mBank SA

WSE:MBK

Earnings Call Transcript 2021-Q4

[Joanna Filipkowska, executive]

Good afternoon, ladies and gentlemen, and welcome to our conference that we'll present the results of mBank Group in the fourth quarter of 2021. Unfortunately, we are again -- we meet again virtually, so please use the chat field to ask your questions. Today, the results will be presented by our CEO, Mr. Cezary Stypulkowski; our CFO, Mr. Andreas Böger; and our CRO, Mr. Marek Lusztyn. Chief Economist, Marcin Mazurek, will present the macroeconomic overview.

Cezary, over to you.

[Cezary Stypulkowski, executive]

Well, welcome. Two major messages, which started to be kind of a routine. Core activities going very strong and very well. CHF Risk on the horizon, we have to tackle both. 2021 was exactly the year of very strong core activity, the strongest in the industry. Quarter-after-quarter, we improve. But at the same time, we have to manage portfolio CHF.

On the major communications around the results of 2021 is that the income has grown -- significantly increased 4.2% year-on-year. Our income has gone about PLN 6 billion, consisting of some improvement year-on-year on the net interest income. And very strong performance of our fees and commissions line, which has grown by more than 25%. And basically, on the fees and commissions side, it's across the products and client groups. So it's a very consistent growth resulting both from the business growth and more systematic adjustment on our fees and commissions pricing.

That led to very strong and consistent cost income ratio has slowed down slightly above 40%, which is, I think, sort of a dream figure for most of the banks, and is a very consistent process in the bank for a number of years. We are proud that we manage the bank around the cost-income ratio since many, many years, and I think that we have a confirmation that we can deliver on this front. Cost of risk has been 76 basis points, which is below our original expectations. We've been guiding the market around 100 basis points. The performance was slightly better. What is important is I think that the first time since I remember our NPL has been below 4%. That's obviously resulting from some sale of the portfolio, the growth of the overall portfolio. So I would say there are a number of factors. But in principle, this is on the downturn.

Well, after all the positives, I have to come to something what is almost at a personal level, being set back because this is the first loss in my professional life. I think I'm sort of a manager in capacity for 32 years, I think that's the first time when I have witnessed the loss. But this has been resulting from very high legal reserves or provisions which we have built up vis-a-vis this heritage portfolio. Resulting mostly from the fact that we are in a very sort of the disrate nonclear legal environment where the Supreme Court basically resist to respond or to set up the jurisprudence. In this respect in Poland. The courts are lost, in my opinion. We will be witnessing unknowns for some time, and as a consequence, we adopted more conservative approach on this issue. Not mentioning that, obviously, we are trying to pilot also some settlements with the clients in the environment, which is changing mostly due to the interest rate movements. When we look into the bank as a core activities of the bank, we know that our business model is very strong, well performing and is delivering almost 12% in our return on equity. In terms of the business volume expansion, I have to say, the major message is that you know our mortgage book is growing rapidly, we sort of regained the momentum. Some of you who follow our figures more stable -- in more stable way know that the bank has slowed down after '15, '16 when we've been subject to significant additional capital buffers imposed on the because of the Swiss franc book that we have in our balance sheet. That was the moment when I think the bank has slowed down. But steadily, we have recovered, and 2021 was the year of the rapid growth of our mortgage book.

I would say what is important, I think, will be reflected in one of the slides is our constant growth of the market share, specifically on the retail side. On the corporate side, we are sort of more balanced with more focus on delivering the efficiency of our customer relationship and specifically risk-weighted assets allocation was the prospects of stronger cross-sell and returns on the individual exposures.

On the liquidity side, not that much to be reported, all the major ratios which describe or are required to by the regulators are at a very high level. I remember when I joined the bank that our loan-to-deposit ratio was 140%. Today, it's half of that, 70%. And what is also important and worth to mention is that the bank continues to have access to the wholesale markets. I think in this respect, we are almost unique in the market. Well, that costs some money. But our ability really to continue on the EMTN program to attract investors this time in the MREL eligible format with a green color on top, I have to say, is another confirmation that investors and the market accepts our approach and our way to deal with the wholesale markets.

On the capital side, obviously, there are consequences of the loss that will be explained. So it has lowered down slightly. I'm still in a comfortable zone 3 -- more or less 3% above the required ratios. Well, customer like us. We have reached 5.5 million of retail customers in 3 markets which we operate. Corporate book is growing as well, more than 30,000-plus of clients. And finally, I think that the major achievement of 2021 in terms of how to manage the organization is very much the fact that we have launched new strategy, but that has been covered during our sessions, I believe, in November. This is a summary of the major developments. I don't want to spend time on these figures. You can read them. Let's move on.

Well, I would say more -- this is more for the media, I believe, but what I would like to focus on is that mostly due to our strategy on the -- with this concept of demography destiny, we have launched this junior account for children. It's a very interesting phenomena in the bank, that having in mind the average age of our clients and the population of clients who are reaching approximately 40-plus years which have children. I believe that we will be benefiting out of the primary relationship with the parents with this approach. Obviously, that will not produce a lot of money, but that will stabilize in the long run our customer base and will add significant portion of young generation clients, who in the next generation of the management, people will benefit out of these moves, which cost us some, but I would say that's the business model of the bank. We are not stealing clients from the other banks. We are attracting clients because of our premier transactionality and the brand appeal, et cetera, et cetera, and then they are growing with us. That's the major message on this front.

