mBank SA

WSE:MBK

Earnings Call Transcript 2019-Q3

[Joanna Filipkowska, executive]

[Interpreted] Good morning. It's a pleasure to welcome you to the conference that sums up the results of the third quarter of the mBank Group. They will be presented by the President, Cezary Stypulkowski; CFO, Andreas Böger; and the macroeconomic situation will be described by Ernest Pytlarczyk.

[Cezary Stypulkowski, executive]

[Interpreted] Good morning, ladies and gentlemen. Welcome to our quarterly meeting. What can I say? We're continuing the good tendencies wherever we have influence and wherever we have not, things are not so bad either. But whenever it's possible to use mBank employees' efforts to get an impact on the events, then things go the right way.

Well, first of all, we have record high interest revenues that has 3 sources. One of them is the systematic improvement of the interest margin in the bank that's been going on for a number of years, and partially has to do with the low participation, low share of the Swiss franc portfolio and improved conditions of the financing of this portfolio and partially the increasing standing of deposits and their structure. But there's not much to discuss. It's almost 18% more year-on-year, so that's really an impressive result.

After a period of stagnant tendencies for a few quarters that we observed in the past due to the events that I described earlier, partially, at least independent from the bank, we are seeing a recovery. And it's 3.4% higher than last year, higher than in the previous quarter. And we are approaching, well, a measure that seems to be a reference to us, PLN 250 million per quarter. We are close to PLN 1 billion of commission revenues. So far, not quite there, but I think next year, this is -- it's highly probable that we shall exceed this level.

Net profit, PLN 354 million. Andreas will tell you more about this. But generally speaking, you can see that it's a lot higher than last year and previous quarter, so no reason to complain. This is coupled with what I mentioned earlier, the interest result in terms of volume and -- volume is growing 4% quarter-on-quarter and over 14% year-on-year.

And, well, I don't think there is any need to comment if there are questions then we will take them. We will respond. What we've repeated on multiple occasions it is -- the motto of the bank is to be a transactional bank or to aspire to be one, first choice of bank in this area. I think we have good standing for that in retail and corporate sections alike, and this translates to more than average influx of clients and their funding.

We systematically increase our share in deposit market. And as you can see, the level of deposits is also growing by over 5% quarter-on-quarter and over 13% year-on-year, and that is specific for the last quarter, I could say.

And there's no secret that on the side of credit products, we have also quite systematic growth and growth in the share -- market share in non-mortgage products. That's credit card indebtedness and consumer that share the dynamics, are systematically quite high. A while ago, we beat the level of PLN 2 billion a quarter, now it's PLN 2.4 billion. So the product is growing systematically at mBank. And undoubtedly, it's an important element of the delivery of our interest revenue because generally it's a high-margin product.

We had an ailment in the mortgage sector in 2016, 2017, perhaps partially 2018. This was due to the fact that the bank had experienced a capital squeeze. And after that, due to the situation in the franc -- Swiss franc sector, there was that story, but now we seem to recover to a level that more or less corresponds to our potential, which has meant significantly in the sales of such products to the bank's clients.

Capital indices are quite decent. Credits and deposit, 90%. Quality of assets is improving. Coverage ratio has improved. I think the previous quarter dropped slightly. Clients, shall we say, like us, and their number is increasing, and that's both true for corporate and retail banking. Quite a significant increase in corporate, the Q3, that I would say, is a new area of interest of our bank. We have made a huge effort over the last years to get a good positioning among the mid-level clients, let's say, in Poland, that's been successful, but the smaller clients, due to the structure of the bank and the relatively low coverage, low market share, well, that sector has had a small contribution to the revenue of the bank, but this is slowly evolving, perhaps not at a radical pace, but it's noticeable.

And Page 6, you've got an overview of, let's say, all the basic elements that constitute the bank's results. You've got the indicators. Wherever you look, Q3 is indeed very good. I'm not going to dwell on that. I think the bank is on a particularly good trajectory in terms of client relations. There is issues, obviously, that are due to, say, some in unexpected increases of BFG. This year, there was a write-off here in the first quarter for that, and this is -- distributes over time, but generally, the cost-to-income ratio is 37.9%, which demonstrates that there is a very good level of revenue, and the costs are not [ growing ] quite so well, so we are one of the most effective banking institutions universally speaking, shall we say. A slightly better return on equity. We know that the Polish banks are very much encumbered in any way. Still, I must say that the return is quite decent. Also, gradually increasing on assets as well.

So to sum up the third quarter in the group, we can say that if you look at Page 7 of -- the areas are in green. So what can I say? Things are good. Andreas?

[Andreas Boeger, executive]

Also a warm welcome from my side. So as always, I would like to take you a bit through more details of the performance of the quarter. And first, starting with the loans to customers on Page 9.

