mBank SA

WSE:MBK

Earnings Call Transcript 2023-Q2

[Unknown Executive]

Good afternoon, ladies and gentlemen. Welcome to our conference where we will present the results of mBank group in the second quarter of 2023. So to introduce our speakers today. We have a new speaker, Chief Financial Officer, Pascal welcome aboard. And our speakers who you know well -- whom you know very well, Mr. Cezary Stypulkowski, Chief Executive Officer; Mr. Marek Lusztyn, Chief Risk Officer; and Mr. Marcin Mazurek, Chief Economist. Let's start.

[Cezary Stypulkowski, executive]

Well, that's the sort of the regular message from our side, fabulous operational results and unfortunately, financial outcome is not that as rosy as the operational can suggest. So on the positives, no doubt that we continue to have strong net interest income. I would say, to some extent, better than we expected since we expected flattening of this line already in the previous quarter, but it still performs reasonably well. Some small drop in net fee and visual commissions, partly due to the higher cost, partly due to some less active balance sheet. Overall costs have been growing in a reasonable pace. Cost income, I don't think that requires any type of comment. We don't think it's sustainable in a long period of time. But obviously, we are benefiting on one side from high growth of our income. On the other hand, I believe, reasonable cost management.

Cost of risk will be commented, I would say, below our guidance. And then the name of the gaming in the second quarter was the cost of the legal risk related to the Heritage portfolio. You've been fully familiar with was a write-down of PLN 1.5 billion, which is a huge amount of money, that will be explained since I can imagine that there will be a lot of focus on this issue. Gross profit, that is excluding some items on the most of the Swiss franc issue and taxes, I have to say this, I think, the highest ever. So that only confirms the operation of the bank is performing very well.

I already started commented that the balance sheet is slowing down. The loan growth was negative. Deposits, I think, as a consequence of our very strong liquidity position, and management of our margin, I think, was some pressure, but we don't consider this big important development. If we can move to the Page 4, that summarizes to some extent, the first half of the year. I would say, we don't have much to be commented on this particular one. I think that the most impressive is obviously the returns, which the bank has been able to deliver on the core business, which is extremely high. And I have to say, obviously, the question whether it's replicable. The answer is not necessarily, but I have to say, the core business is performing extremely well.

Out of this, I think the cost income, I think it's not that much quarterly development, but it shows that we are in the course of this year able to keep the cost income ratio below 30%. I think it's the current development, but I believe that obviously, in a longer period of time, it's more problematic. But as you know, since I was in the bank and is a long period of time, plus it comes in an important factor in our management, and our approach to -- how to steer the business.

Despite these quarterly movements, when you look into the customer deposits, we are still growing. As you know, there is almost 10% growth compared to the previous year. What is worth to mention is that under the circumstances despite this huge pass on the legal front, obviously, to some extent, also due to the fact that our balance sheet on our lending side has been shrinking. We've been able to keep or even increase our capital ratios.

Talking about some major developments, I would say, I will focus just on one. You know that we have launched this year -- beginning of this year, I think we started our asset management company, the TFI. Our intent is really to focus on longer-term savings of our customers, the profit of our -- demographic profit of our customers. From -- in a long-term perspective, we believe that we have to provide them with a strong asset management products. The anchor of our offering for a number of years was transactionality. Many of them are in the 40s, and we believe the best that I'm the right time. And I would say the financial position also just is, that they have to be -- they have to start to think about the longer-term perspective. And as a consequence, we have to assist them with the product range, which will be addressing this longer-term perspective.

By the way, I don't know how many people are today on this call, [indiscernible] because I wanted to offer the-- hope you're on live for those who are present but 99%, I don't think I have. But this is important for our internal management, because all employees of the bank has been granted this book, which I strongly recommend, and this is the current gift from the bank. So we will check whether we have enough in the storage. But this resonates to some extent to this campaign, which have been launched, which is Happy with age and I strongly recommend for the locals, to go to the cinema theaters because I think this is mostly displayed there. And I have to say it's very impressive. I like it, despite the fact that I was not personally involved to design this.

The next one, I would say, well, we continue to have the reasonably good acquisition of new clients, both on retail and the corporate side. Obviously, there are some cleanups, because some dormant accounts are being closed. There is more focus on this issue from our perspective than it used to be in the past, to some extent due to the fact that you know your customer is a different level of requirement in terms of keeping pace with the clients identity change, et cetera. So we are very much focused on this issue. And as a consequence, the nominal numbers of clients can vary over the years -- over the quarters, but I strongly believe that we are still keeping pace with the acquisition of new specific younger clients.

