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Earnings Call Analysis
Q3-2023 Analysis
mBank SA
mBank Group, under the stewardship of CEO Cezary Stypulkowski, CFO Pascal Ruhland, and Chief Economist Marcin Mazurek, delivered their analysis of the third-quarter results in 2023, shedding light on the bank's strong core results and the headwinds it faces. Stypulkowski emphasized the bank's adept handling of net interest income growth amidst falling interest rates, achieving a quarter-on-quarter increase of 3.8%. Despite revenue increases, mBank's loan portfolio expansion has been cautious due to several factors. These include tepid demand from the market, tight capital controls in response to the Swiss franc portfolio uncertainties, and an unstable Polish regulatory environment. Deposits continue to grow, showing client confidence in the bank's services.
Ruhland detailed a strategic move where mBank Group successfully issued PLN 750 million in senior non-preferred green bonds, marking the bank's largest and most oversubscribed bond transaction to date, signifying investor confidence. This strategic issuance also outlines mBank's path to meet the Minimum Requirement for own funds and Eligible Liabilities (MREL) by the end of the year and its aim to cement its position as a frequent issuer in the financial markets. Concurrently, mBank completed the largest synthetic securitization in the CEE region, valued at PLN 10 billion, improving its common equity tier-1 (CET1) ratio by 0.9 percentage points. This savvy capital management capacity aimed to further reinforce the bank's solidity amidst market challenges.
Despite external pressures, mBank reported its highest quarterly total income in history, strengthened by a steadfast net interest margin of 4.26% and cost-efficiency with a cost/income ratio of 26.6%. However, the bank also faced a sizable legal risk provision related to Swiss franc mortgages amounting to PLN 1.08 billion, pushing its provision coverage ratio to 85.6%. This ultimately resulted in a quarterly net loss of PLN 83 million, despite robust pretax profit from core operations. The balance sheet reflects mBank's commitment to rigorous capital ratios, standing above previous quartiles despite significant hits from Swiss franc-related provisions in the earlier part of the year.
Stypulkowski delivered a cautious yet optimistic view of the bank's future. Recognizing a demanding environment with regulatory uncertainties and market constraints, the bank has reevaluated its financial ambitions. mBank adjusted its cost/income ratio target to slightly below 40% instead of the unsustainable 28% at present, reducing its appetite for loan portfolio expansion due to anticipated pressures. Nevertheless, the bank is adjusting its net interest margin expectations upwards, from slightly above 2% to around 3%, in pursuit of a more ambitious return on equity target of 14%. The bank's future direction will depend significantly on the developments in the Swiss franc portfolio and the Polish judicial climate.
Good afternoon, ladies and gentlemen, and welcome to our conference where we will discuss the results of mBank Group in the third quarter of 2023. Today, we have 3 speakers: Mr. Cezary Stypulkowski, Chief Executive Officer; Mr. Pascal Ruhland, Chief Financial Officer; and Mr. Marcin Mazurek, the Chief Economist, who will join virtually. You can put your questions into the chat box, and we will answer them after the presentation.With that, let's start.