On loans to customers, we see upward trend in both corporate and retail business. So you can see that in the quarter, the loans increased by 3% overall, that is 2.4% in corporate and 3.7% in retail. If you look at the longer trend, so the full year trend, corporate lending is up by 14.7%, that is particularly strong. It also has to be seen against the background of, for example, having 11% more clients. So this is exactly what Cezary was saying that clients like to do business with us. We are gaining clients and we are gaining also market share. Market share in corporate has increased, for example, in lending from 7 point -- to 7.4% from 6.5% in the last year. So this is nearly 1 percentage point gain in market share.

Similar picture in retail, gains in market share here, fueled by both non-mortgage loans and also mortgage loans.

You also see this on the next slide when we look at new lending, new lending again here, and let's start with retail. On mortgage, with PLN 2.3 billion in mortgage loans, the highest ever production in mortgage loans, our market share in new production in mortgage loans has reached 12% in the quarter. And also having PLN 2.4 billion of non-mortgage loans is a very strong number. We discussed in the last quarter that non-mortgage loans might have a seasonal pattern and it will -- it could be a bit weaker in the third quarter. So this is what we have seen, minus 8%. But I think the PLN 2.4 billion for Q4 is -- let's put it this way, it's [ getting ] some upside. I don't think that the fourth quarter will be lower than PLN 2.4 billion.

Looking at new corporate business. New corporate business, also a good quarter. The last quarter was particularly strong because there was some structured finance deals in it, et cetera, but it's a good quarter also in corporate. And you have seen this also in the slide before when it comes to the volume development.

Leasing number of contracts down because we have less passenger cars that are leased due to a tax change that was effective beginning of 2019, but still the carrying amounts of loans in leasing are also up for the quarter.

Let's look at deposits, next slide, and the more transactional side of it. Deposits up by 5.8% for the whole bank in the quarter. Very strong in corporates. Corporate deposits up by PLN 4.2 billion [ only ] in the quarter. Out of this, roughly half is -- a bit less than half, PLN 2 billion is term deposits, the rest is operational deposits. The term deposits were gained at similar margins than in the quarters before. And we come to margins and net interest income, and especially also interest expense a bit later. And also in retail, you see a healthy increase of 2.7% in the quarter. Loan-to-deposit ratio in the quarter, 90.3%. So these were the volumes.

I think the most interesting part about the volumes is always the next slide, how it transforms into income, so how do we generate our income. And there, it was already said that core revenues are at a record level in the quarter. If you look at the PLN 1.43 billion of revenues we had, this is the highest we saw for -- in the history. There is also some one-offs, plus and minuses, which I will also obviously explain, but let's maybe first go to the engine.

So what is delivering these results? On the one hand, net interest income, 6.7% higher than a quarter before. We had 1 day more in the quarter, but still 6.7% higher. The interest income increased by PLN 67 million and the interest expense only increased by PLN 1 million. So this is quite a strong sign of very good NII and a very good funding basis, a funding basis that has transactionality in it and that is actually cheap.

What Cezary already mentioned is net fee and commission income. Net fee and commission income, with nearly PLN 250 million in the quarter, if you take this times 4, we are on the track of, hopefully, 1 year and -- this will be next year. I think we're quite confident delivering the PLN 1 billion we always want. This is PLN 22.7 million higher than last quarter, so that's good. Back on the one hand, cards, fees. And on the other hand, you know that we have increased the fees on accounts. So effective 19th of August, we have increased fees on retail accounts, for example, and that should add per month roughly PLN 5 million in net fee and commission income, so i.e., PLN 60 million per year.

What's also good in net fee and commissioning income is not only quarter-over-quarter, but also if you compare it to last year, that it's up 4.1% over last year. So the trend is not only for this year, because you could say this year was maybe a bit weaker, but it's already stronger than last year.

Trading income is strong. On the backdrop -- with the backdrop of strong FX business and general high volatility in the market, also volatility when it comes to government bond, and this is then where -- when the trading platform actually generates more volume and also then generates more P&L.

Looking at the more extraordinary items. First, the positives. So in total, you see at the top of the Slide #12, you can see PLN 100 million positive results. This positive results is basically driven by 2 components. We also name here on the slide. The one is that we made a valuation adjustment to our stake in PSP, so the operator of BLIK. You know that there was an investment of Mastercard into BLIK that basically led to a revaluation of the stake. The revaluation still has a certain haircut in, but the revaluation amounted to PLN 45 million. I think you have seen similar things with also competitors who have similar stakes.

What we also did when we were reevaluating our stakes, we looked at the holding we have in Visa shares. On the holding we have in Visa shares, we are applying a haircut. The haircut we historically had on this position was, I would say, very conservative, and we're now moving more to where we observe like more market norm is, but this stake still also has a decent haircut on it. So that's an extraordinary gain of PLN 100 million.

What stands against it? The lower end at the bottom, so PLN 105 million, basically 3 drivers. The one driver is that we have increased our provisions related to foreign exchange mortgage loans, so that is particularly Swiss francs and indexation loans. Even though we think that the verdict of the European Court of Justice is not really conclusive, we also don't see any pattern in cash flow behavior in our clients, in our clients' portfolio and the loan portfolio. But we think that the next month will be marked with higher uncertainty around this, and this is why the management decided to book higher provisions to be well-provisioned for this also into the future.

