Mbank Sa

Hello and welcome to our conference presenting the results of mBank Group in the third quarter of 2024. The speakers today are Mr. Pascal Ruland, Chief Financial Officer, Mr. Marek Lusztyn, Chief Risk Officer and Arkadiusz Walcerowski, economist from our macro team. Please use the chat to ask your questions. We will start the Q&A session after the presentation. We can start.

Thank you very much. Welcome also from my side to our Q3 call. And for us, Q3 stands for positive records in our business model. And also we took another important step forward to close our SwissRank legacy topic. But now we start with our highlights on slide three. And on this slide, I would like to outline three topics. First and foremost, total quarterly revenues at record level exceeding for the first time 3 billion of Polish Zloty, so more than 1 billion total income per month. This leads to an ROE higher than 40% in our core bank, and that is really something we are very, very proud of. And second, we see an acceleration in our Swiss franc settlement program. coupled with declining numbers of new and pending Swiss-rank-related court cases, which is a good proof that we are heading in the right direction. Third, we are back in a growing mode. Loan growth is visible 5% year-on-year, and extraordinary is our historic mortgage loan sales in this quarter, which exceeded 3.3 billion. Before we go into the details of the financial result, I would like to briefly point out two strategic topics. So let's stop for the first one on slide five. Even if this slide is kind of self-explanatory, while we're developing every time our offers, please turn your attention to the middle part in orange. With our platform, we are now reaching 5,000 clients, but this is still in the testing and learning phase. Our teams are working hard to launch at full scale before Christmas, so with 1.5 million products, and almost every one of our clients will have access and the opportunity to shop. This big launch will be supported by campaigns and we expect that this service adds value to our customers. But we also know that we need to listen carefully to implement the feedback step by step to improve our platform. The second strategic topic I would like to highlight is on slide seven. Please focus on our personal financial management functionalities, short PFM, right hand top. We are constantly expanding those functions. And apart from standards like overview of expenses and receipts, we provide our clients with functionalities that support them to take care of their financial health. And that means building greater awareness of their finances, but also giving them the ability to plan their future. In Q3, we introduced a few important improvements, also one in the area of retirement planning, which was immediately welcomed by our customers. As a result of several efforts to make our tool more useful, we've recognized the jump of number of users to nearly 1.9 million. And on this journey to provide knowledge and visibility regarding our customers' financial situation, we will continue. And now let's jump into the financials on slide eight. As usual on this slide, I also will provide you with an update of our guidance for Q4, and I will provide a high-level outlook for 2025. Let's start with our total income. As said already in Q3, we reported the highest total income in history. It increased by 9% quarter on quarter. But you also can see that a major driver between the two quarters has been the impact of credit vacations. Less demand than expected have resulted in a net release in Q3. Excluding this impact of credit holidays, And also cleaning our one-off in Q2, which was KUKE, 164 million, our revenues still went up quarter by quarter by 1.9%. NRI adjusted for discredit vacations grew 1.6% quarter on quarter. And at the same point in time, we've seen a slight decrease of our net interest margin from 4.4 to 4.3, but without any specific driver rather than broadly. Also, our net fee and commission income increased quarter on quarter, especially due to higher commissions from bank accounts and net result on payment cards. Other income in Q3 was also higher than Q2 if you exclude this KUKA one-off, and it was mainly supported by the increase of net trading. Forward-looking, in Q4, we expect for our NRI, excluding the impact of credit holidays, to be a bit lower than the level generated in Q3. This means for the full year, we expect to be higher than a year ago, even taking into account the negative impact of the credit vacation. Our total net fee and commission income in 2024 is supposed to be higher than 2023. In Q4, our net fee and commission income is expected to be slightly weaker, but this has a seasonal effect. As a result of all of it, we expect total income in 2024 exceeds noticeably 11 billion Polish zloty and will be closer to 12 billion Polish zloty, which is a historic mark for us. For 2025, we expect a slight decrease of NRI, driven mainly by expected interest rate cuts, and our net fee and commission income is expected to grow further steadily, based on our new products, fee tables, and also the expected higher tensionality of our clients. Overall, we expect therefore revenues to be slightly lower in 2025 than 2024, but well above 11 billion Polish zloty. Moving now to the total costs. The total cost of the group increased by 4.1% quarter-on-quarter. The cost increase was driven by material costs, reflecting mostly higher marketing and consultancy costs. In Q3, we reported an again extraordinary cost-income ratio of below 26%, And in Q4, this ratio is likely to increase. But for 2024 in general, we expect to remain below 30% cost-income ratio due to our persisting high interest rate environment we are working currently. For 2025, we expect due to new initiatives, but also inflation-related pressure, a low double-digit cost growth. And the cost income ratio will increase, therefore, but will stay well below our below 40% target. The cost of risk in Q3 were 62 basis points and is below our strategic target, and Mark will elaborate on that fact later on. In Q4, we expect an increase of the cost of