Corporate clients, well, I would say we are very much satisfied with the current base. We grow the number of midsized companies in pound, which is our focus, both on the upper end and lower end. And in this respect, on the corporate side, we are witnessing a very strong presence despite the fact that, as you see, our loan book is shrinking, mostly due to, I would say, less presence in the top companies in Poland, specifically in the state control.

Well, I will not specifically focus on this mBank is an icon of mobility, but what I would like to stress, and this is the, I would say, a result of a number of years of endeavors in this respect, and I think that the product which we have offered to the clients and the systems which we would have on the distribution side, this is the growing importance of digital channels in our client relationship. We are witnessing the situation that almost 87% of our contact with the clients is being initiated in digital channels. It's not perfect yet. Lots of work needs to -- is in front of us. But definitely, in this respect, and we know that from mostly McKinsey studies and Finalta, that in this respect bank differentiates to, I would say, most of the players in Europe.

With this, I will pass to our new kid on the block. He will be overexploited today, because this is his debut. And my strong feeling is that now we are working together for already 3 months, but I have to say, Pascal was with the bank already a few years ago on the extended program back into 2017, '18. So he knows the bank. So he is a new kid on the block, but mostly recovered in new kid on the block. Pascal, I'm passing to yourself, don't be nervous. We will help you where necessary, okay?

[Pascal Ruhland, executive]

Thank you very much for this round worth handing over, and hello to everyone. I'm happy to present the financial details. On Slide 8, financial summary and starting off with the total income in Q2. Revenues have increased by 7.7%, quarter-on-quarter. And this is especially driven, as already said by Cezary our net interest margin. We are very proud of, if you look into the bottom of it that we currently have a NIM from 4.33%, and this is an improvement quarter-by-quarter of 0.49 percentage points, and this proves really a very strong competence in managing our deposit base in both business lines.

Together with a slightly weaker net fee and commission income, this builds the highest quarterly total income in the history of this bank. Total costs of the group, excluding obligatory contribution increased by 5% quarter-on-quarter, especially due to personnel and material costs, which are hindered by inflation. Nevertheless, the reported cost/income ratio of 26.1% confirms still superior cost efficiency, and also fight this inflation pressure on the cost side.

Loan loss provisions and fair value changes increased 7.5% quarter-on-quarter, especially due to LLPs in our retail banking, and Marek will elaborate later on the details. Legal risk provisions related to Swiss franc mortgage loans in the amount of PLN 1.54 billion, as Cezary said it materially burdened our financial results of the Q2, and is especially impacted by the ruling of the Court of Justice of the European Union and the KC for 2021, as well as further updates of our model parameters, we will go into details later.

Just one word on the difference what you see here, as booking versus what we've announced in our current report on the 23rd of June, it's about PLN 20 million. Why? Because we have seen more settlements than anticipated, and this is actually good news for us, but therefore, also the number is slightly higher. As a result of the P&L items, Q2 generated a profit before income tax in the amount of PLN 75.8 million, and a small net loss is recognized of PLN 15.5 million. But the message is strong of this quarter and also for the half year, because the significant burden of the Swiss franc-related bookings in the first half of 2023, we are showing still a positive result, thanks to our very profitable business.

Before turning to the balance sheet, 2 technical comments. And I also saw that the tax -- the topic is already discussed. Our effective tax rate, and I would like to remind everyone that we follow IAS 34. And while the majority of our Swiss franc related provisions are treated as nontax deductible, This relates to a very high ETR of almost 77% for H1. And it's important to note why we see it reflected also in our financials. The second technical comment is that we have a restatement of our valuation of the credit-linked notes related to our synthetic securitization transactions. And the reason is simple, we want to follow market practice. Therefore, we're just swapping account lines. Currently, we have it in net fee and commission and net interest expenses. And previously, we have reflected it in our LLPs.

Turning to the summary of the balance sheet. And here, I would like to draw your attention to the capital ratios, while we will discuss the loans and deposit development later in the presentation. As of the end of the month of June, the TCR as well as the Tier 1 capital ratio, stood at higher levels than the shown in previous quarters on this slide. And here, I would like to remind everyone that in 2022, we had to bear a burden from external effects of, in total, PLN 5 billion, and this amount from Swiss franc to credit holidays and also IPS. And this year, we have significant burden from the Swiss franc-related provision increase.

