mBank SA

WSE:MBK

Earnings Call Transcript 2019-Q2

[Joanna Filipkowska, executive]

[Interpreted] Good morning. Thank you for being here today in big numbers, and welcome to this conference, which will summarize the Q2 results of the mBank Group. Today, we have, Cezary Stypulkowski, CEO; Andreas Böger, CFO; and Ernest Pytlarczyk, Chief Economist. Over to Mr. Stypulkowski.

[Cezary Stypulkowski, executive]

[Interpreted] Good morning. And welcome to this conference. Some of the key messages we'd like to share include the following. The bank has been growing relatively fast both as measured by balance sheet items and P&L items, which increased significantly year-on-year. I should say that the key driver of the growth was the net interest income, which is now approaching PLN 1 billion per quarter. What is unsatisfactory is the net fee commission income. And for many reasons, which we may address in the Q&As. NFC went down year-on-year partly due to the fact that the bank has changed its profile, when it comes to the recognition of certain income items from insurance. But the market is not very conducive, especially to sales of investment products. Therefore, year-on-year the NFC went down.

However, we're quite satisfied with our revenue. When it comes to expenses, we have seen a steady increase, which, however, has been lower over the years than the increase in our revenue. So as we've often said, we're managing this at the CI level. This is what we are focusing on rather than nominal numbers. We don't have a structural problem with expenses.

The profit was -- the net profit was PLN 331.6 million, an increase year-on-year and to anticipate your questions, our separate bank tax has increased partly offset by the recognition of income tax. As I said in the beginning, our volumes grew both in loans and deposits by double-digit number year-on-year, which shows that the bank has maintained its dynamic growth and increased its market share.

In addition, we've seen positive change in the structure of our assets improving our margins. The margins have grown gradually for a number of reasons. On the one hand, thanks to deposits and a better pricing of loans, resulting in a decrease in the volume of Swiss Bank loans, which has -- makes a positive contribution to our NII. As part of the capital ratios, there is nothing new there. We have a relatively strong capital position. We believe that we are more than a safe bank in a safe zone with a Tier 1 at about 16%, 17% under C -- TCR, slightly below 20%. The cost of risk was relatively high, 90 bps partly due to several exposures in corporate banking. We did not see any significant developments in retail. The NPLs, however, are relatively good. The NPL ratio is 4.8% and has not really changed much recently. The coverage ratio is 61%, which seems quite good.

As for other business highlights, the number of retail customers has dropped modestly as we closed down some inactive accounts, and the telecom partnership project, which wasn't very successful. We also reviewed our client portfolio in that context. We have been growing in the Czech Republic and Slovakia. The trends of improving market shares, loans and deposits continue.

In corporate banking, we have been growing fast as well. We have seen a strong improvement over the year. Product innovations, I'd like to focus on the transfer of some insurance products to the mobile platform, which is a risk the bank is trying to take as we add more patience to be the icon of mobility.

Over the years, we've seen a very positive trend as mBank is positioning itself as an SME bank, especially in commercial banking, in e-commerce. We've opened factoring opportunities to SME customers, that's another innovative product that has been welcomed by our clients.

As for the detailed results, I will turn over to Mr. Böger, but first, let me point out 2 items. On the P&L, what I need to stress is the steady improvement of our interest margin, which has been growing steadily for 3 years, and it's a mixed -- it is helped by the asset and liabilities mix of the bank. We believe this should continue. What is important here is the gradual decrease of our exposure to Swiss Bank loans by, I think, 10% last year.

Like all banks in the industry, we are affected by the levies on the industry, which means that our return on equity is not very satisfying.

However, I mentioned this many times before, the Polish banking industry is taxed very heavily, and banks with a very good C&I have a relation -- have an issue with levies and especially if they have an exposure to Swiss banks. They find it difficult to generate satisfying returns for their shareholders.

I do not want to speak much about the balance sheet, all the items look good up and growing in the lower teens, single rate -- single-digit growth but quite dynamic. Over to Mr. Andreas Böger.

