mBank SA

WSE:MBK

Earnings Call Transcript 2020-Q4

[Joanna Filipkowska, executive]

Good morning, ladies and gentlemen, and welcome to this conference that will present the results of 2020 of mBank Group. The results will be delivered by Mr. Cezary Stypulkowski, Chief Executive Officer; Mr. Andreas Böger, Chief Financial Officer; as well as Mr. Marek Lusztyn, Chief Risk Officer. Marcin Mazurek, our Chief Economist, will present the macroeconomic overview.

You can use the chat field to include your questions. I will read them later. Cezary, the floor is yours.

[Cezary Stypulkowski, executive]

Thank you very much. Obviously, we will focus on the major developments related to 2020, more focusing on 2020 than just in the first quarter, unless there will be specific questions, which will be responded in the Q&A part.

I think the major message is that the bank has proven its operational strengths in 2020. And as you have seen already, I think, in our communique and which will be followed by our comments, the operational part of our activities in 2020 was very strong. Our gross income was at a record-high level. That was almost 6% higher than the -- or more than 6% higher than the previous year.

Second important message is that we've been able at nominal level to keep our net interest income comparing to 2019 despite the fact that, as you know, the interest rate environment has changed significantly in the Polish market. The major driver of our strong NII was very much related to the overall liquidity and the much more active management of our funding costs, which, if necessary, will be commented later.

The bank has proven over the last 2 years, it's not only last year, that our strategy, which we signaled almost 4, 5 years ago, that the nature of the income of Polish banks will be evolving and fees and commissions will play more important role has come true. As you noticed, the fees and commission has risen by more than 18%.

There are 2 factors -- major factors which contributed to the result. The number one is very strong performance of our brokerage activities. We have risen from 6% market player to almost more than 20% market player in the stock exchange trading. What makes this possible is the fact that there is much more activity of retail customers and our convenient platform helps them to be more active in the market.

The costs on the, I would say, typical mBank management, so we allow ourselves to grow our cost base. But it's heavily linked or heavily dependent on our ability also to grow our income. So despite a difficult environment, we've been able to manage our cost/income ratio at the low 40s, 41.1%, which I think is an ultimate confirmation that the bank -- that the business model and banking platform is really very strong and is able to flexibly adopt to the changing environment.

Well, cost of risk, as it was signaled by myself on numerous occasions, we have kind of boundaries, between 50 and 150 basis points of the cost of risk, 50 being also the reference for the terrible market conditions in Poland, 150 to be at the time when the market is under distress. So this 119 refers and represents the current realities. We believe that our approach was relatively conservative. In part in principle, I have to say that, while it resulted in significant increase, it's not doubling, but I think 60%, 70% higher than the previous year.

On the net profit, the figure is disappointing. But what needs to be specifically stressed, and I think there is another slide where it's more visible, there are major -- there are basically 2 factors, 3 factors impacting. One was the level of credit provisions. Second is the other -- here we are, loan loss provisions. Then you have the legal risk and FX-related provisions, which totaled PLN 1 billion. You have loan loss provisions at PLN 1.3 billion. And then you have a factor which is not -- that much visible maybe, but we should stress that, that on operating profit of PLN 1.1 billion, if you take into account the banking tax and you take into account the income tax, which totals PLN 1 billion, we end up with the net profit of PLN 104 million.

I think that this shows how difficult is the Polish environment to operate. So you can be best-in-class platform. You can manage the bank in a very reasonable way. But due to the number of uncertainties, and I would say, conflicting messages and the taxation environment, you end up with the disappointing returns. So you have the efficiency ratio, which is, I would say, it's almost difficult to compare a number of other banks. You operate in the environment where the interest rate is rapidly lowering. You are still able to keep the nominal returns despite the 140 basis points drop. You can grow your fees and commissions. But due to these factors, I have to admit that the overall result might be seen like disappointed -- disappointing.

I would say in terms of the balance sheet, the loan expansion was under the pressure. We have to be realistic that, specifically on the corporate side, we've been competing effectively with the PFR money. There was inflow of almost PLN 100 billion into the Polish economy, mostly in the corporate sector in a situation where the totality of the corporate loan -- lending, I think, is reaching the PLN 300 billion, let's say, at the max. So that was a difficult year. We've been able to sort of rebuild our mortgage expansion. The consumer was under the pressure, specifically in the second and third quarter. There is some recovery in the fourth quarter. But that was not able to compensate the drops which has taken place in the first half of the year.

What was it -- what is the most important development? I think that this is, to some extent, also related to PFR distribution. Plus I think that consumption are being under constraints. The deposit base of the bank has skyrocket, it was 18% of year-on-year growth. I think we managed this position very well. I think that the net interest income development was partly -- or the result was, to some extent, driven by our ability to adjust our funding structure and the cost of funding. This is not secret that mBank is benefiting out of the lowest cost of customer deposits on the retail side. It is a significant player in the deposit play.

