Mbank Sa

Good afternoon, ladies and gentlemen. Welcome to our conference where we will present the results of M-Bank Group in the second quarter of 2024. The speakers today are Mr. Cezary Kocink, acting CEO for the first time in this role. Mr. Pascal Roland, Chief Financial Officer, Mr. Marek Rosztyn, Chief Risk Officer, and Mr. Marcin Mazurek, Chief Economist. Cesare, over to you.

Good afternoon. I would like to start from a small introduction and some of my thoughts about the future of EnBank. And after that, I will just, of course, ask Marek and Pascal develop that in a more detailed way and give you all the figures. So, a few initial comments regarding our strategy. So, the current strategy is up to 2025. So, just after holidays, we'll start to develop a new strategy, which we are going to finish during the next year. We are set to our preparation to do that. But of course, before the strategy will be prepared, it will take some time. I would like to share with you some of my thoughts about the most important things for mBank in short and medium term. And from my perspective, I would like to address four points. And the first is equity. And the most important goal for myself is to strengthen our equity base. As you know, the past was highly influenced by provisions for Swiss franc. And due to that fact, we can say that majority of our results were consumed by these provisions. So due to that fact, for sure as a bank, we don't have the strongest position on the market, but now we try to do that. Probably you noticed that last week we informed the market that we changed our dividend policy for the current year and we are not going to pay any dividend this year. It will positively impact our equity ratio, like more or less 50 basic points. On top of that, we are going to use also all other instruments which are available on the market. At that moment, we exclude only issuing new shells, but the rest, including 81 and further securitization transactions are on our agenda. So we will be very concentrated on them to strengthen our equity position. Why we are doing that? Of course, we are doing that because we believe that two very difficult years are behind us. And now we are ready to get back on track as this bank was built by the organic growth. And we always used to progress in our market shares and volume faster than our competitors. Now we would like to continue this after these two years which were marked by huge Swiss franc provisions. Now we believe that we are in such a position that we can just fight for our market shares and even enlarge them to the level which will be much bigger than we used to have in the past. So this third thing is just we would like to continue the current performance because, as Pascal will tell you about the details, this is crucial for us and especially for the first point, because this quarter we were hit by two things, a legal provision for Swiss franc, but also we booked negative effect of long holidays. Despite that, we have the highs from many quarters, net results, and that is also the way how we would like to build our equity by retaining this year the whole, but even in the next year significant part of our earnings. And last but not least, what is very important for the bank, we would like to focus further on Swiss franc mortgage portfolio. Probably you know that up to now I was responsible for managing settlement program in MBank, and I would like to continue as the person responsible for that, because in my opinion, the most important thing for the future of MBank is to solve the Swiss franc problem. due to the negative impact, but also it created a huge problem for us for, let's say, good planning as the negative impact was always difficult to predict. And this is this four point which will constitute my agenda for short and the medium future before we as a whole management will manage to develop it and get acceptance from our supervisory board for our new strategy and after this short introduction i would like to pass to pascal about of course and After the presentation, together with Pascal and Marek, I will try to handle all your questions. Thank you very much. And Pascal, please.