The second point we have, as you might know, is we will, next year, move to a different building, which will be quite important for mBank because we will consolidate 8 different buildings into 1. And what you generally have, if you do this, not 8 of these lease contracts are fully synchronized because you also don't want to run the risk that in 1 year, for example, you have to prolong all the leases or you're actually at risk of higher rents, et cetera. This is why particularly 2 lease contracts are longer than next year. Against this, we booked a provision. Because we will have more office space than we need, we booked a provision of PLN 27 million. We will see how we can sublease or how -- what we do with the contracts, but we thought it's a good approach, and it's a conservative approach to now take this PLN 27 million here through P&L.

And the third part we have is that regarding the other verdict of the European Court of Justice regarding to cash loans and the fees paid on cash loans. We have provisioned PLN 15.2 million in the quarter. This, itself, if you look at it and also Cezary was saying about the full picture, the one-offs basically offset each other, and I think the PLN 1.4 billion in revenues you see is still really the engine, what the engine of MBank delivers. And it's a very good sign for not only this quarter, but also going into the next quarters.

The opposite side of income is always cost. So briefly on costs, costs, well-controlled, with only being up 1% quarter-over-quarter. That's only PLN 5 million, so very low. So good cost control leading to, I think, the best cost income ratio we had so far in the history of the bank in a quarter, 37.9%, really showing the strong operational efficiency. We have -- obviously then if you take the BFG charges, charges that were there in the first quarter and you normalize, this is PLN 41.3 million for the quarter, or for 9 months, PLN 43 million, but I think this is still showing really best-in-class efficiency of the business model of mBank.

Going through the lines. I think if you look at staff costs, staff costs are higher due to performance-related pay also, but also some higher head count. And material costs are a bit lower, but they are basically on the level of the first quarter.

Going to cost of risk. Cost of risk this quarter are affected in retail by a model recalibration. This model recalibration contributed to roughly PLN 58 million higher LLPs in the quarter. The model recalibration is basically looking at a certain time span. It is looking at something that, well, also serves for the past. It's looking at observations, but it also is encompassing some slight methodology changes. But as this accumulates, sometimes you have this effect that you have negative model recalibration, sometimes you have positives. This quarter, we had PLN 58 million, but this is the extraordinary item which should not repeat itself. Otherwise, I would say corporate, 65 basis points cost of risk, lower than in the last quarter. So I think this is all quite uneventful. You have some cost of risk. If you're on a business of being in the risk-taking, that's clear. And if we look at the cost of risk for the bank year-to-date, this is at 83 basis points. Yes, and I think roughly around 80 bps, give or take, that would also be the outlook for the full year.

Looking at loan portfolio quality and nonperforming loans on the next slide. Robust quality, maybe to mention the nonperforming loan ratio of 4.7%, which compares to the sector nonperforming loan ratio of 6.8%, so that's also strong.

Last page I want to discuss is capital, next slide. And there, maybe just looking at the Tier 1 ratio. Tier 1 ratio of the bank at 16.82%. This is 223 basis points above the KNF minimum, so well in line with our strategic targets, and this builds a good basis for further growth.

And with this, I would like to hand over to Ernest.

[Ernest Pytlarczyk, executive]

[Interpreted] Well, hello, ladies and gentlemen. This is the time when we're going to dedicate more time to the year 2020.

Well, 2020? Well, you can check it on your smartphone, how you should pronounce that. Okay, we are going to dedicate more attention to the year 2020. And it looks that, well, the economy will slow down. We have already seen certain symptom in the global economy, and they will have bigger impact on Polish economy in spite of the fact that we believe that next year, most likely, we will see the stabilization of the external environment, Europe and the United States, also due to the stimulation that the banks will continue. It all started in 2019 and, most likely, it is going to be continued in 2020.

There are very sort of serious national factors that will slow down the growth in 2020. We will have that sort of a fiscal measures terminated. And as a result of that, the growth of consumption will be at a decent level. Nevertheless, this factor will discontinue. And finally, we have the investment of municipalities that will drop by 30% next year. Well, this is the result of the EU calendar. We have experienced all that already 3 times. In the extreme case in 2012, the final result was a recession in Poland. Currency -- currently, the situation is better. We have a stronger labor market, more optimism amongst the consumers. And at the same time, most likely, a private investment will not grow. And at the end of the next year, the growth rate will be very close to 0. So at the end of the day, 2020, we expect 3.2%, the growth of GDP. And this is, in a way, the sort of a lower forecast.

And inflation rate, I believe that at the next -- at the beginning of the next year, it will be about -- above the NBP goal of 2.5%. And I think that, that should be correlated to the large extent with the situation on the labor market as well as the situation related to the end market in Europe. All the time, external environment, it is not inflationary, rather deflationary.

Let me move to monetary aggregates. What we can see and what we will continue to see is a very moderate growth rate of corporate deposits. Since we do have pressure or margin on all that, it limits growth of the results, and the growth rate of lending, quite moderate. It will be impacted by working capital loans. And we can look at the trajectory of the investment reflecting the EU calendar, but also on the ratios, I think that we should not expect a spectacular growth of lending. It is going to be slightly slower than currently.

