mBank SA

WSE:MBK

Earnings Call Transcript 2022-Q2

[Joanna Filipkowska, executive]

Hello, and welcome, ladies and gentlemen. Today, we will discuss the results of mBank Group in the second quarter of 2022. The results will be presented, as always, by Mr. Cezary Stypulkowski, Chief Executive Officer; Mr. Andreas Böger, Chief Financial Officer; and Mr. Marek Lusztyn, Chief Risk Officer. The macroeconomic outlook will be presented by Marcin Mazurek, Chief Economist. Cezary, the floor is yours.

[Cezary Stypulkowski, executive]

Hello, and welcome. Traditionally, we will start with the presentation of our good operational results, I have to say, and financial results require, unfortunately, some additional comment.

So on the operational side, I think the most important is that the revenue side of the bank is growing as fast as it used to, even faster specifically on net interest income for the obvious reason that the interest rates hikes benefited the banking sector. But we continue also to grow our net fee and commission income in a pace which was characterizing our outperformance over the last 3 years. But it's a 22-plus percent growth on a year-to-year basis.

From the reporting perspective, the cost base, which we are very proud of that we are able to keep this discipline, and cost income ratio is one of the most important criterions of our performance in management terms. But the total cost obviously has grown significantly, mostly due to the contribution of the protection scheme in so-called IPS, which was the event of the second quarter. Still, the cost/income ratio is below 50% from reporting terms, 47.3%. But when we use this cost/income ratio for our management purposes, we are significantly below 40%. The net profit has been stated at PLN 260 million. This also encompasses the additional contribution to the legal cost for the Swiss franc portfolio in the magnitude of PLN 175 million.

The cost of risk, relatively modest. As you know, our guidance for the year was 0.80; we required 62 basis points cost of risk. And total capital ratio is slightly below the levels which we used to have, that will be explained further, currently at 16.4%.

We continue to be -- to acquire or to push out or to get our clients on the mobile platform. More and more of them are mobile app users. In terms of the coverage of our customer base by the mobile applications, we are #1 in the market, and we are very proud of this.

And also something what I have already announced when we've been discussing our strategy for 2025, that kind of the next big thing in banking will be personal financial management tool. And we launched some of the initial functionalities and enhanced some of the formal functionalities, and we recognized 674,000 users of this new functionalities.

So operationally, we are doing very well, but we operate in a non-friendly regulatory environment in Poland basis. Regarding for the banking sector, as you know, most of the key players in Poland are very efficient. Most of the banks are below 50% in the cost/income ratio. Still, the governmental interventions, if I may say, impact significantly the financial performance of the major players, including ourselves.

During the course of last few months, there was a public discussion around the issue of the treatment of the mortgage borrowers in the significantly changed interest rate environment. Interest set of the interest rate hikes has elevated significantly the interest rate for this clientele. We recognize the fact that these clients, for these clients, many of them, the situation has changed very rapidly, and to some extent, unexpectedly. But the cure which has been proposed by the government was the basically universal type of credit holidays without any specific criteria, was very much strongly opposed by the banking sector, though we have not been successful.

So not going into the very -- into the details, as you maybe recall, some time ago, the estimates were in the making of PLN 20 billion of impact on the banking sector between 2022, '23. The banks has calculated this impact in the respective institutionals, and currently based on the reporting which the banks have done, the estimations are between PLN 12 billion and PLN 13 billion. Obviously, the -- we are, I think, in the first week of borrowers applying for the credit holidays. So it's still very difficult to estimate the takeup, but obviously, we are following what's going on. We still keep our initial estimated between PLN 1 billion and PLN 1.4 billion will be the impact on the bank's profit before tax.

Borrowers' support fund, this is a solution which has been initiated by the banking sector already, to [indiscernible]. This is the tool which we believe serves clients well and should be strengthened, and strong signals from the banking sector was that we are very much prepared to operate with this fund as a major tool to support clients, but the politicians have chosen different solutions. Still the various support funds, which addresses both the zloty borrowers and foreign exchange borrowers, will be strengthened during the course of third quarter. And the estimation which was -- or the figure which was publicly discussed with PLN 1.4 billion on top of PLN 600 million which is already in the fund, in our estimations, we are supposed to put up to PLN 154 million additional contribution to these funds just as mBank.

Another aspect of the proposal which has been stated by the official sector at some point was the WIBOR replacement. This issue is still being discussed. There are some declarations that the new benchmark rate potentially can be introduced at the beginning of the next year. I don't think personally that this is doable. The discussions are being continued. The national working group has been established. They are in the preliminary discussions about the approach. So the phase-out dates or the process are still being discussed and will be ultimately decided.

