margin had actually been increased by 5 basis points. Now Brunon had already mentioned the loan to deposit ratio at 2.6% in the second quarter, a slight improvement in comparison with the previous quarter. Nonetheless, obviously those are very low levels in terms of the overall balance sheet optimization. In terms of the commission related performance, PLN 1.6 billion in the first 6 months, that's 9% increase year-on-year. And now in the second quarter, PLN 571 million commission related income and that performance is similar to that we recorded 1 quarter ago. Now charge and credit card performance is truly extraordinary. That is associated both with the number of cards and the number of transactions. Over the 6-month period, we have also noted higher performance in terms of funding and also the brokerage activity 26% year-on-year. That goes for the participation units as well.

Nonetheless, in terms of the investment fund related performance, that is we have actually recorded a 51% increase year-on-year. Those are the most important components of what we have achieved. Now the cost for the 6 months were PLN 2.3 million. That is a 12% increase year-on-year and, as said before, that is primarily associated with the overall overheads and third-party services. That's 16% to 18% year-on-year. That is closely related to the growth in labor costs and remuneration costs and the third-party services that we need to run our bank operations. Now this increase has come as no surprise. We told you before that operational costs will be affected by the inflation pressure and we'll be moving towards the cumulative inflation related components. Now 9% was the increase of employment-related costs.

As said before, from April 1 we increased remuneration to salaries by approximately 7% this year and we have also recorded a 13% growth in the banking tax. Now regulatory costs have not really impacted our performance in terms of any growth. The FSI related costs included. Now with regard to cost of risk, the PLN 318 million; PLN 53 million for the retail sector, the remaining part goes to the corporate sector. Brunon was talking about it extensively. Now with regard to the increase of risk in the corporate sector has arisen from our prudent forecasting and assessment. On the other hand, we have had these isolated areas of the less positive economic growth. That would also be a driving force behind the revenues. Financial performance and liquidity performance rates or indices have actually caused a worse financial standing. This is why we have established extra provisions.

We believe that this is a natural phenomenon, it is also predictable. We have been taking a close look at the fluctuation rates of the past. This is exactly the kind of thing that gives rise to higher risk rates. Now in terms of the corporate sector, the normalized risk rates are regular. This quarter we established PLN 26 million for purposes of provision for CHF related issues. We have also been taking a look at what was going on in the client sector and the conciliation procedures. We have also been taking a closer look at judicial decisions. We have, among others, corrected the cost estimates concerning interest that is added to judicial decisions. In effect we have reached 116% of risk coverage. We have seen that in the banking sector the analogous rate has reached 100%. So the risk is truly covered there in terms of provisions.

Now in terms of portfolio quality, as said before, also in connection with an increased credit risk and the risk exposure for Tier 2 and 3, we have seen what has happened in Stage 3. The rate there has reached 3.2% growing by 37 basis points this quarter. I believe that this is another thing that I would like to draw attention to in the corporate sector. Should we take a look at the Stage 3 provision related sector? Well, I believe that our performance proves that even those cases that we reclassify for Stage 3 have been properly taken care of and the basis is really good for provisions. Now capital adequacy, we have reached 15.42%. In liquidity, we have achieved great performance in terms of risk-weighted assets.

Now in terms of the liquidity well on Tier 1, I believe that it is worthwhile mentioning that we have paid out a dividend in the first quarter. That was paid out as a result of the decision made by the shareholders' assembly. As a result, our performance dropped by 79 basis points. We have also been quite active in terms of risk-weighted assets, a drop by 72 basis points. On the one hand, this has arisen from the growth in credit volumes not to mention the migration of credit related risk. That has translated into the overall liquidity ratio.

So I believe that is all in terms of the overall commentary. Let us now move to the Q&A session.

[Unknown Analyst]

Congratulations on your performance. I have a number of philosophical questions, if I may, but also detailed questions. What about your market share? Let's move to Page 5. Some banks have told us that they are now -- they have been observing a growing demand for credit. On June 2022, those shares were growing more rapidly than on the market and then 2023 came and specifically in the last quarter, the bank has been losing. In the Retail segment specifically, you have actually been very, very close to market trends. You are not keen on talking about the future. Should that trend pick up? Should I assume in my Excel sheets that we are going to be returning or revisiting pre-2022 rates or are we going to be quicker or faster or beyond? But if you are not happy to answer that question, would you please care to comment on the difference concerning the pre-2022 and post 2022?

