mBank SA

WSE:MBK

Earnings Call Analysis

mBank's Record Income Growth Despite Challenges

In Q3 2024, mBank achieved record total income exceeding PLN 3 billion, a 9% increase from the previous quarter, despite challenges from credit vacations. Net interest income (NII), adjusted for credit holidays, grew by 1.6%. For Q4, NII is expected to be slightly lower, but total income for 2024 should exceed PLN 11 billion, nearing PLN 12 billion. The cost-income ratio remains below 30% for 2024, while provisioning for Swiss franc mortgages continues. Moving forward, revenue is expected to be higher than PLN 11 billion in 2025, although a decrease in NII is anticipated due to interest rate cuts.

Record Financial Performance

In Q3 2024, mBank achieved its highest total income in history, exceeding PLN 3 billion for the first time. This is a significant milestone, driven by a 9% quarter-on-quarter increase. Net Interest Income (NII), adjusted for the impact of credit vacations, grew by 1.6%. Additionally, net fee and commission income increased due to higher commissions from bank accounts and payment cards, evidencing strong operational performance as the bank transitions back to growth mode.

Guidance for Future Growth

Looking forward, mBank anticipates that total income in 2024 will exceed PLN 11 billion, potentially reaching closer to PLN 12 billion—a historic mark. The guidance for Q4 indicates that NII may be slightly lower than Q3’s levels, but overall, full-year figures will still show growth from the previous year, even after accounting for credit vacation impacts.

Cost Management and Efficiency

The bank reported a total cost increase of 4.1% quarter-on-quarter, primarily due to heightened material costs related to marketing and consultancy. Despite this, mBank expects to maintain a cost-to-income ratio below 30% throughout 2024, aiming for low double-digit cost growth in 2025 while ensuring that the ratio will remain below the strategic target of 40%.

Impact of Regulatory Changes

Regulatory changes are influencing mBank’s risk-weighted assets (RWA) and capital ratios. The bank expects a cumulative 175 basis points cut in interest rates during 2025, and is preparing for potential increases in RWA resulting from the implementation of new capital requirements. Nevertheless, they maintain a strategic target ensuring that Tier 1 capital remains comfortably above statutory minimums.

Stable Loan and Deposit Growth

mBank witnessed a continued upward trend in its loan portfolio, with a 2% quarter-on-quarter increase. Retail loans increased significantly by 3.4%, primarily in mortgage lending, where the bank achieved historic sales levels exceeding PLN 3.3 billion. Deposit growth mirrored this success, rising 3.2% quarter-on-quarter, signaling strong client confidence in the bank's offerings.

Handling Swiss Franc Mortgage Risks

The bank continues to actively address potential risks associated with Swiss franc mortgages, having increased legal provisions to PLN 971 million. However, new court cases have decreased significantly, down 46% year-on-year, indicating that mBank is moving closer to resolving its legacy issues. The cumulative value of FX-related legal risk remains under control, with the bank predicting that the impact of Swiss franc provisions will diminish in the coming quarters.

Conclusion and Investor Outlook

Overall, mBank is showing resilience and excitement for future growth. With strategic initiatives in place and a strong focus on managing costs and risks, the bank is well-positioned for sustained performance in a challenging economic environment. Investors should monitor the bank's execution of its growth strategies and regulatory adaptations closely throughout 2024 and beyond.

Earnings Call Transcript 2024-Q3

[Joanna Filipkowska, executive]

Hello, and welcome to our conference presenting the results of mBank Group in the Third Quarter of 2024. The speakers today are Mr. Pascal Ruhland, Chief Financial Officer; Mr. Marek Lusztyn, Chief Risk Officer; and [indiscernible], economist from our Macro team.

Please use the chat to ask your questions. We will start the Q&A session after the presentation.

We can start.

[Pascal Ruhland, executive]

Thank you very much. Welcome also from my side to our Q3 call. And for us, Q3 stands for positive records in our business model. And also, we took another important step forward to close our Swiss franc legacy topic, but now we start our highlights on Slide 3.

