mBank SA

WSE:MBK

Earnings Call Analysis

Record Revenue Growth Despite Legal Costs

The bank soared to a record revenue exceeding PLN 10 billion, marking a 17% year-on-year increase, with net interest income as the main contributor, rising by 22%. Net profit, however, was restrained at PLN 24 million due to nearly PLN 5 billion in provisions for Swiss franc legal risks. While reporting a cost/income ratio of 28.5%, which is unsustainably low, the bank aims to maintain it below 40%. The loan book grew slightly, with digital transactions and corporate banking digitalization on the rise. ESG commitments focus on reducing greenhouse gas emissions. Capital and liquidity ratios improved, reflecting strong capital management despite the Swiss franc challenges.

Executive Presence and Summary of Key Financials

The mBank Group fourth quarter 2023 earnings call featured key representatives led by CEO Mr. Cezary Stypulkowski. The bank reported record-breaking revenues and an increase in net interest margin by 47 basis points, a significant rise especially as most interest rates hovered around 4%. However, the polish over otherwise strong core business performance was dulled by a modest net profit of PLN 24 million, largely due to almost PLN 5 billion in legal costs, earmarked for protecting against Swiss franc-related risks.

Performance Highlights and Corporate Direction

The bank focused on enhancing digital capabilities in both retail and corporate banking, creating an asset management company, and revamping its environmental, social, and governance (ESG) strategies. Ambitious targets for reducing greenhouse gases emissions, aligning with science-based targets, and promoting diversity and inclusive employment practices have been set as part of mBank's approach to sustainable growth.

Loan Book and Deposit Growth Trends

mBank's loan book displayed modest growth, excluding foreign exchange effects, with retail lending stable and corporate lending more dynamic. Deposit growth, although slower than the past at 6.5% year-on-year, continued to be healthy, demonstrating trust and frequent patronage from both new and existing customers.

Capital and Liquidity Strength

The bank showcased a fortified capital position with increases in Tier 1 ratio and Total Capital Ratio (TCR), emphasizing the excess of regulatory requirements. A notable EUR 750 million insurance taken in September bolstered the capital buffer, improved liquidity as shown by a substantially reduced loans-to-deposits ratio from 140 to 61, indicating prudent financial management.

Asset Quality and Risk Management

The cost of risk was slightly up from the previous year's 93 basis points, but overall asset quality was strong with a Non-Performing Loan (NPL) ratio of 4.2%. Proactive settlement strategies successfully reduced the number of active Swiss franc contracts.

Cost-Efficiency and Investment

Strategic investments and modest workforce expansion led to an increase in costs. Despite this, mBank achieved an impressive cost-income ratio of 28.5%, and while recognizing this figure as unsustainable in the long term, aims to keep below the 40% threshold. The emphasis has been on efficiency as the digital channel adoption rate amongst clients climbed dramatically, aiding cost management.

Core Business Performance Amidst Legal Setbacks

Setting aside the Swiss franc provision's impact, the core business generated nearly PLN 6 billion in gross profit with an impressive Return on Equity (ROE) of 40%. The outlook remains buoyant despite legal costs, with strategic projections of maintaining income over PLN 10 billion and a cost-of-risk around 80 basis points. However, a declining NIM and stabilization of the interest rate in 2024 are anticipated to slight decelerate Net Interest Income (NII) growth.

Forward-Looking Statements and Strategic Focus

mBank anticipates a continued strategic focus on cost containment, with an expected cost-income ratio well below the 40% target. Loan loss provision and fair value adjustments have increased, with an emphasis on maintaining stable and manageable risk levels. Moreover, projected loan volumes are reported showing signs of rebounding, indicating optimism for the bank's lending activities.

Net Loss and Tax Implications

Despite achieving robust revenues and critical successes in core operations, the bank posted a net loss of PLN 20 million in Q4 largely owing to Swiss franc-related provisions and other associated risks. Positive tax impacts, however, were derived from deductibles on settlements, adjusted models for Swiss franc settlement costs, and a case law verdict from the Supreme Court administration providing some tax reliefs.

Portfolio Growth Excluding Swiss Franc Influence

When isolating the effects of the Swiss franc portfolio and foreign exchange fluctuations, mBank's retail loan portfolio showed a growth by 0.5 percentage points and corporate loan portfolio by 2.1% quarter-on-quarter. This indicates positive growth momentum within the bank's core lending businesses.

