mBank SA

WSE:MBK

Earnings Call Transcript 2022-Q4

[Operator]

Welcome, ladies and gentlemen to our conference presenting the unaudited results of mBank Group in 2022. Before we start, let me introduce the speakers today, Mr. Cezary Stypulkowski, Chief Executive Officer; Mr. Andreas Boeger, Chief Financial Officer; Mr. Marek Lusztyn, Chief Risk Officer; and Mr. Marcin Mazurek, Chief Economist, who will join us virtually.

Cezary, the floor is yours.

[Cezary Stypulkowski, executive]

Welcome. What should I say? Operational results fabulous. Reported loss, and that's simple. And this is the second consecutive loss and second loss in my 30 years career. So I'm very much dissatisfied, but there are reasons for that. And as I said, we have exceptional operational performance last year, which is very much reflected in the growth of our net interest income and fees and commissions.

Gross -- the interest income is pretty obvious, we are operating in an environment where the interest rates have been growing very fast. I think that you know during my 30 years career in banking in Poland, I have to say that was the most rapid growth of the interest rates I've witnessed. So there are the consequences specifically since the Polish market is very much biased towards floating rates. So the bank has benefited big way.

Reported total income has been at PLN 7.8 billion, out of which PLN 5.9 billion was the net interest income, which has grown by 43% and we had, I think, fifth consecutive year of double-digit fees and commissions growth. This was not in the 20-ish as it used to be, but 13.5% is still pretty strong performance. Very much driven by the, again, transactional turnover. We are very proud that this concept of premier transaction banking [indiscernible] our culture and is recognized by our clients and I have to say no to the situation that our fees and commissions over the last few years has doubled.

Cost-income ratio, and this is due to the lots of external factors. We started to differentiate between, I would say cost-income ratio which we calculate as business rate development and cost-income ratio, which is reported. Reported was a 42% plus, but something when you deduct the compulsory payments, which we're building the Borrowers' Support Fund and protection scheme, which will be elaborated later on. That translated into certain 4.3% and what should I say dream figure for most of the banks not only in Europe.

Expenses have been, as it used to be in the past, under the reasonable control of the management. They have risen by almost 11% that is comparing with the inflationary environment, which was slightly higher again contributing to some extent to the good performance. I think it will be elaborated, which lines of the expenses have been growing fastest like and so the preamp that the cost of the workforce was the major contributor.

On provisions, I think that the simple line is 68 basis points cost of credit, Marek will be elaborating later on. As I said, all-in there was a reported loss of PLN 703 million, mostly due to the legal costs, which are attached to the Swiss franc portfolio, the heritage portfolio, which we have generated beginning 2005 and 2008, and which we manage in this very unstable and unfriendly environment where the power of national banking are being questioned.

Important factor of 2022 were a variety of factors, which have been outside of our control. Mostly the government or state-imposed classification, which costed us significant money all the public burdens, which have been reaching almost PLN 2 billion. And we are talking about most classifications are contribution to the Protection Scheme, which basically allowed the controlled bankruptcy of Getin Bank. Mortgage credit Borrowers Support Fund, which where we contributed PLN 171 million.

So all in was a heavy burden and I would say it was reaching the level of our expenses. If we will add to this banking tax, I have to say that total expenses of the bank have been significantly lower than the public burdens. That is something what is, let's say, unfortunately rather unique in Poland comparing to most of the -- more or less established markets. If we will, I would say, deduct this burdens, that means the ones which were of the one-off nature in 2022, our core business has delivered 22% plus return on equity, which just confirms how strong our underlying business model.

And even in the, I would say, unfriendly environment, which was during the first half of last year, because the assets has not been growing and operating inflation environment. All in, I have to say no demonstrates that the bank has a very strong platform. We made the kind of comparison, which is obviously artificial to some extent. We have calculated, how the bank would operate or what will be the financial results of the bank under the circumstances of before 2016 that means if we will be operating exactly in the same regulatory environment as we used to, and I think that reflects more the standards, which are in Europe, which obviously as I said to some extent artificial, then the overall gross result of the bank will be the magnitude of PLN 5.6 billion. And that shows how difficult this legal environment and unstable financial situation of our public burdens which are posted in the banks.

The balance sheet figures, I have to say, we are doing pretty good on the deposit side. This is growing -- continues to grow and our market shares are growing. On the loan side, the gross loan portfolio has reached 1.1%, which in the inflation environment does not show strong performance. But I think that was the market phenomenon. I think that there will be more information in the presentation about the split between retail and corporate.

In principle, retail has been like we have some slow down on the corporate side to some extent due to the fact that these heavy burdens, which has been posted on the bank plus the Swiss franc portfolio. Buffering led to more restrictive policy as a consequence of recession to really to manage the capital position. As on the deposits side, I already have mentioned market shares are growing. We are very proud that the transactional money with us are even -- we are gaining constantly market share, the term deposits while slightly lower 8.1%. But that only confirms that our model of transactionality attracts a lot of money with our relatively younger clients.

Capital position, we've managed to keep the ratios very much in line with the end of last year and still significantly above the legal requirements. It's 3.4 for the Tier 1 and 3.6 for the TCR, that was resulting to some extent from the 2 securitization transactions, which we have exercised last year. Landmark transactions for the region, which helped us really to manage the bank through this top security time in the Polish market. With the securitization transactions, we put almost PLN 12.6 billion of our allowance into these 2 buckets, which have been placed with external providers.

Loan-to-deposit ratio, the lowest I think in the history of the bank, 69%. The liquidity ratios, LCI at 186, which confirms a very strong liquidity position of the bank. Client base, we continue to acquire retail clients with particular focus on the younger clientele on the retail side. We are also extending our reach to the corporate clients 33,000 of them right now was growing portfolio of clients, which we describe as K3 aggregate. That means small and medium size mostly the upper end of the market, I think, gets more stable.

