mBank SA

WSE:MBK

Earnings Call Transcript 2021-Q2

[Joanna Filipkowska, executive]

Ladies and gentlemen, welcome to this conference that will present the results of mBank Group in the second quarter 2021. The results will be presented as usually by our Chief Executive Officer, Mr. Cezary Stypulkowski; our Chief Financial Officer, Mr. Andreas Böger; and Chief Risk Officer, Mr. Marek Lusztyn. Marcin Mazurek will present the macroeconomic overview. [Operator Instructions]

Cezary, the floor is yours.

[Cezary Stypulkowski, executive]

Okay. So these are the results post second quarter. We have to remember that the second quarter of 2020 was basically the peak of the pandemic year -- not the pandemic, but fears were all around. And I think that, that was the -- through lockdown at that time. So obviously, there is a base to which we have to refer plus in the second quarter of last year, we had the 2 steps of the interest rate lowering which, obviously, impact to some extent, also the comparisons between both years.

In principle, we believe that the business performance of the bank is very strong. Second quarter was strong. This is reflected on the chart which is being presented. I don't want to go into the much of a detail, if necessary obviously, we will be responding to the questions.

It's important that net interest income was 4.5% below the last year. But when we compare on the quarterly basis, we already recovered. So the momentum in terms of the regaining the net interest income is in place. And the fees and commissions, that's the consecutive -- I don't remember sixth or fifth quarter where we are significantly improving in our performance on this front.

What should I say? Efficiencies in place, the balance sheet is growing, cost of risk seems to be moderate. And mobility, which is the signature of mBank is fully in place, and I think that expanding and we are regaining also the market share.

If I can suggest for this audience, to rather move to the Page 5. This is a kind of a confirmation that in terms of the business momentum regaining the market shares. I think things are in place. So the performance of the bank, as you see in the 2 years period of time, on the deposit side, on the loan development, I would say, everything seems to be on track. This is mostly obviously on retail, where I think this picture is continuing since number of quarters. On the corporate side, it's slightly more modest. The corporate is more mature business in principle. And I think that our strategy in this respect is not the only way is up but being more selective.

If we can move on. I think that the way we want to position the bank, and this is clear since 2013, is to be seen like the ultimate reference to the mobile banking. And in this respect, I believe that the bank is continuing its inroads. I think that if you go into the details, the number of the active users, the growth of active users and the saturation of our clientele, which is operating on a mobile devices mostly as a prime channel, we score as the #2, #1 player in the Polish market.

What needs also to be stressed is that this fundamental, to some extent, is also followed by ourselves in the laboring markets, Czech Republic and Slovakia, where I think we distinguish, to some extent, vis-à-vis the local banks, which are definitely strong players in the respected markets.

I don't want to -- I don't intend to go through the details of what is on our -- in our solutions. I believe that if necessary, that can be elaborated in more detail. This is for the sake of documentation that the progress on this mobility and the mobile banking focus is being concluded.

What is very important, I believe, is that our corporate is catching up, also trying to position as the prime mobile social for the corporate sector. And the company mobile, company net, the both Internet and mobile solutions are developing and getting some new functionalities, which I believe already distinguished offered from mBank to some of our competitors. The functionalities which has been included into the offering are certainly right side. What I want to focus on this mAuto, which is a solution which has been delivered by our leasing company, which is effectively the online platform for selling the used and new cars, which I have to say is exceeding our expectations right now. And we -- and I strongly believe that in the longer period of time, that type of solutions, I'm not saying necessarily ours, but I think I'm strong believer that this will be the new way of selling and placing the offer on the -- for the others in the market.

Paynow, our payment gate, which has been set up, I think, started to be operational, I believe, February last year, seems to be developing reasonably well. The most important feature is that this is cloud based, so it's flexible and can respond to the flow of transactions in a active way.

As you see, the volume of transaction is growing dynamically. In the second quarter, we have 25 -- 29 million of transactions, but in these -- on average per month. And we believe that this is also kind of a signal that we are focusing, and we are trying to build the inroads in the e-commerce segment. We believe that we are uniquely well positioned among the Polish players. And I think that the Paynow is one of the ways in which we want to attack this segment of the market.

We also, on the retail side, we're trying to position the bank as an e-commerce supporter to our SME clientele on the retail side. The campaign which we had the digital revolution, which is aiming at micro firms and SMEs on the e-commerce side is developing very well, and I have to say that this is a second addition of this concept. And with dedicated webinars and articles, we believe that our coverage of the e-commerce SME micro firms, e-commerce-focused companies is relatively strong. There are no reliable statistics yet, but we believe that this is the area where we're progressing rapidly.