Good afternoon. Well, we are in a class -- we are in a routine of delivering the very strong core results. and I've commented on the Swiss Franc saga, basically that's the message, which seems to be -- so, when it comes to the performance of the Bank, things which we have clear impact on, I have to say, the Bank is performing very well.And I obviously, will not go through the presentation, which is accessible to yourself, page by page. What I wanted to focus on is this difference between the core bank and -- it's the Page 13, if we can move to this one because it reflects where the bank stands. So, when it comes to the core business, as you see, both the net interest income is growing despite the fact that we are operating right now in the environment where the interest rates are falling down. Still, we've been able to increase by, I think, 3.8% quarter-on-quarter.So, that's strong. The fees and commissions are slightly different because we are, I would say it's more flattish to some extent due to the fact that the loan movement is not growing that much. To some extent, on a net basis, we are -- the cost of the fees -- the cost side of fees and commissions is under the pressure for a number of reasons. We think that next year, we'll be able to improve. But otherwise, if we go specifically to the ratios, the Bank is performing very well with the net interest margins still being very strong, significantly above 4%, with cost/income below 30% and with returns at the dream level, if I may say so.It's very difficult to complain on the business itself. Okay, one thing which needs to be reflected in this introductory statement is that the balance sheet expansion is obviously under certain pressure. That, in fact, is mostly on the loan side. I think that the issue is, on one hand, relatively weaker demand from the market, for number of reasons, which if necessary I will try to address in the questions-and-answer session.And the second is obviously very tight capital management, which we experienced due to the fact that there has been lots of unknowns on the Swiss franc portfolio frontier. All these contribute to more cautious approach to expansion. Additional factor which we cannot ignore is unstability of the regulatory environment in Poland. As you have heard number of times, the government was still coming with a strange ideas of another set of credit vacation, the implementation of the new -- a new mortgage program. In the situation where number of things are not that much clear make us more defensive on the expansion on this front.I'm not saying that the Bank is in a stay-and-waiting mode, but definitely, we believe that number of things needs to be clarified before more active expansion. I have to admit, though, that with some optimism, which is in the markets post the elections and we will be listening also to Marcin Mazurek, one could expect that Poland will be on the trajectory for a more intense growth, and obviously, these opportunities needs to be exercised by the Bank.Our capital position is relatively safe and one could say even strong. We have 4.6%, you know, capital ratios above the regulatory requirements. But in this unstable environment with lots of things around, we believe that, that level of a battery is at least necessary. As you know, our strategy is to be above 2.5%, but I would say, I feel more comfortable with the current level, which gives us comfort. But whether this is the solid base for the rapid expansion, I will be more cautious to declare.I think that you know, you are well equipped, so I don't think that we need to comment that much about the other issues. Obviously, one thing the cost/income ratio at 28% is not something that will be sustainable for a long period of time. We are benefiting from variety of factors. As you see, our cost base is growing more than 19% year-on-year. 3% plus quarter-on-quarter, we have to be prepared for cost expansion though we believe that we are in a good control of these factors and specifically, not building up the cost base which potentially can be -- can hit us adversely in a situation where the interest rates will be falling down. So I think that, as an introduction to the dialogue, I think that that will be it from my side.And now I'll pass on Pascal.
Thank you Cezary, and also hello from my side to all of you. I would like to start with one strategic topic, Slide 9, and then I run us through the financials in more detail.So, what you can see on Slide 9; in Q3, and we are very proud of that. On the left hand of the chart, you can see the details of our successfully placed PLN 750 million senior non-preferred green bond issuance. This is the largest ever bond transaction executed by mBank, most oversubscribed by -- order book by volume plus by investors. With this transaction, we also expect to meet the MREL requirements at the end of the year. Also, this transaction leads us back to be a frequent issuer again, which means at least 1 transaction per year.On the chart on the right-hand side of the page, you can see that we finalized the synthetic...
If I may interrupt. I think that mBank consequently since I think 2012, is the most frequent issuer from Poland after the government.