[Andreas Boeger, executive]

Good morning also from my side. So I would like to take you through some of the details of our numbers for the second quarter. And as always, we start with loans. So in loans, we have seen the continued strong trend in both client groups. First of all, the overall picture. If you look at the growth in the quarter and also in the full year, the growth in the quarter was around 3% for total loans, and around 12% for the full year.

Corporate particularly strong year-over-year, also strong in the quarter. We're particularly happy with what is happening in corporate. And the underlying dynamic here is that the portfolio we're generating is granular and diversified portfolio. So this is a very good pickup in volumes here over the time horizon you can see.

Also very strong and very strong particularly in the quarter was the Retail business on both non-mortgage loans and mortgage loans we'll see that on the next slide. But also the growth rate if you see here of 3.8%, obviously, that includes as the President has said, that includes the Swiss Bank portfolio that's managed down so that includes minus CHF 88 million in the quarter and given that backdrop still having a growth in volumes, in non-mortgage loans of nearly PLN 1 billion and mortgage loans net PLN 1 billion and roughly PLN 1.4 billion without the Swiss francs is really quite strong.

So looking at these dynamics and at the new business, first of all, mortgage loans, and we have said this in the past that in mortgage loans we further want to work on our process, we want that our clients basically have access to mortgage loans in our bank. You see a growth rate of nearly 50% quarter-over-quarter and 90% year-over-year. As I've -- as I said, this is because we emphasize this product more, we work on the process. The good message here is we also, obviously, intensively look at margins here, and I can say that the margins in the second quarter were even slightly better than in the quarters before. So this growth is all at healthy margins and more down to how we internally prioritize the product and less about aggressive underwriting.

Non-mortgage loan on a very decent level was PLN 2.6 billion nearly written business. So we're also happy with how this is going. And obviously, I think to maybe preempt one of the questions that will come, what's the outlook for mortgage loans and non-mortgage loans, given the strong trends. You never know about Q3 because Q3 you have vacation times, et cetera, but we think that the levels we have seen here both in mortgage loans and non-mortgage loans are kind of repeatable and a good basis for future business.

Corporates. So corporate, we had a bounce back in Q1. We were not particularly nervous about the new business because new business basically was with longer tenures, I explained this. But Q2 was particularly strong and what was also particularly good is, I mentioned before, this granular and diversified portfolio that also the number of clients behind this new sales of PLN 9.6 billion is also quite high. So it's not due to some high big -- some big tickets, but really down to client activity. And this is for -- in all client segments as you can see and also includes strong structure finance.

Let's go over to deposits, let's not spend too much time, we'll give you some time for questions. Deposits, transactionality is the key theme. That key theme, and the trend continued, you see continued growth 2.5% quarter-over-quarter and nearly 13% in the year.

Corporate intact, but I think this transactionality trust, as an example, if you look at Retail, Retail in the quarter that transactional accounts, the volume increased by PLN 1.9 billion or PLN 1.88 billion. And term deposits only went up by PLN 140 million. So I think that shows the dynamic that we're growing by more than 10x in transactional accounts vis-à-vis deposits.

Let's go to income. It was already said, a record core income at the quarter, and 5.4% more income than in the quarter before. Key driver for the income at nearly PLN 1 billion is the net interest income and net interest income that was driven from basically 2 levers. On the one hand, we had -- we were working on the asset mix. So higher profitability on assets, but also we had lower cost when it comes to interest cost, particularly because of capital markets -- of the cost of capital markets funding.

Cezary already said, the part we want to further work on is net fee and commission income. Net fee and commission income is down by PLN 3 million quarter-over-quarter. Still we have a situation that capital markets activity is low that is, on the one hand for brokerage, on the other hand also for the funds business. And there is still outstanding discussions also with KNF towards recognition of some of the fund fees. We had higher growth and higher income, for example, on cards business and in credit business. So this amounts to in total roughly PLN 20 million more, but we also had higher cost in the quarter, both for cards but also for intermediaries because if you see the business we were writing before on the loan side, some of this business is also going via intermediaries. So that also gives some fee and commission cost.

Trading, on a good level similar to last quarter, strongly up compared to last year. Then you'll see gains and losses from financial assets and liabilities up that's, for example, now showing the effect of Visa that's why we also restated Q3 last year. So you'll now see a Visa effect here of PLN 7.3 million in Q2 2018, and there are also some other operating costs which basically nets itself roughly out.

