mBank SA

WSE:MBK

Earnings Call Transcript 2022-Q3

[Joanna Filipkowska, executive]

Good afternoon, ladies and gentlemen, and welcome to our conference where we will present the results of mBank Group in the third quarter of 2022. As always, the results will be presented by Mr. Cezary Stypulkowski, our Chief Executive Officer; Mr. Andreas Boger, Chief Financial Officer; and Mr. Marek Lusztyn, Chief Risk Officer. Mr. Marcin Mazurek, our Chief Economist, will discuss the macroeconomic outlook. We will be happy to take -- to answer all your questions after the presentation. Cezary, please start.

[Cezary Stypulkowski, executive]

Okay. I think that the title explains a lot about the burdens and legal backdrop [ weighed ] on the results. I would say we are extremely efficient, well structured. It was a good business model institution, but, to some extent, I have to say we operate in the wrong country. Sad to say, but this is being reflected by the numbers, which will be presented.

So we are in a situation where our core revenues are growing fastly, obviously, to some extent, due to the interest rate hikes, which has taken place during the course of last 12 months. Now on the annual basis, we have doubled our net interest income. Fees and commissions, which was a very strong part of our performance over the last, I would say, 3, 4 years, so really -- with the gross numbers reaching 20-plus percent, still are 8% above the previous year levels.

But -- and obviously, showing that we have -- effectively, we have doubled our fees and commissions within the last 4, 5 years. So I have to say, on the revenue side, the bank is performing very well. The costs are being reasonably well managed with the cost-income ratio normalized to core of the business at -- under [ 32% ]. But there are these outside impacts which -- significant developments which is significantly impacting on our overall result.

So the underlying performance was pretty good. Though, the development, specifically the credit vacation and the other initiatives sponsored by the government and targeting the credit, specifically in mortgage loan holders, significantly we started finding that result.

Second aspect, again, we are talking about the -- some kind of privileging -- the borrowing customers are the cost of the -- specifically addressing the legal costs, which are related to the performance of this portfolio.

As we stated on a variety of occasions, I think it will be developed during the course of this meeting. We don't see still the credit risk on this portfolio, but the legal consequences of instability [ jurisprudency ] in Poland and the paralyzed Supreme Court impact also our approach being on the safe side. We need to protect the bank.

And as a consequence, we have written off PLN 2.3 billion of additional legal provisioning, which led to the figure, almost reaching PNL 7 billion in totality. When it comes to loan dynamics, the stated one is relatively low, 4.8%. But once cleaned out of the consequences of using of credit vacation and Swiss franc portfolio, we are reaching low level of -- slightly above 10%.

Well, in the economy, which is clearly on a direction to slow down, I don't think that this figure doesn't -- I believe that this figure represents the overall dynamic of the market. Specifically on the retail side, I think that our market position is stable or slightly growing.

On the corporate side, we are more sort of picky. We are focusing on a particular group of clients. And I think that if there will be questions, I think Marek will explain.

Cost of risk, reasonable, I would say -- under the circumstances, I think that rather on the lower side of our range, which we target.

And what is important -- and I think that, that is something what you know that this is our [ owners ] -- how should I say owners - the -- mBank signifiers more. So usage of mobile apps is still growing, and activity of our clients is premier in the market on the mobile devices. So that is something what reflects our -- both business model, our message to the clients and our preferred distribution channels.

One thing which we start slowly to introduce to the market and to down is -- and to the investors is, I will -- what should I say -- my strong belief that PFM, the Personal Financial Management is the new big thing which is on the horizon, and this is something what we are investing in. I don't think that this will translate into the instant money.

But in a 5-years perspective, I strongly believe that, that will be something what customers will expect from the banks. And it will be almost mandatory to have that type of functionalities. And we believe that on this front, we are [Technical Difficulty] -- disappeared.

We know that the clients in this respect are valuing the excess from the -- from our app to the public services. And obviously, we will continue to develop additional functionalities on this front. On the ESG side, maybe I will switch to Marek, who is our champion. So he will give some words about our entry into the [ SBTi ] which is -- I would say, very important aspect, though, after leaving the [ recent ] issue of -- the economy is slightly more skeptical whether things can be delivered worldwide by the industry.

[Marek Lusztyn, executive]

But nevertheless, as Cezary said, as part of the ESG strategy of the bank, we have declared that we will join science-based targets initiative, which we have concluded in first quarter 2022. And within that part of the commitment, 2 years ahead, we will submit mid-term targets for mBank, for official validation. And this is basically against the science-based criteria and evidence on the climate change to limit the warming to 1.5 degree.

What we are expected to do is to cover the decarbonization path for the next 5 to 15 years. And then it will be accordingly validated by SBTi. We are glad to highlight that we are one of the first institutions in Poland to join that global platform. And we are happy to have our external -- our targets for decarbonization validated externally. Also as part of our ESG initiative, we keep on helping our clients to decarbonize themselves.

And one of the landmark transactions was -- that we highlight on Slide #4 is the construction of the wind farms under the PPA agreement, which brings one of the big corporate clients of us with the provider of the wind farms to reduce the carbon footprint.

[Cezary Stypulkowski, executive]

There is one aspect, which is not necessarily right in this third quarter [indiscernible] that we announced.

We are very proud that we've been ranked as one of the top banks in the ranking which has been prepared by the American issue of the news week. Whilst most social responsible banks in 2022, we've been ranked as #10, among very respected institutions, by far the only bank from Poland.

