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ING Bank Slaski SA
WSE:ING
ING Bank Slaski SA
WSE:ING
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Ping An Bank Co Ltd
SZSE:000001
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Thank you for such a numerous group of people that came here. We invited you to present our 2017 result. I like to present our CEO, Brunon Bartkiewicz; Bozena Graczyk, Vice President in charge of the Finance Division; [ Jolanta Alvaro Rodriguez ], our Chief Accountant; Iza Rokicka, Investor Relations; Maciej Kalowski, Investor Relations; and [ Rafiao Benitiski ], our Chief Economist.
Brunon, you may take the floor.
As I understand, I need to catch up the time because we are a bit late, but it will not be that difficult because as I -- you know our numbers and the figures are not surprising for you. So maybe referring to the figures that we publish after first quarter -- after fourth quarter, a number of comments.
We will present a traditional layout, major observations and trends, a more detailed information on financial result itself will be presented by Bozena, and we will also present estimates for IFRS 9 and our recommendation on the dividend, then, a number of questions and answers. I think you are waiting for this the most, because it's very difficult for us to refer -- to address the topics that you are most interested in.
We are trying to show the trends in our presentations and divergences from the trends. The fourth quarter -- good morning, ladies and gentlemen. We already started the conference, and apologies for that, but you did not miss a lot.
So the fourth quarter from that perspective was a quarter where we accelerated slightly our -- the growth of the number of our clients, and there was a good moment to accelerate this growth rate. Therefore, the increase in the number of active primary clients were very good in the fourth quarter and it was also resulted from the fact that in the fourth quarter we increased our activity in our core product, which is savings accounts.
So in terms of corporate and retail clients, the increase in the fourth quarter was good, as at the end of the year we report 4.53 million of clients, of retail clients, and 55,000 of corporate entities.
The number of transactions, also a very dynamic growth rate. We don't know the market data yet, but our data -- this dynamic growth mainly concerns higher number of transactions made by our clients, which is very strong, but also changes in channel distribution. So we have some movements towards remote electronic channels, and there we have a very strong shift towards mobile channels.
On the fourth page, we show that the number of transactions made in mobile channels is 12.0 million, and these are transactions which were made in the mobile application because such data are published by banks commonly. If we take into account the number of transactions or transfers made by clients in the mobile application, so in 2017 it was 43 million, 12.7 million in the fourth quarter and additionally throughout the year our clients made nearly 24 million transactions from mobile devices, but in online formula.
For our clients, whether you use the application or you just prompt the -- you open our website and through the website they enter the application, but it is more or less the same, only the authorization method difference or the limits for the transactions, but in fact the feeling is the same.
So from mobile devices, clients made 67 million transactions in 2017 out of the total number of over 220 million, which openly 1/3rd of all transfers were made from mobile devices. And this trend will continue and this is quite obvious. This is our -- this is the direction we are following.
Online banking is something obvious; we used to say this in the past. This is how we contact our clients. So we should notice that in terms of the number of transactions, the basic transactions, but also sales transactions -- in fact within the next 2 years the dominant form of contact between our bank and the client will be the mobile banking. So the PC will be less significant and mobile devices will grow more important.
Sociologically and socially the PC is still significant from the social perspective because -- it's quite interesting, because still in terms of complex elements of our systems, clients still prefer big screens. But in terms of the number of simple transactions, in doing simple transaction, it is the mobile application. Also, the sales activity for our product is also increasing, so more and more clients buy our products or cash loans, loans or services in the mobile channel.
So the fourth quarter was quite active or solid. We present basic data on Page #5. I think that an important element for you is the fact that net interest margin was not reduced. It is still strong. But still it goes -- it's going up, while operationally the bank is still doing pretty well.
Our income rose significantly, while we still control our costs. And the higher -- the increase -- I'm not talking about regulatory cost here, but higher cost is mainly due to personnel costs, which is not -- it does not relate to the higher number of FTEs, but it's due to higher salaries. Because last year, as you all know, the bank unusually made 2 pay rises; 2 pay rises initiatives were run in our bank in April and in September, which is due to the entire macroeconomic situation happening in Poland.
On Page #6 and 7, I think that we don't see major surprises here. But on Page #6, low dynamics of corporate loans in the fourth quarter, negative increase. It's due to the 2 factors. The first is incidental and one huge payout of a loan for clients we call strategic clients. A very high amount; it's PLN 1 billion. It's a huge payout. And how may I call it? The new owner does not need funding, external financing. Maybe I will put it this way. I will not go into more details because this is not a public transaction.
The second aspect is that since September the bank started to review and verify in terms of higher risk of -- higher credit risk operations with corporate clients, with the clients who participate in tender procedures. And the main element of our concern is what we've referred previously, no access to new employees.