[Brunon Bartkiewicz, executive]

Well, that makes me smile. We are not trying to help you in any way in filling your Excel sheets. That is our strategy so to speak. Now the growth is an inherent part of our business model. Past events, prepandemic events should be considered regular. That regularity that more normalcy was reinforced by the fact that quite a few banks had been experiencing capital or equity related problems. As a result of which, the sector could not really afford to engage in credit campaigns. This is something we took advantage of. Now conclusions as well since Q4 2019, we have been experiencing stagnation on the corporate credit market. That stagnation actually truly exploded in later years because companies had been expecting higher inflation. They were increasing their stock or their inventory in order to anticipate inflation.

Nonetheless, that credit activity or credit campaigns have been very inactive whereas today, those credit campaigns are much more active. Nonetheless, those isolated areas of increased activity have not necessarily affected areas that we are particularly interested in. Hence, the rather weakened credit campaigns or our lower share in the market. Now as the waves of economic growth spread throughout the economy rather than throughout isolated growth areas, we are truly hoping that a regular market practice will allow us to revisit normalcy. This is why we are not really dependent on those isolated areas in terms of growth and credit campaigns throughout a period of generally weaker economic dynamic.

The more the dynamic spread throughout the economy, the more inclined we are and the more likely we are to go back to business as usual because high activity is our business as usual in combination with stable balance sheet management. Now to be more specific, let's look at our share in loans and deposits, respectively, and you will be able to see the tendency that our share in the deposit grows at a slower rate than that in loans. But the long-term trends are shown there to be able to outline to you what our business model's all about. And the distortions of the last 4 years are quite specific and that's the reason why we are showing what you can see on the screen right now to bring you closer to what the business model should look like in normal times?

[Unknown Analyst]

Okay. Regarding the balance sheet, another philosophical question. If I understood your comment well, sir, the current level seems to be a threat. Can there be a threat in the loan to depo ratio? I have seen in the last 20 years in an Excel sheet. other banks have not gone beyond 63% in any of the years and that's considered safe and stable. I understand that the loan to depo is different than what you have assumed in your strategy. It's a lot lower than what you've assumed. But what is the nature of the threats of the excessive activity? Unless I misunderstood you.

[Brunon Bartkiewicz, executive]

No, let me just respond very directly. The insufficient development of the capital market and the liquidity market in Poland causes the fact that the low loan to depo ratio means that traditional Polish banks, we are a traditional Polish bank from the point of view of how we operate, were typical commercial banks. Almost all of us actually, perhaps Citibank is different. But this causes us to have to adequately use the funding from deposits. Taking into account all the transmission of risks, the distortion, et cetera. We need to locate all of those funds and other instruments. And the weakness of the market means that there is excessive concentration. So Polish banks are excessively indebted. Our Polish banks have an excessive position mainly in the treasury bonds area. That's an excessively concentrated formula.

And also due to some accounting solutions, this causes risks because we are not capable to make sure that all of these ratios according to accounting rules can be put into formulas that are independent. And so those carry a big market risk. And this component of excessive concentration of state treasury and financial instruments, that is a phenomenon that is actually becoming more and more intense and it's going in the wrong direction and has been for the last 4 or 5 years. And any prognosis, any forecast that we can develop looking at the relative wealth and such components as those, as Rafal has mentioned, the reasons to high baseline inflation. This is something that's structurally integrated. So the reform in the capital market has its consequences and the banks should deconcentrate its rate. And at this point the only element is the loan operations or going overseas, but that carries an element of risk as well.

