mBank SA

WSE:MBK

Earnings Call Transcript 2021-Q1

[Joanna Filipkowska, executive]

Good morning, ladies and gentlemen. Apologies for a small delay. Welcome to this conference that will present the results of mBank Group in the first quarter of 2021. The results will be presented by Mr. Cezary Stypulkowski, Chief Executive Officer; Mr. Andreas Böger, Chief Financial Officer; as well as Mr. Marek Lusztyn, Chief Risk Officer. Macroeconomic overview will be presented by Marcin Mazurek, Chief Economist. Cezary, the floor is yours.

[Cezary Stypulkowski, executive]

Good morning. Well, thank you for your participation. A few introductory words. The first quarter in principle was pretty good under the circumstances. What needs to be flagged is that specifically our net fee income was very strong, which is another consecutive quarter when we deliver above-expectations level of fees and commissions. As I have flagged a few years ago, this is the next stage of the development of Polish banking, and we consequently tried to -- both looking to the pricing of our products as well as focusing in areas where fees and commissions are the major way of compensation of our services.

The bank is, I believe, well known for its strong focus on reasonable cost management. We believe that, obviously, the first quarter is not fully representative to the developments of the whole year. But as you see, the costs are under control. All this plus, what is very important, the cost of risk was relatively low in the first quarter, more in the zone of the regular reasonably good quarters, ending up with 59 basis points, which is much less than we exercised in most of the quarters of the previous year. These were the major components of the relatively strong overall result in the first quarter.

What needs to be also mentioned is that we continue to be recipient of the massive inflows of liquidity in the market. Despite a number of efforts, customers still like our transactionality. And obviously, in this low interest rate environment, they tend to place money ultimately at the banks where they do most of their transactions. So as you see, the deposit base has grown by almost 18%, which is -- which obviously has its benefits but creates also some problems, which are well known in the industry.

As you know well, mBank stands for mobile banking, and we are very proud that more and more customers are switching on mobile apps. We benefit from the, I would say, pretty strong inflows of the young customers. We have launched a number of initiatives, which are aimed at e-commerce customers. And among others is the -- an offer which is designated to the customers who are switching or who are opening the activities in the e-commerce. And in the first quarter, we had more than 5,000 clients using this offering.

The mobile application to junior account, this is -- for those of you who still remember the [ session ] largely this is a new mobile equivalent, which familiarize children with managing their daily spending and also collection of money so allows also for parents to help the youngsters to get familiarize with money [ in their phone ]. The WOSP, which is a landmark charity in Poland, which we are associated since 3 years or 4 years, is continuing to be a big success. And I have to say that since we have been associated with WOSP, I think that they almost doubled the proceeds. And mBank clients plus mBank contributed almost 1/10 of the old money, which has been collected by the charity. What is worth to mention is that we launched the new mobile application for corporate clients. Much more convenient, and there will be some other comments on this in the further part of the presentation.

As you see, our market shares are growing. If we compare this in the 2 years' period of time, it's a significant growth, on the retail side. We continue to be a strong player on the corporate side. In principle, the number of new clients is satisfactory. And specifically, as you know, we are focusing not that much on the switching clients but rather the clients who are entering the market.

On -- in mobile banking, which is our signature, we continue to be #1 in terms of the clients who are using the mobile application out of the total client base and #2 in terms of the nominal number of the clients on the mobile app, the same we observed in Czech Republic and Slovakia where we have a constant growth on clients on mobile devices. And the channel itself, as you see between 2015 and 2021, started to be the major channel of communication between the bank and its clients being on a digital platform.

Our application is highly valued by the clients. We tend to get a number of awards and also in the rankings among the apps, as you see, the scores are relatively high. There have been some changes in application functionalities, mostly focused on some better usage and more convenience. I don't want to go into details, but what is important is that the biometrics is more extensively used. Express transfers using the BLIK system had been fully introduced. This is something where we will be focusing in the coming months to introduce and to familiarize clients with the person-to-person payments.