That's right. That's right. Therefore, we are well prepared in this respect. We securitized retail non-mortgage loan portfolio, as you can see. And it is with a total value, if you look into the numbers of PLN 10 billion, the largest ever synthetic securitization in the CEE region. This transaction will improve our CET1 by 0.9 percentage points, which we reflect 0.5 percentage points already in this quarter. These 2 transactions, as also pointed out by Cezary, should be seen as our strong proof of our capital management capacity.And with this, I'm going now to the financials on Slide 10. Starting with the total income in Q3. This is driven by still growing NII. Important to note is that we kept the net interest margin with 4.26% on a high level, despite the interest rate cut. This confirms our strong competence in managing our deposit base in both business lines, as we can see later on.Together with a slightly weaker net and fee commission income, as already elaborated by Cezary, this builds the highest quarterly total income in the history of the Bank. Total cost of the Group, excluding obligatory contribution, increased by roughly 2% quarter-on-quarter due to higher personnel costs and depreciation.The reported cost/income ratio nevertheless of 26.6% confirms our superior cost efficiency despite this high inflation. Loan loss provision and fair value change increased by 34%. This is a result of LLPs created, especially for corporate loans. After 2 quarters of net releases in the Corporate& Investment Bank, we see normalization here.Legal risk provision related to Swiss franc mortgage loan in the amount of PLN 1.08 billion, materially burdened the financial results of Q3. This cost resulted mainly from the expected distribution of court judgments, estimated cost of settlement program as well as the updates for further model parameter. But this leads -- this booking leads us to a coverage ratio of Swiss franc portfolio with created provisions to 85.6%. Details I will provide later in the presentation.To sum it up, despite significant costs of legal risk related to Swiss franc mortgage loans, we generated a quarterly pretax profit in the amount of PLN 462 million. This confirms the very strong income generating capacity of our core business. But due to an ETR of nearly 118%, which is driven by the fact that the majority of our Swiss franc legal provisions are not tax deductible, we reported a quarterly net loss in the amount of PLN 83 million. But at the same time, the net profit for the group after 9 months, which is not shown on this slide, is positive and amounts to PLN 44 million.Let's move to the balance sheet slide. Here, I would like to draw your attention just on one thing, which was elaborated by Cezary already, at the bottom of the slide, our capital ratios, while loans and deposits, I cover later in the presentation. As of the end of September, TCR and Tier-1 capital ratio stood at higher levels than shown in the previous quarters here.I would like to remind everyone that in 2022, we had a burden of in total PLN 5 billion. And obviously, in this year, our Swiss franc-related increase of provisions of almost PLN 3.4 billion. Those 2 effects and still you see an increased capital ratio is due to our successful capital management and obviously, our strong business performance, which overcompensated those 2 earnings.Let's go through the details of the Swiss franc mortgage loan development on Slide 12. After our additional provisioning in Q3 in the amount of PLN 1.08 billion, the total value of provisions for our legal risk of FX loans at the end of Q3, reached PLN 8.1 billion, as you can see on the left-hand bottom of the chart. This translates into a cumulative amount of provisions created so far since Q1, 2018 to PLN 10.7 billion.The share of Swiss franc mortgage loan portfolio and our total loan portfolio decreased to 2.3% from 5% at the end of the year 2022. Consequently, at the end of September, provisions created and relates to legal risk and claims resulting in court proceedings covered 85.6%. This is significantly higher than the Swiss franc coverage that have our peers with material Swiss franc mortgage loan portfolio and higher than the market average.Let me now briefly describe the recent trends, which are also the driver of our provisioning. The number of pending in real court cases concerning indexation clause increased by 1,588, reached now 21,590 cases, visible in the red bar chart on the right top. We have been observing a growing number of final court verdicts concerning the indexation clause in Swiss franc loan agreements. The number grew to 3,646, end of September.Moreover, the severity of verdicts also has grown. At the end of Q3 2023, 97% of the verdicts were unfavorable for us. On the positive side, we successfully continue our settlement program. As of the 30th September 2023, the Bank concluded 9,943 settlements. In Q3, the number of settlements signed reached 2,787 and was higher than in Q2.As of today, the number of settlements crossed the mark of 11,000. As of today, we have 11,031 settlements. What does this mean? It means we have not seen a slowdown in our settlement program. Our way forward is to conclude further settlements to be in control of our own destiny. This potentially means further legal provisions. The potential legal provisions for Swiss franc in the upcoming quarters depends obviously on a variety of developments, which are hard to predict. But to provide a guidance as of today, it seems that the cost of legal risk in Q4 should be between our bookings in Q1 and Q2.Moving to Slide 13, but I would say, this was already well covered by Cezary, so let's go directly to Slide 15, where we can see our loan trend continues to be negative. For Q3, we have PLN 121.4 billion loans to customers. The negative trend is driven by especially 1 structural reason, which I bring in a short moment in perspective.Starting with the retail loans, which went down in Q3 by 0.5 percentage points. Main driver is this mortgage loan portfolio, which is structurally impacted by our legacy book of Swiss francs. The Swiss franc rundown portfolio decreased by PLN 725 million quarter-on-quarter, including the reduction due to the created provisions. Without this structural effect, our mortgage loan book is slightly growing by PLN 158 million. Plus, the volume of non-mortgage loans increased also quarter-on-quarter by 1.2%, and it keeps our high margin.Turning to corporate loans, excluding FX effect and buy and sell back transactions, core corporate loans decreased slightly by 0.9 percentage points, aligned with the