And this is the situation that's relatively threatening to the state treasury because the potential to sell, potential to generate new sales of debt instruments published by the state meets such entities that are largely concentrated already, which lowers their purchasing potential. So the treasury needs to account for the fact that it is going to have to look outwards into the overseas market, which in the current geopolitical situation is not the most beautiful solution for the state treasury. So this is the sensitive point of this setup. The loan to depo is a serious element of managing all the flows and the paradigms of the national economy. So the consequences might be serious not just for individual banks, but even for all of us as citizens of this country and for the state treasury. So there we are.

We can see the structural lack of balance for commercial banks and the size of the loans, especially corporate loans vis-a-vis GDP. Those are not healthy indicators actually that are hindering our long-term growth and that is convergent with the elements such as the risk exposure related to for example extreme overestimation of the value of treasury bonds. And we have seen that already quite recently actually, when treasury bonds that were considered to be the highest rated could lose value. And let's go back to 2008 to recall that fact. That's not very far in history, is it?

[Unknown Analyst]

Two detailed questions. First, the cost of IT, they have significantly risen, and the fluctuation of IT cost is something that I wanted to ask you about. What is the nature of these costs? You have PLN 60 million in quarter 4 last year, then PLN 100 million -- now PLN 140 million. And question number 2, why aren't such costs such expenses subject to CapEx. Why is it an expense in the P&L account?

[Bozena Graczyk, executive]

Our model is an agile model, and that binds costs or expenses to activities in operations that are being carried out at that point in time. So that's related to that. We capitalized some of these expenses, but not all of them can be capitalized even in the agile model. We are functioning in the area of, well, small lean changes that are constantly being produced. In many cases, those are not great changes. It's not -- we're constructing new systemic solutions. So it's more of an OpEx than a CapEx model, and it's linked to the operations in a specific period, the flow of project development and regulatory projects as well, and they are almost always IT-related projects, too.

[Unknown Analyst]

And the last question from me. NPL in Corporate segment. ING has different trends to that on the market. That's how I understood that. individual large companies have problems. The growth of NPL by PLN 600 million.

[Brunon Bartkiewicz, executive]

Yes, I can confirm. Bozena talks about individual cases. I talks about -- I talk about Ireland, but we're talking about the same phenomenon.

[Unknown Analyst]

My name is [indiscernible]. I wanted to ask you whether we should continue this topic. The individual islands of problems in the enterprise world. Could you quantify perhaps a little bit further? You've spoken about the fact that there is some mismanagement over investment weakening in the economy, but could we say that this is becoming a pattern that some industries, exporters, for example, or exposures of this commodity or a different commodity, et cetera.

[Brunon Bartkiewicz, executive]

Let me repeat my message. We do not observe such trends. We do not observe trends that would point to any shaping of forms in sectors or subsectors. No. We would say that those are more individual phenomenon. That's why I use the [ word ] Ireland because it is not connected to the mainland. There isn't even a lagoon or no. This is exceptional. So a comparable company from the comparable sector with a comparable profile of operations or exports can be doing great and another one not so much to be blunt.

[Unknown Analyst]

The current requirement, does it change your strategy for the sales of mortgage loans or your appetite for sales or pricing?

[Brunon Bartkiewicz, executive]

The indicator Is something that we are going to report on, on a monthly basis, starting from July, not the second semester, but in July, and that's the long-term financing indicator. We will be reporting that to the financial provision authority. But my comment on this indicator, well, the path of -- the pipeline of preparation of this indicator has been quite winding. We need some adjustment and the discussion that's going on right now between us and the financial provision authorities has not been completed yet. So in essence, we understand that this is something that's going to be there. But there are some fine-tuning components that are still being discussed. And those -- that could impact a difference in this indicator by.

So what I would say is that we will be reporting a lower indicator to our target, 40%, but there are some signs that can be interpreted to say that we have no reason to make any adjustments in our operations to match the indicator as prepared by the financial provision authority because we believe we can meet its requirements given the time that we have allowed for that.

[Unknown Analyst]

The indicator will only be binding at the end of 2026, right?

[Brunon Bartkiewicz, executive]

So we need to look at it from the point of view of the large dynamic that we are expecting on the side of our loan operations, but also capital surplus and the weights of these surpluses and the buffers that come into play. So frankly, I believe that the long-term financing index is something that we should look at in a dynamic way and its current levels is nothing about its future level. We have actually, by the way, performed an assimilation analysis, which points to quite a large volatility of this index vis-a-vis the 40% that has been set.