The payment assistant, which is part of our in-person financial management structure, allows currently to remind clients about the payments but, at the same time, you can scan the data or transfer on the invoices, which makes things very convenient. I strongly believe that further development in this area will be crucial to more and more convenient banking for our clients. We continue to focus on our mOkazje, mDiscounts, for retail buyers, the shopping experience and e-commerce-related functionalities.

On the corporate side, more to be added. You know well that we have been awarded the world's best corporate/institutional bank in Central Eastern Europe, which reflects endeavors, which have been launched basically 2 years ago to sort of bring the corporate banking to the levels of retail banking convenience on the mobile devices. In this respect, I believe that this is a distinctive difference currently between what you can do on our mobile company net vis-a-vis most of our competitors. So the onboarding process can be done without personal contact, lots of documentation can be transferred to the digital channels. Control of the payments and remote access to the corporate data are also visible on the display. What is worth to mention on the mLeasing side, new functionality has been launched under the brand mAuto, which is our online platform with an offering for new and used cars, mostly from the pool which is in the disposal of our mLeasing.

As I have mentioned, the bank is trying to assist e-commerce. We've been very strong on this front, our penetration of both clients active in e-commerce and penetration of the corporate sector. Basically, the merchants who are displaying the offer on the digital channels is relatively strong. That's the reason that we have to very much focus on. One of the initiatives is the payment gateway under the brand Paynow, which has been launched basically a year ago and seems to be successful. This is the first offering of this kind, which is fully supported by the cloud, which obviously creates some flexibility on when it comes to the number of transactions to be done and also in terms of development.

I would say both -- since we are the latecomer to this business, we try to be attractive on pricing, but also the functionality is delivered to the clients in convenient management. What is also worth to mention, and this is something I already signaled, we had a special campaign, Digital Revolutions, which was very much focused on support to the micro firms operating in e-commerce. There is a specifically designated group of people who are working on these solutions. We are assisting opening of the e-commerce platforms for the merchants. We also organized dedicated webinars and articles which helps clients to operate in -- on the new platform, which, as we know, has developed significantly during the COVID time. mOrganizer, which is a tool to help clients to handle the invoices, is part of the offering. And this is where we are currently focusing extensively to deliver even better solutions and better offering to e-commerce clients.

Well, on the ESG front, on the left side, you see that we are subject to a number of ratings, which I believe is still in the branding stage. But this is a focus we want, like possibly many other players. The result will be seen, I think, a few years from now to which extent the avenues selected by the different players have been successful. But we believe that we are reasonably well positioned at the starting point to be part of the premier ESG-compliant financial institutions.

Well, the summary of the key financials. As you see the quarter -- when we compare ourselves to the first quarter of 2020, which was still, I would say, okay-ish, the COVID was not that much impacting the first quarter, basically, would blow off -- consequences of the lockdown was in the second quarter. So when we compare ourselves to the first quarter of last year, most of the ratio seems to be pretty strong. The total income was higher. Cost/income ratio is better. Net profit, I just mentioned, is significantly higher. One has to be [ fair ]. In the first quarter of 2020, we put aside a significant amount of money because of the perceived risks. Consequently, the return on equities is significantly higher.

When it comes to the balance sheet, well, this is well known I think across the industry that the loan growth is under some pressure. Deposits are growing. Capital position is really strong. If we look into the activities of the bank, the regular activities of the bank and the level of capital is more than sufficient. And here, we have -- this will be more elaborated by Andreas and Marek, but what I want to stress is that, obviously, we believe that we had the last quarter of the net interest income going down. This is, as you see, on the quarterly basis, 3% lower. Fees and commissions, I already commented.

What is worth to mention, well, we are still a big tax payer. And obviously, my position on the specifically banking tax is well known in that this is distortion in both economy and for the banking sector, especially. The consequence of the lower income from mostly revenue, revenues leads us to the lower net interest margin. What should I say, more cost of risk have been [ declared, returns you see ].

