mBank SA

WSE:MBK

Earnings Call Transcript 2019-Q4

[Joanna Filipkowska, executive]

[Interpreted] Good morning and welcome to this conference that will present the results of 2019 in mBank Group. The results will be delivered by CEO, Cezary Stypulkowski; CFO, Andreas Böger. And then we'll have a presentation of the macroeconomics from our Chief Economist, Ernest Pytlarczyk.

[Cezary Stypulkowski, executive]

[Interpreted] Good morning. This will be a brief overview, and then we'll take your questions.

Operational figures. This was a fabulous year in terms of the bank's activities. All that we control went well, all that we couldn't went so-so. The net interest income, 14.5% up, with an improved net interest margin, partly due to lower cost of financing. But in lending, our changing loan mix also impacts the results. The NFC went down somewhat year-on-year. But well, that was due to changes in the recognition of insurance fees. These lines, the fees and commissions lines that are active have been performing very well. We are very happy with the growth rate, which is largely driven to our strong transactionality and a growing number of customers.

We did not reach the tactical target of PLN 1 billion revenue in this line. But as you may recall, Q4 was very good. More on that later. And we think that this line should definitely improve later this year.

Revenue from payment cards, trade finance, they all performed well. But brokerage and equity-related numbers were not so good. The total costs grew at a lower rate than the revenue as usual, and so our cost-to-income ratio continued to improve. So we are approaching the target level. We are now at 42%, which is a dream ratio for many banks, and I think we still have potential to reduce the ratio. The cost of risk was 79 basis points, approximately what we announced during the year. And we are now getting to the one less good piece of news, the net profit was PLN 1,010 billion, down year-on-year due to 1 or 2 significant factors, one being the legal risk of FX loans. More on that later. That's PLN 388 million we wrote off and a high banking tax of PLN 459 million. The LLPs for the FX loans will be discussed in greater detail by Andreas, but my opinion is that the write-offs across the sector seem to be premature, in my opinion, but that's the trend that emerged. And due to pressure from the auditor and other opinions, we decided on a model that gives us more comfort with all the legal noise across many fronts in Poland.

Loans, there's not much to say. They grew at a good rate, with a better mix, growing both in retail and corporate banking. PLN 108 billion worth of additional loans, that's 11% up. Better growth in retail than in corporate banking. But in corporate banking, we also reported a very good increase. And the Swiss franc portfolio is getting repaid, it's shrinking. And the repayments are steadily decreasing as well. So the portfolio dropped 8.5% year-on-year.

Clients like placing money with us. Our total deposit base grew 14.4% year-on-year, with a good mix. I think we are quite good at transactionality. So we have high deposits in current and savings accounts.

The funding mix is, as usual, very diverse, most diverse perhaps across the sector and also the most secure. And we have good access to the international financial markets. We are Poland's biggest issuer, and that gives us a better MREL position. Last year, we placed CHF [ 120 ] million for a term of 7 years, I think.

The capital ratios are better than decent. We have communicated a revision of the individual stand-alone capital ratio. The significant institution -- significantly important institution, the ratio due to the buffer was raised by 25 bps last year, which came as a surprise, but that's what the regulator decided.

Finally, the loan-to-deposit ratio was relatively, well, I think about the market average. And when it comes to the management of the balance sheet, I think that's quite optimal. Last year -- we approved our strategy late last year in anticipation of the original plan. But as you know, the sale of a big part of the bank is pending, so we decided it would be good to present the strategy ahead of our plans. The strategy is a good continuation of our previous process. So on this point, the strategy focuses on client centricity. We are growing thanks to, and with, our clients.

There are 4 pillars of the strategy. Our focus on the clients, which implies targeted client acquisition. And we have made great strides in this regard, reaching all the targets under the previous strategy. In relation to the target groups, the age groups we are focusing on, we are not aiming to acquire just any kind of customer. It's like laser vision-based acquisition. And of course, we want to retain customer relationships. When I joined the bank, according to our estimates, we had nearly 1.8 million customers, and we cleaned up the portfolio. So now we don't have many customers who open an account, but do not actively use it for months. It may happen. Typically, this is what happens in banking, but we are very selective in our approach.