On the ESG side, I think that there will be, I think, devoted slides, which Marek will comment, I believe that putting aside the WOSP orchestra of Christmas charity, where we are well plugged in 10 days ago when we had this big annual event, which can prove that our customers are truly willing to contribute to the social goals and the concept of WOSP. I think that what I will add only is that we see ourselves as a relatively advanced green bank that will be supported by additional information. What is, I think, on the, I would say, technology front important is that we have launched BLIK payment functionality, which is very convenient in the points of sales and that's the new functionality of BLIK. And it's very interesting to know that our customers are making somewhere between 30% and 40% of this particular type of transactions are being done by our clients, which is our ultimate confirmation how powerful and how advanced and how digital-minded our client base is. Let's move on.

These are about the market shares I already referred to a number of clients, let's move on. Well, this is something that we are proud of. We still claim and our message to the market is mBank stands for mobility, what kind of mobility, you can name it. But what is the most important are the charts on the downside. And I think that, that confirms that we have a significant number of active users. The monthly usage of our mobile platform is growing rapidly. And finally, and this is also an explanation of part of our cost/income ratio being very attractive is that how much of transactions are being initiated in the digital world and how much it contributes ultimately to the fulfilling of these transactions. Let's move on.

This is a wrap-up of the financial performance. What I want to particularly focus on, and I think it's almost very specific Polish phenomena is that when you look into our performance and these are reported figures, this is the bank as a whole, you see that operating profit of the bank is still positive despite almost PLN 2.8 billion of write-off on the legal side and PLN 878 million on the cost of risk, but what really hit us were the taxes. The fact that the banking tax cost us PLN 6.8 million. And income tax in the company which has made losses, this is, I think, worldwide phenomena. I don't believe that, that type of a taxation treatment exist in any other market, which I'm aware of.

With this, I will pass on, Andreas.

[Andreas Boeger, executive]

Good. So I would like to put the development of years in perspective over the last 3 years, it's on Page 11. And like we also did in the last annual conferences, to comment on the income side and also on key drivers and as well as on the cost side. So let's look at income. Even though net interest margin was dropping and still dropping, obviously, as the effect of the lowering interest rates during COVID times, the income in total, it was on a growing path for the last 3 years and obviously also growing in the last year in 2021. Let's start with net interest income. The net interest income did not only stabilize as you see over the last 3 years, but also increase in 2021. We, in 2021, talked a lot about the bottoming out of net interest income so to see that bottom without the tailwind of interest rate raises that also happened. But I would say on the last meters of 2021 with the interest rate raises that came starting from October, obviously, that gave some additional tailwind.

The biggest achievement, I would say, over the last 3 years is clearly net fee and commission income. You see it here with plus 25%. For the last 3 years, it's even plus 49%. So it's PLN 380 million more. And as Cezary saying at the beginning, it's a mixed bag of things stemming from various components. And I'll just give you some examples to show how diverse that also is. On the one hand, we changed pricing on account. And so account fees did contribute by nearly PLN 140 million to this change. Credit-related fees, PLN 77 million; foreign exchange, PLN 69 million; payment cards, PLN 55 million; money transfer, PLN 44 million. So a lot of the things we actually do on a daily basis with our clients is actively and positively contributing to this higher net fee and commission income.

If we look at the proportions. So clearly we had a lower space to maneuver on net interest income. So in 2019, net interest income was, for example, 72% of all of our revenues; whereas in 2021, it was 67%. So it went down, but net fee and commission income increased to 31% of all revenues vis-a-vis 23%. So that's a good mix. We are now gearing the bank, obviously, to benefit from interest rate raises, but I think it was very important for this management here to make sure that we have a proper business model and that we can make money even in lower interest rates. And that's also what we, for example, reiterated when we discussed our strategy back in November. Let's look at the cost side. cost/income ratio trending clearly downwards to as Cezary was already saying, 40.2%. But even starting 2 years ago or 3 years ago, it was 42.2%, I mean that's a very competitive cost/income ratio. To explain the drivers, on the one hand, there is higher personnel costs, while 2020 had very low personnel costs, also due to lower performance-related pay. And also in '21, not only do we have a bit more staff, 50 more staff, but we also paid some COVID rewards to our staff because of the very good keeping up of the organization here in very tough times. We also try to, even in inflationary times, have a very reasonable way of managing the material costs. So that's an increase of only PLN 40 million. Within this, is like PLN 25 million more IT spending; PLN 5 million more marketing spending; also PLN 5 million more cost for the KNF; but also savings in the administration area by PLN 15 million and also on consulting by PLN 10 million.

So you see we're always geared towards having very reasonable costs here. I will later comment on this also with the outlook of higher revenues for '22. Clearly, costs will increase, but the aim of the management board is always to have a very competitive cost/income ratio.

So let's move to the next slide and talk a bit about the core and noncore bank. Cezary already mentioned, it's the strong performance of the core bank. I mean the core bank with an operating profit of PLN 2.7 billion and the net profit, that's with the effective tax rate of 27% of PLN 1.6 billion. This is one of the best performances we have ever delivered, if not even the best performance. And the ROE in the core business here on 12% still in an environment that was characterized by very low interest rates throughout the year.

[Cezary Stypulkowski, executive]

The lowest, I think, every bank has experienced.

[Andreas Boeger, executive]

Yes, absolutely. And let's not forget that these interest rate raises that started in October, that takes some time to actually filter through to the balance sheet. So I think that's also a really strong time when it comes to return on equity. Talking about the flip side of the coin, noncore. Obviously, noncore needs a longer explanation what happened in the last year. And for this, I will hand over to our Chief Risk Officer, Marek Lusztyn, to give you more details.

