mBank SA

WSE:MBK

Earnings Call Transcript 2017-Q4

[Joanna Filipkowska, executive]

Good afternoon, and welcome to this event which will introduce you to Q4 results of mBank Group, our non-audited financial results.

Without further ado, over to our CEO, Mr. Stypulkowski.

[Cezary Stypulkowski, executive]

I am more and more revolutionary with time. I don't like to repeat myself, so I hope you will be amenable to changing the format. Instead of having a boring presentation, why don't we take your questions, unless you think it's better use of your time if we speak and you listen.

What I suggest is quite simple. Why don't we move on to Q-and-A? By show of hands, anyone who would like to have a proper presentation?

Well, then let's stop at that. No. But we'll give you a brief outline of the highlights on our part and then we'll move on to your questions. I think this will be more productive.

So our revenue looks good. We're happy with income levels. Although Q4 wasn't that good with net fee and commission income, but I wouldn't be too concerned with that. The trajectory of NFI is still positive and the trend is bound to continue. We should hit PLN 1 billion of net fee and commission income. But one proviso here: The transition that has been initially announced, the sale of some insurance cash flows means that we are still unable to quantify exactly the NFI, so we'll probably announce some guidance after Q1. But all in all, the core business of the bank, our transactionality, including cards, mobile payments, it's looking very good and we are happy.

NII up 10%. The NIM has improved. Clearly, this has been largely driven by the fact that while we have a relatively more demanding balance sheet in terms of liabilities as compared to other banks, and we pay a price for that, our transactionality provides more cash flows. So NIM improvement is largely driven by optimization of our liabilities.

Costs; as we've said on other occasions, we look at cost income ratio rather than the nominal volumes. We try to be quite consistent at the bank by maintaining stable workforce levels. We think this is the main cost driver. We don't think we have too big a headcount. Our revenue per employee or profit per employee are among the highest in the sector. So this looks good.

Balance sheet; loans, mortgages are dropping, CHF 400 million of repayments every year, so the portfolio is shrinking. And of course, nominally the values have changed due to the appreciation of the zloty against the Swiss franc. So the mix is changing. We have a growing share of cash loans, which doesn't really affect our risk profile, although in the long term it is likely to decline because this is a different kind of business.

As for our retail loans, they grew quite consistently, as did corporate loans last year, so the deposits with a growing share of current accounts at the cost of term deposits. Our capital base is self-explanatory. We have one of the highest capital ratios in the sector. This is suboptimal of course. But we're not fully accountable -- cannot be held accountable for the situation as we remain under regulatory pressure and can react reactively.

Well, to anticipate your questions about dividends, we would like to payout a dividend according to our estimates based on recent KNF statements. The 20% threshold seems to be within reach, but I've lived too long not to expect a potential letter from KNF even the day before our AGM, so we stay conservative. But that would be our ambition and we think that we have real room to payout a dividend, obstructing from requirements, buffers, regulatory requirements, et cetera.

I think we had the best structure of funding on our balance sheet among all Polish banks when it comes to the diversity of sources of funding, the maturities, which involves a certain cost. We are a frequent issuer on the market. We issued CHF 200 million debt last year. This was the second biggest issue in CHF after Deutsche Bank in the market -- not Deutsche Bank, Polska Deutsche Bank. So this goes to say that the bank -- under all the negative circumstance, the bank does have a strong name in the international market.

It is typical of mBank that we aspire to promote mobility to offer convenience and this has materialized with growing customer acquisition last year. Of course it takes money to win new clients. And given the demographics of our customer base, it will take another 4 or 5 years to get the full benefit of those new clients.

We also opened a new head office in Lodz, which is currently believed to be the most state-of-the-art office property in Poland, and I concur, it does seem to be up to scratch.

Last year, we closed a deal, which has a symbolic importance -- is of symbolic importance, but it's also important from the point of view of our P&L, sale of the so-called mBox, which is a package of our solutions, including the customer interface, web-based mobile apps, et cetera and the engine supporting it, with real-time marketing and other functionalities you're probably familiar with if you're our customers.