This covers both -- the 3 elements of ESG. Interestingly enough, I think we've been the only bank which has been ramping this ranking on the corporate governance at the maximum level. So not over-exaggerating the meaning of this rank and its importance, but it's always nice to be ranked and among, I think, 170 class banks. There were 2 banks from Poland, us being at the tenth position and one of our competitors being in the second part of the almost 200 banks.

Market position, I think we continue to grow our market positioning. Our current -- with some slowdown in -- specifically in the second quarter, on the retained deposits due to the -- I will call it kind of a turbulence which went to the market because people try to position themselves on the pricing.

I think that we regained our trajectory to grow our market position. And as you see in the -- on the presentation -- is the presentation being displayed? No?

So this is Page 5 of our presentation. So we are continuing on the trajectory basically on the household side to grow a natural path which allowed us over the last 2, 3 years to gain almost 2% market share.

On the enterprise side, on the corporate side, I think that what is worth to mention is that we are more selective. We just went through the market benchmarking, and it looks that our strategy to be more focused on the returns vis-a-vis the clientele. Profit as reasonably well. This is, to some extent, the expense of our market share, which is basically on the corporate side around 10%.

I have referred already to the -- into our mobile strategy, and I think this is being very much reflected by 2 factors which I want to focus on. One is that -- number of active users. When it comes to the population of overall clientele and active users, we are #1 in the nominal terms of the number of mobile applications used. We are #2 after PKO BP, , the biggest bank in Poland.

What we -- what is, I think, ultimate confirmation of something that was always our aspiration to be the premier transaction bank is the fact that -- specifically on the big payments which are the fastest-growing part of the, I would say, transactionality, very much related to e-commerce. We are, I would say, growing fastest among our peers with a clear #2 position.

And what is worth to mention also to the number of e-commerce transactions done by the -- by our clients. And I cannot go into the very detailed information, because we had some other market players. But I want to stress that our estimates on the 30% of e-commerce transactions are being done by the clients of mBank.

This is also very important that the mobile channel is playing more and more important role in the distribution of products, which was the obvious positive impact on our cost base.

And I would say, the familiarization of the clients with additional functionalities, plus very positive effect in terms of time to money for the clients. What I wanted to stress as well is that, we have some positive effects also on the Czech and Slovak markets, which are our international presence, which we very much changed.

Just to summarize, I think that what is very important, we -- even with the - even -- I think that the best will be really to move to the Page -- I think 9, which I think explains a lot about the performance of the bank after 9 months. So the revenue side of the bank and cost management lead us to the position that we would be able to consume all the burdens which have been in cost on the banks during the course of the third quarter, and still being able really to come with the pretax positive result in a big way, PLN 1.5 billion, which is reflected here.

This is the magnitude of the profit which we've been doing on an annual basis at the best time. I think we never reached that level, by the way, but that was close. But after that, we have PLN 2.6 billion of additional provisioning vis-a-vis Swiss franc portfolio, which we will explain in more detail in the later stage.

But all this shows that what we observed in Poland -- and this refers to my initial statement that -- about the environment in which we operate -- what we observed is effectively transfer a big portion of the capital of the banks in Poland to the -- to be perfectly honest, relatively well as individuals. How to explain that, very difficult, and I have to say, I feel very uncomfortable that these developments have happened.

We are outspoken on the issue. And we -- and some of you who follow our stance know that mBank is very vocal. But still, these are the realities in which we have to operate. And what I used to say, what's real is rational. So we have to respond in a manner which protects specifically all the clients of mBank, specifically the depositors to manage the bank in a safe way.

Credit holidays, I think that they've been already discussed extensively during the course of the previous presentation. I can imagine that there will be questions related to the participation, et cetera, we'll be responding. Borrowers' Support Fund, I think that the question mark is we are talking about our contribution to this fund, the PLN 184 million. Significant.

We don't still know -- and there was no recently report of what are the drawings on the funds. But we know that applications have been going in the course of the first half of the year. That needs to be tracked. But we believe -- I believe that, that's the way we need to address the issue of the problematic customers, not by -- I would say, in -- responsible distribution to each and every result any criteria.

Everything what has happened ends up in the reported pre-tax loss, I have to say the highest ever and highest in my life, and that does not give me a lot of comfort.

The summary, I don't think that we need to spend too much time. And then we are moving to the revised methodology of our approach to the Swiss franc portfolio.

[Marcin Mazurek, executive]

And on the Slide 11, you see the background for our revised approach to Swiss francs that reflects growing severity of the court verdicts and incoming court cases.

I'd explain step-by-step what led us to the change in approach to calculation of the legal risk reserves. First of all, on a positive note, we see that the inflow of the new court cases and its dynamics has slowed down a little bit. In third quarter 2022, the number of individual court cases concerning indexation cost increased by 1,160, that compares with 1,282 in Q2 and much higher numbers in the preceding quarters.

One of the underlying reasons that led us to fundamentally different approach to the calculation of the legal risk provisions is that, since Q4, mBank has been observing a growing number of final verdicts in the accounts concerning the indexation clauses against the Swiss franc loan agreements, and that number massively increased year-on-year.

At the end of September 2021, we have seen 270 verdicts coming in a quarter, and that has increased to almost 1,400 in third quarter of 2022. What needs to be highlighted as well is that the severity of those verdicts massively deteriorated against the bank.