And on this slide, I would like to outline 3 topics. First and foremost, total quarterly revenues at a record level exceeding for the first time, PLN 3 billion, so more than PLN 1 billion total income per month. The leads to an ROE higher 40% in our core bank, and that is really something we are very, very proud of. And second, we see an acceleration in our Swiss franc settlement program, coupled with declining numbers of new and pending Swiss franc related court cases, which is a good proof that we are heading in the right direction.

Third, we are back in a growing mode. Loan growth is visible 5% year-on-year and extraordinary is our historic mortgage loan sales in this quarter, which exceeded PLN 3.3 billion.

Before we go into the details of the financial results, I would like to briefly point out 2 strategic topics. So let's stop for the first one on Slide 5. Even if this slide is kind of self-explanatory, while we're developing every time our offers, please turn your attention to the middle part in orange. With our platform, we are now reaching 5,000 clients, but this is still in the testing and learning phase. Our teams are working hard to launch at full scale before Christmas, so with 1.5 million products and almost every one of our clients will have access and the opportunity to shop. This big launch will be supported by campaigns and, we expect that this service adds value to our customers. But we also know that we need to listen carefully to implement the feedback step by step to improve our platform.

The second strategic topic I would like to highlight is on Slide 7. Please focus on our personal financial management functionalities, short PFM, right-hand top. We are constantly expanding those functions. And apart from standards like overview of expenses and receipts, we provide our clients the functionalities that support them to take care of their financial health. And that means building greater awareness of their finances, but also giving them the ability to plan their future. In Q3, we introduced a few important improvements, also one in the area of retirement planning, which is immediately welcomed by our customers. As a result of several efforts to make our tool more useful, we've recognized the jump of number of users to nearly 1.9 million. And on this journey to provide knowledge and visibility regarding our customers' financial situation, we will continue.

And now let's jump into the financials on Slide 8. As usual, on this slide, I also will provide you with an update of our guidance for Q4, and I will provide a high-level outlook for 2025. Let's start with our total income. As said already in Q3, we reported the highest total income in history. It increased by 9% quarter-on-quarter. But you also can see that the major driver between the 2 quarters has been the impact of credit vacations. Less demand than expected have resulted in a net release in Q3. Excluding this impact of credit holidays and also cleaning our one-off in Q2, which was KUKE, a PLN 164 million, our revenues still went up quarter-by-quarter by 1.9%. NII adjusted for this credit vacations grew 1.6% quarter-on-quarter. And at the second point in time, we've seen a slight decrease of our net interest margin from 4.4% to 4.3%, but without any specific driver rather than broadly.

Also, our net fee and commission income increased quarter-on-quarter, especially due to higher commissions from bank accounts and net result on payment cards. Other income in Q3 was also higher than Q2 if you exclude this KUKE one-off and was mainly supported by the increase of net trading.

Forward-looking, in Q4, we expect for our NII, excluding the impact of credit holidays, to be a bit lower than the level generated in Q3. This means for the full year, we expect to be higher than a year ago, even taking into account the negative impact of the credit vacation.

Our total net fee and commission income in 2024 was supposed to be higher than 2023. In Q4, our net fee and commission income is expected to be slightly weaker, but this has a seasonal effect. As a result of all of it, we expect total income in 2024 exceeds noticeably PLN 11 billion and will be closer to PLN 12 billion, which is a historic mark for us.

For 2025, we expect a slight decrease of NII driven mainly by expected interest rate cuts. And our net fee and commission income is expected to grow further steadily based on our new products, fee tables and also the expected higher functionality of our clients.

Overall, we expect, therefore, revenues to be slightly lower in 2025 than 2024, but well above PLN 11 billion.

Moving now to the total costs. The total cost of the group increased by 4.1% quarter-on-quarter. The cost increase was driven by material costs, reflecting mostly higher marketing and consultancy costs. In Q3, we reported again extraordinary cost/income ratio of below 26%, and in Q4, this ratio is likely to increase. But for 2024 in general, we expect to remain below 30% cost of income -- cost income ratio due to our persisting high interest rate environment we are working currently.

For '25, we expect due to new initiatives, but also inflation-related pressure, a low double-digit cost growth. And the cost/income ratio will increase, therefore, but will stay well below our -- below 40% target. The cost of risk in Q3 were 62 basis points and is below our strategic target, and Marek will elaborate on that fact later on.

