mBank SA

WSE:MBK

Earnings Call Transcript 2019-Q1

[Joanna Filipkowska, executive]

[Interpreted] Good morning, and welcome to this conference summarizing Q1 results of mBank Group. We are few and far between, but we have CFO, Andreas Böger; and our Chief Economist, Ernest Pytlarczyk. Over to Andreas.

[Andreas Boeger, executive]

Good morning and a warm welcome also from my side, and thank you very much for participating in our earnings presentation for the first quarter 2019.

Let me start in giving you some highlights of the first quarter, a quarter in which the net profit after tax ended at PLN 164 million. This result was impacted, on the one hand, by the high BFG contribution, by the high contribution to the BFG resolution fund, that we and also other banks had to stem in the first quarter. And on the other hand, if you compare the first quarter of 2019 with last year's first quarter, obviously, you'd know that last year's first quarter had the one-off gain in from the sale of our group insurance business, which amounted to PLN 220 million before tax and PLN 178 million after tax. So this is if you compare the 2 quarters, I think this is very important to know.

If you look at the key drivers for this quarter, so first quarter 2019, you will see a very strong net interest income. And this was really the key driver for the good underlying performance.

If you look at net fee and commission income, it was somewhat weaker year-over-year, also because we sold the insurance business. The amount is a bit more than PLN 20 million, PLN 22 million, and it's missing from insurance business, but it was stronger also quarter-over-quarter.

The normalized cost-to-income ratio, so with normalization we mean spreading the BFG over all 4 quarters, still stands at 45%, which is basically confirmation of our high efficiency. And talking about efficiency and about the mechanics behind it, you will see that the recurring revenues increased year-over-year by 8.5% whereas the costs, the steerable costs, which are not BFG, only increased by 4.2% Coming to business volumes. Business volumes in the quarter and also year-over-year were strongly up, both in deposits and also in loans. Deposits were a bit stronger in the quarter, but year-over-year both are basically up by roughly 14%.

We continued to work on the asset mix, so the asset mix is still optimized in order to have a more profitable asset side. That means managing that on the Swiss Bank portfolio, but also growing in nonmortgage loans but -- and mortgage loans but also in corporate loans. When it comes to capital, we remain one of the strongest capitalized banks in Europe with a Tier 1 ratio of 17.55%, so that's extraordinarily strong.

And if you look at our asset quality, the good asset quality is demonstrated, on the one hand, with the cost of risk of only 61 basis points, but on the other hand, with the low and stable nonperforming loans ratio of 4.8%. Let's go to the next slide and let's discuss some highlights from the business lines. Highlights from the business lines include strong client acquisition. So we continued to acquire new clients, both in retail and also in corporates. Corporates even had a record quarter when it comes to net client acquisition. Looking at innovation and products. What did we do and what is I think worth mentioning in the quarter? Maybe 5 things to look at, and you also have them on the slide. On the one hand, we were working on a more clearer offering for our private clients in Poland, so making the product less complex and clearer to understand for both mass clients and also for our younger clients. On the other hand, we do not only look at Poland, but we also look at our foreign branches. And for example, in the Czech Republic, we brought the ease of use of banking to our clients by being one of the first to apply Apple Pay in the quarter.

We also took responsibility, taking responsibility in the way of adopting new rules for financing the mining and the energy sector, which means that we are abandoning the financing of new coal mines and coal-fired power units.