Until the end of September this year, roughly 92% of the verdicts were unfavorable for mBank, and those unfavorable judgments were based roughly on the same pattern of facts, which in the past had resulted in different verdicts. Currently, we see, roughly 82% of those unfavorable verdicts lead to the invalidation of the loan agreements.

And most of the others lead to the conversion of the agreement into -- zloty on Swiss franc LIBOR. However, what needs to be also strongly highlighted is that the line of jurisprudence is still not unified as the Swiss franc issue remains unresolved both at the Polish Supreme Court level and the European Court of Justice.

The proceedings in the Supreme Court, in our case, has been suspended. On the positive note, it's worth highlighting that opinions of the National Bank of Poland and the Polish FSA on the case submitted to the Supreme Court, very strongly supported bank's position.

In September, European Court of Justice confirmed the previous views on the cases of mBank and Deutsche Bank regarding whether the National Court can modify the contracts or whether the National Court may supplement the contract by the average Central Bank rate, and the statute of limitations. Also, early October, European Court of Justice performed a hearing on the case regarding the remuneration for using the loan principle by the client, verdict in which case is expected in the middle of 2023. And what's important to highlight is that there was also a presence of the Chairman of the Polish Financial Services Authority that was presenting his view there in front of the European Court of Justice, and that the Polish FSA position was also very much supporting bank's view.

So as announced during the previous quarterly results conference call, over third quarter, we have performed a full-out review of the methodology of calculating the cost of legal risk, which brought us to a significant increase of the overall provisioning. And the current model is based on an advanced statistical methods for determining the numbers of clients who will file lawsuits against the bank, which is supplemented with the expert judgments where necessary given the number of uncertainties with respect to the potential outcomes that we have elaborated at length during the previous results conferences.

In this new approach, mBank has shown a higher number of the future plaintiffs, roughly 31,000 as well as a relatively lower number than in the past, clients who will remain passive. I mean, they will file no lawsuit and they will now enter into a settlement with the bank.

The parameters are derived from the historical data as well as from the current observations of the trends in jurisprudence that is provided against the bank. And then, probability of losing the case is shown here at 95%. And we are not further -- we are not assuming any further verdicts with the average NBP rate.

What needs to be highlighted as well that, what led us so much higher level of provisioning is the entrance into the full-scale settlements program, cost of which is also fully included in the current legal provisions.

Moving to the next slide, please. On Slide #12, we are providing more details with respect to the development of the portfolio as well as the development of the provision income for mBank. So at the end of September, the share of Swiss franc mortgage loans in our total loan portfolio stood at 5.4% on the net basis, or 10.3% on a gross basis that is before the deduction of the respective provisions.

The cutting amount was significantly decreased, as you can see on the top left-hand side of the slide. And that also covers, not only the deduction of the higher legal risk provisions, but also the ongoing repayments that we see from the portfolio.

As a result, to sum up of the application of the updated methodology that I was describing in details before, the cost of legal risk related to the foreign currency loans recognized in the income statement for third quarter 2022 is increased by PLN 2.3 billion. And the total value of provisions then created in relation to the legal risk, and claims resulting from the cost proceedings amounts to PLN 6.8 billion.

In sum, after 9 months of 2022, provisions created in relation to this little risk and claims regarding from court proceedings, covered 51.6% of our Swiss frac mortgage loan portfolio, that is very significantly above the sector average. And it needs to be also remember that, as an IRB bank, we are having this FX add-on allocated to the non-core portfolio segment related to the FX mortgage loans, that amounts to PLN 1.8 billion.

So the total cushion created so far natural equity and through P&L of the bank to cover the legal risk related to the Swiss francs, reached at the end of September, PLN 8.6 billion, which all in gives us the coverage of 68%. And as we have also announced in September, we have decided to launch a full settlement program for our clients who are still with active Swiss franc index loans.

And I pass over to Cezary for the details on the settlement.

[Cezary Stypulkowski, executive]

Yes. I may add one -- if I may add one issue to the -- to what Marek has said is, we have observed a very important development, which was -- which has happened in the end of September, which is the starting process of resolution of Getin Bank. And as you know, Getin Bank has the portfolio of Swiss francs, which has been separated in the residual entity, which is being managed by BFG, which, to some extent, officialize the treatment of the portfolio.

And it's very interesting how it was valued at the time when it was measured by BFG and respective valuators. So we believe that this, I will call it, officialization of the Swiss franc portfolio in the case of Getin. To some extent, it's a reference point for, I would say, official sector understanding of where the portfolio should end up.

I will not go into more details, but as a reference, and specifically for the analysts, I believe that is important factor. Second is that, obviously, in this capacity, BFG will be managing the portfolio with all the legal consequences, which will be a reference. And it will be, to some extent, also official sector being part of the Swiss francs [ are involved ].

When it comes to the settlement program, as you know, our initial stance, which we have presented, I think, a year ago -- was that, despite the fact that on the legal front, we don't share variety of opinions of the legal firms supporting the clients which sue us in the cards, and despite a variety of other billions -- Though, in the meantime, both the KNF, National Bank of Poland has -- have come with the opinions which fully support the stance of the banking sector.

There is continued mass on the legal front, in my opinion. But at the same time, we recognize the fact that the situation of the clients are being -- resulting from the fact that zloty has collapsed vis-a-vis the Swiss franc significantly. Basically, I think that there could -- it was almost how -- I think that what has happened is basically helping the value of zloty, which means that customers run a significant foreign exchange risk, which was not expected by the banks and by the clients.