According to research, our bank is well advanced and positioned quite well in international rankings. We think we are #1 worldwide with our mobile banking app. This is not a purely banking-related app. It encompasses other products as well as a platform. So in this regard, we added life insurance and additional property or non-life insurance products to our insurance offer. So we are now offering a broad range of services on the platform, and we will continue to expand the offering.

Our competitive advantage, which may become an important driver, is our distinctive culture. I don't want to delve into details. But according to in-house and third-party research, we are uniquely positioned with respect to the motivation level of our managers, and we take to ensure that employee culture is fostered. This is a big focus and a big part of our new strategy.

Last but not least, our competitive advantage and the structural positioning of our retail banking, which is very distinctive, different from other retail banks. That's based on a focus on an operational advantage based upon efficiency in our operations. We've invested heavily and we are on good trajectory, on track to achieve our targets, including a cost/income ratio. And that's actually our targets. But of course, the context is rather shaky because the bank is up for sale and it will have its implications.

So that was our vision of the bank in 2019 moving forward up to 2023. So that's the strategic plan of the bank which is [ upsell ]. So I think that's all for me as an introduction.

One important piece of news. I think we are the first Polish bank to be ESG rated. And that's not a fad. It's not because it's in fashion. I've never been a big fan of CSR. In our meetings, I've always said that, to me, it was sort of blown out of proportion. But with regards to ESG, that's important. And I must say that corporate governance paradigms are changing around the world. You probably know about The Conference Board and the Business Roundtable in the U.S. in August last year, and the position on the responsibilities of bodies of banks and other entities in the economy, with a bigger focus on social responsibility, focus on environmental protection, more social responsibility in the community of the institutions. I believe we are well advanced, for example, when it comes to renewable energy sources. Our portfolio is nearly PLN 1 billion. We've approved the new strategy concerning the financing of traditional energy sources. And over the years, we have developed a clear profile as a sponsor of education and mathematics, which has been noted and acknowledged. You know about the great orchestra of Christmas charity, of course. Looking at the new paradigm of corporate governance with a strong focus on responsibility towards different stakeholders, not just shareholders, but also the employees, the clients. And of course, if you take good care of your employees and clients, your shareholders will benefit as well. So that is emerging. It's not yet fully encompassed by the industry, but I think we are well advanced on this front.

So at this point, we have been awarded a certificate by Sustainalytics. We will continue on this path. The result of the survey I read, we are really a total global leader. This is an emerging phenomenon. So I don't want to dwell upon it, but it's a fact that in the peer group, we are the #1 bank, and not without reason. So this is a new area of ratings, and we want to be a participant from the beginning and use it. And I think we are well ahead of the curve in terms of intellectual sensitivity in Poland.

So that's all by way of a summary. Now over to Andreas who will.

[Andreas Boeger, executive]

First of all, welcome from my side also.

I'll first do some summary still of 2019 because what Cezary was saying in the way that this was a very good year, I would like to put this in perspective over the last years. And obviously, you have seen the PLN 1 billion, which is the net profit. If you would add the Swiss francs to this net profit, we're already at PLN 1.4 billion. PLN 1.4 billion is the best net profit we had in the history of the bank, or we would have had. And obviously, it's not only about Swiss francs, but I will also talk later that we had adjustments due to another European Court of Justice verdict with regards to the repayment of fees on cash loans. That's another PLN 93 million. So if you add these 2, for example, to operating profit, the operating profit line in 2019 would have been more like PLN 2.5 billion compared to PLN 2.2 billion and PLN 1.1 billion. And this explains why Cezary is so upbeat and so positive, and why I'm also positive on what we have operationally achieved in the year 2019.

To look a bit closer into '19. Always, at the end of the year, we show a slide where we explain a bit the overall trends in revenues and the overall trends in cost, because this is important because we always -- we mainly manage the bank with the paradigm of cost/income ratio. And there, you have to see that costs are not growing as fast as revenue, but you still want to invest.