Another one is that we continued to invest. We invested via our subsidiary, mLeasing, in a fintech-like organization called LeaseLink. LeaseLink provides a digital way into small ticket-size leasing. And LeaseLink is included in more than 3,000 online sellers. And via this, SME clients can basically lease mostly also technological items directly online and we finished this acquisition in the first quarter. Last not least, it's also about building infrastructure, infrastructure for new regulation, but also for potential revenue generation. Infrastructure for PSD2 also includes that we have now opened our sandbox for third party providers when it comes to mBank's API capabilities, and that is also up and running since the first quarter. I think I will directly jump to Page 9, please, to look at a bit more details of the underlying volumes, and as always, I start with loans and then we go over to deposits. So on the loans side, both business lines, as I already said, performed well. And in the quarter, loans are in total up by 3%, and year-over-year, they're up by more than 12%. Corporates contributed by 4.4%. Retail was roughly 2%, a bit to a lesser extent, but you know the story in retail is that we're also managing our Swiss Bank portfolio. And Swiss Bank portfolio in the quarter was managed down by -- basically the installments amounted to CHF 84 million, so the portfolio is now below CHF 3.8 billion. When you look at the loans, it always makes sense to look at new lending in particular. So new lending, in particular, if you look at mortgage loans, mortgage loans plus 16% quarter-over-quarter and plus 50% year-over-year. I think it makes sense to put this a bit into perspective because I think the -- it's a very low base we were starting off last year. And I think if you look at the future business we want to do in mortgage lending, I think the last 2 quarters are a better predictor for the future where we want to go than maybe looking at the year-over-year figure and looking at a figure that was below PLN 1 billion because we did work in the last 12 months on optimizing our processes and we also heavily looked at the timing of the cash outlay for our mortgages and we optimized this production stream, so to say, because the clients were always interested, but we had the feeling that we could do better in delivering and now we think we are on the right track to delivering and this is why I said I think the last 2 quarters are a better predictor for the future than maybe 1 year ago. Nonmortgage loans sales, you see on the right side of the slide, nearly PLN 2.6 billion, also very strong. We're also coming from a strong base. That's a business that's running really well. You know that we heavily bank on preapproved credit limits. We are still having this as a cornerstone of our strategy, so we're not deviating from this. The growth rates are strong, but our overall market share in nonmortgage loans is right now 5.9%. That is still lower than our overall share in deposits, so we think this growth is very healthy. Looking at corporate loans. In corporate loans, in new lending, you here see a drop. You see the drop, on the one hand, in the K1 volumes, and you basically see it also across-the-board. One explanation I think is high tickets in K1. And the other explanation is that, throughout the last year, we were more moving when it came to renewal of credits into longer maturities. So this is why you, for example, don't see this drop here on the slide before when you see the volumes of the corporate business going up. I think steadily for each quarter, you see it going up by at least PLN 1 billion and that you will -- you also saw in this quarter, even so the technically new lending business is less. Leasing. Leasing by a number of contracts went down. I think we discussed it also end of last year that leasing was very strong last year because of incoming new tax legislation when it comes to the leasing of cars. So a lot of clients, decided to lease cars in the year 2018. It's now less in the first quarter, but I think what's important is not only the ticket size, but it's also the profit. So the profit quarter-over-quarter in leasing is down by roughly 9%. But year-over-year, if you compare it to last year, the profit has even doubled in leasing. So we're happy with the way the business is running there. This was the loan side.

I would like to now move to customer deposits. And you know, there, the story there is about transactionality in mBank and the story is continuing. More than 5% increase of deposits overall. In corporates, increase of 5.5%, without repo.

And in corporates, that is what we discussed at the year-end. Corporates, you've seen the slight dip in Q4 because we basically actively managed the term deposits out of the bank. Part of the term deposits are now coming back, but they're coming back at appropriate prices. We also discussed this in the past. We're not closing business for term deposits, but we might not be the most aggressive in the markets. And if our clients choose that they want to have term deposits with us, we're obviously also the bank at their side. Retail also, deposits up by 3.5%. The full year up by 18% and mostly here with the transactional business model. If you look at the volume development, I just mentioned for both loans and deposits. You have seen that deposits are up by more than 5% and loans are up by roughly 3%. This led in the quarter to affect that the loan-to-deposit ratios of mBank was dropping by roughly 2 percentage points. So we dropped from 92.9% to 90.8% (sic) [ 90.7% ] because basically the deposits were coming in, they still have the transactionality, they still contribute positively to net interest income. But obviously, when it comes to loan sales, we're only doing appropriate loan sales in a given quarter. This is why you see the net interest margin of mBank stable at 260 basis points because basically loan-to-deposit ratio went down, but basically, NII, so net interest income, is still growing against it. So how do the volumes transformed into income? Let's look at the next slide, and I've already said this at the beginning. So very strong core income. And if we look at the components of income, I think the strongest is net interest income. You see it here at PLN 930 million, up by 0.7% quarter-over-quarter. But you know, the first quarter is the shortest quarter, so the first quarter has 2 days less than the fourth quarter. One day less is almost a bit more than 1%. And so these 2 days make up for even more than 2%. So also strong -- really strong growth here in terms of net interest income. And you see, it was the year-over-year figure that is up by 14%. The blue bar -- the blue part of the bar, net fee and commission income. As I said, it's a bit stronger than in the quarter before by roughly PLN 10 million, but weaker than the year before. The year before, we had PLN 22 million more sales from insurance product in there.