Earnings Call Transcript 2023-Q4

[Joanna Filipkowska, executive]

Good afternoon, ladies and gentlemen, and welcome to our conference where we will present the results of mBank Group in the fourth quarter of 2023. The speakers today as usually are Mr. Cezary Stypulkowski, the Chief Executive Officer; Mr. Pascal Ruhland, Chief Financial Officer; Mr. Marek Lusztyn, Chief Risk Officer; and Mr. Marcin Mazurek, Chief Economist, who joins us virtually. You can ask your questions in the chat box. I will read them after the presentation. Cezary, let's start.

[Cezary Stypulkowski, executive]

Good afternoon. As you see, record revenues. Net interest margin going up. Strong protection against legal risk. Unfortunately, only PLN 24 million of net profit. The performance of the bank over 2023 was very strong when it comes to the core business, which we manage. Record income, that's -- we surpassed PLN 10 billion of income, which is almost 17% more than the previous year. The most important contributor was the net interest income, in -- reaching PLN 8.8 billion [indiscernible] to 22% above the previous year. That has been very much demand by the active management of our margin, which has been elevated by almost -- am I right?

[Unknown Executive]

47.

[Cezary Stypulkowski, executive]

47 basis points, yes. There is significant growth specifically since we operated in the range of 4%.

Fees and commissions can be lowered on a net basis, mostly due to the higher costs on the recent commercial side. Nominal expenses have been lower by 7.4% year-on-year. This is very much driven by the lower burdens, which resulted from the base of 2022. There were higher level of payments to the BFG. Yes, the contribution by the banking sector to the protection scheme. That was an important factor. So all in, when we take the -- from the base the burdens that I just referred to, the increase of the cost base was 17%, which was, I would say, above the inflation rate in Poland. But this was very much driven by our investments into the future. To some extent, also by the fact that we have grown our workforce by 300 people.

These exceptional revenues and reasonably well-managed cost base led to this spectacular cost/income ratio of 28.5%, which I have to say upfront that is unsustainable at these levels, but definitely this is on the trajectory this bank has proven over the years that cost income is an important tool of our management as we are, year after year, improving this number. Now our target figure is to be below 40%. That's something what you know our strategy states.

Cost of risk was slightly higher than the previous year's 93 basis points. That reflects a more cautious approach to lending and some cases, which [indiscernible] will be commented. Overall, our asset quality has recently good level. NPLs ratio of 4.2%. So that's slightly higher than the previous year, am I right, before, I recall.

As I said upfront, reported result was only PLN 24 million. That was result of legal costs, which has reached the level of almost PLN 5 billion mainly for [indiscernible] which we put aside to protect the Swiss franc for everything what is around. This will be specifically implemented during the course of this meeting.

If we will -- if we look into the bank at its core, and we will not address the issue of Swiss franc portfolio which is a heritage portfolio, I think the last set of loans have been offered to the clients around 2009, as I recall. It is high remember when I joined the bank in stopped completing the product. So returns of our core business are reaching 40%. So there is not much to be commented on this issue.

What is worth to mention on top of, obviously, this significant amount of money which we put aside is the pace of our settlements, which, during the course of 2023, has accelerated. We piloted in 2022 a variety of options. I have to admit that we've been maybe too conservative at the early stage [indiscernible] only. But our attitude at that time was that we should share the consequences of depreciation of Swiss franc vis-a-vis zloty between the clients and the banks. And then there was the issue around equalization of the Swiss franc borrowers positioned to the zloty. The clients -- but unfortunately, in the jurisprudence point, you have Court of Justice and lack of the action on the side of the Supreme Court in Poland and problems with the judiciary system in Poland, all this led to this massive situation in which we decided to more actively promote settlements, and they have reached the level of 13,300 at the end of last year. The current figure is above 14,000.

As a consequence of this topsyturvy situation, which we observed around the legalities in Poland and the fact that we have put a sizable amount of money, I have to admit that our management was very much focused on the capital position of the bank. That, to some extent, slowed down the growth of the bank since I would say another factor was that the credit market in Poland was not [indiscernible] last year. But definitely, year-on-year, our loan book has a straight by straight 0.1%, excluding the foreign exchange effect, which is important in the overall [indiscernible] portfolio, plus some other lending positions.

