mBank SA

WSE:MBK

Earnings Call Transcript 2020-Q2

[Joanna Filipkowska, executive]

Good morning, and welcome to this conference, which will summarize the results of MBank Group in Q2 2020. Once again, we are meeting online, but I think that's something we are all getting used to.

We have today Cezary Stypulkowski, CEO; Andreas Böger, CFO; and Marcin Mazurek, Chief Economist. Over to Mr. Stypulkowski.

[Cezary Stypulkowski, executive]

Good morning. As you all know, these are not easy times. They are rather demanding, as you say, euphemistically, interesting times perhaps. And it's no more good old times. That's something new. Anyway, speaking to the point, the conditions are rather mixed. On the one hand side, our quarterly results are looking quite good, as a result of some milestones reached in March, April and May, and the impact on different areas of the bank. The name of the game, of course, is our net interest income. Year-on-year, NII has increased. However, we realized that the [ early ] is down. The decisions of the Polish Monetary Policy Council will significantly slash NII in the second half of the year.

Now on the positive note, the net fee and commission income grew quite significantly, something we announced last year. That's our aspiration. The NFC has been driven by a number of factors, more on that later. Our revenue has increased both year-on-year and quarter-on-quarter. We are no longer growing at a double-digit rate though. Thus we're happy to impress you with over the years, but it's still looking good.

Another point to mention, the cost of risk and legal provisions, which made a strong impact on our net profit, which stood at PLN 87 million eventually. So our return on equity stands at about 2%, which is not a good omen.

When it comes to volumes, just like across the sector, our loans were not very strong because we have strong competitors in the form of the government, which is giving away money. Some of it non -- whereas loans have to be paid back. And also, economic activity dropped, which made its impact on lending. So our loans -- our lending dropped quarter-on-quarter and increased 6% year-on-year.

On the other side of our balance sheet, deposits have been growing like crazy, I might say, at a rate of 20-plus percent year-on-year and several percent quarter-on-quarter, which shows where we are. And the trend is unlikely to continue at that rate, but we are also expecting that this process where our balance sheet is based mainly on deposits, that should stay with us.

The relative drop year-on-year was stronger in nonmortgage lending. We are looking at it, of course, and we have to be realistic and say that the actual economic momentum right now for companies and households, the like, will become -- well, we will get a better picture of it in October and November. Under these circumstances, the name of the game is a strong balance sheet, and we're quite conservative about the recent developments. So we are quite well positioned when it comes to both capital and liquidity. And we are well prepared for a potential wave of insolvencies among customers. The NPL ratio is still very good under the Polish circumstances, dropped slightly.

Now briefly, on the support schemes. Our bank has taken part in all the government schemes, including BGK and PFR programs. And most importantly, perhaps, what we decided to offer to retail and SME clients by way of loan moratoria. I'm not going to discuss the details, but I just want to point out 2 things. First, our bank handled about 5 -- let me see, PLN 5.5 billion of PFR money. Interestingly, 22% of all applications or requests approved by PFR came via mBank. They may not even be our clients. I'm expecting they will be one day. But the convenience we offer probably helped. That's our take on it. Our interpretation of that situation.

When it comes to our offering for retail clients, 2 points. We received about 100,000 applications, of course, the number approved was lower. You have the amounts on the slides. The exposure is how much, PLN 6.296 billion. And you have a breakdown on the slide. Our clients have taken advantage of the schemes in various ways. We are offering up to 6 months of moratoria. Our clients could choose the actual periods. We'll see what happens in November, October, when those 6 months come to an end. But the picture is looking quite good. We think our clients and also the banks in the industry have been really quite prudent. And I think it will be fairly certain that they will be repaying their loans regularly after that period comes to an end. I cannot -- I don't have a crystal ball, of course, but that's my sense.

The loan moratoria offered by the banking industry and also properly accounted for under the IFRS, those were quite broadly approved. And the legislative moratoria, I think we only received about 50 applications totaling PLN 1 million. So actually, banking industry has been more sensitive to the actual needs of clients at a very early stage a bit. And let's be fair, the legislative moratoria mainly address the people who are losing the jobs. That's the key trigger. So if unemployment would rise -- I think it's actually dropped, unemployment rate, from 10% to 8%. So it's -- or maybe the projection. But the legislative moratoria are still available as part of the schemes for clients.

When it comes to our operations, and that has to do with our strong transactionality at the bank. Under the COVID circumstances, we feel that our market shares, including transactionality, have been growing steadily. We came late with the solution, but we are offering remote account opening. It came late due to legislative conditions as well, but now you can open an account on your smartphone, which is both secure and supported by all the necessary documentation. It's a complex process, but we will now be looking at customer experience and possibly fine-tuning the functionality.

And one of our aspirations, and that's not easy to do under the Polisafe circumstances, nobody has so far, we are looking at the same for mortgages, opening of mortgage loans without the customer having to be present in the bank. I think we've made some headway, but you still need to come to the branch and sign the papers.