Despite that, you see our capital ratios increasing, and that's the result of a very successful capital management in combination of a high profitable business. And with this said, I'm handing over to Marek with respect to the Swiss franc details.

[Marek Lusztyn, executive]

Thank you, Pascal. So if we look at Q2 Swiss bank perspective, our legal lease provisions related to Swiss franc mortgage loans amounted to over PLN 1.5 billion, and this is something that materially burdened, otherwise excellent financial results of Q2. Why we had to book such a material provisions, that was the cost resulted from mainly the change in the distribution of the expected court verdicts after the judgments of the European Court of Justice of June, that concerns remuneration for the use of capital by the clients.

We have also updated settlement program costs, and we have considered execution of final core verdicts and cost of country settlements. So if we look at the overall coverage ratio of the active portfolio at the end of Q2 that brings us to 75.4%. That is best-in-class coverage if you compare us with the pre-growth of bands with material Swiss franc portfolios. And if we have -- if we would consider also the FX mortgage loans, capital buffer, that is imposed on top of the regulatory ratios, our coverage would stood at 8.2%.

What needs to be remarked as well, is that the share of the Swiss franc mortgage portfolio in our total loan book decreased to 2.9% from 5% at the end of 2022. And the total value of provisions for legal risks at the end of Q2 reached PLN 7.3 billion. And if we would consider the cumulative amount of provisions created since the beginning of the Swiss franc saga, that would bring the amount to PLN 9.6 billion.

If we look at not only the coverages, but actual actions, we are performing to address the issue. The [indiscernible] program 2022 is ongoing. We are quite happy with the results. At the end of Q2, we have 71,000 settlements. June was the month when we had the highest ever number of settlements signed over 1,300 settlements in month of June alone. And what also is important in the context of the verdict of European Court of Justice mid-June, is that we haven't seen a small -- apologies for that -- after the European Court of Justice verdict, we haven't seen a drop in customers' appetite for settlement. So also demand of July was actually the second highest number of settlements ever signed in a month. And this overall brings us, as we speak, to over 81,000 settlements signed to date. And with that, I hand over back to Pascal to comment on the excellent performance of the core business, if we carve out the Swiss and portfolio.

[Pascal Ruhland, executive]

On this slide 11, I just would like to highlight one API. Here at the bottom, our return on equity, which reached 41.7% in H1. This is a significant number, and shows our excellent profitability. And I guess we do not see a lot of other institutions who can show something like that. Nevertheless, we in a total picture, and that was what Marek already reflected, on have still the Swiss franc mortgage loan business next to us, which competes in this slide.

Let's go through the details of our performance on Slide 13. You can see on this slide that the long term continues to be negative, as outlined by Cezary already. The negative trend has structural and strategic reasons, which I would like to bring in perspective. Starting with the retail side. We have in Q2 decreased by 2.1% quarter-on-quarter, but excluding the FX effect, 1.9%. And the main driver is the mortgage loan book. And here, we have the structural topic that the mortgage loan portfolio was impacted by declining Swiss franc portfolio and deductions resulting from the cost of legal risk related to the Swiss franc mortgage loan portfolio. And this alone sums up to PLN 1.5 billion as a structural effect we're having moreover, what we also observed is that we have over payments still of all our Polish mortgage loans, and this has strong traces towards credit vacations, so that receiving and doesn't need to have financial stability rather than gaining financial services and paying back the norms.

Turning to the corporate loans on this slide, excluding FX effects and excluding the buy and sell back transaction, actually, corporate loans increased slightly quarter-on-quarter with 0.6% year-on-year, also minor 0.2%. This stable development is a result of our very selective approach of granting loans in order to preserve the high quality in our loan book, which we have gained in the last 2 or 3 years. And this has also proven for this quarter why we see a slight increase in our margins.

Going to Slide 14. This provides our new lending business, which shows positive developments in 3 out of 4 sub-products in the latest quarter. Visible is especially our rebound of the retail mortgage loans, left top of the slide, increased by 69% quarter-on-quarter, but compared to the previous year, the market is far away from being at the leverage before the interest rate hikes. But important to note, from our perspective is here that our fixed interest rate Polish mortgage loans, now accounting for more than 50% of the sales. And this leads to an amount of 18.3% of fixed mortgage loans in our portfolio in June. And our strategy is also to pursue this path with attractive pricings toward our customers to grow the book further.