On the corporate side, we tend to be around 10%. We manage the end of the year in a very reasonable way, benefiting out of our strategy on the corporate side. So we are sort of keeping the market share. But specifically in the end of the year, we managed down the level of corporate deposits effectively. Overall, our position in the retail deposits has grown in terms of the market share.

This -- liquidity ratios are very, I would say, at a remarkable level. I remember when I joined the bank 10 years ago, our loan-to-deposit ratio was at 140%. Today, it at 80%. LCR, as a regulatory measure, is very high. So that led us to also limit our presence in the markets for wholesale funding, which obviously had also a positive impact on our net interest income. The capital ratios are strong under the circumstances, obviously putting aside the issue of Swiss franc portfolio, which I can imagine will be addressed in the later stage.

In terms of the customer growth, I think that obviously we are cleaning up from time to time. But I think that the bank overall expands its presence. And the customer coverage, this is more than 5.1 -- this 5.6 million clients on the retail side. Obviously, with a different level of activity with us, but these are the registered clients. It was a very favorable demographic profit. [indiscernible] demography will play more and more important role also in our way to present the bank in the future. You will be seeing some distinctive difference in the way we present the bank for 2020 and the bank in the future, starting with the first quarter.

If we can move on, I don't want to spend, specifically with this group of people, too much time on product developments. I think that the most important is everything that is remote helps to lower the cost and get better communication with the clients, as you know, and, I mean, very much in detail, we have extremely successful attracting younger clientele. Obviously, this is a cost for the bank for some period of time. But I would say the benefits will come later after a few years.

But also this leads to the, I would say, sort of alertness on the bank's side to be almost of a focus on digital, everything that is digital, because our clients, the young -- specifically the young clientele, we have to catch up with them. And as a consequence, some of the features, like remote account opening, like some [ gathering of ] documentation, onboarding, which I just mentioned, payments, Paynow, these are things which we are focusing right now. I think that from the, yes, ESG perspective, I think what is worth to mention is that we have committed PLN 4 billion limit for our renewable energy. We are actively progressing on this round.

What was surprising in 2020, I have -- I'm just referring to the way I was surprised, is that when we launched the loan moratoria for our retail clients, interestingly enough, we've been the first bank offering this product to our clients. I have to say that the way clients returned back to the payment discipline was remarkable. That surpassed our expectations. And without going into too much of a detail, I can tell you that we had to release some of the provisioning against this moratoria, which we set up in the in the beginning of the second quarter.

So profit and loss, we kind of we've been discussing. In terms of the balance sheet, I think that the major message is that the corporate lending obviously was under the pressure. Retailers, you see, were still double digits, though mostly focused on the mortgage market.

Okay. You have now on the Page 9, you have a better split of the revenue streams and comparison between 2018, '19 and '20. So you see a pretty stable growth of most of the lines. When it comes to the cost, I think the major dynamics which we have experienced is amortization, which reflects our investments in the past. We've been, as you see, able to keep the cost base reasonably well. In 2020, the material costs has grown to some extent to the fact that -- I don't know whether you see that, but I'm sitting in the new head office of mBank. We moved from Senatorska to Prosta. Fortunately, both addresses are #18. And obviously, that has been related to some extra costs, which we have to register.

And finally, I think the issue which definitely will be of the most of the interest of your group are I think this is the provisioning of our legal risk. I think that credit portfolio is better known to yourself. And you have -- you follow the developments on this front. We -- this time, we decided to go, I would say, extra mile and to reveal our understanding and our management and the way we manage this provisioning. As you see, the major development is the rapidly growing number of cases in the Polish courts, which is reflected on this northeast part of the slide. I would say, in terms of our -- of the probability of losing the cases, this is a big unknown. And I think that, at this stage, it's not something what we can easily predict. We believe that the number of cases which the bank had registered as a final verdict is too small to project. The jurisprudence is -- the way that the courts decide, I think, is unstable.

Now for your information, in months of December, most of the cases which we lost were decided towards substitution of the currency close -- of the part of the contract with the -- something that one of my colleagues intelligently named as Swiss zloty, which is zloty on LIBOR, which definitely, in the long run, will not survive. All of us know that. But this is still a big part of the verdicts which we register. As a consequence, I think it's a very difficult area in terms of managing this portfolio of court cases. But I believe that the coverage which we currently have is sufficient.

And obviously, we will be reflecting these developments in the future. I think on this front, the easiest way for us will be we need to respond to the particular questions obviously to the extent we decide to review. But as I see, I think that the level of openness on this front, which is being presented in this document, is not comparable to anything what has happened in the past, both in our case and the other banks.

