MONETA Money Bank : Přepis záznamu z prezentace výsledků hospodaření za 1H 2023 (angličtina)

MONETA Money Bank

1H 2023 Financial Results Conference Call

Transcript of the conference call regarding MONETA Money Bank 1H 2023 Financial Results held on 27 July 2023 at 10:00 AM CET.

This transcript of MONETA Money Bank 1H 2023 Financial Results conference call is intended for informational purposes only. The transcript may not correspond exactly to the original and may contain misspellings and inaccuracies.

MONETA Money Bank participants:

• Tomas Spurny, Chairman of the Management Board & Chief Executive Officer
• Carl Normann Vokt, Vice-Chairman of the Management Board & Chief Risk Officer
• Jan Fricek, Member of the Management Board & Chief Financial Officer
• Jan Novotny, Member of the Management Board & Chief Commercial Banking Officer
• Linda Kavanova, Head of Investor Relations

Operator:

Hello and welcome to the MONETA Money Bank 1H 2023 Financial Results. My name is Teri, and I'll be the conference operator for today's webinar. All participants will have the opportunity to ask questions today, and you can do this by using the raise hand icon or the Q&A chat box, both found on your Zoom toolbar. Alternatively, if you have joined us on the phone, you can press star followed by 1 on your telephone keypad.

Today's speakers are Mr. Tomas Spurny, Mr. Jan Fricek, and Mr. Jan Novotny, and Mr. Carl Normann Vokt. I would now like to hand over to Mr. Tomas Spurny to begin. Please go ahead.

Tomas Spurny:

Good morning, ladies and gentlemen.

I have the pleasure of covering the first part of our presentation. So, if we can turn to page number two, we first cover the quarterly result. In the second quarter of the current year, we delivered a net profit of CZK 1.26 billion, this is 4% quarter-on-quarter growth. I think, more importantly, if you look at the result of the quarter, we are also delivering a strong net interest income. The net interest income increased more than 6% quarter-on-quarter and it exceeds the forecast that we provided to you in February 2023, by about CZK 180 million. So, we look with confidence into the second half of the year. The other positive news with respect to the quarter relates to net fees and commissions. On the quarterly basis, this category of income increased by 7.6% and this is due to strength of our distribution in asset management as well as insurance delivering a solid result.

If you look at the cost base of the Bank on quarterly basis, it had declined by more than 11% even though we caught a tail end of mandatory contributions, namely to the deposit insurance fund, which had changed prices at the last minute and we suffered a higher charge on insurance during May 2023. Nonetheless, we believe that the result is in line with our guidance and with our operating plan.

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During the second quarter, we incurred a risk charge of about CZK 150 million. The first quarter was impacted by both disposal of significant NPL portfolio, which produced material gain, and also, we had some releases of provisions, a very tail end of the COVID related provisioning.

Now, with that, I would turn to page three, where we look at the semi-annual results published this morning. If you look at the net profit, we stand at CZK 2.5 billion, rounded up by CZK 20 million. This is in our view, a good result in a view of guidance, which we will cover at the end of this presentation, where we increase the minimum net profit target to CZK 4.7 billion from CZK 4.3 billion.

If we briefly cover the other categories which will be commented upon by Jan Fricek, on operating income CZK 5.9 billion. So, in order to meet the guidance for this year, CZK 12 billion we have to produce additional CZK 6.1 billion in operating income, and we're confident that the number will come in, based on evolution of the second quarter. Cost base is under control, I would mind you that the CZ 2.9 billion has in it more than CZK 300 million of mandatory, regulatory contributions which always impact the first half of the year. This year, second quarter as I said we suffered additional charge.

The semi-annual cost of risk at CZK 30 million, this is combining the excellent first quarter with the normalised second quarter charge that we have in the P&L, which I covered on the previous page.

Now, if we continue to the balance sheet, if you look at our activity for the past 12 months in response to the high interest rate environment, we shifted the business model to focus on deposit gathering. The deposit gathering produces growth of 24%, and the higher volume of deposits supports the growth of the net interest income. We ended up with CZK 368 billion. Nonetheless, if you were to add the additional CZK 2.8 billion that we placed in subordinated deposits, which is not included in this figure, the growth would be even higher, and I would like to underline that our growth of deposit base comes at three times the market growth. The deposit base also positively impacts the liquidity ratios where we have increased the liquidity by 120% or a de facto CZK 66 billion on year-to-year basis.

Now if we turn to the lending base, to our performing loan portfolio it stands flat at CZK 269 billion. This is in line with our strategy where we focus on two aspects of the loan portfolio. First aspect is underwriting high-margin,high-rate products. Second aspect is gradual repricing of the portfolio. Both of which these aspects will be covered by Jan Novotny in his part of the presentation.

Now, if we turn into the evolution of our operating platform. If you look at the operating platform, the most important development concerns employment of the Bank. Last year, I believe, it was in October 2022, we announced a target of 2,500 FTEs. So, we come in at the target, we are actually 11 FTEs short, but this restructuring materially contributed to arresting the impact of inflation. About half of the restructuring relates to lower demand for credit products overall, namely on the side of retail. And the other half is related to productivity improvements or discontinuation of some business activities which we found inadequate in terms of return on capital.