In Q4, we expect an increase of the cost of risk partly due to seasonality of corporate write-offs. But for the full year, we guide around 60 basis points cost of risk and maintain midterm, our view cost of risk of 80 basis points.

Coming to the Swiss franc-related risk. We increased our legal provision by PLN 971 million. And as guided, this is significant, but lower than in the previous 2 quarters and also Marek will explain the details in a few minutes. Due to the complexity and various dependencies, you know it's every time hard to guide, but we do our best here. So from today's perspective, we expect Q4 between a similar or slightly lower level than Q3. Therefore, it will stay significant. But based on our current estimation of the remaining risk, we expect every following quarter supposed to be lower than the previous one, while we are approaching, step by step, the end of a long story.

As a result of all P&L items, you see the net profit of PLN 573 million, which translates into an ROE of 14.9%. If we exclude the impact of the FX legal provision, we have generated the strongest quarterly net operating result in the history of mBank. And one comment on the tax rate. This, we calculated in accordance with IAS 34 stood at 41.8% and was, as in the last quarter, heavily influenced by barely deductible costs of our legal provisions.

And now let's move to the balance sheet on the next slide. End of September, total assets were higher by 3.6%. Gross loans to customers increased 2% quarter-on-quarter, while customer deposits went up by 3.2%. Both business segments contributed to these increases, and I will go into details later on.

And now let's go into the capital ratio development on the next slide. Both capital ratios, Tier 1 and TCR remain at comfortable levels with the buffers, and you see it highlighted in gray above the minimum KNF requirements at 4.76 percentage points and 4.31 percentage points. Now very briefly, going into the development left top of the slide. Since the beginning of 2024, Tier 1 capital increased by 5.6% versus end of 2023. And this is mainly due to the inclusion of our net profit of the first half. Our Tier 2 capital went down, as you can see, mainly due to regulatory amortization and FX revaluation of our Tier 2 instruments. Consequently, the own funds of the group increased by 1.4% year-to-date. The total exposure, risk exposure, as you can see left bottom of the slide, increased. A quarter-on-quarter increase in RWA was fueled by business development and the amortization of securitization transactions.

Forward-looking into Q4, our Tier 1 ratio is expected to decrease due to 3 factors. The first one, we expect a negative impact from model and regulatory changes in RWA. Here, we expect PLN 6 billion of RWA increase as a result of a final regulatory decision on PD, CCF and LGD, and this is related to our portfolio subject to IRB model.

Further business growth will also fuel RWA. And last but not least, RWA amortization of our securitizations executed in 2022 will continue. Those 3 items will be partly offset by the new securitization transaction based on corporate loans, with an estimated impact on RWA reduction by over PLN 2.5 billion RWAs and the inclusion of our profit from this quarter. To sum it up, the surplus over the KNF requirements will be well above our strategic target of year-end buffer of at least 2.5% on the Tier 1 ratio.

And now looking beyond 2024. There are 2 regulatory-driven changes, which I would like to guide while those are expected to be significant. First, our RWA is expected to increase due to CRR implementation by around 6%. And please use this as a rough guidance as key technical standards are at the start stage, and the final impact is still uncertain.

The second topic I would like to mention is still in decision process with the banking authorities that has a material change on the RWA to be expected and is known as GDD, the timing impact will depend on the decisions of the banking authorities, so this might be even later than 2025. But having said that, even if it's in 2025, we expect to stay above our strategic target of at least 2.5% on Tier 1 ratio by end of 2025.

And now one last sentence on the capital ratio. It is our aim while the Swiss franc-related risk step by step is reduced, that we are operating a capital ratio, which is closer to our strategic target, while we would like to put our capital to work.

Moving to the right-hand top of the slide, as you can see, also we meet comfortable MREL requirements with a ratio of 23.3%. And this is also due to our latest transaction which I would like to comment briefly on the next slide.

Slide 11 shows the successfully launched PLN 500 million senior preferred green bond. The transaction for us was an overwhelming success. We were almost 6x oversubscribed with more than 200 investors submitting interest for the bond in a volume close to EUR 3 billion. This is the best feedback we can have in a very good basis for the following slides.