I already made some comments on the protection scheme, which has been established as a public go, but the banks who are free to participate, 8 banks already declared their participation. The expected payments should happen as we speak, basically, because the institution responsible, which had been set up based on this public go, has been registered, I believe, last week or this week. So we are on the eve of setting it up. Our contribution will amount PLN 390 billion at this moment.

Obviously, this situation and the governmental initiatives have impact in a variety of ways, both on the individual banks and transferred a significant portion of economic value from the banks to the borrowers. At the same time, obviously, is impacting the macro picture of Poland. I would say the most important is the potential impact on the capital base of the banking sector in Poland, consequently on the credit activity and lending activity of the Polish banks, and what is the most difficult, I believe, will have impact in the longer run.

This is another aspect of moral hazard, which will impact the general population, was an expectation that whatever happens, someone will contribute and someone will take the burden from themselves. And that is something what I consider now having significant impact on the paying discipline in Poland. And I think that, that's the reason that we are so vocal to defend our position as guardians of the contractual arrangements in Poland.

As you know, and this is -- I'm not saying this is a defensive position, but I think that the realistic evaluation of what's going on in Poland requires, also on our side, to show, and that's the rationale of this particular chart, to show how rapidly that the overall burden for Polish banking segment, specifically for mBank, is growing since 2016 with the banking tax, the significantly growing contribution to Bank Guarantee Fund, payments to the Polish FSA has tripled, and public income tax, which is growing despite a variety of additional burdens which banks have to incur. And as a consequence, as you see, over this year -- these years, the amalgamated figure of all these burdens has reached almost PLN 10 billion, PLN 9.312 billion.

Again and again, what needs to be stressed is that we are talking about one of the most efficient banking sectors in Europe, which was partly burdened, is unable to pay the dividends. In our case, that was only once, 2017. We always hope to return back, but you have this development slide this year, which set up, if I may describe, an unfriendly environment for our efforts to please the investors.

As I have stated several times, the level of the effective tax rate in Poland has, I would say, has exceeded 40% for a number of consecutive years. And that's something what we are trying to change in the environment, which unfortunately also from the macro perspective, and I would say in this international environment, is not easy to be done.

Some more, I would say, business achievements during the course of this quarter. I will focus just on one. We -- years ago, we have set up the venture capital funds on the brand mAccelerator. And one of the initially invested companies, Digital Fingerprints, which is specialized in the security, which the bank has been using for the last 3 years as a tool to strengthen the security of our clients and is able to follow the patterns of the usage of the equipment, has been acquired. The company has been acquired by credit bureau, okay, Credit Information Bureau here in Poland, and it is supposed to be used not only for us, provided by our bank, there was I think 2 other banks which already have been signed up for the product, but with the intermediation of Credit Information Bureau, this tool will be accessible to all the banks in Poland. Client base is growing. Our market shares are pretty high, stabilizing at 8% for the retail side. That was a significant growth over the last -- especially in the last 2, 3 years. Corporate banking notes, I would say, over the last almost 10 years, ranging between 8% and 11%, 11%, 12% depending on the products and returning to the loan book and the deposits.

And finally, from my side, well, we continue to be the -- as we try to -- as we like to describe ourselves the, icon of mobility. The bank was [ a month ] which -- where clients are using mostly the mobile platform. What is worth to mention is the share of processes in retail banking which is initiated in digital channels. And just over the last 2.5 years -- 2 years, 3 years, it has a significantly increased, and it's reaching right now 80%, which I think is something that is very difficult to be compared to many other institutions, including also the aspirational impacts.

To summarize on my side. Now, I will pass to Andreas to summarize the financial part.

[Andreas Boeger, executive]

Good. Welcome also from my side.

[Cezary Stypulkowski, executive]

Now it works. Sorry.

[Andreas Boeger, executive]

I think I'll start again. So let's first look at the first half of the year, and then I'll go more into the quarters.

So first half, very strong revenues. Revenue growth 45%. But I would like to highlight that next to, obviously, net interest income, there was also, over the full first half year, a strong growth in net fee and commission income that was amounting to 25%.

Also, the cost income ratio, and Cezary was mentioning the cost of the IPS, but also in the first quarter, we had very high cost for BFG. So the cost income ratio here on a normalized level at 35.7%. That's also really strong, and that then translates into net profit of the core business here of above PLN 1 billion, and the return on equity of the core business, which is a bit shy of 20% at the print of 19.4%.

Further, we have seen good growth on loans, reduced nonperforming loans and also deposits growing. The Tier 1 ratio you see here, that's a comparison half year over half year. That dropped. Obviously, we made a loss last year. That's also part of that. But the Tier 1 ratio is still 329 basis points above the KNF minimum.