We have to admit that our active promotion of the lending was under the pressure and, as a consequence, our market share, mostly on the retail side, to some extent, on corporate, which was more stable, has shrink. What is worth to mention is that deposits are growing -- continue to grow. Last year, it was less aggressive than the previous year, 6.5% year-on-year, which is at the level of PLN 185.5 billion loss. There was some evolution of the structure of the deposits, more interested in the term deposits, but still we've been able to manage the margin under this circumstance is mostly due to the fact that the transactionality of the bank is highly valued by the client and as a consequence, we benefit disproportionally of the transaction money. Pay the bank.

The capital position has been strengthened. As you see on the chart, both Tier 1 ratio and TCR has grown. We are significantly above the regulatory requirements, respectively, 5.6 percentage points and [indiscernible]. What was important from the outside perspective, inside as well, is that in the capital buffer on Swiss franc portfolio which was launched around 2016, as I recall, and it was a significant part of our capital buffering, was originally more than 4%. That one has expired. We got the respective consents from regulators. So when you will be looking into our capital structure in [indiscernible] strong, very much due to the fact that in the meantime, we have built up this significant amount of buffering against Swiss franc portfolio on the regulators showed our view that does not make any [ tens ] in the future to continue with this element of our capital structure.

We successfully managed to meet the criteria on the -- well, as you remember, I think we've reported on this, I think, is both the third quarter. We launched the -- what was 615?

[Unknown Executive]

EUR 750 million.

[Cezary Stypulkowski, executive]

EUR 750 million insurance in September. As a consequence, we are, I would say, on the safe side, in respect to the requirement.

Something what I have to say being a veteran in the market, I did observe in the past, this is the allowed-to-deposit ratio. I remember when I joined this bank, it was 140. So currently, we are at 61, and I have to say the whole market is in, I would say, below 70%. So below 70%, more or less 70%. So that's something what is a new [indiscernible] and banks are, on the one hand, obviously, the piece of comfort. But on the other hand, that's something to be proactively managed. LCR at 217, so does not require any comment, I believe.

Customers. Customers are still like us. They tend to not only visit us frequently, but also the newcomers, new clients are opening accounts, both in the corporate and retail sites. That's not needing much of a comment. Our strategy, demographies, destiny and the focus on the other client works well.

When it comes to the sort of the wrap-up of financial metrics, you see on this chart, most of them have been already commented. I think that -- no, we don't think that this will require a specific comment.

One issue that I also need to stress is that we are operating within the framework of the strategy, which has been adopted 2.5 years ago, 2 years ago. And we revised the strategy. It proved to be in principle despite a significantly changed alignment mostly on the interest rate side. But I would say, pillars of the strategy have been referred. So we feel comfortable with the strategy which we have adopted. There are some changes mostly on the ESG side. More, I would say, realistic and more, I would say, up to the current understanding of the dynamics of ESG debates and regulatory requirements, which were not on the horizon at that time. This has been adopted.

When it comes to the sort of the major business-driven strategies, we are progressing our development of PFM, the personal financial management. On the retail side, we have launched the asset management company, which started to be fully operation at the beginning of this year. We continue to acquire clients, and clients are doing more digital, are initiating transactions or concluding transactions on individual channels more and more frequently. Corporate banking is sort of catching up in terms of the digitalization. We have some internal use metrics to assess the progress. So the number of users logging into the systems, digital channels is reaching all spectacular numbers. And I have to say more and more, we are using digital channels also for the corporate banking activities. I would say, when we talk about mobile applications, obviously, we are in a different time -- at a different stage of the development. It's not revolutionizing [indiscernible]. And I think at this stage, at this moment, it's more like individualization, better customer experience based on interactions with clients. They are very much being reflected in the document which we presented to you.

So on ESG, from [indiscernible] return to Marek because this is the most important further reshaping of this part of our strategy. If you can make some further comments please.

[Marek Lusztyn, executive]

Thanks, Cezary. So as flagged, ESG strategy revision was part of the strategy revision that we have performed a while ago. It's built on 3 obvious pillars, environmental, social, governance. On the environmental side, we basically have 3 directions of travel. The most important one for us is the reduction of greenhouse gases emissions from our own portfolio because this is the biggest legal problem that we have on the overall initial reductions. And we remain committed to use the science-based targets as still mechanism to get to net zero by 2050. Later on this year, the late September, we are going to submit our targets for SBTI validation.

