Earnings call transcript: PKO Bank Polski Q2 2023 highlights NIM stability

PKO Bank Polski reported its Q2 2023 earnings, emphasizing a stable net interest margin (NIM) and strategic innovations amid potential market changes. The bank’s stock saw a slight increase, reflecting cautious investor optimism about its future prospects. According to InvestingPro data, the bank maintains a FAIR financial health score, though its stock has seen a -35% total return over the past year. For deeper insights into PKO’s valuation and future potential, InvestingPro offers exclusive analysis through its comprehensive Pro Research Report, available for over 1,400 top stocks.

Key Takeaways

• NIM guidance set at a minimum of 4.8% for the year.
• Introduction of a 5-year savings product aimed at improving long-term funding.
• Operational expenses anticipated to rise in low double digits.
• Central Bank’s potential rate cuts could pressure margins.

Company Performance

PKO Bank Polski has maintained a strong financial position in Q2 2023, with a focus on managing its capital and preparing for potential market shifts. The bank’s introduction of a new savings product for retail customers is part of its strategy to enhance long-term funding. Notable financial metrics from InvestingPro show a robust current ratio of 9.04, indicating strong liquidity, while maintaining a beta of 1.53, suggesting higher market sensitivity than its peers.

Financial Highlights

• Net Interest Margin: Expected to remain at or above 4.8%.
• Fee Income Growth: Projected at 5-10%.
• Operational Expenses: Anticipated low double-digit increase.

Outlook & Guidance

The bank remains optimistic about maintaining its NIM at or above 4.8%, despite potential pressures from expected central bank rate cuts. It continues to explore strategies to strengthen its market position, including potential Tier 2 debt issuance.

Executive Commentary

• "We are actively managing our capital position," stated Jakob, CFO, highlighting the bank’s focus on financial stability.
• "We want to be ready and execute any opportunity on the market," a management representative noted, emphasizing strategic readiness.
• Jakob, CFO, reassured investors, saying, "We do not see pressure on deposit pricing currently."

Risks and Challenges

• Potential rate cuts by the Central Bank could affect NIM.
• Operational expenses are expected to rise, impacting profitability.
• The entry of Erste Bank into the market could increase competition.
• Regulatory changes could affect long-term funding classifications.
• Swiss franc mortgage impacts on capital remain a concern.

PKO Bank Polski is navigating a dynamic market environment by focusing on strategic product innovation and capital management. The bank’s proactive approach aims to sustain its competitive edge amid evolving economic conditions. InvestingPro subscribers gain access to exclusive financial health metrics, valuation models, and expert insights that help decode complex market dynamics. Get real-time access to over 30 key financial metrics and professional-grade analysis tools to make more informed investment decisions.

Full transcript - Powszechna Kasa Oszczednosci Bank Polski SA (PKO) Q1 2025:

Call Moderator: Good afternoon, ladies and gentlemen. Thank you for joining our call following our release of Q1 twenty twenty five results. We have as always strong team with our CFO, Head of Finance, our Economist and IR team. As you know, our company very well, as always, I suggest simply to start directly with Q and A.

Jakob, CFO/Finance Lead: Lucas, please.

Lucas, Financial Analyst: Yes. Hi. Thank you very much. Thank you very much for for the call. Couple of questions from my side.

There were already plenty of topics on the NII, the NIM, but my question is what is your, let’s say, economic view on the potential cut to the remuneration of the mandatory reserves and what could be the impact on your NIM, on your net interest income? I just wanted to make sure that my calculations are correct. So that will be my first question. Thank you.

Call Moderator: Piotr, maybe you will start with your macro view on probability of this

Piotr, Economist: event. Yeah. We know that there has already been a discussion on the topic at the NPC on the issue for for quite some time. But so far, an important argument against such a change was that financial result of the Central Bank was deeply negative. And then the change regarding interest on required reserve wouldn’t have a desired positive fiscal effect.

And that’s why some NPC members that we talked to on the issue signal that the the change will not happen because simply it will not bring positive fiscal results. Possibly, projections of the financial result of the Central Bank for this year or maybe for the next one indicate that there is a chance for returning to the positive results. So maybe now there is a chance for the positive fiscal impact of such a change, and that’s why maybe they will start to to seriously discuss. So and and also given the context, original context, given that other central banks in the region have already conducted such a change. I I I think it will happen.