So we have to make a review of our strategy and practice so that we don't have a situation where an entity financed by us participates in a tender and then due to the limitations, which have huge impact on the market, is not able to meet them due to that they don't have employees or the tender is unfavorable for the client because the assumed cost of work are changing very fast. And we see this. And it's time for intense investment works and its impact on a number of assets, not only people, but on raw materials, because we've seen a big dynamic in motorway construction.
So these 2 factors make us more prudent to grant loans in tender procedures. But still I will emphasize this high dynamics of lending in all areas is the basic -- is the foundation of functioning of our bank and this is the direction we will be going in the future.
Other data are not surprising. In our result year-on-year, you can see that on Page #8, aggregates of bank's market share are still trending up. We can see this practically in all groups of clients, in groups and groups of products.
We can give you details, if you are interested, later on when we talk about lease or consumer lending or PLN mortgage loans, because, as you can see, our market share in CHF loans is not going up, it goes down and we are not concerned about this.
More details you can find on Page #9, it's the structure of retail loans. There was a certain imbalance in the bank. We had lower exposure to retail loans versus our entire exposure. This is the characteristic feature of our operations that we are making up, catching up with, and we are doing pretty well in this.
Still this is not a position -- our desired position and which is relevant to the balance sheet of our organization, but we were a weak player in consumer lending and we have not participated for many years in the mortgage market. It still finds its reflection, but this is characteristic feature of PLN mortgage loans. Our market share is 9.4%. I hope that you see how strong this increase is in the market, because it's not that easy on the competitive market to increase our market share by 1% point over 12 months, but we managed to achieve this, as you can see it.
I would like to emphasize once again the dynamics and -- of lending versus the market is the foundation of our operations. I'm not claiming that the funding part is less important. But as you may all know, our market position is solid, it's strong and very strong, with a strong position in savings accounts. And we think that is -- we think that we created this type of product on the Polish market.
2017 was of course due to quite low interest -- relatively low interest rates. And on interest savings account, there is a strong dynamics in terms of core deposits on accounts. In terms of -- the situation might be a bit more sensitive, but we will see how it will shape in the future.
This is the introduction. Let's proceed to macroeconomic data, because here our scenario -- co-scenario for 2018 and we decided to show to you our assumptions for 2018 for microeconomic data. We realize that the scenario from the business development perspective is -- our is a bit more optimistic than other co-scenarios that you may see in other institutions, financial institutions.
Our general global perception of the market is like this. We deeply believe the Polish economy year-on-year goes up by 4.6%, which means that in the fourth quarter there is an acceleration. We think that the increase itself in the fourth quarter was over 5% -- 5.2 percentage point. It was so -- it was relatively strong, so therefore we maintain our forecast for the economic growth of 4.4%.
Strong drivers or aggregates that had an impact on the strong economic growth was consumption. We think that the effect of consumption participates quite significantly in the economic growth. 2.6 percentage point out of 4.6 percentage point we may refer that to consumption. It's impact -- what you can see on the -- on Page 12, you can see its impact will be slightly smaller in terms of dynamics, but really transparent in 2018.
Over last 5 quarters, we spoke a lot about investments. In investments -- of course public investment by local governments we think that the trend has already been set and there will be strong growth over there. In our opinion, investment in the private sector in the fourth quarter has already started to accelerate. And the data less FX rate impact shows that the loan for corporate entities for investment purposes started to grow and quite significantly. So the fourth quarter was maybe not that visible, but undoubtedly to a certain degree it was a period -- it was like a breakthrough.
We still believe and we treat this as an optimistic element that the first wave -- exchange of the machines and equipment in enterprises that creates today the demand for investment. It will also translate in 2018, probably in the second half of 2019, to strengthen the production capacity so that private investment will follow public investment, because these are -- this is obvious.
[Foreign Language] Here you have also -- on this slide, you have a reminder of aggregates, deposits and loans, which shows our share in the market. These elements are to show you the basis of our conclusions and what we are basing our conclusions on. This is the table from page 12 and it was, you can see here, the basis of our assumptions.
So still strong growth in lending, strong deposit base, and all this based on a stronger growth in the number of clients, demand in clients who want the best solutions, the best channels. So all the elements that we have been talking for a long time they are present in the strategy and they are growing. I think this would be so much as regards to retail. We have of course parts related to corporate and retail banking.
Please take it as 100% sure that when we are talking about progress, technological progress, generating solutions, we are aiming at generating the best solutions for clients. We want to earn their trust and we don't want this progress to limit our clients. We always have mention that we are a long distance bank and that this is not as a short perspective performance.
The same relates to the payout of dividend. Yes, it is true that as regards to figures we can afford the payout of even a higher dividend. The priority is of course supporting lending and capital consumption. Yes, we are not sure -- 100% sure as regards RWS. We think 30%, it will be a fair value and it will be a long-term amount of dividend.
We also don't want to have such a situation. This is not our style that we would have very shaking and fluctuating dividend rate, [30%, 15%]. This is not the way we function.