But going to net zero is not only the reduction of the portfolio emissions, but it also deals with partnering with our clients. And on this, we have set ourselves ambitious targets, how to support our corporate and retail partners with regards to debt transition.

And the last but not least, it's the lowest component of the emissions, but also we want to lead by example by decarbonizing in full our operations. We are proud to remain one of the highest ESG-rated products in Poland. Sustainalytics gave us one of the best industry ratings worldwide. And it needs to be said that if it was not for the [indiscernible], that would be likely even better.

Going to the other 2 pillars of our ESG strategy, we remain committed to remain an attractive work environment that shows diversity, equality and [indiscernible]. We have said ourselves ambitious targets with respect to gender balance. As it comes to the succession programs, we aim at having a minimum 45% of a given gender. In the succession plan, tapping [indiscernible] for the best-in-class standards.

Going further on improving gender diversity, we also set ourselves a target for gender representation in managers of our subsidiaries, as you can see on the screen. And as it comes to the social component of our interactions with the clients, Cezary was already alluding to that. We will continue working with our clients on the financial education and promote the responsible management of the personal filings.

As it comes to the governance pillar, all our key managers and the managers of our subsidiaries have and will continue to have ESG as one of the drivers of the objectives and results. ESG became an important element of our overall risk management framework. This is included in the credit decisions and materiality assessment. And leading by example, we also [indiscernible] demand from our partners and suppliers to comply with [indiscernible] of [indiscernible] by 2025.

Cezary, over to you on market positioning.

[Cezary Stypulkowski, executive]

As I already signaled, there was a drop in -- on the lending side. We also lost some market share on the retail side comparing to the previous decades. So that's the factor which we signaled. And the corporate side is more or less stable. That is something what is worth to mention. I think that we continue to grow our mid-market and SME sector on the corporate side and very successful -- successfully broaden the number of clients perspectively also let me look on this front is strong.

[indiscernible] I don't think that, that requires any specific comment. The bank has a very strong position. Clients -- more clients are moving from the mobile, but obviously, the pace is slower than it used to be. What is very important that this is the [indiscernible] part of the Slide 12. This is the share of processes in retail banking that are initiated by the clients in digital channels. It has reached already 87%. And this is major reasoning of our of our very -- how should I put this, successful cost management. I have to say that, that's something what, over the years, profit the bank with benefits mostly on the cost side. So we are able to support more than 5 million clients, which is relatively small network. Because the customers are moving, as you see between 2020 and 2023, this is a 20% increase of initiation of the transactions via the digital channels.

As you see also, as a kind of an example, nonmortgage products, how much of them we are concluding on the mobile device and how much on the -- in the Internet. And you see this, the process of switching from between the Internet and mobile, which I'm a good example. These guys are old-fashioned in computing that are using just the mobile phone.

To wrap up, I think -- I don't think that these qualified audience requires very much an explanation. I'll let you...

[Pascal Ruhland, executive]

I would like to -- thanks, Cezary. Also, hello from my side. I would like to not repeat what was said, but give to one or the other lines a bit of background. So that we have a record income that was said and also the driving force is our net interest income. But maybe 2 words to the drop of the net fee and commission income, which is close to 10%.

Yes, I would like to remind us all that in 2022, we have charged deposit facility fees towards the outstanding balances at the end as well as end of month fees, which were strongly connected to the negative interest rate. Pure focus on corporate customers on our side. But while the interest rate environment has changed, the justification for those fees diminished.

The fee income, if we look into our details, were stable year-on-year. So we coped with the drop of the fees from 0 interest rate. But we recorded an increase of fee expenses, and this is driven by volume and obviously also by higher prices. That's definitely something which is what I've mentioned on this slide.

And also on the cost, as I said before, we have a cost increase by 13% if we adjusted for the one-off contributions in 2022. And just to recap, we are talking about adjustment of the Board, support fund of [ 171 million ] and the protection scheme with 428 million, and then we are left over with 13%. --

General driver is inflation, but also our projects, which we obviously try to embrace in order to continue our success story, and therefore, we have material and personnel cost increases. Nevertheless, as said, and this is the most important from our perspective and is connected to how we operate. We have a very efficient business model, and this leads them to the cost of income ratio of 28.5%, which is very low currency and extraordinary. And that's definitely nothing which we should treat as a new normal, but it shows how we operate.