And that as a consequence, we have come with a pilot proposal, which was sharing the burden of the depreciation of zloty. This pilot -- I have to admit - in -- truth lies in response level which we have expected from the clients. That has been helpful for us to master the process, which we have, which is pick out to optimize.

But we came to conclusion that we have to come with a new proposal, which is much more individualized. What we have learned during the pilot processes is that this more mechanical type of approach, not necessarily was welcomed by the clients.

So we are individualizing more our approach. And we are offering the clients basically the conversion of the loan into zloty which is a significant reduction of the outstanding plus fixed interest rate on the -- at the preferential level of 4.99 percentage points to the -- for the client, which obviously comparing to the current fixed rate offered for the new loans is significantly better this.

We believe that the stabilization of the current repayment perspective should be appealing to our clientele. And that's the reason that we believe that the response level should be strong. As I've seen in one of the questions, we are certainly envisaging 33%. And why we believe that it will happen, that will be the strong priority of the bank in the coming 6, 9 months, to proceed and to approach on an individual basis, all our clients with outstanding loans vis-a-vis the bank.

The program started this quarter. This is premature to really reporting this. But initial response is encouraging. That's what we can say at this moment.

[Marcin Mazurek, executive]

And as we have 2 questions on the Swiss franc topic, that are related to what we have just said, maybe we will address them on the slide. So one question on the model itself asks us, if our model includes the remuneration for using the loan principle or not?

So as you can see from the size of the write-off, it is reasonably higher compared to the number, as if all the loans would be converted to zloty at the original FX rate. So there is a certain scenario that assumes that no remuneration on -- We've said [indiscernible] may happen.

But overall, the model is significantly skewed on the parameterization that assumes that remuneration for using the loan principle applies.

And in this context, addressing also the other question with respect to what would happen if European Court of Justice rules that no remuneration for banks is due?

I would like to refer to the overall scenario that Polish FSI presented in spring 2021. That basically shows that, if that is the ruling, then the overall loss for the banking sector as a whole would be roughly equal to the total capital that is held by the Polish banking system.

So that roughly means that, that is the scenario in which the banking system in Poland seems to exist.

[Andreas Boeger, executive]

Good. Maybe one last comment on Swiss francs. And obviously, you know that we are trying to have the most robust disclosure also here. I would like to refer to the financial statements. We're on 7 pages. You're actually seeing how our approach is designed and what the respective outcomes are.

So I recommend everybody to read that and go through, because I think also there, we're industry-leading in being transparent, what we are doing.

Let's maybe go back to the performance of the bank. And on Page 13 -- well, you have heard the very negative effect from the Swiss francs. And that for the first 9 months -- this is the 9 months you here -- adds up to nearly PLN 2.7 billion in Swiss francs legal costs booked, which obviously puts the noncore in deep negative territory with nearly minus PLN 2.8 billion.

But let's maybe here use the time to talk about the core business, core business for the first 9 months. You see down below, net interest margin, net interest margin that is without the credit vacation.

So if there would be no credit vacations for 9 months, 3.73%. That's a very strong print, and we'll also see later that the third quarter was even better than this 3.73%. Cost-income ratio -- and here in the core bank, you have that is -- including credit vacations, including IPS, including Borrowers' Support Fund, cost-to-income ratio is still below 50% so 49% in quite a distressed quarter -- 9 months with these extraordinary effects.

And even with these extraordinary effects, the return on equity is at 14.3%. Last year, for the first 9 months, it was at 11.7%. So return on equity here after this quite stressed 9 months, still really good for the core bank.

Let's go to the detailed view of the quarter. There I would like to be brief. If you look on Page 15, if you look at the development of the loans, well, on corporate, we have seen a slight increase. And I've also seen that there is a question, the increase of roughly 1% after FX movement is more skewed towards working capital loans, and still the investment loan demand we are seeing is more on the lower side.

Retail, the gross loans here are lower, lower by PLN 2.3 billion. But Cezary mentioned that beforehand, it's also technically affected by the Swiss franc booking because we're deducting this from the carrying amounts, that's PLN 2.2 billion roughly deducted.

And also, the credit vacations. Part of the credit vacations, the ones that are not taken yet, but which we foresee in the future, is also deducted by the carrying amounts, that's another PLN 1 billion. So there's a PLN 3.2 billion negative drift in that due to the technical effects.

So it actually makes more sense to look at the next page, and the next page is the loan dynamics or the new sales. First of all, starting with the mortgage loan side. Mortgage loan, we have, as anticipated, seen the strong drop to a volume a bit shy of only PLN 1 billion in the quarter. That's a function of various things.

On the one hand, interest rates have strongly -- went up, while affordability there technically goes down. But also, there are very strong KNF criteria towards affordability.

On the other hand, we also have adjusted our prices. But still when it comes to the prices at the higher end of the competitive range -- because we also need to see how the whole product evolves. And obviously, after these government interventions here into the market, we're not fully, at least, with the product.

And there's a third effect that also the market is not in full swing because obviously, if you have -- and we come to that later, that we have 80% of our volumes -- eligible volumes in credit vacations. I mean these people don't have any incentive of moving the house.

So also the housing market, to some extent, in Poland, has been heavily distorted by the credit vacations, and we also expect this to continue for the duration of the credit vacations, which is until the end of next year.