On sustainability, I will call on Marek to do short brief.

[Marek Lusztyn, executive]

Okay. So we continue our drive on sustainable and responsible banking. It is one of the pillars of our attention. We'll focus on limiting both our direct and indirect impact.

In terms of a bank, our indirect impact matters much more, therefore, we very much focus in our policy to support the clients in energy transformation, and we are selling it away from the sectors which are helpful for the climate and not supporting the AEO, the climate policy. We have echo-supportive products in each of the customer segments. And as of now, we have PLN 4 billion, the envelope dedicated for renewable energy sources financing.

As far as second quarter is concerned, our ESG efforts were appreciated by [indiscernible] that we have received from Sustainalytics with ESG, the impact of and [ graded ] as low risk.

[Cezary Stypulkowski, executive]

We are on Page 11, I think there's a very reasonable wrap up of what has happened. As you see on most of the metrics and the volumes, it was an exception of Tier 1 calculation, which will be explained later. I think that you see only the positives of the performance of the banking relative terms vis-à-vis the second quarter of the previous year.

On the Page 12, you have a wrap up of the performance of the bank, which does not call that much to the comment. I think that the balance sheet developments are, as you see are the things on the green. Important thing, which I understand can attract some attention, this is the development around our Swiss franc portfolio. The number of the cases still going up in a pace which represents basically the quarters of the previous trends.

We have increased the level of our provisioning by almost PLN 250 million relative vis-à-vis car cases. Well, the portfolio, as you see, historically, was at the peak at PLN 7 billion. Currently, it's below PLN 3 billion. And it's going up in a steady way. But obviously, there comes out in cases which we have on our -- in the courts right now is a concern.

The coverage, I think that has shrink to some extent, but we believe that the new developments around the Swiss francs are mostly the opinions of the National Bank of Poland or the President of National Bank of Poland and KNF, I believe strengthen the position of banking sector in the dialogue with the courts and adding the confrontation with our clients.

And then we have the new segmentation, which we started to present in the -- probably the first quarter, which is showing the core bank stripping out our Swiss franc portfolio, which has significant impact on the overall performance. But when you look into the bank from this perspective, basically, on most of the courts, we are being seen reasonably stronger, most of the return on equity and return on assets is much stronger.

Cost of risk at 82. But as everyone knows, the Swiss franc portfolio in terms of the credit risk is performing very, very well, continues to be very strong, which is a reflection of, to some extent -- or what is confronting was the overall -- so the public opinion, which, in many respect claims that the Swiss franc holders are in a very difficult financial situation, which does not prove in variety -- on variety of fronts.

Cost/income ratio, as you see, at a pretty low level. I think this margin better. But I think that when you look into the bank from the perspective of its core business, it's a very strong, well-performing bank.

And with this, I will turn to Andreas for some more light on some specific aspects, not on everything, but the developments both in the -- in respect of the sectors or segments of the bank and some both balance sheet and P&L issues.

[Andreas Boeger, executive]

Yes. Thank you, Cezary, and also welcome from my side. So let's start with loans. On loans, we have seen a continuous expansion with the driving engine here being mostly retail, not only for this quarter, but also for year-over-year figures. But the overall portfolio, as you see here, loan portfolio growing by 7% roughly for the full year and 3.4% for this quarter. So the quarter had some extra momentum.

If I look on the corporate side and on corporates, you know this since COVID, it's an ongoing theme that corporates are cash rich, and that leads to deposit inflows, that leads to low -- to relatively lower cost of risk because they are, obviously, on the one hand, you have some defaults, Marek will talk about this, but their cash rich, that's good. But the demand for credit then is a bit weaker. But even though you see here in the last quarter, that was 2.6%, was strong. And very strong was the retail side in this quarter. And I think that's best also explained on the next slide because on the next slide, we look at the -- a new loan, a new lending business, and let's start with retail. Let's start with the mortgage loans.