Generally, the story we have in net fee and commission income and I think we're not alone in the industry is that, next to our insurance business, the industry trend, the fees we can take under MiFID 2 for our mutual funds we have sold. This is still kept and this is still low compared to the past because we still need to solve regulatory issues with the KNF when it comes to the amount of fees we can actually really book there. But we are positive that throughout the year, we will be able to recapture some of these amounts. And we're also seeing that, generally, Polish capital markets are, to some extent, weaker than they used to be. This is what we then see in brokerage and also in portfolio management, et cetera, so it's slightly weaker, but I think the biggest drivers for mBank are MiFID 2 and also our insurance business. Going forward, in net fee and commission income, we are always saying we ideally would like to have PLN 1 billion of NFC in a given year. You see that the run rate here would not show that we are at PLN 1 billion. I would expect that over the next quarters, we are moving upwards from this PLN 228 million, so that we are still moving up. If we can reach the PLN 1 billion, I would, to some extent, question under current capital market circumstances. If capital market really improves and we have some real positive news on MiFID 2, I think this could be within reach. But I would say, right now, roughly we're looking a bit below the PLN 1 billion. Last year, we finished the year at PLN 975 million. Yes, this was also including some insurance business. Maybe this is good. This is a good direction to go. Looking at the third component, trading income. A bit weaker than in the quarter before. But with more than PLN 100 million, still really decent quarter in trading. This quarter less on the FX side, but more when it comes to some interest rate derivatives and valuations, so a good positioning here on the interest rate side. And so I would say above PLN 100 million is always a very good contribution from trading income. Two extraordinary items I think that need explanation. On the top, you see a positive PLN 27 million gain from financial assets. This is, on the one hand, we saw sold treasury bonds in the first quarter. This amounts to PLN 18 million because we were basically, in treasury, taking the chance of dropping interest rates to some extent in the first quarter and we did some profit taking there on some bonds. And you know the -- these are shares we have, which are, on accounting, not treated as -- well, they are not treating as share. They're basically in a preferred share format, but they're not treated as a loan. So basically, we have to fair value them this is something we had to change last year and I think the whole industry also changed and the reason are also positively contributed to this PLN 27 million. But as I said, PLN 18 million, out of this is treasury bond.

On the lower hand, you will see some negative net -- other operating income, so other operating cost. This was amounting to PLN 28 million. Out of this, the largest position is a one-off PLN 27 million hit we were taking when it comes to withholding tax on some foreign issued bonds. There was a change in the tax legislation in Poland. And basically, issuers were able to choose certain taxation modes. The one was to have either higher future taxation or to have a one-off hit right now, and we were choosing the one-off hit right now. And with this PLN 27 million hit, we consider this checked closed. I think I will then move over to costs to the next slide. And I think if you look at the top bars on this first quarter's here, you actually see the magnitude of the BFG and the BFG, the payment is higher in total by PLN 94 million this quarter. So PLN 94 million in nontax deductible costs in the quarter we had to bear. I think that's the story that basically distorts this quarter vis-à-vis the quarters before and also vis-à-vis the first quarter last year.

