mBank SA

WSE:MBK

Earnings Call Transcript 2021-Q3

[Joanna Filipkowska, executive]

Good afternoon, ladies and gentlemen, and welcome to the conference that we'll present the results of mBank Group in the third quarter of 2021.

Today, we would like to focus only on results as the presentation of our strategy is planned for November 16. And the results will be presented as usually by Mr. Cezary Stypulkowski, Chief Executive Officer; Mr. Andreas Böger, Chief Financial Officer; and Mr. Marek Lusztyn, Chief Risk Officer; Marcin Mazurek, our Chief Economist, will present the macroeconomic outlook.

[Cezary Stypulkowski, executive]

Good afternoon. Some key messages. The most important ones, I believe you know the net interest income has recovered. Now we are 4.6% year-on-year, and I think 4.5% quarter-on-quarter, which is a clear signal that we have returned back to upside trajectory. And it was obviously before the interest rate hikes. Fees and commissions, consecutive second or third year of a significant increase. As you see, this is more than 28% year-on-year.

Worth mentioning is also the level of Swiss franc reserves, which costed us more than PLN 400 million and constant growth of the balance sheet items, but that will be elaborated later on.

Our new product front, I think that what is worth to mention, I believe is biometric being used for the confirmation of transactions, depending on the systems, whether it is iOS or Google-related applications. You can confirm transactions via face ID or fingerprints. What is also worth to mention is that we have also -- we consider ourselves big in the forefront of renewable energy financing, and this has been sort of scaled down also to the smaller players. So we started to offer some financing for small RES installations. With a significant coverage, this is our drive into the SME sector.

Something we will be elaborating in more detail when we invite you for the strategic session is our drive into e-commerce and our strong position and now digital revolution, which we supported, as a kind of a semi competition and which was part of a drive into e-commerce. That is I think second edition of this competition has happened in the third quarter, and I think has been -- has attracted more than -- as I recall, more than 800 players.

The important development of the third quarter was the placement of our MREL-eligible senior green bonds. Andreas will elaborate a few words about this. He's been personally involved.

[Andreas Boeger, executive]

Yes, briefly. So I think this was indeed a financial highlight of the quarter. It was the inaugural senior nonpreferred for MREL, but it was also in green bond format. So we think this is, first, a testament that what we have done in terms of the green bond framework, obviously, together here with other -- the risk side. That this is not only a theoretical exercise, but we make that work. We went to market with that transaction. We saw a very strong demand. We had more than 110 investors who actually ordered with an order book of EUR 1.2 billion. As you see on the right side, also, it's nicely spread across Europe, the investor universe. And in the end, we were able to execute a EUR 500 million trade there.

What is, I think, important for us is this is the beginning of the green bond issuance. We got very strong confirmation from the market that the frameworks we're using are seen as very good. And that also in senior, it would be highly -- in future, it will be highly rewarded and highly appreciate if we come back in the senior nonpreferred market with further green bond issuance.

[Cezary Stypulkowski, executive]

Yes. Our market position is significantly growing year after year. As you see on the retail side, we have gained significant portion of the market over the last 2 years. When I look back in the perspective of the cadence almost doubling our market share on the retail side.

The corporate, which is obviously a more stable part of the market in principle, and our position was -- used to be very strong and continues to be strong. We keep the market share on the loan side, though the fact that the bank is a big cash manager attracts a lot of money from the market. And our market share now will rise obviously around 10%, 11%, 12%.

What is worth to mention and what is sort of the signage of mBank, which is our mobile focus. We believe that those -- cards are very important. One is the number of active users. We are #2 in this respect, in terms of the active users of our mobile app. And the second is we are clearly #1 when it comes to number of transaction done by clients on the application.

We are also recognizing with this appeal in the specifically Czech market. And what is important part of the longer-term strategy decision of how much of transactions are being initiated on a mobile device. This is something what's -- the drive of the bank, the fact that we are focusing on the -- something that we used to call a mobile icon, and we are more going into this icon of possibility. The revolution, which we will elaborate in more detail when the strategic perspective will be presented.

In principle, we see that share of processes in retail banking that are initiated in digital channels has grown significantly on the trajectory to be at the level of 80% in the not-too-distant future.

I will not elaborate on this in more detail. I think that you know what's worth to mention is both corporate and retail. And specifically, corporate is trying to catch up in terms of the way we are presenting ourselves to the clients. And on top of that, applications which we use, and to some extent, one can say that we are also, on the corporate side, we are trying to catch up with what the retail has done to its clients pushing the mobile and digital.

