Q2 2005 Results of BRE Bank Group

Q2 2005 Results of BRE Bank Group

After 2Q 2005, BRE Bank generated the highest consolidated net profit in four years at PLN 144.5 million. The net profit grew 216% year on year. The BRE Bank Group reported a net profit of PLN 83.9 million in Q2 2005, the best result in 16 quarters. The gross profit was PLN 196.7 million after 2Q 2005, up 76% year on year. BRE Bank is much ahead of its financial targets and on track to achieve its strategic goals, including a ca. PLN 290 million gross profit this year.
Over the past 3 months, the Bank’s loan portfolio grew 3% and its deposits grew 14%. As a result, the Bank’s total assets grew by PLN 2.2 billion, reaching PLN 33.4 billion. Core business performance was also much stronger than in H1 2004, especially in net interest income which grew from PLN 225.9 million to PLN 327.2 million. Net commission income grew less fast (up PLN 1.2 million) due to the new policy of calculation of the effective interest rate. Net operating profit was PLN 196.7 million after 2Q 2005, compared to PLN 111.5 million in H1 2004.

“The financial results as at June 2005 are optimistic; they prove that this year’s targets are realistic, including a 14% ROE and a PLN 290 million gross profit. Irrespective of the good performance of the core business and a good outlook of all business lines for 2005, it is key for a lasting improvement of the BRE Bank Group’s results that we continue to expand in the retail banking market, ensuring a strong profitability within three years, and deeply restructure our corporate banking business. The latter is the main goal of the comprehensive programme initiated in 2005 under the name BREactivation. I believe that next to customer satisfaction with top quality products and advanced advisory, the real measure of BRE Bank’s market success will be a permanent structural improvement of profitability in the next few years. The ROE target of 20% in 2007 is increasingly realistic,” said Sławomir Lachowski, BRE Bank’s CEO.

BREactivation, the new corporate banking business model and strategyCorporate banking is the original business of BRE Bank and the driver of its success story in the 1990s, a matter of no coincidence, but a product of a carefully designed and effectively implemented strategy. However, Poland’s corporate banking market has changed dramatically over the past few years. Many new strong competitors have entered the market. After EU accession, foreign banks can freely offer their services in Poland. Margins and commissions have dropped while customers’ expectations increased. A process of simple cost savings has its natural limitations; technological progress requires continued investment. Mid-term profitability targets and improvements of product and service quality necessitate complex strategic measures, including a new corporate banking business model.BRE Bank expects that corporate banking will remain the Bank’s major business line and source of income; it will generate 35-40% of annual profits by 2008. The corporate banking business strategy, BREactivation, will implement a new business model for corporate services and strongly improve the profitability of the line. The planned changes include a new customer segmentation, adjustment of products to the needs of target customer groups, reorientation of customer service with an emphasis on partnership and advisory, and a strong focus on the sales and service process in branches. Outsourcing of a large part of the back office and centralisation of such functions at the Bank will enhance business support processes. It will also provide considerable cost savings.“We will achieve our goals by raising the productivity of sales (front office). We want to enhance the sales performance, so corporate branches can focus on their core business operations. By growing the sales force by at least 60 FTEs at the Bank, we will strengthen our capacity to win new customers and to service corporate clients,”said Janusz Wojtas, the Management Board Member responsible for corporate banking.BREactivation’s success will depend on the implementation of necessary changes in credit procedures, adjusting the credit process to the new customer segmentation. The new credit system will enhance the credit risk rating process depending on the customer segment and profile, and ensure future compliance with the requirements of the New Capital Accord. Improvement of credit services for SMEs is another important goal. As a first step in the process, overdraft limits (under SME Packages EFFECT Plus) have recently been raised from PLN 200 thousand to PLN 600 thousand. At the end of July, BRE Bank launched a new SME Package Financial EFFECT which includes credit limits up to PLN 1 million, easy access to overdraft facilities, working capital loans, discounting of bills, bank guarantees, and letters of credit.

The BREactivation strategy will ensure a significant increase in the number of corporate customers. The 2008 target is to grow the market share and the number of customers in the segment with annual sales:- up to PLN 30 million (SMEs): from 6.6 thousand at present to 9.8 thousand customers in 2008 (up 48%);- from PLN 30 million to PLN 1 billion (large corporates): from 1.6 thousand at present to 2.3 thousand in 2008 (up 46%).The Bank plans to maintain its existing close relations with a hundred largest capital groups and international corporations, whose annual sales are over PLN 1 billion.
The corporate banking business line generated a pre-tax profit of PLN 117.4 million after 2Q 2005. Corporate deposits grew PLN 2 billion year on year and stood at PLN 7.8 billion (9.1% market share). The corporate loans portfolio remained stable (PLN 7.9 billion) in the context of an overall 1.6% year-on-year decrease in corporate loans in the banking sector. The Bank’s foreign trade finance services grew 22%, strengthening its position of a market leader.