Moving to non-mortgage loans. Non-mortgage loans, also to some extent, weaker. There, we will, in general, move with the market. The idea is to be cautious on volumes and not to aggressively grow here. We're very much looking at the margins we're having. So we're looking at the business that has more choosy margins there. But currently, on the volumes, we would also remain a bit more conservative.

Going over to corporate sales, and you know the story here very well. We continued our selective approach, being -- well, growing in K2 and growing in K3. Most likely more also at low single-digits this year overall, and on K1 also being very cautious and seeing that we actually get the right rewards for the risk and for the capital we also employ here.

Leasing, similar story to what we've seen. It's down. That's on the one hand, a function of availability of assets. On the other hand, if interest rates are very high and small ticket leasing is not really on the cards, people rather pay in cash.

So let's move to deposits. On deposits, well, the deposit base did increase on the one hand through a slight increase from corporate, but even stronger increase came from retail. You know that over half year, we had lower deposits, but that was also, to some extent, something where we wanted to see where the market equilibrium is and what you need to pay for deposits? And how much is a good remuneration we should pay for that, where again, on the growth path, you see here the term deposits, for example, have risen. I mean, term deposits are the part of the deposit structure where we actually also pay for deposits, and that has -- did get good client feedback, and with this better volumes.

Moving to income. Well, the income side on the next slide, and you have that very high grey bar with the credit vacations. Well, adjusting for that or without -- if the bar would be solid, this will be record high revenues. Just looking at net interest income, if you take the green PLN 724 million, and you add the PLN 1.28 billion on credit vacations, you come to net interest income of a bit more than PLN 2 billion in the quarter, PLN 2.6 billion. That's the best net interest income we ever had. Obviously shows that the theoretical run rate there is really good. I mean, we're fighting for every piece of net interest income every day in trying to get the right amount of interest income but also in terms of not paying too much out. But that's strong. And also if you take core revenues, so NII plus net fee and commission income, that's PLN 2.5 billion to PLN 8 billion, 12% more than in the quarter before. That's also really strong.

Maybe to briefly comment also on net fee and commission income. Net fee and commission income, up PLN 8.8 million year-over-year, a bit down over the quarter with 6%. Well, mixed bag here of drivers. The one thing is that you don't see on the right side in the grey box, what went down is, for example, also currency transactions, the margins there, because we just had lower volumes. We traded, that's another PLN 14 million, for example, and to some extent, also a bit higher cost of fee and commission, but still with PLN 520 million. That is a very strong and high level.

The small red bar with the minus PLN 26 million, that's trading income. Trading income turned negative because part of the credit vacations effect is also a negative effect on trading income, namely that's effect from hedge accounting relationships that became inefficient. That's another PLN 63.5 million negative in this. This is why the whole trading income is negative. And then finally, you see in other operating income, minus PLN 166 million. That's also quite a big chunk that's on the one hand, explained PLN 84 million of repayment of the so-called bridge margin. The bridge margin is something that was taken in Poland on mortgage loans before the mortgage loans were fully registered. Due to also the delay in the courts, the legal environment has changed, and the banks should now not take this bridge margin anymore and also repay it for the loans that are currently not registered yet. And this is PLN 84 million unexpected, I wouldn't say within the control of the bank, more public reflection that courts are just very slow, especially also after COVID.

[Cezary Stypulkowski, executive]

Another example of, I would say, a legal environment and lack of understanding of the usage of capital in volume. These are the factors which we have to take into account. And as Andreas rightly pointed out, instead of speeding up the process in cards, they are spoiling the clients claiming that there is no cost of capital usage. And that's something what we are fighting with.

[Andreas Boeger, executive]

On the other hand, we currently have intensive discussion with the Social Security Fund with the [ z.o.o.s ] in Poland on the operating model that we use in our subsidiary, mFinanse. We believe that what we did here is according to the rules, and it's also according to the practice. It's an industry-wide phenomenon. We also reserved PLN 98 million for potential future payment -- of potential repayment of such charges there, and we also reflected this in the third quarter here.

Let's move to the -- maybe finally, one thing, the net interest margin -- because I mentioned it before for the core bank, net interest margin in that quarter -- if you would disregard the credit vacations, is, I think for the first time above [ 4 ] -- it's a 401 basis points. Very strong. We have said that last time, we think that the very strong growth in net interest margin is over. We still believe that. It's more of a tactical nature that the net interest margin is, to some extent, in some products increasing. Because, I mean, what we need to do on a daily basis, we try to keep the bank as efficient as possible, but we view this level as very, very high. And this might for the NIM be the top. But as I said, we, every day, try to get the best out of out of the business here for the bank and the shareholders.

So let's move to the cost side. Well, on the cost side on Slide 19, if you look at it, well, the headline is impacted by external burdens -- just these 3 additional bars on Q1, Q2, Q3. First quarter is [ PLN 194 million ] BFG. Second quarter is [ PLN 391 million ] IPS, and third quarter is PLN 184 million for Borrowers' Support Fund, and another additional PLN 37 million on IPS. I think we've also explained this at the beginning, these are extraordinary burdens.

Otherwise, if you look at the height of the bars below, and given the fact that we are in a highly inflationary environment, I think costs are kept under control. We try to be very reasonable with the spending. You see here personnel expense a bit down, roughly flattish. Material costs, bit down over the quarter year-over-year. We have the usual drivers here. So for example, the quarter was a bit lower because of lower IT spend and consulting spend. But I think this is all within the range how you would expect mBank to reasonably manage the cost. Same thing is for amortization. Amortization is a bit down, but amortization, we expect to be trending up over time because of also CapEx we do.