What is worth to mention is that the first wave of the cases which we have witnessed was very much very specific clientele, bigger tickets, well educated in many cases. Marcin Wojtachnio, who is running currently the dedicated effort, we have a separate department which we set up just to manage these cases. And Marcin Wojtachnio, who is our -- who is leading the show on this front, he's a former deputy at our mortgage bank. He's a person who used to work in the credit department, when we've been offering this product. He's well positioned, I have to say with in-depth knowledge. And he can comment in more detail.

But what we observe is that this is a very specific clientele, which is, to some extent, in our opinion, exercising this turbulent and non-clear area of unstable verdicts, which we observed in the Polish courts. We are on the eve of some clarification, which potentially will come with the Supreme Court Civil Chamber, obviously responding to the questions which have been submitted by the chairwoman of the Supreme Court. That will definitely help to some extent to understand which direction courts will go. But I don't think it will be the end of the story. We have to be realistic. There is a number of cases hanging in European Court of Justice, which I think will be a part of the longer-term line of jurisdiction in this respect.

I believe that the fact that the questions have been submitted to the whole Civil Chamber of the Supreme Court, at least on my side, gives me some dose of optimism that this is a significant issue, which I believe requires more reflection, not only in the context of this particular cases but can influence in a big way the contractual law in Poland. And I believe, to some extent, the Supreme Court is being confronted by the question of supremacy of the contractual law over consumer protection law. This is a new area where I think that it's not only in Polish -- this is an area where not only the Polish courts but also European courts are struggling. This will be, well, at least interesting time.

As you know, we have particular views that we got some -- I have to be fair. We got some positive message from the Governor of the National Bank of Poland, where I think that his comments, which have been done -- which have been delivered on Friday at his conference, I think that there is basically all the aspects what he has mentioned or the answers he answered or the questions he answered, I have to admit I share. So this reflects very much the same type of opinion as the majority of the banks in Poland share. As you know, there is also an initiative by the Chairman of the Supreme Court. But since this has been already well covered by at least Polish media, it will be more advisable for us and more efficient for the discussion to respond to the particular questions which will be raised during the conference.

With this, I will pause. And I understand that -- who is next, Marcin or...

[Joanna Filipkowska, executive]

Andreas.

[Andreas Boeger, executive]

Yes. So let's briefly go through Q4. Let's stay here on that slide, #12. Cezary already mentioned that the quarter was obviously heavily affected by the legal reserve, which was PLN 633 million. But maybe 4 key takeaways and then we briefly flip through the slides.

So my 4 takeaways are very strong revenues, including also core income. And that on the back -- with the backdrop of a very strong net fee and commission income of nearly 19% higher year-over-year. Second one, cost/income ratio, very good for the quarter. It was 34.6% and 41% for the full year. Third one, loan volumes, roughly flat but very strong in mortgage loans. And the fourth factor, I would say, the basis of all this is a very strong capital ratio and also very strong liquidity ratios.

Let's briefly look what happened in the quarter and go to Page 17, development of loans. Development of loans, there, we have a rise in retail. That rise in retail is stemming from mortgage loans. Non-mortgage loans are a bit down in the quarter. And we have a stronger reduction on the corporate side. On the corporate side, that also coincided obviously with the active balance sheet management. Active balance sheet management in the fourth quarter started with the deposit side. But the deposit side then also transponded into our clients actually repaying loans. And debt repayment was not only seen on traditional loans but obviously also on credit lines, which has the lower usage. And this is why you see the corporate line here going down.

New lending business, I think that's slightly self-explanatory, strong in mortgage loans. Non-mortgage loans still on quite a good level, given the fact that for a significant part of the fourth quarter, we were in lockdown or semi-lockdown. And non-mortgage loans, I think now clearly we see the trend that this also depends on the COVID restrictions. But I think we've also found a good equilibrium here for finding new business at a good price and also at a good risk appetite. Corporate loan sales, also strong in Q4. That contradicts a bit with what you have seen before with the repayment. Well, the one thing is repayment. The other thing is new sales. And please also remember that not all of these new sales are immediately drawn, but they're also in part committed lines.

Deposits, next slide. Corporate, minus 8.7% (sic) [ 18.7% ], very active management of getting the deposits down, especially over year-end. Also, with the introduction, always the further introduction of a broader year-end fee there on accounts. And retail, together with the transactionality, still growing deposits here, PLN 5.6 billion more. Here, we said this also in the last earnings call, we have basically stopped paying for deposits, so all these deposits roughly come for free. You also see this on Page 33 in the appendix. Let's not flip there. But you see how nicely the cost of deposits is actually going down. And that trend will be sustained also in 2021.

Briefly, on income. Cezary already said it that income is stable and was actually very strong in 2020. Fourth quarter, I think you see here, in green, the case for net interest income bottoming. That obviously is very important, given the huge interest rate cuts we had in 2020. We will further work from here. If I look a bit into Q1 2021, I think that will be also part of the bottoming because the first quarter obviously has less business days. But we will work our way up from here.