A separate topic is the 2% safe credit program, which brings in addition, some revival into the housing loan market, which is not yet visible on our side at this page, why we declared readiness to this program on a later stage, and this will be Q3 2023. The currently described positive developments, we also expect to continue then in the next 2 quarters, but this will be largely offset by our shrinking loans of the noncore segment, which gives you then the trend for the full year.

On our nonmortgage loans, you still see there's not a lot happening, because you're still in a high interest rate environment. And here, our focus is to have a decent margin and not to gain market share. Therefore, the PLN 2 billion we are currently seeing in the last 2 quarters is also our expectation for the upcoming too. What is not wealthy is that our new sales are now over 60% channeled digital. And the main driver is our mobile application, which brings from an efficiency point of view, exactly what we want to achieve.

Now focus on the sales of profit loans in Q2 2023, we went up by 19%, very good is that all customer groups are affected and especially term loans and overdrafts are increasing. Finally, [indiscernible] continues to have a good performance. The value of newly concluded contracts increased by more than 26% year-on-year, and we are well above market. In the corporate environment, we expect a slightly grow in a loan book in the second half due to this already started increasing momentum.

Let's turning to the next Page 15. To comment the deposit volume, it is important to note that our aim is to maximize the total income from deposits. So it's every time a trade-off between volumes and margin. And as we already elaborated that we optimized our margin in the last quarter, due to our comfortable liquidity situation. While we have gained and this is visible on the left-hand bar chart, more than PLN 50 billion more deposits from our clients. And this gives actually a very strong position to optimize pricings, and that is what we have done. Therefore, the slight decrease in deposit volume was actively managed. By the end of 2023, the group deposit base is likely to remain stable or slightly growing. That's the expectation.

Following up with the next slide, the total income slide. Record level of income, almost PLN 2.7 billion income in one quarter, as said, is a historic high. And let me briefly bring that in perspective on NII and NCI development. As outlined before, with respect to our deposit pricing strategy, you can see on the right-hand top, that our net interest income is stable, and we gained a positive momentum in optimizing the interest expenses, and this is visible at the bottom. The trend of deposits I already elaborated on. So one heard on the non-deposit source, which is also driven because we paid back part of our outstanding debt, and that's the explanation.

Let's have a look at the net fee and commission income with our Q2 result at PLN 488 million. On the year-on-year development, I would like to remind us all about some structural changes. So we charged in 2022, deposit facility fees towards especially our corporate clients for year-end balances and as well also monthly fees, which were connected to the negative interest rate environment. But we are now in a totally different environment, the justification for those fees diminishing, and that's the major trend year-on-year we witness. On the quarter-on-quarter development, we have a slightly higher net fee commission income, but it is overcompensated by higher net fee and commission expenses, and this is especially driven by higher cost of services.

Looking forward, we do not change our guidance of Q1. So PLN 500 million per quarter is what we expect. So we will expect a slight increase versus the Q2 figure you currently see. Turning to Slide 17. Cost rise is below inflation levels. This is the good news. Nevertheless, if you look into the details, the operating costs adjusted for the BFG contribution booked in Q1 increased by 5% quarter-on-quarter. And now we are at the level of PLN 704 million. The main driver is personnel expense. It is visible in green. You see 3.6% quarter-on-quarter and 18.3% year-on-year. This is due to wage increases, which will continue because we would like to keep our key people, and it is also noteworthy that we have perceived as one of the best employers in Poland, via our results as the pipes check. And that's just another cornerstone which are not anymore -- that's visible. And we are aiming or we are just seeing for half year 28.5%, which confirms our best-in-class efficiency.

In the following quarters, our operating costs are expected to increase versus Q2. But from a total cost base point of view, we're expecting to be lower than 2022, while we do not expect to pay into the IPS and for support fund in the next 2 quarters, and therefore, we have a structural difference. With this said, I'm handing over to Marek for the LLPs.

[Marek Lusztyn, executive]

Thanks, Pascal. So going through Slide 18, let me comment first on loan loss provisions and the cost of risk, and I will also tackle maybe on the slide, one of the questions that we have on the lease regarding the guidance for the cost of risk for second half of this year. So in Q2, for retail banking, we have seen a material increase of the cost of risk. The increase was driven mainly by the recalibration of our loan loss portfolio model to reflect the latest macroeconomic assumptions, and the level of observed delinquencies. And that was largely offset by the outstanding results of net impairment losses for corporate and investment banking that were actually not losses by profits in this quarter, and they were positive at PLN 46 million versus a flat result of Q1 in that segment.