Paynow, which is our payment gateway. Worth to mention that it has been launched, I think, 2020, as I recall. First quarter of 2020. It's growing faster. This is the first cloud-based solution of this nature. It's growing 27% quarter-on-quarter. So we are very much satisfied because this is a part of our strategy, really, to go into the e-commerce.

And finally, we are coming to some key elements of our strategic -- of our results. What is worth mentioning is while the total income is growing, cost income traditionally of mBank is at a very more than reasonable level. As it will be elaborated later on, we -- since I think a year, we are presenting our results in a new format, which, as you know, the reported results and the results of our core business.

As you see when we strip out the Swiss franc or foreign currency portfolio, in a way which we consistently presented since, I think, beginning of this year. Yes.

[Andreas Boeger, executive]

Beginning of this year.

[Cezary Stypulkowski, executive]

The returns are very satisfactory. The balance sheet positions are growing. So let's move on.

I think that when it comes to the net interest income, I already talked about net fees and commissions quarter-on-quarter, almost 6%.

One have to be, though, fair, third quarter was very active. I think that was the record fees and commissions quarter in the history of the bank. Some except obviously related to the fact that it was a retention season.

Total income I think that you see that on the chart. What I want to add, the balance sheet figures, growing nicely both at the quarter level and also the year-on-year level. Not that much to be complained. If there will be any questions, we'll go in more detail.

Finally, summary of litigations and provisions. This is an important part of our reporting, and I think that the transparency around this issue, I believe, should distinguish us because I think that we are coping with very much uncharted waters. The situation on the judiciary front is very complex in bonds. As you know, it's not only on Swiss franc, but in principal, judiciary is in kind of a disarray, and that make all the things more complicated. But worth to mention is the following, in principle, the overall portfolio is going down. This is currently almost PLN 11 billion mostly in the Swiss francs.

One have to compare this to PLN 123 billion of our loan book across all the products, which more or less is less -- slightly less than 10%, but at the same time, we are booking almost PLN 3 billion of our margins. PLN 3 billion of our capital against -- you know this and out of PLN 16 billion-plus, so that shows how capital consuming is this portfolio. And at the same time, not that much to do, really, for the bank.

We observed some, I would say, modest slowing of the number of cases, which has been brought against the bank in third quarter. It will be premature to say that this is signaling something important. Though in our estimates, we believe that the time lag between the time when we sort of understand that the customer is preparing for bringing the case against ourselves, that means he's asking for more documentation. And the time when effectively, we are being informed about the case brought against us in the court somewhere between 7 to 9 months. Well, in my opinion, the next 2 quarters will be the most critical really to assess whether the [ wait ] is still on or on the upward trends or contrary.

I think that the number of developments, which has happened specifically in the second and third quarter, in terms of legalities, I refer to what the Supreme Court's postponed meetings, the KNF position as the Trojan horse of banking law. The National Bank of Poland, which is instrumental to the fix law -- law in Poland and setting the tone for this and their opinions.

The cases which have been addressed by Austrian Supreme Court and the Hungarian case in European court of justice, all of these have been signaling some kind of a change, in my opinion, in terms of to which extent the judiciary is prepared really to accept that there will be an automatic annuation of the contracts. And that is something what is on the horizon.

We are closely observing the developments. That's still saying, okay, this is not yet in the -- reflected in the figures which we see on the purely legal front. But this quarter and the next quarter will be very much to judge which direction it goes.

As you see, we have added some provisions, more than PLN 400 million provisioning vis–à–vis the -- this portfolio that totals to almost PLN 2.2 billion. Part of that, which we have created this quarter was related to one of the class actions which we have in our portfolio, and there were some legal developments which we have to reflect.

The coverage of the portfolio is currently at more than 17%. And when it comes to the coverage of the claims against ourselves, this is being reflected on the southeast part of the chart, which I believe makes us of the opinion that we are reasonably well covered at this stage with the lots of unknowns in the market.

And then finally, the new segmentation that was mentioned by my friend, Andreas. He will elaborate in more detail about this.