So all in all, it was quite good. Last year was good in terms of macroeconomics other than for the bank tax, which costs us about PLN 400 million, taking away about 2.7% of our return on equity.

As for other highlights, our capital ratios are on the order of 20% and up, which is comparable only to Scandinavia, but their weights of risk for mortgages are about 10% and for Poland it's 100%.

Another important point to note especially from the perspective of analysts is that our NIM is converging with the national average. We lagged behind and that's because 17% of our loan portfolio is CHF loans, with all the ramifications, but mBank has always focused on growth and expansion rather than short-term efficiency. So if you compare us to Pekao S.A, we are 2 different beasts. But also those banks that have a very strong focus on efficiency are now losing a big part of their market share. And 60% of our revenue is from retail banking, so in fact we are quite unique in this market.

So much by way of an introduction to warm you up and I guess we'll be getting your questions now, your smart questions that we will try to match with our answers.

[Joanna Filipkowska, executive]

Questions anyone?

[Unknown Analyst]

I remember your very bullish presentation from Ernest concerning macroeconomics and the volumes this year. On Slide 16, my question is could you refresh your view on volumes this year, because corpo volumes went down last quarter with -- well, that has to do with origination, among other things, but no matter. So are you still bullish about volumes for this year? Could you give a comment on corpo volumes, because banks are very different among themselves, some of them optimistic, others not quite so?

[Cezary Stypulkowski, executive]

Ernest, why don't you start with macro?

[Ernest Pytlarczyk, executive]

Well, we believe that the investment cycle is up and running. The recovery is not well advanced in Poland. In some parts of the market there are tensions, for instance, in the job market. But in 2018, 2019, private investments will be the name of the game and public investments are a catalyst for that. This should be accompanied by bigger corporate lending.

[Cezary Stypulkowski, executive]

If I may make a reference to our numbers, if you net them off, if you adjust them, the growth rate is still positive. Don't get fixated on the change quarter-to-quarter because -- well, now it's 14% and previously you had 20% net seasonal -- well, growth rate, net of seasonal effects. So we are trying to be more proactive than [ Tramaseat ] or other forecasting programs. About 2018, we're not dogmatic about it, although we tend to argue on that, as you realize. But when I look at the discussions, the debates on our credit committee -- it's not that I never go, but I like to look at the minutes from the meetings of the credit committee. But I'm not involved in the decision-making process unless there's a facility that the management has to decide on. But that's rare. So what strikes me more often than not is that most of the big tickets are not production loans. They are loans from the world I'm used to, leverage buyouts, M&As, things like that, deals, the big tickets I mean. And there's a certain history to it because over the past few years, our bank has moved away from large companies and big tickets to the mid-market in Poland. And I think -- well, it's true, as Ernest said on many occasions, that they are reaching their capacity. Many companies cannot just rely on additional headcount to improve their sales. The market is overheating, exports are huge, so they need to invest. And there are some uncertainties around, including regulatory uncertainty, uncertainties about internal dynamics, which drags down on growth. But a 4% or 5% GDP growth, plus those companies reaching their production capacity means that they will have to invest. There will have to be private investment as well. This is a year of local government elections and local governments, municipalities are putting in best efforts to complete investment projects. My municipality is going to repair an embankment in Mikołajki, that's just an example of course. But this will drive expenditure. In addition to the generous EU funding, there are also other investments in the private sector. Does this imply additional growth? Our colleagues in corporate banking say it's 6%, 7%. But it could be 6%, it could be 8%. But whatever happens this year, we'll see growth, no doubt about it. But how much? We'll see. Maybe less growth with better margins, why not? I would like that instead of having huge volumes at lower margins -- no, thank you very much. And I have talked about NIM and ROA, we're lagging behind the benchmark. ROA, okay, that's one thing. But with the margin, we should try to converge with the market. So that's it.

[Unknown Analyst]

And this year what -- well, what about your cost income ratio, what's your target? Are you expecting an improvement like what you reported last year, 2 percentage points I think?