The lower LLPs are primarily due to the efficient management of the debt collection and restructuring portfolio, which contributed to the nonrecurring release of some of the provisions established in the previous reporting periods. And we consider this largely to be to be one-off. So the cost of risk that we have seen from corporate investment banking segment recognized in Q1 and Q2 cannot be extrapolated from the following quarters. So despite our entire loan portfolio, having high quality, we do not see -- we don't see the major risk in our corporate portfolio at the moment, but overall, cost of risk for second half of this year is expected to be higher than what we have seen in Q1 and Q2. And that's obvious to say that the level of the LLPs will also depend on macroeconomic developments, including the impact of inflation, and the level of rates that will impact our clients in the following quarters. But overall, compared to the results of cost of risk that we have seen in first half of this year, our outlook for second half is slightly negative.

Going to Slide 19 and having a divide on loan portfolio quality. Despite economic slowdown seen in Poland and our major trading partners, we see a good asset quality in Q2, the nonperforming loans ratio marginally increased to 4.1%, and was significantly lower than the overall NPL. The ratio in the sector that was at 5.7% according to [indiscernible] of data. We have seen a slight increase of NPL ratio for retail loans that were from 3.7% to 3.9%, but that was primarily driven not by the higher amount of inter loans, but largely by the decrease of the retail exposure volume at about PLN 2 billion. So it's basically the denominator effect.

Also, if we look at the coverage, the coverage ratio for Stage 3 and 4C, it was slightly increased from 52 to 53 percentage points and the overall coverage ratio for loans in Stage 1 and Stage 2, went up to 71%. And last from my side, capital ratios and liquidity position, also answering some of the questions that we have seen in the Q&A, why the capital ratios have actually improved. What we need to remark is mBank is one of 3 banks in Poland that have this so-called FX mortgage loans, add-on over imposed by the regulators to put at banks which are -- have been standardized and internal rating model-based regulatory capital calculation, and we are of the latter group. And that capital requirement related to FX add-ons decreased by a [indiscernible] decision in June. It was lowered by almost 60, 58 basis points to be precise for total capital ratio, at the group level. And that, combined with outstanding internal capital generation capabilities from the core business allowed us to improve the overall capital ratio compared to the Q1 despite PLN 1.5 billion write-off of the Swiss Bank portfolio.

And last but not least, as you can see on the right-hand side of the slide, excellent capital for extent liquidity ratios, both in terms of the LCR perspective, that's significantly above 200 basis points, and very well above the regular capital minimum net stable funding ratio. And with that, I hand over to Marcin to comment on [indiscernible].

[Marcin Mazurek, executive]

Thank you, Marek. Good afternoon. So economy is at the crossroads right now. But I mean, in a positive sense, it is highly likely that second quarter is going to mark the turnaround in GDP growth. So we will turn from negative to positive. It would be a slight positive number, but we have to start something. Consumer modes are better and better, but they fail to spend more. We think that the reason lies in real wage growth. It used to be negative in July, it turned positive. So it's up to 2, 3 months when consumption spending could be on the rise. And to be honest, it would be the main driving force behind economic recovery that we are forecasting right now.

The other part would be based on investment, private investment activity because it stays strong despite high rates. At the same time, we observed that labor market stays super strong, unemployment rate is still falling. We see only minor of drops in employment in the enterprise sector. 20,000 people laid off is just, I would say, nothing compared to the scale of deceleration of GDP growth.

Inflation is falling, but it's fair to say that low hanging fruit has been gathered so far. So the process of falling towards the target will be much harder from now on. But nevertheless, the NPC decided to take stock of inflation developments. And here, we should change -- we change -- we are changing our scenario. So far, we expect that NPC to cut rates in 2024.

Now we move forward this first rate cut to October. Since NPC clearly communicates that current inflation below 10% would be sufficient level to start cautiously lowering rates. We cannot disagree here, so we are going with the flow. In terms of deposits and credit on the market, it mostly reflects our accounts, our bank accounts. So there is plenty of deposits in the market. We are seeing some turnaround in credit activity. And I would say the worst situation is on the corporate credit. It's suffering from the negligible amount of investment credit, and also it's under the spell -- under negative spell of shrinking current financing due to the fact that corporates are slowly getting rid of inventories.