[Andreas Boeger, executive]

So let's briefly go through this. These are the 9 months figures. So you see the 9 months here, and as Cezary was saying, the minute you start separating the noncore, so i.e., noncore to repeat, that's the FX mortgage loan portfolio. With its low-yielding assets, with its equity allocation, that's currently PLN 3.1 billion and also with the legal reserves we have booked, you actually see the core bank more in detail. And I think the only figure I would like to note is you see return on equity here in the core bank above 10%, 11.7% here. And I think that's a good way of also looking at mBank.

With this, I think I'll go over into more details. Let's start, as always, with the development of loans, which has seen a strong retail momentum in this quarter, again, I have to say.

So in total, the development of loans is up by PLN 3.3 billion in the quarter, that's roughly 2%. Full year, it's up by roughly 9%, so PLN 10.5 billion. If you look at the composition, where does it come from? Corporate is rather flattish, so actually flat over the quarter. So that's still a testament to the overliquidity we see in the corporate portfolio, but that's something we also then positively see materializing in nonmaterialized loan loss provisions. So that's actually a coin that has 2 sides of the corporates being overliquid.

Still for the full year, corporate loan growth is roughly 4%. So it's still up. And if you look at our market shares, it was in one of the slides before, the market share in corporate I think it's 8.7% versus 8.6% a year before. So we kept the market share. This also shows the dynamics that are there in the market. The share even increased a bit.

Stronger market share increase is what we've seen in retail, And there, for example, the market share in total household loans is now 7.7% versus 7.3% a year ago. But let's more look at what happened. The strong growth here only in the quarter, the growth without foreign exchange effects is 3.3%. So really a very strong new lending business in retail. And I think for this, the best is to also look at the next slide and to just take a deep dive there.

So as I said, let's start with the upper-left side. Mortgage loan, for example, very strong sales, plus 49% in this quarter and also in the last 2 quarters. I think what's really nicely seen is the very strong sales in Poland that's the blue part, so the PLN 2.7 billion and PLN 2.2 billion. So both quarters were record quarters. So that's good. We also expect the Polish mortgage loan production to further prosper maybe not at the PLN 2.7 billion but rather, I think what happened in Q2 is a very good proxy, and we want to build on this.

What also nicely played out, we out -- we have talked about it, I think, for 2 quarters that in Czech and Slovakia, we have actually increased prices for mortgage loans with the plan of also printing less than, but refocusing that business on non-mortgage loans, and that's what you exactly see on the right side. The PLN 497 million in red. So the contribution of the Czech and Slovakian business to the non-mortgage loan side has increased in the last 2 quarters. And that is exactly also what we were planning to happen, so that nicely happened.

Speaking about non-mortgage loans, non-mortgage loans with a record overall sales of PLN 2.7 billion. As always, it's not easy to hold the record, but we will work hard to actually be on that level. So that's the level we would like to also ideally see in future quarters with the usual fluctuations obviously.

Looking at corporate. So corporate is all story of K2 with a strong as K3 backbone, but the volumes is mostly K2. You see a good growth here quarter-over-quarter, but also year-over-year, that's minus 8%. But if you take the K1 out, you also see a growth year-over-year.

On K1, as you know, our mantra is we like the business to a certain extent as long as it's fun and as long as the return on equity we get there is adequate, but it's not that we run after volumes. So this explains the corporate quarter.

Leasing. Leasing here, new leasing contracts are down, to some extent, maybe seasonal effect. In general, we're very happy with the business development in leasing and we also have a strong outlook here. So nothing to worry.

Let's go over to the deposit side. So deposits have strong constant inflows. The deposit inflow in the quarter is nearly 5%. That's quite high. This time driven, as you see on the right side, by corporate customers. It's to the one end transactionality and also new clients. We'll closely monitor this. Obviously, it's now a more lucrative business to have more deposits, especially given the interest rate raises.

But on the other hand, there is a evolving market practice, and we're also following this of charging for zloty amounts. So for heavy users and the high balances in corporates -- in corporate deposits, we will start from beginning -- from end of November to charge also on an ongoing basis for current accounts. And retail added another 2% of the deposit base, but I think that's nothing to further report on.

Let's go to the revenues, as Cezary already said at the beginning, very good revenues, record high core revenues. And to highlight are actually 2 things, let's start with the one that delivers the most, that's net interest income. Very strong, back above PLN 1 billion. That's an important psychological mark, at least for the management Board here. But it also shows nicely that the bottoming out in interest rates, you see that on the right side, in NII. The bottoming out that we've spoken of that we will rebuild here from the interest rate shock we had in COVID times with the lower rates that we were rebuilding and that rebuilding works out nicely and that's before interest rate raises. That's quite good.