[Marek Lusztyn, executive]

Thanks, Andreas. So as we have communicated previously, we have separated the noncore on one hand to clearly demonstrate the outstanding performance of the core business; on the other hand, to isolate the effect of the legacy portfolio of the Swiss franc mortgage lending. And from the capital allocation perspective, that noncore unit, capital allocated to it amounted to PLN 1.9 billion as of the end of December last year. And on top of that, we have provisions for the legal risk in total of PLN 4.1 billion, which looking at the buffer set aside from the development of the Swiss franc issues, this gives the total amount of PLN 6 billion which is set aside for Swiss franc mortgages. And just as a reminder, if we compare this with the estimate of a potential impact of the conversion plan as was proposed by Polish FSA Chairman, Jastrzebski, that would amount to PLN 5.6 billion.

So if we go to the next slide, please. We have summarized the developments of the Swiss franc issues in the last quarter. The total value of provisions created in relation to the legal risk is still at PLN 4.1 billion, which gives us one of the highest coverage ratios among the Polish peers. The coverage increased from 21 to 32 percentage points. And as I said, on top of that, we have nearly PLN 2 billion of additional capital, which is set aside. So the total value of the existing clients is covered more than 100% higher than it was at the end of 2020. What needs to be said as well is that the portfolio of mortgage loans in Swiss franc is reducing calculatively a high piece. Year-on-year, it has decreased by 29 percentage points, which brings us to the total value of that portfolio in total assets being significantly below 10%, actually at 7.5%. Also, what needs to be highlighted is that the piece of legal proceedings is decreasing. In Q4, We have seen slightly more than 1,300 new cases coming in as compared with nearly 1,600 of quarterly average after quarters 1 to 3 of the previous year.

That brings us to the total cost of legal risk that we have created in 2021 of nearly PLN 2.7 billion as compared with PLN 1 billion in 2020. And that amount is composed of 2 main components. The most important element of that amount is linked to the increase of the provision for the individual court cases. That reflects the inflow of cases, which I have alluded to. And the other one in the amount of another PLN 1 billion is basically a cost of potential settlements program. We are still in the pilot phase of the settlements program. As we've communicated before, it's too early to conclude on the results yet. The pilot phase is still up. But we have already created that amount in anticipation of the potential settlements program going forward. On the following slide, we also comment on the ESG aspects. ESG is an element that was strongly organizing mBank in 2021. As Cezary mentioned earlier, that's a very strong driver of the way we operate and the way we interact with the clients. It has been well appreciated by the Sustainalytics for its ESG rating that puts mBank in 2021 of the 15.9, which means low risk, and in all practical terms, it means that we are in the top 10% of the financial industry worldwide as far as this rating is concerned.

We have not only migrating ourselves into the ESG world, but also we are helping our clients in doing so. We are at the forefront of helping our clients, reducing the environment of footprint through the support of the energy transition, which is demonstrated through the landmark transactions of renewable financing we have completed in 2021. Cezary was also referring to the impact that we do for society, which is not only expressed through our cooperation with the Great Orchestra of Christmas Charity that we are proudly sponsoring, but also through our contribution into the mathematical education in Poland and the support of the young artists.

In 2021, as we have communicated as well for the strategy presentation, we have firmly embedded the ESG values into the way mBank operates. ESG factors are incorporated into top managers objectives each and every of people from this group have been part of the goals related to the ESG target implementation. We have made progress in preserving gender diversity in recruitment and selection processes. And as far as the responsibility of the financial health of our clients is concerned, it's super important for us as well, and we might have a progress in improvements of the personal finance management functionalities to give our clients better control over the finances. And last, but not least, it's also worth reminding that as the first Polish bank we have independently signed the principles for responsible banking of United Nations Environment program, which also is a guiding principle for us how to be net 0 fully climate neutral bank.

Andreas, over to you.

[Andreas Boeger, executive]

Thank you. Let's go into the fourth quarter and try to be brief on the fourth quarter to give you more time for questions. The fourth quarter clearly showed this coin that has 2 sides with the strong business performance and then obviously dealing with the Swiss franc legacy. If you look at core revenues, core revenues in the fourth quarter are clearly at a record high. I'll also explain that later, but that's for both net interest income and net fee and commission income. We've never seen it in the quarter at this high rate. Cost/income ratio at 36.7% is also extremely good cost/income ratio. So that is the one side, that's the positive side. And on the other hand, obviously, most of the annual effect on the Swiss francs of the PLN 2.75 billion that we did book, we booked that in the fourth quarter. So this is why the fourth quarter is actually heavily burdened with PLN 2 billion of legal risk cost and that it clearly left its marks. So let's go into explaining the volumes a bit and what happened behind it. So that's on Page 20. Let's start with loans. The loan book is slightly down over the quarter, but it's not really down. And let's not forget that the Swiss franc legal reserves are a deduction from the gross carrying amounts in the balance sheet. So after adjusting for this, it's roughly flat. Clearly, as always, you see on the corporate side, there is a lower seasonal usage of lines, but also repayment of loans. That is what we have seen over the last years, and we've also seen in the last quarter. Retail, you see here flat. But if you adjust retail for the Swiss franc portfolio, you will see that the mortgage loan book, for example, went up by PLN 2 billion, and by PLN 2 billion equivalent in Swiss francs. That's for the one-to-one, if look on Page 44 in the appendix. So the retail loan book is actually up.