Let's go over to total cost and Cezary also already said, total cost, good underlying efficiency. And you can particularly see this in the cost-to-income ratio. The cost-to-income ratio of 40.4% is very strong, and I'm not aware if we ever had such a strong cost-to-income ratio in the quarter, at least not in the last 2 years since I'm here. So this is a very good result. Cost itself increased and as was said, we continue to invest also, was increased by 3.7% in the quarter, but we've said that revenues increased by 5.4%. And maybe to give you a feeling of where we actually spent the money, obviously, part of it is staff cost PLN 5.5 million more staff cost that includes commissions we pay for good new business. But also the head count increased by roughly 100 FTE in the quarter. And if you look at material cost, it's on the blue bar here, material cost increased by PLN 15.6 million. And the key drivers here is, on the one hand, marketing with PLN 9.7 million, we always say marketing if you have a branch like business model you'll need to invest in marketing, and this is where you also get new business volumes from and the rest here is IT.

So let's go over to cost of risk. Cost of risk higher in the quarter with PLN 224 million, you see this here up by 50%, but we always evidence some of the seasonality here from first quarter, second quarter. If you, for example, compare corporates and maybe it's better to compare this also to the second quarter last year. So corporate cost of risk, let's go to the basis points, is 81 basis points versus 113 basis points last year in the second quarter. And Retail, I think, that's something we always say is there is an upward trend in the cost of risk because obviously, the mix is changing towards higher-yielding assets. And this is why we also have a higher cost of risk here.

As I said, I think, there is a seasonal pattern. You always have in last year seen Q1 a bit lower, Q2 particularly heavy on LLPs, and I think the second half we've also last year seen is still higher than Q1, but often Q2 marks the high point. The outlook on our cost of risk is given that backdrop, we think that cost of risk for the full year will be close to 80 basis points, 8-0. Loan portfolio quality in the next slide. Let's briefly look at this, I think, it's not spectacular, but let's look at non-performing loans because we have also added a new number there. But first on the non-performing loans, the non-performing loans are at 4.8%. This is still well below the sector average, sector average is at 6.8%, and we have also for competitive reasons added the non-performing loan number that is calculated according to the EBRA, according to the EBRA definition, it's 4.35%. There is various differences between EBRA definition and the way normally you would look at it and how analysts look at it, particularly difference, for example, is that EBRA takes cash balances and Central Bank balances in. This is why this number is a bit lower. And you know there is a magic number of 5% for EBRA so if you breach the 5%, you need work more on your NPL strategies, et cetera. But I think this adds some more clarity that with our 4.8%, we're still far away from the EBRA number because our EBRA number is 4.35%.

Last slide from my side is capital, as already mentioned, capital -- strong capital ratios, the Tier 1 ratio is more than 200 basis points above the KNF minimum. And on the liquidity side, both liquidity coverage ratio and net stable funding ratio are at very healthy and solid levels

And with this, I hand over to Ernest.

[Ernest Pytlarczyk, executive]

[Interpreted] Good morning. Interesting developments on the macro fronts. The global economy is at the weaker point, and we have some mixed data for Poland. We look at the difference in business days, which is minus 2 now. And with additional holidays, the monthly macro ratios have dropped. Analysts are wondering what's happening next in the second half of the year. Some analysts have upgraded their forecast, others have downgraded theirs. So it's an interesting turning point. It's like a betting. But we believe that in H2, the trajectory of growth will be better than in H1, thanks to fiscal stimulation.

The 500 plus scheme with benefits for children, 0% personal income tax rate for young people. So fiscal stimulation at 1.1% in GDP in H2, which should improve the growth trajectory even though the global economy is not that strong. But yesterday polls in the U.S. that the U.S. economy is past its dip, but we will see stimulated monetary stimulation across the world. The Fed will cut the rates as well as ECB and other banks in H2. Inflation in Poland is rising. Current inflation will continue to grow. We've seen a lot of supply drivers. What will the Monetary Council do in Poland? We don't think it'll do anything because it's watching the global economy, and it's watching the long-term prospects of growth next year. And especially in 2021, the growth trajectory in Poland will weaken. So it's better to buy insurance rather than cool down the economy.