We're excited to tell you about an upcoming capital markets innovation from us, and we are working on finalizing our additional Tier 1 transaction. This will be not just the first one for us as mBank, but also the first broadly distributed AT1 for the Polish market. And as most of you likely know, it's just possible since end of last year because the law was passed. We are doing this transaction in order to strengthen the capital base and position us for further growth in volumes and market shares. We have corporate authorization to do a transaction up to PLN 1.5 billion and the transaction is being done in Polish zloty in order to support the development of the Polish capital markets, but also we minimize IFRS P&L volatility if we do it in the local currency.

We expect strong participation in particular from our colleagues in the Polish capital markets community, and we appreciate that. While this transaction will open up a new tool for the banking sector to support the economic growth of this country. Our book building will close on the 15th of November.

And with this good news, I'm now handing over to Marek in our FX mortgage details.

[Marek Lusztyn, executive]

Thank you, Pascal. So as you can see on the following slide, it was yet another quarter with a strong provisioning for Swiss franc mortgages. We were also very active with respect to the continuation of the settlement program with the clients. Overall, we have concluded by the end of September in 19,500 settlements, but we carry on even faster in October. And I'm happy to say that we are not slowing down. We have concluded over 1,100 settlements in the month of October standalone.

As you can see on the Slide 13. Overall, cumulative value of the FX-related legal risk that we have created so far is almost PLN 16 billion, out of which PLN 7.9 billion remains on the balance sheet and the other half has been used to complete the verdicts that we have received from the courts, as well as to conclude the settlements. Overall, the value of the Swiss franc mortgage loans stood at less than 1% of the total loan portfolio.

We see a slowing number of new court cases entering mBank. It is down 46% year-on-year. We also do not see a significant increase of the lawsuits related to the repaid contracts. It's also good to highlight that this was the first quarter in which the number of actual settlements concluded was larger than the number of contracts still open in courts. And since we are coming to an end of the active population, as Pascal already alluded to earlier, we expect that the following quarter's provisions will be gradually smaller and smaller.

And this brings us to the following slide, which you are very much used to, which is the breakdown of the core business and non-core showing how strong performance in core business, we have demonstrated in the first 9 months of 2024 and Pascal, over to you.

[Pascal Ruhland, executive]

Yes, let's move to Slide 17, our loan development. We see the rebound of our loan portfolio is now turning into constant growth, 2% quarter-on-quarter, visible in both business lines. And let me first focus on retail right-hand bottom of the slides. The upward trend in loan to individual clients initiated in Q1, as you see, strengthened in Q3. Gross loans to individual clients increased by PLN 2.3 billion or 3.4% quarter-on-quarter. If you would exclude the non-core business or the Swiss franc, we had increased by 4% quarter-on-quarter and 7% year-on-year. The mortgage loans increased here 4.4%, while the nonmortgage loans grew by 3.2%. The margin on the retail launch in Q3 declined slightly, but was higher, visibly higher than a year ago.

Moving to Corporates, right top. Loans and advances through corporate clients increased by 0.4% quarter-on-quarter. The core corporate loans, so if you exclude reverse repo buy and sell transactions went up by 1.9% quarter-on-quarter and were higher than a year ago by 7.2%.

And as guided before, we are growing over the market, Loans to enterprises in the sector grew by 3.4% year-on-year in September. And if you compare that to mBank, we have grown 8.1%. The loan margin in the Corporate & Investment Banking segment remained stable which shows that we can currently grow without making compromises on our profitability levels. Going forward, we are aiming to gain market shares with single-digit increases in the loan portfolio. Especially we aim for higher growth than the market in our corporate books.

Slide 18 provides our new sales, and I will explain just very extraordinary developments. Starting with our sales of mortgage loans, left top of the slide, which exceeded EUR 3.3 billion and is a historic mark for us. This shows that the runoff of the subsidized mortgage loan products was more than offset by our core franchise. Thanks to more attractive pricing and increased efforts of our sales forces.

We sold the mortgage loans primarily to our own customers, while we have seen high demand. mBank share in the new mortgage loan production reached 12% after 9 months and was above roughly 7% if you take the corresponding period last year. This shows that we are back in a growing mode whenever it makes sense, and especially it makes sense for us for our own customers.