In fourth quarter 2017, a continuation of our strategy; the same trends, the same dynamics, high dynamics, growth rate and we are also rebuilding technologically our structure.
But I think that you share our opinion that we are moving towards such a direction which is predictable for you and also predictable for us, although behind the stage it requires a lot of work, especially as regards effectiveness. And without this, we will not be able to afford to follow the requirements of our clients.
Bozena, if I may ask you if you may add details, more details.
So I will sum up financial results. If you can have a look at Slide #20. Here you have net profit. It grew 40% year-to-year. It was more than PLN 1.400 billion. It improved year-to-year.
It is also worth mentioning that if we're talking about comparability of financial result 2017, it is connected with one-off transactions as regards Visa. So without the effect of one-off transactions, then our result would be -- for 2017 would improve by 26% year-to-year.
As you can see, it was possible thanks to a very strong growth in income, which grew by 15%, and a very moderate growth in operating cost, which grew by 2% only. Thanks to this, our adjusted cost to income ratio improved by 5 percentage point, in fact it fell.
And here using this occasion, when we look at general figures, I would like to comment increase in our effective tax rate, which we have already noticed in your morning commentaries. Yes, that rate for fourth rate was 20% and it was lower a bit than in the third quarter. And I also saw it in your comments, morning comments, that that growth of tax rate it was the effect of the state of corporate receivables which we conducted in the fourth quarter, it couldn't be tax deductible of course.
And also, we -- in this quarter, we had provisions which could not be a tax-deductible item. It also explains the growth in the tax rate. It also translated into the growth rate of net result.
If we have a look at the next slide and the growth rate of our income, our income grew 9% year-to-year. Still the main driver is the income driver. And you can see that they are growing both in corporate and retail segments.
If you look at interest result -- please have a look at -- our quarterly interest margin improved by 2 basis points, and thanks to it, it exceeded 3%. Also, Brunon mentioned it already, you can see that our loan to deposit ratio in the fourth quarter decreased, dropped to 84%. And that decrease was related to seasonality of corporate portfolio and also to very strong increase in deposits, which in corporate segment grew by 11% quarter-to-quarter, and in retail deposit segment, which is cyclical in fact, incidental, but it happens every year. Yes, it is a phenomenon which always happens in our balance sheet in the fourth quarter.
If you have a look at revenues, fees and commissions income, we are very happy with our commission income in the fourth quarter. And especially if we have a look at 2017 result, I would like to draw your attention to a very strong result on FX exchange income. Fourth quarter was record year. We managed to maintain the same result, FX exchange result. And you can see it from quarter-to-quarter that our clients are using more and more our products and infrastructure, technological infrastructure, which enables them to conduct transactions fast, FX transactions.
Also, if you have a look at trends, I think you also see that our credit card results shows negative trends, negative growth rate. We had cooperation with our partners, but we are expecting that our clients use less and less foreign ATMs. And we are forecasting such a phenomenon and it is already visible in the results. And also in the first quarter, traditionally there was a higher burden related to fees and commission costs, which is also reflected in our financial result.
As regards total cost on Slide 24, I think it is worth mentioning that our operating cost in the fourth quarter in fact have not -- did not change. They were rather flat generally thanks to such a strong cost control. Our cost to income ratio, as I mentioned, was 40% in the fourth quarter and thanks to it there was -- the ratio was 45%, which stems from the results from 2 events. In the context of comparison, we had higher cost in 2017 in fourth quarter due to the bankruptcy of bankruptcy of Bank Nadarzyn, and as you remember, a one-off, higher amortization due to changed amortization principles we adopted in 2016.
Next Slide, 25, presents risk costs. Here risk cost in fourth quarter was of 51 basis points and was in line with our expectation. In the retail segment, the risk cost in 2017 was 45 basis points, and in fact it remained flat. In the corporate loans segment, the risk cost was 53 basis points and was higher than the year before.
We spoke about it during our previous conferences. On the one hand is the effect of low base in 2016 and a number of one-off instances that we reclassified to non-performing receivables over -- throughout 2017.
And I would like to say that our highest scale of impairment losses in the corporate segment in that quarter is the effect of our very conservative approach. We simply increased provision coverage ratio and this ratio quarter-to-quarter was improved 0.6 percentage point.
In terms of portfolio quality, we have a very stable situation here. In fact we still -- our share in non-performing portfolio in the entire level of portfolio are twice as better than the market average.
If we are to summarize our capital adequacy, you can see on Slide 60 -- 27 that in the fourth quarter this ratio significantly improved. It was 1.6 percentage point up, which in fact results from the fact that we recognized a part of -- a portion of profit from the second and third quarter to capital ratio and a significant improvement of risk-weighted assets due to the changed provisions for mortgage loans and the effect in the fourth quarter after the implementation of new regulations for -- on risk-weighted assets for mortgage loans.