market development on a quarter-on-quarter. This stable development, also visible in our stable market shares in this respect, is a result of our selective approach in granting the loans in order to preserve high profitability, which is also proven this quarter, while loan margins in our Corporate segment increased slightly.Slide 16 provides our new lending business. Starting with the mortgage loan development. The sales of new mortgage loans slowed down quarter-on-quarter in Q3 due to a few reasons. First, our customers' expectation of a drop of NBP interest rates, which materialized also in September, plus the announcement of the safe credit 2% program pushed some demand to Q4.Second, our pricing aimed at optimization, which placed us rather among more expensive mortgage lenders. In our mortgage loan book outlook, we expect the positive trend of new sale, especially driven by the safe credit 2% program for Q4. In October, the 2% safe credit has accounted for almost 50% of mortgage loan sales and the sales increased significantly versus September. Therefore, Q4 is expected to be the best quarter of this year in terms of new mortgage loan sales.This positive trend of mortgage loan will be offset by shrinking loans of the non-core segment at the end of the year. Sales of non-mortgage loans increased by 9% quarter-on-quarter and remained almost unchanged versus Q3 2022. Most important for us is that within this growth, we kept our margin on high level. This reflects the strategy on our products. Positive to notice is also that the vast majority of non-mortgage loans, 81% are sold through digital channels, which leads to a highly efficient business model on our side.Our outlook is here; stable production while we keep high level of margins. Focus on sales of corporate loans went up by 8.3% quarter-on-quarter. The quarter-on-quarter increase was driven by K2 customers. Overdrafts and term loans had the biggest share in our structure of the new sales.And finally, on this slide, mLeasing continues a good performance. In 9 months 2023, the value of newly concluded contracts increased by 25.4% and here, we are well above the market. All in all, in our outlook, we are expecting a slightly growing loan book in [ corporate ] in the last quarter of the year. Stronger new sales will be slightly compensated by the seasonal expected [ end ] management of our clients.Now talking about deposits on the next slide. To comment the deposit volume development, it is important to note that our aim is to optimize the total income from deposits. So, every time the trade-off between pricing and volume. Taking into account our current comfortable liquidity situation summing up to PLN 185 billion, we have a comfortable position to optimize pricing further. This active deposit management by our 2 segments is the driver of our NII and led to improved margin and volumes on deposits in Q3, despite the dropping interest rates in September.The quarter-on-quarter increase was driven by current accounts, which grew 6.4%, while the term deposits went down slightly by 1.1%. The term structure of our deposit base confirms that we are a premier transactional bank. Current accounts represent 77% of total deposit base of the Group by the end of Q3. Therefore, we are well positioned when interest rates are going down.Taking into account our current loan-to-deposit ratio, as already mentioned by Cezary, the Group's deposit base is likely to decrease slightly, while we will have a strong look at our pricing of deposits in the next quarter.Follow up with the total income. Record level of income PLN 2.7 billion income in just 1 quarter is a historic high, and let me briefly comment on that. As outlined before, with respect to our deposit pricing strategy, you can see in the green bar on the left-hand chart, NII in Q3 increased by 3.8% quarter-on-quarter. The increase of NII was driven by higher NII from deposits while NII from loans remained stable, which is visible on the right-hand chart.Forward looking, we expect the NII lower than Q3, while our net interest margin is largely exhausted and interest rate cuts on the 7th of September by 75 [ service ] points and also in October by 25 basis points will be visible in our Q4 results. Moreover, our economic team predicts that the reference rate will be reduced by another 25 basis points by the end of the year, but Marcin will elaborate that later on.Let's have a look at the net fee and commission income with our Q3 at PLN 483 million. On the year-on-year development, I would like to remind us all that in 2022, we have charged deposit facility fees towards the outstanding balances at year-end as well as kind of end of month fees, which were connected to the negative interest rate, purely focusing on our corporate customers. But while the interest rate environment has changed, the justification for those fees also diminished.On a quarter-on-quarter development, we have slightly higher net fee and commission income, but this was overcompensated by higher net fee and commission expenses, driven by higher cost of services. Forward-looking, we expect for Q4, a similar contribution as we have seen it in the quarters of this year.Finally, one special explanation to net other operating result in Q3 2023, which stood at minus PLN 53 million. The negative result was driven by a one-off increase of legal provisions for future commitments for corporate clients, the details you can find in our financial report, Page 48 in the English version. To sum it up, we believe that the peak of revenues was achieved in Q3, and in Q4, we may see slightly lower total income.Let's go on Slide 19 to the costs. The operating costs increased by 2.1% quarter-on-quarter, Q3 is at the level of PLN 719 million. Main driver are personnel expenses in green, they rose 4.3% quarter-on-quarter and 25.9% year-on-year. Driver are wages, this will continue while we will keep our