Strong operating results from core business. Financial results lowered by significant provisions for foreign currency loans
Consolidated results of the Bank Millennium Group for 1st quarter of 2021 Bank Millennium S.A. Capital Group posted consolidated net loss of PLN311 million in 1Q21. Substantial provisions against legal risk related to FX-mortgage portfolio totalling PLN 533 million (portfolio originated by the Bank PLN512 million, portfolio of former Euro Bank PLN21 million) were the main drag on the results. More conservative inputs into the risk model, reflected, inter alia, more challenging environment – higher inflow of court claims and lower proportion of cases won by banks. At the end of March 2021, the balance of provisions for the portfolio originated by the Bank stood at PLN1,432 million, an equivalent of 10.8% of exposure. Excluding FX-provisions, the Group would post net profit of PLN182 million (up 24% vs. adjusted 1Q20 net profit). Moreover, reported operating profit amounted to PLN444 million, marginally below this in 4Q19, while operating profit before FX-provisions would amount to PLN363 million, only 7% below this in 4Q19, indicating that the Group has largely weathered the direct and indirect impacts of the pandemic.
– Financial results of the 1Q2021 were impacted by the substantial provisions against legal risk related to FX-mortgage portfolio and the Group reported a loss of PLN 311 million. On the other hand, operating profit amounted to PLN444 million, business results were very positive, close to pre-Covid levels, proving the strength of the Group’s business model, consistency in transition strategy implementation and attention to high quality customer experience.
1Q2021 was very strong in retail loans: Bank reported new record in mortgage disbursements of PLN2.2 billion (up by 64% y/y) and origination of cash loans of PLN1.3 billion, translating into market share respectively of 14% and 10.5%, well above the natural market share of the Bank. We observed further growing interest of our customers in electronic banking, which has always been Bank Millennium’s competitive advantage. The number of digital customers, already high, increased further by 10% y/y reaching 2.1 million clients and number of active mobile customers exceeded 1.7 million growing by 16% y/y.
Developments in the corporate business were less spectacular but customer activity picked visibly, to name factoring, leasing or transactional banking, while cost of risk was on healthy level and adjustments due to pandemic are not forecasted. Bank achieved high efficiency gains as a result of measures implemented in 2020. Capital ratios remained strong.
As it was consecutive period of pandemic the Bank continued to provide protection in branches and offices for customers and employees’ health and to support its customers on the return to normal economic activity with a dynamic credit activity for individuals, entrepreneurs and companies – said Joao Bras Jorge, Chairman of the Bank Millennium Group summarising the results.
What we are particularly proud of this quarter
- stabilisation of NII with NIM and core income in a steady uptrend
- new quarterly record of mortgage loan disbursements (1Q21: PLN2.2 billion, up 5% q/q and up 64% y/y) translating into 14.6% market share in new agreements (1Q20: 10%)
- origination of cash loans at PLN1.3 billion, only marginally below the 1Q20 level with market share in origination increasing to 10.5% from 9.9%
- record high net fees (PLN205 million, up 5% y/y)
- digital customers crossing the 2.1 million mark (up 10% y/y), number of active mobile customers exceeding 1.7 million (up 16%) and over 2.3 million downloads of goodie application
- AuM of Millennium TFI and third party funds combined grew 6% q/q to nearly PLN9.0 billion with y/y growth at 37%
Substantial extraordinary P&L items
Apart from the above mentioned FX-provision and an annual fee for BFG resolution fund (PLN36 million booked in 1Q21 out of PLN49 million total 2021 charge), it was a relatively clean quarter with no major extraordinaries on both income and cost side. While reported ROE was negative, extraordinaries-free ROE stood of 9.3%.
1Q21 results highlights
Although the third wave of Covid-19 pandemic brought much higher-than-expected number of new cases and fatalities, the economy proved much more resilient than during spring and autumn waves. This helped to partly offset the negative impact of last year’s interest rate cuts, lower number of open branches or a higher number of quarantined staff.