We see that when we are able to have current estimates, appraisals, but also when we receive mortgage entries, then this effect is very strongly visible. That's why thanks to this, the capital adequacy ratio significantly improved, due to this quasi optimization of risk-weighted assets due to the regulatory possibilities.
[Foreign Language] The fourth quarter the limitation of IFRS 9 -- I would like to shortly implement -- present a number of information of how IFRS 9 changes both classification and measurement of lower value of loans.
What you can see on Slide #30, shows the basic theoretical assumptions of IFRS 9. I would like to draw your attention to the fact that the nomenclature of different categories of asset changes. Still we can split them into 3 categories, derivatives, capital instruments, loans and debt instruments.
Here the way how we divide, classify these assets depends on the fact of how we receive payments on principal and interest, SPPI test. If the -- [Foreign Language] using a certain category of an asset. If this model shows that the assets held are used to hold them till maturity, then we can value such assets at amortized cost using the IFRS 9 nomenclature. These are only mainly loans but without any leverages, but also debt instruments which in fact are close to risk held at maturity assets. Here IFRS 9 -- these requirements maybe are less restrictive, but still they assume no sale or resale transactions especially before the maturity.
If the business model is about holding and sale, so we hold debt instruments for which there are sale transactions. This is an equivalent of the available-for-sale category. Then these financial instruments are valued at fair value through capital equity.
Here is an analogy for assets held for sale. This compared with IFRS 9. It ensures bigger classification freedom. I would like to stress this. You will see this at other banks. If SPPI test, I referred to before, is not met -- so there are loan agreements, lending agreements with multipliers with interest rates based on the management board decision -- then SPPI test may not be met and then also loan agreements, receivables from clients should be valued at fair value.
And IFRS 9 result -- it turned out that a number of loans with leverage, for example, for loans granted, like student loans or loans granted from the agricultural fund, there are certain multipliers at fair value, but this is only a part of the product, but the biggest problem were products -- consumer finance products, so cash loans and credit cards whose interest rates is based on the multiplier, which in fact depends on the maximum interest rate.
So as you can imagine, the scale in the entire banking sector of such product is very big and that's why we've seen a discussion. Also, Polish Financial Supervision Authority also takes part in this, how these products and for what conditions it should be valued at fair value.
At our bank, contractual provisions for credit cards and for cash loans do not force value at fair value, but there are banks in which this problem is big and I think that so far it hasn't been solved. We started 2018, and in fact this classification should be finished. So we may expect that some products, credit products will not be intuitively valued at the fair value and these might be quite big portfolios.
In terms of derivatives, nothing has changed, we value them at fair value through profit or loss. There hasn't been no change here in terms of equity instruments. Shares may be valued at fair value or through other equity. So then this valuation is through revaluation reserve and it's not in the income statement. We decided to adopt such an option in our minority shares in the Credit Information Bureau and here that fair value would be valued through other equity.
So as you can see here, on Slide 30, the impact of IFRS 9 implementation from the perspective of our business model and our classification of assets has not changed. In fact we being aware of the effects of IFRS 9 implementation effects, we adapted our business models to IFRS 9 requirements, so don't have to expect significant reclassifications of portfolio. As at the end of year, they met the classification required by IFRS 9.
I would like to talk also about -- of what changed in the impairments. IFRS 9 was a model -- impairment model based on incurred losses. IFRS 9 changes this approach, which is more based on expected losses, which also have to account for future events, also macroeconomic changes.
IFRS 9 authors assumed that the impact of IFRS 9 will be more anti-cyclical. That's why they introduced microeconomic elements. But I have to say that our experience from IFRS 9 implementation and observation of effects on parallel portfolios show that this condition will be very difficult to meet especially with the implementation date for 1st January, 2018 and the economic forecast we had.
If we talk about classification, so far the lending portfolio was divided into performing loans and nonperforming loans, IBNR. And now this division will change. The lending portfolio will be split into 3 stages. Stage 1 will be lending receivable, credit receivables with low risk or no impairment, no deterioration in credit quality. So we don't look at the absolute assessment of credit risk, but the change of the PD ratio from the loan granting date.
So all loans, newly loans or loans that -- with no deteriorating quality will be classified to stage 1 and these loans will be valued on the basis of expected loans for 12 months horizon.
The scope of change and the impact of the opening balance for the first stage will depend on what periods, identification periods -- loss identification period the banks were using so far, because now all banks will use 12 month PD to estimate provisions for the stage 1. The average in the banking sector was different, from 6 to 12 months. These were average lived values. So the effect will depend on how this ratio was adopted by a given bank.
Now, stage 2 is the core IFRS 9 change. It's a new category that we haven't heard before. It's a category to which -- exposures with significant deterioration from the credit disbursement date. And here all banks identify different types of triggers. But I can tell you that both our bank and I think also in the entire banking sector the most important trigger will be change of the PD in the lifetime perspective versus the ratio as of the loan disbursement date and at every balance sheet day. And the expected losses will be measured in the lifetime perspective.