Let's remember that one of the intentions other than to extend the passives and the change of financing of the banking sector was to issue covered bonds, as the cheapest way to supplement long-term passive. And here, we have an SPV, our mortgage bank. But if the need should arise can quickly issue quite a lot at the lowest possible expense. And that's a model that should be thought about in the context of this index.

When we created [ bank protection ], we created it because we expected that this could happen. It was already clear that only dedicated special banks and the special jurisdiction would have the right to issue covered bonds, and that's the decision that was made. So we wanted to have a tool available in our toolbox for that purpose. And as a rule, I think that the issues are insufficient for covered bonds in the structure of the Polish banking sector. And I think perhaps the time has come to reverse that trend.

[Unknown Analyst]

Thank you. A question about equity and the change in next year's CRD. Can you share an estimate here?

[Bozena Graczyk, executive]

We cannot give any specific amount at this point. Certainly, this is one of the strategic regulatory projects that we are carrying out and the completion date will be by the end of this year. So we're looking at quite advanced calculations. But I think that until we have completed all the works and you know that regulations have changed in Europe concerning important components for new capital requirements, we will not be able to reveal or disclose these effects.

Perhaps during our next conference, we will be able to give you a ballpark value that's going to be close to what we're going to be reporting starting on January the 1st. But this question has already appeared during our previous conference, and I mentioned that this will not have a significant material impact. And we are definitely going to handle the -- we are also going to be, and we are definitely also going to be able to handle the interest rate risk-related issues.

[Unknown Analyst]

Now with regards to the credit or loan market, specifically when it comes to corporate loans, would you care to comment because, for example, should the national recovery plan funds be replacing loans this year and next year. Do you see any opportunity for that market to grow this year, next year? I understand that you are not keen on specifying details for your perspectives, for example. But for example, do you expect the entire sector to absorb 5% to 10% of those funds? So can you also expect any kind of effect on the corporate sector?

[Brunon Bartkiewicz, executive]

Well, I will not be happy to confirm that the national recovery plan is pushing banks out or the banking sector out. But activity is a different thing altogether, okay? So let's consider an overall body of water. So yes, indeed, the national recovery plan is a stone that causes turbulence. And this is a system, where everything affects the overall body of water.

Now we have a certain take on economy, both as citizens and as banks. The point is that any sources of funding, be it grant-based or otherwise, they should definitely have an effect of the cascade or a multiplier effect. The entire economy is a separate being, which, thankfully, in Poland has a high absorption rate, which means that if you throw a stone into the body of water that causes waves, makes waves, and that's great, people that are excited, et cetera, et cetera. And that is the entrepreneurship spirit that Poland is famous for. Although recently, it seems to have a cold, and if not the flu. So that is not about pushing out. It is about coexistence.

Now the economy as such, has a high capacity for absorbing the multiplier or cascade effects. If entrepreneurs assume -- should entrepreneurs only or enterprises only based on grants or the national recovery plan or EU funding, that is not necessarily good for the economy because the economy ought to be stimulated by the general environment rather than access to free funding.

So what we need is a naturally developing economy rather than an economy stimulated by expenses with a source in centralized stage functions and this is what we are after here. I tried to respond to the question before by telling you that we are really very happy that the campaign that the loan campaign indices have been growing at a faster rate than the predicted national recovery fund rates. This ultimately means that any increase in the loan campaign ought to be higher than GDP small print. That would be healthy for the economy. It would also mean that impulses sent out by consumption or defense of the defense sector, or the national recovery plan would indeed translate into economic growth.

To go back to the first question and answer, today, we wanted to grow faster than the market. So the market faster than the GDP, we will be growing faster than the market. It goes back to Julian Tuwim's famous poem about people grabbing each other to get the [ turn up out ] of the ground.

[Piotr Utrata, executive]

And to allude a number of questions from the internet. This is something that has already been responded to a certain extent, the risk in the corporate segment, are they isolated cases or the beginning of a trend. This is something that has been responded to. The same goes for the long-term funding index an estimate. There has been a question requesting or a request for an estimate. This is something that has been responded to.