So what do you see here? On the one hand, you see the net interest margin which has increased by 11 basis points. Without the adjustment on the cash loans, which went against net interest income, it would have been roughly 2.75%. You see, without extraordinaries revenue growth of 13.7%, but in the last years, I've always spoken about core income. So let's also look about -- look at core income. Core income growth was a bit less, 11.1%, including the cash flow adjustment. But okay, that's life. And the 11.1%, I would compare to the costs side, on the other side, to the plus 4.5. The plus 4.5 is the growth in the cost without BFG. Including BFG, in zloty terms, last year, we have spent PLN 165 million more than in the year before. Out of this, PLN 76 million is already high a BFG. Then you see in material costs and amortization, the balance is PLN 22 million more. So that's only a very small increase. The numbers are distorted because of IFRS 16. So in IFRS 16, what you had is some part of the material costs were traveling to amortization. So the red box naturally shrinks and the yellow box naturally goes up. This is roughly PLN 120 million, PLN 119 million, was the effect. So if you neutralize for this, you will see amortization is up by roughly 1%. You see that material costs is up by a bit more than 2%. And the biggest cost increase that we were able to control was on the HR side. On the HR side, the cost increase is 7%, but this is also due to higher FTE. I think at the end of the year, we have more than 250 people more employed in the bank, and this also has to do with the expansion of the network we are doing, which we think in 2020 will also be mainly finished.

This is about 2019. Costs growing faster than -- growing slower than revenues, leading to a strong core income -- cost/income ratio. And if you look at the cost/income ratio, the 42.2%, this is the only figure, and I think you've see this also with other banks, but I would like to explain why I also stand behind it, which we have adjusted for the one-offs and which we have adjusted for Swiss franc legal reserves. The reason for this is, if you judge the performance of mBank and if you judge net profit, et cetera, obviously, everything that happened in 2019 is booked, and you see it, and we did not adjust. I told you what the adjustment could be, but we are having this fully in. The reason why you look at cost/income ratio and why also we look at cost/income ratio when we manage the bank is we operationally want to make sure that the money we take in our hand to run the bank is wisely spent in order to generate costs. A legal reserve that stems from 12 years ago we think is not operationally what actually is part of this -- part of the year. This is why you see 42.2%. Including the legal reserves, we would still be at 45%, which is also a very strong ratio.

Let's now briefly look into the fourth quarter. I think for the fourth quarter, it's important that we explain the 2 extraordinary effects to you. The one thing is the Swiss franc legal reserves, which in the fourth quarter was PLN 293.5 million and for the full year is PLN 388 million. Especially in the fourth quarter or this PLN 388 million is the whole year, and also includes part of the old methodology we had. And in the fourth quarter, this mainly represents the new methodology we have. What we are doing here is, in the past, we mainly, only mainly, but part of it was also a bit -- going a bit further, we mainly booked for existing legal cases. So if somebody came and was suing mBank for a Swiss franc loan, we were immediately putting in some legal reserves. I think with this approach, we were also, I would say, at the highest standard of the industry. And we also put some buffer for the future in the past. What we have now done is we are under IAS 37, moving to the expected value methodology, which means we are preempting what we see coming in the future. We have chosen a time horizon here of 5 years. And this is what we under very much a high degree of judgment, this is what Cezary was saying, is it premature? Is it not premature? But you cannot neglect that things are going on. With a very high degree of judgment, we were trying to preempt, on the one hand, and this is part of the methodology, how many people are likely to go to court? What is the probability of the bank of losing in final instance? What is the kind of archetype how you can lose a court case? So currently, we see it's either invalidity, it's Polish zloty, but still staying on Swiss franc LIBOR. Or it's repaying the spread. And also the severity of these scenarios. This was expert judgment driven, but also consulted with external opinions, for example, also on the legal side. With this, we came to this higher legal reserve of the PLN 293.5 million. And we think with this, we -- as far as we know, our expectation is we have captured the future.