And in fact this stage in this category will be characterized by high volatility. This is what we expect both looking at behavior of our portfolio and the expectation in the entire sector. So we will see instances which will be classified to this stage, will come back to this stage depending on the relative PD value.
There are also a number of other triggers such as 30 DPDs or IFRS restructuring. But in fact the most important trigger will be relative change of the PD ratio.
And the stage 3, which in effect is analogous to the current classification of non-performing loans, here we don't expect and we don't observe any changes in terms of value and the effect of IFRS 9 impact.
And to sum up, I would like to say that IFRS 9 implementation for the stage 3, the way of presentation and calculating the impairment interest changes, which will be not calculated on the net value, but on the gross value.
And here I would like to give you a short introduction so that you can see the effect of IFRS 9 implementation, but now referring to the summary of the standard, its effect in our bank. We estimate that the total negative from that perspective impact of IFRS 9 on the total capital ratio should not exceed 30 basis points. It's of course 35 basis point. This is our preliminary estimates.
In the banking sector there are still discussions with advisors, auditors, also financial supervision. We expect that by the time our full disclosure is presented along with the annual report, this ratio may -- and the effect of IFRS 9 may change. From my own experience, I can say that.
And the implementation of IFRS 9 in [ 2000] -- we make expect that in 2018 this effect may be changing because it will evolve along with the interpretations that will be shaped in the banking sector. We should also remember that the Polish Financial Supervision Authority started the work after IFRS 9 audits in major banks. They started to work on accommodation, which is intended to have bigger relative comparability of approaches adopted by banks on impairment.
From our observations, we can see that both the approach of advisors, auditors and banks differ significantly, so we may expect a number of changes, methodological changes, which may also translate into adjustment of the balance sheet, of the opening balance sheet.
We also took a decision to use the temporary provisions and settle the effect over time. That's why our total capital ratio will not be encumbered 100% with the IFRS 9 implementation. The provisions allow us to spread this effect for 5 years.
Where in 2018 this effect is 5% for adjustments, IFRS 9 adjustment, so impairment losses, assets on deferred tax due to these changes, but also adjustment for credit risk towards expected losses for IRB approach we estimate because there are items which are subject to this spreading over time and there are items which are not subject to this. And we expect that the impact should not be higher than 20% of the initial value of 35 basis points.
We assume that this is a very moderate impact. In this context, our capital ratios in 2018 will be only slightly affected by the IFRS 9 implementation. We informed the Polish Financial Supervision Authority on the selection of such option. The deadline is 31st January to inform the regulator by every entity that would like to use this option.
And now comparison of financial results and implementation of IFRS 9. And please ask -- you may ask your questions. First, we'll answer your questions from the room and then we'll answer online questions.
I have a question about what you, Mr. President, said, because from what I've heard as regards the dividend, I have heard long-term dividend volume and that you don't want to have volatility in this respect [ 50%, 30%]. So the question about 30%, is it long-term for the next years or this was your comment...
No, don't read it that it was a declaration, that we are going to payout 30% dividend next year. I would like to -- next years. I would like to draw your attention to it that our plan and also growth in lending is a priority for us and we should adjust our dividend policy in such a way so that it does not distort our ratios regarding solvency next year and in a long-term perspective. And this is all combined. So this was not an announcement that our policy practice is that we will as of this year payout 30% dividend.
I would like to ask a question about the slide regarding investments, whether your expectations regarding growth is it emanation of macro analyst, economists or is it somehow materialized in the pipeline? Do you see a really growing demand, questions from clients about investment, CapEx loans?
Yes. And we have already -- and we already mentioned it in the third quarter.
So I can see that is in progress. And a question relating to IFRS about the retail area, because I think at least looking at the quarterly burdens, if I remember, 25, and it is somehow contradictory to what you are saying, because retail portfolio is growing. Its risk profile is also changing. But risk costs are dropping quarter-from-quarter. And I was used to 4. Right now we have 3. I know that it is changing, because we had some sales in the past. But if I look at the quarterly cost, we already have 35 basis points. So the question is, right now I know that IFRS will change, but as of excluding from IFRS, can we expect as if reverse of the trend?
I think most sensible answer would be that we are right now also at the stage of preparing for IRB in the mortgage portfolio. And in the fourth quarter we stopped -- we ended working -- works on the models. Right now, there are in use tests. And thanks to it, we could improve our LTD ratios for mortgage portfolios, which we were using, which were not based on IRB model. And I think it also explains why that cost in the fourth quarter in the retail part dropped. It was thanks to mortgages and also improvement in the LTD ratio.
And a philosophical question, why do you need so much deposits, especially retail deposits, so many deposits? Because corporate growth we have been observing it, but we really had growth in savings. You are an ultra-liquid bank. Why philosophically do you need that much of liquidity?