Corporate banking looks similar in that we also offer fully automated account opening without the customer having to be present physically and something we pay a lot of attention to, something that is quite unique of mBank, something I mentioned many times. We are not naturally positioned to serve SMEs. We don't have branches in every county. But honestly, our penetration, especially in e-commerce, the most progressive segment, is phenomenal, and we are still investing both in the Paynow, quick payment gate and also the functionality of opening an e-commerce operation through our accounts. So these are all long-term investments of ours, which are now paying back with our strong presence. And also the fact that 22% of the PFR applications were processed via mBank. That proves that we have found our niche in the SME segment. And that's something that will pay off greatly in future.

When it comes to business growth, well, we are still growing. Over the years, we've been growing at 1.5% in terms of market in retail. So we are a strong market player in many segments, especially transactionality. We have a double-digit market rate -- market share in some segments with a very strong position for mBank. But we have a strong market share in households and steadily growing market share in corporate banking as well. So there are some positives.

In the first half of the year, we also revisited our websites, which originated back in 2013, '14, when we implemented a massive refurbishment of mBank's offer. And I think the new layout follows the new trends. Some clients say that they don't like it because it's new. It depends where you are on the curve from being open-minded and embracing change to being rather conservative.

Another point I should mention is that we are making a lot of efforts to improve our ESG position. We are financing large solar power plants with a big loan from mBank. That's where we want to continue growing our position. I think Mr. Böger will comment on this more extensively. But I should say that we see a very strong improvement in the activity in our clients' brokerage accounts. So we are getting commissions on those transactions. We've opened a lot of new securities accounts. And people are switching from term deposits to mutual funds and capital market instruments, not yet on the mass scale. It will never happen on a mass scale, but we've seen that shift. So we are positioning the bank as a key market player in the brokerage segment for retail clients. That's something that's already happening.

Some numbers to summarize the past quarter, LOPs. I think Mr. Böger will comment more on the provisions, but I should like to say that, apart from credit risk provisions were to be blunt, we are anticipating some potential and adverse developments. The dogmatic approach to IFRS perhaps wouldn't approve, but I have my own take on the IFRS. I think there should be more space for managers to manage institutions well rather than simply address quarterly challenges. That's a more philosophical discussion, I guess. And you may disagree, but I think if you know that a storm is coming, you should get your umbrella already rather than sit and wait until it strikes. So I think -- well, I'm just giving you some a soft message that we have a proactive policy to provisioning.

And then the legal risks. The provisions in Q2 were high, PLN 200 million, I think, PLN 189 million. So we are trying to balance the arguments. My opinion is there is no clear case law in that area. Clients who go to court use a range of very different arguments. Some of them really make me -- they make me -- they do surprise me. I think it will take time before a clear case law develops. So we are working on the basis of some historical assumptions and also trying to anticipate events. Of course, this is all judgmental. It's not clearly measurable. We cannot use hard facts and model the future. We think our provisions are quite high looking at the number of cases we've lost in court because we do take stock. And I'm quite vocal on this point. So I don't want to elaborate on this. I've written and discussed this publicly on many occasions, and I will continue to do so.

From the point of view of investors and analysts, these are not very good times. Return on equity, return on assets are rather low. I can't remember them being as low ever. So let's hope things will get better.

And to conclude on my part, you're probably expecting me to pronounce myself about the second half of the year. Well, I have a vision, but I think it will be too early to share it. We'll see how things stand when the periods of the loan moratoria for retail class customers expire and when companies publish Q3 results. Well, Q2 results will be indicative as well, but expecting that economic activity will continue. We know that a second wave of the contagion is coming, but we are not reacting to the pandemic as such, but rather to the lockdown in the economy.

The epidemic put the economy in lockdown. So that's what was decided, and it's not up for me -- it's not for me to argue whether they did the right thing not. I'm not competent enough. But the lockdown has had a very strong impact on the economy and adverse impact, of course. And the bank, just like any other market player, is trying to assist its customers to help them navigate taking -- of course, taking care of what we are responsible for that is clients' deposits. And when it comes to deposits, given the current rates and the bank tax, it's very difficult for banks to operate.

And if you have questions on that, I will come back to that later. Andreas?

[Andreas Boeger, executive]

Good. Thank you very much, Cezary. So I will now guide you a bit more through the details of the quarter, and we'll start with the loans. The overall volume of loans you have seen on the slide before also went down in the quarter. After adjusting for foreign exchange, it went down by roughly 1%, but we're still up for the full year at roughly 6.3%. So looking where this comes from, on the one hand, if you look at corporate loans, corporate loans are, when it comes to the carrying value, down in the quarter. And this is pretty much an effect of also the government-sponsored programs because obviously, the demand for short-term credit, especially for working capital credit, is less right now because corporates are flooded with cash. We see this later when we come to the deposit side. And it's to a lesser extent also down to less friendly environment when it comes to taking out investment loans, but it's mostly coming from the short-term side.