What's more interesting is the new lending business on the next slide. There, we see that the retail business was a bit lower than in the third quarter, but still on a very high level. So Cezary was mentioning it before, on mortgage loans, for example, the total 2021 sales are PLN 3.4 billion higher. So that's 38% more. We finished the year with PLN 2.9 billion, a bit less than in Q3 and Q2. But please look also at the zloty amounts that's the blue one for individuals. We've guided already that for Czech Republic and Slovakia, we changed the pricing policy. So the Polish business here is quite strong, even stronger when we look at market shares. The market share in new sales, for example, in the fourth quarter for the mortgage book was around 12% with December, even exceeding the 12%. So that is a good trajectory. Similar thing on non-mortgage loans. Non-mortgage loans, plus 40% over the full year. When it comes to full year volume, not only quarter-over-quarter, with the 45%. So total sales, PLN 2.8 billion from PLN 7.1 billion in 2020 to PLN 9.9 billion in '21. Also, fourth quarter, you see here a bit weaker, but that's also a seasonal effect. In general, the outlook on both, especially the mortgage loans, but also the nonmortgage loans in retail remains positive, especially for the medium and for the longer term. We will need to see how interest rates movements and also clients clearly seeing how much net salary they have now after Polski [ VAT ], et cetera, will affect the first quarter sales, but we, in general, take a positive stance towards the new sales here.

Going over to corporate. In corporate, the fourth quarter is always very strong. You've also seen this in the fourth quarter last year. That's also mostly due to seasonal effects because in corporates, you have renewals in the last quarter. Renewals, less on the investment loan side, more also on also short-term money and overdraft facilities. So that's the usual effect you see here and that also happened in the fourth quarter. General outlook also on corporate, as I was commenting on retail, corporate outlook for the full loan book, single-digit growth maybe closer to 3% than 5%. So -- but somewhere between 3% and 5%. As you know, and also what's part of our strategy, we're very selective when it comes to efficiency of the exposures, the underlying transactionality of the client and client activity and gaining new clients is actually very strong, but the appetite of giving our balance sheet for this is there, clearly, but only at the right prices.

Coming to leasing. Leasing was good progress, plus 9%, I think no further need to comment here.

Let's move over to the deposit side. Obviously, strong annual growth. I commented this before, PLN 22 billion more annual, that strong. Corporates in the fourth quarter, less, that's year-end deposit management. You know this. We do this every year, also worked in the fourth quarter. And on the retail side, you see steady inflows happening here with plus 3%.

As I said, I want to be brief, so let's move to the more interesting things, the income side. I was already saying and as Cezary was saying, record high revenues. So let's first look at net interest income. Net interest income, PLN 186 million higher. That is, to some extent, helped by volumes, but also, to some extent, helped by interest rate raising.

I think you see on the right side, when it comes to the development of the net interest income right upper side, you see that bottoming out that we discussed over the full year from loans, for example, and also from the investment portfolio. From loans, it was in the first quarter, the bottoming out from the investment portfolio in the second quarter. So even without higher interest rates, we clearly demonstrated that we can keep this on a upward trajectory. Net interest margin in the fourth quarter also much higher at 242 basis points. That's also a good sign that we're going in the right direction.

Net fee and commission income here in blue did not rise that much quarter-over-quarter, but PLN 490 million is a very strong result, as I said, record and we were even able to beat the very strong third quarter here. Two negative things here. On the one hand, net other operating income is down. That's due to some future commitments, which we booked. And we have a negative trading result of more than PLN 36 million in the quarter. That is mostly due to interest rate derivative valuations. What you have in very strong rising interest rate environment, you actually have a lot of distortions in the valuations, not only on the fixed rates, but also on even floating rates. I can comment on that later if that's wanted, but that actually led to a stronger decrease here. And let's not forget, in that quarter, we actually had interest rate increases in October, 40 basis points; November, 75 basis points; and December also 50 basis points.

So extremely strong interest rate. What is important here in terms of outlook also, we finished the year with net interest income of PLN 4.1 billion. Given what we see and what we expect, we see the net interest income for the year 2022 to finish above EUR 5 billion. So that's a PLN 900 million difference. And that would also lead total income, which was at PLN 6.1 billion, then to exceed PLN 7 billion. This is the goal to which -- towards which the management is actually managing the bank, so above PLN 7 billion for total income and above PLN 5 billion for net interest income.

Let me briefly finish with costs. So costs, I already said, cost/income ratio at 36.7%, so quite strong. Maybe what needs some explanation is HR cost. HR cost, as I said, we paid COVID awards or rewards in the third quarter. That is why it's down quarter-over-quarter. It's up year-over-year because the performance-related pay in Q4 2020 was very low, what we booked there.

What is more important on the cost side, I think, is the outlook. The outlook is what we can guide is cost will increase in mBank. Cost will increase in mBank on the one hand, on personnel costs. That's also due to inflation and salary pressure; on the material cost side, also due to inflation, but also due to delivery of the strategy and due to further investing and taking money into our hands and making this bank even more successful in the core business. We also expect BFG to rise in the year 2022. The year 2021 was a bit lower. In total, BFG at PLN 230 million. So the year 2020 was PLN 300 million, I think above PLN 300 million is a good proxy here. Whatever will happen on the cost side, I think what is clear, we're clearly guided by cost/income ratio, and you will see mBank with a very competitive cost/income ratio also in 2022 and in the years to follow.

With this, I will hand over again to Marek to explain the risk side.