The second extraordinary item that you should be familiar is the other European Court of Justice verdict stemming from the 11th of September. That actually means that if a loan of a private client is paid back before maturity, the client, the private client can claim back a fraction of the fees this client has paid. There's things to deal with, with the past, but it also means that from 11th of September onwards, if a client pays back the loan, it's clear that part of the fees that were paid are not our money anymore, but there's a claim the client has, and this money will not make its way into net interest income. So it's a fee, but technically, it's part of net interest income.

The adjustment there we did was PLN 68 million in net interest income for the quarter. And also, for old claims, we put back another PLN 9.6 million. Obviously, I think the big question for analysts is, what is the outlook on this? The outlook, what we envisage, what we might lose in net interest income for 2020, currently, we think for the full year is roughly PLN 90 million, 9-0 million, but the business is obviously working proactively towards looking at the way the products are structured, and the way the infrastructure behind it is done, and we are working on mitigating this effect. But what we currently can best estimate is PLN 90 million, 9-0.

Good. With this understanding, I think I will briefly run you through some of the dynamics. Let's go to Page 16. And I will try to do this very brief.

Loans to customers, over the full year, very strong, 11% growth. Corporate growth in the fourth quarter, slower. The corporate business being roughly flat. You see it here, slightly down, but this is mostly by sell-back transactions. So the corporate book itself is flat. Healthy new business but at the end of the year, we had strong repayments. These repayments we knew, and there was also a similar pattern last year.

Retail side, still very strong growth. Very strong growth both on non-mortgage loans and mortgage loans. And for example, year-over-year, the non-mortgage loan market share increased from 5.8% to 6.5%.

You see the new lending on the next slide. And there, roughly, you see mortgage loans, very healthy, a bit down, but very healthy and especially at good margins. You see record revenues on non-mortgage sales. You also see the corporate side performing well. You see that it came from repayments and less from new business, and also leasing picking up.

Deposits briefly. Deposits. Deposits in mBank is always a story of transactionality. This transactionality story is fully intact for corporates and for retail. But this time, it was also on the corporate side in managing down term deposits. Term deposits are down by PLN 4.6 billion. This is why you see the deposits going down. But current accounts, for example, in corporates are up by nearly PLN 1 billion. And on the retail side, this is about current accounts, what you've maybe seen, as you're also consumers, that there are some current advertisements where we seek outside money for savings accounts to gain new clients. This is also part of this strong increase in deposits.

Let's go over to income, and let's just look at the quarter-over-quarter. Trading income slightly down from a very, very strong basis of PLN 120 million in Q3. This is mostly due to lower FX result. Net fee and commission income, Cezary was already saying, strongly up, with 5.2%. Basically there, on all cylinders, from account fees, over credit, brokerage, cards, et cetera, all working well. And the net interest income effect, down by 5%. This is because we booked PLN 68.5 million -- or we didn't book them because this is the NII that was actually lost. And in part, this is the normal money you would lose now in a quarter, but also has some catch-up effects.

Against this backdrop, costs obviously need to be well managed, and costs are strongly under control. You see this in the fourth quarter, down quarterly. Minimal movements. A bit stronger down in HR costs. Obviously, this is if the quarter doesn't produce a very high net income, then you pay higher -- then you pay lower commissions against the higher commission in Q3. And also performance-related pay, the accrual for this in this quarter is not as high as it is in the quarters before. I think that's clear.

Next one is cost of risk. Cost of risk, we have delivered in line with what we were guiding for the full year. The full year guidance was around 80 basis points. So we finished the year at 79. Cost of risk a bit lower in the third quarter. You see -- I think the one thing we should explain is retail, because in retail, normally, you have an upward trend. This has to do with the mix. I explained to you that in the third quarter, we had a bit of a higher booking there because of a model recalibration. The second part of the model recalibration came in, in the fourth quarter. So this is the downward thing there. Ideally, honestly, you do this in one quarter. But I think with this, you see what mBank is doing. The minute we have bad news, we don't wait for the good news. We just booked it in Q3. And the other effect just came in Q4. But I would say the PLN 81 million is not the new normal. The new normal is more what you see the trend from fourth quarter, first quarter, second quarter, trending upwards in cost of risk for retail.