The 40 basis points interest rate hike that happened on the 6th of October, I think. We also have it in our results package. We expect that this roughly adds PLN 180 million of net interest income over the next 12 months.

And I think the best part in revenues of this quarter is, as Cezary was saying, net fee and commission income, very strong contribution from cards. You see this on the right side, very strong contribution also from lending. And also, as Cezary was saying, it's a strategic target for us to grow net fee and commission income. To immediately repeat Q3, this will not happen. So Q3 is a mixed bag of vacation time. Q4 will also have some nonlinear cost items there. So Q4 will be lower, but net fee and commission income remains a very strong focus of the bank.

Let's move to costs. So the only thing to really mention, costs were growing, but costs were growing because we were rewarding our employees for the tough times and for the exceptional work that was done in COVID times. So I think we can say we're very happy that costs are increasing in this quarter because it is something that's very important for the franchise to adequately also see what kind of extra miles staff was going. So that also explains the 16% higher quarter-over-quarter personnel costs at nearly PLN 300 million.

Most of the change compared to the second quarter is the COVID rewards. It also is, to some extent, commissions, that we are paying. Also to some extent, a bit higher salaries. But as I said, it's mostly the COVID rewards, and I think it needs to be seen in conjunction with the cost income ratio, cost income ratio here on the right side.

And you can talk about quarter, except throughout quarter is still strong, but what's really important for us is that 9 months normalized cost income ratio is at 40.7%. Okay. Let's not forget the BFG cost was a bit more benign to us this year than last year. but this is a very strong cost income ratio. And this is also why we think it was more than reasonable to actually, in this quarter, have higher costs.

And with this, I hand over to Marek.

[Marek Lusztyn, executive]

Okay. Thanks, Andreas. So on the cost of risk, excellent results in Q3. And impairment losses going down quarter-to-quarter and year-on-year. Year-to-date standing slightly below 70 basis points, which we see as -- is slightly better than the outlook we provide for the years to come. It's thanks to the outstanding macroeconomic developments in -- mainly not post-pandemic, but post-lockdown environment, a strong rebound of the economy, which is reflected in the portfolio results.

Also, when we look at Slide 23, where we provide more details on our asset quality, we see a continuous improvement of the credit portfolio. Impaired portfolio going down almost 10% year-on-year and 6.2% quarter-on-quarter.

The NPL ratio are systematically going down at the end of Q3 standing up at 4 percentage points. It is going down both in terms of corporate portfolio and retail portfolio. The coverage almost unchanged in the quarter-to-quarter and slightly going up year-on-year. On the mortgages, we see still a continuation of the stable trends with respect to the level of NPLs in the total portfolio.

And looking at the next slide, where we provide the picture of the capital and liquidity position of the bank. Quarter-on-quarter almost unchanged, total capital ratio standing at 17.5 percentage points, 364 basis points above the minimum regulatory requirements. So very healthy capital position, and liquidity even improved in the quarter-on-quarter with liquidity coverage ratio standing at 280 basis points and loan to deposit ratio going down quarter-on-quarter to 72.9%.

[Joanna Filipkowska, executive]

Now Marcin Mazurek will present macroeconomic outlook.

[Marcin Mazurek, executive]

So macroeconomic situation is still favorable. We've seen recently the progress of -- in consumer opted in, but it's somehow sold recently. It doesn't seem to be connected with labor markets and this part of the economy is doing more than fine. We think the culprit here is inflation because consumers haven't seen such high inflation numbers for 20 years. So it's small economic toll that is being spread on consumers right now.

It is not a growth pillar, though. We still see the growth picture for the upcoming years as favorable, close to 5% mark. What -- we've done some minor adjustments recently. We've moved down a little bit in 2021 to 5.2% and a bit in 2022 to 4.8%. As speaking about inflation, in October, it passed 6.8% mark, and it's going to rise towards 7% or even 8% at the start of 2022. The good news is that MPC started rate hike cycle, which is going to be continued in the next month, and it will help bring inflation down in 2023. But in 2022, inflation on average will be higher than it was in 2021.

Speaking about monetary aggregates, we see some same old story here. So there is still high deposit base, credit volumes in the retail sector are clearly on the rise, but still corporate sector is kind of lagging behind, but the good news is that we've seen the trough in growth rates. So the outlook here is favorable as well.