[Marek Lusztyn, executive]

So fourth quarter 2021 led us to a slightly higher write-off for the loan loss provisions and slightly higher cost of risk in particular in the corporate loan portfolio. We see this as a more focused on legacy issues, but most of the write-offs in the corporate loan portfolio in the last quarter were done on the cases that were more historical, they were already in our defaulted portfolio before. As Cezary was alluding earlier, we made a great bit of effort last year to focus on the decrease of the nonperforming loans. So that jump in the LLPs in the last quarter from the corporate loan book was the sign of conservatism from our side. We definitely do not see it as a sign of deterioration of the quality of lending. The quality of our corporate loan book remains very good. We also do not see any early signs of the deterioration coming due to the interest rate increases, also taking upfront one of the questions from the chat. Also, it needs to be highlighted that most of the in particular investment plans that we have on the books were granted in the higher interest rate environment. So we do not expect that at this level of interest rates, they will have any material impact on the increase of the -- on the cost of risk. So on this, we see a 2022 cost of risk not to be materially higher than the one of the past year.

As you can see on the Slide 26, we have considerably decreased the size of the impaired portfolio over 2021 by 12.5 percentage point. The NPL ratio went down to 3.9%, which by local market standard is actually a very low number because the industry average is around 6 percentage points. That cleanup of the portfolio through sale and write-off of impaired loans led to a slight decrease of the coverage ratio but it's still, given the size of the NPL book, remains relatively high. And as you see on the NPL for retail, they are relatively flat compared to last quarter and last -- the previous year.

Can we go to the next one, please? As you may see on Slide 27, total capital ratio and the overall capital position of mBank remains relatively good and well positioned for the strategic targets that we have communicated in autumn. The decrease from September to December 2021 comes mainly due to the write-off that we have discussed at length. And there is also a minor component related to the revaluation of the treasury bonds portfolio due to the higher interest rates, but that impact compared to some of our peers remains relatively modest. As far as the liquidity position of mBank is concerned, the liquidity ratios still remain at very high level, significantly above the deposit rate requirements.

[Joanna Filipkowska, executive]

And now we hand over to Marcin.

[Marcin Mazurek, executive]

So when we met here 1 year back, we expected that 2021 is going to be very demanding in terms of macroeconomic factors. But in fact, it ended up much better than expected. It can be estimated that GDP growth in 2021 amounted to around 5.9%. And the whole year ended with a very high note. Of course, this high growth led to some imbalances in which the most important one is inflation in the end of the year and amounted to 8.6%, and it's going to hover around 8% also in 2022. On the flip side, we had improvement in the labor market, unemployment rate declined further. And also, we observed some wage pressure. But in the end of the year, consumer sentiment deteriorated. It coincided with higher inflation and of course, with interest rates increases delivered by NBC, and that's why we think that 2022 is going to be slower in terms of GDP growth. We now expect 4.1% GDP growth in 2022.

As far as monetary aggregates are concerned, 2021 was proved to be, I would say, very close to expectations. So we had a turnaround both in consumer lending and in lending to corporates. High deposit base, which we enjoyed in 2021 is going to be also repeated in 2022. But you should bear in mind the fact that it seems that we've seen the best in terms of household lending so far and 2022 is going to be slower in that respect. But of course, on the flip side, the corporate loans are going to accelerate in 2022. So this is kind of a positive note.

When you look at financial markets, you can see that bond yields increased massively in the end of the year. It was, of course, accelerated by the actions of Monetary Policy Committee. So far, it seems that we are close to top in yields in Poland. And from now on, we may expect some stabilization or even decreases. As far as the zloty is concerned, zloty stayed weak in 2021, and it's going to be a little bit stronger in 2022, but not so much. Thank you.

[Joanna Filipkowska, executive]

Thank you, Marcin. Let's move to our Q&A session. Some questions have been already covered during the presentation. So the first one is about capital. Do you expect KSF to restore 3% systemic risk buffer?

[Cezary Stypulkowski, executive]

I don't expect this to happen in the upcoming future. I think that there are a number of factors, which, in my opinion, will discourage KSF really to go rapidly. Even if they will start to consider, it will not be just 3% burden put on the banks. It will be spread across at least few quarters. But I don't think that anything significant will happen during the course of 2021.

[Joanna Filipkowska, executive]

Could you please comment on sensitivity of your FX settlement scheme to rising interest rates?

[Cezary Stypulkowski, executive]

That's a big question mark. I think that you know that there is also a question about the pilot. And obviously, to that -- to which extended pilot is being impacted by the fact that zloty interest rates are rising. This is something that we are trying to figure out also in dialogue now with our customer base. My feeling is that we will end up with kind of a speed of the customers between the ones which will continue to stay court and exercise, I would say, the big unknowns of the jurisprudence in Poland and lack of stable line of jurisprudence in Poland, something that we continue to fight as an industry.

There will be a group of people who will take the opportunity to lower down the overall burden going through the settlement processes. We know that from PKO BP, which is the most advanced. We are too early to say what will be the outcome of our dialogue with clients in this respect, but we believe that there is group of clients interested. And there is a third group clients who definitely see the interest rate hikes on the horizon. Marcin said that we are close to end of the cycle, but that is still an issue which is in the public domain is being discussed, impacts also the mindset of clients. We believe that there will be a group of clients who will stay and continue to service as of now. And as we informed, this has been the best performing portfolio of loans, which we have on our books. The paying discipline on the clients front didn't change.