Portfolio quality, small comment because we did more than PLN 300 million of nonperformance loan sales in the quarter. So this shows this market is intact. There was a minimal charge to the P&L on this, a bit more than PLN 1 million, I think. So really, really small. Sector-leading nonperformance loan ratio of 4.5%. This compares to 6.6% with the industry. And we are also quite far away from any EBA guidance, et cetera, on where you get into the territory of doing other things. This is the 5%. According to the EBA definition, we're at 4.03%.

shortly on capital, capital position, as always, a strong 206 basis points over the KNF minimum on Tier 1 capital. So also there, stability behind the strong growth.

This would be it from my side. And I would hand over to Ernest.

[Ernest Pytlarczyk, executive]

[Interpreted] Good morning.

Our forecast of GDP growth for the year is now almost 3 months old and wasn't really affected by Q4 results, 2.8% for 2020, the lowest in the industry probably. What is behind that forecast? The other analysts will be downgrading their forecasts. No one can reasonably expect 3.7% GDP this year. So what is behind this lower growth? Mainly consumption trends, affected mainly by higher inflation, and also precautionary savings. The fiscal packages are phasing out. They are still in place, but the impact has lessened to a great degree after 2019. And also, local government investments. Local governments' plans are 20%, 30% lower for 2020 also due to the time line of EU funding. With all that, in 2020, GDP should grow by less than 3%. We are saying 2.8%.

With a relatively improved global environment, of course, setting aside the coronavirus effects, which will impact Q1, maybe Q2, the production stoppages in China. But from the current point of view, it looks like a soft patch. And if that happens, if markets decide it's a soft patch, they cope with it. And then the next 2 or 3 months of weaker figures no longer have an impact.

In Poland, a key issue is inflation, which will probably be 4%. Fuel prices have been dropping. So inflation probably won't be 4.5%, which seemed quite probable recently. It's a bet whether inflation will stay. We have been filtering data, inflation data and apparently, it's a accumulation of the effect of higher controlled prices, prices under new regulations, including renewable energy sources. And also, demand makes inflation grow. But in our opinion, that's less than 2%. So that's equal to 2017 inflation.

If you look at GDP and the trends in payrolls, which are growing less fast, there will be an internal balancing in the economy. So inflation should bounce back to about 3% by the year's end.

If NBP presents a similar approach and the Monetary Policy Council too, the rates will be unchanged.

Moving on to the monetary aggregates. You can see that the businesses are now more comfortable in the position due to -- or rather causing good demand for loans and also bigger growth in deposits.

When it comes to households, the current trend that will continue is growing demand for mortgage loans and falling growth of deposits, partly due to the fact that deposits are invested outside of the banking sector, in retail bonds and in the property market, real estate.

We have updated our 2020 outlook, and we talked a lot about the internal balance in the economy. The external balance reflects on the financial ratios, such as currencies, bonds. Our spread against Germany is shrinking. The zloty is very stable because our trade balance is strong. And we have a surplus in the current account, thanks to the improving, steadily improving balance of payments for services. So that sector has been growing for 6, 7 years in Poland, hence, it counteracts the cyclical trends.

Our current account is better in every point in the cycle than years ago. And this is how we differ from the commodity-based emerging markets, and that reflects the position of the zloty.

Thank you.

[Joanna Filipkowska, executive]

[Interpreted] Thank you, and we are ready for your questions.

[Unknown Analyst]

[Interpreted] What is your view on the probability of the bank being sold to a foreign investor? Is the probability bigger or lower than you thought last year?

[Unknown Executive]

[Interpreted] Well, it's a question you should ask of Commerzbank, not me. I can say, in general, I think the Polish banking sector is today less attractive than it was. I believe that the taxes and levies in the industry are critically high. And the returns generated by the industry are very low, which doesn't attract many investors. So in general, I still stand by that position. An investor would have to be really imaginative and bold to invest in Poland in banking today, but there are such investors.

[Unknown Analyst]

[Interpreted] And you and your shareholder, have you developed a consensus concerning the Swiss franc portfolio in the process of sale?