Well, in today's world, you know ESG is an important element of the reporting. With this, I will pass to Marek, who is championing these efforts at mBank, and he will elaborate in more detail on ESG progress. On the strategy, which we have announced October, 2021, I think that the pillars of this strategy have not been out. We've done some look back and we are scrutinizing our initial pillars in the context of what has happened in 2022 in this rapidly changing environment. I think that the major directions are still valid.

So I don't -- not intending to elaborate in detail, I can say only that obviously, the market conditions has changed them, they are -- they need to be reflected in our financial projections, but I would say to focus our strategy on these demography, destiny, which is a sort of made the message from our strategy this move from mobility to the possibilities. Unfortunately, she does not work the same way. I have to say we are having some progress. That means, I would say, development was the first stage of the implementation of personal financial management, which those of you hopefully listening to our presentation to strategy, one of the pillars of the longer-term perspective of the enhancement of our offering. The digital works, if you will, will be more detailed elaborating on how it progresses and how many transactions are being initiated on the mobile devices or in the Internet.

While there are some new features in our mobile platform, but I have to admit that due to the number of mandatory regulatory implementations, the pace of the implementation of new features is under distress. So that is something what we have to recognize that the Polish banking sector which is proud of being very modern and with lot of folks, and we are championing this mobile effort. In these circumstances where there is lot of pushing from the official sector to encompass some of the ideas, which have been on our agenda is more difficult because of this public, but not only to the financial terms, but also the implementations, which are resulting from either the government initiatives or regulatory requirements.

One thing, which I have to stress and this is something obviously still to be discussed, evaluated is the remote work. I have to say this is a new phenomenon we went through the cycle last year. We believe that the way we have organized ourselves into new offices, which we have and structure and responsibilities in this respect are well received by the employees and they, I would say, in principle, support success of the bank. So we believe that our practices in this respect has been reasonably well defended, despite the fact that was the first full year of action.

As you may remember, we have changed our approach to the asset management. We used to have the more open architecture. We decided to centralize this function and to set up your own asset management company that has been done during the course of [ 2022 ]. We've got license and we started being operations beginning of this year.

All the other things you can read in our document what they would like to stress is that the corporate started catching up in terms of digitalization on its customer offering and the way we approach clients via the mobile and Internet channels. So more to be more in the mobile, then the mobile bank is on the agenda and will be continued.

Marek on ESG?

[Marek Lusztyn, executive]

Thank you, Cezary. So as we have demonstrated as part of our strategy, ESG is one of the key pillars, and in 2022, we have actually significantly progressed with respect to that, along all the freelancers. And to briefly summarize our achievements with respect to that as far as environmental concerns are concerned, we have signed up with science-based targets initiative that helps us to lead us through the decarbonization path as we have declared by 2050 we want to be fully net 0 and SBTi is our way to derive science-based targets that help us getting there. One of the first institutions in Poland start signed up for that initiative.

And also in 2022, we have performed throughout review and calculation of our overall carbon footprint as it comes to the banking operations. The carbon footprint that really matters is the one from the credit portfolio. And now we have a detailed understanding of what our emissions are.

One of the key pillars of mBank DNA was a contribution to the society. And in 2022, we have continued our cooperation with large studies the Great Orchestra of Christmas Charity, one of the landmark non-government organizations in Poland. And we are happy to say that our mobile features really help out our clients to donate to that organization where we have together with our clients collected over PLN 22 million this last year.

As far as our contribution to the society is concerned, we cannot forget about the unfortunate developments in Ukraine. And as far as mBank actions on that front are concerned, we were actually very active to support the victims of the Russian invasion on Ukraine and to help refugees we have chosen to cooperate with Polish centers for international aid that is a reputable and established organization that is well experienced in delivering humanitarian assistance.

And as organization, we have not only provided help to our clients to support them with the online banking and mobile application. But also we have organized customer living spaces for refugees. We have organized the Ukrainian school and daycare and also assisting the refugees with the basic banking solutions. Those initiatives were actually well recognized for the international rankings. And one of the things that we are very proud of is that as far as the ESG risk rating from Sustainalytics is concerned, we are rated low risk in top 10% of financial institutions worldwide.

And as far as the G part of ESG is concerned, I'm also happy to remark that as far as Newsweek ranking of world most socially responsible banks is concerned we were rated in the top 10 institutions worldwide among 175 financial institutions banks. And in particular as far as the governance concerns are considered, we were right at the highest score.

[Cezary Stypulkowski, executive]

There is one aspect, which I already tackled which is market shares. You have the information on the right side. I think what is worth mentioning is that this drop in deposit taking, which has taken place, mostly in May, June last year was a result in some extent from the more active presence in the market by the government, which [indiscernible] launched retail issuance and we didn't participate in the distribution.

Well, in our case M stands for mobile, so naturally we want to report where we stand on the sort of the mobile part of our branding. The number of active users is growing. This is almost 3.3 million clients. I have to admit that I'm struggling to differentiate between the mobile clients and clients of the bank because to be perfectly honest someone who has not downloaded a mobile application of mBank I think should rethink whether it makes sense really cooperate with us because the real value, which the bank creates for the clients is to operate and to be able to execute transactions on the mobile devices.

While still the number of active users of our mobile application is fastly growing, as you see on the Northeast part of the chart 9 and what is very important and I think that is something what the bank is very proud of and we know that on this we score almost a worldwide top names. This is the share of digital channel initially, the transactions and the number of [indiscernible] happens specifically there is on the -- you see on the right side down the page how much transactions, how many transactions are specifically sale of non-mortgage loans is being done via the mobile devices or on the Internet and is very promising and what is I think almost it's kind of the signature of mBank is the fact that in 2022 more than 55% of transactions of this nature have been started and concluded on the mobile device and this is doubling the figure of 2019.

And I think that the next one is the most important page of our presentation, which shows you other financial result in fact, impacted by external factors. So when we look into the sort of something what we call adjusted pre-tax profit, which is something what we have delivered out of the business platform of the bank, this is almost PLN 5 billion. And then you deduct number of items starting with the governmental imposed bank credit holidays that's a separate issue. Our views on this issue are well known. If necessary, obviously we will refrain our evaluation of the initiative, but that costed us PLN 1.334 billion.