So lots of things around these portfolios I have commented since, I don't know,5 years. And sort the public dynamic in the discussion around this is problematic from my perspective. So I think that there will be group of clients who will prefer to be in this environment where on one hand, they are exposed to some foreign exchange risk, but at the same time, they are benefiting big way from the interest rate differential.

[Joanna Filipkowska, executive]

0Do you expect salaries at mBank to grow slower than inflation in 2022?

[Cezary Stypulkowski, executive]

Well, I think that between Andreas and myself. We don't -- I mean, I personally don't believe that as long as the inflation horizon is not determined yet, I mean, inflation is below 10%, I think it does not require sort of the rapid adjustments. I think that the market is also differentiating. You have groups of people or professions where definitely there is a need to address the issue. The banking sector is very sensitive to the cost of employment. This is sometimes over using comparisons, but it's like my view. This is a very important component of our cost base. We are adjusting our salaries, but I would say it's more not through across the employment, but rather being sensitive to groups of people who are operating in the professions, which are more sensitive and more exposed to the growing level of overall salaries. So I think that will be a selective process. But in principle, I can imagine that now the cost of employment will grow. And I would say, one, being -- if I would be an analyst, I will assume that inflation is [indiscernible].

[Joanna Filipkowska, executive]

Another question from [indiscernible]. When do you expect deposit rates to start rising?

[Marek Lusztyn, executive]

That is a very good question in the context of rising interest rates. But as we have also demonstrated for our liquidity ratios, we are actually as of now flooded with the liquidity exactly as the whole sector is. So it's a matter of more how market reacts to the rising interest rates, how much pass-through is going to be there. But this liquidity component definitely plays a material role so that would be too early to give a precise estimate.

[Cezary Stypulkowski, executive]

I may add to what Marek has said. I have mentioned that when I joined the bank, the loan-to-deposit ratio is 140. It's 70 right now. Last year, mBank during this COVID-related time was disproportionately benefiting from the inflow of money, both on the corporate and specific retail side, which is a confirmation of what our strategy has been over a number of years, which is to be the premier fast transaction bank. Definitely, it impacts our strategy vis-a-vis on the inflows. I'm seeing right now on the TV ads, some banks already moving up in, I would say, in a sophisticated way the interest rates. But I think -- I don't think that we will be the champion of this race. I think that the bank is a very privileged position. And I think that we have learned during the last 2 years how to manage this part of the -- of our balance sheet. And I think that in this respect, I believe that we will be managing this part in a very sophisticated way.

[Joanna Filipkowska, executive]

New sales were lower sequentially in zloty mortgages and cash loans in Q4 doesn't reflect some impact from higher rates. How should we see loan demand, both in retail and corporate in the current higher rate environment? And another question from [indiscernible] can you please provide some sensitivity for the recent rate hikes?

[Andreas Boeger, executive]

Maybe I'll start with the volumes because I already commented on the volumes before. So corporate, I said 3% to 5% is maybe a good proxy, more 3% than 5%. Retail will be -- still be trending upwards, but our clients are actually assessing right now what the high interest rate environment will mean for them. And as I said, it's also the question of net salaries, but that, to some extent, will fade. We still see a healthy high single-digit growth in retail, most likely this year. But we will -- after the first quarter, we will know more. So far, the demand is still good that we're seeing behind it. The next question was because it was...

[Joanna Filipkowska, executive]

Sensitivity of our interest rate -- on the interest rate hike.

[Andreas Boeger, executive]

NII sensitivity.

[Joanna Filipkowska, executive]

Yes.

[Andreas Boeger, executive]

We -- right now I'm not publishing a new NII sensitivity, which is, by the way, a risk measure, which we publish is not a management estimate, but it's normally a good proxy. I think the PLN 900 million that I mentioned before for what we are seeing currently and how we're seeing the year, that's a good starting point. It also shows that the journey we have done from the raising interest rates. Well, it's clearly very positives, but we'll have to see how we can actually materialize for the interest rate rises in the market.

[Joanna Filipkowska, executive]

Another question...

[Cezary Stypulkowski, executive]

May I add a few sentences? Because this phenomena of first quarter where we have witnessed some slowdown, not only in our bank, but I think it's a reflection of 2 psychological phenomenas, which I think we have to take into account. One is that while people have been confronted with a rapid interest rate hikes, and they don't know where is the end. I think that naturally slows down the appetite. And the second is that we've been on the eve of launching the Polish new deal or whatever is the right description. And I believe that a number of people trying to understand what will be impacted. As we know, after the 6 weeks. It's still difficult to measure, but there is no doubt that there is a group of customers, including also our customers, who will be adversely impacted. And I would say when people try to evaluate on their position and how they can move and you know what will be the impact and what will be net income position and ability we need to service the debt, people are trying to figure out. And I think that, that's the -- in my opinion, it explains to some extent the slowdown.

And I think because either Andreas or Marek, I believe that after the first quarter, we will be much better equipped to understanding which groups of clients are sort of losing the propensity to borrow or which clients will feel more comfortable to be active in the market. This is, to some extent, also related to some other legal initiatives, which would potentially will limit access to nonbanking shadow or whatever is the right description lenders. So I think that we will be -- the first half of the year will be in this respect relatively turbulent. And I don't think that we know -- currently, we have all the,let's call, the ingredients of ability to evaluate the dynamic of the market.

[Joanna Filipkowska, executive]

Do you see growing interest for fixed rate mortgages? If yes, how big is the portfolio? What percent of new credit sold is on fixed rate term?