As far as rates are concerned, we've seen recently and are seeing still some aggressive repricing of monetary policy. It's mostly driven by regional and local development. It's less connected with global picture. And since we think that Monetary Policy Council is going to kind of fall behind those market expectations in the near term. We think that the zloty would be weak and any appreciation down the road is expected to be rather minor. Thank you.

[Joanna Filipkowska, executive]

Thank you, Marcin. We have some questions in the Internet. I can see that not a lot is related to our results, which means that we did a good job in our disclosures. Most of them are related to the sensitivity to interest rates. The first question will be to Marcin actually. Could you please share with us mBank's rates projection in 2022?

[Marcin Mazurek, executive]

Yes. We think that this year, rates will reach 0.75% in the year-end or 1%, and next year, 1.5%.

[Joanna Filipkowska, executive]

Thank you. Is your 40 bps NII sensitivity provided earlier a good proxy for any further tightening? And also regarding this subject, what is deposit and loan repricing looks like after recent 40 bps rate hike? Could you comment on front and back book development, please?

[Andreas Boeger, executive]

Okay. So a long question. The 40 basis points is a mild increase. And obviously, the sensitivity of a bank -- of our bank against interest rate rises is not completely linear. But in general, the 40 bps, which corresponds to PLN 180 million, that means 100 basis points is roughly PLN 450 million, if I mathematically get that right. That, in general, holds, but if you see very high interest rate rises, it's not linear. So that's the -- but in general, the proxy is good to extrapolate from this.

So what does it do to the repricing? Well, the repricing on the loan side will happen when we either disburse loans or when the loans which are floating actually have their reset. The large amount of the retail book, for example, will only reset late in December. So stronger NII push there will come in the first quarter, not immediately in the fourth quarter.

When it comes to deposits, we are staying on our path that we are currently not paying for deposits. So the sensitivity or the pass-through of interest rate raises and especially on the 40 bps that have happened on deposits is minimal, so it's not really there.

[Cezary Stypulkowski, executive]

mBank is extremely liquid, and we don't have any temptation to pay for the deposits, which, obviously, under the current circumstances with the current levels, we are not losing money out of these deposits. But I think that naturally, it will be slower growth, reflecting what will be the competition in the market.

[Andreas Boeger, executive]

And talking about front versus back book, I mean, what obviously helps is to understand that a lot of loans in Poland are actually floating. So that helps us in gaining traction here and transforming this interest rate hikes into P&L. I think that covers the question. Let's see what else we have.

[Joanna Filipkowska, executive]

Well, the other question concerning this subject is what's the impact of rising sovereign yields on mBank capital in 9 months of 2021?

[Andreas Boeger, executive]

Obviously, the strong interest rate raises have happened in October. So in the 9 months, there has been an effect. That effect, we will have to see, I think we have to get back with more details. There was an effect because obviously, part of the sovereign portfolio in which we invest is in -- it's in hold to collecting for sale. So you see this in other comprehensive income.

The other comprehensive income is not going through P&L, but is part of our equity base. And this means if interest rates rise, so our future NII and our future potential is stronger, that valuation part goes down. The effect was there in the first 9 months. It's not very significant. So -- but I don't have the figure here.

[Joanna Filipkowska, executive]

So changing the subject, some of your regional peers suggest that rising energy prices and supply chain obstacles as potential area of risk, if it comes to asset quality outlook. Have you looked into mBank exposure to industries affected and what's potential risk?

[Marek Lusztyn, executive]

Okay. We have deep dive into this one. As far as the supply chain disruptions are connected, we see some impact on the customers of mBank. As far as energy prices are concerned, it really depends to which extent the current peak energy prices is transitory and to which extent it is [ permanent ]. At this stage, it's too early to say in our view.

And looking at our cost of this outlook, we believe that at this stage, both supply chain disruption as well as peaking of the energy prices are not yet in a situation to drive us to change the outlook on the cost of risk as communicated also last week with respect to the strategic targets that we believe that in the quarters to come we'll cover around 80 basis points.

[Joanna Filipkowska, executive]

Okay. Have you done in NPL sales in corporate segment?

[Marek Lusztyn, executive]

Yes, there was a sale -- in Q3, we have sold around slightly north of PLN 200 million under default for corporate segment with a slightly positive impact on the quarterly P&L.

[Joanna Filipkowska, executive]

Thank you. Do you think that current higher growth in PLN mortgages are sustainable? How do you see corporate loan dynamics ahead? What level of loan growth do you expect for 2022?