Let's go to the next slide, where I would like to bridge the quarter and the half year, because I think that -- we will revisit a lot of these details, but what needs an explanation in this quarter is the effective tax rate. Because what we do in the effective tax rate under IAS 34 is we actually project the annual effective tax rate, and that annual effective tax rate is then reflected in the respective quarters.

In the first quarter, the effective tax rate was 28.2%. Now we know that the aforementioned credit vacations and also other burdens will have either hit us in the second half or the most is to come when it comes to the credit vacations between PLN 1 billion and PLN 1.4 billion. As was said, that is to come in the second half. So we know that the protective tax rate, because the profits against the nontax deductible parts are actually lower, so that projected tax rate will be higher. And the projection for the annual tax rate is 43.4%, which meant that in Q2, in order to have first half at 43.4%, we took like a catch-up. And that results in a 61% effective tax rate.

It's all very technical. We didn't pay more or less tax. It's more of what we do under IAS 34 to smoothen that out. And it stems from that, I would say, a huge shock to P&L that wasn't fully foreseeable in Q1, that we would actually have to relinquish a huge chunk of our revenues here.

Maybe one thing to mention, and I'll skip the balance sheet part, but before I hand over to Marek Lusztyn on the Swiss francs, obviously, you also see the CHF 175 million here, which is also an extraordinary item that we booked in the second quarter. But as we discussed in the last quarters, the reserves are so high, so they have their own life. So CHF 175 million is also within what was to be expected here.

With this, Marek, I hand over to you. I hope you hit the button better than I did.

[Marek Lusztyn, executive]

Okay. Good afternoon, everyone. Thanks, Andreas. So on the next slide, we can see the dive -- deep dive on the Swiss franc portfolio topic. The carrying amount of the Swiss franc mortgage portfolio in first half of 2022 was going down by 9 percentage points in Swiss franc terms. And this contributes to 6.7% of the total loan portfolio of mBank at the end of June.

What needs to be highlighted as well is that the inflow of the individual court cases concerning the indexation clauses in second quarter of 2022 visibly slowed down. That was actually the slowest level of inflows since like 6 quarters or so. We keep on adding provisions in response to that inflow. So the level of provisions was increased as well in 2022. Overall, it brings the coverage of portfolio to nearly 35 percentage points, which is one of the levers which is the highest among the Polish peers.

And so going to the next slide, if we look at the total number of cushion that we have created so far for the Swiss franc issue, taking into account the capital allocated to the noncore unit, that amounted to PLN 1.8 billion and PLN 4.4 billion of provisions for legal risk, which are currently split into the deduction from the gross assets and the amount included in the bank liabilities. This gives us PLN 6.2 billion overall allocated at the end of June for the Swiss franc portfolio that is our noncore unit.

And I hand over back to Andreas on the performance of the core banks.

[Andreas Boeger, executive]

On the core bank, let's briefly stay on Page 14. Some comments I already mentioned, the net profit is about PLN 1 billion, so PLN 1.15 billion. And the return on equity was PLN 19.4 billion. Please bear in mind that this PLN 19.4 billion fully includes the high BFG costs in the first quarter, also the IPS costs in the second quarter. So even in the times with very high burdens here, the core business is performing very well.

Obviously, in the third quarter, when the credit locations will be reflected, that will also affect the core business. But as it stands here, you see it's a very, very robust business. And also, we had a very successful 2 quarters in the core business or in the general bank that should not be forgotten with all the negative burdens and public pressure that we have discussed beforehand.

But now I would like to go a bit into the dynamics of the quarter. So let's start with loans. So loans were growing roughly 2% in the quarter. And the drivers here is, on the one hand, you see the expected slowdown in retail and the also expected expansion in the corporate segment.

Corporate, you see here growing by a bit more than 4%. Well, that's less of an investment loan story, more of short-term loans and also a higher usage of credit lines that show the higher carrying values here. And I think the retail story is best explained on the next slide when it comes to the new lending business. There, it's important to understand both sides of that story.

If you look at mortgage loans, sales are down, and they are down significantly. I mean on mortgage loans, next to what we discussed on credit vacations, I think it's fair to say there is a shock to the market here. On the one hand, there are higher interest rates. On the other hand, we have the matter of credit vacations, and we need to see how the production in the next quarters will actually pan out. We expect that the third quarter will be significantly lower than the second quarter in the sales, and from fourth quarter onwards, it might pick up because -- so Q4, it might pick up again because clearly in our client profile, the demographic profile we have with the client base, that's very benign. People would actually like to finance houses. But let's not forget the complexities of these mortgage loan locations also for the whole housing markets. If you are having an asset, i.e., your house, and that is financed, and you were planning to maybe change houses or sell the house in the next 18 months, well, if you know you are subject to credit vacations and you can select them, we expect also the turnover in the whole housing market, i.e., also for new market entrants. That will need to be seen how that pans out. But the mortgage market in Poland will most likely have different dynamics in the last 18 months than what it had in the last decades.