On the retail side, after foreign exchange adjustments, the loans are up by 0.6%. 0.6%, you can split into 2 parts. The one is the mortgage loan part. Mortgage loans are still up in the quarter by 1.3% and nonmortgage loans are down by 3.1%. But still loan growth in total retail for the full year is still at more than 10%. So this is still a very strong growth trajectory.

I think it makes more sense in that quarter to also look at new lending business. That's the next slide. The question obviously is how much new lending business for that specific quarter is really representative for the rest of the year because I think it's very important to take into account that this was characterized by a restrictive credit policy. And I think what the Management Board here very soon discussed when the pandemic and especially the lockdown started, was that it was very important to stand by our clients. It was very important for us. I think it was the 16th of March to come out and -- as the first bank offer voluntary moratoria for our clients without giving reasons, just standing by them, et cetera, and making sure we can do all of this for our clients. The idea was not to aggressively go after market shares, but to obviously be cautionary.

If you look at nonmortgage loans, nonmortgage loans, minus 24%; mortgage loans, even minus 50%. Within these 2 categories, you also have different patterns. The nature of mortgage loan, in general, is the mortgage loan doesn't immediately react to what's going on outside in the world, let's put it this way. So the disbursement of the mortgage loan, you can say, well, there's at least a 2-month time delay because you have viewings of properties, et cetera, then people decide to buy, then they want to finance and the financing is given out.

So for example, in March and April, mortgage loans didn't react a lot. They more reacted in May and June. Nonmortgage loan is the flip side. Nonmortgage loan business immediately reacted after the lockdown because obviously, people were sitting at home, not consuming, more concerned with the overall financial health. We will also see then on deposits, maybe more also going into even precautionary savings. So nonmortgage loans, higher drop. But the good thing about nonmortgage loan is you're seeing April, May and June coming back. So what we are seeing also in July is it's coming back, trending towards the right direction. Obviously, it will take quite a while to go back to pre-COVID level. But within the high drop of nonmortgage loans, at least, you see strong June and July figures.

Going to corporate loans. Corporate loan sales, PLN 400 million more than the last quarter, but these sales figures are quarterly. They are fluctuating very high. So it's PLN 1.6 billion less than the previous quarter in the year before. What's important there is, I've already said it's less demand definitely for short-term loans, a bit less for investment, what you would have expected. It's important for us that these loans are also giving -- given out at proper risk standards and also at healthy margins. So we are working towards having a stronger margin base on the corporate loan book, and we're also successful in also executing this. And when it comes to also, again, within the quarter, because the quarter is so difficult to judge, what we are seeing in June and July is also more promising, and that's good.

Similar picture in leasing. Leasing down, as the overall leasing market, 22%, quite a substantial number also. But obviously, this was not the quarter to go after leasing assets. Also, a recovery that we see stronger sales in June.

So going over to deposits. Banks are flooded with deposits, especially the ones, I think, who make it easy for the clients to be transactional and who their clients like. I think that liking bank was demonstrated by roughly PLN 10 billion -- PLN 11 billion, so PLN 10.7 billion deposit inflow in the quarter only. That's 8.6% and is 27% year-over-year. So extremely strong.

What happened in corporate? Corporates, as I said, government programs obviously helped. And also, on the other hand, clients were cautious. And also on retail -- on the retail side, I think this is some precautionary savings and just excess liquidity.

General statement on deposits. We have, in general, stopped paying for deposits. You might find the one or other product that maybe has more of a symbolic 1 basis point interest on this, but we're not paying for deposits. It's not fully reflected in the net interest income or in the interest expense of the quarter because, obviously, that has a time lag when it comes to term deposits, but also when it comes to retail savings accounts, for example, but we have stopped paying for them. That's also something you then see on the income side, which is the next slide, if you can please flip.

Nevertheless...

[Cezary Stypulkowski, executive]

What is important to say is that even if you don't pay to the customers, still we are paying tax on the taken deposits, which obviously have the asset side of itself. And I have to say that this is a very expensive exercise. And I think that some reflection needs to be done on the regulatory side because we end up in a situation where what Central Bank is, [ Böger ], has 10 basis points?

[Andreas Boeger, executive]

Even on deposits, it's 0.

[Cezary Stypulkowski, executive]

Zero. And out of this, we are paying, what, 44 basis points on the banking tax. So this is income negative to the bank. And I have to say this is nonsustainable solution. ECB has adopted some measures in this respect, I would say, partly artificial like paying specific privileged rate on some deposits in relationship to the obligatory reserve. But in principle, I have to say, the banking sector will be calling on some different treatment of deposited lease placed with Central Bank or the instruments issued by the Central Bank.