It is only a question of time, whether it will be the nearest tenancy meeting or or later. I think it it very much even what we have heard from MTC members, it very much depends on the projection of the central bank’s financial result. If it is going to be positive this year, so then savings on elimination of the interest of required reserve will increase transfer to the central budget, then it may happen. If there is no such a chance for positive result, I think it will not necessarily happen. That’s that’s my take on the issue.

Lucas, Financial Analyst: And do you think it will be kept to zero or, like, half?

Piotr, Economist: To tell, maybe maybe I would bet that it could be a gradual change. And I would I would I would also not rule out simply one move to zero. I think it it could also happen potentially.

Jakob, CFO/Finance Lead: Cool. No no clear. Yeah.

Call Moderator: If you like comment on impact.

Jakob, CFO/Finance Lead: Yes. And, you you know, take into account what Josh said that for now, we don’t know and what what level would be if they will decide to cut if to zero or to the other number, but also take into account that we already and and we assume that’s okay. We are already half year half almost half year. So assuming that it will be cut, so then we’ll talk in about few basis points impact on our NIM in the context of 2025. But finally, it will depend when, of course, and to what level.

But we are talking in this context of few basis points on NIM.

Lucas, Financial Analyst: Sure. Sure. Thank you very much. The next question maybe on on fee income. The beginning of the year is, like, I would say, not great, not terrible.

And what would be your outlook for for this line for the entire year, the dynamic, for example?

Executive/Management: We declared last year that we’re gonna keep the pace of dynamic here, single digit five to 10%, and we will see and we will try to execute this option, the market one. Yeah. That’s this result is mainly an effective dynamic. Negative one is an effect of one offs in first quarter of last year. And what we see, we see that core drivers of recent accounts are going quite well.

You see a kind of acceleration. Even if we take into account fact, we obviously have have the less number of days working days in the first quarter. In the longer run, the share of fees and commissions in core income should go should go up.

Lucas, Financial Analyst: Okay. Thank you very much. Short question on cost. Would you maintain your outlook for this year, like low double digit increase in total OpEx, including regulatory costs?

Executive/Management: Yeah. We keep this. We keep this. Yeah.

Lucas, Financial Analyst: Okay. And the last question on the legal risk, but in the consumer loans, any comments on the development here? The the number of litigations and the values gradually, not really dynamically, but growing. You have not recognized the provision for this yet. What is your view on this on this risk?

Thank you.

Risk/Legal Representative: The number is still, I would say, stable. Today, we we in court 90% of of the cases. And so up to now, we see rather that the risk is reducing. So we we don’t make the decision to to create additional provisioning. We provide only for these cases in the court.

Lucas, Financial Analyst: Okay. Thank you very much. That’s all from my side. Thank you very much.

Call Moderator: Do we have any other questions? Gabbard, please.

Gabbard, Financial Analyst: Yes. Thank you. A few questions from me, please. The first one on margins, just to clarify your NIM guidance. Are you are you expecting broadly stable NIM at the at the q one level for the for the coming quarters?

Is that fair? Or shall we model some decline in NIM?

Executive/Management: As we explained during the conference and in line with our declaration from previous year, we should see the landing level for this year not lower than 4.8. That’s the average margin for the last year. Interest margin, you mean?

Jakob, CFO/Finance Lead: And and Yeah. Yes. And and of course, the margin will be under pressure after the rate cuts. So so it it it’s actually will will in the in the next quarters will have an impact on the margin.

Executive/Management: It doesn’t mean that that it is a target. It’s a threshold for us for this year. It’s not the target, but, of course, we will Yeah. Action simply to to keep it as we can, maybe higher. But to be honest, if the macro scenario is like we are seeing here, yeah, we shouldn’t be lower than the 4.8.

Gabbard, Financial Analyst: Okay. Very clear. Thank you. And on your NIM or rate sensitivity guidance is 500,000,000. This is very kind of reassuring, I would say.

At do you have a sense of at what rate levels would this sensitivity increase significantly? I believe the forward markets are pointing to around three and a half percent short term rate by next year. So if you go from 4.5 to 3.5, how would your sensitivity look like and potentially at lower levels?

Jakob, CFO/Finance Lead: So I would say this actually is a few elements. One is because this sensitivity which we are showing, they are based on 100 basis points, right. And when actually it will have a higher impact, when the rates will be at the level in which, for example, for a term deposit will not be able to adjust the pricing of term deposits or savings account. So then the sensitivity is growing. Secondly, the growth of the balance sheet itself also is growing sensitivity usually in our case because then we start to hedge on our side.