risk, partly due to seasonality of corporate write-offs. But for the full year, we guide around 60 basis points cost of risk and maintain mid-term our view cost of risk of 80 basis points. Coming to the Swiss franc related risk, we increased our legal provision by 971 million. And as guided, this is significant. but lower than in the previous two quarters, and also Mark will explain the details in a few minutes. Due to the complexity and various dependencies, you know it's every time hard to guide, but we do our best here. So from today's perspective, we expect Q4 between a similar or slightly lower level than Q3. Therefore, it will stay significant. But based on our current estimation of the remaining risk, we expect every following quarter supposed to be lower than the previous one, while we are approaching step by step the end of a long story. As a result of all P&L items, you see the net profit reached 573 million, which translates into an ROE of 14.9%. If we exclude the impact of the FX legal provision, we have generated the strongest quarterly net operating result in the history of MBank. Comment on the tax rate. This, we calculate in accordance with IAS 34, stood at 41.8% and was, as in the last quarters, heavily influenced by barely deductible costs of our legal provisions. And now let's move to the balance sheet on the next slide. End of September, total assets were higher by 3.6%. Cost loans to customers increased 2% quarter on quarter, while customer deposits went up by 3.2%. Both business segments contributed to these increases, and I will go into details later on. And now let's go into the capital ratio development on the next slide. Both capital ratios, Tier 1 and TCR, remain at comfortable levels with the buffers, and you see it highlighted in gray, above the minimum KNF requirements at 4.76 percentage points and 4.31 percentage points. Now, very briefly, going into the development left top of the slide. Since the beginning of 2024, Tier 1 capital increased by 5.6% versus end of 2023. And this is mainly due to the inclusion of our net profit of the first half. Our Tier 2 capital went down, as you can see, mainly due to regulatory amortization and FX devaluation of our Tier 2 instruments. Consequently, the own funds of the group increased by 1.4% year to date. The total exposure, risk exposure, as you can see left bottom of the slide, increased. A quarter and quarter increase in RWEA was fueled by business development and the amortization of securitization transactions. Forward looking into Q4, our tier one ratio is expected to decrease due to three factors. The first one, We expect a negative impact from model and regulatory changes in RWEA. Here we expect 6 billion of RWEA increase as a result of a final regulatory decision on PD, CCF and LGD. And this is related to our portfolio subject to AIR-B model. Further business growth will also fool RWEA. And last but not least, RWEA amortization of our securitizations executed in 2022 will continue. Those three items will be partly offset by a new securitization transaction based on corporate loans, with an estimated impact on RWA reduction by over 2.5 billion RWAs, and the inclusion of our profit from this quarter. To sum it up, the surplus over the KNF requirement will be well above our strategic target of year-end buffer of at least 2.5% on the Tier 1 ratio. And now looking beyond 2024, there are two regulatory driven changes which I would like to guide while those are expected to be significant. First, our RWA is expected to increase due to CRR implementation by around 6%. And please use this as a rough guidance as key technical standards are at the start stage and the final impact is still uncertain. The second topic I would like to mention is still in decision process with the banking authorities and has a material change on the RWA to be expected and is known as GDD. Here, the timing and impact will depend on the decisions of the banking authorities. So this might be even later than 2025. But having said that, even if it's in 2025, we expect to stay above our strategic target of at least 2.5% on tier one ratio by end of 2025. And now one last sentence on the capital ratio. It is our aim, while the Swiss franc-related risk step-by-step is reduced, that we are operating a capital ratio which is closer to our strategic target, while we would like to put our capital to work. Moving to the right-hand top of the slide, as you can see, also we meet comfortable AMR requirements with a ratio of 23.3%. And this is also due to our latest transaction, which I would like to comment briefly on the next slide. Slide 11 shows the successfully launched 500 million senior preferred green bond. The transaction for us was an overwhelming success. We were almost six times oversubscribed with more than 200 investors submitting interest for the bond in a volume close to 3 billion euro. This is the best feedback we can have and a very good basis for the following slides. We're excited to tell you about an upcoming capital markets innovation from us, and we are working on finalizing our additional tier one transaction. This will be not just the first one for us as mBank, but also the first broadly distributed AT1 for the Polish market. And as most of you likely know, it's just possible since end of last year because the law was passed. We are doing this transaction in order to strengthen the capital base and position us for further growth in volumes and market shares. We have corporate authorization to do a transaction up to 1.5 billion Polish zloty and the transaction is being done in Polish zloty in order to support the development of the Polish capital markets, but also we minimize IFRS P&L volatility if we do it in the local currency. We expect strong participation in particular from our colleagues in the Polish capital markets community. And we appreciate that. While this transaction will open up a new tool for the banking sector to support the economic growth of this country, our book building will close on the 15th of November. And with this good news, I'm now handing over to Marek in our FX mortgage details.