[Andreas Boeger, executive]

So looking on the income side. Looking at net interest income, which is down PLN 59 million in the quarter, obviously, we have some relief from deposits. The relief will be more pronounced in the third quarter and even also in the fourth. But the interest rate lowering is just eating itself through the P&L line. That's clear. Because if you think we had 50 basis points in March, 50 basis points in April and then 40 basis points in late May, then you need to see when the resets actually come on the products. But clearly, the asset side is now yielding less because most of it is actually LIBOR or WIBOR based.

Net interest margin in the quarter then resulting from this is at 234 basis points versus if I can remind you, it was 263 and 275 in the first quarter and, respectively, in the fourth quarter. So this is something that clearly is the effect of the lowering interest rates. And at least for the next 2 quarters, we would also not -- we would also see lower net interest income than in the quarter right now.

A positive sign is net fee and commission income. We have been working on that hard. We have been working on that also last year in summer, actually repricing some of our products. What was in the last 2 quarters important was the brokerage business. This quarter, the brokerage business was even better, but foreign exchange was a bit less to some extent. But for brokerage, for example, and you can see this also in the appendix on Page 29, we don't need to flip, but fee and commission income from that is PLN 54 million. So that's quite strong. Also if you look at it historically, we have won 28,000 new clients in the quarter, and we think that roughly is 35% of all clients that newly came to the brokerage market. And I think there also, you see the beauty of a good business that actually has ease of use and good digital access actually leads then also in good client acquisition in these times when it's needed, and it helped us in the P&L.

The outlook for NFC is still strong. Obviously, you can repeat a particular quarter is always a question. It will always fluctuate. What I'm seeing at -- when I'm looking here at the other end of the slide, and I look at Q2, where it was 2019, where it was PLN 300 million. I think this is a figure from the past. So we will be definitely above that. And we will work on consolidating here in the next years, even growing net fee and commission income because that the focus.

Trading income is a bit down. It shows here 11%, that's lower FX result, but PLN 40 million of trading income in that environment where the FX margin is part of net fee and commission income. That's still a good income for trading. We have 2 extraordinary buckets that maybe need to be explained. On the one hand, you see PLN 30 million here on gains on financial assets. That's mostly the valuation of Visa. You have seen the valuation of Visa in the first quarter down. That was the minus PLN 24 million. Obviously, we had huge fluctuation in equity markets, and that actually is just reflecting there. And then you see other operating income, PLN 26 million. This is due to some provision release we were able to do in the quarter.

Flip side of income is always cost. So let's move to the next slide, please. Cost in the quarter without BFG flat minus 0.1%, so let's call it flat. I think what's important is, even with the kind of headwinds we have on the revenue side, cost income ratio 38.9% in the quarter. I think that's really strong. If you normalize that, so you take the BFG in 4 portions, you will still come to 41.7% for the quarter. So that's quite strong.

The cost categories within this, HR costs, slightly down 1.7%. Material cost down to a larger extent. This is a function of actually cost consciousness on, I would say, various -- of the areas, but also to some extent, less marketing spending. The only area where we spent a bit more, so operating expenses went up by nearly PLN 5 million was the IT side because, obviously, the corona environment does not mean you're really saving on IT side because you want to make sure your clients are served, but also that our colleagues and the employees can work properly. So that actually meant we had to spend some more of money on IT.

Amortization, as you know, is generally trending up in mBank. It was trending up quite strongly in this quarter. There is also some extraordinary effects in it. So this is not the new basis, but it's kind of trending up steadily, PLN 100 million plus. I think that's clear, but there were also some one-off items in there.

Maybe outlook on cost. What's the plan for the third and for the fourth quarter? If you look at this quarter, there is obviously no plan to increase costs from here. So I think it's a good -- it's maybe a good guidance that roughly -- and we know we don't manage each quarter separately, but roughly on average, third quarter and fourth quarter should not exceed what we have here.

Going over to the cost of risk, Cezary has already mentioned it. Cost of risk remains elevated, and that's the right way to also approach the matter, 128 basis points in the quarter, 141 basis points now for the first half. The quarter, we have seen 57 million less LLPs than in the first half, but still we remain cautious here. We have to see what happens after summer. We have to see what happens when clients come back from loan vacations. The outlook on loan loss provisions is difficult to judge but we think it will remain elevated and we will also remain conservative when it comes to that line item.

Going over to loan portfolio quality, maybe 1 remark there. Nonperforming loans are going up. So the -- obviously, volume is going up. We discussed about loan loss provisions, but also the ratio is ticking up a bit more. That's a function of higher impaired loan loss -- loan portfolio and lower amount of loan portfolio. So this is 2 things that actually move this. The sector average in May was still 6.8%. I think maybe in June, it will even go down, but 6.8% against this our 4.9% is still okay. The -- according to the EBA definition, we're at 4.7%. ABA changed its definition. So under the old definition, we would have been at 4.2%, but they have changed the definition of taking out Central Bank cash but still also for EBA purposes, we're fine.