Well, households now, 2 important things. First of all, the continuation of high-growth of mortgage loans. And this is the sort of an outcome of the situation on the labor market. And the fiscal packages, to a very big extent, they are dedicated to savings and people are more willing to save. We have the sort of -- and as a result of all that, people save money on the deposits in the banks. And we are the beneficiaries of fiscal stimulation for many different reasons, also from the point of view of the improvement of the credit rating of the borrowers due to the fiscal package, and I'm speaking right now about the whole sector.

And now alternatives. Deposits, even without high interest rates that reflects the level that is defined by NBP, is still attractive. Interesting situation on the financial market bonds. Well, these are the global factors. So it will be very difficult to identify local factors that might have a major impact on Polish bonds rate. Without any changes this year and next year as well, I think that there might be some on the occasional fluctuations of inflation.

And now considering 20 -- to 2021, and we expect lower growth rate, I don't believe that there may be any growth of rates. I think that we have a bigger risk of a decrease of interest rates. So well, the zloty graph, really nothing is going on. It is really a straight line, and all that shows that our currency is liquid, that we have a well-balanced economy for many different reasons. Well, our current account is quite stable and then the state budget, so we have ever a sort of well-balanced economy, and we believe that, that situation will continue.

And now let me swiftly move to forecast and impact on the mBank growth. Considering historical regulations and the mechanisms that we used in our bank, we have -- we will see the growth of our revenue by 8% by 2023. And I think that it is slightly more than the growth of GDP. And the growth of average cost of 5%, so that was between inflation rate and the growth rate of salaries. We believe that the growth of the revenue will be faster than growth of the provisions. And now considering our position or the loan-to-deposit situation, we believe that loans should increase by 6%, so that is significantly more than the market situations. On the left-hand side and the growth rate of deposits, 6%, and that will be similar to the general market situation. Thank you very much.

[Joanna Filipkowska, executive]

[Interpreted] I would like to clearly encourage you to ask questions.

[Kamil Stolarski, analyst]

[Interpreted] Kamil Stolarski. Well, perhaps, I will sort of ask about the results of the verdict of the European Court of Justice, the small one. So what were the implications besides the reserve provision, PLN 15.5 million?

[Andreas Boeger, executive]

Second [ two ] verdict one on cash loans, I think that's the question. It's not yet clear what will really happen. And the bank, like also other entities in this sector, I think we're currently analyzing the effects what this verdict will have on business, the way it's conducted on our operations, on the way we have to give it back to clients and also what the future financial effects will be. As I said, for the history, we have provisioned 15.2% -- PLN 15.2 million, not percent, but we cannot, right now, give a clear answer of what it will mean for the future. This is to be investigated and have to be discussed here with also the authorities.

[Kamil Stolarski, analyst]

[Interpreted] Is it a sort of portfolio provisions for different cases? Or could you please comment on that, how, in your opinion, this situation will evolve? And what is the sort of current tendency after the recent verdict or verdicts?

[Andreas Boeger, executive]

Let me say something about the financial impact and then Cezary will give the overall picture. I think there's huge uncertainty, and Cezary will talk about this. And we looked at it and we said, you can either look at what's happening and what's coming in or you just take a more proactive approach and just the management decides to put something more against it at times where it can be done. And this is why we decided to book the PLN 66 million in this quarter against it. But if the situation, I think, is far from being clear, and with this, I will hand over to Cezary.

[Cezary Stypulkowski, executive]

[Interpreted] Well, this is a question about jurisprudence of the cards and how it evolves because there are more and more disputes and more and more cases. And my opinion is known, I have expressed it several times. And to a certain extent, it has an impact on how our bank operates. When we question -- continuously, we question sort of -- in the sort of court proceedings the argument related to the abusive clauses as well as the way that the cases are handled.

And as I told you, and I think that, that was at the sort of previous meeting, our confidence with regard to this verdict of the Court of Justice. Back then, it was a potential verdict. I was sort of am not certain. I didn't believe back then that, that would be a very important change related to the legal situation. And what -- in my opinion, well, what this verdict showed or demonstrated what had been considered by the courts before. However, well, I think that we have sort of a higher level of reluctance about acceptance of considering those contracts not valid if there are some abusive clauses. Well, that was not handled by the European Court of Justice. For us, as a banking sector, we do question it.