Then you have the next item which is Borrower Support Fund. Something what I have to admit, makes sense. And I would be very much tempted to agree that some beefing up of these fund make should be done instead of implementing this government response, government-imposed credit holidays, which are without criteria and benefiting basically, it was just part of the Polish population.

Then we have the protection scheme something what I already elaborated is helping health -- helping hand of banking sector, who avoid bulk the pros getting disaster in the Polish market, which in our case costed us PLN 428 million. So even with all these burdens, we still will be pre-tax more than PLN 3 billion. And then comes the heritage portfolio Swiss francs, which we've been discussing now in and out during our quarterly meetings obviously will be prepared to dive in also today. That was the cost of more than PLN 3 billion, PLN 3.112 billion that leads to the reported pre-tax loss. And then comes the banking tax and all the other things ends up in the overall loss.

Andreas, to yourself.

[Andreas Boeger, executive]

Yes. So to finish the summary of the results for '22 before we go into a more of a multi-year view backwards. This slide here shows what was said before. So in orange see the reported figures and then you see the adjusted if they could have been in that year that definitely had 2 sides of the coin, the one was operationally very positive and the other one, as we laid out before, was very strong headwinds.

Maybe some things to look at, here also, if you look at the operating profit before banking tax, the operating profit before banking tax was still positive in 2022 in the magnitude of PLN 576 million. So how you come to the PLN 703 million negative result so, the net loss solely stems from banking tax and also from corporate income tax that we are paying. I think that's also remarkable to understand about the operating environment we are in.

With this, I think we go more to the multi-year view on Page 13, because it's always good to see how things have actually panned out over several years and here just some highlights clearly the net interest margin I mean that was a tectonic shift to an average of the year underlying without the government imposed credit vacations of 3.7%.

You will later see we finished the year with 403 basis points. So even finishing on a stronger note of 370 basis points. Very strong, debt left even after the credit holidays to a net interest income that's 43% higher at nearly PLN 6 billion. But that's the one thing. And the other and that's to some extent, obviously by the macro environment that is with us, but to come to the point in revenues, which we were actually heavily steering that's net fee and commission income and as Cezary has said, we had very high growth rates over the last years. Remember last year, it was over 20%, but also from 2021, but also from '21 to '22, you see here, plus 13.5% year-over-year, well, that's 40% higher than 2 years ago, and that's also a very, very strong performance here on net fee and commissions.

Going to cost, Cezary already said the underlying cost was up by 10.9% without the whole compulsory contribution stemming from IPS and Borrower Support Fund and you name it. There it is indeed the case that we within the 10.9% increase, the increase we have on staff is more pronounced that's plus 14.6%. It's actually something we're proud of because we have very good people in the bank and we want to pay our people, give you more picture of what happened in Q4. But people need to be paid for good performance. And we're also proud that we managed the material cost below inflation and also below the overall cost increase at only 7.8% here.

That concludes the multi-year view. And with this, I hand over to Marek for the Swiss francs.

[Marek Lusztyn, executive]

Thank you, Andreas. So as it comes to the Swiss franc topic, the first message from our side is that we have very strong protection against the legal risk that is ensured by high risk provisions. If we look at the exposure at risk at the end of 2022, the share of the Swiss franc denominated mortgage loan portfolio in our total loan portfolio was at 5 percentage points after deductions. As far as the cost of legal risk related to those loans in Q4 is concerned, we have written off additional PLN 430 million in Q4. That brings us to the overall write off in the year 2022 of PLN 3.1 billion and that together with the write-offs that we have done in the preceding years bring us to the overall amount of provisions created for that risk that amounts to nearly PLN 7.3 million.

And if we take into account corporate hedges, provisions in the loan brings us to 54% of our Swiss franc mortgage loan portfolio. That has been already written off. That is one of the best-in-class coverage ratios. And significantly higher than the sector averages, in particular, when you compare to the other banks with the large Swiss franc portfolio exposures. And what needs to be reminded as well that taking into account that we are advanced IRB bank, we have these additional FX mortgage loan regulatory add-on. That amounts at the end of 2022 to PLN 1.35 billion. That gives us the total cash against legal risks related to the Swiss franc mortgages at the coverage ratio of over 66% of the exposure.

And just to give you that figure in a perspective, that is significantly above the number that we would have incurred as a loss if overall active portfolio would have been converted into the Polish zloty at the FX rates at which that were prevailing at the time when the loans were underwritten. So it's roughly PLN 5.45 billion equivalent if that Polish financial services authority proposal would be implemented in full. So the coverage ratio is significantly above that amount.

As far as the changes into the modular consent, we have discussed the change in the provisioning assumptions in details with you at the end of Q3. In Q4, there were no significant changes into the current methodology applied. So I will not spend much time on this.

Instead, let's move on to the next slide, which summarizes our approach through active management of the bigger risk, because what Marek said, Q4 as far as our approach to the Swiss franc-denominated loan portfolio risk is concerned, is that we have decided after a number of test phases and pilots to launch a full-scale settlements programs with our clients and the details of that program are listed on Slide 15.

What we would like to highlight as the cornerstones of that offer that we will provide to the clients is that the offer is made to all the clients with an active Swiss franc mortgage loans, including those that are disputing those loans with us. Ascot, what we propose to the clients is a conversion of that loan into zloty with reduction of the outstanding loan balance, which is individually negotiated with each and every client and considering also that the clients may find themselves into not really welcoming interest rate environment in Polish zloty when compared that, we have decided additionally to sweeten that offer with preferential periodically fixed interest rate offer that is currently set at 4.99 percentage points, which compares to almost twice as much in the regular fixed rate offer in a standard pricing.

We have started that settlement program in Q4 in the middle of Q4. It is conducted in stages. We plan to offer the settlement to all the active clients by the end of second quarter of this year. But what we are happy to highlight and underscore into this presentation is that by now at the end of January, which you can see on the slide, we have already approached almost 87% of all the active clients with an initial settlement offer. And within that slightly more than 3 months since we have started offering that settlement, more than 3,000 of clients already accepted the offer.