As far as rates are concerned, expectations for quite aggressive NPC cutting cycle brought government bond yields to the lowest level since Russia invasion. We don't think there is much more room left for profit drops. That's why we also expect that the European and rate reached its local minimal. From now on, we expect PLN to be a bit weaker, reflecting a little bit more -- a little bit too high eagerness of NPC to cut rates.

And last but not least, due to the fact that Poland has become fashionable of late, we decided to add some structural issues. It's -- right now, it boils down to 4 graphs. So summarizing it, Poland still is a growth story and will be a growth story since it is very, very competitive in terms of hourly labor costs. You can see that on the right-hand side, upper graph. At the same time, even though unemployment rate is low and even both demographics, I would say, not very good going forward. We still have some juice left to catch up in terms of labor activity rates. So in terms of labor supply in the medium term, there may be some room for maneuver to increase labor supply just to properly economy grow forward.

And last thing to note, well, there are various measures of competitiveness of the economy. Our favorite is the balance of international services. You can see quite dearly on the bottom right-hand side graph that there is a growing surplus in services rendered by Poland. And I think it speaks for itself. That's why Poland is very competitive in, I would say, areas that would be very, very fashionable going forward. Thank you.

[Unknown Executive]

Thank you, Marcin. Now let's go to the Q&A session. So the first question is about the sensitivity to 100 bps decline in base interest rates. So what is the sensitivity in NII and NIM?

[Pascal Ruhland, executive]

Yes. Sorry, I'm taking this question. It is also outlined in our management report of the first half of the year on Page 62. And I'm just saying that because I would like to bring our sensitivity into perspective. What you can see there is that we show on a 100 basis point shift in a static balance sheet approach that we are affected by PLN 670 million. But important to note is that within this shift, just 55% roughly respected to Polish Zloty to the shift we are currently discussing and also margin described that we see some interest rate cuts at the end of the year, so half of that.

And while this is a static approach and obviously has, therefore, ups and downs, you cannot take this ever strict guidance. This is just as an anchor point, while customers' behavior is highly sensitive, as well as also pricing strategies towards the topic. But to give you a sensitivity in our management report, it is reflected, but out of the sensitivity you see, it's just 55% on Polish Zloty related.

[Unknown Executive]

So what is the NII outlook for next quarter? Is there any room for positive surprises similar to second quarter of 2023?

[Pascal Ruhland, executive]

So as guided with our very high net interest margin, we just received this quarter, we believe that this is largely exhausted. Therefore, together with the expected rate cuts, we believe that it will be slightly lower, not dramatically, but slightly lower.

[Unknown Executive]

So another question to Pascal, what is the guidance on cost growth in 2023?

[Pascal Ruhland, executive]

So the operational costs will follow the growth path we've seen in Q1 and Q2. But the total cost base, and this gives you then for your estimation, and maybe the correct guidance will be below what we have seen in 2022.

[Cezary Stypulkowski, executive]

If I may, we think that when it comes to cost, we are planning to manage this also in respect to our ability to generate the income, and obviously, some one-off type of costs we can accept, as long as they will not impact our longer-term perspective in terms of disciplining the bank via the cost/income ratio. So I will not over focus on cost in this year. I think that they will be under the control. But there are some investments in terms of building now specifically people, but I would not exclude that they can lead to some one-off type of spending, which we originally haven't envisaged in the beginning of the year, or during the course of the year.

I don't want to be very precise. I'm just saying that let's not over focus on this extremely low cost/income ratio, which I believe is the guidance, as I said. But what is very important, we are trying to manage this line in a longer period perspective, not just on a quarterly or annual basis. So the costs which are determined in the longer period of time, are of our special interest and special thoughts.

[Unknown Executive]

Is there any change in the cost of risk outlook for 2023? What does mBank see for 2024 in terms of asset quality and risk costs?

[Pascal Ruhland, executive]

Yes, I have partially answered that while presenting. Outlook for Q3 and Q4 is slightly negative compared to what you have seen in the first half of this year. And we expect that 2024 is going to be roughly similar to 2023. We expect a slight improvement in the quality of the retail portfolio in 2024. That's going to be compensated by the longer-term effect of economic slowdown on the corporate portfolio, also taking into account these one-off effects that I was alluding to before.

[Unknown Executive]

So about this one-off impact, what was the level of one-off impact provisioning release in corporate segment?