Well, and now invalidity and all the [ lenders ] know how important are our contractual conditions and to what extent the clauses are abusive, and you can, in certain situation, consider those contracts as not valid. Well, the European Court was quite skeptical. They say, well, there are certain premises that consider those contracts as not valid, but perhaps we should forewarn them since the invalidity will have a very high-reaching consequences. In many cases, people are not aware of that. I can envisage certain category of the clients that might, well, prefer invalidity. I will not make any suggestions to the lawyers. But with regard to the longest contracts in Poland, and they were closed in good faith, so that would be sort of like questioning] [of ] contractual obligations. And as a lawyer and as the CEO of the bank, I will try to dispute with this line of thinking. We have to be aware of the fact that the courts, they have their own approach to the way the cases are handled, but I think that after this sort of verdict of the European Court, then we have another [ wave ] of the cases due to the fact that certain cases were suspended since the courts were convinced that the zloty, [ in ] LIBOR, is a solution. And I don't have to sort of share with you the arguments that sort of make me doubtful about such opinion. And I think that -- well, certain cases were raised and we are aware of all of it as a sector, I want to accentuate it as a whole sector, about -- what can I say about certain feature of the verdict that, to a larger extent, reflect care for the clients.

However, with regard to sort of precise definition of such terms, I believe that in Poland, we will have a dispute and it will take a lot of time. It is not a sort of magical wand can change that and -- but, well, this is what politicians believe. But I think that the disputes that are pending, in case of the sort of last case, well, that -- we will have increased the provisions, but as Andreas said, we have already provided PLN 66 million. And since we believe that the direction of the current verdict, at the current stage, is less advantageous for us and we have, well, decided to have additional caution. Most likely in the circumstances that will develop if we have such cases, and if we will assess the situation that way, we will increase provisions or decrease if the situation will evolve in a different direction.

So we -- you told us about what square meters of office space we have a number of contracts right now, and some of them, we know that, well, that they were too big and we hope that we will be able to re-lease it, but meanwhile, we believe that we have to be more conservative.

[Unknown Analyst]

[Interpreted] On the same topic actually. I wanted to ask first, you were kind enough to say that the following month...

[Unknown Executive]

Did you mean month or -- okay. Sorry, I didn't get it.

[Unknown Analyst]

[Interpreted] In that case, let me just ask you about the jurisprudence as well. The data that we have available in the public space somehow after the European Court, you had 7 cases, I believe, lawsuits, and 6 of them were lost as far as I can see. How does that compare to the verdict before the European Court of Justice decision? And how many more judgments can we expect in this year and next year because you said how many lawsuits there are?

[Cezary Stypulkowski, executive]

[Interpreted] The number of lost lawsuits has increased, and this is why we responded with an increased provision, which is what we have done. But like I said before, I don't have a feeling that there is a preset mode of jurisprudence yet, regardless of the fact that there is a definite difference in opinions that's demonstrated by the fact that we continue these proceedings, but I don't believe that there is a shape yet to the tendency. There is an ongoing debate in the area. I think that we'll probably approach a bigger number of decisions on the level of the Supreme Court. As far as I can understand, there's [ a list pending ] on a few dozen of these cases in the Supreme Court. I think that the gravity of those decisions will be quite big, but those are, it so happens, various cases. And putting all the franc -- Swiss franc cases into one sector is not really such a big concern in me.

I think we will be continuing the disputes. The number of cases is growing. There is definitely a growth. I'm present on Facebook, I can see every day, at least 3x in my news feed, the law firms are encouraging people to sue. But this is somewhere in the space, but it reaches me because I'm on Facebook, right? It's not that I want to read it. It's somewhere in the public space and people are being bombarded with it. So let me just be very direct. This is a fundamental humbug. This is what I believe regarding Swiss franc cases. So for as long as I can, I will oppose such approaches because I think that the banking sector has done a lot of good to the customers in the year 2005, 2008. Perhaps not all the elements of the legal infrastructure were perfect at the time, but not to the extent where you can challenge the validity of these cases. You can even discuss some issues. Perhaps some of the banks charged spread that was too generous to them, that's an area for debate, but it's not a debate on the level of validity of contract. It's not a debate about whether or not the clauses that determine the exchange rate based on the exchange rate tables were abusive, and therefore, the contracts are invalid.

Now let me emphasize again, if you, at this point, wait at the [indiscernible] railway station and buy a newspaper using the mBank credit card, then you will use the same abusive clause -- then you will be benefiting from the same abusive clause of mBank by using foreign exchange credit card. This is the same now and it was the same then. So well, a certain in-depth thought is due that is backed with proper knowledge, and I, as a guardian of good reason, I will be advocating for that.

[Unknown Analyst]

[Interpreted] Could you disclose data on the increase of a lawsuit after the 3rd of October, vis-à-vis what you actually disclosed in your report end of September?

[Cezary Stypulkowski, executive]

[Interpreted] I don't even know the number, really. It's not as if the world has changed, but it's a growing number of them. And as far as I know, I'm aware of them growing, but I don't feel that it's a turning point in my outlook on the world.

[Unknown Analyst]

[Interpreted] I've got another question, the provisions. What is the difference between what is seen in other banks? ING, for example, has a provision that amounts to about half of the value of all the cases at dispute. For you, it's 1/6, shall we say. In your debates with auditors that the banks are currently having in order to elaborate a joint position, do you think that this position will be going more towards ING's approach or perhaps rather less conservative as yours?

[Cezary Stypulkowski, executive]

[Interpreted] Well, ING is a personal bank. I think from that point of view at least. So I would not really make reference to their policy in this area. Of course, they do have some disputes, but they're not in the mainstream of this debate.