key people, and here, it's definitely noteworthy that mBank is perceived as one of the best employers in Poland via our pulse check, and this also supports us in the journey to keep our key place as well as we've seen increased headcounts in this quarter, mainly driven by IT. In addition, you see depreciation increased by 6.2% quarter-on-quarter and 7.9% year-on-year, due to new IT investments and project that implemented earlier.On the material costs side in blue, a quarter-on-quarter decrease was driven by lower cost of admin and real estate and slower costs of IT. On the annual basis, all cost categories increased, marketing expenditure and IT costs represent the main cost drivers. In the first 9 months, 2023, the normalized cost/income ratio of mBank Group adjusted for the annual contribution to the resolution fund and also adjusted for credit vacations, reached 28.4%, which confirms our best-in-class cost efficiency, again.In the subsequent quarters, cost increases versus Q3, as Cezary said, it will be driven by continued inflationary pressure affecting personnel and material costs, rising employment in selected areas and also depreciation related to implemented projects and new IT investments will be on the rise. Total costs in 2023 are expected to be lower than in 2022 due to the significant reduction of regulatory burdens.Moving to Slide 20. Net impairment losses and fair value change on loans were higher by 34% than in Q2. This especially is a result of LLPs created for corporate loans after 2 quarters of net releases in the Corporate & Investment Banking segment. Here, we have seen normalization. Consequently, after 9 months, 2023, our cost of risk amounted to 70 basis points. Though it was well below the strategic level of 80 basis points in the mid-term, we want to achieve that.Noteworthy is, Q3; here, our retail segment, the cost of risk in Q3 reached 100 basis points compared to 142 basis points in Q2. This is due to a model impact resulting from recalibration in Q2 and this elevated the cost of risk in Q2. On the Corporate & Investment Banking segment, as said, we have now a negative impact of PLN 94 million while the previous quarters were more or less driven by positive effects due to efficient management of our debt collection, also our restructuring unit.And it was clear that this is kind of an extraordinary situation and will now ease out. In Q3, we expect LLPs for a few -- or we have seen LLPs for a few individual credit exposures and not for any industries. The overall cost of risk in Q4 is expected to be higher than in Q3. For the full year, we expect to be higher than our strategic target in our cost of risk. For the next years, we maintain then again, our strategic target of around 80 basis points.Continuing on Slide 21 with our NPL development. In Q3, our NPL ratio increased marginally to 4.2%, visible on the right-hand chart on the top. With this average, the quality of our loan portfolio remains much better than the sector average. Published by KNF on August of this year, the sector average was 5.74%, and we are also well below the EBA limits of 5%.Looking at the splits of NPL, we see that the moderate upward trend tendency is visible in all parts of the portfolio. Especially, there is one structural effect, I would like to mention. This is the decreasing total loan exposure in retail, which is driven by our Swiss franc non-core portfolio. And in the corporate asset, it is driven by a few individual cases and not by asset quality changes of entire industries or sectors. We are obviously also closely monitoring the situation in the sensitive sectors. But going forward, we do not expect further worsening of loan quality. In contrary, asset quality will be supported by the gradual rebound of the macroeconomic scenario.Moving to Slide 22. As of the 30th of September, Tier 1 capital ratio stood at 14.6% and TCR amounted to 16.89%. As a result, a significant buffer of 4.6% above KNF minimum requirements for TCR and Tier-1 ratio is reported. Noteworthy, with respect to the capital requirement is that in September, the KNF confirmed that the O-SII buffer for mBank of 50 basis points will not be changed.There is still uncertainty concerning potential implementation of regulatory model changes which, if implemented, would have a negative impact on our capital ratio. But also furthermore, we expect that by the end of 2023, the FX add-on will be removed. But final ECB KNF decisions are still pending, so the full impact and the timing on the changes remain uncertain.With respect to the liquidity position on the right hand of the chart, we demonstrate one of the strongest in the market, evidenced by an LCR well above 200% and NSFR above 160%. These strong ratios are supported by our successful NPS, and those liquidity ratios give us ample space for active deposit management in Q4. Going forward, we're going to keep safe capital buffers above the KNF's minimum requirement despite the expected regulatory burdens we would see also in our capital ratios.With this, I'm handing over to Marcin Mazurek for the economic outlook