Going to the last slide, and I think this is what Cezary also said about the strength. What do you do? You remain cautious. Capital ratios at a bit less than 500 basis points above the minima. And if you look at the liquidity coverage ratio and also all other internal and regulatory ratios, we measure when it comes to being liquid, I think the bank is super liquid, and we're taking a conservative stance.

That would also be my, like, let's say, financial summary. This quarter, I think, is about standing to our -- standing by our clients, but also being robust: being robust on capital, being robust on liquidity, taking the right amounts for loan loss provisions, taking active step towards Swiss franc legal reserves and obviously also about keeping costs under control.

And with this, I move over -- or hand over to Marcin Mazurek, our Chief Economist.

[Marcin Mazurek, executive]

Good afternoon. The economy bottomed out around April, and has since recovered. The recovery is faster than we thought. Consumers -- consumer sentiment has improved according to the V-shaped curve, mostly in retail sales, less so in services. But the first phase of the recovery is very much V-shaped, which is owed mainly to the very good situation in the labor market. The unemployment rate grew to only 6.1% in the midst of the pandemic. Our projection for the year-end is 8%, but it may seem to be overestimated, too pessimistic.

As it is the impact on that low unemployment rate and the good position of the labor market came from the good support schemes. The condition for companies to get subsidies was that they retained the headcounts and the companies complied in order to get subsidies rather than loans. That came out quite nicely in the NVP survey of adjustments taken by companies, where head count comes last during the recession. So companies are reducing costs other than by reducing head count, and that helps consumers and the labor market.

The bottom -- the economy is now recovering, but we expect that GDP will drop 6% this year. The past quarter, of course effecting the annual situation most of all, we expect that the recovery will not be U-shaped or V-shaped, but a thick-shaped curve. Inflation is rising, co-inflation, which may be worrisome, but this mainly is due to the economy heating up in the past quarters, the effect of controlled prices and the fact that some prices -- some of the costs of security in the epidemic are being shifted to the consumers. But that process seems to be stopped and inflation will be dropping. The demand gap will be negative, which should force inflation down. A year from now, inflation will certainly be lower.

Let's move to the next slide. As we've said on many occasions, the market is floating in money. Corporate deposits have been held by PFR support schemes. About PLN 60 billion have been paid thus far to SMEs, which is a major game changer in the recession. Companies are actually improving their liquidity. That will have its consequences when it comes to demand for loans. More liquidity, more uncertainty means that companies will have much less demand for loans than before, even considering the recovery. The same goes for consumers. Although the increase in household deposits was less fast. But people are saving and not consuming, trying to save as a precaution. Like companies, consumers will not be lending -- borrowing money on a massive scale. They will remain prudent. So the loan volumes will be dropping.

On the financial markets, the markets are quite calm. Following the early drop in economic activity and lockdowns, the financial markets panicked. The yields grew, but the measures taken by the Central Bank stopped that. The yields on the bonds are much lower than before the pandemic. The risk premium factored into the bond prices is very stable. Demand for Polish bonds in Poland and abroad is quite strong, which proves -- well, companies are not willing to surrender bonds at NBP auctions. The zloty reacted with a panic, but that's all right. That's how the FX rate should respond. The currency should weaken in order to stabilize the economy during crisis, but the market remains liquid.

The outlook for the Polish economy is strong. Any projected GDP drop followed by a recovery is still quite mild in Poland compared to our neighbors and well-developed economies compared with the fact that at the time of a strong recession, the external balance of the Polish count improved, the zloty is now relatively strong and will probably continue to appreciate when new EU funds become available.

Thank you.

[Joanna Filipkowska, executive]

We have some questions that came online. Let's begin. On volume progression for second half of 2020, which segments should be a key driver for the growth?

[Andreas Boeger, executive]

The outlook is fairly stable, and it's fairly stable for both corporate and both for retail. So there is, I would say, volume-wise stable and no outlier from both.

[Joanna Filipkowska, executive]

What were the drivers for PLN 189 million provisioning for FX mortgages in the second quarter? Should we now expect legal provisioning on FX mortgages every quarter?

[Andreas Boeger, executive]

What we do on the Swiss franc legal reserves is we have to take a holistic view of what's going on. That's the first thing is always we have to holistically see and then we have to judge, and we have some measures at where we look at. We, for example, within what we holistically do, have to see how many clients did go to court and how many clients do we expect to go to court? How many final verdicts did we win, lose, what's our expectation. And also what's the severity of losing in court because there's also various ways of how to lose in court and what that means.

The -- as I said, it's a holistic thing, but what we mostly did is we mostly look at the second too. So we mostly looked at probability of winning or losing in court. And we also looked at what kind of severity that would mean, and we did not adjust the number of clients because what we do -- anyhow, we have this expected value methodology under which we anyhow have to preempt. So we are trying to preempt the future. This is not about booking what's actually happening. This is about booking what we expect to happen.