Well, on the right side here, you see the cost-income ratio, and cost-income ratio, the red line, the reported one with all of the 3 interesting bars here on the left with the extraordinary burdens. I mean, that looks hugely distorted. If you exclude, for example, the credit holidays and the Borrowers' Support Fund, you come to a completely different cost-income ratio for the bank for this quarter and also for the last quarters. If we just normalize it over 9 months and we say, okay, let's take the credit vacations out and the Borrowers Support Fund out, you come to 34.6, which we view as actually an excellent cost-income ratio.

With this, I hand over to Marek Lusztyn for the risk side.

[Marek Lusztyn, executive]

Thanks, Andreas. So as it comes to the risk aspect of this -- on the main risk, that we have already commented, that was the legal risk related to the Swiss franc portfolio, that, by all means, was the south of the biggest write-offs for the 9 months of this year.

As it comes to the loan loss provisions and cost of credit risk, as it comes to the Q3, cost of risk at the mBank Group was 58 basis points. That was roughly at a similar level compared to the Q2 and 8 basis points lower than respective period of a year before. The quarter-on-quarter decrease was primarily driven by the lower loan loss provisions in Corporate Investment Banking segment.

Net impairment losses and fair value changes in retail went up to PLN 55 million. That includes a revision of the macro scenario that pursues a slower GDP growth in Poland. And at the same time, the net impairment and losses in corporate and investment bank segment significantly declined just to 8 basis points, and that was actually the byproduct of 2 vectors going into the different directions.

We have released some larger provisions, for example, for the construction sector in the tune of PLN 35 million, due to the repayments and improvement of the financial situation of some of the counterparts that were conservatively provisioned in the past. And some of the new defaults were basically covered by the new loan provisions from those releases.

What needs to be stated is that the overall quality of the individual exposures was maintained at a good level, that we have seen also in the previous quarters. And as it comes to the outlook, I mean, it's pretty clear that the geopolitical and macro situation deteriorates -- Marcin Mazurek could comment on that more in details afterwards. But we are clearly getting into the kind of stationary scenarios, not only in Poland but also at our main trading partners.

So that very much skills our outlook on the cost of risk for the next quarters, more to the downside, to the negative territory. So at the end of the day, we were seeing in the past, cost of risk in the tune of 60 to 80 basis points in the good quarters. I would say, given the uncertainties and the risks related to the macro scenario, in 2023 in the first quarters, we may see temporarily something going -- EBITDA up to PLN 90 million to PLN 100 million territory. But we do not foresee anything close to what the bank experienced in the first year of pandemic.

What needs to be highlighted is also, the higher cost of this has driven by the IFRS 9 models required banks to speed up the recognition of the provisions due to the portfolio approach and worsening macro prospects. And to a large extent, the provisions may be also driven, and that is actually quite a big uncertainty that is ahead of us -- by the impact of the Russia Ukraine or in terms of the supply chains and topics related to the energy in availability. But so far, cost of this remains relevant stable.

NPL levels, that you can also see on the next slide, Slide 2w. They remain very stable quarter-quarter. We also do not see a significant deterioration of the quality of the NPL portfolio in the individual customer segments. So overall, we do not expect a significant worsening of the portfolio quality just for a limited number of clients, and materialization of risk can lead to financial liquidity problems resulting in temporarily increased provisions.

What clearly attracts a lot of attention is the capital position of the bank that we have on Slide 23. And the capital position of the bank, at the end of September, total capital stood at 14.66%. Tier 1 ratio was 12.11%. That was roughly 1.5 percentage points above the minimum requirements. If you want to see the details, you can find them on the Slide 36, but we stay on the Slide 23 for the time being.

So main driver -- the main driver of the decrease of the capital deterioration was clearly the mix of the Swiss franc write-offs and regulatory interventions that we have discussed at length. So overall, own funds decreased by PLN 1.75 million quarter-on-quarter. A part of -- the main negative impact that is the net loss in the amount of PLN 2 billion. We had a positive impact that was coming from not inclusion of adjustments to the current specific risk adjustment due to the recognition of the cumulative loss. That amounted to PLN 200 million, and there was also a positive impact of the valuation of the [ owned ] portfolio measured through fair value through capital, and some negative impact coming from the GTA. So only decrease on funds by PLN 1.75 billion.

Total risk exposure quarter-on-quarter almost unchanged. And as it comes to some of the capital-related questions that we see on the Q&A, maybe I will address them on the fly as we are on this slide as well. So first of all, as it comes to the impact of the so-called COVID quick fix on the Tier 1 capital ratio in Q3, it's roughly 39 basis points as of September 2022. So that is the [ waived ] negative valuation of the bonds, which is not fully reflected in the capital ratios.

There is also a question in context of the PKO BP that got the FX part reduced yesterday. And the question there is, when do you expect the Swiss franc buffer to be decreased? And that is subject of the administrative proceedings, which are regularly ongoing on between the bank's -- Swiss Bank portfolio and the KNF that also reflects our situation.

We cannot comment on exact date when we should expect this, but we remain optimistic that also this buffer for us, given the massive increase of the FX provisioning that we have performed in Q3, will be subsequently reflected in the reduced buffer, giving us more briefing space on the…

[Cezary Stypulkowski, executive]

And we are in the dialogue.