In the last quarter, we have sold PLN 1.7 billion more mortgage loans than in the second quarter 2020. So that's 100% increase. Obviously, the second quarter, as Cezary was saying, last year has a little -- has a smaller basis because of the COVID effect. But the drop wasn't that strong in mortgage loans. So the PLN 3.4 billion is strong print, the strong print on which we will continue to build. We still see very strong demand also going forward on mortgage loans. We might see less business on mortgage loans in Czech and Slovakia, where we are changing focus a bit. It will be more towards non-mortgage loans, but you also see here good trends in Czech and Slovakia and because we've also changed the pricing policy. In the country, it's still more profitable to do mortgage loans in Poland. This is why for mortgage loans, the focus remains in Poland.

Let's go to non-mortgage loans. So non-mortgage loans also up by more than 100%, but okay, that basis was really low for the second quarter, but it's very important we are back to pre-COVID levels was the roughly PLN 2.6 billion in this quarter. And here, the same as for mortgage going forward, we think that trend will continue. We're down in the third quarter. Third quarter always means holiday season, so it might be a bit weaker, but that trend will be with us. And it's very good. It's very promising to see that the retail business is completely back on track and having these really, really strong sales figures here.

Going over to corporate. Cezary was already saying it, we are selective on the larger exposures. That's something also you have heard from us and you will continue hearing, so slightly down against the full year, but up in the quarter.

And on the leasing figures, I mean, okay, leasing up by 91%, but that Q2 2020 was also a clear COVID quarter. But the new business in these and currently is also really promising and that engine has not stalled. We saw a bit of a dip in COVID, and it's back up where it should be, and that's also very good.

Going to deposits briefly. We see the continued inflow in deposits. The continued inflow leads to a loan-to-deposit ratio, which is still roughly around 75%, so 74.2%, roughly in line with the quarter before. It's slower than where we want it to be, but you have seen the effort on the loan sides are bearing fruits. That's important.

What's obviously important from the financial side is, and you see this, let's not flip side, but I think it's Page 33 in the appendix. The costs of the deposits, even though we had higher deposits, are even lower in the second quarter. The second quarter cost of deposit was a bit more than PLN 12 million. Before, it was PLN 14 million or roughly PLN 15 million. That's small figures, but it shows that even a higher deposit intake doesn't lead to higher interest expense here.

Let's move to total income and to spend total income a bit. In total income, it's very important this quarter to again look at core revenues because, as you know, and as it's also shown on the slides here, the 2 quarters beforehand were also characterized by extraordinary gains on bond sales, roughly PLN 90 million in each of the quarters. We didn't have this in this quarter, but the core revenues are on the same level as in the first quarter, it's PLN 1.4 billion. And out of the 5 quarters you see here, that's the strongest, is the strongest out of the 5. So the core revenues are also rebuilding and that's obviously very important.

In the core revenues, we have net fee and commission income. Net fee and commission income is slightly down at PLN 452 million, but you have to remember that the base is the PLN 468 million also included a year-end deposit fee we took from our corporate. So the real comparative basis is PLN 430 million, and there, you see a nice upward trend on the right side, you see more where it comes from, the increase. That's on car payments, lending across the board and things that are just a bit weaker this time is, to some extent, the brokerage business with minus PLN 15 million and obviously, the accounts with PLN 35 million less, but out of this PLN 38 million was the deposit fee.

What's important for net interest income? Because net interest income, what always helps in the second quarter is second quarter has 1 business day more than the first quarter. But if you look at the engine that is within net interest income, and that's on the upper right side, in part the NII comes, or the interest income comes from loans and it comes from other assets like the bond portfolio. And you're nicely seeing that bottoming out that we are steering towards, and you're seeing that the second quarter interest income from loans is at PLN 820 million vis-à-vis PLN 788 million. So that's a nice rebound here. Even if you take out the 1 day, you will be at PLN 811 million, so it's a clear sign that the interest income from loans is on the right track where it should be.

Talking about the right track where it should be, let's move to costs. On the cost side, our goal is always to be disciplined but to also foster for investment and to foster for further growth that we've again demonstrated. If you look at the cost-income ratio for the first half, that's here in yellow, normalized with BFG equal, that's 39.6%. So really very strong efficiency. The quarters -- within the quarters, second quarter is a bit higher, but you know we don't manage by quarters. And obviously, in the first quarter, it's important to keep cost even more under control because there is this high BFG one-off.

Maybe two sentences on these items that have increased. The one is personnel expense, business is good. You've seen that. So there is commission payment for sales in that. There is, in general, performance-related pay. It's to some extent also salaries, but we also had a bit less headcount, especially when it comes to year-over-year, head count is down by 2.7%.