And also when the sensitivity is actually increasing, when we are actually with the rate on our consumer portfolio are hitting the maximum rate which we can have on it, which is in Polish is Antelifa, called Antelifa, but maximum rate which we can have on consumer loans. And if we hit that rate, then we go down. But what happened before that, due to the fact that the new measure, supervisor outlier test concerning NII is measuring two fifty basis point move of for PLN’s law for PLN, Then even earlier, we’ll be forced to actually make an action potentially to add additional hedging due to increase of sensitivity of NII for the SOT purposes because it’s $250,000,000 move, not 100 as we 100 basis point move. So increase of balance sheet and situation in which we are actually are not able from the model point of view, adjust rates on deposits by 100 basis points in case of SOT NII, SOT NII by two fifty. And on the asset side, it’s it’s usually actually where we hit for the consumer portfolio loan at the maximum rate which we can have, and then we have to decrease it.

So that’s

Gabbard, Financial Analyst: Remind me what and what’s the what’s the threshold you need to stay below in case of a two fifty basis point shock?

Executive/Management: It’s 5%. We simply calculate the delta, calculated based on the formula described by Jacob, and then we divide by the capital. Should be 15%.

Gabbard, Financial Analyst: Five % NII. Thank you. And just briefly on capital, if I may. On this op risk impact on your capital ratios, can you explain this a little bit to us? I think you are flagging 65 basis points from CRR and then another 22, maybe also from CRR.

So what is this operational?

Executive/Management: Same source. Yeah. That’s the same source, CRR, but Peter simply made a split to for better understanding. 60 something is connected with credit risk and 20 something connected with operational risk. But the source of the change is the same, CRR three.

Risk/Legal Representative: Yeah. Right. No. Is any of these sorry. In the in the upgrade, this is connected with the losses which we have due to the Swiss mortgage.

Yeah. That’s what I thought.

Call Moderator: So so shall we expect

Gabbard, Financial Analyst: some reversal here as as the Swiss franc charges come down? Do we have a timeline?

Risk/Legal Representative: It will be temporary revert.

Jakob, CFO/Finance Lead: Just just the The 22 dashboards. Also, it’s due to the fact that we switched method because we want we were one of the banks on the Polish market who use advanced management management approach for a op risk. And then we had to switch to the new standardized method. And it’s also due to the change of method for calculation. We’re also adding what Piotr said, additional provisioning resulting from CHF.

It added also some capital requirements.

Gabbard, Financial Analyst: Okay. Very clear. Thank you. Last question for me would be on your capital requirements. And I believe there is a countercyclical buffer about to be phased in.

This is 200 basis points maybe by next year. So if I just apply that simply on a fully phased basis to your current buffer of 277 basis points, which which which you have above the minimum requirements for a 75 payout, that would come down to below 1%. Any thoughts on that?

Jakob, CFO/Finance Lead: Actually, we are actually actively managing our capital position. And as a kind of general rule, we definitely want to be above dividend levels, keeping also around one percentage point of kind of management buffer. So for example, what you can expect potentially from our side, for example, Tier two issuance, if needed, is also connected with the change of rating of our senior non preferred debt, which was changed in the first quarter from BA. Three to BA. Two because we agreed with Modis that we’ll keep certain level of subordination, meaning Tier two or more subordinating instruments in relationship to our assets.

So this also will trigger from our capital structure Tier two potential Tier two issuance. That’s one point. Second point, our own funds will also slightly increase after General Shareholder Meeting, assuming that General Shareholder Meeting will accept Management Board and Supervisory Board proposal concerning around 75% payout because part of the profit out of this 25, which will be retained, will increase our own funds. Hence, additional point, usually what we also do and assume that part of the first half profit, after approval of Polish FSA, we include in the own funds. So this also will actually and we assume also that we’ll do this year.

Last year, we included 1,300,000,000.0 on the group level to the

Gabbard, Financial Analyst: own funds. Have you had any discussions about buybacks with the KNF at all recently?

Jakob, CFO/Finance Lead: Recently, there was no, and I would say extensive discussion concerning payback, except the fact that, okay, in our strategy, we assume that we can and our dividend policy, we can pay the dividend or or share share buybacks, but but for for now, there was no any more concrete discussion with.

Gabbard, Financial Analyst: Okay. All clear. Thank you, Tim. Appreciate it.