Thank you, Pascal. So, as you can see on the following slide, it was yet another quarter with strong provisioning for Swiss franc mortgages. We were also very active with respect to the continuation of the settlements program with the clients. Overall, we have concluded by the end of September 19,500 settlements. but we carry on even faster in October. And I'm happy to say that we are not slowing down. We have concluded over 1,100 settlements in the month of October standalone. As you can see on the slide champion, Overall, cumulative value of the ethics-related legal risk that we have created so far is almost 16 billion zloty, out of which 7.9 remains on the balance sheet, and the other half has been used to complete the verdicts that we have received from the courts, as well as to conclude the settlements. Overall, the value of the Swiss bank mortgage loans stood at less than 1% of the total loan portfolio. We see Slowing number of new tort cases entering mBank. It is down 46% year-on-year. We also do not see significant increase of the lawsuits related to the repaid contracts. It's also good to highlight that this was the first quarter in which the number of actual settlements concluded was larger than the number of contracts still open in COTS. And since we are coming to an end of the active population, As Pascal already alluded to earlier, we expect that following quarters provisions will be gradually smaller and smaller. And this brings us to the following slide, which you are very much used to, which is the breakdown of the core business and non-core, showing how strong performance in core business we have demonstrated the first nine months of 2024, and Pascal, over to you.