If you look at the other aspects of the operating platform. On the positive, we reached agreement with four banks to not only share ATM infrastructure with respect to withdrawals, but we are planning to implement, by the end of the year, functionality of deposits. We believe that this will not only improve our cost position, contribute to CO2 reduction targets, but also broaden the reach of MONETA for those clients that need the ATM infrastructure for deposits. We grow the client base and digital, I will cover in separate part of the presentation.

Now, with that in mind, let's take a look at the operating environment as we would like to present some key numbers.

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Now, if we look at page 7, the operating environment is frankly challenging. On one hand, you have economic stagnation with the most optimistic forecasts with respect to GDP growth for this year, it comes in about 0.5%. Hence, the economy is clearly slowing down. The positive factor remains with respect to unemployment, because the unemployment is hardly moving up and this in our view contributes to benign credit environment to continued benign credit environment, which actually is most likely and it's very thraw as the metrics on risk management are at historical lows and this will be covered by Normann in his part of the presentation. We continue to suffer from high inflation, which is followed by materially high public budget deficits. As you can see, the public budget deficit is estimated at CZK 295 billion for this year. At mid-year, the deficit stood at CZK 215 billion. So, we believe that there is more upside - I'm sorry, more downside on government spending than upside through consolidation. The consolidation package, which should reduce public spending by CZK 150 billion in midterm is still in the parliament and pending approval amidst fairly material obstructions. And we think that it might be altered during the parliamentary debate. If you look at indebtedness of Czech Republic with respect to GDP, that metric seems to be continually increasing.

Now, if you look at the next page, inflation. Inflation, the latest number reported by Czech National Bank stood at 9.7%. The annual number is in excess of 15%. The inflation is continued to be driven by housing costs, energy, groceries, and this causes some public discourse in the media. So, our view, MONETA house view, is that the struggle to subdue the inflation is certainly continuing, but not yet over. And we believe that the rates will come down rather than at the end of this year by beginning of next year. That house view is framed or anchored in comments by at least three members of the Czech National Bank's Board. This is the Governor and Vice Governor Frait and Mr. Procházka, who cautioned that the markets might be too optimistic. If you look at the rates, the short-term key rate remains stable at 7%. And if we then examine the yield curve, we can see that the swap market since beginning of the year decreased its estimate of medium and long-term rates by about 25 to 50 basis points. So, the medium view is fairly optimistic on ability to subdue the inflation.

So now, this is with respect to the operating environment, and let me cover a brief update on our digital platform. If you look at our digital platform, this actually shows the tremendous importance of it or materiality that it gained over the last five years. I recently looked at a presentation made to our staff and management, this was from 2017, where the digital platform at that time processed about 20% of all transactions.

If you look at the digital platform from the perspective of first half of this year, we did more than 40 million transactions split into three categories. Payments grow by 18%. If you look at our effort to add service and customer relationship management features, this category grows by nearly 70%. And if you look at our distribution capability through the platform, we have more than 20% growth.

On the following page, we tried to provide a simplified view of materiality of the digital platform with respect to distribution. Here, we focus on eight key products of the Bank. And if I start with deposits, if you look at the individual lines, the digital today enables 40% to 60% share on key deposit products and so on and so forth. So, this really gains materiality by every quarter. Nonetheless, the branch network still carries material part of services, certain services and distribution capabilities for the Bank.

On the following page, we also show you the trend of the digital, trending of the digital platform. On one hand, we have solid double-digit growth of users, unique users on the digital platform. But if you examine the growth of the mobile platform, the mobile platform actually exceeds the 11% growth by more than double, and the traffic is undoubtedly shifting onto the mobile platform. This is also visible from the share of transactions between internet banking and mobile banking, where I believe that by the end of this year, 80% of the traffic, perhaps more than 80% of the traffic will migrate onto the mobile platform. Hence, the Bank is updating, its investment plan as we would like to further digitize product

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distribution and service enablement for small businesses and SME companies. And this will be the focus of our effort during the next three years.

And now very briefly on the branch network, how it complements the digital offer. If you look at the branch network, it has become largely irrelevant in terms of payment transactions. Today, in the branches, we process about half a percent of the payment traffic. Nonetheless, the branches are pivotal to cash services where we processed during the six months about 590,000 transactions. Nonetheless, you can see that the cash intensity within our branch network is declining. If you look at it from perspective of branch visits, we actually have good growth in branch visits because in many locations, some banks discontinued to provide over-the-counter cash services. We believe that being a rural bank serving communities with less than 10,000 inhabitants, it is our responsibility to ensure that cash services are available. Nonetheless, we will continue in rationalising the network. By the end of the year, we will close seven branch units which were selected during a mid-year review. From the perspective of loan applications, we see a similar trend. The branch network reduces the number of applications it receives. This is a function of lower demand and it's also a function of branch closures, which were realised and executed through the first quarter of this year. And with respect to number of staff that we deploy in front offices throughout the branch network, you can also see that the reduction is consistent with the 13% reduction of staff overall within the Bank.