Strong net fee and commission income. So the core income in the fourth quarter was also very strong, only slightly beaten by the first quarter 2020, but otherwise a very strong quarter also historically. Plus we had extraordinary events. Roughly 2/3 of these extraordinary events stemming from the sale of bonds. And with this, crystallizing some positive market values and also were helped by the valuations we had in Visa, where we actually also in November have sold the part that is sellable, roughly half of the position and also some other participation.

Briefly, on costs. Costs, as Cezary was saying, we are maintaining a tight cost discipline. We don't have a mantra of managing it down on a nominal basis. Well, that happened because obviously we want to run a tight ship. But we very much look also at cost/income. And the 34.6%, obviously then put the basis for a 41% cost/income ratio for the full year. We will remain cautious there. But we will also further invest because we want to obviously secure a bright future for the bank.

With this, I will close my remarks and hand over to Marek to do some comments on risk and capital, please.

[Marek Lusztyn, executive]

Okay. Thanks a lot, Andreas. So in the next 3 slides, I will try to comment both on the risk capital as well as answer some of the questions that already popped up on the Q&A front.

So on the risk side, we have seen a positive trend in the cost of risk continuing in the fourth quarter. And the total cost of risk expressed in zloty and is -- in basis points was lower than in the previous quarter. In the first quarter, we have completed the sale of the nonperforming retail receivables, around PLN 240 million, which had a positive impact on the retail loan loss provisioning. It was also a reason of the slight decrease of the coverage that you will see on the following slide. The level of the loan loss provision in the retail banking reflects a very good quality of our retail portfolio.

There was a question on the performance of the loan moratoria, so I will respond this right now as well. At the end of December, in the retail banking, approximately 90% of the volume of loans ended moratoria. And the payment discipline, I have to say, was extremely good. The customers after the moratoria was -- roughly 98% of the contracts that ended with moratoria are regular. So that is with the debt [ dates ] past due lower than 30 days. It is better than initially expected. And that's very positive news for the quality of the portfolio.

There was a question on the Q&A with respect to the amount of the COVID-related provisions created in the first quarter. So on that side, we have created roughly PLN 90 million of additional COVID-related provisions and additional PLN 20 million was coming from the recalibration of the model for corporate portfolio.

There was also a question with respect to the outlook on the LLPs. So as you may imagine, the outlook of the level of provisions will largely depend on the pandemic and related macroeconomic developments. But in our current scenario, we expect that it will be still elevated in 2021. But in absolute terms, we expect the cost of risk for 2021 to be slightly lower than it was in the past year, slightly lower than in 2020. As we said, the data that we have currently at hand indicate that vast majority of clients who benefited from the loan moratoria returned to the debt repayments.

Some of the large corporate clients have already obtained or are in the process of obtaining Polish Development Fund support. At this stage, it's quite challenging to say what is the actual situation in the industries by the second wave of COVID lockdowns. And we expect that more visibility on that will be coming in the second and third quarter of this year. So the situation of those will be more reflected in the -- at least at the later stages of the year. Also, we have provided in the disclosure an information that in the first quarter 2021, we will see additional impact of the new definition of default that was implemented in regulatory requirements and we expect this one to bring additional PLN 40 million of provisions.

On Slide 23, we see the loan portfolio quality. Fourth quarter, the nonperforming loan ratio for mBank Group was stable at 4.8%. It was slightly going down on the retail portfolio, as I said, to a large extent, thanks to the sale of the retail NPLs. And on the corporate side, it was marginally going up from 6.3% to 6.5%, due to 2 reasons. We had some individual reclassifications of clients that were in the sectors most vulnerable to COVID, in particular some of the hotels. And also, it was caused by the drop of the denominator, because as Andreas was saying, there was a small drop of the overall volume of corporate loans.

Going to the next slide, Slide 24, key regulatory ratios on liquidity and capital. I'm glad to confirm that mBank Group maintains a very strong capital position and a very high cushion above the minimum regulatory requirements. At the end of fourth quarter, the total capital ratio was higher than the minimum regulatory requirements by 5.9 percentage points at the group level and Tier 1 capital ratio by 5.8 percentage points.

And last but not least, the mBank Group demonstrates an outstanding and one of the strongest on the market liquidity positions, which is evidenced both in the short-term liquidity ratio, LCR stood at 218 points for the group and 202% standalone, and long-term liquidity measure, NFSR, stood at 138%.

And with that, I hand over to Marcin for the macroeconomic comments.

[Marcin Mazurek, executive]

Thank you, Marek. Let's start with macroeconomics. So economy is still in the grip of the virus. You can see that in consumer confidence. But definitely, the bright spot in Poland is labor market. Labor market was well hibernated in 2020. But everything has its price tag. So this hibernation means also that in 2021, the labor market will be waking up only slowly. So that translates into a rebound in consumption but not a very strong rebound in consumption. Therefore, we expect GDP growth to reach 3.8% in 2021. So obviously, the GDP growth would be better than the recessionary year of 2020.