If we look at material cost, material cost was quite low in Q1. The increase here solely stems from 2 items. The one item is PLN 15 million in marketing and PLN 9 million in IT. And that's exactly the space where we also want to spend the money.

With this, obviously, I'm later open to questions, but I will now hand over to the Chief Risk Officer, to Marek Lusztyn, for further insights on the risk matters.

[Marek Lusztyn, executive]

Thanks, Andreas. So on Slide 22, we see the development of the loan loss provisioning we had at cost of risk. In second quarter this year, we have seen cost of risk coming back to the level starts. We've seen in mBank take on it, and this is the level that would consider to be, let's say, a normalized cost of risk in mBank post-pandemic. This is not something that we see as the guidance for 2021, given the fact that we still think that the cost of risk will be lower than 2020 but still higher than the prior COVID times. But if nothing unexpected happens on the pandemic front, we expect a deeper decline in cost of risk in 2022 and going forward.

This is, of course, conditional on the development of the epidemic situations in Poland and any further potential restrictions that may come as a result of potential for work. But a part of that, we see the loan portfolio of mBank quite well positioned for the future with a positive overweight into the sectors that are productively well in the pandemic situation. So we see a little downside from the sectors which are too exposed to the pandemic restrictions.

Let's then follow-up to the next slide. The loan portfolio quality of mBank based at content by resilient risk indicators. We see in the figures non-pandemic-related deterioration. As far as the stake of the impaired loans portfolio is concerned, it's going down year-on-year and quarter-on-quarter. To some extent, this driven by NPL sales that we have performed in the past month. You see that NPL ratios in both segments are going down quarter-on-quarter. And we are considerably below 5% threshold, which is set by EBA as elevated NPL ratios.

The coverages quarter-on-quarter stable for Stage 3, going up for Stage 1 and 2. NPL ratios on the mortgage portfolio from the beginning of the year incomparable due to the previous year, due to the new default definition implementation. But on mortgages looking at the last 3 quarters remains flat.

And going to the capital and the liquidity ratios, there is a drop in total capital ratio and [ cap Tier 1 ] ratio. I have seen that there will also questions on the chart on that drop. So I will tackle them on the slide. As you may remember, mBank is one of the 2 banks in Poland, which are operating in advanced internal rating-based approach model for calculating risk-weighted assets. And there was a set of the changes in the both models and in the regulations surrounding the banks that operate in the [indiscernible]. And in the second quarter, we have received a number of approvals for model changes from the regulators, mainly for the loss given default model from the primarily retail portfolio as well as the implications for the implementation of the new definition of default or across different segments.

And those approvals from the regulators were coming with certain regulatory buffers to implement up until the final recommendations from regulators are implemented. So that was the -- driving the drop in the capital ratios. That was also the reason of visible change in the risk-weighted asset density in Q2. That is, first of all, as I said, one-off. And second of all, we expect that part of the drop will be recuperated once all the expectations of the regulators are pulled in the [ month ] framework.

And the last from my side, as Andreas was saying, the liquidity position of mBank remains excellent. Loan-to-deposit ratios of mBank net growth coming, still down quarter-on-quarter, excellent regulatory ratios both from the perspective of net stable funding ratio and the liquidity converge ratio. [indiscernible] about the [indiscernible].

[Joanna Filipkowska, executive]

Thank you very much. And Marcin will present the macro-economic overview.

[Marcin Mazurek, executive]

Thank you. So let's start macroeconomic overview. Macro situation is improving in every quarter. You see that consumers are feeling much better than during the epidemic during the most severe period of epidemic. The trend is clearly upwards. They have strong balance sheet, so the consumption somehow jump started and we think it's going to only for the better in the future.

The good news are flowing from the labor market, unemployment rate is still declining, and it's expected to decline further. We don't see any hidden structural problems in the labor market. So the economic cycle would carry on unemployment rate lower and lower in the coming quarters and years.

For this year, we expect GDP growth to be 5.7%. Of course, there is COVID-19 risk on the horizon due to the [indiscernible]. But at this moment, due to vaccination process, we think that it's much better manageable than in the previous wave. So the risks that, pure economic risks stemming from those waves, the subsequent waves are much, much smaller than they used to be.

Of course, inflation is on the rise, mimicking, I would say, good macroeconomic environment. It's reached 5% in July, and it's expected to stay above 5% in the end of the year. We don't see inflation falling towards NBP target in the next year. So we expect NBP to react and start normalizing interest rates from the first quarter of the next year.