Going to corporate loans, left bottom. The volume decreased by 4% quarter-on-quarter due to falling structured finance loans after excellent sales in the previous 2 quarters. In 9 months of 2024, the volume of new corporate loan agreements increased by 6.9 billion or 32%. So it's slightly quarter-to-quarter decrease in sales of corporate loans is for us not really disappointing as we have already a very high off-balance sheet exposure, and we are waiting for the clients to draw the loans.

And finally, at the right bottom of the slide, a quarterly amount of new leasing contracts in Q3 declined sharply. This decline is related to small amounts of big ticket business generated in Q3 and also a general slowdown in the leasing market, especially the heavy transport market, which can be measured by the number of new registration, which is a barometer of the economic situation, has shrunk.

And now let's go from loans briefly to deposits on the next slide. Total deposits increased by 3.2% quarter-on-quarter. The quarter-on-quarter increase was driven by inflow of funds of individuals and corporate customers. And at the end of Q3, you see our current accounts represent 80% of the group's deposit base, which confirms that we are a premier transactional bank. The loan of deposit ratio is still low 64%. In the next quarters, a single-digit deposit growth will be driven mainly by retail deposits, supported by growing customer base and increased wages and salaries.

The corporate deposits are intended to grow at a pace similar to the market which we currently forecast between 3% and 4%. While I already elaborated the total income slide in our others slide, I skip it, and let's go to the cost slide and our cost income ratio.

You see that on the right-hand top in purple that our adjusted cost income ratio of 28%, those how effective our business is operating. And if you look into the quarter, the operating cost increased by 4.1%. And within the quarter, we just had one major driver in blue material costs. They increased 9.5%, and the increase was especially driven, as I already said, by higher marketing costs and also higher consulting costs.

Our outlook based on this 28% provides a further growth of operating costs to Q4, and the growth is not just inflationary related. We also have new sales initiatives and regulatory costs, which will be funded. And I repeat myself on the guidance of 2024. The cost/income ratio is expected to remain below 30% in 2024.

For 2025, we expect a further increase of the cost base driven mainly by growing staff costs, and we expect the growth pace, excluding BFG costs to be similar to 2024. The BFG costs supposed to be higher year-on-year while we consider 2024 as beneficial.

For 2025, we expect the cost income ratio, which will stay below our strategic target of 40%.

And with this good note, I'm handing over to Marek.

[Marek Lusztyn, executive]

Thank you, Pascal. So as we can see on Slide 22, credit provisioning in Q3 at a normalized level, well below the annual guidance. As Pascal said, we expect the end of 2024 to be broadly in the area of 60 basis points for the midterm, we continue to guide around 80 basis points. And that low level of provisioning was supported by good assets quality and a decrease in NPL ratio, which is displayed on the following slide.

The NPL ratio was considerably below the European Banking Authority guidance where the threshold is below 5%. And we have seen improvements both on the corporate portfolio and on the retail portfolio side with coverages unchanged quarter-to-quarter.

And with this, I'm happy to hand over to our macroeconomist with a brief outlook on the macro situation and where do we see economy and rates going forward.

[Unknown Executive]

Thank you, Marek. So I will start with the overview about the Polish economy. Recently, we've seen consumer sentiment stopped improving anymore, and as optimism regarding falling inflation faded. Customers have recently rebuilt their savings over the course of the past months. And now we think that they are less likely to consume significantly as real wages won't accelerate anymore.

On that account, GDP growth is likely to average at around 3% in '24 and around 4% in 2025. Investment growth is likely to be the major contribution to GDP growth over the 2025. As we expect EU-led projects to accelerate significantly and also some military spending to contribute positively.

Inflation is likely to stay elevated over the course of the rest of this year and to pick up to some extent in Q1 2025. And then we expect a gradual decrease towards the NBP's target due to slower nominal wage growth and costs being more and more absorbed by profit margins being inflated over the past 2 years in the Polish corporate sector. Overall, in that environment, we expect NBP rates to be cut by cumulatively 175 basis points in 2025.

And moving to the next slide. Both corporate and household loans are slowly but surely improving. It will continue to do so in '25 in the face of lower interest rates and rebounding investments, as I said previously.

Markets Bond Yields were little changed so far this year until October when we saw some substantial increase, which we believe was predominantly driven by core market behavior and to less extent to -- by domestic effect. We think that the credit risk measures remain quite stable, and we don't expect those measures to increase significantly.