[Unknown Executive]

Well, I shouldn't say it here perhaps, but -- I mean, this mood -- I've been speaking on recent developments since 8:30, where we held the first meeting internally with our Directors. So structurally speaking, mBank should have a better CI ratio than we do. But we're not very concerned about it in that we have a very decent CI ratio that others can only hope for. But our retail banking is quite exceptional; it gives us a natural advantage. It's different with corporate banking. In corporate banking, I think the ratio is better than in our retail banking -- no, no, that's so for universal banks in Poland and beyond, but it's just the opposite for mBank. So I think we have some room for improvement. But as I've said on many occasions, our bank has a revenue capacity. And at all times, especially now in the next 18 to 24 months of very likely strong growth and interest rate hikes, if we wanted to discipline ourselves around costs obsessively -- and I'm speaking, if I may say so, as a seasoned manager -- that would be irresponsible. We have to build alertness, but at the same time if we have revenue capacity, it's good to grow revenue and to watch our headcount. If we do that and in addition if we position ourselves better with costs in corporate banking and improve the customer mixture, which is already happening -- well to conclude, I do believe that the bank has the structural capacity to maintain or improve the CI ratio.

[Unknown Analyst]

What about IFRS 9? Would you be kind enough to present the structure of your loan book? How much of it would go to basket 3, basket 2, basket 1?

[Unknown Executive]

Well, on the structure of the loan book, we're not giving currently the breakdown for this especially as we're just working on the opening balance and we're not really reporting under IRFS 9. So this is not something I can give you. I can tell you something about the one-off effects we will have, about the outlook on LLPs, but not how the portfolio is breaking down into the various baskets.

[Unknown Analyst]

I mean, so in general you expect 5 basis points total impact? So probably in the first year it will be meaningless, although...

[Unknown Executive]

Yes, exactly. So it will be insignificant for the first year. Obviously, when it comes to the opening balance, we will have some zloty amounts that will be deducted technically from our capital base. But on the other hand, in regulatory capital what you have, you already deduct the so-called expected loss shortfall that you have as an IRB bank. Part of this expected loss shortfall will go away under IFRS 9, so basically on the one hand you have less capital, but you actually miss a deduction point, so the capital effect is not that high. And generally speaking, as we are a bank that has an internal ratings-based approach, we already have an approach to loan loss provisions that comes from modeling, so that is closer to the new world. So that means why we also don't need to book any -- significantly more LLPs on the IFRS 9. It's maybe a difference to others who are on the standardized approach and chose that also over the last years. We've always been quite conservative or to say closer to what the picture of the reality is right now. That's the opening balance. Obviously, when it comes to the outlook, we will have -- and we've always said that, we will have higher volatility when it comes to loan loss provisions. And that is something I think where we all need to learn how this actually works, how this works through the cycle. But obviously the idea of IFRS 9 is -- because the criticism was too little, too late in old accounting under IAS 39, so the new dogma is actually that you should very early -- at a very early point in time book the loan loss provisions. And that is what we will experience. But I think we've also said -- I mean, we've said here last time that over the cycle this should most likely also even out.

[Unknown Analyst]

And maybe another question on capital. Do you have any time frame at which you want to implement the IRB method on your corporate book? Is there a specific date in time or is this sampling that you're currently working on more intensive?

[Unknown Executive]

We are covered by IRB on the corporate side.

[Unknown Analyst]

It's already covered...

[Unknown Executive]

Yes, yes, yes. I would say the bank has -- I think that the coverage of IRB methodology is the highest in the market. And I will say with the exception of our mortgage bank, I have to say most of the lines are covered, I think including the lease. So we are the -- not IRB, we are the most advanced.

[Unknown Analyst]

Could you comment -- have you talked to KNF on the reason why there is no stress -- there's the buffer -- or factor stress -- there's the buffer? During the most recent dividend discussion, there's a big gap between you and Millennium Bank, do you know why?

[Unknown Executive]

The letter we got from KNF says our buffer is 0%, so there is no additional impact. So you should go and ask them I guess.