[Unknown Executive]

[Interpreted] You should ask that of Commerzbank. We manage the bank. And under the different scenarios conceivable, I think according to the position of KNF, the potential seller is responsible for the sale and that portfolio as well. So I don't want to speak for others. It's something to be resolved in the future or you should ask this of Commerzbank.

[Unknown Analyst]

[Interpreted] If I may follow up, you had your own consultants in the sale. So you said you would rather see an external foreign investor. Have you attracted anyone? Do you know how many nonbinding bids are on the table?

[Unknown Executive]

[Interpreted] Well, you know who you should be asking that. But okay. So I cannot say. Again, it's for the seller to answer that question. We are not authorized to make any comments. But I can repeat what I said before, from the perspective of our competitiveness, our position in the Polish market, benefits for customers, the potential retention of our drive forward, we would benefit from an investor that has no presence in Poland.

[Unknown Analyst]

[Interpreted] If I may continue, I'd like to ask about Swiss franc loans. Could you tell us how many new claims have been filed by clients in Q4? Do you keep statistics? Do you have numbers regarding non-finite court decisions in Q4 after the Court of Justice judgment?

[Unknown Executive]

[Interpreted] Let me take a different perspective. I mentioned that I'm not a big fan of setting up huge provisions. I do believe it's premature. That's my opinion. And I'm probably in the minority in the sector, and the auditors think otherwise. But I think that the current turbulences, the confusion with Swiss franc court cases, the quality of the reasonings, the misunderstanding of the nature of FX loan contracts, suggesting to borrowers that contracts should be annulled. And also, the absence of a case law. The case law is only emerging now, and it's very fragmented. And the courts are also under pressure. So in fact, under the circumstances, to make a professional reasonable judgment, whether the number of cases we have is representative, whether our model fully addresses the issue or is perhaps over its state, that would be very difficult to say. So I think disclosing too many details at this stage would be unreasonable. That's my perspective. And as long as I'm in the position, I mean I can press for this position to be broadly accepted. But I think, again, that it wouldn't make sense to disclose too many numbers at this point.

[Unknown Analyst]

[Interpreted] The provisions, have you consulted the auditor?

[Unknown Executive]

[Interpreted] Yes. I said we did have a dialogue with the auditor. I believe the dialogue was difficult. I expressed my doubts in the process. But yes, we have agreed on a given position with many provisos. Our assumptions, which are, I believe, doubtful -- many of those assumptions are doubtful, but that's the model we have developed, and it is acceptable to the auditor.

[Unknown Analyst]

[Interpreted] Correct me if I'm wrong. But if the Swiss franc situation develops according to your current expectations, you are not expecting to set up any additional provisions. So if you set up additional provisions, that means that the situation develops to your disadvantage compared to what you're expecting right now.

[Unknown Executive]

[Interpreted] Well, that sets a rigor for us for the future. But in general, I believe what will happen is when a case law develops, a stable case law, assuming that it is, to an extent, reasonable to claim that those contracts have unfair provisions, which I disagree with, then in my opinion, we'll probably end up with the average FX rate quoted by NBP as the official FX rate for the agreements.

[Unknown Analyst]

[Interpreted] One further question, the model you use in provisioning. What do you assume to be stable case law judgments in first instance, final legal judgments: if most of them are to your disadvantage, all of them are to our disadvantage?

[Andreas Boeger, executive]

What we can say is that the methodology we have is, on the one hand, based on evidenced court cases on the outcome, on the other hand, also on some expectations. So it's not only the evidence. And as I said, we look at what are the potential outcomes, because it's not clear what it is. We have then said, put certain percentage on these outcomes, what we think. And this was not only our judgment, but it was also after consultation with external lawyers. This is the best we can now do to preempt what we think will be the final outcome of the court. But we -- under this expected value method, you actually have to look what the possible scenarios in and are and what then the most reasonable is, and this is taken into account.

[Unknown Analyst]

[Interpreted] I have another question, MREL. Correct me if I'm wrong, but I think the requirement is higher in your case than other banks on average reporting on that. Why?

[Andreas Boeger, executive]

So we also have the formula here. One of the drivers is, obviously, the Swiss franc add-on we have, and this is one of the main drivers why it's higher. The mathematical derivation of how the MREL is calculated is just the same for all banks; in Poland, at least.