If you look at the underlying trends, the underlying costs are kept under control. If you look at the yearly growth rate, you see this plus 4.2%, that's PLN 20.5 million. This is mostly driven by HR costs because HR costs went up by more than PLN 20 million year-over-year. So you see that material costs are stable and HR costs were moving up. HR costs were moving up. We discussed this on some quarters before. On the one hand, we see some cost pressure when it comes to staff in lower paid levels and also when it comes to IT staff. But on the other hand, you have also seen that due to certain projects, we've also increased the number of FTEs and you know that we are also working on having more physical outlets. The FTEs in the quarter increased by 52 million -- that's 52, not million, by 52, and year-over-year, the FTEs increased by 230 heads. When it comes to material costs, now you see the first-time shift of IFRS 16. So what IFRS 16 is doing is that former payments we had for rents and other long-term leases that were shown in material costs are now shown in amortization and in part also interest expense. Most of this has moved to amortization. This is amount of a bit more than PLN 30 million. Interest expense on this was roughly PLN 1 million, but basically we had a shift between material cost and amortization that will stay with us. But you see that the overall amount of this cost is stable when it comes to material cost plus amortization. Looking at efficiency, the normalized cost income ratio for the quarter was 45%. If you compare this to last year's first quarter last year, it was 45.5%. So even though we have higher BFG charges over the 4 quarters, the cost-to-income ratio on a normalized level improved. Let's move to cost of risk. So in the first quarter, we have seen a lower cost of risk, something we have also seen last year and it should not surprise you. Especially in corporates, the first quarter is normally traditionally low and we've also witnessed this, this year. And in retail, we basically a stable development of the cost of risk when it comes to, on the one hand, zloty amount and even a bit lower basis points amount. So cost of risk in the quarter was 61 basis point. Obviously, 1 quarter is not the full year and we know we always have fluctuations, so I would expect that for the second quarter, we have higher cost of risk, maybe more stable in retail, but most likely higher in corporates. This is at least what the past has shown us and you also see it here on the chart.

In terms of total cost of risk for the full year where we see the year ending, we see the year roughly somewhere between 70 and 80 basis points in terms of cost of risk. Let's go to the next page, loan portfolio quality. Not a lot to mention there. I think I already mentioned at the very beginning when it came to our highlights the low nonperforming loans ratio of 4.8%, which compares to the sector nonperforming loans ratio of 6.8%. And I think we have historically also been low there. Going over to capital. Capital ratios on both Tier 1 and total capital we remain to be overcapitalized by roughly or even more than 300 basis points, so very strong capitalization here. Also, IFRS 16, for example, has been digested, the IFRS 16 effect, because you know it's not only that the P&L items have changed, but also we needed to show basically the amount of liabilities we have going out to the assets against it. These assets are risk-weighted assets. This amounted to 15 basis points, 1-5 basis points. And I think my biggest concern on IFRS 16, I'm not sure if it's a big concern, is that obviously under Polish law it's also banking tax eligible. So we also pay roughly I think PLN 3 million or PLN 5 million of banking tax on this. So we pay PLN 3 million of banking tax on this, which I think is not really necessary, but okay, I think this is the way accounting and taxation works because the bank has not changed since the 31st of December and the 1st of January. If you look at liquidity. Liquidity ratio, still very strong. And I think it's fair to say when it comes to capital and liquidity, mBank is one of the most -- of the best capitalized and one of the most liquid banks not only in the Polish sector, but also in Europe.

And with this, I would like to close and hand over to Ernest.

[Ernest Pytlarczyk, executive]

[Interpreted] Okay. It's been a good start to the year in the economy. We had a positive momentum clear in industrial production, which is the most cyclical component in the economy, which shows that the Polish economy did not really fold up like the German economy did. Our exporters have diversified nicely and they still have an important cost advantage after a 2-year lag in the exposure to cost of labor compared to other countries. And it's all coming up nicely with a more demanding macroeconomic environment. So Q1 was quite decent. GDP growing by about 4.6% Q-on-Q more than the Q-on-Q growth in Q4. And both this year and next year, we will see fiscal spending contributing 0.5 basis point -- or percentage point to GDP plus additional reforms in the pension saving sector moving parts of the funding from -- or savings from pension funds to IKE, individual savings accounts, which means that the budget deficit will be under control. So in our view, public finance, despite large social packages, will continue to stay at a safe European level. The ratings are not under pressure. And this year, the economy looks quite like last year following additional fiscal stimulation. GDP will grow by about 4.5% year-on-year. This year, we'll probably see a higher price index than last year. We may reach the National Bank of Poland's inflation index. Core inflation as well as CPI will be growing steadily, crossing the NBP's target by the year's end. And we can see some potential for strategies based on bonds. More on that later. The real economy is reflected in the monetary aggregates. We can see some step up of investments, which suggests that corporate deposits are shrinking. There's been a steady growth in corporate lending. In retail, importantly, we've seen a sharp increase in household deposits. In the mutual fund sector, it is the banks that are benefiting from all the concerns circulating in the market. The banks are probably the most stable part of the financial system. And we will continue to attract new deposits, so funding will become even cheaper for banks. The tenors, we don't have to be concerned about longer tenors of funding. The rates in Poland or in Europe are not likely to be hiked anytime soon. What's important is that the social benefits will generate additional savings more than in the first phase. So again, banks will benefit greatly from the additional social schemes because we will continue to retain core deposits.