Thanks a lot, Czarek, and also hello from my side. And we jump directly to slide seven, to our financial summary of Q2. And on this slide, I also will give you then the guidance for 2024 results. And as I said already by Czarek, Q2, has been a very good quarter for us despite high legal costs related to FX, mortgage loans, and despite the credit vacation impact. Let's start with our revenues. Group revenues declined marginally in Q2 as they were impacted by the credit vacations in the amount of 257 million Polish zloty. And a brief side note on the credit vacations. In our financial statement in Q1 2024, we provided the estimated cost related to the extension of the credit holidays in the amount of approximately 350 million proles. The currently recognized amount is well below the initial estimate due to a lower usage of this option by borrowers than we have had expected. Excluding this impact of credit holidays, revenues went up by 7.7% quarter on quarter. Strong NRI adjusted by Credit Holiday School 3.5%, and this result is supported by both products, loans and deposits. Also, our net fee and commission income increased, especially due to higher net result on payment cards. Furthermore, we have been benefiting from an extraordinary effect in other income. which is related to a recovery of a receivable guaranteed by KUKIN in connection with a final court judgment which was favorable for the bank and amounted to 164 million Polis Lotti. Forward-looking, we expect for our NRI to be slightly higher than 2023, which includes already the negative impact of the credit vacations. Our total net fee and commission income is supposed to be higher also than 2023, and here we expect a slight grow quarter of quarter as we have seen it now between Q1 and Q2. As a result, we are now aiming to beat 11 billion Polish Zloty total income in 2024, which is for us a historic mark. Moving to the total costs. The total cost of the group excluding compulsory contribution increased by 5.5% quarter on quarter. The cost increase was mainly driven by material costs reflecting higher activities in certain areas, but especially in marketing. As a result, we gain again an extraordinary cost-income ratio of 27%. And here, as I always say, you know, this should not be treated as the new normal because our long-term strategic target is below 40%. But for 2024, we will stay well below the strategic target due to high interest rate levels. Going to our cost of risk. In line with our early expectation, cost of risk increased in Q2, mainly in the corporate and investment banking segment, in which we reported net releases of LLP in Q1. Cost of risk of 58 basis points is well below our guidance for 2024, and due to this very favorable first half of the year, we guide for the full year below 70 basis points cost of risk. The cost of legal risk related to loans indexed to foreign currencies recognized in Q2 reached, as Jarek was saying it, 1.03 billion. And Marek will share details later. And as you know, due to the complexity and dependencies of this topic, it's not easy to provide guidance. But as of today, we expect for the second half of the year a lower impact than in the first half of the year. But it is expected to stay very significant. As a result of all the P&L line items, Embank's group net profit reached 422 million. And also Charik pointed that out, and I would like to bring it in perspective. If we exclude the credit holidays, if we exclude the FX impact, we have had the quarterly strongest net operating result in the history of the bank. The effective tax rate, which is every time a bit odd calculated under IAS 34, hereby is at 41.3% and is heavily influenced by barely deductible costs of our Swiss-Francois provisions. Let's move to the summary of the balance sheet on the next slide. Here, I would like to draw your attention just on one observation on our balance sheet. As indicated in our Q1 call, we expected to grow our asset side, which is visible in our gross loans to customers, by an increase of 4.1% quarter-on-quarter. Both segments are contributing to the growth, and I will go into details later. Normally, I also would draw your attention to the capital ratio development, but this I will now do on the next slide, which is new and has the aim to show all regulatory capital requirements at a glance. As you can see on this slide, both capital ratios, Tier 1 as well as the total capital ratio, are at comfortable levels. Our buffers above the KNF minimum requirements are higher than 4%. They are 4.6, 4.35. And now, very briefly, jumping into some details. Since the beginning of 2024, T1 capital increased by 126 million, or roughly 1% versus here in 2023, mainly due to the inclusion of 50% of the net profit generated in Q1. While T2 capital went down by a bit more than 18%, mainly due to amortization and ex-revaluation of Swiss rank debt. The total risk exposure, as you can see left bottom of the slide, increased. The year-to-date increase was mainly driven by an increase of credit RWA, mainly due to our growth of customer business and the normalization of our securitization transactions. Also, we have seen increased operational risk RWA due to higher income levels. And now this is very important, and Charik pointed it out. These numbers do not yet include the change of the dividend strategy, though also we do not have yet in this numbers, our net profit of this quarter included. Furthermore, we have conducted already, as you see on the right hand bottom, an extension of one of our existing secularization transactions in June, and we plan to close another secularization transaction in the coming months. These actions will support our capital position in the second half of the year. Our expectation for Q3 tier one ratio will be broadly similar to current levels and a bit lower towards the year end. And why is that the case? And I would like to bring now all effects into order. In the second half of the year, we expect higher RWA's due to the result of our business growth, which is the most important one. The second thing which will hit us in Q3 is an implementation of a regulatory definition of new definition of default. And Mark will elaborate a bit later on. And lastly, our amortization of our secularizations, which we have executed in 2022, will follow up. These three things are largely offset by the dividend retention and the new secularization plan for the second half of the year. So I repeat, we expect Tier 1 buffers above regulatory requirements to exceed 4%, both to the end of Q3 and to the end of Q4. And this is well in line with our strategic target of having buffers of at least 2.5% on the Tier 1 ratio. As you also can see on this slide on the right hand top of the slide here, we meet MRL requirements with a ratio of 22.8%. And despite that we have very comfortable buffer, We are aiming for an annual issuance of the second half of the year in a benchmark format. And with this, I'm now handing over to Marek for the FX mortgage details.