[Joanna Filipkowska, executive]

[Interpreted] If there are no more questions at this point in the room, I have some questions from Societe Generale. Two questions.

How do you see loan growth progressing? Can you give some outlook in terms of growth in different loan categories? And the second one, wondering if mBank can pay out dividend from 2019 earnings?

[Unknown Executive]

[Foreign Language]

[Unknown Executive]

No, that was about our growth expectation.

[Andreas Boeger, executive]

So let's first talk about our growth expectations. Our growth expectations, you can also see on the last slide of this presentation. On Page 65, you can see what we have assumed for the strategy. And that is that we think loans will grow by roughly 6%, revenues by 8%. If we think loans for mBank will grow by roughly 6%, this means the underlying growth is higher because we have the Swiss franc portfolio that is managed down. This is also over a certain time period, obviously, so it does not have to mean that it's linear. If you look at last year, the growth was solid double digit. I think now for what we should expect for 2020, it would be strong mid- to high single digits. So along the lines of this 6% is maybe a bit low, 8% revenues, maybe somewhere around this area should be the loan growth.

Where do we want to grow? On the corporate side, obviously, you know we have these 3 different segments, which we call K1, K2, K3. So the very large clients, the middle market and the smaller corporates, growth should mainly come from the middle, and the smaller corporates, so K2 and K3. And when it comes to the retail side, it will, on the one hand, come from non-mortgage loans, but you have seen that in the last year particularly, we have put a huge effort on also being more competitive, being faster, being better in mortgage loans. You've seen this with mortgage loan production of more than PLN 2 billion per quarter, and we also think that mortgage loans in polish zloty, obviously, will continue to be a strong engine.

Second question was about dividends. On dividends, we are before the individual debate with the KNF, so we would rather now not comment on the outcome. I think we leave this for a later stage.

[Unknown Analyst]

[Interpreted] Why did you decide to set up a 5-year horizon for future court cases? Some banks opted for 2, others for 3. Why 5?

[Unknown Executive]

[Interpreted] It's 4, it's been for 4 years. 2023.

[Unknown Analyst]

[Interpreted] I'm not talking about the strategy. I am talking about the legal provisions for the Swiss francs portfolio. 5 years looking forward, 5 years looking forward. So it makes your provisions higher.

[Andreas Boeger, executive]

The approach we have taken is it's less relevant what you want to choose, if it's 1, 2, 3, 4, 5 years. It's more what do you think is a reasonable time frame to expect the biggest chunk of the court cases to come in. Because if you would sit here and think that in 5 years, something big comes in and then you choose to have a 2-year time horizon, this is not what it should be. We looked at some, as I said, with a high degree of judgment, but some expert judgments of what we think is the future we should catch. And we think it's reasonable that if people want to go to court, that this will happen within the next 5 years. Not within 10 but maybe also not within 2. This is why we, in our methodology and with the expert judgment, believe that with the 5 years, you can have a proper catchment of what is to come.

[Unknown Executive]

There is a formula: whenever you don't know, be conservative.

[Unknown Analyst]

And do you envisage? Or do you think there's a way to reach outside of court settlement with clients at this point of time? Or has the matters went too far already?

[Unknown Executive]

[Interpreted] I think it would be very difficult to opt or to work out this kind of process with clients. When I go on Facebook, I get invitations from different law firms that encourage me to fight the banks. So to be honest, I have a very clear position. It's not that our bank or any other bank are really to blame. I think, well, of course, it's important that we explain the situation to clients. FX risk, interest rate risk were obvious factors. People say that the banks abuse the trust of their customers because they set up their own FX rates, but customers buy currencies from exchange desks. And they must know that FX rates change from minute to minute, from second to second, if you go online. So claiming that FX rate schedules or tables used by banks were unfair, well, we could have a discussion whether the spreads we used were too high. That's a different story. But assuming that FX loans can be challenged as a formula, that's hard for me to accept. But that's what the lawyers who advise customers are trying to say. They try to challenge the very structure of FX loans. That's unacceptable to banks. Such products continue to be used by commercial customers mostly. But I think it would be very difficult to find a point where we could agree with customers.