Now I move to non-mortgage loans. For non-mortgage loan sales, you see here still on a high level. We also expect the high level to continue. For Q3, we expect the market to go down a bit. We will also go down a bit. It's also vacation time, that's what you often see. But we expect the non-mortgage loan sales to be more kind of ordinary business vis-a-vis the mortgage loans where I said that's clearly something that will go down.

On corporate loans, maybe let's just give the outlook. I mean we've -- I've stated before, we see the carrying values there quite high usage of credit lines. Business is good. The economy is still in good shape. On the other hand, we have inflation. So working capital needs to be financed, but we also have a little bit less investment loans.

We continue to be selective in the client base and the business that we do. So I think a good proxy for the overall volume of the corporate book is a high single-digit growth over the year. We were starting the year with more thinking of more of a low single-digit growth, but we would say it's more of a high single-digit growth.

Let's move briefly to deposits. Well, there, we've seen a slight decline. The slight decline is around 1%. That's in line with what we also see in the market. And please remember, we are starting with a loan-to-deposit ratio below 75%. So we were also not immediately the ones who were cheering first pay for deposits. Loan-to-deposit ratio is at 77%, so we have a better usage of the balance sheet right now. And the market is slowly finding also its equilibrium in terms of paying for deposits, and we expect the deposit base to be stable in the future. What you have, you have some changes in between. Some people change from various account models into others. So you have shifts between current accounts, savings accounts and term deposits, but the overall deposit base, we expect to be stable.

Let's move over to income where we have seen historically high core income. We already discussed this last quarter where it was nearly PLN 2.1 billion core income, i.e., net interest income and net fee income and commission income. So the green and the blue bar, we're now at PLN 2.24 billion. So that's a good increase.

Let's look at the drivers. We discussed that the interest rate environment helps. Net interest margin is at 354 basis points. So that means that net interest income is at PLN 1.69 billion, again, another 12% stronger than in the quarter before. Obviously, the question is, what is the outlook here? What the outlook is, that is a good basis. We don't expect further substantial growth. It might still grow, but give or take, new interest rate rises, if they were to come, would not really translate fully into new NII. So we will have to pay that gain actually out to the market. So that's already a very good level here.

What is also on a very good level is net fee and commission income. Well, you see minus 7% here vis-a-vis the last quarter. But let's remember, the last quarter actually had PLN 37 million in deposit fee in there, which is a one-off which we take in the first quarter. So obviously, that doesn't repeat in the second quarter.

What we have seen, and you see this also on the bottom right, is that the brokerage business, obviously capital markets, new issuances and that kind of business that was weaker in the quarter, that is down by PLN 17 million, so brokerage down to PLN 41 million here, the overall brokerage fees. But if you add up these 2 things, you come to PLN 54 million; that's already a higher drop than the PLN 42 million drop that you've seen. So it means that the rest in NFC is going on full steam and is actually going well.

Maybe to explain one last thing here. You see a minus PLN 91 million here being the gains, less losses, from financial assets and liabilities. That's a mixed bag of things. So also in the background of a high interest rate environment, for example, we did a revaluation of the nonbusiness stakes we have, though we have a stake in, for example, BLIK, [indiscernible] in BLIK and [ in cure ]. We attached higher discount rates there. So that was a PLN 54 million valuation loss we booked here, but also in part is the Visa shares, and it also contains a bit less than PLN 30 million loss on the sales of treasury bonds that we did.

With this, I will move to cost. And on the cost side, I think the dominating topic is actually the black box here. The black colored box is not a black box anymore. And we know it's PLN 319.8 million what we pay for the IPS. That IPS payment is reflected fully in the second quarter. Against this, we didn't accrue BFG charges when it comes to deposit guarantee scheme because there is an expectation that in the next quarters, we will not pay that respective PLN 51.7 million. You saw that -- you see that on what we booked in Q1. So that we didn't book in this quarter, we also don't expect that booked in the third and fourth quarter, and it needs to be seen if that holds, but that's our expectation that it should not be charged.

Maybe the second thing to be explained here is material cost. All other things, I think, are in line with the expectations. The material cost is a bit higher by PLN 25 million. Just to give you 3 examples that actually add up to this PLN 25 million: PLN 11 million IT, PLN 9 million marketing and PLN 5 million for consulting and projects. That roughly gives you the PLN 25 million increase in the material cost here.