OK, thank you, Pascal. So as you can see on the following slide, quarter by quarter, we are increasing the protection against legal risk of Swiss francs portfolio, Q2. in 2020 brought us another over a billion write-off, which increased the coverage of the portfolio to 130% with respect to the active portfolio. We have heard on the balance sheet at the end of June 8.4 billion zloty of legal provisions created for the FX. FX loans and in total the cumulative value of foreign currency related legal provisions created by mBank since the beginning of Swiss franc saga amounted to almost 14.6 billion zloty. The difference between 14.6 and 8.4 is the realized loss due to the realization of the final court verdicts and the settlements that we have concluded with the clients. On the top right-hand side, you can see the evolution of the active portfolio of the Swiss franc cases. So starting with 85,500 disbursed loans originally, we are down to only 23,400 active contracts, of which 74% are by now in court. And as we said, they are more than covered by the existing provisions. We are addressing the issue with ongoing settlements. Can we please move to the next slide? As you can see on the slide number 11, in Q2 of 24, we have concluded another 1,850 settlements, so it's roughly the same number as in Q1. The total number of settlements was going up to over 17,000. We are happy to report that it was another quarter where the number of incoming cases was falling down. It's good to remark that we have had a larger number of settlements in this quarter than the number of incoming court cases. And on top of that, the total number of outstanding court cases marginally decreased compared to the previous reporting period. That was also the first time since the beginning, basically, of the Swiss rank saga that the number of active court cases was actually reducing. That's context to you.

OK, then on the next slide, exactly. Very briefly, I mean, the main observation is that the core business of the group with an ROE of 40% and a gross profit of 2.7 billion is stronger than our FX mortgage-related burden. And this is especially visible if you look at the black bar and bank group with an ROE of close to 10%. Let's move to slide 14, our loan development. We see the expected rebound on our loan portfolio visible in both corporate and the retail business. And I would like to bring that now a bit in perspective. I start with corporate clients. Loans and advances to corporate clients increased by 7.9% quarter-on-quarter. The increase was in large parts driven by reverse repo business. The core corporate loans went up by 1.8% quarter-on-quarter. And the loan margin, as you know, we're very much focusing on our margins, remained stable in Q2. and was significantly higher than a year ago. Forward-looking, we expect to grow fairly over the market while keeping our margins at high levels. Moving to the retail segment, the upward trend in loans to individual clients initiated in Q1 strengthened in Q2. Loans to individual clients went up by 1.2% quote-on-quote. Gross loans to retail customers, excluding non-core portfolio and excluding the negative impact of the credit holidays, increased by 2.5%. and the increase was pulled by both products, mortgage loans and non-mortgage loans. Important for us as well here, the margin developments, why we are fairly stable margin in our retail segment. Going forward, we expect growth single digit, so within the market for this year, but we are aiming for more. On slide 15 with our new lending business, I will focus just on the mortgage loan products while the other trends are already covered indirectly with my messages. Left top of this slide shows a slight drop quarter on quarter in mortgage loan production. And here I would like to highlight that the sales of mortgage loans in Q1 were largely driven by the disbursement from applications for the 2% safe mortgage loan program governed by the government. And between September 2023 and June 2024, we sold in this program 2.3 billion of mortgage loans. So we managed to capture roughly 20% of the addressable market. In Q2, M-Bank share new mortgage lending in Poland surged to 12.6% on our introduction of a bit more attractive pricing. So we compensated the runoff of this subsidized program with our core franchise. For us, it is important that we use our capital, especially to our own clients, first of all. And this is also visible in our statistics, as around 80% of the sales are contributed to our existing customer base. Now let's go from loans to deposits. Total deposits increased by 2.4% quarter-on-quarter, and the quarter-on-quarter increase was driven predominantly by retail deposits, thanks to inflow of funds on current and saving accounts. which is important to note why the more expensive term deposits are largely stable. Here we follow our strategy to optimize total income and therefore we are not too aggressive in pricing deposits. Our margin on deposits remains stable while we attracted inflows. At the end of Q2, current accounts represented 79% of our group's deposit, which confirms that we are really a premier transactional bank. In the next quarters, a single-digit deposit growth is expected to driven mainly by the retail deposits supported by growing customer base and increased wages and salaries of our clients. The total income slide I did cover already in our P&L view and therefore let's jump directly to slide 18 and we look into the cost developments. Starting with the normalized cost income ratio of the group visible in purple right hand top of the page. The cost-income ratio, adjusted for a few things, so annual contribution for the resolution fund we adjusted, we adjusted the credit vacations, and we adjusted also the positive one-off of KUKA, reached 27%. And this shows how effective our business is operating. Derived from this efficiency, now looking to the cost drivers. The operating cost adjusted for the VFG contribution increased quarter by quarter 5.5%. And we have two drivers. The first driver is in green, staff-related expenses. They rose 2.3% quarter-on-quarter, especially due to increased wages and salaries driven by higher variable part of remuneration and higher employments. And the second driver in blue, material costs increased by 16%. And this quarter-on-quarter increase was especially residing for marketing costs, reflecting more or less our increased activity in the area with TV campaigns And that is the most I would say we currently have on the cost side. Our outlook based on our current cost income ratio expects further growth of our operating costs in the second half of the year. And important to notice, it's not just inflationary driven. We also have new sales initiatives. As you know, we have the marketplace with Morella. Also, we have a mortgage loan sales via mobile app. So we invest in sales initiatives. And also we face in the second half regulatory costs with respect, for instance, of DORA, which will be funded. The group's cost income ratio is expected to remain well below our strategic midterm target of 40%. And with this, I'm handing over to Malik for the cost of risk.