Well, you may look at liquidity from many perspectives. Let's look at stable funding and funding costs over a longer term, a longer perspective. The basis of functioning of our bank is caring about low funding cost and we have it thanks to the growing number of clients and really big core deposits in core savings accounts and core current accounts and because there is a new situation, namely consumption growth, which is connected with the growth in core deposits at banks, but it is lower than the growth in lending, which we think will be happening this year. So as a forward looking, it is good -- it is advisable to reinvest the scheme, yes. Savings accounts are an important element of your regular operations, of your regular daily banking. I would also like to draw attention to the fact that an element of a campaign regarding -- because you are asking about it -- regarding savings account also translates, although with some delay, to increase in non-balance sheet assets in our organization. So if we are increasing the number of people who are saving, you also are, with a delay, the number of people who are saving long-term and then investors, starting from funds. I think this scheme -- this pattern is also known to you, you also know it.
I would like to go back to the risk cost in the retail area, because I was assuming that it was because you reduced provisions level. Is it only the result of model changes or you see that the quality of the loans is really better?
The risk cost, well, used to be flat in fact. But, yes, the change of models had an impact on this improvement. We are not making any manipulations. We are using only models here. And this is the only thing we can do.
And I would like to ask about costs. Do you have an estimate regarding any -- I'm thinking right now about 2019 regarding costs. If that act abolishing limits, for personal limits, would it have any impact?
Yes, yes, for sure certainly. Well, that condition it would influence. I don't if we can talk about it. But we made our estimates. And if it had been implemented as of the 1st January -- because we are still not sure costs for employers, because we also have to think about employees costs. But cost for employers would be PLN 40 million, in the order of -- I'm saying in the order of because I don't want to talk about exact numbers. It is a substantial figure undoubtedly. Although the cost of employee -- satisfaction of the employee, adjustment, movements, they would be even bigger. But it is hard to anticipate them right now. That is why in this base variance we have not been taking account that element for 2018, but we don't know whether that change as of 2019 will be activated because -- we don't know. It hasn't been settled yet, at least not finally.
And talking about risk costs more as regards IFRS 9, do we have any -- do you think there would be any impact, serious impact on it?
We have estimates, but we have to go through at least 2, 3 quarters to be able to see the models, how they really affect risk costs. As I showed it to you earlier, stage 1 the effect we can say it would be precise. But the biggest question would be about stage 2. And stage 3 would be de facto the same. It would be dependent on what will be happening to the performance of our non-performing loans.
And the second question as regards IRB in mortgages, any time horizon of implementation of this, what do you communicate?
In general this process of approval both as regards the Polish Financial Supervision authority and CBS it is a lengthy process, so I don't think it will be completed this year.
Because that drop there in risk weight, it was significant and it was related to a lower risk weight in [ P&L ] and mortgages. But I think the effect was substantially higher than the influence of mortgages. Were there any other actions taken to optimize?
We haven't taken any particular optimization steps. This is the effect of portfolio performance. When receive mortgage entries and when we evaluate appraisals, then that risk weight may go down. So we are obliged to -- we are required to really look at procedures, so all entries into registers regarding real properties. We want to be sure that everything is done. We want to ensure that everything is done in this respect. So also update of valuation of appraisals, which is periodic. It is an element of lending IRB process. So that -- all employees should remember that this capital management is an important element and we are all required to follow all the required steps. As it was for regulator capital, it is also combined. The impact here is also fluctuating from quarter to quarter, from period to period.
And if I may? Also, you, Mr. President, said a lot about what your expectations were regarding corporate loan. I would like to ask about the retail area. There is such a nice slide in your presentation, #9, where you are showing the sale -- yearly sale of loans in the retail area. It is a very nice trend. Do you think there will be any upside for next years, for the coming years?
As you know, we are not talking about future elements, but I think my answer was ambiguous. We do care about having a diversified profile of our assets. And I also said that growth in our lending and maintaining our capacity is a priority for us. I know that I am not answering your question directly, but I think you have noted -- you have mentioned that we have become a significant player regarding all elements. And when you see where we are weak, then you will guess that this is where we will be matching up. And there is still a potential in some areas.
And I have 1 question about personnel costs on Slide 24, because you mentioned that you had 2 growth pay exercises -- pay growth exercises last year. Why you -- and if you think about next year, because in macro figures you're also thinking about having high increases.
Bank has increased employee salaries undoubtedly and this element has been settled. And you know that we have announced -- that we have also communicated principles of pay rises this year. These are public data, so everyone knows about it. Costs of income are growing, which does not mean that components of that element -- of this element will not look differently. We also have this, that, in 2016, we created provisions for severance pay and they are as if subject to -- so if we compare 2016 to 2017, we have to remember that last quarters of 2016 are also influenced by those provisions for severance pay related to both 2016 and 2017. So the cost per employee will go up and is going up. This is this element.
Do you think that the pressure at the bank is -- on remuneration is stronger, weaker than in the rest of the economy?