Thank you, Pascal. Good afternoon, everyone. So it seems that this year's GDP growth is looking not so spectacular. We are heading towards 0.4% on average. But this, I would say, mediocre result is overshadowing 2 important developments that were taking place. So, this GDP growth was brought down by a very negative inventory formation and also by the fact that consumers retreated a lot at the turn of the year, that was partially fueled by the fact that refugees went back to Ukraine.So far, the consumption is on the rise again. So, it seems that we passed the trough in consumption growth. Consumers are feeling better and better, which is portrayed by consumer optimism. Also, real wages and real wage fund has started to grow again in the next 2, 3 months. Therefore, we are seeing that there are good foundations for a solid rebound in consumption. Moreover, it seems that the labor market is still faring very well despite the fact that GDP growth is slowing.Unemployment rate is steady at 5%. And in terms of employment, we see only a very moderate drops confined to some sectors. Compared to the recent slowdown episodes, I would say, it's just negligible. So we expect that -- again, we expect that this year's GDP growth will be around 0.4%, but we expect a visible re-acceleration in terms of annual growth towards the end of the year and towards 2024.At the same time, inflation fell to 6.5%. Today, the Central Statistical Office published official figures for October. Inflation is falling, but -- well, I think that we have reached the lowest number for this year. And this fall of inflation masks also important developments since core inflation momentum stays at 0.5%. So despite strong disinflation in goods, core momentum seems quite elevated. That's why we think that the NPC may decide for another rate cut this year on next week's meeting, but afterwards, the path for lower rates would be rather hard to achieve.Turning to monetary aggregates, I think that we are following the recent trends. So, we have plenty of deposits on the market and also credit activity is rebounding. I would also like to draw your attention to the fact that at no other points in time during the slowdown, the ratio of deposits to GDP was so high as this time. So, I personally think that there are huge foundations for a rebound in consumption in the next few quarters.Moreover, it seems that consumers and firms deleveraged a lot. So, as for deposits, we had the highest ratio. In terms of loans for firms and households, we have the lowest ratio, and therefore, it seems that companies and consumers have much room to make credit activity more active in the next few quarters. Therefore, it's another factor stimulating the view that we are just a step before the rebound begins.Government yields are stable at around 5% to 6% right now. It seems that the risk for -- the political risk connected to elections has faded. And right now, the most decisive factors for interest rates would be economic cycle. So, so far, we think that there is no room to go much, much, much -- much lower from this point.As far as the exchange rate is concerned, also, we had some volatility before elections. Right now, the zloty is stronger than it was before elections, but still, we do not think that there is much room for improvement, especially in the next few quarters, since inflation is still too high. Thank you.
So, Pascal or Cezary, would you like to comment on our new financial targets?
Yes. We've done after more than 2 years sort of additional look into our strategy, and obviously, the environment has changed to the time when we launched our strategy, which I think in principle, talking about the major directions, the major, I would say, non-financial goals, I think that we are of the opinion that it has survived this -- its time, and I think that we'll continue the directions in terms of focusing on e-commerce, focusing on the ability to expanding the product range.So, I think that -- I would say, directionally, we are very much on track and we don't need really to intervene, maybe with some small exception of ESG, where obviously everything is in making, so that requires secondary look into this. But I don't think that the major goals are not valid.But when it comes to the financials, we -- after reflection, I think that there are 2 major aspects. One is that, we believe that after what has happened over the last 2 years, and we have more confidence that we will be able to manage the bank in terms of the cost/income ratio.And as you know, from number of meetings which we had over the years, cost/income is a very important management tool in this bank that we'll be able to manage the Bank slightly below 40%. Obviously, as I said in my introduction, 28% is not something which is sustainable, but we are targeting to be below 40%.The second issue, while we are getting more realistic, and I think that again returns back to my introduction, that both the market plus still lots of unknowns in front of us and not clear regulatory environment does not provide for very strong expansion of our loans. And on top of that, obviously, under the current circumstances was the -- our capital management and the necessity really to continue to buffer ourselves vis-a-vis the Swiss franc portfolio in this unclear environment, we are of the opinion that our loan growth will be under more pressure, so we lowered down the appetite in this respect.Deposits, we believe that they continue to grow and what transactionally attracts clients and structure of the funding which we are getting from clients, as it was already commented by Pascal, I think is very attractive. But on this front we came to conclusion. That not necessary we'll be fighting for the volumes, specifically since our dynamics of the loans is under the pressure. So, as a consequence, the revenues will be under more pressure than we have originally expected.On the other hand, we are more positive on net interest margin which used to be slightly above 2% and at least 2.5% under the previous assumptions was like ambitious, but I would say we've been -- we've got spoiled after experiencing 4% and I think that we will try to manage the bank in the range of 3% and slightly above.Plus the returns as a target, we are getting into the more ambitious zone of 14%. This is reflected in our assumptions on variety of other fronts. So managing the capital and the revenue side and the cost side, I think that we will be able to deliver 14% and above. Much depends, obviously, on the issue of how much we'll be still impacted by the Swiss franc portfolio and consequences of this unclear and the controversial line of jurisprudence which survives in Poland for the time being. Thank you.