[Marek Lusztyn, executive]

So on Slide 20 -- page, we are providing our outlook of the overall Polish banking sector, both for corporate loans as well as for the mortgage loans. So we expect both of them to grow as far as the sector is concerned, around 10 percentage points. So this answers also to some extent the question about how do we look at the mortgage growth because what we have seen in 2021, to a large extent, was a result of clients shifting their savings somehow into the real estate market.

And we believe that, that level of mortgage loan demand that we've seen in past quarters is not sustainable going forward while still, we expect healthy growth of the mortgages for the year to come. As far as corporate book is concerned, we need to highlight that in the past quarters, the demand has been, I would say, somehow subdued due to the liquidity provided by the Polish Development Fund as an anti-crisis measures.

And those actions ceasing the effect, we expect the growth of the corporate loans to go up to the extent which is highlighted at the Slide 28, but we will continue our selective approach in particular to larger clients. And therefore, we do not plan to chase the volumes. We will be very selective on pricing, and we will need the low margin benefit.

[Joanna Filipkowska, executive]

Thank you. How should we see provisioning for FX mortgages in future quarters? Can you provide some color on the PLN 200 million additional provisions taken by management in FX mortgage charges? Is this one-off or can we expect more such provision in future quarters?

[Andreas Boeger, executive]

So maybe I'll start and then Cezary ends. So to first talk about what we did this quarter. And we've talked about that before that we have a methodology of how to look at this, and this methodology is under expected value, how many clients are expected to come, what's the volume of cases, what's the probability of winning or losing in court and what's the loss given losing in court. If we look at what has happened over summer, Cezary was alluding to this before, not a lot of things have actually changed and various things have even changed positively in terms of rhetoric, but there is a huge uncertainty.

So the minute we were plugging in our figures into the methodology, including the class action suit, what came out was the -- was PLN 237 million. And given the fact that the fact pattern around that didn't change over summer, we also don't saw a reason why we should holistically revisit the methodology and what we're actually doing.

Nevertheless, given the uncertainty, and if you also look at the sensitivities that we are giving in the disclosures around the matter, and that is very fluid, we decided to take a cautious stance for future events that might come, but they are not specified and nothing is exactly on the horizon and the background of this. And we've said that we will take the PLN 200 million management adjustment.

Going forward, what we will do because I think that was also part of the question. We cannot say if there will be a management adjustment still in the fourth quarter or not, so we'll have to see because what we are planning in the fourth quarter for annual accounts closing is we will take a more holistic view at the methodology and at the way how we reflect the Swiss francs topic. So this is something we will have to decide in the next 3 months, how we actually approach the matter. But as I said, we will take another more holistic view into what we're doing.

[Cezary Stypulkowski, executive]

The critical element is the number of cases which are coming to the cards. And the second is the probability of losing the cases. The problem we have is the number of cases which have been already ruled by the courts in the second round is relatively small comparing to the overall portfolio. And that creates a big unknown with your experience in Poland being, as I said, in disarray. I think that you traditionally in Poland -- the judiciary in Poland is really in a bad situation, and that creates a lot of unknown, which are very difficult to be judged. And obviously, you can be on the conservative side, you can try to manage the portfolio. But that's the reason that this more holistic view is needed to end there.

[Joanna Filipkowska, executive]

Thank you. What's the potential cost of out-of-court settlement offer prepared by you for the client?

[Cezary Stypulkowski, executive]

Too early to say. We are -- as we have declared on several occasions, we are working on our own solution, which we believe better explains our position. Because I think that there is sort of a lack of understanding that this is also proven by the -- as I understand, by the [ PKO BP ] situation. The people who are in court are hesitant really to accept the amicable agreement proposals. So most of the people who are considering this are people who are out of court at this stage. So one has to approach this issue separately, in my opinion.

If we go into the solution which currently being proposed by KNF at some point, which I personally consider as being at the extreme of rationality when we say, then I think our estimate was in the magnitude of what?

[Andreas Boeger, executive]

The [indiscernible], we estimated at PLN 5.5 billion.

[Cezary Stypulkowski, executive]

PLN 5.5 billion. And obviously, this is a significant burn for the bank. We are -- I personally look into this more from the perspective of potentially sharing the consequences of the exchange rates between Swiss francs and zloty and sharing the burden, if I may say. But this is not yet decided by ourselves. So it's too premature, definitely it will be much less than in the scenario, which has been presented by KNF.