The balance sheet, as you see on the -- what is worth to mention is that clients loans on the corporate side are under the pressure. We are competing with the public money to some extent, but all other measures on the balance sheet side seems to be reasonably strong. On risk side, not specific developments worth to mention. We mentioned loan-to-deposit ratio, it must be, I think, the lowest which the bank has experienced over the last 20 years, I believe.

Now I will turn to Marek. Marek will elaborate on the Swiss franc -- France. Marek.

[Marek Lusztyn, executive]

Thanks, Cezary. So on Slide 14, we see the summary of the litigations and provisions related to the Swiss franc mortgage portfolio. What needs to be highlighted is that the first quarter of 2021 was definitely not a game changer with respect to that front. What we have seen is the continuation of the trends seen in the previous quarters.

First of all, we need to highlight that the volume of the mortgage loans granted to the individual customers continues to decrease. It was going 3% down compared to the end of 2020. And over the last 10 years plus, it continuously decreases at the rate of 8% per annum. There was not a significant increase of the provisions created from the individual court cases. Total value of the provisions created was going up by 4%. So the total coverage of the existing overall portfolio-carrying amount was going up by 0.8 percentage points.

We see a steady inflow of the individual court cases concerning the indexation clauses. In the first quarter, we have seen around 1,500 new cases coming in. And it is worth highlighting that what we see from the numbers from early second quarter, this number is not -- it's not significantly differing from the long-term trends that we have seen. There were no significant changes in the provisioning approach nor into parameterization of the model.

And we can go to the next slide, and I hand over to Andreas.

[Cezary Stypulkowski, executive]

Maybe a few words from my side. We have decided it some time ago that since the first quarter of this year, we will be presenting the bank in a slightly different format. That means we will do the separation of FX mortgage loan portfolio, which obviously impacts significantly our overall results, and we wanted to sort of redesign our reporting to differentiate between the heritage portfolio of Swiss franc, which we have generated almost 15 years ago and which obviously is a burden on the bank and impacts the performance of the bank in a big way, to show that the core bank, which means retail offering to our clients as it is now and corporate banking, performs reasonably well and which, in principle, is the focus of ourselves. Obviously, we manage our heritage portfolio, but we believe that investors need to understand better the core business of the bank, and that's the reason that we are showing this in this new format. Andreas?

[Andreas Boeger, executive]

Yes. Thank you, Cezary. Let me guide you a bit through what we are doing. So as Cezary was saying, we are defining these noncore assets, and noncore assets that is the portfolio we have in residential mortgages that is FX denominated, so not Polish zloty but sold to Polish residents. We took an approach here of not separating the bank in 2 and having a very complicated cost allocation of something like this, we are merely separating a portfolio. And also on costs, you'll see this also later, we take a marginal approach. So only the ones that are really directly associated to that portfolio to clearly show it's a portfolio dialogue we have and not splitting the bank in 2 here.

What we're doing in this presentation of the noncore assets is, as I said, we shift the nominal amount from an accounting view. We obviously also gave all legal reserves that are currently on the portfolio. We also put that into noncore. We are in -- that move also changing our approach to some extent because what we have done so far is we have so far only shown the full stack of legal reserves under IAS 37 on the liability side. We are now moving to a regime where under IFRS 9, we adjust the carrying values of the asset side due to the expected lower cash flows. That is out of the PLN 1.48 billion legal reserve, that's roughly PLN 1.3 billion, and another roughly PLN 200 million remains on the liability side because that is for the repaid portfolio.

That's -- as I said, it's a noncore asset segmentation. The liabilities come from the bank. We don't apportion the liability. We have a funding cost. The funding cost we give to Swiss francs is roughly 100 basis points, and we'll also frequently monitor this and update this, what is currently planned on a semiannual basis. And obviously, the question is next to legal reserves, what else we shift over? What else we shift over is capital. The capital we shift over is currently PLN 2.9 billion. And that stems from what mechanically -- or mathematically comes out of the regulatory calculations for RWAs but also out of the FX ML add-on that we have on the full bank [ trail ]. And that full add-on is in noncore. And we will continue doing it like this, either on actual, what we did right now, or if we expect a stronger change in FX ML add-on, we might also do this.