Continued expansion of retail bankingThe retail banking business continues to expand its sales and performs its financial targets (gross profit of PLN 31 million at the end of 2005). As at June 2005, retail banking generated a gross profit of PLN 8.6 million, compared to a PLN 17 million loss in 2004. The Bank has 1.126 million retail customers (up 160 thousand in H1 2005) whose deposits are nearly PLN 4.5 billion (up 19% in H1 2005). The Bank received PLN 700 million in new deposits in H1 2005. The retail loans portfolio grew 35% in H1 2005 and reached overt PLN 3 billion. BRE Bank extended PLN 771 million of mortgage loans in H1 2005 and was a top five market player.

mBank, Poland’s internet banking leader, opened nearly 90 thousand new accounts in Q2, and now has 1,171 thousand accounts. The deposits of mBank’s 900 thousand customers total PLN 3.6 billion, and loans committed stand at PLN 0.8 billion. The assets invested by over 105 thousand customers of the Investment Funds Supermarket are over PLN 420 million. In April, mBank launched sales of life assurance combined with investment funds, starting a price revolution in the market as its insurance costs are comparatively much lower. Customers can acquire a policy with a fund over the internet, without the mediation of an insurance agent charging fees. mBank has recently launched an internet service eMakler which gives easy access to a wide range of equities, bonds, and securities on the Warsaw Stock Exchange.

In Q2 2005, MultiBank’s loans portfolio grew by nearly PLN 300 million; its loans committed total PLN 2.3 billion. The loans grew 70% year on year. MultiBank has 228 thousand customers (up 50% year on year) whose deposits total PLN 852 million (up 10% in Q2 2005). By mid-July, two years after the launch of the Savings Centre, MultiBank customers invested over PLN 100 million in investment funds. The partnership outlet network is growing dynamically: in June and July alone, MultiBank opened 6 outlets, growing its network to 57 outlets.
Private banking sales also grew dynamically in Q2 2005. A special investment programme combined with life assurance, developed in co-operation with Generali, was very popular with customers, who invested over PLN 100 million in the product as at the end of June 2005. BRE Bank in co-operation with Skarbiec TFI offers private banking customers two funds of funds as well as loans for the acquisition of listed stocks (over PLN 0.6 billion committed in Q2 2005).

Investment banking and Group subsidiariesThe investment banking business generated a pre-tax profit of PLN 83.7 million after 2Q 2005. The Bank consolidated its position on the non-Treasury debt market and moved to the first position among the arrangers of bank and corporate bond issues with maturity over 1 year. Thanks to growing sales of risk hedging instruments (IRS, CIRS, option strategies, fx forwards and futures), trading in financial instruments grew 43% in H1 2005.The strategic companies of the Group also generated very good profits after 2Q 2005. The profits of the Intermarket Bank Group’s largest companies (factors) totalled PLN 23.6 million gross. The sales of the Intermarket Group grew 15% up to EUR 1.8 billion. BRE Bank SA Securities (Dom Inwestycyjny BRE Banku) reported a net profit of nearly PLN 11 million, a two-fold growth. DI BRE is the leader of the option market (35% market share). In June, the company recorded a record-high share in trading in forwards and futures, taking the third market position (11%). The profits of BRE Leasing after 2Q2005 were up 34% year on year, totalling PLN 8.6 million gross. Executed leasing contracts grew 38% by value (up to PLN 976.5 million), including a 56% growth in leasing of movable goods (PLN 549.5 million) and a 47% growth in real estate leasing (PLN 427 million). The assets managed by the AM companies of the BRE Bank Group were PLN 4,407 million at the end of June 2005. Skarbiec TFI reported a PLN 82 million growth in fund assets in Q2 2005 (compared to Q1).

Core business resultsThe structure of the results after 2Q2005 indicates a strong year-on-year growth in core business performance. In particular, net interest income grew 45% and was PLN 327.2 million. A lower growth of net commission income (up 1%) was due to a new policy of calculation of the effective interest rate. Dividend income grew significantly by a factor of 5 (PLN 21.7 million compared to PLN 4.4 million in H1 2004).Net operating income was up 76% after 2Q2005 and reached PLN 196.7 million, compared to PLN 111.5 million in H1 2004.
Key indicatorsROE as at June 2005 was 21.7% gross (16.9% net). The Bank maintains its cost regime: the cost/income ratio fell to 69.8% and will drop below 60% by 2007. The Bank’s solvency ratio was at a safe 13.05% (11.07% for the Group). The non-performing loans ratio fell to 10.8%.The total assets grew significantly in H1 2005. The Group’s assets grew by PLN 2.2 billion compared to March 2005, to PLN 33.4 billion, mainly thanks to corporate deposits (up 36% year on year) and household deposits, as well as retail loans, mainly mortgage loans (PLN 770 million).

An optimistic outlookThe financial results of the BRE Bank Group after 2Q2005 were in excess of the targets. BRE Bank is on track to achieve its strategic goals, including a ca. PLN 290 million gross profit this year. The Bank’s good performance in H1 2005 was possible thanks to dynamic growth of its core business lines, in particular the expansion of sales in retail banking which, together with corporate banking, will be BRE Bank’s growth driver in the coming years. Dynamically implemented changes of the corporate banking business model contribute to the strong outlook for H2 2005. As a result, the Bank opens the second half of the year with optimism, and its gross profit of PLN 196.7 million after 2Q 2005 is a good start for the Bank’s stable growth in subsequent periods.