So the number that you can see on Slide 15 at the end of January was 3,000. We have cross-checked the figures just before the presentation, the number is over 3,300 signed settlements as we speak today. So you can see that the run rate as of now exceeds 1,000 settlements amount. And we see also that, there is a very active interest in that offer.

Clients are actually generally interested in discussing with us the settlement conditions. So we are optimistic in getting more of those figures demonstrated to you in the results of Q1 and what is also worth highlighting as we speak about the run rate of settlements since we have started offering the settlements, the number of settlements signed monthly, visibly exceeds the number of new court cases that are using the same time frame.

Slide 16 is just a brief summary of split between our core business and non-core business, but that have been discussed at length in the previous slides, for the sake of time management, I do not spend that much time on this unless there are specific questions and I hand over to Andreas to walk you through main trends that we have seen on the finance side in Q4.

[Andreas Boeger, executive]

Yes. So let's dive a bit more into the fourth quarter and let's dive very deep in the next slide, which is a bit more detailed, but it gives the full picture and then we'll selectively and a bit faster than usual go into the fourth quarter to be mindful of time and give you time for questions.

So Page 19 please. Because what we have in the fourth quarter is the highest quarterly net interest income and the highest quarterly revenue we ever had in the history. You see this in total income at PLN 2.4 billion. If we just go down the lines, you'll also see that we have higher costs that is mostly staff cost. We have a slide for this. We don't have compulsory contributions in the quarter. We even have a positive one because we booked conservatively the Borrower Support Fund in Q3. So we even have a bit of release there.

Cost of risk under control, Swiss franc at minus 430 and why I think it's good to stay on this slide to also explain the PLN 834 million net profit because I think the cornerstones will see that the effective tax rate in the quarter was only 16.9%, that is stemming from the fact and we were also putting this into our talk when we report the Swiss francs that we also prospectively looked at how many Swiss franc settlements we want to achieve over a certain time frame and part of the Swiss franc settlement, if the clients actually fulfill the eligibility criteria given by the Tax Authority then in part this is tax deductible. So we also recognized a PLN 198 million deferred tax assets that's positive obviously for net profit and that explains why net profit is at PLN 834 million.

I would like to now jump into some of the details. And as I said, I would like to be short, so look at let's look at the loans and briefly Cezary has said that was a bit up over the year, but down in the quarter, why are they down in the quarter, well on corporate that's more seasonal because you see the full year was actually up in corporate inflationary environment we discussed means that clients in general have high demand for loans we tried to be selective, but there is always year-end effects with for example paying bank overdraft facilities and other things, because you also saw that in December 2021 the year before, PLN 47 billion was also a very low print year.

On retail, what needs to be also explained and understood is, you see here that the loan volumes went down, but as we've impact the Swiss franc legal reserves, most of it from the loan volumes, part of that is stemming from the Swiss franc portfolio. So you'll see that in more details we don't switch to this, but those who want to look Page 47, you'll see that the whole FX portfolio went down by PLN 3 billion over the year and also in the last quarter that effect makes up for PLN 1 billion. It's a bit less than PLN 400 million or roughly PLN 400 million on the legal reserves, but there's also PLN 600 million FX effect. So that also needs to be seen in these figures that be corrected the carrying values on the balance sheet here.

What's always more interesting is the next slide is the new lending business. And there we exactly see what we all expected was the mortgage loans and mBank here is absolutely in line with the market. I think we even gained a bit of market share in that very, very weak mortgage market. We discussed that before and it's actually exactly turning out like this.

Interest rates are rising affordability is going down, also affordability criteria set by the K&S have been actually very strict, plus, let's not forget the government-imposed credit vacations, that actually means that for us more than 80% of all clients are under this credit vacations, it makes no sense to sell your house and to move. So that means the housing market in Poland is not in the shape where it actually should and could be. But that's part of also I don't know if that's intended or unintended but that's a consequence of government intervention here. And I think the banks, but also consumers feel that what's happening on the mortgage market.

Non-mortgage loan sales also down in the quarter by 15%. If you take the overall annual sales, the annual sales is 5% less for 2022 than what it was in '21 with strong front-loaded into the first quarter, but overall sales was PLN 9.44 billion over the year compared to PLN 9.9 billion in the year before. There Cezary has mentioned that we are really proud that out of the units sold in non-mortgage loans, 80% of all units, all numbers of contracts have actually been done in digital channel and out of this 55% in mobile that for universal bank, which is mobile heavy, I think is you have to look very long until you find somebody who has actually comparable figures here.

Briefly on corporates we saw the usual year-end renewals that's always, what you have at year end. Q4 is going a bit up. Even so the overdraft usage is going down. But that's also what is expected and you noted on corporates, we continue to be very selective with the exposures. The exposures need to earn a certain return on the risk and on the financial resources we deploy and we always don't only look for loan margins, we want to do other business with the clients and that you also see in the net fee and commission income we generate.

Briefly on deposits, well, deposits inflows over the year, less on corporate in the last quarter, but retail deposits are very strong and a strong deposit inflow that obviously then explains together with the mild rising loans that explains 69% loan-to-deposit ratio we were showing.

Let's switch to total income. And on total income, if you adjust the revenues for the credit holidays, the income is actually stable, but that stable income I think needs a bit more explanation. So on net interest income, as said net interest margin of 403 basis points. So, net interest income is nearly PLN 2 billion and this still has a slight negative effect of the credit holidays in, because you see that at the very bottom, there is a minus PLN 11.4 million in the final booking of the credit vacations. And we needed to do an estimate over summer in the estimate of PLN 1.3 billion, we were off by PLN 11 million. I think that's actually quite accurate estimate. But we, in the fourth quarter booked PLN 40 million more in net interest income, but we released PLN 51 million that we were before booking as negative trading income due to inefficiencies in hedge accounting. So in total, it's PLN 11 million effect. I think that needs to be also mentioned.