Interest rates. Well, what we would recommend for Polish bonds is to sell for many reasons. The inflation story provides some potential -- the Monetary Policy Council is not likely to change the rate this year or next, but the markets will remain concerned about inflation because inflation is on an increase in all the countries of the region, now also in Poland. So this will be a hot topic for the market. In addition, the social packages -- social benefit schemes will generate more supply, and again, banks will absorb a big part of that especially through deposits now growing much faster much than lending. The zloty, it is a very stable currency. The volatility, in fact, was one of the lowest historically and it has remained so for a number of years. The zloty doesn't have to stabilize, any further, the economy is well balanced. We have a well-balanced public budget. So if anyone is trying to question the strength or stability of the zloty, that's wrong because the zloty has nothing to stabilize. There are no external shocks to offset. In case of a bigger slowdown, the zloty would become an important buffer for the economy.

Thank you. The floor is open for questions.

[Joanna Filipkowska, executive]

[Foreign Language]

[Unknown Analyst]

[Interpreted] A question about your outlook for NIM, the net interest margin. Is there any space for -- to shrink the cost of funding? Or are you looking to assets, the asset mix mainly? What is the potential to grow the margin this year?

[Andreas Boeger, executive]

So on net interest margin, you know that we will have a general trend upward in net interest margin as the current net interest margin, including the Swiss franc portfolio is at 260 basis points. But excluding Swiss franc, it's 285. So there's basically 25 basis points to generally catch up. But you know the Swiss franc portfolio will be with us for quite some time and we've always said like in 5 years, it will maybe be half, but in 10 years, it will roughly be gone. So but there, you can expect permanent trajectory upwards from there on the current business mix. And I don't think that the underlying business mix of the non-Swiss franc portfolio will also change that dramatically.

The key driver, and I think that's your question for this year, the one thing is that it should creep upward by some basis points, but if the key driver is more from deposits or more from the asset side. I think the key driver will be the asset side because when you look at deposits, we are already very efficient when it comes to the cost of deposits. The overall interest expense on deposits has increased in the quarter, but you've also seen that we have 5% more deposits and that also some term deposits have come back. But when we compare ourselves to where we think the industry is, we think we have one of the most efficient liability and -- or especially deposit structures, if maybe not even the most expensive structure. And I think there, there's not a lot to get out of it. But obviously, with a transactional banking business model, the more deposits we get in for free, the better it is for NII and for NIM, but the driver will be the asset side.

[Joanna Filipkowska, executive]

[Foreign Language]

[Unknown Analyst]

[indiscernible] today, the topic is about the situation of Idea Bank and the situation of the whole group of [indiscernible], I mean Getin and Idea. And there were press articles saying that some banks are working on some sort of solution to the situation. My question would be could you share with us any sort of scenarios possible that could materialize here?

[Andreas Boeger, executive]

I think it's very difficult to comment on these events in general because they affect our competitors and also what could happen behind the scene. So I would rather not comment on this specific situation. But in general, I think if you look at the Polish banking system, if you look at our earnings power and earnings capacity we have and also at capital positions and this is -- if you look at our capital position, my last slide, we are one of the most liquid and one of the best capitalized banks not only in Poland, but also in Europe. And I think also our key competitors in Poland are quite strong when it comes to these metrics. I think that we are a strong sector and it needs to be seen if some others are not as strong. How this can be dealt with, but there's nothing we can really comment. And the way we as a sector can only prepare for this is to be as resilient as possible and I think we are.

[Joanna Filipkowska, executive]

[Interpreted] Any further questions?