[Marek Lusztyn, executive]

Okay. So I will take this one. We don't see much of an interest for fixed rate mortgages. I mean we have them on the offer since quite some time. But what needs to be said is that the demand on the client side is very large at least to the steepness of the yield curve. And the times when the Polish zloty yield curve was kind of flattish, the demand was relatively higher. Now with this quite steep yield curve that amount for the fixed rate mortgages significantly subdued, and we don't see much of a new sales going on as we speak on the fixed rates. So clients are much more focused on the current level of installment than the interest rates that is fixed.

[Andreas Boeger, executive]

I think maybe one more comment on the fixed rate. I think would be really important in Poland for the whole market is to have a clearer guideline or a clear legal situation when it comes to also prepayments. Because for the Polish banks, obviously, we offer fixed rate mortgages. But in fixed rate mortgages, we need to factor in the prepayment risk, and that's obviously then in the end, paid by the client. We understand that consumer protection is there to protect the consumer, but if it comes at a burden for the consumer because it needs to be priced in, it needs to be seen how reasonable that is and where actually a way in the middle is that actually makes sure that this product also is -- also in international terms, a good product to actually -- yes, to actually go into from a client side and also from the bank side. But as I said, we clearly offer every client can have a fixed rate loan. We also have some campaigns on fixed rate loans. But as Marek was saying, it's -- the traction could be better there.

[Cezary Stypulkowski, executive]

Yes. The historical development was that this is the country of the zloty, right, for a number of reasons, I don't want to go into details much. But I think that the lack of understanding of the dependencies also by the regulators will lead to the situation that now without being able to charge clients for the prepayment in this environment, we have to price it as Andreas has said. That makes the fixed rate being perceived like very expensive. And you cannot just manage the type of the dilemma of the client by Netherlands. And that's something what specifically a misunderstanding. You have also to explain with the decision makers and to their regulators, that if the customer comes to concluding that he want to prepay, well, we have a balance sheet. We need to manage the balance sheet and also the consequences. So that's the major factor, which I believe leads to the situation that instead of having growing portfolio of fixed rate, we are exposed to the lowering demand and interest on the client side.

[Joanna Filipkowska, executive]

Next question is on our legal provisions. Do you think the current 32% coverage on FX mortgages are sufficient? Why have you kept the probability of losing the FX mortgage case in your model unchanged up 50%, given that the losing probability has significantly risen in the past year?

[Cezary Stypulkowski, executive]

Yes. Maybe I will just respond to the so-called probability of default. We -- okay, we have still comparing the 13,000 cases vis-a-vis approximately 400 rulings on these cases, it's not a proxy at this moment. And one has to be realistic that under the normal circumstances, if the judiciary would be more stable and not tortured by constant structural problems and the quasi reforms, one could expect that the jurisprudence is being built. There is a particular way how it operates in the favorable environment. We do not have that type of environment. We fundamentally disagree still with this rulings by the investment court's first and second round. We believe that this requires, even though fighting in the court, to build up the solid line of jurisprudence, which requires active role of Supreme Court. There is still on a horizontal number of cases which have been questioned to the European tribunal. So the probabilities based on the current flow in my opinion, do not support the change.

One has though to be realistic. There is sort of the tendency, which, by the way, undermines the -- some paradigm and functioning of the banking. I will give you one example. One line was that the banks are using their own FX quotations. And that's -- that was a deterioration of the customer position was a consequences of annulation of the contracts. I think we have a new phenomena that in principle, these contracts which are named contracts coming out of the banking law are sort of socially...

[Andreas Boeger, executive]

Unjust.

[Cezary Stypulkowski, executive]

Socially unjust. Well, it is a result of monetary policies in Poland. If you compare the Czech koruna vis-a-vis Swiss franc, in some cases, appreciated. I would say, between 2015 and today, it has appreciated. So the customers are not victims of the bank. They are victims things of the monetary policies in this particular loan related to this currency. So you have a number of factors. We are, though, some people who know me better know that I'm sometimes quoting what was really the rational. So I have to reflect the realities of the current situation. That's the reason that we think has increased so significantly the provisions. In this PLN 1 billion sort of semi preallocated for the settlements, there is a space from my perspective. But to be perfectly honest, I think that it will take still significant time while we will in Poland start to understand what are the legalities around this issue. It's not finalized -- it's not finished yet. It will be a very detrimental if this current sort of compressions or one-sided line of jurisprudence will survive because it will have the impact also on the zloty loans at some point.

[Marek Lusztyn, executive]

What's important to highlight in the overall discussion is that more and more this concept of the social justice is in the play in the Swiss franc discussion. And we see occasionally a verdict, which are actually putting Swiss franc borrowers at a serious advantage over the Polish zloty borrowers of the mortgages from the same bank. And the question here from the social justice perspective is, is it really a social unjust that a group of borrowers is at a significant advantage over the rest of the population, in particular, those that were taking similar products in the different currencies. Because as I said, some of the verdicts are definitely putting Swiss franc a borrowers at the advantage of the Polish zloty mortgage products.

As Cezary mentioned before, the legalities in particular, the ones, carving in stone, the jurisprudence coming from neither Polish Supreme Court nor the European Court of Justice are cleared. Therefore, based on this very small number of inconsistent between themselves verdicts that we have received so far, we believe that it is not a good proxy of ultimate outcomes. But when we look at the overall level of the provisioning that is done for this portfolio. And we refer to the KNF Chairman proposal that just to remind was to treat those loans as if they were originally granted in Polish zloty.