And now I understand that the -- I think that with regard to exact amounts do join us at our next press conference. This is when we are going to be making announcement concerning the rates that we are going to be publishing as of January the 1st.

So to NII, this is something that you mentioned already. So could we please now move to other questions, which -- what is your market share if I understood this speaker correctly with regard to fixed and variable rate credits 32%, well, 33%, 33% the entire portfolio of zloty-denominated mortgage loans. Now what is the share of the fixed rate interest loans in the assets hedging and so-called natural securitization.

[Brunon Bartkiewicz, executive]

I understand the first part of the question. I don't understand the second part. Bozena will offer a commentary. As you probably know, we have, for a long time now, been applying the strategy of active interest management. We are using the macro flow -- macro cash flow hedge instrument. This is something that is not necessarily connected to the mortgage loans, but to deposit stability. Now from the viewpoint of the hedging strategy, we are using derivatives by applying them to mortgage loans that 40% to 50% of the nominal value, should we take that particular perspective thereon.

[Piotr Utrata, executive]

The next question, what is the source of the growth of the NPL rate by 0.7% quarter-on-quarter in the corporate sector. I think we have already responded to that question before. Okay.

Would you please care to comment on the sensitivity of your overall loan portfolio?

[Brunon Bartkiewicz, executive]

Well, obviously, we are obliged to reveal such data. So do reach for our annual report. I'm also going to be commenting on the drop of the interest rates by 100 basis points the annual report mentions that.

[Piotr Utrata, executive]

In terms of the overall decreases in interest rates, so we have assumed a regular decrease of interest rates over a span of 12 months, that's PLN 228 million of the negative impact on our performance, 100 basis points -- with an assumption of 100 basis points decrease. According to Slide 28, the mortgage loans denominated in foreign currencies have grown up to [ 164 given the 181 ] in the first quarter. So have you reclassified those loans? When is the growth given extra provisions and no drastic moves on the FX market?

[Bozena Graczyk, executive]

Well, as aforementioned, we have updated our assumptions through the overall model, which means that this move is a result of -- this is a result of the overall perspective that is the use of provisions to cover the risk, and this has grown from 113% to 116% in the second quarter or quarter-on-quarter. This is just a technical change arising from a change to model assumptions. Moreover, we have approach specific items in on balance sheet and off-balance sheet, as a result of model of changes to our balance sheet model.

Now given the specificity of our model, it is quite obvious that the number of cases in our active portfolio has been dropping. It is now well invisible as proven by the schedule of payments and since our mortgage loans have been moving from the active status to repaid status, not to mention consolidations we have signed and the overall dispute settling.

[Piotr Utrata, executive]

Now will bank revisit the option of WIBOR-based mortgage loan issuing. That's part number 1. Part number 2 of the same question. With regard to the campaign you have launched according to the periodically fixed rate loans, how is that campaign doing?

[Brunon Bartkiewicz, executive]

Now I'm going to take the first part. I'm going to answer question one first. With regards to the fixed rate loan, it goes without saying that given overall market trends, those have been dropping, 63%, I understand is the average for the second quarter, approximately 63%, but it goes without saying that in June it had dropped below 63%. And that is quite natural and quite obvious.

Now secondly, if I understood the question correctly, is the bank intending to revisit the WIBOR-based mortgage loans. We should respond in the affirmative. The answer is yes. And that ties in with the [ WIBOR-related ] social consultations currently in progress. So we have to bear with the social consultations in order to await the final decisions of the steering committee. Since however, the consultations have been in progress for the past couple of weeks, we are probably closer to the ultimate resolution.

[Piotr Utrata, executive]

All right. The next question. Now the report mentions the judicial questions to the European Union Court of Justice. Now don't you think that since the case has actually passed to the [ CGU ] 0:73:27, don't you think that this is not going to affect the overall banking sector.