So and there was a question not to drop this. So in our assessment, we currently view the reserve as being adequate. As in every quarter, we have to monitor what is happening in the market, at least what is happening on these 3 dimensions, but also what's happening on a more holistic basis. And then we need to see if something else should be done, has to be done, et cetera. So it's always individual assessment of the situation then. It cannot be ruled out that there will be bookings in the future, but there's also no clear trajectory of now doing something every quarter. So this is not an automatic thing that is happening.

[Cezary Stypulkowski, executive]

To give you an example, I think this will be very illustrative. Some court judgments say that the bank should apply the PLN LIBOR FX rate -- interest rate. That's what the court says in its judgment, which goes against some fundamental paradigms of banking. Should we take it seriously? Will such a judgment stand? Will this be a permanent case law? That's a dilemma.

Another example, a recently resolved case of [indiscernible] Bank class action of 10 years, with several different stages in the story. It was initially resolved in 2013, 2014. The judgment was that the bank should use the FX rate from the interest rate from the date of the agreement, 3% on the Swiss franc. Well, those customers likely to be happy, they won in court.

So just like Andreas says, in many cases, we have to exercise judgment, which takes into account many dimensions. The probability of a new case law developing the potential severity of the loss to the bank, that's not something we can do easy. It takes some guidance. We look at some assumptions. The provisions we've set up are relatively high, but they will be subject to ongoing review in and out. In this sense, the question asked, if I understand it, well, to take your question, this is what we monitor on a quarterly basis. And we may, in certain quarters, set up additional provisions, release provisions in other quarters, depending on how case law develops.

[Joanna Filipkowska, executive]

When do you think bottoming of net interest margin for mBank will happen and at what level?

[Andreas Boeger, executive]

We're not specifically guiding on this. So it's nothing -- we cannot exactly tell.

[Cezary Stypulkowski, executive]

This has not happened yet.

[Joanna Filipkowska, executive]

Any outlook on fee income progression?

[Andreas Boeger, executive]

I think I said that before. We have 2 really strong quarters with more than PLN 360 million net fee and commission income. We're working towards even improving this. We have to see if we can exactly repeat this in the next quarters, that longer-term trend, and this is not several years, but also for next year is the -- goal is to have higher net fee and commission income than this year. And we are on a good basis. And as I said, the second quarter 2019 was like PLN 301 million or whatever the number was. This is ideally for the history books, and we try to more -- have a comfort zone with upward look from here. But let's see, Q3, it always fluctuates a bit in net fee and commission income because also not everything is linear.

[Joanna Filipkowska, executive]

What is the impact of current commission returns on the net interest income in the second quarter? And what's the provision for future commissions returns created in the second quarter?

[Andreas Boeger, executive]

Now we're getting granular. So that question, I think, refers to the -- what's called small tool. So to the repayment of the loan fees, the repayment of the loan fees within NII, we had for the first half is roughly PLN 25 million. And I think for the quarter, this was PLN 8.5 million. So you see that within NII, PLN 8.5 million have not been recognized due to the fees we have repaid. Why is it less than in the first quarter? Because we had less early repayments because people on the one hand, obviously, didn't take non-mortgage loans, but they also didn't repay early. Because if you're locked down and you don't know how your financial situation is, you're cautious. And cautious means you don't repay your loan and maybe even have the money on your current account.

And the second part was if there is any specific future commitment in this quarter, there was no -- to my knowledge, there was no provision for future commitment there. This is only the effect in NII, which was quite small. It will return with the prepayments to the level, I think we have also guided to and the level we have set at the yearly conference was PLN 70 million, PLN 80 million, PLN 90 million, roughly, depending on the client activity for the full year. But this is kind of -- it's not in NII. This is what the question is more, what is the component that is not in and it's PLN 8 million for this quarter.

[Joanna Filipkowska, executive]

How many of your employees at the end of Q2 were working remotely? How many will be working remotely as a target?

[Cezary Stypulkowski, executive]

Well, in both our headquarters, we work from headquarters more than from branches, it's about 10% of our people are in the office. And we have limits imposed on our departments. 15% is the cap, but the effective number is about 10%. And we have a similar number, a similar ratio, a bit higher in [indiscernible], I'm not speaking of branches at this point. But branches are not the biggest part of our head count. We are not focusing on a target structure in that regard. But as I've said before, we are trying to develop a hybrid model and we are in a unique position that we will be moving to a new head office. 3,000 people will be moved here in Warsaw. So we are trying to make sure that our organization is a better proxy to the current circumstances.

We will to get to -- later today, we will talk about our recent internal survey, focusing on what our employees think about the kind of remote work model, but we are not being dogmatic about it. We want to efficiently manage the process, depending on the needs of our people and units. What we know is that people who commute for long really appreciate being able to work from home, except Martha here. She lives in a suburb of Warsaw, but she loves commuting. And then again, people who have kids at home, that's a downside, of course, but it's a trade-off. But we need to be smart about it, and we want to be friendly to our employees.