OK. Thanks, Pascal. So as you can see, year on year, there is a decrease in the lending permit portfolio. There is a quarterly increase of cost of risk Q1 to Q2, but it happens after exceptionally low cost of risk of Q1. That was on the back of one of the factors in the corporate portfolio. Q2 brings a normalization, so to say, of cost of risk in both segments. We are coming after a series of relatively high write-offs in retail driven by the historical developments, now we see that cost of risk in retail as well as in corporate normalized, that is also the reason of our lower guidance for year-end results. We are guiding around 60 basis points for the overall cost of risk of 2024. that's going to be significantly better than the cost of risk achieved in the previous years and previous quarters. The second quarter of 2024 is to an extent impacted as well by a number of, in particular, heavy risk valuation adjustments, thanks to the beneficial macro changes. which is unlikely to continue in Q3 and Q4. That's the reason of the higher guidance for the following following quarters. Can we go to the next slide, please? As far as the loan portfolio quality is concerned, there is a slight uptick in the NPLs, in particular on the corporate segment. This is driven by older corporate loans. that were classified to not performing the reasons were specific for each of those exposures name specific not anything related to the to the industries overall we see quite a good environment supporting the corporate and retail credit quality so we do not expect this to be uh beginning of a deterioration trend rather we attribute it to the one of one of factors on on the next slide as it comes to Sorry, we missed the one that was typically there on the capital and liquidity. As Pascal said, capital and liquidity remains excellent with significant buffers about the regulatory minima, and this one brings a marching far with respect to the macro-assoc. Thank you, Marek.

So fast forward to the economy. So we are still operating in moderate growth environment. We have been very clear and directional in guidance here. We are guiding towards three and a half GDP growth this year and this forecast is not changed. GDP growth is based solely on private consumption, but still with the scope for improvement of households balance sheet, this consumption is going to improve in the following quarters. The main laggard in economic growth is construction activity that awaits the new round of EU financing. We do not see any dangerous processes on labour markets. The demand for labour is lower than it used to be, but it partially may have been reflecting automation and robotization of the Polish economy as the labor become less cheap than capital. Still, unemployment rate steady. Inflation has reached a trap in March. We were guiding that it will be in March and afterwards inflation is supposed to reaccelerate before it settles down close to MVP target in 2026. In such circumstances, NBP is not going to cut rates this year. They may start thinking about cutting rates in the first quarter of 2025 and then do a first rate cut in the second quarter of 2025. Turning to monetary aggregates, everything is evolving as expected. So slowly but surely, the positive growth in corporate sector is slowing, but it's still positive. We are seeing an upswing in corporate financing, but still this is very moderate. As far as household loans and deposits are concerned, we see still a high year-on-year growth of household deposits, but the momentum seems to be fading and it poses, I would say, a good starting point for a further revival of consumption. Also, credit activity in non-mortgage loans is slowly arriving as well. So it's also a good prospect for consumption going forward. In terms of interest rates, Polish bonds are stable. Risk-wise, asset swaps are tight. Recent global developments sent bond yields lower. As I am speaking, 10-year yield is around 5.4%. So this makes a strong improvement from the last quarter. And last but not least, Exchange rate is stable or slightly appreciating. We think that the Zloty may be appreciating forwards towards 420. The main reason behind this is rather strict monetary policy compared to other central banks and also good sentiment for the Polish currency. As far as fundamentals are concerned, these are fundamentals, so they are not changing quarter to quarter. Still, they are quite good. Thank you.