So roughly PLN 2 billion in NII, net fee and commission income is weaker in that quarter. You always have this in the fourth quarter. It does not come from the fee and commission income itself, it actually comes from the fee and commission expense. Fee and commission expense is up by nearly PLN 51 million quarter-over-quarter. That is in part due to year-end settlements we have with counterparties. It's also due to sales contests. It's also due to some other external counterparties, for which we pay. In general, we view the net fee and commission income for the coming year or for the year '23 roughly in line where we have been on '22.

Let's turn -- my last slide here on cost. Well, on cost I've said, well, what needs to be seen is the higher staff cost that we have in the fourth quarter. To put this into perspective, we had salary raises over the year. We also have more FTEs. We have 270 people more on the payroll and well that also pans out over time. So there is an effect from this.

And when it comes to performance related pay, given the CHF 2.3 billion booking we actually did in the third quarter, the performance related pay we did in the third quarter was extremely low. So there was also kind of a catch-up effect in the very, very strong performance in closing the year and you'll see this in the quarter and that also led to a higher performance-related pay and that is why we ended up with PLN 346 million here.

That led to a cost-income ratio, well, reported 42.3%. Honestly there is so much normalization going on. But what do you take out, what do you take in, we can say the engine of the bank is running definitely below 40%. Below 40% is also our strategic goal. And I truly hope that next year or for the year 2023, we don't have to talk about too much normalization because ideally, the interventions that happened in the year 2022 will actually not repeat in '23.

With this, I hand over to Marek.

[Marek Lusztyn, executive]

On the risk capital in Q4 I will not spend that much time since the situation was quite okay. And so changes were seen. As far as loan loss provision and cost of risk is concerned, that we display on Slide 27, you can see that cost of risk was steadily going down quarter-by-quarter as well as the net impairment losses and fair value changes on loans. We were converging around 70 basis points out Q4 2022 as far as the year-to-date cost of risk is concerned. That was quite well supported again second quarter in a row by very good numbers coming from the corporate loan portfolio in particular thanks to the very good recoveries from the transactions that were impacted in Stage III with no significant new migrations to that category happening all at the same time.

Therefore, if you look at the next slide, Slide 28, that shows this from a portfolio perspective, our impaired loan portfolio slightly decreased quarter-to-quarter 5.8% down that this PLN 300 million lower as far impaired portfolio is concerned. Thanks to the active management of all the Stage III cases recorded -- sorry, coverage ratio year-on-year slightly down, but improvement on Stage III quarter-to-quarter. As far as the net performing loan ratio overall and by segment is concerned, almost flat quarter-to-quarter and year-on-year.

And last but not least, Slide 29, which gives us the summary of total capital ratios and liquidity ratios, despite of those massive hits into the capital base that we have discussed at earlier slides at length. We are proud to show that we are still keeping very decent buffers above the minimum capital ratios.

Actually we are almost at the same size of buffers above the minimum capital ratios as we were the year before, which shows 2 things. First of all, the very strong capital generation capability of core bank of mBank franchise, which we're already proud of and that has been underscored by the colleagues before. And second of all, our great capability of actively managing the risk-weighted assets balance sheet shape and our ability to securitize the risks on the balance sheet to the outside investors, which was also very active in 2022.

So overall we are showing you the balance sheet that is as healthy as it was year before despite almost PLN 5 billion hit that we have taken over the course of last year. And as far as liquidity ratios are concerned, ample liquidity well above the minimum regulatory ratios, one of the best-in-class with even small improvements quarter-to-quarter.

[Joanna Filipkowska, executive]

Marcin, your turn.

[Marcin Mazurek, executive]

Good afternoon. Last year ended on a good note, I guess. The growth of GDP was better than we anticipated, but only a bit. It was driven by the fact that tail risks connected with cash supply were not triggered. And it's not going to be, I would say, the story for 2023.

This year the slowdown is inevitable. We think that the GDP growth would slow to plus 0.4%. Risks are tilted to the upside now, but still there is lot of going on in the economy situation may be very dynamic. One thing is worth to note, we probably had consumers in recession in the fourth quarter, but possibly it was not driven solely by incomes, but by uncertainty and right now we are seeing that consumer optimism has risen, that's why we think that we may be close to the bottoms in consumer activity and we may see this bottom at Q1 or maybe Q2.

Consumers are still supported by very tight labor market. Unemployment rate is at all-time lows, and of course, it has some inertia, but well this GDP slowdown that is ongoing is rather than not going to propel this unemployment rate by more than 1 percentage point, I would say maximum.

This year it's going to be marked with falling inflation. We are yet to see the peak in February, it would be somewhere between 19% and 20%. Thereafter, inflation is going to fall. But what I think the most important thing, the first phase of this fall that would be visible in 2023, it's kind of mechanic one, I would be very surprised if this inflation was much higher than 10% in the year-end. But what counts for monetary policy is the longer-term horizon. So what will be happening with inflation after 2023.

Hence after that point, given the stability of the labor market and the new cycle that is going to kick in, inflation is not going to fall fast therefore, we think that MPC could decide to keep rates at current levels in 2023. When you look at monetary aggregates, you can see that on the corporate side and also on the consumer side, the direction is clear, and it's downwards. At the same time deposit base is, I would say, growing steadily. The more pronounced falls are recorded in household loans. As you can see, we are now recording negative growth on annual term. It is possibly not the bottom, but the bottom will come this year.

Turning to financial markets, we've seen a huge correction in bonds in Poland, 10-year bonds fell from 9% yield to 6% right now. I think that's the revisit of the highs. It's rather not possible. And we've gone to my head, I would say that in the year-end yields would be lower than they are now. But in the meantime, anything can happen because the market is quite aggressively pricing in rate cuts at the turn of the year, which as I said, I don't think they are going to happen.

On the PLN side, we see the zloty as still weak and perspectives for spectacular improvement, I would say, are rather slim. So the best we can count on is a minor appreciation of 10, 15 ROCE in the year-end, but still it is mostly dependent on inflation path, and as I said, we are seeing more and more upside risks despite the fact that the market is going in a different direction. So it may be exerting also temporary upward pressure on PLN . Thank you.