Yeah, let's move to slide 17, our loan development. We see the rebound of our loan portfolio is now turning into constant growth, 2% quarter-in-quarter, visible in both business lines. And let me first focus on retail right-hand bottom of the slides. The upward trend in loan to individual clients initiated in Q1, as you see, strengthened in Q3. Gross loans to mutual clients increased by 2.3 billion or 3.4% quarter-on-quarter. If you would exclude the non-core business or the Swiss franc, we have increased by 4% quarter-on-quarter and 7% year-on-year. The mortgage loans increased here 4.4%, while the non-mortgage loans grew by 3.2%. The margin on the retail loans in Q3 declined slightly, but was higher, visibly higher than a year ago. Moving to corporates, right top. Loans and advantages to corporate clients increased by 0.4% quarter on quarter. The core corporate loans, so if you exclude reverse repo buy and sell transactions, went up by 1.9% quarter on quarter and were higher than a year ago by 7.2%. And as guided before, we are growing over the market. Loans to enterprises in the sector grew by 3.4% year on year in September. And if you compare that to mBank, we have grown 8.1%. The loan margin in the corporate investment banking segment remains stable, which shows that we can currently grow without making compromises on our profitability levels. Going forward, we are aiming to gain market shares with single-digit increases in the loan portfolio. Especially, we aim for higher growth than the market in our corporate books. Slide 18 provides our new sales, and I will explain just very extraordinary developments, starting with our sales of mortgage loans left top of the slide, which exceeded 3.3 billion and is a historic mark for us. This shows that the runoff of the subsidized mortgage loan process was more than offset by our core franchise, thanks to more attractive pricing and increased efforts of our sales forces. We sold the mortgage loans primarily to our own customers while we have seen high demand. mBank share and the new mortgage loan production breached 12% after nine months and was above roughly 7% if you take the corresponding period last year. This shows that we are back in a growing mode whenever it makes sense, and especially it makes sense for us, for our own customers. Going to corporate loans, left bottom. The volume decreased by 4% quarter on quarter due to falling structured finance loans after excellent sales in the previous two quarters. In nine months of 2024, the volume of new corporate loan agreements increased by 6.9 billion or 32%. So it's slightly quarter to quarter decrease in sales of quoted loans is for us not really disappointing as we have already a very high off balance sheet exposure and we are waiting for the clients to draw the loans. And finally, at the right bottom of the slide, a quarterly amount of new leasing contracts in Q3 declined sharply. This decline is related to smaller amounts of big-ticket business generated in Q3 and also a general slowdown in the leasing market. Especially the heavy transport market, which can be measured by the number of new registrations, which is a barometer of the economic situation, has shrunk. And now let's go from loans briefly to deposits on the next slide. Total deposits increased by 3.2% quarter-on-quarter. The quarter-on-quarter increase was driven by inflow of funds of individuals and corporate customers. And at the end of Q3, you see our current accounts represent 80% of the group's deposit base, which confirms that we are a premier transactional bank. The loan-off-deposit ratio is still low, 64%. In the next quarters, a single-digit deposit growth will be driven mainly by retail deposits, supported by growing customer base and increased wages and salaries. The corporate deposit I intended to go at a pace similar to the market, which we currently forecast between 3 and 4%. While I already elaborated the total income slide in our other slide, I skip it and let's go to the cost slide and our cost income ratio. You see that on the right hand top in purple that our adjusted cost income ratio of 28% shows how effective our business is operating. And if you look into the quarter, the operating costs increased by 4.1%. And within the quarter, we just have one major driver in blue material costs. They increased 9.5%. And the increase was especially driven, as I already said, by higher marketing costs and also higher consulting costs. Our outlook based on this 28% provides a further growth of operating costs to Q4. And the growth is not just inflationary related. We also have new sales initiatives and regulatory costs which will be funded. And I repeat myself on the guidance of 2024. The cost income ratio is expected to remain below 30% in 2024. For 2025, we expect a further increase of the cost base, driven mainly by growing staff costs, and we expect the growth pace excluding BFG costs to be similar to 2024. The BFG costs supposed to be higher year-on-year, why we consider 2024 as beneficial. For 2025, we expect the cost income ratio, which will stay below our strategic target of 40%. And with this good note, I'm handing over to Mark.

Thank you, Pascal. So, as we can see on slide 22, credit provisioning in Q3 at a normalized level, well below the annual guidance. As Pascal said, we expect end of 2024 to be broadly in the area of 60 basis points for the mid-term. We continue to guide around 80 basis points. And that low level of provisioning was supported by good assets quality and decreasing NPL ratio, which is displayed on the following slide. The NPL ratio was considerably below the European Banking Authority guidelines, with the threshold is below 5%. We have seen improvements both on the corporate portfolio and on the retail portfolio side with coverages unchanged quarter to quarter. And with this, I'm happy to hand over to our macroeconomists with a brief outlook on the macro situation and where do we see economy and rates going forward.