Let me put it this way, the element of pressure is of course quite significant, but in the meantime I would like to draw your attention to the fact that requirements in terms of employees change, which has an impact on the changed profile of the employee. So here the change and higher costs does not -- do not result from the fact that for the same work you need to pay much more because I think it does not affect banks that much. But the correct structure of remuneration in a bank needs to be built to attract proper talents which are able to function in a given organization in 10 years time, where skills they will need to work in a bank will be different than 10 years ago. There is no question about that. If we have a distribution network, it changes from transactional customer service towards remote advisory for mortgages, pensions, wills, succession, et cetera. Of course then we talk about all the different requirements for employees, which does not mean that we have to replace all employees, because this is not what we are talking about, because today experience also becomes a very important asset and the long-term seniority employees will be desired, but look at new jobs. So all those elements. When you only look at the remuneration costs, of course they do not cover this element. But you may expect that we employ only IT specialists, but also people who deal with customer journey, growth hackers and all new types of jobs, Agile coaches, Pace coaches, et cetera, et cetera, which have a totally different nature -- or data scientist. These are good -- big changes. So there's also a quality change and it will be hard to fish it out. And in these jobs, remuneration pressure is huge because we don't have many of such people. So we need to employ those who are available, but also we need to attract people with the potential of learning new things and we need to invest in them. So I cannot answer your question directly. But you all know that as of 1st of March we raised also the minimum salary up to PLN 4,000 in our bank because we thought that it was not fair that we have such huge remuneration discrepancies in our organization. And we cannot respect this, because this is not fair. So that -- and this was the move we made as of the 1st September. I think you know that pretty well.
Looking at the expected investment in the public and private sectors this year, what started in quarter fourth 2017, can we expect that the higher volumes for corporate loans will be of 2 digit nature in 2018? We may not eliminate this?
Yes, we are going towards that direction. So we may risk saying that higher lending may be of 2 digits both on the retail and corporate side. There is a huge potential in the bank. We talk only about the economy, not -- we don't communicate any information about 2018 at the bank. Our priority is that the lending grows faster than the market. I sustain -- I uphold this. How to say so as not to say? Years of practice.
One more question, about macroeconomic forecast. Your forecast is for high dynamics of remuneration, but still I have an impression that inflation is lower than the market consensus. So I want to ask about this discrepancy in this?
Acceleration of the economic growth towards the end of the last year was huge in terms of nominal GDP, which means that the productivity made up with a high increase of wages. In our equations on inflation, it means a later effect of the inflation pressure. That's why we more talk about inflation risk in 2019 than in 2018. This is a very important assumption, which we can see in -- we have in our equations and stressed by the Monetary Council. Other factors you should remember, headline inflation this year -- the registered CPI inflation will not be too high because effects of higher food prices from 2017 expire. We also expect further cheaper rates for dollars -- depreciation of dollar to Polish zloty, which means that the price of raw materials does not go up as fast as in dollars. It will impact the CPI, which is quite low in 2018. The base inflation is going up. And in total the base growing inflation and all regular factors in 2019, the average will be 2.7, 2.9 and then we would expect higher interest rates -- higher rates.
I want to ask 2 questions about loans. In the review, you spoke about funding for entities participating in tenders. Is it a permanent change in tightening credit policy in the bank which would stop the development of loans in 2018?
No, it's an operation -- it's a review for 4 months just to verify how much [ is ] the sensitivity of separate clients. We had to select data which we did not have in our systems. We had to complement these data so that the models that measured the sensitivity how we can update them. I treat it more as an operation, a prudent operation rather than an operation to change our policy in that regard. There are simply new factors that our models, credit capacity models did not take into account in tender circumstances. We still -- still our entities -- we granted these loans, but we were more prudent than so far.
And I understand that in 2018 this more prudent approach for these groups of clients will be maintained?
Yes.
But it seems -- now you attacked not only here, but will move by 10% and you attack this group of --
I understand that it applies only to a group of clients. It doesn't mean that lending dynamics will be weaker because we will move our priorities.
Now, my question about the IFRS 9 impact on the dynamics of loans in the future, in 2018, be it a bank or this sector. What do you think? Will it not maybe stop, but will be a factor that will hamper the growth?
As I said before, macroeconomic factors are built in the IFRS 9 models and they are positive. So to be honest, the impact of IFRS 9 on the possibility to generate new credit exposures is moderate, maybe not significant at all, but in particular in the first year of IFRS 9 application because -- I spoke about this before. Before we started to implement IFRS 9, it was estimated that the total provisions in the banking sector everywhere in Europe will go up by 30%, 40%. Both from our data and the data other banks disclosed, we don't have such a value. So this impact is slightly much weaker than expected. But in fact from the perspective of stage 2, it will be necessary to observe the PD changes very carefully for each item in that portfolio by general risk, because it's only movement over time when we create provisions. But by principle, the relative value of these charges will be the same. IFRS 9 does not change the bank's strategy in that regard. We have the strategy, how we shape the lending. We go -- and our machinery works. These are only elements that modify it. And let's say its return margin, but it's still at the level of any benchmark point and the spread of provisions over a credit lifecycle. This is the only change. It does not disrupt it. Any element of our -- element needs to be replaced, it's not profitable, so we need to switch it off, it doesn't work like this. Many macroeconomic factors if they start to change, then the sensitivity of IFRS 9 model will be much higher.