[Unknown Analyst]

[Interpreted] If I may. [indiscernible], [ Interia ]. I have a question. LIBOR, who's rising or will rise. So I'm sorry, it will be phased out, I suppose. So what happens next on the interbank market? What's going to happen between banks and regulators and Polish banks and then parent entities? Especially in the context of Swiss franc loans. What is -- well, a more urgent issue for Poland is the future of WIBOR. But LIBOR is -- the situation here is clear. We know what's going to replace LIBOR. The new rates should be more transactional, including not only banks, but also funds, mutual funds and insurance funds. So I don't think this will cause a collapse to the financial market. LIBOR will be replaced by its successor.

[Ernest Pytlarczyk, executive]

[Interpreted] If there is a successor, there could still be doubts as to whether the successor, a new benchmark of the Swiss franc, whether it will be adequate to the pricing of the liabilities of clients in Poland. Well, in this debate, it should be said it's not only the interest rate that impacts the rates on Swiss franc loans, also the cost of funding. We've been having this discussion for a number of years, and it should be said that LIBOR did not determine the actual cost of funding of mortgage loans. Rather, it was the availability of funding. In some periods, funding was a scarce good. I understand that there's little understanding about the mechanisms behind it. Somebody has been saying that zloty-denominated loans should be subject to the Swiss rate. That would be absurd. So it's really hard to comment. Of course, somebody may try to question the financial architecture of the world. But again, it's not just a benchmark like LIBOR that determines the cost of funding in the Swiss franc. It's not the only driver of interest rates on loans in the Swiss franc.

[Unknown Analyst]

[Interpreted] To follow up on this point, I'm not quite clear. So there will be decisions on the European level to replace LIBOR. How will that be taken to the level of contracts with clients, including loan contracts?

[Ernest Pytlarczyk, executive]

[Interpreted] Well, I suppose this will happen automatically. LIBOR will be replaced by the new rate, which will be similar as to its level, but determined in a slightly different way. I don't think there will be any shift in the rates when the new rate is published.

[Unknown Analyst]

[Interpreted] Yes. But the whole debate about Swiss franc or FX loans centers on some legal nuances. It's the same here. How can we replace LIBOR with a new rate, a new benchmark in contracts, how will that happen?

[Ernest Pytlarczyk, executive]

[Interpreted] Unfortunately, I cannot tell you that at this point.

[Unknown Analyst]

[Interpreted] Are you discussing the process? Have you been talking to regulators, to the Competition Protection Office or to KNF?

[Ernest Pytlarczyk, executive]

[Interpreted] Again, we would not like to comment. This is still an early phase. I don't think a comment would be helpful.

[Unknown Analyst]

[Interpreted] I don't -- I'm not asking you to comment. I'm just asking if you are in discussions.

[Ernest Pytlarczyk, executive]

[Interpreted] Again, no comment.

[Joanna Filipkowska, executive]

[Foreign Language]

[Unknown Analyst]

[Interpreted] MREL issues, what's the status between the bank and the regulator? Have you been awaiting new guidance or do you have your own estimations?

[Andreas Boeger, executive]

What we know about MREL and obviously this is a relationship of mBank and the BFG and the resolution authority is that MREL in Poland will become binding on the 1st of January 2023, so this is still quite a long way to go. I think there was one part of legislation missing for MREL. This was the establishment of senior nonpreferred debt in Poland. I think that legislation has been passed. So in theory now, banks could issue MREL-eligible material that would be eligible for MREL on a solo basis. So it's a bit complicated.

But let's look at this certain debt class, for example. And the question now, obviously, is that we often get asked, why haven't banks started issuing? In order to be MREL eligible, the debt needs to have 1 year remaining life still on the 1st of January 2024. So if we would now issue a 5-year bond, this would count until April 2024. So this would basically count for 3 months. So we would now pay up for 5 years in order to have something that is clearly MREL eligible for 3 months. I think this is why you have seen the developed banks have not issued the senior nonpreferred yet because, obviously, the credit curve, once you go longer than a certain timeframe, especially you go longer than 5 years, is not very optimal from a cost perspective. That's the one thing how you'll fill it. Obviously, if you don't fill it with senior nonpreferred, currently the strategy is you fill with total capital. Total capital, is obviously Tier 1 capital plus subordinated debt. But also, in the issuance we are doing, which is just senior, we are making sure that our senior issuance is not sold to private individuals and it has a minimum denomination that is more than EUR 100,000 in order that it can be counted for MREL purposes on a group level. So this is a bit more complicated. But for example, the Swiss franc bond, we just did on a group level, would count as MREL, so we're basically doing what is sober and what makes sense to plan that right now.