Thank you, Cezary. Now we will move on to the Q&A session. Some of the questions have been already commented during the speech, but let's look at the other questions. Could you please provide more details on the provisions related to [ derivatives ] transaction? Do you expect such cases to repeat in the future? If so, how large could this problem be?
I'm taking that. So on Page 48 in our consolidated financial statements, we provide all the details with respect to this transaction. Nevertheless, the provisions for future commitment, this includes, among others, this PLN 79 million for the loss in the second instance of a court case brought by Bank's corporate clients regarding the validity of this sales transaction. And we expect on other cases that we are currently having positive verdict assumed because the claims do not relate directly to the same FX instrument. So I guess this is then indirectly also covering another question.
What is your assumption for NII dynamics in Q4?
I mean, we currently guide that we will be lower than in Q3 due to the effect that we see this 100 basis points lower interest rate scenario on a quarter-on-quarter basis, therefore, we expect lower income.
I suppose that the full effect of securitization deal will be recognized in Q4?
Exactly. Until end of year, we will have recognized this 0.9 percentage points, and currently you see reflected in the Q3, 0.5 percentage points.
Are you experiencing an increasing number of Polish mortgage lawsuits?
No, I think that on this front for the time being, we haven't observed significant movement. I think there is more in media than in reality.
Is the future growth in number of Swiss franc related court cases in October?
No, I have to say that obviously, we have steady flow, but it's very interesting -- I think that October was -- don't know whether it was the first months when we had more settlements than inflow of the court cases. Interesting phenomena is as well that there is a growing number of settlements which we reach with the clients who are in court with us, which is promising development. It's premature to say that it's a tendency but that is something what we observe.
I think we commented on the question, what is the outlook for risk costs in 2024?
But that's -- maybe to repeat, so for this year, we expect in Q4 versus Q3 an increased cost of risk and also that we will then be higher than our mid-term target of 80 basis points cost of risk. For the upcoming 2 years, we expect to be back to our trajectory of having the mid-term targets achieved, obviously, accelerating round. But that's for '24 and '25.
Could you please repeat your comment on capital position? You said something about regulatory uncertainty, did you mean regulations specifically related to capital or the general uncertainty regarding the Polish banking sector like credit holidays, etc.?
I was referring more to the uncertainty than something what is very tangible on the horizons. And as we have experienced over the last few years, it's very difficult to operate in this environment because the stability is not something what characterizes the Polish market.Well, we have some hope that with the new government, there will be more rationalization on this front and these excesses which has happened will not necessarily be continued. We also hope for the better dialogue as an industry with the regulators and respective institutions.
Just to add up on that topic, while I also stated, and maybe this is referring to the topic that I stated that we still have uncertainty due to the potential regulatory model changes on EVA guidance, etc. we're seeing, because here, we see still that we are having an implementation phase, but we are not yet having assurance on when and which kind of magnitude it's taking into account.Nevertheless, same point in time, I would like to refer to our significant buffer currently of 4.6%. I'm above the KNF minima, plus the 2 messages I wanted to send at the same time that we will keep the O-SII buffer on this 50 basis points plus that from our current perspective, by end of year, we expect that the FX add-on will be reduced. We do not know the timing for sure because it needs to be a KNF and ECB decisions to follow-up. But overall, this was the message we wanted to send.