[Joanna Filipkowska, executive]

Thank you, Marcin. Now let me read the questions that we received online. What was the reason of dynamic growth in personnel costs in the fourth quarter of 2022. What could be the growth in personnel costs in 2023?

[Cezary Stypulkowski, executive]

We wanted to compensate our top employees and the performance, which is taking place during the course of the year. Andreas, you want to add something?

[Andreas Boeger, executive]

Yes, for 2023, I think the quarters in '23 will not exactly repeat Q4. So but costs of employment are on the rise. We have inflationary environment and we would like to continue to be a competitive player.

[Joanna Filipkowska, executive]

What is the reason behind lower sales of non-mortgage loans, lower interest from clients at current prices, lower risk appetite from mBank or else?

[Marek Lusztyn, executive]

So as far as the risk appetite for New lending is concerned, we have actually not changed the credit policy as such. We see that lower appetite of clients for new loans is a market-wide phenomena you can see this being disclosed also in the industry numbers. What is fair to say is that overall as far as the latest salaries and inflation data show, there is a squeeze in average purchasing power of the average bond. And as far as consequences of the interest rate increases are concerned, they naturally lead through the lower ability of average clients to take on the new exposures and actually this is exactly what is meant by the Monetary Policy Council during the monetary tightening.

[Andreas Boeger, executive]

Maybe on the non-mortgage loans, part of the underlying trend we have is we also have improved the margins on the non-mortgage loans. So we are selective in all corners mostly in corporate, but also in retail.

[Joanna Filipkowska, executive]

Can you please discuss deposit beta at mBank, what's current deposit pricing? What rates you are offering, and what are the dynamics between demand and time deposits? What net interest margin contraction you are assuming in 2023 and the loan-to-deposit ratio of 69% is not supportive for net interest margin management or client acquisition is top priority?

[Andreas Boeger, executive]

That's a very long question. To maybe start from the end, the NIM is one KPI and that's the margin. The other thing is what comes out of it at the end in terms of P&L. So that's something we're not only optimizing NIM, we also want to make money overall. When it comes to deposit beta and discussing this, well, we're not formally discussing this. We obviously discussing this internally what we do, but it's not outside debate we're having. If you look at the underlying dynamics that may be help to understanding it, the 2 business lines are actually quite different because corporate customers did faster accustomed to the interest rate environment and the stability also of the deposits and the deposit margin is actually quite high and we have over summer is especially found a very good way of managing this.

The same is true for retail, but you know, in retail, and also in corporate, we were late in paying for deposits. And this is why we said we first want to see some outflows. If you look at the slide that's currently presented, I think it's 24, you'll see that in June, actually retail deposits went down, deposits went down a bit, because we said okay we need to in that environment, try to find out how the market really works and how the market...

[Cezary Stypulkowski, executive]

There was one element which I mentioned at that time of the government [indiscernible]

[Andreas Boeger, executive]

But also -- that's one thing, but also our market share went down in that quarter. Then, if you look at the retail composition and things really have changed. Look at the slide you have in green, you have the current and the savings accounts and it's mostly a current accounts, and that is transactional. The part that is more interest rate sensitive and more cost-sensitive is the term deposit part that went here, up from PLN 8 billion to PLN 27 billion.

So that's the part for which we need to pay competitively for which we need to make sure that ideally stand-alone makes sense or in the client relationship make sense. You might know that in the Polish market you'll even see some offers that go up to 8%, for example, but that needs to be managed within that part and I think the term deposit part is the one that's more closer to competitive pricing and the green bond still competitive.

But clearly in a way that this is operational with us and it more comes from the client relationship and less from opportunistic way of shifting money back and forth. The question was very long, I think I in part answered this. I don't know if there is any part still missing in this.

[Joanna Filipkowska, executive]

We have some questions -- several questions about credit holidays. What was the credit holidays participation rate per volume at the end of 2022 and what is the assumed mortgage portfolio participation ratio increase of credit holidays provisions following changes in the fourth quarter versus actual level of participation ratio?

[Andreas Boeger, executive]

So the participation and the credit vacations is still above 80%. We haven't disclosed it here in the preliminary figures, but it's still above 80%. And as I've said in the PLN 1.3 billion estimate we in Q4 did a final booking of that -- I won't even -- we did a final booking and the difference was PLN 11 million. So there is a minimal difference and you can say that 80% of the volume in mBank which is eligible is actually under credit vacations. What was the second part of the question, because I think that was something about Q2 versus Q4, but that's answered by the PLN 11 million or...

[Joanna Filipkowska, executive]

No, Q2, what is the assumed mortgage portfolio participation ratio in case of credit holidays following changes in Q4 versus actual level of participation ratio?

[Andreas Boeger, executive]

If that question is...

[Joanna Filipkowska, executive]

What is assumed versus what is actual?

[Andreas Boeger, executive]

Okay. Part of this is obviously. So what we do is clients select to have credits vacation with us and they can select for up to 8 instalments, but not every client is actually electing for 8 instalments. Some people are only electing for 5, some for 8. And as of Q3, this was a bit more than 6. But then we have an estimated value also in this.

So it has, in part, an estimate in that, but as 50% of the credit vacations have already passed, because that was the second half of the of the last year, the amount -- so the fractional amount of how much of this is an estimate and how much of this we know the estimate part actually went down. So we are quite sure that this is a very good figure. It will change. But most likely slightly because we were also in summer already very well estimating how our clients could be it.

[Joanna Filipkowska, executive]

Could you please share more details on capital improvement in the fourth quarter?

[Andreas Boeger, executive]

I mean as far as Q4 capital improvement is concerned, that is actually the outcome of a number of factors, because we have received a lower capital requirements for the FX and regulatory add-on for the Swiss franc denominated portfolio interest rates and the Polish office were doing a EBITDA which helped to improve the devaluation as well. And last but not least, there is also the impact of the ongoing active management of the balance sheet that includes active reduction of the existing exposure and the securitization itself.