Yes. But I'm talking only about this year.
IFRS is an element that increases the cyclical sensitivity, and in a situation when something bad is happening in the economy, it will have an impact, just like in the past. Provisions were more backwards and now they will be forward-looking, so they will kind of anticipate, yes. Then we will go through -- to crises, we will verify IFRS 9, so that we can have more stability. So therefore -- so the authorities that implement the regulations will have plenty of work. [ Risk ] officials, lawyers, consultants, regulators they all have to have work. It's like public works. So it has a good impact on the economy and we should be happy about this. Let's not go into more detail who is paying for this, because we all know that.
I wanted to ask about IFRS 9. Do you expect any changes for the pricing policy -- I mean, going from stage 1 to stage 2 where there are higher costs and banks are thinking what to do about this? Do you see any potential here? And the second question about free accounts following the EU provisions I think in the second half of the year. Will it be a big cost for you?
Referring to the first question, of course like other banks we are watching the absolute return or measurement of profitability, loans (sic) [ loss ] versus expected loss and it will change and it will be higher. But by principle, it should not change the risk profile of the portfolio of loans that we generate and our risk appetite. So of course I think that the market will try to adapt to this so that this return on the exposed capital and the margins that they are stable having given risk parameters. Referring to the second question, the intention of the regulator is that free allowances, free services for clients are -- compensate the fees that clients have to pay nowadays. So banks will be affected by this. As of present, it's too early to talk about the real effects of this because we don't even know the willingness of groups of clients to shift or to move from one form of corporation to other. This sensitivity element to the implementation of new product, we will have to analyze it to see -- I don't know if we are able to estimate it. We have certain estimates, but I think it's not the basis to make certain statements. Because there are so many elements around it that it's not possible to -- we just have to wait and see. It will not be a hit for the bank, but the income may be affected. I don't know if you all know what we are talking about. We talk about the PAD regulation, the implementation of the account formula of a banking account that will be -- for which there will be no fees and there are number of activities that the banks needs to make for free for an entity that opens a given account. And the bank has to have such accounts in its offer for payments, transfers, deposited. There's a number of transactions that the bank needs to make for free for a holder of such an account.
A question from the room? Any questions from the room? I have 2 online questions. Because -- I can see that you answered some questions. The first question, I will read it straight on -- that is in English. This is a question regarding Slide 22. First, we are not commenting at the shape of margins for the future. This is the first part of the answer. I don't know -- interest assets growth, yes, I think we explained it as regards corporate loans, because these are 2 components. So I think we have answered this question. And the third part of the question, the third component, competition, yes?
Yes, of course competition is important here. But today -- I would say that, yes. And you can see it -- you can see the pressure regarding acquisition of core deposits. We have moved as a market towards 2.5 interest for acquisition offers. So important offers in the fourth month perspective. I think the market has unified in this respect. So we don't have any important impacts of the competition. It was maybe more important in September, October. Then, November and December were calmer. Right now, all banks have their offers at 2.5 around. And as regards lending, undoubtedly, and we are emphasizing it that we expect higher activity of other banks which so far have not been then active here due to their capital base. Right now, it is quite clear and the banking sector is well capitalized. And we -- yes, we are expecting higher competition in this area. But as regards concrete figures, for instance, regarding tenders, local government tenders, it is right now hard to say -- ambiguously to say that it is really visible. Such ratios are related, for instance, to municipal tenders. We observed them in the year 2010, but it was because banks as if stepped out of that market. And after that waves of drops to 0 or even negative between 2007 and 2008, we then saw rebounding. Can we expect it right now? I don't think so. I think it will be a calm adjustment, a relaxed adjustment to the competition as we have been observing it over the last years; that is again calm adjustments to -- as we had a calm adjustment to tax levy, especially that appetite for lending -- during that we are expecting expected growth. So there is space for everyone here. I do not think that it will have any serious influence this year.
[indiscernible]?
I think I have answered this already. Unfortunately, we are expecting such an effect. That is why we reviewed our basis of credit requests, which I have already mentioned, we sought. And the last question?
[indiscernible]?
Of course we are looking long-term. We're talking about a 5-year horizon, which can be amortized. And also what is significant is that in line with the regulations, we can step out of a settlement of that effect over time, whereas a lack of that option right now. If we wanted to make such a request, we would need an approval of the PFSA. And right now we don't need it. So it is a more flexible method.
If there is no other questions here in the room, thank you very much. And we would invite you to an official party. Thank you.