[Pascal Ruhland, executive]

So the biggest one-off impact in corporate portfolio in Q2 was a single-name effect that was slightly above PLN 70 million.

[Unknown Executive]

Was higher delinquencies reported in mortgage or consumer lending?

[Pascal Ruhland, executive]

We see this in a retail book of mBank similar to the general trends since in the market that is actually the delinquencies are seen all across the board.

[Unknown Executive]

Is mBank budgeting any costs related to deposit guarantee fund contribution to BFG in 2024?

[Pascal Ruhland, executive]

We are budgeting in, but it is not significant and we are talking about a very low double-digit number, so. What needs to be said is that, as you have seen in '22 BFG council have decided to lower the coverage ratio for DGS from 2.6% to 1.6%. And as of December 2022, the level of funds gate in DGS accounted actually above 1.6%, 1.77% of the covered deposits to be precise. So they exceeded the target. So the contributions in the following years provided that there is no change in the decision of BFG council that we do not foresee at this stage. The contributions in the following years will not materially change and will entirely depend on the dynamics of the covered deposits.

[Cezary Stypulkowski, executive]

Plus there's European standards. The coverage and funds are slightly behind.

[Unknown Executive]

It seems that there was an upwards revision of capital ratios reported in the first quarter of 2023. What was the reason behind this?

[Cezary Stypulkowski, executive]

Let me explain that.

[Unknown Executive]

Actually I -- yes, we put the answer in the chart. I will read this. The reason was the retrospective inclusion of the first quarter '23 profit into own funds after the KNF approval. Another question, will you start offering 2% subsidized mortgages?

[Cezary Stypulkowski, executive]

Yes, I would say demographic property of our clients definitely versus, if I may say, to offer that product despite all the questions around the structure and the development in the market. Clearly, there is interest on the side of our clients. As you know from the previous presentation of the bank, also in the strategic presentation. The democratic profit of our clients is just in the range of the age brackets, which have been declared in this product by the official sector. So we will be ready. We aim to be ready by mid-September with an offer, we witnessed some interest on the side of line. Marek, would you like to add something?

[Unknown Executive]

Can you comment what's the use of borrower support fund on the rise in the second quarter 2023?

[Pascal Ruhland, executive]

No, we have actually seen a decline in the customer interest of using that fund.

[Unknown Executive]

What is your ambition when it comes to the number of Swiss franc settlement signed?

[Cezary Stypulkowski, executive]

The more, the better. Look at me, who got a [indiscernible]. So I'm under the circumstances with the risk prudent. By the way, I want to say to those of you who are less aware with the tale of the spots, which has been built around the Swiss franc portfolio. EVAP will certainly survive in a longer period of time, the ETJ, the European Court of Justice line can adversely impact in principally the European banking. It's not just Poland. We are like a proxy for what can emerge as a strong customer protection in the very -- in the product, which is long term and with implications for the management of the balance sheet of the bank.

So I have to say, I'm just not worried not only the Polish officials, but also the European officials that it's not neutral. It's not just limited to the Polish environment. As a consequence, the more settlements we can reach with the clients, the better it will be for the bank. Obviously, there is a cost account which we have to manage.

[Unknown Executive]

We have another set of questions about Swiss franc provisions. What are your expectations for Q3 and Q4? What is the probability of further model updates that increased risk provisioning going forward?

[Pascal Ruhland, executive]

So we expect that the provision that we have created in Q2 in response to the negative verdict of the European Court of Justice, is actually the highest as far as 2023 is concerned. We expect that Q3 and Q4 will also bring some increase in provisioning, in response to the developments, both in terms of the number of cases, jurisprudence, and settlements offered to the client. But we expect them to be much smaller than what you have seen in Q2 and actually also them to be smaller than the number that we have in Q1 this year.

[Unknown Executive]

Is there an increase in the number of legal cases coming from Swiss franc mortgage loans already paid back or settled with customers? What is the current level?

[Pascal Ruhland, executive]

The vast majority of the claims that we get is from active portfolio. And if we look at the proportions of most recent proportions of active versus repaid plans that we received, we don't see the proportions of the repaid actually being higher than historically.

[Unknown Executive]

Is mBank noticing an increase in the level of loan history taken by the clients, which would imply a higher level of legal cases in the perspective of the following months?

[Pascal Ruhland, executive]

Yes, that is a small uptick compared to what we have seen in last year, but the increase is small, it's actually in low teens percentage point wise.