[Brunon Bartkiewicz, executive]

Well, no, this is going to be my private opinion, I'm going to count to 10. With regard to -- it is about the preliminary rulings. Thank you very much. So it is -- okay -- I think that the process of damaging the state is in progress. I think that the preliminary ruling filed with the court has been truly biased. I believe that the court did not account for the leading institutions of the state, who have actually made a statement concerning WIBOR. All institutions have been -- have made their statements, whereas we are now filing highly biased rulings or questions with the court.

With regard to the CHF denominated loans, I would really want each and every citizen regardless [indiscernible] station to be responsible for their own loan decisions. And that is all for me at this point. So I would like to remind you that WIBOR also provides stability to that particular index throughout the European Union. I think that common interest beyond own interest.

[Piotr Utrata, executive]

Well, I understand what you're saying as follows. You are revisiting WIBOR-based mortgage loans because you believe that WIBOR is going to be the reference rate that is going to be used in the future.

[Brunon Bartkiewicz, executive]

Well, it is there. And what is -- we can't tell you what is going to replace WIBOR, whereas not causing confusion to our clients is the absolute foundation of our customer service and customer relations. WIBOR is our reference rate. It has been quoted. It has been regulated. It is also subject to certain regulations with its own administration and management structure.

The main thing, however, is for our clients not to be thrust into a state of confusion. Now obviously, the -- obviously, we are considering the option of revisiting new production of WIBOR-based mortgage loans because we are no longer issuing WIRON-based loans, once the social consultation -- public consultations have been launched with regard to the question of whether we are going to be using WIRON or another rate. In order to alleviate confusion on the market, we have decided to refrain from WIRON-based loans until consultations are over. Exactly, which means that at this point, we are not issuing any variable interest rate mortgage loans.

[Piotr Utrata, executive]

So with reference to this topic, how is the selection of the new indicator going and we're looking at some kind of a time frame here, I'm sure.

[Brunon Bartkiewicz, executive]

Please contact the steering committee. This information is confidential, and we have no access to it.

[Piotr Utrata, executive]

Next question. This time concerning the consumption loans, your question is the following. In your opinion, where does the demand come from for consumption loans -- even though the Polish banking sector has a higher rate of...

[Brunon Bartkiewicz, executive]

This is quite an interesting perspective. From the point of view of comparing to the European average, we would say that all the banks in the EU are homogenous. No, that's not the fact they very much differ. And we cannot compare because one is not like the other, it's like apples and pears. So it's not the same aspect.

Number 2, the level of loans, credit consumption loans, seeing the level that we have right now is behaving quite -- in a quite normal way. It's not an excessive growth of cash loans. What it means is that, as a matter of fact, well, touching this sector, I hope this actually being affected with what we refer to as an incredible inflation, which has pushed the society into extreme poverty is not exactly true. We have seen the sudden growth of loan portfolio in what we've heard just parabank during the pandemic.

But right now, the loaning operations, the cash loans in banks, well, the growth of it is following a completely different trend, whereas we perhaps could have wondered at the time that perhaps individuals are having difficult to make ends meet and seeing that they cannot -- they do not have creditworthiness and they use the services of parabank.

But increased operations in banks that go by the rules in terms of assessing creditworthiness would prove that things are businesses are normal. It's business as usual. We're getting excited by inflation, but we can see that the reading of inflation is definitely a lot lower. Look at -- please look at the growth of remuneration. It suddenly turns out that we have quite a strong increase, a realistic increase in the societies income. So hence, there is a revival in demand for both cash flows to perform your plans such as furnishing your flat, for example, that's quite a normal thing.

The cars are experiencing an increase in sales. So all of that is interlinked. We can no longer look at Poland, as a country, where the level of interest rate is the killer for the economy. Because on the other hand, the income for both corporate entities, as individual retail customers is statistically growing, such as the statistic growth of salaries, and that's a significant growth. So cash loan is not something that I would treat as prove that the society is getting impoverished quite the opposite.

And we all see the labor market and where it's going, Rafal, as an economist is covering his ears right now, but I can tell you quite directly, we have a shortage of labor force. So the market is experiencing a strong demand for labor force. So the fear to lose your job is disappearing from the point of view of prognostics for individual customers, retail customers. We can see that in the area of consumption, too. People are putting money aside, ladies and gentlemen, which is the other side to the story, which pairs up with cash loans.