[Marek Lusztyn, executive]

And we are in the dialogue. And in this context, in the context of the capital bricking space, there is also a question coming from Kamil Stolarski, that calls as follows: in the relatively thinner capital buffer over the minimum capital requirements affecting mBank operations or loan growth appetite to an extent. No, they are not affecting our loan growth appetite or operations. We confirm that our strategic targets remain unchanged.

As we have commented at length -- as you have seen from the previous slides in the presentation, our capital generation capability of the core business of the bank is very strong. And unless unforeseen at this time, headwinds pop up, we are very confident that we can very quickly rebuild that capital for further growth. So we have no plans or any indications to -- that would divert us from the strategy that we have been communicating to you over autumn last year.

And to finish with the capital and liquidity position, as you can see on the right-hand side of the currently displayed slide. We are having liquidity position which is very strong. It has actually improved over Q3 2022, and remain one of the strongest when compared to the peer bank groups.

[Joanna Filipkowska, executive]

Now we hand over to Marcin.

[Marcin Mazurek, executive]

When you look at the economy, you can see the divergence between soft indicators, namely business tendency indicators and real figures. Business tendency indicators suggest that the economy is right now, what could be in recession. It applies mostly to consumers. But in fact, it isn't -- But it's safe to say that the economy is slowing down.

We started the year on a somehow high note. GDP growth exceeded 8%. Right now, we are coming closer to 3%, and in the year-end, it will be close to 0. But overall, GDP growth in this year and here our guidance is not changing -- would be around 4% to 4.5%. So it would be still quite solid.

But the trajectory of the economy -- I mean, that downside sloping trajectory, is going to bring much, much lower GDP growth figures in 2023. And the economy is set to barely recession growing by 0.4%.

At the same time, we observed that labor market is still strong. Unemployment rate is still at bottoms and wage growth is quite fast. Of course, the slowdown in the economy is going to affect labor market as well, but we expect only a minor change in unemployment rate, minor change upwards. We think that most of the adjustments would be done by the growth of wages.

Still, cooling economy is coupled with very high inflation and still inflation hasn't reached its peak. We expect that the peak will come at the start of 2023. It would be around 20%. Yet the inflation is reflecting the imbalance of demand and supply. And primarily, I would say that past changes of energy and food prices and the pass-through of those prices towards the other goods and services. So the key to lower inflation is our lower energy prices. Yet NBP is also cooling demand after rates reached 675% in August. We expect that they may stay at this level for some time. In the end of 2023, we are going to see still rates around 675%. So we think that NBP is already down with interest rates.

As far as monetary aggregates are concerned, we can clearly see that, on the corporate side, the growth is still troubled by current financing, and also corporate deposits grow at a solid pace. It is soon expected to reverse and -- because the momentum is growing weaker and weaker. At the same time, household loans are going down. They are shrinking in annual terms and at the same time, growth of deposit is very low. Still, there is no visible turnaround insight in 2 or 3 quarters. We just have to wait until 2023, '24, until we see some new momentum here.

As far as the financial markets are concerned, the government bond yields are just off the peaks. We are around 8% in 10-year bonds, whereas some weeks ago, we hit 9%. Yields are high because inflation is high, and NBP is reluctant to hike as much as markets are expecting. Besides liquidity is low, and credit risk is on the rise because the market expects substantial supply in 2023.

As far as zloty is concerned, zloty stabilized of late. And we think that -- well, there is not much room for improvement, but also the perspective is not as bad. And we will say that current levels of European run-rates are set to prevail in the next months before we will see some downside push in European run-rates, I mean, stronger zloty. Thanks.

[Joanna Filipkowska, executive]

Thank you, Marcin. Now we are going to the Q&A session. We've answered a lot of the questions already. So I will start with the guidance for NII and net interest margin. Your guidance for NII and net interest margin after the second quarter was very conservative, adjusted for long holidays, as in fact, you delivered around 50 -- plus 50 basis points net interest margin growth. How should we read this time your neutral guidance?

[Marek Lusztyn, executive]

Well, it was conservative in the past. We continue to be conservative, even though the basis now is higher. In the end, it is a function of how much we have to pay for deposits. And yes, the 400 basis points, we see as quite high. If we can keep that, that's good. If we can maybe get inch higher, that's also nice. But there's also a downside to that, and 400 basis points is a very strong... Yes. These are the [ cash ] positive.

[Cezary Stypulkowski, executive]

I'm being -- we are very much privileged by significantly into -- and growing market share. There was, as you've seen in one of the charts, some drop in our market share at the time when -- I think it was second quarter -- when the market…

[Andreas Boeger, executive]

The temporary disruption of the market structure happened.

[Cezary Stypulkowski, executive]

I would say, very much driven by some politicians encouraging mostly state-controlled banks to go more aggressive. That was very much unknown for us, which direction the market will evolve. But I have to say, if you look into also the structure of our retained deposits, we have a significant portion of the transaction money in almost all the current accounts. We are less represented on pure deposits. And we believe that this element will be the critical potential further increase of our net interest margin.

[Joanna Filipkowska, executive]

Next question is on the Borrowers' Support Fund. What was the bank's use of this Borrowers' Support Fund in the third quarter?

[Andreas Boeger, executive]

It's -- it was only in roughly PLN 15 million, which was significantly lower than our contributions to the fund.

[Joanna Filipkowska, executive]

And what was the reported participation ratio in credit holidays in August and September?