Cynically speaking higher inflation solves some of the problems. It's 2.9% so it's still within the band. But it solves a lot of fiscal problems because with positive inflation, the problems are resolved. Across the world inflation is too low. In Spain, and in Portugal inflation is low or negative. The PMI has stabilized, its components are quite interesting because for instance, we've seen a decrease in purchasing of finished goods, while orders have been growing. So we see this as cost restructuring of enterprises. The loss rate of the portfolio is rising because there is so much competition in the corporate sector. Companies are restructuring, and they're trying to use some cost reserves. So the economy is improving its competitive rates, even though salaries have been up and rising.

Now the monetary aggregates as a reflection of the real economy. We have seen stabilizing increase in deposits and loans in corporate banking. In our view, this trend will step up as a condition for GDP growth. In our opinion, where we are now is a point where investments will step up sharply in Q2 and forward. In household aggregates, we've seen a strong increase in demand for mortgage loans as a result of the conditions on the job market and the consumer sentiment index, which is very strong where consumers consider their financial position to be very strong. And as Mr. Böger has said, this will be a lasting part of the landscape growing demand for mortgage loans. What is interesting is the situation with household deposits. We've been saying it for many quarters, we have benefited from the weak activity in investment funds and no alternative to investment savings or investments for households because of the lateral trend on the exchange. But more and more banks are offering negative rates in real terms. So what we need is an incentive for the market to channel savings to other sectors, mainly real estate we've seen growing prices, although earlier this year, we had a mixed feeling. But we believe other asset classes should also benefit from the low or negative rates environment. So the fiscal and monetary policy in Poland is very stimulating, and this will also impact the prices of assets. Bonds, I think the main trend is over, but there is a new paradigm circulating around the world, and nobody believes that bigger growth can be stimulated without inflation. So we're benefiting from the situation around the world. And we have seen full year lows in terms of yields. The zloty will be stable. Thank you. The floor is open for questions.

[Unknown Analyst]

[Interpreted] I'd like to ask about the yield NII, which grew 7% quarter-on-quarter and 17% year-on-year. These are high rates of growth and bank experienced last year much stronger compared to the market, was there one-off? And why is this growth so strong? And will the bank continue to benefit from strong growth in the coming quarters?

[Andreas Boeger, executive]

So first of all to answer, there's no one-off in this. So this is underlying business. And I think it's 2 sides of the coin. On the one hand, it's really the interest income, and this is strong because the mix is changing. And you see much more on the mortgage loans like now in -- for example, you see the mortgage loans going down -- the Swiss Bank mortgage loans going down. And in general, when you look at the dynamics of the loan book I mean the loan book went up by 12% year-over-year. So that's quite strong. And the other side of the coin is always strong growth, different mix. And the other side of the coin is still that interest expense is contained because of the business model we have, on the one hand, which is based on transactionality with very cost-efficient deposits. We think that we have one of the most efficient deposit bases in Poland, if not the most efficient deposit base. And also the fact was that we were able to contain the cost of capital markets funding. So you can also see this on -- in the appendix, for example, on Page 25. You see the dynamic here. Interest income, growing by 14.6%, and interest expense only growing by 7.1%. And you can also see the drivers here, and the drivers are mostly in loans and advances also in the income. And that's all what I said regarding the mix. And I also said that issue of debt securities somehow contained with PLN 70.7 million in the quarter vis-à-vis PLN 82 million in the quarter before, but the year before PLN 73 million. So that's quite stable in a growing bank and in a growing balance sheet. But no one-offs that's somehow -- worth mentioning.

[Unknown Analyst]

Question about cost of risk, you commented about the cost of risk may be they segment, but it seems the volatility comes from the corporate segment. I wonder what was the reason behind the increase in second quarter? And what is your outlook for this particular category? Do you see any worsening of the situation of Corporates? Or it's like second quarter -- increase in second quarter was sort of a one-off?