Overall -- let's not spend too much time on it. We're happy to take questions. I think Cezary has said the -- it shows the beauty of the core business. That's very important. It was also very important in investor dialogue we had over the last especially 2 years. And I think the ROE of 8%, 8.1% for last year, even in Cove times, shows how strong the core business was and also continues to be.

With that, I will move over to explaining the first quarter and go through more of my standard slides. I'll try to make that short. Let's first look at the loans to customers. Loans to customers are slightly up year-over-year with a stronger trend quarter-over-quarter. If you look at it on the corporate side, you see corporates down in the full year; quarter, up. We have discussed this in the last earnings call that especially around year-end, we had clients paying back credit facilities and trying to actually not have a lot of cash on their accounts. Now we see this usage coming back on credit facilities. And also, we see further good business on retail.

I think the best one is to directly jump to the next slide on new lending volumes where it's clearer seen that, for example, mortgage loans continue to be on a very strong level, with PLN 2.8 billion. Polish business there is strong, also the Czech business is strong. With regards to the Czech business, we We're especially benefiting from the fact that more and more remote services were also accepted by the clients and strong demand there. To guide you a bit, these are quite high figures. The Czech market is very competitive. We will not compete on price there. So I would expect that this is going down even a bit over time or even stronger to where we've been in the past, but we continue to see a very strong Polish business.

Same on nonmortgage loans. Nonmortgage loans, I think in these days, still in COVID but going out of COVID time, anything above PLN 2 billion is really a good result, and that's also the mark where we want to be over the next quarters. New sales in corporates, our clients have a selective approach towards investing. And we also have a selective approach towards pricing. This is why the new sales in corporates is actually lower. You have seen before that the carrying values are higher. That's a function of prior sales. But there have been lower new sales in corporates. But the focus we have, especially also on K3, paid off. So K3 with PLN 1.2 billion of new sales was exceptionally strong and leasing also, to some extent here, stabilizing on a good level.

Let's go over to deposits. Deposits strongly up, as Cezary was saying. Everybody is flooded with cash. PLN 152 billion of deposits here. That's quite an amount. If you put that in perspective, what we have paid in the last quarter on all of these deposits, that was PLN 14.8 million. So we are really paying very, very low amounts on this. And as we have said various quarters before, we have actually stopped paying. So on some, you'll see more of a symbolic payment of 1 basis point. Some of the interest we are still paying is because we have some promotions where people also invest on mutual funds on the retail side. But in general, it's clear we've stopped paying.

The dynamics here on corporate cash came back after we also intentionally managed it down at year-end. Corporates remain to be very liquid. That's obviously not good for deposit management, but I think Marek will later comment that's actually good for corporate risk. So if the corporate clients are cash-rich, they park their money, but they also tend to not default. That's also good news. And on retail clients, we still have the strong transactionality and ease of use that even though we don't pay for deposits means we are still a magnet for deposits.

Let's look at total income. Total income in the quarter, above PLN 1.5 billion, so quite strong. Cezary has said it that net interest income is lower. The lower net interest income has actually 2 effects that, I think, should be mentioned. On the one hand, the first quarter has 2 days less than the fourth quarter. That's already like PLN 20 million, if you adjust for that. Plus, we have also in the fourth quarter and in the first quarter, due to the strong market movements we had in the Polish government curve, we have taken some profits on the bond portfolio. And these profits of roughly PLN 180 million in total for Q4 and Q1, obviously, will not show up in future NII. We think is the bottoming out. The bottoming out will take time over the year 2021. So don't expect the V-shape in NII, but we're building up from here.

Strongest point is the net fee and commission income. Net fee and commission income was nearly PLN 470 million. The key driver there was the year-end fee. We took on corporate accounts selectively on higher balances. That was contributing with PLN 39 million. But otherwise, the engines of the last 12 months, like brokerage, credit, but also, for example, insurance, sales were positively contributing to that strong net fee and commission income. You see PLN 87 million here on gains from financial assets. This is due to the bond sales, I've said before, and also trading income was strong, also helped by the strong client demand and strong client turnover when it comes to FX business.