When it comes to the level you would have to fulfill then in 2023 or even later, that is obviously a function of your current capital requirements. So you could do the math on this general guidance that was given by the BFG. For mBank, for example, in the next 4 years, I would expect that this capital requirement in general go down because I think we have -- we should have now reached the peak of our Swiss franc at on -- we have in the capital ratio and with the bank more growing and the Swiss franc portfolio going down, so you have 2 effects basically on a percentage basis, they are doubling. I think the MREL that mBank will have to face in 2023 looks very well digestible. But I think this is the reason why you don't see banks active right now? It's difficult to do now 5-year deal that only counts for 3 months. It's -- but I think it does not exclude that a bank would go out and do it and would not exclude it. We would do it, but I think this would have to be at very benign capital markets, et cetera. If you find a sweet spot, then you maybe pick a instrument. And also, for the future, it's counting more. But I think we're not at this stage currently.

[Unknown Analyst]

One question about the NPLs and your strategy towards NPLs because I think there was some new recommendation from ECB when it comes to how to manage NPLs. There were some I think expectations from KNF. Do you expect any changes in your approach toward NPLs management?

[Andreas Boeger, executive]

I think this will remain to be seen how we manage it. So we have not changed something now. And we currently feel in a good spot, because I think in Europe, there's a discussion if an NPL ratio above 5% is not good. I personally struggle to really understand this because I think NPLs are always a function of also net interest margin. So the one thing is I think a bank that has a 80 basis points net interest margin and 3% nonperforming loan ratio I think has a problem. But a bank that has a 260 like we have and 4.8% I think is in a much better place. So I think it's -- as I say, I don't want to criticize, but I struggle to understand the meaning of 5% per se. What we do is we try to be well provisioned against our NPLs. And you know, for NPLs, for example, mBank is taking a cross-default approach also, so this is -- we generate Stage 3 assets earlier than others because, basically, we don't only look at single products, but we really look at the full client relationship.

Against this provisioning, we always test what the market price is. And you know we -- every year, we're active in NPL sales. And I think especially in Q4, for example, there, we were a bit more active there. But we have not changed our strategy yet. But we also think that if we would sell more right now, it would not be a very big hit because what we have seen evidenced in the last sales is that always our provisioning was adequate for what we have.

[Unknown Analyst]

I think that the deadline is quite close yes, because it's mid this year to make some sort of changes or is it not?

[Andreas Boeger, executive]

I'm not sure what exactly you're alluding to. I think, on the one hand, we have this NPL discussion. On the other hand, what you have was the ECB and the KNF is obviously a discussion about the so-called new definition of default. Are you alluding to this or to the NPL?

[Unknown Analyst]

To the NPL [ losses ] and this 5% and potentially the need to sell more NPLs.

[Andreas Boeger, executive]

Yes. There, I would say what we currently have we are comfortable and I don't see us doing any like fire sale-style things in the next quarter. That's clear.

[Unknown Analyst]

Okay. My last question would be, do you expect any sort of positive one-off from this master cut [indiscernible] thing or not really?

[Andreas Boeger, executive]

It might be.

[Unknown Analyst]

It might be?

[Andreas Boeger, executive]

No. We have so far -- on [indiscernible], we have so far always taken a very conservative view in accounting for this, so let's see what the final result is and then I think we'll have to examine. I think the downside risk on this part of our balance sheet is very low. So that means if there' is positive news, it might be that there is some upside, but this is too early to comment.

[Unknown Analyst]

Can you comment what's the value in balance sheet? Is it around 0 or it's ...

[Andreas Boeger, executive]

It's not 0, but I think it's quite low.

[Joanna Filipkowska, executive]

[Interpreted] If there are no further questions, please join us for refreshments, and thank you. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]