[Unknown Executive]

It seems that the new volumes in mortgage lending in PL were still in the downward slope quarter-on-quarter, what -- was this intentional?

[Cezary Stypulkowski, executive]

Well, there are 2 aspects. One is that what we have witnessed in the market there was a slowdown, not on and that's one of the second, I have to say that the legalities around the mortgage business in Poland are problematic. That is not -- that is the position of the banking sector, we speak to this question in not only in capacity of mBank but also representing the banking association. I have to say there is a pending discussion to which extent with the lack of solid respondents with the question almost of everything. And I would say, even conflicting messages from the official sector, to which extent we will be able to rely on a solid basis to offer that type of a product to the clients in need. And as I said, mBank is in a very specific position, because we have a very strong and very loyal and very sticky clientele, which is people with a strong intention to purchase form housing.

And I have to say that dilemma is in front of us. I have to say that aspects which are related to our understanding of what's the future of the product, it's all for the clients. Now I said our clientele is definitely there will be interest. The third element is on the U.S. I would say, overall, from this is Polish judiciary, which is enough comfort that the bank is in -- the bank's intention is to the product. I think that we have to assist our clientele. Marek, would you like to add something?

[Marek Lusztyn, executive]

No, sir.

[Unknown Executive]

Question on the net interest margin. If I'm not wrong, you have been keeping cautious short-term outlook on net interest margin since Q2 and since then it's appreciated by 70 to 80 bps. Was it rather the deposit side, which outperformed your expectations. How should we read it this time?

[Cezary Stypulkowski, executive]

To be perfect, yes. This is much more on the deposit side. So I would say, and as I said similarly in my entry statement, I think that [indiscernible] mere transactionality, very growing funds since the income levels of our clients are growing as well, plus the systems which we use, which allow us to visualize across the clients. All this contributed to this phenomenal growth on their net interest income, whether this is sustainable, the response was in place. We are cautious. We will continue to process but we will manage.

[Unknown Executive]

Do you see the trend in declining share of term deposits in the retail segment sustainable?

[Cezary Stypulkowski, executive]

It's difficult to respond to that question. I think that we are in a situation where [indiscernible] decides. As I said, we have in proportion to our overall retail deposit market share. We have rapidly higher level of the money-tracking accounts, and this is a result of mostly our premier transactionality. So we believe that, that creates a stickiness, which is an important factor, but still we want -- we allow, we encourage clients we to put money into the longer-term play with the interest rate, which reflects our liquidity position. Would you like to add to that?

[Pascal Ruhland, executive]

2 things maybe because we're discussing the great progress in terms of deposits. And this is something which especially is also leveraged by our digital position to really dig into our data sets and to understand our clients' behavior in order to also optimize then our offers towards them. This is one of the drivers why NIM overperformed. And secondly, towards the slight downward trend on the term deposit, I just reconfirm this is not yet easy forecastable because we, every time, face more circumstances in the market, competitors' behavior in order to manage our total deposits. As said, our aim is to have total income increase, and that is then the game it volumes and margin.

[Unknown Executive]

What is the share of fixed loans in total outstanding loans compared to 1 to 2 years ago?

[Pascal Ruhland, executive]

I mentioned that during the presentation, it's roughly 18% currently. We started for 2 years in 2021 the product. So it's now migrating from 2021 from 0 to 18%. And last year, we had the same time in time, 3%. So it's on a growing trend, and this is also our strategy.

[Unknown Executive]

18% of the retail Portfolio.

[Pascal Ruhland, executive]

Yes.

[Unknown Executive]

What is the average duration of the investment book?

[Pascal Ruhland, executive]

Well, I'm new. That's definitely something I also witnessed. We do not disclose the topic towards the market. But while you can get some points within our disclosure to give you the confidence on our duration in total, it is slightly below 2 years. You can then judge out of our data that we're delivering towards you, and that's the answer. But this, in total includes the hold-to-collect and the hold-to-collect-for-sell portfolio.

[Unknown Executive]

Thank you very much. We covered all the questions. So thank you all for your attention, and we wish you a great holiday.

[Cezary Stypulkowski, executive]

Sorry, if I may Interrupt. Those of you who would like to get-- I promised a copy of book. Apply to journal and the distribution will work. While we're seeing different projects. One copy Okay. Thank you very much.

[Unknown Executive]

Thank you