What's in monetary aggregates? I think that [indiscernible] is slower improving the deposit growth rates of both. This is mostly reflect in the obviously, the [indiscernible] from last year. And what's the good news is that we have inflection points in credit growth almost everywhere. So that spans from corporate loans to household loans and especially mortgages that are powering ahead right now.

As far as interest rates are concerned, we see bond yields rising investors that are slowly pricing in monetary policy normalization. So this process of increasing yields should continue in the future.

At the same time, Polish zloty stays weak. It's reflecting very low negative real interest rates and some of CHF legal risks right now, but it's that -- this is the factor that is on the decline. We expect zloty to slowly reflect cyclical developments and as economy is powering ahead, the zloty should be also adapts stronger, but only slightly. Thank you.

[Joanna Filipkowska, executive]

Thank you, Marcin. We have some questions from the Internet. Some of them have been already addressed, especially about capital ratios. So I will start with questions about costs.

Your cost efficiency is impressive, yet wage inflation, up 10% in June, appears to be emerging as a cost pressure. Can you comment on that, please? How serious program is it for the sector? And the similar one, what was the driver for 6% growth of cost of salaries quarter-on-quarter?

[Cezary Stypulkowski, executive]

Well, that's the phenomena which we observed in Poland. There been a sector of corporate sector, there is increase of wages we have to respond. Yes, that's the pressure which we'll witness in the upcoming months. We have to manage this in effective way. I think that this is not going across all the represented professions in the bank, but some of them definitely need to be addressed.

The 6% is mostly due to the fact that we decided to pay an extra awards, which are related to the COVID time. We had people dispersed across the country, some of them working very hard. And as a consequence, we decided that we will compensate some groups of people for this extra effort.

Yes, one thing which is important, the personnel cost is a significant attribution to the overall cost. So in this respect, we will have to respond to the potential pressures. Though I believe a better understanding of the dynamics of the labor market, specifically for the qualifications, which are required by ourselves is the fair requisite for doing some adjustments.

[Joanna Filipkowska, executive]

Another about costs. IT and marketing costs came back to pre-pandemic level. Any comment on run rate going forward?

[Andreas Boeger, executive]

Well, run rate going forward on this is it will increase because it is areas where we would like to spend money. There is no run rate which we will kind of set in stone, et cetera, but expect, if in doubt, and we can select as a bank, to either or to both spend money on marketing. And with this in our digital business model, also gain clients or gain traction with clients on products or further foster for our digital infrastructure with IT spending, we will both spend money. And I would think that within the material costs, they will always have higher growth rates than other areas. But on the other hand, we're also reasonable and managed, as you've seen in COVID times, also downwards in case space is needed to.

[Joanna Filipkowska, executive]

Do you think the current higher growth in PLN mortgages are sustainable? What level of overall loan growth you expect for 2021? How do you see consumer and corporate loan dynamics ahead?

[Andreas Boeger, executive]

Yes. So maybe I'll start and then Marek adds. As I said, we will further bank on this trend. The PLN 3.4 billion is a strong print, also the PLN 2.3 billion in Poland here. We continue to see the demand. As I said, the summer will maybe bring a small dip, but we think that it will be with us for quite some time. That's the comment on mortgage loans and same is on non-mortgage loans.

If you look back into 2019, for example, PLN 2.6 billion was not a outlier. So that is the rock-solid quarter. And it is also right now. And also, from there, this is kind of, I would say, back to normal, not extraordinary, but it's just good to be back to normal.

Marek, do you want to...

[Marek Lusztyn, executive]

Yes. It's maybe worth highlighting on top of that, that I mean, our historical levels of the mortgage loan size were below where do we see the, say, French channel mBank in the overall sector sales. As Andreas was saying, the market really strongly moved up in the long-tested environment. Clients are looking for alternative ways of saving money. And what in addition brings, we believe, a reasonably good size of the mortgage loans going forward. At least the demographics of our customers is that in the context of the overall competitive field, we believe, would have not exploited in full year.

[Joanna Filipkowska, executive]

So the next one, what drove provisions for FX mortgages in the second quarter? How should we see provisioning in future quarters? Are you hopeful on the implementation of KNF Chairman's loan settlement proposal? Do you see any traction in clients willing to take up your voluntary offer?