[Joanna Filipkowska, executive]

Thank you. Can mBank fully cover its foreseeable FX mortgage litigation costs for its entire portfolio under its to be proposed settlement regime using its own capital? For example, surplus capital of PLN 1 million requirements and litigation reserves? Or will it require additional capital, whether or not from Commerzbank?

[Andreas Boeger, executive]

Well, as Cezary was saying, we're working on our proposal, and that's most likely financially, if you look at it, something that's not going as far as the Austrian proposal. But let's anchor on the [indiscernible] figure. The PLN 5.5 billion in our understanding is that the market practice is to see that part of this, a large part, is even tax deductible.

So if it would be fully tax deductible, the PLN 5.5 billion become PLN 4.5 billion, but let's talk about anything between PLN 4.5 billion and PLN 5 billion. And then you look at mBank with the noncore portfolio of already PLN 2.2 billion reserves booked and a current capital allocation of PLN 3 billion. I think that -- and with the rest of the capital, core bank is operating. And that shows that for scenarios in that magnitude, the capital is there.

[Joanna Filipkowska, executive]

Okay. Which portion of staff cost increase in Q3 is nonrecurring?

[Cezary Stypulkowski, executive]

I would say, as it was and I think said by someone of us, these were specific COVID-related rewards directly to mostly the staff, not the management. So one can assume that this, it was in the magnitude of almost PLN 40 million. Part of that, one can assume that will play a role because we're observing that the market -- labor market is changing, and it's not exactly recurring these rewards, but I think some increase of the cost of the workforce is on ours.

[Joanna Filipkowska, executive]

How do you see fees trajectory into 2022 as sustaining 2021 growth rate looks rather challenging?

[Cezary Stypulkowski, executive]

Well, that's my work. I have to say, as I mentioned, we have increased our fees and commissions over the last few years, significantly. One cannot exclude that next year, we will be at the level of PLN 2 billion fees and commissions. Obviously, there were some of methodological changes also in terms of what gets into this slide. But the current 28%, which is being reflected in the figures post 9 months, I don't think it's sustainable. Though the volumes are growing. The price adjustments are taking place. So some growth is expected, though not in the magnitude which we have observed last year and this year.

[Joanna Filipkowska, executive]

Thank you very much. We have also a question about strategy. But as we said, today we'll focus only on results, and our strategy will be presented and we will also answer your questions on strategy on November 16. So today, we will not elaborate on it.

[Cezary Stypulkowski, executive]

So one thing which I can add to your questions, even preempting the meeting on the 16th will be welcome. So if you have any questions that you want to raise just post the basic -- the note, which we have placed when the public announcement has taken place anything, I think, on Friday. If you want, you can address to Joanna, and I think that they will be welcome and obviously, that will help us to prepare and more sort of focus on issues which are of your interest.

[Joanna Filipkowska, executive]

Okay. We have some new questions. Can you comment on the inflation impact on cost base in 2022 and whether you plan to address these somehow to make sure operating jobs remains positive?

[Andreas Boeger, executive]

Yes. So we expect inflation. Of course, we have inflation. They are both in our plans reflected when it comes to material costs and also when it comes to staff costs. I think the most dynamic part currently is the job market and the staff cost. This is one of the challenges we have.

On the other hand, what we have, we have just beforehand spoken about interest rate raises that will also add revenues there. So in the end, what we will do is we'll gear to what's doing the right thing in terms of long-term getting the best out of it for the bank. The cost income ratio will be very competitive, but inflation will hit, but it's also the inflation we currently foresee and what inflationary shocks could further come, but any of these inflationary shocks, fortunately, would also come with higher interest rates and with higher benchmark rates. So we will also earn against that.

[Cezary Stypulkowski, executive]

I will even address this issue in more generic terms. I believe that in the inflation environment, banks are pretty well equipped to manage the cost vis–à–vis the income levels or revenue levels better than many others. So I'm very positive in terms of us being able to continue to grow our revenues more aggressively than our cost base.

[Joanna Filipkowska, executive]

Thank you very much. With this, we covered all the questions. So thank you for your attention today, and we hope to -- you will join us on November 16 for -- during our conference presenting our new strategy. Thank you very much.

[Cezary Stypulkowski, executive]

Thank you.

[Andreas Boeger, executive]

Thank you.

[Marcin Mazurek, executive]

Thank you.