Thank you, Martin. Now let's look at the questions that we received. So the first one, what is the approximate level of long-term funding ratio?

Yeah, I'm taking this question. I mean, first of all, it needs to be said that mBank, we are one of the most frequent issuer in the market. And therefore, we are also in a very strong position to fulfill these requirements. And we have currently a very strong ratio, which is beyond 50%. And I just want to remind everyone there was a statistic among the top eight banks by end of 2023, and we have been the one with the highest long-term funding ratio. So it's currently not a concern of us.

Thank you. The second one, what is the share of fixed rate mortgage loans as percent of the total mortgage volume?

So the fixed share mortgage loans currently on our mortgage loan book in the Polar Slot E is a bit more than 30% of our current books.

But descending from a new sales, it's more than 50%, so it's gradually moving in this direction.

Exactly. Doesn't bank meet SOT and II requirement?

If not, how far is the bank from meeting it?

I mean, the requirements we watched very closely, so also in the last months, and we are meeting those thresholds comfortably. So there is also the same as with the long-term funding ratio, nothing currently of a concern for us.

Should we consider 50% dividend payout from 2025 earnings?

Yeah, so also from my side, so we have changed the dividend assumption for 2024, as said already, to strengthen our capital in order to capture growth. And for 2025 onwards, we have not changed our aim to pay 50% of our dividend. And please believe us, we are coming in the morning into this bank in order also to make our shareholders happy. And therefore, we are aiming from 2024 also to pay dividends on our dividend strategy.

Has mBank Capital position been constrained to mBank strategy so far?

Yes, that I tried to elaborate in this introduction that last two years were suffering from um and not enough uh risk-weighted assets which could be utilized to our long growth and now we will we believe that it is behind us and we are focusing on the growth of our portfolio thank you are you planning to book more swiss fund provisions this year

I guess I have covered already so our view and our message today and I make this disclaimer this is every time where we I would say complex topic to guide the next quarters is that we expect for the next half of the year second half of this year to have a lower impact than what we have seen in the first half but we expect that this stays significant for us.

The next one I think we also covered but let's Again, say it when the new strategy will be published.

You know, for sure in 2025, because 2025 is covered by our current strategy. At this moment, as we will start working on that from September, It's difficult to give you a precise date, but probably it will be accepted by the supervisory board on June or maybe September, but September is the latest one.

What are your expectations for the lending growth in 2024-25?

I will take this one. As part of our presentation, we are providing the outlook on the market growth. So it's between 4.8% and 5.8% in 2025 by different segments. And as Tarek said in his opening speech, our ambition for the rest of 2024 and 2025 is to increase our market shares So we consider those figures that you see here, that is the expectation of Polish banking sector growth as kind of the floor for our ambition. So it's not going to be lower than what you see here.

Thank you, Marek. Could you elaborate more on the KUKA one of booked in this quarter?

OK, so that's on me again. the cookies are positive one of in our other operating income in turn of 164 million slotted that we have recovered from receivables due to a favorable final court judgment in the case that we have had with with cooker on the case that was back from 2008.

Do you consider updating 2025 guidance outlook?

From our perspective, this is a bit early to tell, but in general, while we now breached this 11 billion of Polar Slotly income level, that is our next challenge to also compete with this level, despite a lower interest rate environment, which we are expecting to have in 2025. Thank you.