[Andreas Boeger, executive]

Good. So I think I'll start with the technical side, and then I'll hand over to Cezary and/or Marek. So technically, what we did is, as you know, we have a methodology under which we actually book the legal reserves. That has various components. And one of the components is the projection of the number of court cases that will come or how many people will come and sue us. On this, we have an overall projection. And then we also have a kind of base case how we think this should evolve. And we are revisiting this basically every quarter and look at the dynamics here. And the higher legal reserve of the PLN 248 million mostly stems from a higher population that we have put in that still might come and sue us.

As you see here on the slide, we have roughly 10,000 cases that are in the bank. You also see it's a bit more detailed in the disclosure that we expect that 18,600 people will come in total. That's 29% of the whole portfolio for active and for repaid. And this was actually driving it. We'll continue to monitor this. But you also see the strong trend here and incoming cases. And this technically led to a change in the projection.

Cezary, maybe more on the substance behind?

[Cezary Stypulkowski, executive]

Yes. What was the -- can you repeat the question?

[Joanna Filipkowska, executive]

Just a moment. Are you hopeful on the implementation of KNF Chairman's loan settlement proposal? Do you see any traction in clients willing to take up your voluntary offer?

[Cezary Stypulkowski, executive]

Well, in the service, which we've done with our clients, I think that now that the picture is pretty mixed. And I think it's mixed because the agreements with the clients are being confronted at the same time with the jurisdiction, which we've done or the verdict, which the Polish courts for the time being are thinking. And as a consequence then, I would say, responses with the clients, as I said, are mixed. That's one.

The second, I think that the fact that the Supreme Court is proceeding the questions submitted by the chairwoman. So then the -- also the willingness of clients we need to decide on the preference is whether to continue to litigate us or to enter any type of negotiations. So that's the picture, which I would say we witness right now.

In the meantime, we are preparing our own, let's called it, compromise proposals. The background of our thinking is that, and this is something what needs to be repriced, we strongly believe that from the abusiveness of the clause is used are questionable. But as a consequence, we are very much interested in what the Polish courts will decide because this is about the paradigms of banking sector functioning. If some of the issues will be -- will continue to be questioned, then it will spread across a number of other products. And as a consequence, I believe that this is very problematic from our perspective, and we very much wait for that in response of the Supreme Court.

In the meantime, we've got some, the dose of optimism because our stance has been -- as the stance of the banking sector, including ourselves, have been very much confirmed by KNF and the President of the National Bank of Poland. So I think that basically on each and every aspect of the pending cases, I think that both institutions have endorsed our interpretation of what's going on.

And this is not trivial for the banking sector to get some kind of a solid response and solid confirmation of legalities around what has been done, especially in a situation where, for the time being, number of cases led to the situation that the contracts, which are on average, I think 17, 18 years long are supposed to be in [indiscernible]. That is something that, as I said, puts a big question mark around the way the banking sector operates, specifically on this new situation where the abusiveness is very much grounded on, I would say, from my perspective, relatively weak grants, specifically when we are -- where abusiveness is questioning or the argument of abusiveness is referring to the usage of the [indiscernible]. So unilaterally set the exchange rate by the banks.

It's very interesting. We don't have cases on the euro and other currencies. We have obviously a smaller number of loans denominated in these currencies, but I have to say the picture is completely different. But it's confirmation of what the Central Bank governor has said in his opinion that the issue is not legal. The issue is really from the bank perspective deterioration of the situation of the Swiss franc holders vis-à-vis the expectations at a time of the inception of the contracts.

So our sense is that, yes, we witnessed the situation that some risks related to the currency has materialized. And in this respect, we believe that some solutions, which can help our clients, and at the same time, potentially can lead to the slowdown of the court cases is necessary. We are working on this solution. But one have to be realistic that under the current circumstances, without having also solid declaration of the Supreme Court, whether this 1 million contracts in Poland are still valid or can be subject to invalidation, is a big question mark. So yes, we are working on the solution which we hope to present to the market sometimes in the -- out of this year.

It's worth to mention that [indiscernible], which has started this process already at the end of the last year and the beginning of this year is still also in progress of preparing those solutions. As I know, the cases which they presented to the clients that needs amicable solutions with the clients, only some of them have been accepted by the clients because clients, some of them at least believe that via the [ card ], they will get better conditions. Whether these are clients or the legal firm representing them, that's a separate issue and how it is being managed, it's a separate issue. But our position is pretty clear, we need solid legal understanding of the nature of these contracts. At the same time, we are very much prepared to -- and we declare vis-à-vis our clients, the willingness to get into the amicable solutions, both for the clients who are -- specifically clients who are hearing us in the courts.