[Cezary Stypulkowski, executive]

[Interpreted] We don't think this is a strong trend, it's quite incidental to corporate banking. As I said before, in Retail, we did not see any deviation from the trend in corporate banking. There were 3 incidents, which caused the cost of risk to increase in Q2, but we do not think this represents a trend. Yes, we've looked at it with risk, but there is no common denominator for all those incidents. There is no pattern in terms of this -- the business -- the industry. So this is just incidental.

[Unknown Analyst]

[Interpreted] Could you comment on your annual net profit outlook? And CEOs of banks, asked for comments about the opinion of advocate general of the European court of justice, would say let's sit and wait. The opinion of the advocate general does not always coincide with the opinion of the court or the decision of the court. What do you think?

[Cezary Stypulkowski, executive]

[Interpreted] Let me take your second question first. Well, we have been worried about it 5 years. In 2015, that was 4 years ago, I think it was on the 1st or 2nd of August that the Polish Parliament, the lower house, voted on a law that would cost, I don't know, PLN 20 billion, PLN 60 billion many numbers were mentioned. But there was a tangible fact, not just someone's making a statement. The lower house of the Polish Parliament passed that law. So the roller coaster has been running and that something we have to live with. But let's not get overexcited whatever happens, whatever is being said. Let's keep the -- let's stay calm. I don't -- well, I believe you realize that when you use an interest rate for one currency to -- and apply it to another underlying currency that goes against everything. Everything -- all the rules of the business. So I'm not saying there is nothing to be concerned with, banking is all about being concerned, but let's stay calm.

There is no clear case law. It takes time to develop it. I'm a lawyer by education, and I'm interested in how this situation will develop. A year ago, a book was published presenting the case of Polish courts, and I have been watching new court decisions closely. But I wouldn't jump to conclusions. The opinion of the advocate general comes in response to a question from a specific court. And I don't think we should jump to conclusions or panic, it will take a lot of time before the case law develops. Now for the time being, in the majority of court cases that we took part in, which were decided by the courts, the courts mostly agreed with the position of the bank. But I realize that the climate, especially where the parliament did not accept the expectations of people who are considered agreements to be full of abusive clauses means that this will be taken to court. And this is something we have to live with for a while. But on your question about the opinion of the advocate general, I think this will have to evolve.

On our annual profit, I am looking at my colleagues, they are saying I shouldn't -- I should keep my mouth shut. I think we have maintained our general guidance with like our net profit to be bigger than last year of course, but obviously, the banking sector, including mBank, faces decisions of regulators and public levies imposed on us. So at this point in time, it would be hard to come up responsibly with a forecast that would be really reliable, but it is our ambition, of course, to improve on last year's profit.

[Unknown Analyst]

[Interpreted] I have a question about what you said about better pricing in lending. Is it thanks to a better mix? Or did you reprice the loans?

[Cezary Stypulkowski, executive]

No. Look at our mix. We had PLN 2.666 billion of consumer loans, 6:1, the best quarter ever. And this is a higher margin product. In corporate banking, we have seen some changes in the mix as well. So the bank is gradually changing its mix and improving its margins. It doesn't happen every quarter to be honest. In corporate banking, we have seen some volatility in margins. But I don't really think that quarterly figures matter that much because the trend has continued for years. Since 2014, we have seen our margins rise. And the details that were mentioned by Mr. Böger, when you look at the full picture there are many factors, many drivers. If we change our funding mix to the detriment of its long-term profile, if we decide to finance our business more with deposits as our peers do, we could improve our margins even further on the balance sheet. So we have room for that. But we are quite conservative with our funding, considering the mix and the structure of our assets. But the trends are quite satisfactory I think.

[Unknown Analyst]

[Interpreted] You announced some increases of fees and commissions, when are you expecting the first results?

[Cezary Stypulkowski, executive]

[Interpreted] The increase kicks in on August 19, we think this will help the results this year in part. And we published the justification for the increase. I think the Polish banking industry will have to raise fees for some activities. I do not want to discuss the expected impact of the changes. It will not be very significant this year, but over a period of 12 months, we can see some increase offsetting part of the costs we pay due to public levies.

[Unknown Analyst]

[Interpreted] A question about new sales of consumer loans. In view of much higher costs of your intermediaries, was there a seasonal effect to the cost of intermediaries? Or is it that the cost of intermediates will grow because you're selling more outside of your proprietary network?