The amount of provisions we have created is basically in tune of the amount that we would have lost if all of those active loans were converted into the zloty at original FX rate. And in the context of that social justice, I started my speech with, we have already commented that basically, we think that, that amount is the furthest reaching economically justified cost for the conversion of that portfolio. And that for us is before tax PLN 5.6 billion. We have PLN 6 billion allocated for this program as of now.

There is also a question on taxation. And since we are on that very topic, I will also maybe ask Andreas to finalize that on the tax impact, but the potential core litigations and settlements.

[Andreas Boeger, executive]

Yes. That's obviously a debate that's out there. On the one hand, for the court litigations but also for the settlements. What we have taken so far, the stance we have is that we, against our legal provisions, did not book a deferred tax asset. So obviously, we're working towards solutions there. But when you compare the PLN 6 billion mark, I think, is a good anchor here, so the PLN 4.1 billion plus the PLN 1.9 billion capital against a potential PLN 5.6 billion Jastrzebski amount. I think you would in the industry see that this PLN 5.6 billion normally gets a DTA attached, so then actually gets -- goes down by 19%. That's also a comparison.

But we so far in what we did at a conservative stance and did not assume any DTAs there. But clearly, the works are going on in the overall industry on this and a bit more clarity is also on the horizon. There has been a communication from the Ministry of Finance. So that provides a good first step.

[Joanna Filipkowska, executive]

How has been the FX borrowers response to the launch pilot settlement program by mBank? Should we expect higher provisions for potential settlement in future quarters, given that PLN 1 billion provisions taken in Q4 represent just 1/3 of the expected amount for all borrowers?

[Cezary Stypulkowski, executive]

This is too early. We need to respond to this question, we are still investigating this basically technically. We are in the second month, but effectively, you having in mind you in the Christmas time, I think that January is the first round, though we are not prepared to answer the question yet.

[Joanna Filipkowska, executive]

Do you observe earlier full or partial mortgage repayments due to rising interest rates?

[Marek Lusztyn, executive]

As of now, we don't observe a repayments on the mortgage loans. It needs to be said that the current interest rate levels is actually not really a factor that in our view would trigger repayments as most of our Polish zloty mortgage book was actually originated at the interest rate levels, which are similar to those that we see as of today or even higher. That's definitely a phenomena that we will be closely looking up for the months and quarters to come in light of the expected Polish zloty interest rate trajectory. But as of now, we don't see the value shrinking because of that.

[Joanna Filipkowska, executive]

Taking into account that Swiss franc loans decreased to below 10% of loan portfolio, do you expect that Pillar 2 requirement would be dropped in 2022?

[Andreas Boeger, executive]

Yes. So it's good to see the portfolio trending downwards. Before 2022, don't expect that to happen because the 10% also is on a bit of a different basis when it comes to calculating that. But we are, over the next years, getting much closer to that threshold. And then on the basis of stability of KNF rules in some years, we can talk about this. But for '22, it's not what we expect to happen.

[Joanna Filipkowska, executive]

Could you please comment on the impact of rising yields on capital?

[Marek Lusztyn, executive]

Yes. Q4 2021 impact of repricing of the treasury bonds in the portfolio was roughly 44 basis points on our ratio.

[Joanna Filipkowska, executive]

How many of 13,000 lawsuits were filed by clients who had already fully repaid their Swiss franc loans?

[Cezary Stypulkowski, executive]

We need to refer to this one. My opinion is that, that was a couple of hundred, but...

[Andreas Boeger, executive]

Yes. It's a very small...

[Cezary Stypulkowski, executive]

Number. Yes.

[Andreas Boeger, executive]

It's very small...

[Cezary Stypulkowski, executive]

That was the figure which is on my mind. But if someone is interested, obviously, we'll provide the exact figure.

[Joanna Filipkowska, executive]

There are a few questions about our sensitivity to interest rate hikes, but I think we already covered that. So another one on Swiss franc provisions. What should we assume for Swiss franc provisions in 2022 and 2023?

[Marek Lusztyn, executive]

I think we have already answered as well is largely depends on the development of the various products. As we said, the current level of provisioning, it is the fastest reaching economically justified level of provisioning. It's equivalent to the treatment of all the active loans as they were originally granted in zloty. And anything that goes beyond that level, it would mean that, as I said, the significant growth of Swiss franc borrowers would be considerably better treatment than everyone that was taking the loans on the bank.

[Andreas Boeger, executive]

Exactly. And I think just for the analysts, obviously, the stack is now at PLN 4.1 billion, that's quite high. And we will, in each quarter have different inputs. So the line item will always -- so you will see something in that line item happening. But in terms of increasing the provisions, it's currently not foreseen.

[Joanna Filipkowska, executive]

I think the last question on ESG. What are the reasons behind the decrease in the MSCI ESG rating to BBB in 2021?

[Marek Lusztyn, executive]

Okay. Thanks for spotting this one. Honestly, saying, we were not happy seeing it. But it's largely driven by the MSCI change of the methodology. They have extended the scope of the inputs they take into the rating model, namely they have extended the scope to look more on the ethical aspects and the corporate behavior. Last year, we were not tabulating that much in our disclosure. We are on the case -- going forward, we expect that to improve as well.

[Joanna Filipkowska, executive]

Thank you very much for your questions and your attention. We covered all the questions. So that's all for today. We hope to see you in May. Thank you very much. Good day.

[Cezary Stypulkowski, executive]

Thank you very much.