[Joanna Filipkowska, executive]

Another one on Swiss francs. It may be a naive question, but what is holding mBank from setting aside more provisions, so it covers better related risk? It seems inevitable coverage will increase from current 14%.

[Cezary Stypulkowski, executive]

Well, that's the situation which is -- as it was conditioned naive to some extent due to a certain way of addressing this issue. You can dump, I don't know how much money and was it believe that you will lose? I think that -- as I have mentioned, I think, at least 2x or 3x during my response to the previous question, I strongly believe that if you go into the sequence of the questions, which have been submitted by the Chairwoman to the Supreme Court, you have, first, the question about -- there was no question about abusiveness, which is separately very important question, which I think still pause for response. And I think that the [indiscernible] cases, which has taken place last year and which have -- where the verdicts have been published this year, both of them, one in February and one I think in May, and one have to remember that [indiscernible], the country was the biggest portfolio in Europe, [ 80 billion instead of comparing to our 70 billion ]. Anyhow since it's pretty clear on the abusiveness, the Supreme Court of Austria has ruled very much in a way which we interpret the nature of our contracts.

Interestingly enough, Poland is country where the portfolio is covered by mostly 2 type of contracts. One is the so-called denominated in Swiss francs and another one is indexed. These were solutions which have been prepared by the Polish banks. As I have to say, as a solution which was pro clientele that helped in the context of how the Polish real estate market and the new [ purchases ] department has been said, I think it was to respond to the way the clients wanted to get the money for the -- to pay for the apartments with the developers. There are particular transactions which are registered in the Polish banking law. This is different than in Austria. In Austria, it's just a silly part.

Then you have the situation where I believe in the sequence which the Chairwoman has asked, the first is, okay, if this is abusive, should the Central Bank rate used? And we strongly believe that this is -- if the abusiveness will be questioned or decided, then the natural response is that this is the Central Bank rate, which has the referencing policy report because as governor has put in his opinion, the issue is not about the interest rate. It's about -- no, not about the exchange rate in the former at which the bank proposed to the clients. It's about the overall position of zloty vis-à-vis the Swiss franc, which was an economic issue and not purely legal issue.

So we believe that still a number of issues around the legalities has not been cleared. And as a consequence, I think our approach is wait and see and address the issue or as the cases come to the courts.

[Joanna Filipkowska, executive]

Another one on Swiss franc provisioning. According to its disclosures, mBank saw a 22% increase in new court proceedings and raised Swiss franc mortgage provisions by PLN 66 million in the first quarter. In the second quarter, it saw a 20% increase in new court proceedings, but increased provisions by PLN 248 million. What drove this proportionality in provisions quarter-over-quarter? And how should investors anticipate the output of your provisioning model going forward? What did you see in the second quarter that you did not see in the first quarter?

[Andreas Boeger, executive]

Maybe I'll start. There is no hard-wired system behind this. And it doesn't mean if one thing is plus 20% then something else is also plus x percent.

As I explained before, we try to look into the future. We'll try to catch things that happen in the future. And I was referring to the 29% of the portfolio that we now think might sue us, which equates to 18,600 clients. That is revisited. That has seen what the assumptions were. And at certain points, we then decide to add things or it's within what we expected for that quarter and then it's of rather technical changes.

We cannot exclude the next quarters that there will be further bookings, but we will also then individually look at these situations. And as you know, this is highly assumptions driven, and it's an environment that, as Cezary was saying is from the legal front, pretty much unstable and you have to try to navigate through it in some shape or form. And there's -- but there's no linearity between things happening and then bookings. I think that's part of the question or the court part.

[Joanna Filipkowska, executive]

Some more on results. Can you explain where is the noncore segments trading loss of PLN 19.7 million in the second quarter and PLN 10.7 million in the first quarter coming from? Is mBank signing any agreements with clients will incur to repay FX loans already?

[Andreas Boeger, executive]

Yes. Okay. On the trading loss for the noncore, that mostly comes from some FX differences. And yes, it's the FX side that is actually then leading to some of these rather small trading losses.

[Joanna Filipkowska, executive]

Could you explain PLN 43 million of provisions for future commitments in other operating expenses?