Let's move to the cost side, which is well under control, but let's start with one angle that we don't directly control, that's the BFG. So good news this year from the BFG side, as the BFG resolution fund was PLN 36 million less than last year. And together with the deposit guarantee scheme, we for 2021 expect to pay roughly PLN 70 million less than in 2020. Even without BFG, costs are up slightly, 1.8% quarter-over-quarter, but down more than 5% year-over-year. So that also shows a tight cost management.

To roughly go through the components, you see staff-related pays of personnel costs at PLN 240 million. So lower than last year year-over-year but higher than in the quarter. This is mainly down to variable pay, so performance-related pay, which was obviously very low in the fourth quarter but still high last year in the first quarter. We also, to some extent, have less people onboard, 44 people less than last quarter at 177, but that doesn't move the needle too much here. Going over to material cost, tightly controlled and tightly managed, PLN 147 million. That is a very low point. But as I said, it was tightly managed and controlled, contributing therefore various angles from administration, over IT but also, to some extent, the lower marketing spend.

Short comment on amortization, that continues to grow, as you know. Even though we have a tight cost discipline, we continue to invest. That's very important for us. And overall, the cost/income ratio picture here is, I think, very positive when you look at the normalized with [ the linear, so quartered ], BFG, 36.8%. That will not be the run rate for the full year, but we will continue to be very conscious when it comes to managing our costs.

And with this, I will hand over to Marek Lusztyn for a view on risk and also capital.

[Marek Lusztyn, executive]

Thanks a lot, Andreas. So on the next slide, we see that first quarter 2020 was excellent from the point of view of cost of risk. The positive trend in cost of risk observed from second quarter 2020 continued in the first quarter of this year. Total cost of risk expressed in zloty was lower than in the previous quarter by almost PLN 98 million, that is 37% down due to the lower loan loss provisioning in both client segments. Consequently, our cost of risk for mBank Group in the first quarter 2021 went down to 59 basis points compared 97 basis points in the fourth quarter of last year and 152 basis points in the first quarter of 2020, which was the first quarter of COVID.

The level of the loan loss provisioning in the retail banking reflects very good quality of our retail portfolio and conservative credit policies implemented across last year. What needs to be highlighted is that after the loan moratoria, the payment discipline among our customers remains very high. We have seen that almost all borrowers who benefited from the moratoria returned to the regular repayments of the loans. We see almost no increase in delinquencies in that segment. As Andreas said, corporate clients benefit from a number of fiscal stimulus which are provided. And that is clearly visible through the lower net impairment and fair value changes in the corporate segment. Those numbers declined by almost 50%, 48.1% to be precise quarter-on-quarter. In zloty terms, it is a decrease of PLN 64 million. And cost of risk went down then to 60 basis points from 118 basis points in the fourth quarter 2020.

This is also the expression and evidence of the conservative approach to provisioning that we have undertaken all across 2020. It needs to be highlighted that those lower loan loss provisioning in the corporate segment are not related to any specific sector. Our loan portfolio is well diversified. We have individual approach to our corporate exposure provisioning. And this is not related to any particular customer segment. Also, it needs to be highlighted that the situation remains highly uncertain from the pandemic perspective. Therefore, in the coming quarters, the level of provisioning will depend on the macroeconomic developments on which -- and Marcin will comment subsequently, and the impact of the economic measures related to pandemic on our borrowers.

The situation of industries hit by the subsequent waves of COVID-19 will be reflected in the LLPs in the following quarters. Relatively low cost of risk in Q1 reflects our proactive conservative approach to the provisioning in 2020. It needs to be said that we cannot really extrapolate the results of the first quarter into the next quarters. We expect that due to the delayed effects of the weakening of the economy during the lockdown periods, 2021 cost of risk may decrease only slightly compared to previous year and only in 2022, it will show a further and deeper decline.