To maybe finish that view is obviously the cost/income ratio. You see that distortion in the quarter, 47.3%. While that's IPS-driven, you will see a further distortion in Q3 because we will lack revenues in an amount equivalent to what we book on the credit vacations. But in general, Cezary said that the bank is run -- if you take that noise out below 40% cost/income ratio, if you even take the whole BFG, IPS, everything out, the bank is even run currently at a cost/income ratio below 30% before these compulsory contributions.

With this, I will end and hand over to Marek Lusztyn.

[Marek Lusztyn, executive]

Thanks, Andreas. So I'm moving to the [ pattern ] risk and capital, and risk and capital management in the second quarter was exactly how we should be in banking, that is, very boring. So there is not much to comment.

As you see, the net impairment losses and fair value changes quarter-to-quarter were going down by 27%. The write-off was PLN 195 million. This brought us to the quarterly cost of risk at 62 basis points. Year-to-date cost of risk at 76 basis points, and it is roughly in line with the guidance that we were providing so far from the cost of risk in 80 to 90 basis points, which we keep so far unless any kind of stress event related to the macro geopolitical situation happens.

Moving to the next slide. Loan portfolio quality quarter-to-quarter is very stable, almost no changes, with respect to the value of the impaired loans portfolio, 1 percentage point up quarter-to-quarter. The coverage ratio almost unchanged quarter-to-quarter. Same applies for the NPL ratios at the bank level. And segment-wise, the NPL ratio of mortgage loan portfolio, as you see on the slide, quarter-to-quarter, is going a bit up, but it is primarily driven by the Swiss franc legacy portfolio. As far as the Polish zloty mortgage portfolio is concerned, the NPL ratio was 0.7 percentage points, and that was actually even better than before the pandemic as in -- at the end of 2020, it stood at 0.96%.

Going to the next slide, the capital and liquidity position. Capital ratio is slightly up quarter-to-quarter. At the end of Q2, it stood at 16.38%. That was 321 basis points above the minimum regulatory requirement at that moment, with total risk exposure amount almost no change quarter-to-quarter as well. As far as liquidity ratios are concerned, they were also well above [ new ] regulatory requirements and one of the best in [ sight ]. And with that, I'll turn over to Marcin for the macro update and outlook.

[Marcin Mazurek, executive]

Thank you, Marek. I guess that during today's presentation, we've heard a lot the word headwinds, and headwinds are, I would say, dominant force also in the economy. Right now, we are seeing that consumers are under constant and broadening pressure to limit their expenditures. So far, we haven't seen that in real figures, but in the last few months, it's becoming more and more visible.

It's safe to assume that consumer spending will be even lower in coming quarters because consumers start to crack on just higher prices, negative real wages and also uncertainty connected to almost everything, and last but not least, higher interest rates. At the same time, still unemployment indicators look good, but they have some kind of inertia. So as soon as economy deteriorates, unemployment rate should go a bit higher, and we expect this.

And turning to the cycle and the GDP growth, I think that everything is evolving according to the recently presented forecast because economy is slowing down. It's not still -- it's not going to be visible this year because the starting point was very high. This year, we expect economy to turn out at 4.6% growth. The most important, I think, is the next year when we are going to see a cyclical bottom, not much above 0. At the same time, we are facing very high inflation. Recent readings were above 15%. And right now, we've entered a period in which inflation is set to stabilize. But yet, we haven't seen the top because the top would be generated in the first quarter 2023 by energy price increases that are set to be expected by the Polish [ war stock ].

On monetary aggregates, I guess Andreas pointed out the most important development here, because we are seeing that still corporate credit is growing, but it's mostly because of current financing, the demand for investment credit is falling. Well, the whole volume has still some juice left, but it's going to decelerate into year-end and in 2023. At the same time, we are seeing visible symptoms of a slowdown in household loans. They are going possibly under 0, led by mortgage loans in this year.

As far as the financial markets are concerned, it is safe to assume that we've seen the top in government bond yields and we are not likely to revisit these levels. But also, it's safe to say that it's not that the worst is already behind us because as we are entering something resembling recession, credit risk assessment of investors may go up.

At the same time, zloty stays relatively weak. So far, it was mostly reflecting risk aversion and some weaker fundamentals. But right now, this weakness is also portraying cyclical characteristics of the zloty. So over time, there are some perspectives for appreciation of the currency. But still, as we are repeatedly saying, there is no potential for a huge appreciation. So the zloty can be only a bit stronger in the medium term.