Key highlights of the results were:
- NIM’s gradual improvement continued and despite the much higher denominator (IEA up +6% q/q) it widened by further 3bps to 2.56%; marginally higher loan margin and lower deposit cost (0.08% vs. 0.11% in 4Q20) more than offset narrower margin on bonds;
- net fees were up 5% and up 6% y/y with accounts/deposits as well as card business driving the growth; the former benefited from annual deposit fee, while card fees benefitted from annual settlements with card organisations (lowered card fee cost);
- contribution from other income was very low this time with solid q/q improvement of FX-income but no major revaluation/capital gains; there were no provisions against ‘small TSUE’ either;
- operating jaws were positive with 4% y/y drop of total revenues comparing against 17% drop of opex (14% ex-BFG charges) with reported C/I ratio of 49.3% (adjusted 46.2% vs. 45.7% in 4Q20 and 48.2% in 1Q20); both HR (down 16% y/y on 14% lower FTEs) and non-HR opex (down 19% y/y on 15% fewer branches and other cost efficiencies);
- risk charge was relatively light at PLN76 million or 39bp benefitting from stable loan book quality, no Covid-19 provisions per se and contribution from the sale of NPLs (PLN13 million); the split between retail and corporate segments was almost even this time; loan book quality marginally improved with share of Stage 3 loans at 4.85% vs. 5.0% at YE20 (corporate segment the main driver), the share of DPD90+ and the share of Stage 2 also down (2.61% from 2.7% and 5.42% from 5.6% respectively); quality of loans coming out of credit moratoria remained good with mere 2.8% of such loans in arrears;
- build-up of provisions against legal risks related to FX-mortgages continued with 1Q21 charge of PLN 512 million (Bank originated loan book only) increasing it to PLN 1,432 million or 10.8% of the gross FX-mortgage book excluding loans originated by Euro Bank (subject to indemnity clauses and guarantees issued by Societe Generale); the number of individual lawsuits filed against the Bank in relation to indexation clauses reached 6,816 at the end of March (including 558 cases relating to f.Euro Bank originated loans);
- y/y loan growth remained above the market (+5% net) with PLN mortgages (up 9%), the main driver, benefitting from strong originations (see below for details); cash loans were up 2% owing to improving originations while corporate loans were down 3% amidst low demand for funding; q/q dynamic was solid (+2% q/q or +3% ex-FX mortgages) with PLN mortgages up 6%, cash loans up 1% and corporate book almost flat; FX-mortgage portfolio continued to contract (down 12% y/y) and its share in total loans decreased to 17.8% (16.6% ex-Euro Bank portfolio);
- growth of deposits accelerated significantly (+8% q/q) following the reduction in 4Q20 with corporate deposits (+22% q/q) generating the bulk of the ‘swings’, while the retail deposits grew more moderately (+4%); L/D lowered again (85% from 91% at YE20) while the deposit mix was broadly stable with share of current accounts and savings deposits at 81%;
- capital ratios remained strong with consolidated TCR/T1 ratios at 19.4%/16.3% respectively; surplus over the regulatory minimum ratios remained substantial (5.3ppt/5.1ppt); consolidated FX Pillar 2 buffer of 3.4%, covering risk connected with FX-mortgage loans (including legal risk among others), was equivalent to PLN1.6 billion of absorption capacity.
Business trends and highlights
Economic activity remained strong in 1Q21 despite the more severe-than-expected third wave of the pandemic. A relatively lacklustre performance of the corporate segment on the one hand and high activity of retail customers on the other hand were the features of the quarter.
As for the details of business trends, 1Q21 brought a continuation of strong mortgage originations with disbursements crossing PLN2.2 billion mark for the first time (up 5% q/q and up 64% y/y) and market share in originations at 14.6% vs.10% in 1Q20. As a result, PLN mortgage portfolio at the end of March was up 6% q/q and up 25% y/y.
Originations of cash loans were less linear but the quarter overall brought solid nearly PLN1.3 billion worth of sales, well above the PLN1.0 billion in 4Q20 and only slightly below 1Q20. As a result, the non-mortgage retail loan portfolio grew 1% q/q, while margin on the stock continued to gradually improve. Customer acquisition continued although it was admittedly slower than before the outbreak of the pandemic. All key metrics – number of active retail customers (2,611 thousand, LFL up 23 thousand y/y), Konto 360 current account (1,728 thousand, up 7%), active micro-business clients (106 thousand, up 10%) as well as cards (debit cards: 2,991 thousand up 3%, credit cards: 479 thousand, up 3%) continued to show healthy y/y growth.
Mutual funds managed by Millennium TFI as well as the third-party ones saw continuation of inflows (partly a result of conversion of deposits at the Bank) resulting in a 6% q/q growth in AuM in both categories combined. At nearly PLN9.0 billion at the end of March, total AuM well exceeded the pre-Covid of level of PLN8.2 billion (YE19).
Growth trend in sales closed through digital channels continued and new important milestones were reached in digital banking: the number of active digital customers crossing the 2.1 million mark (up 10% y/y), number of active mobile customers exceeding 1.7 million (up 16%) and over 2.3 million downloads of goodie application.
Developments in the corporate business were less spectacular but customer activity picked visibly, to name factoring, leasing or transactional banking, as few examples. Corporate loans were down 2% q/q and down 3% y/y with some repayments and low use of overdrafts being the main culprits. Spreads were stable however. Turnover in factoring was solid (up 25% y/y), though shy of the record PLN7 billion in 4Q20, while the portfolio was 8% up y/y. New volumes in leasing were strongly up y/y (+23%), particularly those in March, but portfolio overall was still down y/y (-5%). Transactional banking saw a revival of business with number of guarantees and LoCs issued increasing 6% y/y, while the y/y growth in the number of transactions reached solid 7%.
Results of the Group are also available here: https://www.bankmillennium.pl/en/about-the-bank/investor-relations
Last Updated on June 8, 2021 by Karolina Ampulska