At the same time, on average, inflation is going to drop towards NBP target. But this average drop masks a more important process that is somehow brewing underneath. The trough in inflation will be reached in the first quarter of 2021. But overall, in the full year, the path of inflation will be rising. And it's also possible that in the year-end, we will be close to the upper bound of NBP target. So it will generate kind of a huge inflationary pressure for 2022.

Turning for monetary aggregates. We may see that the processes that started in mid-2022 -- in 2020 are being continued. There is a huge inflow of liquidity that is resting on deposits. And also, the demand for credit is low right now. As economy jump-starts in 2021, the demand for credit will be somehow higher. But the brightest spot in the credit market would be mortgage credit on consumer side.

As far as interest rates are concerned, interest rates and market yields are very low. And interest rates start to stay flat in 2021, especially the ones set by the NBP. At the same time, zloty is going to be weak because NBP invested a lot to show the market that they have inclination to see weaker zloty just to support export. And also, just last but not least, 2 words about expected future post-pandemic trends for mBank Group. We expect 5% CAGR revenues and cost/income to hit 30%, 39% in 2024.

That's all from my side. Thank you.

[Joanna Filipkowska, executive]

Thank you, Marcin. Now we are going to retail questions. There are a lot of them. I will try to put them in some thematic blocks. And thank you, Marek, also for answering some of them already.

I will start with the questions on outlook. Any color you can provide on volume growth outlook? Which segments likely the drive of the growth? Do you expect mortgages to continue growing at Q4 pace?

[Cezary Stypulkowski, executive]

Well, maybe on this outlook, I think that -- two major comments. Yes, I believe that the mortgage will continue to grow as you -- while the demand for housing in Poland, and specifically for ownership housing, I think, is both culturally well anchored. And additionally, we have high demand, specifically in the big cities, where people are sort of moving in. The less important is this demographic aspect because I think that the numbers will be going down in terms of people maturing to the moment of buying into their new apartment or house. But I think in terms of growing 2021, I think the trend should continue. That's one.

The second is, and this is more difficult, how we predict the recovery of a consumer financing. I think that will be heavily dependent on the COVID developments. And I think vaccination will be a very important factor. Once the general public will come to a conclusion that it's semi-over, we will be seeing more of a consumer, not only returning back, but I would say that one can expect that there will be a kind of outburst of more active demand. So that is one.

I think that the more problematic will be the recovery of the dynamic of the loan buildup on the corporate side. I think that this very much depends on particular sectors. I think that on this, I will turn to Marek. But before doing this, I think that I'm personally expecting that important driver of the areas of the expansion will be, to some extent, related to the adjustments in the banking tax. I strongly believe that there is enough reflection among the decision-makers on this front that banking tax in the current format is completely out of the -- I would say, out of the reasonability at the time when you want to sort of steer the economy out of the recession.

And my feeling is that some relaxation and some more sophisticated format of favoring some of industries, we can expect. And I think that will be the major factor. This is premature, and I'm not the right person to decide which direction to go. I can imagine that some of us will be of the preference. But in principle, I think that I expect that in the first half of the year, there will be some changes in the banking tax. Marek?

[Marek Lusztyn, executive]

Thanks, Cezary. So what's worth highlighting here on top of the forecast, which Marcin provided and comments of Cezary, is that credit portfolio of mBank is quite immune to lockdowns because our customers are actually very mobile and they do not really focus on branch-going. So on the retail side, as we were saying, we see a very strong quality of the portfolio. And on the corporate side, we see that, looking at the different sectors, we are underweighted versus the peers group with respect to the most exposed sectors, that's in particular hotels and shopping malls. So I look quite positively into the development of 2021, both in terms of the volume and in terms of the quality of the portfolio.

I have seen that there was a question on the volumes on mortgages. So we see that, overall, the mortgage loans are going up quite quickly in the country as well as in mBank. As an organization, we are making an incredible effort to improve and enhance the mortgage process. So part of the success will contribute to the fact that we are becoming simply more efficient and quicker in making the decisions. And this is the trend that, in the mortgage, we'll continue also in 2021.

[Joanna Filipkowska, executive]

Thank you. Another question. Do you expect some more pressure on interest revenue yield? Has your bond portfolio yield reached the bottom in Q4 2020? Or is there some more to come in 2021?

[Cezary Stypulkowski, executive]

Andreas or Karol?