[Cezary Stypulkowski, executive]

[Interpreted] I think market mortgages would grow by 90%, I think, had a big impact. So the fees were paid to intermediaries for sales of mortgage products. I don't think consumer lending generated such a significant increase. The volumes grow, yes.

[Andreas Boeger, executive]

Of course, I think in consumer lending on non-mortgage loans, it's important that we base this on our own clients. This our own clients, this is their profile which we see. This is the pre-approved credit limits we do. The amount of non-mortgage loans we have written in the quarter and also in the last quarters with non-clients is less than 10% of the overall. So it's not any external or whatever, some of it is always the case. But the main business behind it is our own clients as I said, we know them, they have pre-approved limits and they use them.

[Unknown Analyst]

[Interpreted] What is the average size of the consumer loan that you grant?

[Cezary Stypulkowski, executive]

I think the average is much smaller than the sector average 12,000; 13,000? 15,000 I think, and the tenures are shorter than the industry average.

[Joanna Filipkowska, executive]

[Interpreted] We have some questions that came online.

[Unknown Analyst]

Lower funding costs ahead, can we expect similar trends for mBank, funding costs?

[Cezary Stypulkowski, executive]

[Interpreted] It's a generic question. So we think we report relatively low cost of deposits. We think this trend will continue. Although Ernest said, we might be at the turning point and clients will shift from deposits to investment products. But we have seen an increase in double-digit growth. And a significant increase in the bank's market share over the years. So I don't think that trend is likely to turn. And when it comes to wholesale funding, mainly from the international market, the cost of that funding drops year-by-year significantly that's one of the reasons why our NII has improved. Let me have a look at the question again. Interest rate cuts across the world, a 30-year yield close to 0 in Germany. So that also helps us. Next question.

[Joanna Filipkowska, executive]

[Interpreted] How many individual court and pre-court cases concerning Swiss franc loans to which the bank is a party, how many of such cases are pending at this point?

[Cezary Stypulkowski, executive]

Well, I know that one of the banks published such numbers. But, in fact, we believe considering the current situation with court cases, trends and the lack of a stable case law, we do not want to disclose the numbers. To be honest, we don't want to affect our position in individual disputes. But I can say that we're sorry about each and every court case with dispute because this concerns our clients. But I get ads on Facebook from lawyers all the time. And I think we will stand by our position, we will defend the position of the bank in those cases.

[Joanna Filipkowska, executive]

[Interpreted] Another question from [ JP ]. Are you planning new Tier 2 subordinate bond issues, in what currencies for what tenders? Are you planning to redeem subordinated bonds from 2014 early in the beginning of next year?

[Cezary Stypulkowski, executive]

[Interpreted] Well. I think we're planning to issue Tier 2 bonds this year in autumn. And the tenure would be -- well the bonds are maturing in January. So I don't think we're going to redeem them early unless to do some rematching.

[Andreas Boeger, executive]

The call rights on any existing bonds in the early redemptions once we decide on this, not in the earnings calls.

[Joanna Filipkowska, executive]

[Interpreted] Next question. The bank has recently said it signed a loan agreement with the European Investment Bank to finance, among others, green projects. Are you planning to develop your offering of green products?

[Cezary Stypulkowski, executive]

[Interpreted] Well. This is the tide guys. So yes. We had a demo in front of the building 3 weeks ago concerning our exposure to -- well our participation in the EMEA bond issue. I don't want to go through that again. But there are 2 points to make I think. First, our employees and managers are quite sensitive to our environmental issues. And we believe we have a mission to serve. And we feel responsible in our relations with customers who are our long-term customers. So we have to balance that and try to take our customers through these difficult times, that's not easy but we'll try to balance -- to strike a balance between our historic exposures and -- historical exposures and a certain shift towards a better environmental responsibility. Well, I come from a region of Poland that is called the greenlands of Poland.

[Joanna Filipkowska, executive]

[Interpreted] A question from [indiscernible]. Demand for loan seems to stand strong, will it stay so, however? And do you think you can improve your margins on new lending?