As Marcin will elaborate in details, some industries will quickly recover once the COVID-19 pandemic and lockdowns are over. However, there are also some sectors which have been more deeply affected by the lockdowns. But overall, we see that mBank's loan portfolio is pretty well positioned in relation to those total sectors. And we are overweighted in the sectors that have fared relatively well during the pandemic and lockdowns. We may, however, not exclude that some corporate clients, in particular, from the segments of commercial real estate might have troubles in the -- in servicing the loans in the coming quarters. Overall, there is still high uncertainty that surrounds the COVID-19 pandemic and the asset quality and the LLPs.

Going to the next slide, Slide 25, we see that the nonperforming loan ratio from the group decreased to 4.6% It's worth highlighting that this ratio is way better than the overall Polish banking sector average which, at the end of February, stood at 6.8%. The coverage ratio based on the provisions created in Q1 for loans in Stage 3 remained pretty stable. It stood at 58.5%. And the coverage ratio, including also provisions for loans in Stage 1 and Stage 2 reached 73.7%. which is marginally higher than 72.9% a quarter -- in the quarter before.

Going to the key regulatory ratios. On the next slide, we see that the capital position of mBank Group is excellent and continues to be excellent. We were 5.33% above regulatory minimum requirements. Total risk exposure amount was going slightly up compared to the end of the previous quarter. To an extent, it is driven by the regulatory changes in the risk-weighted assets calculation models, which is a similar trend, which is observed in most of the European banks those days. We expect that total risk exposure amount, for the very same reason, will also marginally drift up in the subsequent quarters.

Looking at the liquidity position. It remains excellent, both net stable funding ratio and liquidity coverage ratios are very high, materially above the regulatory minimum requirements. Loan-to-deposit ratio is one of the lowest ever seen. So from the liquidity point of view, the situation and the risk position remains excellent.

And with this, I hand over to Marcin Mazurek to reflect on the macroeconomic update and outlook.

[Marcin Mazurek, executive]

Thank you, Marek. Macroeconomic situation is improving. When you look at consumer optimism, you can see that this optimism stayed below the levels prevailing before the pandemic. But the last wave of economic restrictions that were mostly hitting the economy in April did not affect consumers at all. So we see a huge adaptation here. And also, it is worth to note that the first quarter was much better than expected. And it was mostly reflected in industrial output and exports.

With this number in mind, with these facts in mind, we upgraded our forecast for the economy for 2021. We now expect GDP to grow by 4.7%. It was mostly the revision of the starting point and mostly, as I said, the strong performance of exports. But next quarters are going to bring further intensification of economic growth because the sectors that were already turned off are going to be operating fully again, I mean, mostly some services.

Unemployment rate is kind of reflecting the good state of the economy. We now see only seasonal movements in unemployment rate, and we can safely say that unemployment rate stabilized. It would go down along with improving GDP growth prospects. It does not apply to inflation. It will not go down. It reached a trough in the first quarter 2021. And given the state of the economy and given the state of local and global economy overall, we think that inflation is going to accelerate further and reach NBP target.

As far as monetary aggregates are concerned, we can see and you can also see that in our bank statistics, deposit base is very high and will stay very high. As far as the loans in the corporate sector are concerned, we do not see a turnaround here, so situation is rather weak. We expect growth rates to turn positive this year. But still, volume-wise, volumes will be lower than in the last years. As far as household sector is concerned, the situation here is better. We can see and observe turnaround in growth rates. And it is safe to say that in next month, the situation will be improving further.

As far as financial markets are concerned, we see that bond yields are somehow higher now than they were in the last year. And this reflects mostly global development and improvement of global growth prospects. But having said that, it is also worth to note that due to NBP buying and NBP auctions, so-called structural operations, the yield levels of government bonds are staying below the corresponding swap rates. As far as the zloty is concerned, it is still weak now. It reached a maximum of 4.68 in the first quarter. And we expect the zloty to slowly strengthen on the basis of stronger economic growth this year and in the next years. Thank you.