[Andreas Boeger, executive]

So in general, well, the yield environment, as we said, is not easy because the yield environment is now down. We have an investment portfolio. That investment portfolio in part is in hold to collect and for sale, out of which we crystallize some gains. There is still positive market values in this, which can either be crystallized or we'll see over time its P&L effects in net interest income. That roughly is after tax between PLN 150 million and PLN 200 million in this. And then there's a more substantial amount. I think you'll see this in the annual figures that we have in the hold to collect portfolio. That's not sellable, but that will, over time, also go into NII. So we're still also benefiting from our interest rate decisions from the past.

[Joanna Filipkowska, executive]

Next question, revenue projections of 5% CAGR until 2024, as flagged by Commerzbank, mBank will be a major growth engine. What assumptions regarding FX loans did you include in that projections?

[Andreas Boeger, executive]

Maybe there also comment from me. The -- if you purely look at the revenue contribution of the FX ML loans, that's anyhow minimal. So the question here on FX ML loans is more about legal reserves, about any programs, et cetera. If you look at the engine, how we run the bank, on which we also feed the bank and invest in the future, that's less a function of the revenue contribution there. So the FX ML plays a very minimal role in these kind of projections.

[Cezary Stypulkowski, executive]

Well, I would say there is one aspect which definitely might be of the interest. In the case that there will be Armageddon on this front, that will impact our capital position. And obviously, that will be hindering us to grow rapidly. But otherwise, I think that the bank has proven track record of growing somewhere between high single-digit or double-digit. And I think that that's the assumption which is still valid. And that's the way we want to contribute to the overall results of Commerzbank.

[Joanna Filipkowska, executive]

Okay. Thank you. The next question, on excess liquidity, all banks in EU are trying to sweep deposits into mutual funds or investment products. What are mBank plans in that respect? And what are the key obstacles, consumer protectionism, et cetera?

[Cezary Stypulkowski, executive]

Yes. I think that this is the issue which has been already discussed in -- over the quarters. To some extent, I have to admit that this is my almost personal mistake, to give some more comfort to my colleagues. I was hesitant to set up the investment fund on the mBank as is solely owned by mBank because I was a strong believer on more open architecture and ability really to tap the best performance or to attract them to very attractive mBank clientele.

But I have to say that the MiFID II plus the collapse of the independent players in the Polish market led to the conclusion that my initial strategy was wrong. And now we are in the process of setting up our own investment fund, which was already preannounced and which is in the stage of development. So I think that in this respect, we didn't utilize all the opportunities to the extent possible/we didn't have sufficient infrastructure. We believe that we will be catching up with the rest of the market. Marek, would you like to add something?

[Marek Lusztyn, executive]

No. This -- I think that was very sufficient as account.

[Joanna Filipkowska, executive]

Okay. Thank you. So another question on outlook, what is your outlook for net fee income in 2021?

[Cezary Stypulkowski, executive]

I believe that this line will continue to grow, maybe not in the pace which we have experienced last year. But I'm seeing this is a positive contribution. And its contribution to the overall results of the bank will be growing.

[Joanna Filipkowska, executive]

Thank you. Now I will turn to the questions regarding the Swiss franc issue. Is it fair to say that you are looking to implement the KNF loan settlement proposal? Can you provide some color on the methodology adopted when you estimate PLN 4.7 billion for active portfolio or PLN 5.4 billion for both active and repaid portfolio? Do you feel comfortable to manage the estimated impact? What sort of regulatory support you expect from authorities?

[Cezary Stypulkowski, executive]

Well, I think that we have to split because -- can you start with the first question? Go one-by-one.

[Joanna Filipkowska, executive]

Sure. Is it fair to say that you are looking to implement the KNF loan settlement proposal?

[Cezary Stypulkowski, executive]

Well, this part, I will answer. I think that our position is pretty clear. We know that the best way we need is to reach agreements with our clients. This is not easy and trivial. Under the circumstances, the proposal, I will name is not the KNF proposal, but the Chairman's proposal because we have to distinguish between the institutional part of KNF and sort of the personal proposal set by Chairman Jastrzebski. I believe, and this is the way we try to describe this, is this is the most favorable, rational proposal which can be accepted. Do we believe that this is the solution which will be fully endorsed? There is a lot of things which needs to be still clarified, though I have to say a lot of work has been already done.

When I say that this is the most reasonable, that means that this -- setting up the comparison between the zloty mortgage holders and Swiss franc holders makes sense, though one have to be realistic that the Swiss franc mortgage holders already benefited a big way. They bought the bigger apartments. They -- for a number of years, they've been privileged of lower monthly payments. So I think that obviously you will not be able to reach full comparison in this respect. But I have to admit that as -- when I look into the variety of ideas, I'm not saying proposals, ideas which have been submitted, the proposal by the Chairman sets some kind of ultimate solution which could be accepted. As I said, we are not in a position today to say yes. This will be a complex process, including the governance structure of mBank, which needs to be alerted, informed and ultimately decide because money at stake is pretty high.