Thank you, Marek. So I will start with the overall view about the Polish economy. Recently, we've seen consumer sentiment stopped improving anymore. And as optimism regarding falling inflation faded, customers have recently rebuilt their savings over the course of the past months. And now we think that they are less likely to consume significantly as real wages won't accelerate anymore. On that account, GDP growth is likely to average at around 3% in 2024 and around 4% in 2025. Investment growth is likely to be the major contribution to GDP growth over 2025. as we expect EU-led projects to accelerate significantly and also some military spending to contribute positively. Inflation is likely to stay elevated over the course of the rest of this year and to pick up to some extent in Q1 2025. And then we expect a gradual decrease toward the NPP's target due to slower nominal wage growth and costs being more and more absorbed by profit margins being inflated over the past two years in the Polish corporate sector. Overall, in that environment, we expect NPP rates to be cut by cumulatively 175 basis points in 2025. Moving to the next slide, both corporate and household loans are slowly but surely improving. It will continue to do so in 2025 in the face of lower interest rates and rebounding investments, as I said previously. Markets, bond yields were little change so far this year until October, when we saw some substantial increase, which we believe was predominantly driven by core market behavior. and to less extent by domestic effects. We think that credit risk measures remain quite stable and we don't expect those measures to increase significantly. In terms of the FX market, we think we also saw some decrease in the case of the Polish zloty against the euro. And the major reason was weaker US dollar, which has been, sorry, stronger US dollar, which has been gathering pace again against basically each currency. Moving forward, we think that the European land may stay elevated at around 4.4% over 2025. And the major reason is also strong US dollar due to the fact that the divergence in productivity growth between the US economy and Eurozone simply favours weaker weaker euro. And the next slide is the fundamental view of the Polish economy, which looks uninterruptedly robust with real GDP growth outperforming its peers. labor cost competitive and a pool of people who can be motivated to who can be mobilized to to enter the labor market and thereby is some pressure on wage growth going forward judging from these factors we believe that poland will be a beneficiary of nearshoring trends in the in the years to come and that's all from me thank you

Thank you very much, Arek. So now we are going into the Q&A session. So far we received only three questions, so please add your questions to the chat. The first question is from Jarek Szortyka. Will mBank decrease interest on deposits if the central bank stops paying interest on mandatory reserves?

I'm taking the question. So first of all, if there is a change in the mandatory reserve, I would say interest rates towards the banking sector. In general, this has then a drag down of the profitability of the banking sector, but there is no directly pass through idea, which is automatic towards the deposits pricing we would then get because there are more factors than the minimum reserve taking into account. So I would say there is no direct translation. But for the banking sector in general, it would then lay on the profitability.

Thank you, Pascal. Another question. Given many regulatory changes in the risk-weighted assets composition you just explained and meet to high single-digit organic growth, where do you see the risk-weighted assets at the end of 2025 and what would be your comfortable CET1 and Tier 1 ratio going forward post-81 issue?

Yeah, I'm also taking this question. I mean, I really try to guide as best as possible on the regulatory front because there's, with CRR and GDD, two things from our perspective which are changing the RWA landscape. But at the same point in time, what I also announced, and I just repeat myself, we have a strategic target of the tier one of at least 2.5% above the KNF minima. And that is also something we maintain also after especially our 81 transaction. And this includes that we are aiming for growth.

Another question, what drove the increase in deposit costs this quarter?

I'm also taking that. I mean, deposit cost is a very complex environment, but in general, what drove this time and therefore also it was laying on our net interest margin was more in the corporate sector that we've seen in the term deposit side that we needed to be more competitive. And that was one of the drivers.

Yes. Do you consider issuing new mid-term strategic KPIs like your peers as some of current ones for 2025 appear undemanding since Quarters Akshi?

Can you read it out once more, please? Yes. Thank you.

Do you consider issuing new mid-term strategic KPIs like your peers as some of current ones for 2025 appear undemanding

Ah, we are not issuing, we are not planning to issue now new KPIs for 2025, but you also know that we are currently conducting and started a strategy process and we will announce then our new targets probably in autumn next year. Nevertheless, I tried to guide the 2025 expectations from our side as I was running through at the beginning through our P&L and that is obviously something which is our new target. while we want to deliver on what we've got.

And last one so far. When does mBank management see FX mortgage provisions sunsetting finally?

Here, we also try to guide. We see that the risk is step by step materializing, getting lower. And from our perspective, there is no clear end yet, while we see that every single quarter we expect to come will be less impactful. And if you want to sum it up, we expect that to a large extent we have dealt with by end of 2025.

Thank you very much. This was the last question I can see online. So thank you very much for your attendance, for your questions and have a lovely weekend.

Thank you so much. Thank you. Bye bye.