Do you see a trend of rising claims or complaints regarding the Polish zloty cash loans?
[ The timing ], not.
You assume a revenue CAGR of 2022 to '25 of 45%, but '20 to '27 of 7%, why the big increase in revenue growth in '26,'27?
I mean, this is then a long shot to 2027, therefore uncertainties are, but in our current planning assumptions, we see inflow of deposits also then growing asset side. Therefore, on the NII, you will see on a kind of stable interest rate environment, yes, growing balances and plus that, obviously, our initiatives, which we are placing in terms of increasing our net fee and commission income paying off step by step.
Can you comment on NIM sensitivity to 100 bps declining rates?
Yes. So as you know, we do not update our delta NII in the Q3, but we have shared with you in our half year report. And in the half year report, we stated that PLN 670 million is our delta NII in this static balance sheet approach, if we reduce by 100 basis points. But just 55% of this PLN 670 million, yes, at that point in time, so roughly PLN 380 million are affecting the Polish interest rate market. And this is still a valid guidance. So if you take around PLN 700 million as...
PLN 704 million.
Exactly, as the best possible idea on the delta NII.
Why will Q4 '23 cost of risk be higher than 3Q '23? Do you see any asset quality deterioration?
So, we don't see any asset quality deterioration also as stated in my part of the elaboration on our presentation. Nevertheless, we expect 2 different things might happen in Q4. The first thing is kind of a model change. We want to be aligned with international standards and a bit more conservative when we push our clients into Stage 2. And this could cause then an increase of our cost of risk in Q4. It's one-time effect.And secondly, we, at the end of the year, review also our corporate clients, customers on the back of the current financials and we might see single cases occurring. Therefore, we guide Q4 higher than Q3. And also then total year higher than our strategic target. But there is no deterioration of assets from our perspective. It's the contrary, while we see economic rebound happening by next year also, as elaborated by Marcin and that's as far as it gets.
Are the MREL requirements met or will they be met at the end of '23?
Clearly, currently, we meet the MREL requirements, and also thanks to the non-preferred senior transaction, we just issued, we also expect to meet the MREL requirements at the end of the year.
You will soon be at 100% Swiss franc coverage. Do you think it is likely that the figure can go above 100% in 2024?
Yes, right. What should I say? We've been commenting on the notes, in terms of the jurisprudence and a variety of our other aspects. Yes, I would say -- I'm not saying that 100% as it is being stated, you know, currently must be the end of the game, I would say. I will keep this as an open issue. Yes.
The press -- was the press comment for the impact of credit holidays extension for 2024 based on the proposed by the Council of Ministers? In which segment the loan growth was trimmed most?
Can we repeat?
Was the press comment for the impact of credit holidays extension in '24 based on the proposed by the Council of Ministers? In which segment the loan growth was trimmed most?
To be honest, I don't follow the question. The issue is that, yes, we have heard the announcements by the outgoing government. We have some estimates, how much it potentially can impact. The rage is PLN 300 million to PLN 400 million. Lots of money, to be honest. And I don't think it's justified. This is reflecting the structure of our client base. But otherwise, I don't think that anything I can add to this.
I'm just adding -- I mean it's definitely from our perspective, too early to tell anything in details about it because we have a rough intention, yes, and also some guidance on how this would look like. For certain is, therefore, what Cezary said, is a number that if we look into the details, it would have had, if this is then passed at one point in time by the new parliament, a lower impact than what we currently would have seen in the past, obviously, to calculate it for 1 year, because our previous credit vacation were for 2 years. Nevertheless, from our perspective, too early to comment in detail.
Well, I have to say, I strongly believe that the perspective of these credit holidays are remote.
I think the last one, what do you think a [ Tosca ] government would change for the banking industry?
I would say it's too early to say. I have expressed a small dose of optimism, but I don't think that this is something what, you know, at this moment we can comment on. In principle, I believe that there will be more rationalization of the approach to the banking sector. We think that the banking sector has suffered over the last few years, something what has been reflected in its high efficiency and very low profitability. But that's the reality we have operated in and I think that's how we will see what the new government and you know, we hope for the better dialogue.
Thank you very much. We covered all the questions. So, thank you for your attention and see you next year. Bye-bye.
Thank you very much.
Thank you.
See you.