What is the sensitivity of NII to 100 bps drop in market interest rates?

On this data NII sensitivity, I just want also to put out the disclaimer, because it's hard to compare between the market participants, while it is heavily dependent on customer behavior. But on our side, the sensitivity of 100 basis point rate cut is 665 million Polish Zloty, and of which, while we are operating in three currencies, 60% is related to the total stock. It's roughly 400. And if you compare that to our total NRI contribution, we are talking about less than 10%.

Thank you.

Cost of risk guidance of below 70 BIPs would imply a significant growth in the second half. What is the main driver here?

I believe I have answered to an extent on that already. I would say the base in the first half of 2024 is extraordinarily low and we expect that to normalize in the second half.

What has caused the increase in risk-weighted assets? Any extraordinary factors like in Q1? What would have been the CET1 ratio if including H1 net profit had been included?

So the first half of that question was answered by Pascal already.

Yeah. I mean, there is extraordinary nothing. If we expect to RWA growth, we see our businesses growing, plus then also the operational risk RWA's, they are also growing. And the third thing which we currently see on a steady level, but we are working with new securitization against it, is that we see by running off of the replenishment period of our securitizations that we have then higher RWAs and this will be counteracted by new securitizations. And I bring that now into perspective because I really try to give you an expectation for the second half of the year, Q3 and Q4. So we will have a growing RWA due to the fact that we are aiming for business growth. We will have further impact on regulatory topics like the new definition of default, and Marek will elaborate in a second on that. And thirdly, that our secularizations will run off. And why we guided that this will have not a major impact on our current capital stack, our minimum requirements versus um the knf requirements is because if we then include our net profit um in our capital plus if we include the two secretizations so the one we just closed and the one we expected to close in a few months this would be then counteracting those two events thank you Last quarter, management declared that mBank's NII reached its high in this rate cycle, yet the second quarter... Yeah, I just need to say, and I also said it in bilateral meetings when we talked with you about our performances, I'm every time surprised how mBank is capable of managing the deposit stack. And there is definitely a technical advantage versus our competitors in it. And I still would say it has reached its peak, even though that I was wrong for a few quarters, because we were really anchoring currently on a very high level.

What do you aim for?

such high values for long-term funding ratio at this stage? How many BIPs on NIM costs this expensive policy?

Currently, this is not a concern of us because currently we're meeting this long-term funding ratio. Therefore, there will be not a short-term impact on any of our profitability levels.

Should the cost growth base remain at double digit level in 2024?

Yeah, so we guided already by end of the year also in the last quarters and I still repeated it today that we expect the operational costs grow similar between 2023 and 2024. So that means double digit of our operational costs.

And what is the level of customer participation assumed in the calculation of credit holidays?

On the credit holidays, I mean, we adjusted this assumption based on the info we have seen. And you have that in our financial statement on slide 18, on page 18. And currently, according to our assumptions, customer whose loan represents 87.9% of the value of the eligible portfolio will or already have in some parts applied. And they will apply on an average of 3.4 months. And that is the core assumption how we come up to this roughly 260 million Polish zloty on the credit vacations.

I think the last question, what is the absolute ceiling for Swiss franc mortgage book coverage? How much more it would cost to cover all existing and repaid loans?

It's a very good question and I believe that it's actually quite difficult to precisely answer on that because also we see that there are some still ongoing changes in the jurisprudence on that. So it's very difficult to give the a final number that is the absolute ceiling on that thing.

Yeah, but you see on the KPI itself, and that is something we point out, we try to be here on the conservative side. That means we are, in terms of the KPI, the coverage ratio leading among the banks with half severe portfolios. And at the same point in time, you also see us guiding that it is not yet over. But while we're guiding, it is less impactful if you compare it to our core business. Obviously, the topic is step by step, not completely away, but it is less harmful for us. And that also gave us the confidence, as we pointed it out and Charlie Kotchick repeated it today in his vision for the bank. that we feel comfortable now to also capture more market share by growing our asset books. And this should, I would say, round up the question towards the Swiss Franc TV provisions.

Thank you. I believe we covered most of the questions. If not, we will cover them offline. Thank you very much for your attention, for your questions. Thank you guys for for your presentation and see you in October.

Thank you very much and see you soon.