And the biggest benefit of the exercise is that in many ways, it would have taken us much, much longer, maybe 2 years of discussions and negotiations and arguing to reach the conditions we have been thrust into. Things have stepped up. People have got used to the new model of work. And our initial assumptions for use of office space in the new building have been largely reviewed.

[Joanna Filipkowska, executive]

Two questions from Kamil Stolarski. What about branch traffic? Have -- has that changed? Some banks are closing down branches to cut costs. Are you planning any significant changes in your branch network? And then one of the Polish banks says it is planning to slash operational cost by 10% in CapEx, by 17% in its target model. Have you or will you set similar targets?

[Cezary Stypulkowski, executive]

No. We take a different approach to our reality. We think our operational model is evolving rather than being exposed to revolutionary change. Especially in retail banking, it is quite well fine-tuned. We are fine-tuning it on a regular basis. We are closing down 3 or 4 of our branches right now, but we may open new branches at any time. So I think we have a very model -- a very, very modern model, an omni-channel model with the customers' journey supported on every level at the bank.

Of course, we could still centralize some of our functions based on technology, but we do not want to take radical measures with regard to our branch network or cutting our operational costs. What we are thinking to do is that we've been managing costs over the years based on the assumption that our costs should be growing less than our revenue. We've never said it explicitly, but the differential between the growth rate of costs and income was 50%. But after Q2, our costs have been flat, and we expect to keep the cost base as it is, subject to certain adjustments.

Well, we are not expecting to slash our CapEx drastically. We will be investing in IT because that will help to reduce our cost base in the future. That's our take on it. And we have to look forward in 2022. Well, 2020 is perhaps a year last due to the circumstances. We have to look forward, and this is our philosophy.

[Joanna Filipkowska, executive]

You said that in Q2, the loan moratoria expired for about PLN 900 million of loans. Could you share your comments about the repayments from such customers? Can you compare repayment ratios for those volumes?

[Cezary Stypulkowski, executive]

Yes. I don't have very granular figures, but that's what I said when I spoke in the beginning, I said I was optimistic because clients are repaying loans after the loan moratoria stop. Delinquencies or late payments of credit cards or loans have dropped, to be honest. So the trajectory is positive. Of course, it's masked in a way. It's concealed by the fact that we do have loan moratorium monitor. And this is why I said that we will see what happens later, step by step. But the PLN 900 million, that's looking quite optimistic. And that goes back to what Marcin Mazurek said. In fact, we are in deep crisis, but unemployment has not increased significantly. That's thanks to the responsible approach of entrepreneurs and the expectation of returns. There are many factors at stake. But as it is now, we don't see any reasons to be pessimistic.

[Joanna Filipkowska, executive]

There are some questions about the details of the results. Why did commission costs drop in credit cards? Is it due to customer activity? Or have you received any one-off discounts?

[Andreas Boeger, executive]

The complexity with the net fee and commission income is, obviously, it's on the one hand, income and on the other hand, expenses. Not everything is always linear. I cannot go into this line item, but you see this throughout our history that there's always a fluctuation within the certain lines. So I cannot further comment on this one.

[Joanna Filipkowska, executive]

Are you planning to support your NFC with additional repricing as you did in the second half of 2019?

[Cezary Stypulkowski, executive]

Yes. Our pricing policy is subject to ongoing review. Considering the market conditions and the levies imposed on the bank, we assume that some of our prices may be further revised under these circumstances up rather than down.

[Joanna Filipkowska, executive]

Why is depreciation and amortization high?

[Andreas Boeger, executive]

It's in general high because we continue to invest. So this is clearly also effect from past investment. And as I said, there was -- in the quarter, there were some one-offs also within this line item. This is why I also said when we had this line, that the basis for the next quarter will always be trending up, but the PLN 116 million is not the correct starting point.

[Joanna Filipkowska, executive]

And we have some questions from Marta Czajkowska. Change in the projected growth in loan volumes for the sector. That's quite severe. What is your approach to the current guidance concerning the impact of lower rates on the margins? Is it conservative? Or will you keep it up? Can you see improvement in new mortgage and non-mortgage lending in June and July? And what was the improvement?

[Andreas Boeger, executive]

Various components, let's start from the end. So June and July, we have definitely seen a comeback in nonmortgage loans is what I said before. Mortgage loans have like a 2-month delay. This is why I said when we were at the slide that we expect a rebound in mortgage loans more over summer, latest after summer. In general, I've also said that we think the loan volumes in retail will be roughly flat throughout the year.

Margins. So the margins, which we can steer for both, and that's, let's say, on this slide, the mortgage loan product and the corporate side, these margins, we are working on improving. And everything we have written here in the last quarter was at better margins than in the quarter before. The flip side is the nonmortgage loans because on nonmortgage loans, we have this regulatory cap, where you have the reference rate plus 3.5%, and the sum of this times 2 is the maximum cap at the beginning of the year. The maximum cap then was 150 bps reference rate, plus 3.5%, makes 5 times 2 is 10. And that right now, with a reference rate of 0.1 went down to 7.2. So we can actually charge lower margins on nonmortgage loans due to regulatory cap. So these margins are lower, but everything else where we can steer, they are higher than before.