[Cezary Stypulkowski, executive]

Well, we can comment on what we're responsible for, not -- we cannot speak for Millennium. But I think this could be due to one reason, the funding structure of the Swiss franc portfolio. Banks that rely mainly on PLN deposits as a source of funding must be more sensitive in stressed conditions I think. It costs less when the times are good.

[Joanna Filipkowska, executive]

We have a few questions that came online from Anna Marshall of JPMorgan. The first question is about the dividend.

[Anna Marshall, analyst]

The potential 20% payout from 2017 earnings, what is your dividend policy going forward? Would you consider 100% or higher dividends if allowed by the regulator?

[Unknown Executive]

I would say our standard approach, which we have declared some time ago, was 50% payout. But one have to be realistic. I would say you are having conflicting dilemma. On the one hand, the bank is well capitalized by the international standards, much above most of the thresholds we know, and I would say there is a capacity at some point also in the context of the status of the Swiss franc portfolio which we have where potentially we can distribute more than 50%. On the other hand, we are being confronted with the regulatory requirements which are highly individualized and which reflect overall discussion which is going on in Poland on the status and the future of the Swiss franc portfolio and political stability around this issue. And I understand it has a consequence. The regulatory prefers the banks to be more conservative on the capital side. Some are in between -- there is a trajectory of a decision-making, and whatever declaration I will do today or tomorrow, I think that it will be subject to the revision depending on the circumstances and regulatory requirements. As I said, some of the criteria which is being adopted by Polish regulator seems to be too much individualized. This is my personal view on this issue. But well, this is how -- so the realities which we are confronted with. So the answer is for the time being based on the information which we've been able to get, we are living with a capacity of 20%. Our intention is to pay 50%. The time will show.

[Unknown Analyst]

What are some [indiscernible] -- next question about ROE -- and dividend payments are factored into your strategic target of achieving top 3 ROE in the sector? What other ways of capital utilization would you consider apart from dividends?

[Unknown Executive]

Talking about the dividend and our plans, assumption, yes, we build up our plans around 50% payout, constant 50% payout ratio. And obviously part of the unsatisfactory result that you know we are not achieving the top 3 of the local players is a result of over capitalization in this respect, that we are managing relatively high level of capital comparing to our goals. What was the second?

[Joanna Filipkowska, executive]

What other ways of capital utilization would you consider apart from dividends?

[Unknown Executive]

The question is not that clear to me to be honest. I would say you can expand your balance sheet, you can accept different profile of risk at some point. But definitely what is not on the agenda is a buyback of our shares. So that's more or less my answer, unless you want to add something.

[Joanna Filipkowska, executive]

Maybe M&A.

[Unknown Executive]

M&A -- no, I would say M&A is not something what is obsessing this management. We have declared several times that the preferred option of this bank is to grow organically, though -- and this is some kind of a change comparing to what we have declared a few years ago. We do not exclude acquisitions, though I think we will be very, as some people, say selective and some people say picky in terms of accepting the potential targets because they have to fit our profile. It's not simply to be bigger. And that led to some consequences last year, which are publically known, that after initial stage of investigation, we decided to drop one of the opportunities in the market. And on the other hand what is also important, it has to be sizeable; means just to spend too much time on the target which will be not delivering enough revenues I would say from the managerial perspective -- from the fact that any type of acquisition is specifically very costly from the management time perspective, I would prefer to rather consider something what is not less than PLN 1 billion of revenues.

[Unknown Analyst]

A very general question. You talked about the profit target this year, it's going to be better than last year, and in 2, 3 years from now you're expecting to go back to PLN 1.3 billion. So all in all when you look at all your business lines -- the consensus is more than PLN 1.3 billion in 2018, so is there an income line that could go down in 2018 year-on-year?

[Unknown Executive]

When I look at your consensus numbers, I think it's overly ambitious. We may not be able to deliver. But of course the expectations we expressed when the bank tax was imposed -- I think we have been very systematic with releasing our guidance over the past few years and we've been able to deliver on it. But there are a few reasons why I have my doubts about PLN 1.3 billion as expected by the analysts in 2018. It might be hard to get there.