In terms of the FX market, we think we also saw some decrease in the case of the Polish zloty against the euro. And the major reason was weaker U.S. dollar, which has been -- sorry, stronger U.S. dollar, which has been gathering pace against basically each currency.

Moving forward, we see -- we think that the Euro PLN may stay elevated at around 4.4% over the 2025, and the major reason is also strong U.S. dollar due to the fact that the divergence in productivity growth between the U.S. economy and Eurozone, it simply favors weaker euro.

And the next slide is the fundamental view of the Polish economy, which looks uninterruptedly robust with real GDP growth outperforming its peers. Labor cost competitive and a pool of people who can be motivated to -- who can be mobilized to enter the labor market and thereby is some pressure on wage growth going forward. Judging from these factors, we believe that Poland will be a beneficiary of near-shoring trends in the years to come.

And that's all for me. Thank you.

[Joanna Filipkowska, executive]

Thank you very much, [indiscernible]. So now we are going into the Q&A session.

[Joanna Filipkowska, executive]

So far, we received only 3 questions. So please add your questions to the chart. The first question is from [indiscernible]. Will mBank decrease interest on deposits if the central bank stops paying interest on mandatory reserves?

[Pascal Ruhland, executive]

I'm taking the question. So first of all, if there is a change in the mandatory reserve, I would say, interest rates towards the banking sector. In general, this has then a drag down of the profitability of the banking sector. But there is no directly pass-through idea, which is automatic towards the deposits pricing we would then get because there are more factors than the minimum reserve taking into account. So I would say there is no direct translation. But for the banking sector in general, it would then lay on the profitability.

[Joanna Filipkowska, executive]

Thank you, Pascal. Another question given many regulatory changes in the risk-weighted assets composition you just explained and mid- to high single-digit organic growth, where do you see the risk-weighted assets at the end of 2025 and what would be your comfortable CET1 and Tier 1 ratio going forward post AT1 issue?

[Pascal Ruhland, executive]

Yes, I'm also taking this question. I mean I really tried to guide as fast as possible on the regulatory front because there's with CRR and GDD 2 things from our perspective, which are changing the RWA landscape. But at the same point in time, what I also announced, and I just repeat myself, we have a strategic target of the Tier 1 of at least 2.5% above the KNF minima. And that is also something we maintain also after especially our AT1 transaction. And this includes that we are aiming for growth.

[Joanna Filipkowska, executive]

Another question. What drove the increase in deposit costs this quarter?

[Pascal Ruhland, executive]

I'm also taking that. I mean deposit cost is a very complex environment. But in general, what drove this time and therefore, also it was laying on our net interest margin was more in the corporate sector that we've seen in the term deposit side that we needed to be more competitive, and that was one of the drivers.

[Joanna Filipkowska, executive]

Do you consider issuing new midterm strategic KPIs like your peers? As some of current one for 2025 appear undemanding since quarters actually.

[Pascal Ruhland, executive]

Can you read it out once more, please.

[Joanna Filipkowska, executive]

Yes. Do you consider issuing a new midterm strategic KPIs like your peers as some of current ones for 2025 appear undemanding?

[Pascal Ruhland, executive]

We are not issuing -- we are not planning to issue now new KPIs for 2025, but you also know that we are currently conducting and started a strategy process. And we will announce then our new targets probably in autumn next year. Nevertheless, I try to guide the 2025 expectations from our side as I was running through at the beginning through our P&L, and that is obviously something which is our new target, while we want to deliver on what we've guided.

[Joanna Filipkowska, executive]

And last one so far, when does mBank management see FX mortgage provisions sunsetting finally?

[Pascal Ruhland, executive]

Here, we also try to guide. We see that the risk is step-by-step materializing getting lower. And from our perspective, there is no clear end yet, while we see that every single quarter we expect to come will be less impactful. And if you want to sum it up, we expect that to a large extent, we have dealt with by end of 2025.

[Joanna Filipkowska, executive]

Thank you very much. This was the last question. I can see online. So thank you very much for your attendance, for your questions, and have a lovely weekend.

[Pascal Ruhland, executive]

Thank you so much.

[Marek Lusztyn, executive]

Thank you. Bye-bye.