[Joanna Filipkowska, executive]

Now let's look at the questions. Some of them have been answered already during the presentation. I will start with some questions about the results. Could you please shed more light on how your asset management business development progressed? Is there any visible impact on your fees performance? Almost 30% fee is stunning results. What's your full year growth guidance? And what will be key drivers?

[Marek Lusztyn, executive]

So in general, asset management and also brokerage is strong. We have announced for asset management as a strategic move that we have founded our own TFIs, our own fund subsidiary. That itself will bring a boost. We're seeing more and more -- but that's more for next year. We're seeing more and more clients interested in investing. That, we also see as a long-term trend. So we're not giving any full year guidance for this year on this, but it clearly is one of the strategic pushes, also demonstrated by the TFI where we actually want to grow.

[Cezary Stypulkowski, executive]

If I may add, one have to be fair. We -- or I've done some kind of a strategic mistake a few years ago when I was hesitant really to set up our own funds, mostly due to the intention to keep the open architecture and to invite a number of players. As we all know, the local market has collapsed and it's -- and we ended up in a relatively difficult situation, which means that we have to, to some extent, also intermediate between the clients and some of our competitors' funds. So the result is that we set up the TFI under the management of are [ Jarek Kowalski ], well known to most of you, our long-term employee and the Head of Brokerage for a number of years and Head of Wealth Management. We believe that with this step, we will be in position to significantly increase also the stream of fees on this front.

[Joanna Filipkowska, executive]

Okay. Thank you. Another question on fees. Do you think the current high growth in fees are sustainable?

[Cezary Stypulkowski, executive]

No, I don't expect that we will be growing 30% year-by-year.

[Joanna Filipkowska, executive]

Now the cost of risk. Why corporate cost of risk dropped so significantly? Do you have any one-offs moved back from Stage 3? Or is it something else?

[Marek Lusztyn, executive]

No, I haven't had any significant moves from the Stage 3 backwards. Basically, we have provisions for the existing portfolio already in the year 2020 and no material defaults were visible in first quarter of this year.

[Joanna Filipkowska, executive]

Okay. Another question on cost of risk. Can we assume 60 to 70 basis points cost of risk for 2021? Can you comment on asset quality trends after support measures expire in the second quarter? What portion of your portfolio rests on state support?

[Marek Lusztyn, executive]

We believe that 60 basis points cost of risk that we have seen in first quarter of 2021 is rather one-off. Overall, we would expect that in the whole year of 2021, the cost of risk would be slightly lower than it was in 2020 across the year. But definitely, 60 basis points is not what we should expect to be a good proxy for the whole year -- for the full year results. It needs to be said that there is a -- part of the portfolio remains on the state support, but overall, that portion is lower than the average in the sector. Our loan portfolio piece, well positioned towards those sectors, which are actually benefiting from the pandemic situation. However, we expect that once the state support is over, we may see some deterioration in some of the clients, which are in the sectors that are affected by the pandemic measures. But we expect that it is not something that will have a material impact on the overall cost of risk which, as I said, we expect to remain slightly lower than it was in previous year.

[Joanna Filipkowska, executive]

Thank you. Why is PLN 66 million in legal provisions for mBank's FX mortgage portfolio this quarter adequate in management's estimation? Given the likelihood that the Polish supervisory agency settlement proposal will prevail, how does mBank's risk model account for this probability?

[Cezary Stypulkowski, executive]

Well, maybe I will start, and I will pass to Marek. This is a proposal, which is being, I think, discussed also between ourselves and our shareholders. We had a set of meetings with major shareholders, not only with Commerzbank, to some extent, testing the appetite for the amicable solution under those thesis of KNF. We have a general view out of these meetings that we will be able to get the support from our shareholders. There is one caveat, which is many of them expect that it will be not one-sided solution. Obviously, part of the whole picture is heavily dependent on the direction of the jurisprudence, which is around these cases. Currently, there is one bank, Pekao BP, which is leading the show, testing the waters. We will be looking into what will be the developments. And based on the -- their experiences, we are in a close contact, we will decide, and we will also approach our shareholders to come with the ultimate solution.