As you know, we have some buffers. We are committed to use these buffers to settle with the clients. But at the same time, I'm very, very firm that the bank is of the belief that we didn't violate any laws. We still believe that the FX clause, which we've been using 2005, 2009, to set up the mechanism of Swiss franc/zloty conversion was right. This was very much confirmed by the governor in his strategy in his Friday meeting with media. And we believe that automatic abusiveness, which is sort of assumed by a number of legal firms, is wrong. And we will be still fighting this in the courts. But at the same time, obviously, we know that this big question mark hinders our more, I would say, active expansion. And we are committed to find out a solution which will be reasonable. With this, I will stop and please go with the second question.

[Joanna Filipkowska, executive]

Okay. Can you provide some color on the methodology adopted when you estimate PLN 4.7 billion and PLN 5.4 billion impacts?

[Cezary Stypulkowski, executive]

This needs to be answered either by Andreas or Marcin. Who is volunteering?

[Andreas Boeger, executive]

I can start. So what we do there is we actually take the portfolio, and it's -- that PLN 5.4 billion was taken with the date end of September, when you take the portfolio as it is right now. And you actually then see what it would have been if that would have been a zloty loan. And from this, you get these results.

I think one of the questions is also why, for example, the repay part is significantly smaller than the one that is still active. That's also a function. Those who have repaid have repaid obviously earlier, in earlier periods and not only that far away, if you look at FX rates in 2018, for example. But also earlier in time, FX was more benign. So they actually locked in at better rates. And this is why actually the hypothetical loss or the -- we would have on that portfolio, if we would make them, put them in the same position as borrowing in zlotys is not that big.

[Joanna Filipkowska, executive]

Okay. Thank you. Do you feel comfortable to manage the estimated impacts?

[Andreas Boeger, executive]

Sorry. What was the question?

[Joanna Filipkowska, executive]

Do you feel comfortable to manage the estimated impacts?

[Cezary Stypulkowski, executive]

Well, we are being paid for managing. So we are comfortable to manage. Though I understand that in the background is whether we will be able to manage this within the boundaries of the regulatory expectations or rules. I would say, yes, I think I have to be realistic that there are some declarations by the KNF in terms of flexible approach to some of the restrictive measures of the banking or the bank's capital or the BRRD rules or not that much liquidity. In principle, I have to say, yes, we believe that it's manageable from the bank's perspective. But this will significantly limit the ability of the bank to expand, unless we'll be able to find external capital because the -- that will consume a significant part of our capital.

Obviously, when we talk about this PLN 4.7 billion, we are talking about a situation where all customers will come and will be offered and they will accept. I think that the customer behaviors at this stage are very difficult to be predicted. I don't think that each and every customer wants really to convert. We know that also from our dialogue with customers. Some of them, in my opinion, talking about the ones which are in courts, they believe that they can get apartment for free. This is something which we will fiercely oppose and we will be fighting this. But in principle, I believe that the bank obviously will be heavily weakened. And I think, to some extent, it also resonates to the previous question that, at least for 2, 3, 4 years, the bank will be in a position to rebuild its capital base. Andreas, you would like to add something?

[Andreas Boeger, executive]

No, nothing to add.

[Joanna Filipkowska, executive]

Okay. So another question, what sort of regulatory support you expect from authorities? And the similar one, what could the regulator, so PFSA, NBP, UOKiK, do in order to encourage both banks and borrowers to sign the agreements?

[Cezary Stypulkowski, executive]

Well, in my opinion, this is, to some extent, premature. I think that what is needed really is a better -- at this stage, a better cooperation between -- within the official sector. We know as a bank that, on one hand, there is the issue, which I think on either Marek or Karol Prazmo can address. This is the FX position, which I think creates itself a number of issues, which potentially can emerge, including reversion of the position that the roll-off the National Bank of Poland, sequencing of this situation, ability will need to reconvert. Because just to use the surveys to decide of the opening of the FX position is not the way I will advise to manage. So I think that's a very subtle process which requires a lot of discussion and potentially not opening some kind of a ruining of the FX market in Poland.

The second issue which I believe is important are the consequences for BRRD treatment of the bank, the restructuring of the bank under the regime and our restructuring program because that will be artificially, to some extent, triggered. And the good news for us is that we believe strongly in our business model. And we believe that we will be able to work out the situation. But obviously, there will be some stages of the implementation of the potential scheme which will require strong cooperation with the regulator. We are currently working on exactly what I think stands behind the question. That means what will be the sequence of the developments and triggers to -- for our dialogue on the particular issues vis-à-vis the KNF?

The separate issue, which is in the embryonic stage of the discussion, this is how to manage this FX position. This is very important also in the context. I believe that somehow this didn't go to -- or didn't emerge as a -- in a public domain. And I think that didn't -- has not been fully comprehended by the courts. The banks are very restricted in terms of opening the FX position and they can not earn money. And I think the number of people believe that on this fluctuation of the currencies on this portfolio, we've made a fortune, which as you at least know was not true. But this is another aspect where I think there is a need for cooperation. Marek?