The practices that the banks are applying, of course, result from their determination. They result from the fact that they value their legal clauses differently. Some of the legal clauses -- and I may freely say that I have had a look at the banking documentation. For example, in the area of informed concern -- consent of the clients who signed a contract and also the ForEx risks awareness, I think that the documentation of our bank is very strong. That gives us a premise to take a different outlook most probably than some other banks have where we know that perhaps their documents are slightly differently phrased or differently elaborated.

So perhaps in ING, this is the way they value the quality of the contracts that they have concluded in the past when they were giving those loans. But like I said, it's a personal product in their case. I think that in our bank, we attached a bigger importance to these clauses in the years 2005 to '08, and the documentation gives us a better assurance to believe that we can statistically win those disputes.

However, when it comes to the arrangements with auditors, well, they are in progress. It's a difficult conversation actually because you can ask, well, on what grounds? You can either take one bank as a reference point and then investors can judge that, but at the end of the day, it's the management's decision, isn't it? When we manage an institution, we come to the conclusion that a certain level of provision secures the risks of the bank. I can have a difference of opinions with my auditor on that, right? At the end of the day, it's the investors that judge that. At the stage we are at, we're conducting a dialogue with our auditors. And let me -- I'm not -- I won't be hiding. This is not a simple conversation.

[Unknown Analyst]

[Interpreted] My question is about an issue that is somewhere there. I'm aware that you might not have been involved in the mass granting of Swiss franc loans at the time, so that's a different story altogether. However, I have spoken to a person that was very close to some of the decisions that were taken in the period of 2005 to 2009 and that person told me that the very phenomenon of foreign exchange loans that there were some experiences taken from the Italian and the Nordic crisis, and they were quite familiar to the banks. And that assuming that the banks were aware of the risks involved in granting foreign exchange mortgages, that awareness should be there in the banking sector. And that's why the fact that back in 2005 and '06, especially '07 and '08, Poland actually entered that market with a certain breach of, shall we say, cautiousness standards, prudence from that point of view in terms of the -- this historical background.

[Cezary Stypulkowski, executive]

[Interpreted] What can I say? Well, I have taken a position so many times on that. But let me just see briefly, I was not even in Polish banking sector in 2005 to '08. Most of the time, I was actually working abroad. So I have kept a reasonably cool head about this, but I have done my homework. I have checked, to the extent I was able to, what had happened.

And what I can say is that, well, I have seen the letter of the Polish Banking Association that actually undermined, for reasons that are more complex than that, the prudence motive, et cetera, but there was this letter to the banking supervision sector to the authorities [ who is ] generally asking that we should discontinue the granting of ForEx, foreign mortgages. And both the supervision and the public area actually encouraged the continuation of that. The reasons were, I think, significant. We were at a point in time where there was no capital in Poland, which I have said on multiple occasions. And if you read the representations of mBank's customers that have taken out these loans, the first sentence actually says, "The bank has presented to me an offer in Polish zloties. However, I am opting for the foreign currency loan having full awareness of the ForEx risk and the interest risk."

Well, the interest risk was present with zloty loans as well, but the chances of financing such an expansion of real estate, given the demographics then, were slim in Polish zloties. The interest rates would have soared if that had happened. So that was the benefit of accessing EU capital. The banks could not really take a foreign exchange position, so that's the consequence of that.

Now I'm not even sure whether the Nordic crisis back from 1991 actually was linked to that same thing, but there have been cases where the currency mismatch of the, let's say, consumer loans or retail banking actually led to a crisis. That also took place in South America and other countries, but definitely on a scale that was not comparable to Poland. And briefly speaking, this was due to the internal situation of each country. There were some mismatches, the big inflation came into play and the local currency was, quite simply, valued differently. And some of the banks, purely international banks. For example, ING, and I know that from personal talks in the years 2004 and '05, having had the experience in Latin America and South America, never opted for those products at all.

Well, we cannot say about the crisis. The loans are being repaid, so we are speaking about a hypothetical situation. And we say that someone would like to make money at the end of the day. Well, the paradox is that in those cases that you are referring, so there was the crisis of credit risk. At the end, when the clients were not able to repay the loans. And it is not what we see here in Poland. And the extent of this situation is also different, and I have discussed that many times. So we -- our situation is completely different. Well, you can then continue to debate this subject. Nevertheless, I believe that we have very specific credit agreements and we believe that those credit agreements were drafted, as well, reflecting the situation back then. And in our opinion, they do not have fundamental weaknesses.