[Unknown Analyst]

I think you were right talking about the consensus and especially with respect to the cost of risk, which grew 40% in 2017 year-on-year mainly due to the base effect. What about this year?

[Unknown Executive]

While as I've said, our mix -- our credit mix is changing. On the one hand -- well, it's a philosophical question about where we are in the cycle concerning mortgage loans and what kinds of risks are acceptable, just sales or selection, what are the customers' choices, et cetera. So mortgages I still believe to be stable with lower costs of risk, especially at mBank very low. But then again, last year we increased our consumer finance portfolio by I think 17%. So we used to be dogmatic about it. We used to stick to our transactional clients and not so to non-clients. We've relaxed our policy there and this will impact our cost of risk. That's something we have to bear in mind. Still our cost of risk when compared to the aggressive marketplace is relatively lower. And in corporate banking -- those of you who have been monitoring, covering us will know that over the last decade we have really shifted from Polish blue chips, whatever blue and chips means, towards the middle markets, [Foreign Language], and so on the one hand this improves our margins, helps us to split the risks, but under conditions of a downturn the portfolio is more vulnerable. I used to say that our cost of risk would be 50%, 70% or 100% depending on the market conditions and the growth rate in the economy. So with the shifting mix, we have to think about 50% being replaced by 70% -- 60%, 70%, we'll see, time will tell and statistics as well, especially post factum, ex-post.

[Unknown Analyst]

About IFRS 9, just to confirm, you're not going to use phase-in. You're going to do everything upfront, right? That's what I understand from our release.

[Unknown Executive]

Yes, no phase-in.

[Joanna Filipkowska, executive]

A question from Marta Jezewska-Wasilewska.

[Marta Jezewska-Wasilewska, analyst]

[indiscernible] the risk weight for FX and PLN mortgages at mBank, do you expect any meaningful impact from potential LGD factor increase recommended by Financial Stability Counsel?

[Cezary Stypulkowski, executive]

I know you can see me [Mr. Stypulkowski shrugs.] But how shall I put it? There's so much mess around with respect to the Swiss franc issue. A bank like ours -- to be honest, we have been penalized disproportionately with the requirements. So if you add LGD on top of that, we will be penalized twice. I think there are only 2 banks involved, Millennium and us -- maybe ING as well, but they have a smaller portfolio -- so it doesn't make sense. And I think this is the reason for this regulatory delay or slowdown. KNF may simply impose some new rules on banks using the standard approach. In our case, they would need to pass a new law. So people responsible in banks for risk management say that we must maintain the capital buffer, which we do to be clear. But I don't think this is going to happen; I don't think it's going to materialize. Well, I may not be very specific in answering this, but there you go.

[Unknown Executive]

It is also supported by the NBP in the financial stability report in December, even writing that banks who are under IRB already have a strong risk coverage and even the NBP is to some extent questioning if a LGD floor makes sense. And we've have always said that having additional capital buffers plus LGD floor that also increases the RWA is anyhow a double counting. But I think since December -- I am also a bit more hopeful in also readings some more official statements that this is just a doubtful instrument.

[Joanna Filipkowska, executive]

Any further questions?

[Unknown Analyst]

I have a specific question concerning your leasing activity. Last year you achieved substantial growth in volumes while declining profitability, which I attribute to market conditions. Should we expect more of the same this year or do you see any changes for the structure?

[Unknown Executive]

I think the trend will continue. One factor plays a special role. We are expanding our SME leasing portfolio, which we didn't have before. But now as you know, we are in a different position than some other banks because we have SME as part of our corporate banking and as part of our retail banking. The corporate banking part grew, but not fast enough perhaps. But colleagues in retail banking grew from -- well, they just use the standard mBank offer to grow very fast. Plus, we now have leasing for SMEs, something we didn't have before. And that drives growth. It helps to share the risks or split the risks, but it also adds to our LLPs. I don't expect any problems this year or next. I think we are slated -- we are poised for dynamic growth in leasing. That's an area of potential growth for the bank.

[Joanna Filipkowska, executive]

If there are no further questions, thank you very much and please join us for refreshments.