[Marek Lusztyn, executive]

Yes. Thanks for that, Cezary. As it was said, we are not yet at the stage at which the governing bodies of the bank can decide about the implementation of the plan of about not implementing it. The analysis are ongoing. And this is a very complex exercise that involves multiple dimensions as well as including but not limited to the FX position management, both at the bank level and at the sector level. The topics related to the possible implications on the capital position and not only the target one, but also the path how to get there, it requires a coordination of the number of actors on the public side.

And what I would like to highlight as well, in the numbers that we are showing on the Slide #10, the increase of the legal risk provisions, we are provisioning for as-is scenario. We are not provisioning in these numbers for the hypothetical implementation of the plan.

[Cezary Stypulkowski, executive]

Andreas, you would like to add something?

[Andreas Boeger, executive]

No, nothing also to add here. I think we're also getting other detailed questions here on various angles, including active versus repaid, et cetera. I think what we have done here today, we have given strong transparency in the disclosure. But it doesn't preempt anything that we actually really plan or fully support. And this is, I think, the way it should be read and should also be discussed.

[Cezary Stypulkowski, executive]

Yes. One more -- one comment of a more general nature. Whatever happens, we will be having continued cases in the courts. With this number of cases reaching almost 7,000, I don't think that even -- it was Chairman Jastrzebski's proposal, we will be able to reach agreement with each and every client. That leads to the situation that the verdicts will be coming. They will be, I would say, still to some extent open issue. And they need -- and they will require to be managed. What I want to stress again and again, we are of the opinion that the bank has performed its duties vis-à-vis the clients in the past. We didn't violate the client relationship. We believe that some of the, I would say, directions of a potential verdict will distort the industry. We strongly believe that the official sector covering the banking official sector participants should come with more clear message independently of the fact that the agreement with the clients is needed.

But I think that if things will not be settled in terms of what does it mean FX market, what does it mean using the tabela kursowa and what are the ways the banks operate in this respect. Because the issue of existence of the index loans is out of the question, both the denominowany and indeksowany, I think that this is something what is in the banking law. So I think that what we need is a clear message from the official sector participants about the way banks operate. That cannot be dominated only by the consumer protection people because there is an obvious conflict which has emerged despite the fact that the banks has provided a lot of capital, importing the capital from the outside, allowing people really to build up the apartments. And we don't believe that it's ethical for them, for a number of clients, to exercise some non-clear or not fully explained specificities of the banking operation, so they benefit in a big way, which translates into expectation that they will get their assets partly for free.

[Joanna Filipkowska, executive]

Okay. Another question, you estimate the potential impact of implementation of the KNF's conversion plan on repaid portfolio at circa PLN 0.7 billion. At the beginning, it seemed that this group of clients would not be eligible for KNF's agreements. Did something change in this matter? Does KNF now wants to cover both active and repaid portfolios?

[Marek Lusztyn, executive]

I think if I take this, this is along the lines of what I just said. This is about creating transparency on our side. We did the calculations. This is why we thought we'd share it with you. It doesn't mean that the KNF is changing. It stands here. It's for completeness reasons to see the differences. But we're not implying with this that we are either ready to go for the repaid or that the KNF wants also to go for them.

[Joanna Filipkowska, executive]

Okay. So another detailed question about our calculations. My question is whether presented estimates of Swiss franc costs, PLN 4.7 billion to PLN 5.4 billion, are on a pre-income tax basis or post income tax and whether this includes provisions which have already been created or it's a top-up.

[Andreas Boeger, executive]

Okay. This is the full effect. So any provisions that we already have would actually positively contribute of getting that number down. So this is the full effect. And what we have for our full stack of legal reserves, we currently assume that it's not tax-deductible.

[Cezary Stypulkowski, executive]

This is the technical assumption. But that will be almost unimaginable that, that will be -- that this money will be taxed. And I think that the clarification on the tax treatment, both of the clients and the banks, I think, needs to be reached. As we understand, some initial comments in this respect, the positive comments have been done. But obviously, this requires a solid confirmation by the respective bodies of Ministry of Finance.

[Joanna Filipkowska, executive]

Thank you very much. I think we've covered most of the questions. Some of the data that you are asking for will be presented in our annual report that will be published very soon. So again, thank you very much for your attention. If you have any more questions, please contact mBank's IR team, and see you all in early May, when we will publish our first quarter results. Thank you very much.

[Cezary Stypulkowski, executive]

And we decided that the first quarter results format will be significantly changed. And I can tell you that one of the aspects which we want to tackle in a very specific way will be the treatment of our Swiss franc portfolio. Thank you very much.

[Joanna Filipkowska, executive]

Thank you very much. Bye-bye.