I would like to remind you, as I said several times, back then I had not been aware of the fact that such a document was drafted. Back in 2006 and '07, a special guide was drafted for the foreign exchange borrowers describing all those agreements, and it was issued by the foundation of mortgage loans, published by them, and the founder is the Minister of Finance and the President of the National Bank of Poland and many other entities. Well, if you need it, you can go to my office and I will show it to you. That is like a booklet, 20, 30 pages. And in my opinion, based on those booklet, journalists described the nature of those loans precisely based on that document, and that was an official document that was published by the foundation for mortgage loans. So it's not really the case, well, that perhaps, well -- but you can say that the banks might have foreseen that. We can use many different arguments, but I believe that [ a product, ] as such, it sort of contributed to the growth of the economy and provided about 400,000 of financed -- 400,000 apartments because there were like 700 agreements, and I believe that, well, even one contract financed -- one apartment, so that was the pool of apartments that was availed to the [ generation ] in a number of sort of 800,000 people, a smaller number of households. With the microphone.

[Unknown Analyst]

[Interpreted] Well, in Poland, foreign currency mortgages did not result in a crisis. However, it is like in the Nordic countries. However, when you have a crisis, you have very big fluctuations of exchange rates, and that results to people defaulting if they're exposed to foreign currency loans.

[Cezary Stypulkowski, executive]

[Interpreted] Well, this argument, well, in general terms, is quite substantiated in general terms since when you have fluctuations of exchange rates, well, there are certain consequences for those who are not properly secured. However, our situation is as follows. Well, we have offered a product -- let me reiterate. And without that type of loan, most likely in Poland, zloty-denominated loans wouldn't be available in that sort of quantity that would allow to finance the housing projects. There had not been any sort of state financing system. And even though some sort of fluctuations of the foreign exchange, well, I told you about that several times. Well, the reasons of that were, out of Poland, could have banks, well, anticipate that? Well, if you have a look at the sort of guide leaflet for the foreign exchange borrowers, you will see [ certain ] estimations related to the possible volatility of the exchange rate. I think that was up to 40% historically, the exchange rate fluctuated from the original level. So while the awareness that you can have -- you can be exposed to the fluctuation was quite high. But on the other hand, historically, Polish economy, in the last 25 years, will grow 2x faster than Switzerland. And if we take into account that, generally speaking, we have bigger purchasing power parity compared to a nominal evaluation of our money, then there are many reasons to believe that besides different sort of purely factors related to the market, fundamentally, Polish currency has the potential to grow. And I think that, that was the assumption that had been made back then.

[Ernest Pytlarczyk, executive]

[Interpreted] Yes. We had at least 2 or 3 stress tests conducted on Polish currency, and it didn't have an impact on the level of repaying those loans. So it's not that we only hypothesized. However, we refer to a very specific situation, but -- that the growth of GDP plus the sort of growth of wages resulted in a situation that we -- sort of discontinued set of problems. So that's not the problem of the economy and consumers here in Poland.

[Joanna Filipkowska, executive]

[Interpreted] Well, do we have any further questions from the floor?

[Unknown Analyst]

[Interpreted] Well, if I may, a sort of more sort of enjoyable issue to discuss. I have a question about the loans, consumer loans. What are they offer? Well, first of all, whether those people who currently repay loans before the maturity, do they get a sort of return for certain commission in a way automatically? Or do they have to apply for that? Do they have to take some actions? How does it work in the bank?

And my second question is also related to the first question is whether the bank modify or perhaps you plan to modify your offer, and in what way? I don't know, will you have sort of more commissions or perhaps some people will not have access to certain loans?

[Cezary Stypulkowski, executive]

[Interpreted] So well, first, I will answer the second question. I think that you have to take into account one thing, namely when the bank makes a loan, of course, you have to sort of freeze a certain amount of capital. And most likely, we will have to take a new look at the algorithm related to the utilization capital during the life of the consumer loans. And of course, as a result of that, most likely, and we will have to define the probability of the utilization during the time defined in the contract. So we will have to make certain movements. And most likely due to the fact that the sort of previous repayment of the loan, to a certain extent, will cost us as, well, where we have certain sort of capital management ways the capital related to this loan. And this is one of the very important issues in the sort of operations of the bank.

I'm speaking about the solutions that will sort of respond to such a sort of structure. We are going to search for some ways. I understand that everything has to be sort of client-oriented, but on the other hand, we have our own business logic that we will defend. Well, otherwise, it wouldn't be possible. Since if we are to use capital, and this is the capital that can be used in many alternative ways, then, well, there are certain consequences. For the cost of the loan, so far for the time being, is not the cost that is defined by the authorities. However, it reflects certain calculations about how the capital is utilized and it reflects the goals that the bank would like to achieve since we are a commercial institution. So I do not have the final answer to your question, but -- well, this is the discussion that we have internally.

And now with regard to your first question, I'm not sure whether technically we are already ready to do that, but whether the clients have to approach us, but I think that sooner or later, we are going to have sort of certain modules that will automate the whole process.

[Unknown Analyst]

[Interpreted] So how far are you, well, from the limit? I'm speaking about the statutory limit, 10%.

[Cezary Stypulkowski, executive]

[Interpreted] Well, I think that we are further than some other players from this limit that is defined.

[Unknown Analyst]

[Interpreted] What can you tell us about sales transaction? Well, have you sent invitations to potential buyers? When do you think that this process will conclude? I'm speaking about the selling process. And there is sort of very high interest as media, we write that almost everyone here in Poland, and to a certain extent, the investors from out of Poland would be interested.