[Andreas Boeger, executive]

Basically, as we have communicated our initial estimates at the beginning of Q3 when loan holidays were announced, we said that we expect the participation ratio between 60% and 80%. I mean, it really depends on how do you calculate the participation since not everyone applies for all 8 installments, et cetera. But all in, I would say, we are a big team time of our very -- of mobile population of customers, because we see that it was on the upper end of, not only our estimates, but also the participation of the peer banks. We've got -- as I said, it was at the very upper end of our estimates, the details and the financial statements. But for the time being, we see that it was exactly spot on within the estimates that we have provided.

[Marek Lusztyn, executive]

Maybe briefly -- I mean it was 80% of the digital portfolio at 6.4% installments. And what we then booked -- because we said we do expected value. We did we booked 86.9% of the portfolio at 7.5% installment. So if you take this times the installments, also we have still quite a buffer of people, to come. But a lot of people were actually coming and taking credit vacations, especially the high tickets.

[Cezary Stypulkowski, executive]

There are figures and there are also anecdotes, and I still remember on the first day of introduction of this opportunity for the clients. I was talking to one of my colleagues from the peer bank. And well, we've been -- started exchanging the figures. And in our case, it's like 24% people coming in first 2 days. So he was short because in his bank, it was half of the population which we have, which I think is out with confirmation with [indiscernible]. The first 2 which is the quality clients and the mobility has w angles, I will say.

[Joanna Filipkowska, executive]

What impact does mBank expect from recently approved windfall tax in the Czech Republic for 2023-'25 ?

[Andreas Boeger, executive]

We do not expect to fall under the windfall tax in Czech Republic.

[Joanna Filipkowska, executive]

Can you please comment on PLN 99 million provisions related to [ z.o.o.s ]? Have you agreed to pay additional taxes? Do you expect further cost from controlling the bank? Or was that just the case of mFinanse?

[Marek Lusztyn, executive]

So I think we -- in part, commented on this. It's an isolated case when it comes to mFinanse. And as I said, the company is in a dispute with the social security institution, over an interpretation of the application of the security regulation. And the position of the banking of the group is that the company complies with the provisions of the law, including also the banking law here and also the banking secrecy. And it's an interpretation difference, but it only relates to the business model of the agents in mFinanse and not to mBank. And we have a conservative approach with the PLN 99 million booked. But also the inspection is even not closed, but it's still ongoing, but we thought we'll reflect this right now.

[Joanna Filipkowska, executive]

The next question is on mortgage originations. Have mortgage originations hit the rock bottom? What total loan growth do you expect for 2023?

Well, maybe I will combine that answer with the answer to another question that has been posted on the similar topic, because there is also a question asking us to comment on the current demand for financing in the corporate segment, operational and investment loans.

[Marek Lusztyn, executive]

So on Slide 26, we expect -- we display our forecast for end of this year and next year, both for retail and corporate lending. So -- on retail, as you see for household loans, we expect the market to slow down -- actually to contract both 2022 and 2023, primarily driven by a decrease in the nonmortgage lending. We expect a market for mortgage loans in 2022 to marginally contract by 0.9 percentage points, to an extent due to the long holidays that we have discussed at length. And we expect the market to revive a little bit by 4.4% within next year. But as you may see, this is the top of the market, much lower than what we have seen in the first 2 years of COVID 2020, 2021. And in particular, if you compare that number with the reading of the headline inflation, that means that the volume of the mortgage loans in the economy in real terms will also contract.

We are a bit more optimistic on the corporate loans. We expect nominal rates of the market still to be positive, not as fast as it was in 2022, where it was almost going up by 15%. Our current forecast is 5.2%, which also in the real term is a contraction, but in monetary terms -- and this is what we are concerned running the bank -- in our view, that's positive.

There is also a question further on -- I see on the Q&A list, on our expectations for the base rate. So having this slide displayed , I will maybe answer it on behalf of Marcin, that we expect that rate to be flat until the end of next year.

[Joanna Filipkowska, executive]

Thank you, Marek. We have a question on MREL and what is the MREL capital gap to the current targets set at the January 1st, 2024?

[Marek Lusztyn, executive]

We're not quantifying the current gap. What we have is, currently, we are fulfilling all MREL requirements. They will -- they are set to go up, especially by the date beginning of '24. For this, we have an issuance plan, and the issuance plan will also need to be fulfilled, or partially fulfilled to then fulfill the final MREL requirements. So we're here in the transition, but for getting the whole journey, things still need to be done next year.

[Joanna Filipkowska, executive]

And what is the share of clients' amount of loans that are being prepaid earlier as far as credit holidays are being concerned?

[Andreas Boeger, executive]

So we have seen a bit of early prepayments at the very beginning of the long holidays. But as of now, I would say this is not really material compared to the prior loan holidays period.

[Joanna Filipkowska, executive]

And I think the last one. Would exempting repo transactions from banking tax bring any material impact for your business?

[Andreas Boeger, executive]

We don't expect exclusion of the REPO transactions from banking tax to materially impact the way we contract the business. And we see this as a way to unlocking some of the liquidity, which is currently trapped in the system through the treasury bond holdings by various commercial banks. As we said, for us, it is less of a problem because of the abundant liquidity that mBank has. But overall, from the sustaining liquidity risk, we consider this to be a positive news.

[Joanna Filipkowska, executive]

Thank you very much. I think we covered all the questions. If you have any more questions, please contact Investor Relations. So for now, thank you very much for your attention, and have a nice day. Thank you. Bye-bye.

[Cezary Stypulkowski, executive]

Thank you.