If clients are in special need whose banks are proactive and empathetic, negotiating with clients to reach an agreement. But when the approach is so extremely different in terms of the judgments of different courts, some judgments are completely indefensible from our perspective, and it would make sense for us to differentiate between different clients. So what we will be doing is to try and convince the courts to develop a more stable case law, but that will take time. For the time being, banks will have to argue with clients or their lawyers.

[Joanna Filipkowska, executive]

[Interpreted] A question from Maciej. During the presentation, you said that income lost due to the new -- the small CJEU judgment will be about PLN 90 million in 2020. Did you calculate that number based on the methodology of repayment of commissions on a straight-line basis in proportion of pro rata at the time?

[Andreas Boeger, executive]

We, in general, used the linear method on this. So we don't go because it is a question of discounting and a question of how fair you are to clients, et cetera. And I would say the empathy we have towards our clients doesn't end there. So we linearly pay back and we don't apply any compounding there which might be to the detriment of the client. So this is the linear method we're using.

[Joanna Filipkowska, executive]

[Interpreted] Two questions from Maciej. The government is planning to curb sales of housing loans. Do you think there are arguments in favor of such limitations? The sales in the sector are growing fast, but so are the margins, which may suggest a high risk. In NBP surveys, banks have been saying for some time that they will make the policy of granting mortgage loans stricter. So do you think there are arguments in favor of such restrictions or limitations?

[Unknown Executive]

[Interpreted] Well, a year ago, we were expecting home prices to go up due to the job market, the affordability of loans. But now it's in fashion to expect a bubble. And some people are trying to warrant, to issue warnings rather than make projections. The economy is cooling down. It is stable internally. The job market is not growing as fast. Margins have been growing. But that could happen for 2 reasons, not only because of concerns about the situation of clients. There's bigger demand, so the margin is adequate to that development in the market. Should the government intervene? I think the market should reach a point of balance on its own. The prices are already quite high. Regulations concerning short-term rent, that's different, and that's happening in Europe. I think we are getting that too. But we see no reason -- well, we see no probability of a bubble bursting. If you look at affordability and other indicators, salaries were growing fast and home prices did so too. And globally speaking, the prices of certain assets were driven by low interest rates. And Poland is a victim as well, not to the extreme, our rates are 1.5%, but that's the global side effect of stimulation of the economy with lower rates over the years.

The Economist recently published a special report on housing, on the housing industry. So if I may wax philosophical for a moment, the mortgage market, the housing market has caused trouble on several occasions globally. So in Europe, due to cultural reasons, ownership, home ownership affects the mobility of the population. But in some societies, such as Poland, which appreciates home ownership, and homeownership is quite, quite high, this could cause a run. If demand and supply do not match, this could cause a growing bubble, because the cost of buying a home is relatively high. But as Andreas has said, affordability in Poland is still quite good and unproblematic. There are some balancing factors. The migration of Ukrainian workers, which is turning negative now. We have positive migration into Warsaw, and Poland is like France in that regard. Warsaw is a key city like Paris in France. So home prices in Warsaw are above the national average, and the trends are also different.

[Joanna Filipkowska, executive]

[Interpreted] We have a question about MREL. In the context of the communication concerning the MREL requirements, what size of an issue will you need to place in 2020? How big an issue in 2020?

[Andreas Boeger, executive]

There's no need in 2020 to issue in order to be able to reach the -- because we have a phase-in also in MREL, so we are not in any position where we now need to act.

[Unknown Analyst]

And sorry, in the following years, what is the total to reach the level?

[Andreas Boeger, executive]

In general, so on MREL, you most probably know that mBank is the most active bank on capital markets, and we already have a lot of bonds outstanding. On the assumption that the outstanding bonds, once they fall due, will be replaced with funds that don't need to be subordinated debt, but that will be according to the law, then for example, senior nonpreferred; and just by replacing what we currently have, we will reach the targets we have. Once they fall due, we'll replace and prolong, but it's not that we have a immediate need to now issue.

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]