[Joanna Filipkowska, executive]

Thank you, Marcin. Now let's start the Q&A session. I will start with questions about credit holidays. What is the current participation in the credit holidays? And also what number of PLN mortgages is eligible for credit holidays?

[Marek Lusztyn, executive]

So as far as mBank's mortgage portfolio is concerned, we estimate that roughly 90% of the portfolio is eligible for the holidays program. We are just, after a couple of days when clients can submit the motions, we know that there were different ways of submitting the motions in the different institutions. We see a relatively high interest of our clients to apply for the moratoria. But the number of applications we have received so far keeps us confident that basically the initial estimate, between 60% and 80%, that we have presented to the market is still valid.

[Cezary Stypulkowski, executive]

Interestingly enough, some of the clients do not apply for the full package, but for some release not exercising in full [indiscernible] for June.

[Joanna Filipkowska, executive]

How confident are you in your capital buffer against deteriorating outlook, looming regulatory costs and ongoing FX loan stagger?

[Andreas Boeger, executive]

The capital buffer, as I said, is 329 basis points over Q1 minimum. That is a very strong capital base. We are seeing headwinds, as we discussed. So that's on the cost side, but also on the revenue side, i.e., the credit vacations. On this -- obviously, against this, we will also burn. That's the one thing because I've seen there's also a further question on the capital hit from credit vacations. And the intention needs to have -- it needs to be that we should have a buffer against other unforeseen things.

When it comes to the burdens of the banking system, we are actually of the opinion that actually the capacity to bear further burdens is exhausted, but we also, as mBank, needs to be mindful of further development that might come on Swiss francs. So against this, the PLN 329 million is a good starting point, and you know that we are also doing active balance sheet management. We did a securitization, for example, also recently. So we are further working on keeping a strong capitalization.

[Joanna Filipkowska, executive]

Should we expect higher provisions in Q3, given your expected review of methodology? And any update on FX mortgage-related provisions ahead? At what provisions level already at 35% in Q2 will you be comfortable? And another similar question, can -- what is the likelihood of risk for the coverage ratio of FX mortgage book to go above 50%?

[Marek Lusztyn, executive]

As we have explained at length in the financial development, as well as we have elaborated extensively during the previous investor calls, the jurisprudence on the Swiss franc mortgages is not yet like fully crystallized. We are still expecting a breakthrough verdicts the European Court Justice among others, which are expected towards the end of 2023. That is also answering one of the questions from the Q&A list.

Therefore, taking this into account, it is difficult to answer what is the ultimate level of provisioning. The current level of provision income we have, if you combine 4.4 that has been rather the reserve plus 1.8, which is the capital allocated for noncore portfolio, it's nearly equivalent to all of Swiss franc-denominated mortgages being converted to the Polish zloty at the original FX rate, so to so-called [indiscernible] proposal. And given the circumstances, we are of the opinion that at this stage, it is the furthest-reaching economically justified level of provisioning.

As we explained at length in the report, every quarter, we can fully look at the developments. We look at the incoming cost cases, we look at the verdicts and we adjust the methodology and the provisioning to accommodate for those developments. But at this stage, we believe that the current level of provisioning is adequate, but we cannot exclude that the revision model will bring competitive considerations.

[Cezary Stypulkowski, executive]

As Marek said, there is still a lot of unknowns, and crystallizing the jurisprudence will take some time. And managing the past, this heritage portfolio, and managing also the future requires some reasonable balancing. That's the reason that after some months of operating with the methodology which we -- as announced 2 years ago, I think that we are coming to the point where we need to have a fresh look into this to reflect in our steps better what is more on the horizon and not what are the historicals.

[Joanna Filipkowska, executive]

Now maybe on cost of risk, do you expect a material increase in cost of risk in the coming quarters?

[Marek Lusztyn, executive]

We don't expect material increase in the cost of risk in the coming quarters. We believe that 80 to 90 basis points is still a good guidance and a healthy cost of risk that mBank also experienced in the past. We have carefully reviewed the portfolio. We believe that our loan book is well positioned for the headwinds ahead that we have discussed at length. Also looking at the potential stress coming from deterioration of the gas availability for Poland, answering to one of the other questions from the Q&A, that is included. to that.

We don't expect material increase in our level of provisioning. We have done a stress test on that, and even in the situation of the full closure of the gas to Europe, we would expect our cost of risk not to go up more than 10 basis points in 2022.

[Joanna Filipkowska, executive]

Commerzbank planned mBank to contribute some PLN 600 million group's revenue by 2024. That looks now a very optimistic scenario. Could you please comment on mBank's revenue trajectory?