[Joanna Filipkowska, executive]

Okay. We have also number of questions about Swiss franc provisions and settlements. So let's look at them. Do you expect upcoming European Court of Justice opinion or ruling to be an important milestone in Swiss franc?

[Cezary Stypulkowski, executive]

That would be an opinion remote to the final verdict which potentially can come and the ARPU we are of the opinion that has been expressed several times that capital cost capital usage has to be numerated. We still keep that respective that it is some kind of rationalization of the jurisprudence obviously aspects of our strong beliefs and the vehicle developments, which unfortunately not help the updates as a bank, a banking is the digital banking industry in Poland. If let's assume the opinion will not be in line with, but we expect obviously well try to evaluate the possibilities of the burden the longer period of time. But I don't expect that under this scenario would call for instant reaction. I believe that aren't waiting for the final verdict reacting also in financial terms.

[Joanna Filipkowska, executive]

And further on this subject, you suggested earlier negative EU court ruling would drive your capital ratio below regulatory threshold, implying that leaves about PLN 3 billion. Could you please specify that or provide a range of that worst case scenario?

[Cezary Stypulkowski, executive]

Yes. In the case that ultimately will be adverse and what will push the banks into the situation where there is a rationale usage will not be accepted. Then obviously we can slide into the negative capital impact, and potentially also the capital requirements. So that is something that is on the horizontal, that has been evaluated as you know by KMF. And KMF has done in the public statement as long as the court justice this evaluation.

And you know this not coming with a particular guidance, but I'm just saying that the 10% participants in the Swiss franc portfolio. This -- there is -- if the capital impact is in the magnitude of PLN 100 million, which has been mentioned by KMF and the current level of almost PLN 7 billion, which we have put aside, you can calculate how much potential negative net income.

[Andreas Boeger, executive]

Yes, obviously in the worst case scenario, because I think what we need to evaluate the one thing is, first of all, we have the opinion of the European Court of Justice, then we would have with verdict of the European Court of Justice then we need to see what local courts make out of that. What really the dialog jurisprudence is. And then in a worst case scenario there might be adverse effect, but that will then need to be really seen how things will pan out.

[Joanna Filipkowska, executive]

Another question, what are your current base case, worst case assumption for the Swiss franc loans provisioning requirements in 2023, any quarterly run rate?

[Cezary Stypulkowski, executive]

At this stage, I don't think that we -- at this stage, we don't expect significant movements unless this final verdict, which is expected in being adverse otherwise I don't think that required unless there will be adjustments as a consequence of the settlements and verdicts from the courts.

[Marek Lusztyn, executive]

Because if you look at the disclosures were outlaying we described how we approach the current level of provisioning that is actually the lifetime value of the expected provisions. Considering all the available information as of today calibrated to all the available external data, of course, with the actual level of judgment, but we believe that the current number that is all in PLN 7.3 billion that we have created so far is the right figure unless as Cezary said, the jurisprudence significantly changes impacting the overall number of cases incoming as well as the loss given the court verdict.

[Andreas Boeger, executive]

Everybody is saying something, but from a finance perspective, don't expect that line to be zero, because obviously what's happening it's a PLN 7.3 billion which you put in after usage and also after FX it's now [ PLN 6.4 ] because part of that is in Swiss francs. It's a larger estimate it follows the model if things realize we benchmark this against the model will also revisit the model so that even if nothing happens, the line item and I think we'll have some small life, but not a material life. I think that's a good guidance of how it should end up.

[Marek Lusztyn, executive]

And since Andreas alluded to that, maybe also addressing one of the further questions in advance. Because if you look at the PLN 7.3 versus PLN 6.46 that you can see on Slide 14, the difference comes from to an extent foreign currency movements that Andreas alluded to, but also we need to point you out the fact that this is already kind of a leading number in a sense that the portfolio, which is subject to the provisioning changes as it comes to the realization of the settlements program.

Because we -- as far as we reach out the larger and larger number of clients who agree to settle with the bank, a part of that provisions created in the past, which are provisions for future legal risks and costs actually it materializes and it is taken away from future expected losses into the losses which are being realized. So for that reason also you'll see number, which is a bit smaller than the previous quarter despite of the additional provisions which were created in the Q4, because that reflects the currency situation that reflects this number of settlements done in Q4, and also the verdicts, which we have received on calls of the reporting period.

[Joanna Filipkowska, executive]

What's your assumption for the percentage of FX loans sorted via out of court settlements?

[Marek Lusztyn, executive]

We have provided in the disclosure that detailed numbers with respect to the assumptions to that model has not changed compared to the Q3, and is slightly above 50%.

[Joanna Filipkowska, executive]

The question about the number of new cases in case of number of new low cases presentation shows net which if we adjust for settlements and final verdicts have also jumps substantially to some [ 3,000 ] in the Q4 from someone when 7 in the third quarter. Can you confirm?

[Marek Lusztyn, executive]

No, the March would be that actually a bit differently if we can go to Slide 15, this not be actually adjusted for settlements, because the settlements, which as we speak we are doing largely to the clients. As of today or at least as far as the Q4 is concerned, we were primarily reaching out to, I'd say low-hanging fruits, that is the clients which are not yet nothing court with us at the point of settlement.

So the actual number of new incoming prices in Q4 is the sum of what you see on the right -- sorry left-hand side of Slide 15 at the top and the bottom of it, because we have received 600 final rulings which are taken out of the gross numbers. And gross number of new lawsuits in Q4 is around 1,300 new lawsuits in a quarter in Q4, which is visibly lower than what we have observed in the past quarters, because if you look at the left-hand side of the -- top left-hand side chart, the one with the red bars, the first numbers are actually the gross because there were almost no final verdict yet. As you can see on that slide at some point, the new coming lawsuits were almost close to [ 1.7000 ] a quarter.

And since that peak that was around, Q2, Q3 2021, we see gradual slowdown of new incoming cases quarterly, which we know as well is not exactly the case for everyone in the industry that is facing the same trouble. But as far as we are concerned, as far as 2022 is concerned, we were getting on average in the quarter slightly more than [ 1.3000 ] a quarter.