[Cezary Stypulkowski, executive]

[Interpreted] Well, one of our shareholders who has 70% -- almost 70% of the shares has the intention to sell those shares. And well, they have the right to do it and they will be conducting this trade and us, as the management board, we are going to assess so that, in the best way possible, we conclude the sort of the sales process of the shares, well, to a sort of a good buyer and with the conviction and [ phase ] that it shouldn't really violate our market position. And while it also has to reflect other -- and take into account other shareholders or other stakeholders, rather. So this is a sort of a -- this is, in a way, the very fashionable word. So it is not necessarily shareholders, but stakeholders. And this is our starting position.

Of course, we have a sort of an access to the sort of own developments, but I don't want, on behalf of the bank, to comment about what the shareholders, [ thus, ] willing to sell shares. My role or our role as the management board, and this is also the expectation that we have defined and with a positive response to it, that with regards to the final choice of the shareholders, we are not going to be helpless. We hope that we will remain in the dialogue with Commerzbank during the whole transaction. So that's the biggest possible extent, we maintain the identity of mBank as an institution with a unique sort of possibility to grow organically. However, mindful of the fact that the scope of potential interest in institution is quite significant for some of them. Well, what is at stake is the possible synergy with the bank, and I think that, that will be quite challenging. And for some other people, well, this is the matter of entering the Polish market, but for other, assessing the way, the sort of temptation of the organic growth of mBank. I would say that the sort of level of interest that institutions will be quite significant.

[Unknown Analyst]

[Interpreted] Well, based on what you say, if you want maintain the identity of the bank, then for you, what would be a better investor would be someone who is not present here since, well, then they wouldn't have to change anything.

[Cezary Stypulkowski, executive]

I'm not saying that, well, whether this bank should not be changed. Well, there is a number of things that we continue to change in the ongoing base. Well, it is not a bad bank, generally speaking.

And so, well, answering your question, yes. Well, my answer is yes, definitely, well, someone not present on the Polish market from the standpoint of the employees of the bank as well as the management board seems to be a better solution.

[Joanna Filipkowska, executive]

[Interpreted] Well, we have also a question from Handelsblatt about whether we have had or whether we do have discussions with Polish regulatory authorities about potential sort of retention of Swiss franc portfolio by Commerzbank?

[Cezary Stypulkowski, executive]

[Interpreted] Yes, we do have such discussions. And this requirement has been defined by the Polish KNF, well, in all the transactions in the past. And well, the way we are going to solve this issue might be slightly different than the sort of previous scenarios. And from that point of view, definitely the seller will stay in the sort of dialogue with the financial authority and since this condition is quite firm -- quite firmly maintained by Polish regulatory authority. But right now, we do not have certain scenarios that would sort of be final about how we are going to proceed, how the -- sort of how we are going to handle Swiss franc portfolio.

[Unknown Analyst]

[Interpreted] Any comments about options because you say that you do not have a final scenario, but what about options?

[Cezary Stypulkowski, executive]

[Interpreted] Well, I don't want to speculate about options, really since, well -- and there were some other speculating on options, so I will not do that. And I have my own sort of beliefs, but it is not the time to discuss that. I will not be sharing that with you right now.

I can only say that, well, the whole separation of foreign exchange portfolio from the bank that remains the relationship with the client is not good to anyone.

[Unknown Analyst]

[Interpreted] Yes, one more question. I'm not sure whether you will sort of allow that because it is not directly related to the financial results, but I have a question whether the bank has certain statistics that you might share with us about availability of your systems or the lack of availability from the point of view of the clients, whether sort of this year is similar to the previous year or if anything has changed, so what -- all that might be related.

[Cezary Stypulkowski, executive]

[Interpreted] Well, I do have such materials, and I can tell you more. I have some materials that can -- it is comparable to other banks in spite of the fact that we do not have access to the database. I think that KNF is the only institution that has such a database. But since we believe ourselves that we are a premium transaction bank, so we attach a lot of importance to what you have said, and we have sort of fewer outages.

[Joanna Filipkowska, executive]

[Interpreted] I would like to change the topic about cost of risk in 2020 to '23. Ongoing shift towards unsecured consumer loans, is that a cocktail implying 80 to 90 bps cost of risk will be mBank's new normalized level in the next 2, 3 years?

[Andreas Boeger, executive]

So if we look at the cost of risk, and the cost of risk, obviously, is a result of the portfolio you're taking. What we're always saying is we're working towards the mix of the portfolio. So we're managing down the Swiss franc portfolio, which is low risk, but also low return. And we're actually growing also above market in non-mortgage loan and also mortgage loans.

So in general, the cost of risk will trend upwards. I don't think that there will be big spikes, but they will be slightly trending upwards. But the net interest income we will generate from this business will, by far, outpace the cost of risk for the portfolio.

[Joanna Filipkowska, executive]

[Interpreted] Do we have any further questions? If it is not the case, we would like to thank you very much, and I would like to invite you for some refreshments, breakfast actually.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]