[Andreas Boeger, executive]

Good. So on this, the revenue trajectory is intact. Commerzbank, at one point, made a statement of PLN 600 million against their original strategy in '24. So the figure needs to be reconciled with Commerzbank what the starting point and here is. But when it comes to the inputs that mBank has in this and the increment, that still holds, and I think it was PLN 600 million delta, obviously, because in the first quarter -- in the first half, we already have more than PLN 4 billion of revenue. So that delta is to be more discussed with Commerzbank Group. But for us, the long-term trajectory and also the long-term trajectories that we set when we put out the strategy last year, when it comes to the growth rates and what would actually result from that, all of that is intact.

[Joanna Filipkowska, executive]

What is the level of MREL-eligible funds needs for 2022 and 2023?

[Andreas Boeger, executive]

So on MREL and the minimum MREL we have, you see, I think, on Page 37, it stated that we were currently fulfilling all MREL requirements. The MREL requirements will phase in over time. In order to, in the future, also fulfill this higher than phased-in requirements, the plan for MREL in general is to, like what we did last year when we issued EUR 500 million, to each year tap the market by roughly EUR 500 million to maybe even EUR 700 million, but let's say, to EUR 500 million-plus. We are also monitoring the market here. We are willing to issue.

On the one hand, the war in Ukraine, but also in the other hand, domestic discussions around the credit vacations and around the complexities on which we spend the first 15 minutes of this meeting make the market currently very difficult to access funds there. But as I said, we are continuously monitoring. Currently, it's fine and against phasing in, we would, in the future, have to issue.

[Cezary Stypulkowski, executive]

I have to add that I believe that there will be a reflection in the phasing in of the MREL in [indiscernible] 2022 and '23 when we are visited by the respective regulators.

[Joanna Filipkowska, executive]

And now net interest margin. You sound a little bit more bearish on the NII net interest margin outlook compared to your peers. Other banks rather expect further improvement, excluding credit holidays. What may be the reason? And another one on NIM, when mBank expects its NIM to peak in this interest rate cycle?

[Andreas Boeger, executive]

Yes. I think they're both clearly related. As I said, we don't expect it to substantially increase. There might still be increases. If others are more positive -- well, they are more positive, we try to have a conservative assessment here. And there is some more leeway, but the historical jumps we have seen over the last quarters, obviously, they're not in the book anymore. And that's what we can deliver. 354 basis points of NIM is strong. As I said, it might be stronger, but there will be no huge jumps there.

[Joanna Filipkowska, executive]

Another one is connected to interest income and costs. Could you please shed more light on your deposit repricing and outlook in the second half?

[Andreas Boeger, executive]

Yes. So on deposits, you see here the blue line on the right side. You'll see how much we actually pay for deposits. And you clearly see that we clearly have started to pay for deposits. That's also an interesting narrative that somehow is that the banks don't pay for deposits. Well, we are paying, but we're paying where we see it as adequate. And the deposit structure plays also a very important role. The benefit that mBank in general has is that a lot of our deposits are operational, transactional.

So that's part of the technology. Also, we offer that transactionality is very easy with us. And that means a lot of money is on current accounts for transactional purposes. And that's the one where the pricing pressure is smaller, I would say. But on the other hand, well, we had interest rate raises, and that equilibrium in what you pay as a market also for deposits is different to high-frequency trading, where maybe equilibrium is done in milliseconds. This comes over time. So that means we expect that the interest expense on deposits will also further rise in the future. And that's also a part why, for example, further rises in interest rates will not one-for-one translate into higher net interest income at NIM.

[Joanna Filipkowska, executive]

Did you increase the scale of your hedging as, first, the negative impact on NII was PLN 240 million in the second quarter versus PLN 59 million in the first quarter? And second, in the Management Board report, you present a negative impact of PLN 62 million for 100 bps increase of interest rates.

[Andreas Boeger, executive]

Yes. I mean on this when it comes to the hedging, so what we do is, we, for example, look at how we can model certain balance sheet items. And as you have seen, during the COVID crisis, when interest rates were dropping from 150 to 10 basis points, our net interest income did not drop at all. That, on the one hand, was a function of us printing more business. But with this, you can actually not make up for 150 basis points down to 10 basis points. So we have a fixed receiver position, that's a rolling position that we have strategically on the balance sheet.

Against this, we actually pay floating rate into the derivatives. And the floating rates into the derivatives, well, the huge jump actually we also have seen in the last quarters and especially in Q2 for the full quarter, we actually had quite a high 3-months WIBOR. And that's the interest expense part you then see here on the side.

So the derivative volume itself against it, because that was the question if there was a change in strategy, there is no change in strategy. It's just right now the respective, yes, floating legs filtering through.