We want to stress that mBank is interested in amicable resolution of the issue. We share the view that both the banks and the clients have been exposed and exercised unexpected level of foreign exchange developments, talking about Swiss franc and zloty. And to some extent, it has impacted the clients. That's the reason that we believe that our legal position needs to be solidified. And that's the reason that we believe that a number of things should happen on the legal front but, at the same time, independently, we will be interested in amicable solutions with our clients. That's the current line. And obviously, depending on the upcoming rulings by [ EU Court ] which, as I understand, just has happened and the Supreme Court in Poland, we will be better equipped and I believe also the customers will be better equipped because, as I hear, the customers at that stage have been hesitant to open the active dialogue with the banks as well. Marek, PLN 66 million as...

[Marek Lusztyn, executive]

Okay. So on the level of provisioning, as we have explained at length discussing our fourth quarter results, the provisions created in the fourth quarter 2020, which were a very material amount, in the opinion of the management at the time, we're covering expected inflow of the cases over the 5-year period, which is ahead of us. Since the number in the first quarter was slightly higher, we were just adjusting the level of the provisioning to the number of incoming cases, but there were no other material changes in the model and in the way we calculate the level of provisions.

[Joanna Filipkowska, executive]

Thank you. The next question had been already answered in part, but I will say it, are you hopeful on the implementation of KNF Chairman's loan settlement proposal? Have you done any survey, et cetera, to check if clients would be willing for such offer? What sort of regulatory support you expect from authorities?

[Cezary Stypulkowski, executive]

I believe I have already answered to the big part of the question. As I said, we are interested. Though we believe that there is a number of very specific conditions which needs to be met, I believe that some clarification of the legal environment is necessary. We are working in concert with other banks, including the leading Pekao BP to set up the right framework for the agreements and to get into the operationally sufficient structure, which will allow us to execute. The execution will not be trivial. And as I said before, surveys are surveys. And based on the surveys, one can expect that there is, I would say, a significant group of clients interested in amicable solutions. But as I hear also from Pekao BP, for the time being, customers are hesitant really to enter into the very active dialogue.

We have to understand that there is -- as you've seen in our case, it's a significant number of cases. So also the infrastructure for this needs to be well prepared. Otherwise, we will end up with an operationally difficult process. Plus, some clarification is definitely needed because let's assume we will switch clients into the zloty on the request that should be initiated by themselves. They will enter into the interest rate risk. And based on the current legal interpretations in Poland, I have to say I'm scared that we will move from the currency risk, which has been questioned and led to the number of valuations of the contract, into an environment where the interest rate will go up and will be in very much the same situation. That's the reason that the paradigm of legalities around the contracts needs to be solidified in Poland. Without this, it's very difficult to make such a decision.

So the answer is, yes, we are fundamentally interested. Even more, I would say, independently of what will be the results, even if they will be favorable for the bank -- for the banks, I should say, we will be approaching our clients with some kind of a proposal on switching into the zloty exposures but, obviously, with lots of conditions, which will not expose us to the -- another set of the questionable legalities in the future.

[Joanna Filipkowska, executive]

Thank you. And I think the last question today, EU Court in today's ruling has put onus on Polish courts to solve FX mortgage fights. Does it disappoint your expectations or impact mBank in any way?

[Cezary Stypulkowski, executive]

Well, obviously, this is premature to make any comments on this front. But the wording, which I have seen on the neighboring screen, I have to say, is encouraging. So as I said, this is premature. But I believe that as I have mentioned, as some of you know, I'm pretty vocal on the issue due to the fact that I don't have any sort of intellectual/management mortgage since I was not around when the product has been offered. But I believe that what I'm seeing on the screen seems to be encouraging.

[Joanna Filipkowska, executive]

Thank you very much. I think we have covered all the questions today. So thank you very much for your attention, and have a nice day. Bye-bye.

[Cezary Stypulkowski, executive]

Thank you.

[Andreas Boeger, executive]

Thank you.

[Marek Lusztyn, executive]

Thank you.