Jakob, CFO/Finance Lead: Mikhail? Hey. Good afternoon. I I have a question. Maybe maybe you could give a little bit of your personal commentary on what do you expect from the Polish sector following Erste entry.

Do you think it’s as an opportunity maybe to grab more share during this kind of handover and perhaps some disruption of as one of your competitors or maybe a more competition going forward? Like, any insights would be welcome. Thank you.

Executive/Management: We open such a discussion simply to be better prepared for the different scenarios, and we analyze both the change, no change, and negative change for for us, positive, negative, and neutral. And what we do, we simply define actions to be taken to make usage of the situation. That’s but it’s a it’s not a we do not classify this m and a as a kind of consolidation on the market. It’s a it’s a change of the owner from a local market. Of course, rumor, maybe one year, maybe one year plus internal connected with allocation and change management and all this stuff.

From this perspective, we we want to be ready and execute any opportunity on the market including both segments, retail and and corporate.

Lucas, Financial Analyst: Thank you.

Call Moderator: Any other questions? Should I assume that the results were quite clear?

Jakob, CFO/Finance Lead: There’s no need for further Maybe one one more comment to to to the to the Gabbard question. Please take into account that in the dividend levels, already 2% of countercyclical buffer is included. So this according to Polish FSA dividend policy. So of course, the question mark is what they will do going forward with the debit dividend levels, but currently they are already assume two two additional percentage points to cover the counter security buffer. Thank you.

Gabbard, Financial Analyst: Thank you, Jakob. So the so the 12 and a half and 14 and a half, the debt there is is the countercyclical buffer, is it? So

Jakob, CFO/Finance Lead: so the the level On

Gabbard, Financial Analyst: page page 25, I’m talking about the chart on the right.

Jakob, CFO/Finance Lead: So so the dividend levels already includes 2% of countercyclical buffer. Yes. And they they are on on the TCR level and 14 yes. 14.4.

Risk/Legal Representative: Okay. Thank

Gabbard, Financial Analyst: you. Thank you.

Call Moderator: Matt, please.

Matt, Financial Analyst: Good afternoon. Thank you so much for your time. May I kindly ask you to comment on the deposit trends? And specifically, are you seeing any incremental pressure in this sector right now for deposits? I’m asking as it seems like there’s some inflows into term deposits again and pricing is increasing.

And if that’s the case, how do you see the developments later in the year relative to loan growth overall?

Jakob, CFO/Finance Lead: So oh, okay. So from I would say, I I understand that you are referring to the retail deposit pricing. And so what we see, we we see rather from the structure point of view that is not changing as fast as we thought it will change towards current deposits. So that means that the part of the term deposits is decreasing, but it’s decreasing at smaller pace that we that we assume. That’s why also you what what what you can see that potentially the rates the the rates might be slightly higher.

However, we don’t see pressure on deposits on our side. Having if you also look from the LCR’s point of view, you can see that our LCR is around over 240%. Many players also have LCR’s above 200%, which create no pressure on the deposit pricing. What you can see, of course, you can see offers for a new money, so with conditions. So it’s treated as we see kind of and they are trying to attracting new customers, giving us 7% for example, 7% on saving account for a new money.

But in general, I would say we do not see pressure on the currently on the deposit pricing. As you can see on our deposit base, it’s growing quarter to quarter. So we on our side, we are trying to change a little bit our deposit structure also in the context of the long funding ratio implemented by the recommendation of Polish FSA, meaning that we in April, we implemented a product five year along for retail cost customers as a saving product, which will contribute to the long term funding ratio. And we are currently in the discussion among other institutions with Polish FSA to change one thing in this context. One thing in the long term funding ratio recommendation, because currently we can have deposits only by the end of twenty twenty seven.

We can include them in the long term funding ratio. And we are actually discussing to remove this time restrictions and use these deposits as a normal form of long term funding next to covered bonds, next to own fund surplus, to Emerald Emerald issuances. So so from from from this perspective, okay, we we as a biggest bank also showing because there is no common product such also similar project on the market that we also would like to, on the one hand side, give customers a good product and on the other hand address regulatory requirement.

Matt, Financial Analyst: That’s very helpful. Thanks very much.

Call Moderator: Any additional questions? So thank you for participating, and hope to see you next quarter. Thank you, and goodbye.

Jakob, CFO/Finance Lead: Thank you. Thank you very much.

Piotr, Economist: Thank you. Bye. Thank you.

Call Moderator: Hi.

This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.