[Joanna Filipkowska, executive]

And another granular question. Why did you release provisions against future liabilities in Q2, PLN 20 million plus in other operating income?

[Andreas Boeger, executive]

The reason for having these provisions were not there anymore. I think that's the short answer. A little bit longer answer is there is, for example, a dispute we had in with [ UOKiK ] where we reserved something, and the case has been resolved. And they have also been -- there's also been another case of a similar matter, where the reason for having the provision has clearly not been there. We've before been conservative for provisioning against it. And now the basis is not there anymore. And this led to releasing the provisions.

[Joanna Filipkowska, executive]

And we have a question from Reuters. Well, consolidation in an industry step-up or just the opposite because banks are coping with their own problems, they have less money, and they're unlikely to get engaged in M&As in 2020 and '21? What about Swiss franc provisions in looking forward? You've answered that. What is the biggest problem for banks? 0 rates or other issues? How will mBank navigate through those waters, expecting that the rates are unlikely to change in the coming years? How will the net profits of the industry drop in 2020 and mBank's profits?

[Cezary Stypulkowski, executive]

Well, I've answered some of those questions in the article I published yesterday in [ Rzecz Pospolita ]. So I refer to that publication, when it comes to more general issues relating to the banking sector. Consolidations, I think, people prefer to keep their hands in their pockets now, watching the balance sheet and the P&L rather than looking around to buy out in the market. It's even more difficult in Poland because the structural profitability of the banking industry has been put under pressure.

We don't know how this will evolve, but I'm not expecting any consolidations in the coming months, at least nothing that would be not justified by a business rationale of marketplace. The sector will stay under pressure. According to forecasts, the industry's earnings will be the lowest in many, many years. According to research, the bank tax this year will be higher than the profits in the industry. So we know it's not going to be an easy year for many reasons.

And how about the future? There are many open questions. We need a debate on the positioning of the banking industry in Poland. On Swiss franc loans, well, at some point, the banking industry was supposed to pay billions of zlotys overnight. That was the proposal. Again, in the article, I speak on the issue. But is what it is. We have those portfolios on our balance sheets. They are being repaid gradually. They are good quality portfolios. They are not profitable portfolios -- not very profitable portfolios. And they freeze quite a lot of our capital disproportionately much. And that's an issue for the industry, of course. And then court judgments are also quite questionable. So the situation is unstable.

But looking at different proposed legislative solutions, the current situation with the uncertainty involves -- and that is something very difficult to explain to investors, still, it's spread over time. We will see a new case law evolve, but this will take another year or 2. And then we'll get a better picture of where we are. Nobody can expect to buy a new home with money from other clients' deposits. If that's what people think, my agreement is invalid, but I keep -- get to keep my apartment. That goes against very paradigms of what money stands for, what banking is about, or the market integrity looks like and I still believe that we will see a more rational approach in the future. But as usual, it takes some time to reach a rational resolution, and many people are involved, of course.

Let me share an anecdote as an example. Someone I know who is a barrister, a lawyer, he said to me, he took one of the car -- one of the banks to court, not mBank, by the way, a law firm offered to work for him. Due to unfair provisions, I said to him, being a lawyer, you should have known back in 2006, whether those provisions were fair or unfair. I'm saying this as a lawyer as well. I cannot comprehend many arguments raised. I think we need to continue this debate. We need to exchange arguments and reach some conclusions. We shouldn't get overexcited with someone winning in court. So if you won the class action in 2014, you should be paying 3% on the Swiss franc. We don't have many customers who would pay 3% interest on the Swiss franc loans. So that's the kind of dilemma, and we need to be rather consistent about it and rather calm about it at the same time.

[Joanna Filipkowska, executive]

Higher NPLs in the corporate book?

[Andreas Boeger, executive]

NPLs in the corporate book went up from 5.4% to 6.3%. I said there's a upward trending factor because the corporate book also decreased. That's the one thing to look at. On the other hand, what we did for -- in the corporate side is, we went through sectors. We went through single names. We went through watch lists, et cetera. And wherever this was about being conservative, we were conservative. And I think the -- actually having higher LLPs here, then also shows a higher NPL ratio to some extent and also obviously about when to default the exposure or when not to default the exposure. I think in overall, we are taking a more conservative stance.

[Joanna Filipkowska, executive]

The final question, your guidance concerning the impact of freight cuts, PLN 250 million, PLN 300 million. Are you standing by this guidance? Or are you expecting a better outcome?

[Cezary Stypulkowski, executive]

We give no guidance.

[Joanna Filipkowska, executive]

Well, that was all the questions we got. Thank you so much for being with us, and see you next time.