[Andreas Boeger, executive]

So we generally think that loan demand will be healthy. We think the loan demand in general will be in high single-digit for the overall market. Also, for us it might be a bit better there, maybe overall market is single to mid-single-digit. As said before, we are working on the margins. It's not always every quarter, and it also depends on the client. But obviously, we're not into buying market share at low margins. So to summarize, yes, we think it will further grow. Market will grow similarly through the past, and margins should slightly increase.

[Cezary Stypulkowski, executive]

[Interpreted] Over the years you've seen the bank grow quite fast. Our market share has grown. There was a dip around 2016, which was due to a sharp increase in the capital requirements for the bank. So the growth rate of our risk weighted assets had to slow down because of the capital buffers imposed on the bank because of our Swiss franc portfolio. Those were really extraordinary, and we couldn't absorb them overnight. So apart from late 2015 and 2016, we have seen a steady improvement in the context of a growing economy, as Ernest said. And we think in the next 12, 18 months this will continue, right?

[Joanna Filipkowska, executive]

[Interpreted] And another question from Maciej. Why a bank tax provision? Why did you set up a bank tax provision?

[Unknown Executive]

[Foreign Language]

[Joanna Filipkowska, executive]

[Interpreted] And the last question that came online. Santander bank has recently said it set up provisions for Swiss franc litigation. Did you do so as well in the past few quarters?

[Cezary Stypulkowski, executive]

[Interpreted] We are setting up and releasing provisions as we go. Our litigation is covered by provisions. And then we release provisions when the courts decide, to the extent allowed in the absence of a clear case law. Most court cases, however, have been resulted to the benefit of the bank. So we set up provisions depending on the situation. We do it steadily, regularly on a regular basis, and I don't think we differ from the mainstream in the banking industry. I do believe that the methodology we follow is the best possible reflection of potential risks of litigation that is pending. So to the extent we can judge, we believe our provisions are perfectly adequate to the court cases pending.

[Joanna Filipkowska, executive]

[Interpreted] Thank you. Any questions from the floor?

[Unknown Analyst]

[Interpreted] One question about your anticipation concerning inflation? Do you think the upper limit of the inflation band, 3.5% will be crossed and when?

[Ernest Pytlarczyk, executive]

[Interpreted] This is quite likely, by the end of the year inflation will stay at roughly 3% mainly due to higher food prices, next year we'll see energy prices being unfrozen, but before the election, gas prices may be reduced. The energy regulatory office has a new precedence -- 3.5% is quite likely. On the other hand, when? Well. Sometime before the end of the year -- before the end of the year that would be very likely. But what we also think is likely is that NBP's model cannot, with all its dynamics and mechanics, it cannot produce a higher inflation band. So I think the Monetary Policy Council cannot really raise it overnight because of the intricacies of the model.

[Unknown Analyst]

[Interpreted] I have a question about your approach to the capital buffers for FX loans, mortgages, following the recent decision of KNF concerning BNP Paribas and lifting the capital buffers. How likely is the position of KNF to be relaxed for any other bank? Or was it just a specific case of BNP?

[Cezary Stypulkowski, executive]

[Interpreted] Well. The landscape is shifting. Historically speaking, some of the decisions of the Financial Stability Board and the Polish Financial Supervision Authority have been made to encourage banks to offer voluntary currency conversion, not necessarily due to a prudent approach as such, rather that was just a tool. As the legislation does not address the expectations of some customers, the banking industry has always been saying that we need to offer assistance to people who need it, but it is unjustified to offer a flat or a blanket conversion to everyone. Some prudential measures concerning Swiss franc portfolios seem to be rather unjustified. On the other hand, there are some risks involved in litigation. But the case law has been quite good for banks. We may disagree with the individual court decisions, but the majority of them have been positive. But the risks that we face have to be mitigated, and we need to stand by our believes. And to be -- and to address your question directly, we need to -- this is something that needs to be revisited by KNF, not only with respect to individual banks because they are making individual decisions, and the capital requirements are approved and reduced by KNF on a case-by-case basis depending on the calculation methodology they follow, but at 150% risk weight for such exposures has never seemed to be justified.

If you have no further questions, thank you very much. And please join us just in the wings.

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]