[Joanna Filipkowska, executive]

The mortgage NPL ratio is up again in the second quarter. Can you please comment on key drivers?

[Marek Lusztyn, executive]

As I have to add to earlier, that is mostly driven by the noncore portfolio. That is much more mature. If we look at the zloty portfolio, the NPL ratio at the end of June stood at 0.7%, 70 basis points. That is very small for this type of book. Starting from the next quarter, we will start showing up the NPL ratios from the mortgages of core and noncore separately, just to make it clearer.

[Cezary Stypulkowski, executive]

My feeling is that between 2016 and 2022, we shrank our Swiss Bank portfolio from PLN 5 billion to PLN 2 billion, so naturally, the contribution of nonperforming [ on rates ].

[Joanna Filipkowska, executive]

Can you please provide details on mortgage production in the third quarter? Do you expect portfolio to be flat this year? Do you experience elevated level of repayments?

[Andreas Boeger, executive]

Yes. Let's maybe first start with the repayments. We expect elevated prepayments because we're also seeing that. And we, to some extent, also reflected this in NII in a conservative assumption on the prepayments, the so-called small [ tour ]. So that's also part here of the approach. When it comes to the prepayments, I think it's a very, very important point to monitor over the next quarters because clearly, the credit vacations about which we spoke are, so I would say blunt instrument that is not really looking at the need of the client and at the cash flow need. There is a certain push that it would be wise that people actually take their credit vacation as prepayment. I think with this, taking the cash that is gained and then investing it into a prepayment where the money is then kind of stuck from a cash flow perspective for a decade plus would definitely mean that the client did not need the credit vacation at all. So that will be a very interesting point to monitor. But we expect clients to be smart and to look at the optionalities they have, and some of them will think it's smart to do a prepayment. Some of them will think it's smart to not take your credit vacation, take one or do something with it.

So, we, in general, given the higher interest rate environment, expect prepayment, plus also with the credit vacations expect more prepayments, and we will actually see that, I think, over time.

When it comes to the mortgage production in the third quarter, as I said, given the circumstances and also given the unclear situation that I think exists or will exist on the housing market, you're being unclear if you could [ for sure ] right now, sell your house or if we show how it should go in the market. We will just see less activity, there will be less opportunity for nonincumbents to actually buy real estate. And we will be cautious, and we think the third quarter production will be significantly down still also from second quarter.

[Joanna Filipkowska, executive]

How serious is windfall tax threats in Poland? Government track record suggests that this cannot be ignored, especially after Spain, Hungary and even Czech Republic consider such tax are already introduced. Could this potentially be a risk for 2023?

[Cezary Stypulkowski, executive]

We suppose, I will say, things aren't predictable. There is a lot of unknowns in the Polish political environment. We are approaching the election season. This is something what will be significant unknown, shadowing what can happen within next few quarters. I personally consider this a remote perspective. But since there is this kind of a fashion across Europe, one cannot exclude that since there are no copyrights on this issue, things like that can come to us as well.

[Joanna Filipkowska, executive]

Now I think the last question may be a bit more positive.

[Cezary Stypulkowski, executive]

If I may add one thing. This space for taxation of the wind -- I would say, windfall type of revenues, which we -- profits, to be perfectly honest, seems to be very small. So the [ palette ], it's, interestingly enough, in some other markets, the governments came to conclusion that they wanted to take parts of this, [ cash ] it out indirectly to the government pockets, in our case, as it was already mentioned. The transfer is going directly to the borrowers. So space for additional taxation seems to be very small.

[Joanna Filipkowska, executive]

Amongst slew of headwinds Polish banks are facing in the next few quarters, could you comment or name any positives for the sector, which investability status have deteriorated massively recently?

[Cezary Stypulkowski, executive]

We're the most positive is that the business model of the bank like ourselves, not only us, plus the level of effectiveness of Polish banks is very strong. So this is the most important buffer against all the odds. And I think that's a very positive development. Over the years, we have built up institutions which are pretty resistant to what's going on, both in terms of the market developments. And I would say I have to describe this variety of excesses also on the regulatory front.

[Marek Lusztyn, executive]

So today, if you look at Slide 14, that summarizes the performance of the core business of mBank. We are talking about the franchise and the business model that brings nearly 20% ROE. That is significantly [ tough ] the cost of equity with cost/income ratio, which is not only one of the best-in-class in the local market, but one of the best-in-class in Europe or in the [indiscernible]. So if it was not for the legacy portfolio and the regulatory headwinds that we have seen in the last couple of months, that would be one of the best banks to invest in the world.

[Joanna Filipkowska, executive]

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