So if I know that I'm going to make the money, if I feel that I'm stable enough or if I'm looking at my salaries increasing, my salary increasing even given the high cost of interest rates, if I need to buy a car, I will buy a car. If I need to buy a washing machine, I will buy a washing machine, and it's quite obvious that what we see is a shift towards a high-value loan -- higher-value loan, and that's a phenomenon throughout the market because the low-value cash loans, which are characteristics for people with lower income, have slightly different rules.

Let me just add that the power of the labor market, well, in brief, unemployment is basically stable despite the slowdown that we experienced recently. And the lack of availability of labor force is what leads us to the discussion about the middle income, high income trap. Turkey and Romania are quite a competitor in terms of labor markets. The unavailability of work, this will be one of the components that we will be struggling against in the years to come, and it will change the behavior of Poland's economy in the next economic cycle.

And another question that makes reference to the cost of risk in the corporate segment, what sectors and what industries have caused these costs to increase, not sectors, not industries, entities. Let me repeat that. We are talking about islands, let's stick to this terminology. Those are, I would say French Polynesia rather than an largely populated Indonesian and saturated Indonesian islands.

[Piotr Utrata, executive]

Okay. Question is whether this is possible without lowering interest rates by the National Bank of Poland?

[Brunon Bartkiewicz, executive]

Yes. But our baseline model says that it is the market's conviction to have a decrease of interest rates in 2025. Banks can vary among themselves, but the sector as such is convinced that the decrease will take place. Our model talks about 70 bps of reduction. And that's what experts are expecting. But also, this is also what the operators, what the entities are expecting because this is not a barrier to -- a serious barrier anymore.

So this is what Rafal has been talking about there is an expectation to see whether it's worth investing. And if it is worth investing, can we rely on the subsidies that will be reinforced again. And now again, to separate myself from the bank's position, I'm wearing a different hat right now. As an economist, I don't like it. Not much. But now I'm wearing a hat of the economists and my 15 years' experience rather than the perspective of the last year or 2.

I'm not sure if we made reference already to the CRR and CRD indicators. The question was what impacts will be felt driving on the change in those regulations. I think that we have responded to this question already. CRD4, yes.

And here is a question about the credit dynamic, 2004 -- 2024, 2025, what are we expecting on the retail and corporate side, but I think that we've already heard on that extensively. We haven't spoken about retail -- the retail market, but we do not want to be speaking about this. unless we lead to quite a serious distortion with promises of very cheap mortgage loans. I think everything will run as it has. So far, I think at this point, we have quite a lot of demand and the growing demand for mortgage loans. So all is well, let's just not spoil it. Perhaps not ruin that.

There's a question -- another question regarding another topic, and that's the impact on the level of fees and commissions. What will be the impact of the product offering in the brokerage house. I'm not sure I understand the question that what changed in the offering. I don't believe there have been any. We are not expecting significant changes. There have been some. As a matter of fact, the level of our revenue is a derivative of the volume of transactions that our clients bring to us. And as we indicated in our report, the second quarter has seen an 8% increase of turnover of our customers on the stock exchange PLN 3 billion, which obviously translates to the level of revenue we obtained from that branch of our operations.

[Piotr Utrata, executive]

The last but one question. Well, should banks stop giving out mortgages when the state cannot maintain stability of long-term contracts with customers.

[Brunon Bartkiewicz, executive]

No, banks should not consider such an option.

[Piotr Utrata, executive]

And the last question, what is the natural unemployment rate in Poland in the current environment. If we were to measure that would be -- this is slightly below 3%.

[Brunon Bartkiewicz, executive]

Yes, we have practically achieved this rate. We're very close to it. Let me just recall that we're at a stage, where over the last decade, the number of people, who are professionally active has dropped by 10%, and we are expecting this to continue. So the current rate will be very close to the neutral rate and any deviations due to the economic cycle will not cause it to budge very much.

[Piotr Utrata, executive]

Thank you so much. Unless there are any other questions, we can close the meeting. Thank you very much, and see you in a quarter.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]