[Andreas Boeger, executive]

Yes. Other operating expenses in this quarter have a mixed bag of things that are reflected. Not all of them are strictly business related. It, for example, also includes rather a cleanup we did in the lease portfolio of some properties also here in Warsaw and where we were closing contracts and that is part of that, of these future commitments that then negatively affect the other operating income. But it's a lot of -- it's various situation. It's various things. There is no one line item that completely shouts out and is dominating that.

[Joanna Filipkowska, executive]

Another one is cost of risk. Your cost of risk in the second quarter versus peers tells a bit different story. Can you please share more details on asset quality outlook? What's your normalized level?

[Marek Lusztyn, executive]

Okay. So as I was highlighting earlier, we believe that around 80 basis points is like normalized post-COVID level of the cost of risk on mBank portfolio.

If we compare our number in second quarter versus the peers, what we see highlighted is that we have a one-off effect related to the changes in the -- one of the internal models for provisioning, mainly for corporate specialized lending portfolio. And in Q2, we were anticipating implementation of that model and its results. And that was in tune of PLN 60 million additional one-off provision income included in the numbers.

[Joanna Filipkowska, executive]

How should we see net interest margin trends ahead? Any outlook on fees? And another similar one, what's the outlook for F&C income? Has there been a short-term focus to improve F&C income in light of lower rates or is strong growth more sustained into the second half in 2022?

[Cezary Stypulkowski, executive]

Maybe, I will comment on fees and commissions. If you look back, the trend which was in the bank, I think that you have some 6, up to maybe 7, 8 consecutive quarters where our fees and commissions have been growing. So this is not the -- just to respond to the net interest income drop, that was both driven by the volumes and some adjustments in our fee and commission structure.

[Andreas Boeger, executive]

Good. On net interest margin, if I look at the dominance in the debate also internally in the management board of net interest income versus net interest margin, I think we're currently more managing net interest income because we need to have that turn. And that turn, we think at the -- we are at the bottoming out, but also, there was a question about the outlook. Well, 2020 still had higher interest rates and still higher NII. So the idea is that the zlotys we make out of these banks are increasing when it comes to interest income.

Then we have NIM, and NIM obviously, is a margin and the volumes play a role. The volumes are highly distorted by the massive inflows of deposits we currently have. There are obviously efforts in not pricing deposits at all or pricing them at 0, let's say it's this way, so not paying for them at all. There are also efforts on the retail side, for example, of getting these deposits more into investment products. But these high swings currently distort the NIM. So I can tell you there is no NIM target.

We like to look at it every week, but there is NII and overall balance sheet thing that got much more attention over the last 1.5 years since the interest rates were dropping. And that's important for us to make our way up there and to increase NII and less of an NIM debate. The NIM debate we'll maybe have once things are a bit normalizing, and we maybe know what the what a normalized deposit base of a bank also will be because I still think that this is an exceptional situation we're currently in.

[Joanna Filipkowska, executive]

And last, but not least, we have some questions on ESG issues. ESG seems to be important for the bank. What are the major targets for mBank so we can measure your relative performance? Can you provide some more quantitative targets? And another one, what is the value of the bank's potential financing at the end of the first quarter -- or the first half 2021?

[Marek Lusztyn, executive]

Okay. I will take this one. So first of all, thanks a lot for the comments. In the corporate responsibility and sustainability is one of the guiding principles of mBank activity, and we have all those aspects deeply rooted in the way we operate.

As far as the detailed metrics with respect to the ESG are concerned, we would like to ask you for a bit of patience. We are now putting in place a comprehensive framework how we can measure ourselves with respect to ESG and how we can be held accountable to our -- those commitments.

We are going to present you that set of ESG, I think that KPIs fall both direct and indirect impact. And when we are presenting the broader and strategic overview later that Cezary was referring to. As far as the numbers for existing green financing are concerned, on Slide 10, we are referring to this PLN 4 billion that we have dedicated for renewable energy sources financing. This one is at the end of Q2 deals to the extent of PLN 2.25 billion.

And another perspective I can provide with respect to the green financing is the base for the issuance of so-called the green bonds where so-called green real estate is the underlying. And when we look at the balance sheet amount of those loans, it totals to PLN 7.5 billion.

[Joanna Filipkowska, executive]

Thank you very much. We covered all the questions. So thank you very much for the attention and questions. Stay healthy and safe and see you in the autumn. Goodbye.

[Cezary Stypulkowski, executive]

Thank you.

[Andreas Boeger, executive]

Thank you.