Hence, with that in mind, I will now turn over to Jan Fricek who will provide you with detailed evolution of the P&L overall. Thank you.

Jan Fricek:

Thank you. Good morning, ladies and gentlemen.

I am now on page 15, and we'll continue with the profit and loss statement. In the first half of the year, MONETA delivered a net profit of CZK 2.5 billion with the operating income of CZK 5.9 billion and delivered Return on Tangible Equity of 18.9%. Lower revenues is driven predominantly by net interest income down by 14%. However, partly compensated by net fee and commission income growth of nearly 21% and more than doubled other income. On the cost base, we report CZK 2.9 billion, which is just marginal increase by 4% year-on-year. However, this year we charged regulatory charges by CZK 80 million higher than last year, and last year we obtained M&A cost reimbursement. On the cost of risk line, we report CZK 30 million net cost for the first half. Such a solid result was enabled by continuing solid performance of our loan portfolio and also gain realised on NPL disposals.

On the following page, we can continue with the net interest income development. In the second quarter, we increased the lending income by CZK 391 million year-on-year, predominantly due to increased loan portfolio yield by 50-basis points. And also, treasury income went up by CZK 1,300 million due to higher balance of liquidity, higher income from hedging derivatives, and also the market interest rate increased by 2.5% during the last five quarters. On the expense side, our cost of funding increased by nearly CZK 2 billion, which is a function of the deposit-based expansion by 24%. And also, we repriced significant portion of the deposit base to current market level. As a result of that, our net interest income declined by CZK 300 million year-on-year. However, from the quarterly development, you can see that in the second quarter, we increased the result versus the first quarter, which is actually in line with the projection we provided last quarter.

And if we flip the page, which is already on the screen, page 17, here we show the original projection of net interest income for the last three quarters of the year. You can see that in the second quarter, we outperformed the forecasted number by CZK 77 million, which was achieved by better-than-expected income from hedging derivatives and also small one-off gain. The projected income going forward,

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basically the drivers of the projected improvement going forward remain the same. It is ongoing expansion of the deposit base with a positive margin against the two-week repo and also increasing loan portfolio yield. Below that, we report net interest margin in the second quarter, we outperformed the forecasted result by 10 basis points and going forward, we project stability in this respect.

On page 17, we continue with the detail about net fee and commission income, sorry, page 18. In the second quarter, as was mentioned, we increased the overall result by nearly 22%, of which the income side increased by 20%, driven by higher transactional income, and also increased income for distribution third-party products, namely insurance and asset management. Below that, you can see that expense side increased as well. However, at significantly lower rate and this is in line with increased volume of client transaction.

If we flip the page, we can provide you with more detail about the income side. In the chart on the right side, you can see that year-on-year, we increased the income from insurance and asset management by 47%. And in the second quarter, the result reached CZK 378 million. This represents nearly 50% of the total income in this category. And the driver is driven by improved distribution capacity and also improved commercial conditions negotiated with the insurance company.

And now we can continue with the cost base on page 20. On a comparable basis, we report a stable development with CZK 1,372 million for the second quarter this year. You can see that the higher regulatory charges book up was compensated by a reduced personal costs and administrative expenses. Let me also point it out that for comparable purpose, we adjusted the figure of cost base for the second quarter last year for M&A cost reimbursement, which we obtained last year.

On the next page, we provide more detail about personal expenses development. In the second quarter, we achieved a reduction by 2.6% year-on-year, predominantly due to reduced employment by nearly 13%. And this was only partially compensated by increased average salary amid the high single-digit inflation on the labour market, the pressure coming from the labour market inflation.

And we complete this section with the page number 22, where we show a decline of administrative costs by nearly 7% year-on-year. Again, this is on comparable basis. And the reduction was achieved predominantly due to lower marketing intensity in the first half of this year and small savings on other items. On the right side in the chart, you can see that the D&A charge, remained broadly stable.

With that let me hand over to my colleague, Jan Novotny, who will comment on the balance sheet. Thank you.

Jan Novotny:

Thank you, Jan. Good morning, ladies and gentlemen. I have a pleasure to walk you through the next section of today's presentation, which is the balance sheet development section.

Let me start on the page 24, where you can see the evolution of our balance sheet for both asset and liability side. You can see that the very steep growth more than 15% year-on-year is driven by very successful deposit gathering campaign. In the key category of core customer deposit, we have achieved 24% year-on-year growth and this growth contributes quite significantly to the improvement of the interest income generation capacity. We have also slowed down our growth in net customer loan portfolio, as we have focused mainly on the repricing of the current portfolio, plus we are focusing on originating especially the high yielding products. Overall balance sheet has reached CZK 423.8 billion and we will continue to grow the balance sheet according to our strategy.

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