[Joanna Filipkowska, executive]

Are the plaintiffs out of clients who are already repaid loans, a common practice?

[Marek Lusztyn, executive]

It's not come on practice and so far we have also seen a difference in jurisprudence. So, that's why, as it comes through offer of the settlements as highlighted on Slide 15, and also at with the disclosures. We are offering the settlement down to the clients don't get active loans. Those that have not yet repaid that loan in full.

[Joanna Filipkowska, executive]

Okay. Let's move to other subjects. What is the probability that we see another credit holiday program? Is there a chance that we see a reversal of the negative NII effect from the credit holidays booked in 2022?

[Marek Lusztyn, executive]

So maybe I will start with the first part of that question and hand over to Andreas for comment on the financial aspects of that. As far as the risk of the new loan holidays is concerned, I would say it's primarily in the domain of the political forecasting is not really a financial forecast, because also as far as mortgage loans moratoria that was announced last year are concerned, they were offer without any kind of income criteria, they were offered universally to everyone including those clients that were even having very low fixed-rate mortgages.

So that were -- totally immune to the interest rate increases. And as we have seen also looking at the statistics of the overall population of the clients that taking the benefit of that moratoria, most of the clients were actually not in the financial need of getting one. So it's difficult to speculate, because it's primarily politically driven, it's not really driven by the financial necessity of the client to receive those moratoriums.

[Andreas Boeger, executive]

And my understanding is that there is more and more understanding that you know the way it has been structured and offer to the clients is problematic. I think that's pretty focal position of the Central Bank. I think that was making its comments addressed comments as well. And I'm of the opinion that will be a surprise to me that it will be adopted in the same type of format.

[Marek Lusztyn, executive]

So there has been a bit of speculation in the media with respect to the possibility of the extension. But so far we consider this to be in the domain of speculation. And to those are from the audience that have not seen the comment of the National Bank of Poland today as well, they were quite clear that basically they do not support the idea and they consider these to be harmful for the banking system if extended.

[Andreas Boeger, executive]

Yes. And on the question with the financial effects, as I've said before, it contains estimates in it. But the estimate is smaller than it was when we did the first time booking, because also 50% of the time has passed for the whole period and some clients have asked for obviously for things that happened in '23. So wherever there is a estimated at one point you have a final one. So you have to book something, so it will not be exactly that figure, but we don't expect any material changes to the upwards downside here when it comes to the negative NII. So all effects from credit holidays are behind us in '22 and '23 is materially clear of the credit holidays effect.

[Joanna Filipkowska, executive]

What is the outlook for risk costs in 2023?

[Marek Lusztyn, executive]

2022 was extraordinarily good as far as the risk costs are concerned. Concerning also the fact that we have successfully worked out some of the older exposures in my Slides 33, we provide a brief outlook on how do we see the quarters ahead. And as far as the loan loss provisioning is concerned, we remain slightly negative due to the combination of the 2 effects.

The one is financial standing of the borrowers that we expect is likely to be impacted by the stack scenario that Marcin described earlier, and which you can see briefly summarized on the left hand side of slide 53 and also what is not to be to be forgotten that the Russian invasion on Ukraine continues as we speak. And it's also not to be taken out of the picture that this geopolitical situation can also influence in some shape or form the credit worthiness of the clients and the sentiment on the market.

So we consider 2022 to be exceptionally good number as far as cost of risk is concerned and we keep on maintaining our outlook of 90 basis points to 100 basis points for the 2023.

[Joanna Filipkowska, executive]

And the last one, what might be the value of MREL issuances in 2023?

[Andreas Boeger, executive]

Yes. We don't -- we definitely want to issue in 2023, we want to do one to 2 issuances, most likely in euros. We did a successful euro transaction 1.5 years ago by EUR 500 million. So we think EUR 500 million is also called ticket size, what we're aiming for is something between minimum EUR 500 million and up to EUR 1 billion during the course of the year. Yes.

[Joanna Filipkowska, executive]

And one last one -- last question, in the already created provisioning for Swiss franc portfolio, what is the assumed probability of receiving remuneration from capital?

[Andreas Boeger, executive]

Yes, that's also in the disclosure notes. What we have in the scenario of invalidity. We have a split of 70% to 30%, so 70% probability that we actually receive remuneration on capital and a 30% probability that we don't receive remuneration on capital.

[Joanna Filipkowska, executive]

Thank you very much. Thank you for your questions. We've answered all of them -- so -- on the spot. And if you -- maybe you have some final remarks?

[Cezary Stypulkowski, executive]

This will be a difficult year, because the political environment in policies complex at least. The discussions, which we have on the questions, which have been risen, mostly in terms of credit vacations, just confirmation of yourselves and the market that we can, there is a lot of unpredictability in the environment. It's easier to predict as Marek has said, what can happen in our balance sheet, on our P&L as long there is no too much political interventions.

One thing which has being discussed already and I have to say that the problem which we have tackled is the one is the unpredictability and the second is overall collapse of the paradigms functioning of the low income. I think that is something is a very difficult way to manage under the circumstances. This is related to the contractual arrangements.

This is very much over usage of this some of legal clauses, and I would say pretty active specialized legal firms, which are trying to undermine lot of things which are tax for the banking sector, including also the discussion, which has sort of emerge around the LIBOR treatment. All these issues, they should be on the top of mind of the regulators also central bank and stability part. And this is something what about banking association is trying to push and that creates less stable environment in which we operate.

Under these circumstances, I have to say the business model which mBank represents or has built over the years as it was with this store confirmed in this presentation is very strong and obviously this is very unfortunate that a lot of energy is being spend on issues which do not create value for the clients.

[Joanna Filipkowska, executive]

Thank you, Cezary. I will only add that our Annual Report will be published on the 2 of March. Thank you very much for your attention, and have a nice day. Bye-bye.

[Cezary Stypulkowski, executive]

Thank you.