On the LLPs and cost of risk, this is higher than in the previous year, as you see here, but we also guided that in Q3 that Q4 will be extraordinary and especially driven by onetime effects, which will be elaborated by Marek later in more details.

Jumping to the pretax profit, which is PLN 970 million, and then you see the net result, which is kind of symbolic with PLN 24 million left over. This is a result especially by the high ETR we are having, so the effective tax rate. And this is due to the fact that the majority of our Swiss franc legal costs are not tax deductible.

And with this said, let's jump to the next slide, 14, the one with the balance sheet. Here, I would like to draw your attention to 2 observations on the balance sheet. The first one is the drop in gross loans to our customers by 5%. If you would deduct the rundown of our legacy Swiss franc portfolio, as the Swiss franc mortgage portfolio decreased significantly driven by provisions, repayments, settlement but also by final verdict, the gross loans year-on-year has a decrease of less than 1%. And then we are in line with the market or even slightly better than the market. That's the first observation on our balance sheet.

The second one is, please look to the equity and capital ratios at the bottom of the slide. Everything improved versus 2022, despite the already mentioned significant burden of the Swiss franc provisions. And next to our great core business performance, as mentioned already, ROE of 40%, this is a result of our very successful capital management. And if you go into the details, we have shown this year, for example, improvement of the valuations of our debt securities. We've improved our value of unrealized losses in our cash flow hedges, and we executed the largest ever securitization in the CEE region in order to support our capital position.

And with this said and why Slide 15 is more or less repeating what I already mentioned, I'm handing over to Marek for the details.

[Marek Lusztyn, executive]

Okay. Thanks, Pascal. So as already highlighted in the introductory speech of Cezary, 2023 brought us the highest ever write-offs on the Swiss franc mortgages. So basically, if you look at our figures, the whole bank and its entire employee population for the entire year to hand over all the profits back to the very small group of Swiss franc borrowers, but this led us to the significant reduction of the value of the mortgages to Swiss franc. That, at the end of 2023, constitute just 1.6% of the total loan portfolio. And that, in comparison, was 23% in 2015.

If we look at the coverage of Swiss franc portfolio and legal risk with respect to the active portfolio, it reached 100% of gross loans on the balance sheet at the end of 2023. And if we look at the number of active cases, out of 85,000 Swiss franc loans granted overall, 39,000 is fully repaid, and only a small fraction of that is in [indiscernible]. And out of those remaining, we have [ 4,500 ] verdict, we have reached 13,000 of settlements, most of them actually reached in 2023. So we remain with 28,600 active Swiss franc contracts, out of which 62% is in court.

But we are also happy to say, going to the next slide, that we are quite successful reaching also the settlements with the clients who are in court.

But if you look at the statistics as shown on Slide 17, the number of settlements reached in Q4 '23 was the highest ever. It was 34,000 in the quarter. And by now, as we speak, we still keep concerting with the customers, the number of settlements as we speak, is over probably [ 20,000. ]

Also, what's worth commenting though is it was the first quarter in which the number of loan contracts in courts [indiscernible] increases, so to say, decreased quarter 2 -- to quarter. And answering maybe as we discussed, the Swiss franc topics also one of the questions that we have in the Q&A because there is a question. If we expect additional Swiss franc costs coming from ECG rulings from December. And the question is mainly about the risk of highest statutory interest for borrowers. And have we seen any chance in the jurisprudence in that gap. We basically expect further provisioning for the Swiss franc portfolio, but not of the magnitude that we have seen in Q4. We expect Q1 booking to be below what we have seen in Q4. And in that specific December verdict of the European Court justice, they have pointed out that penalty interest accrues during the retention period. This may affect the value of interest that we owe to the client in the future and potentially the provisioning, but it needs to be understood that domestic law -- the domestic case law has not yet clarified on the issue. So this is still to be seen.

Cezary, and over to you for the performance on the core bank?

[Pascal Ruhland, executive]

Yes. I'm taking Slide 18. Here, you can see on the left side, what [indiscernible] with all the Swiss franc, and just to repeat 2 numbers, which are on this slide. The core group generated close to PLN 6 billion of gross profit and PLN 5 billion of net profit. That means it doubled almost just in 1 year, and this really confirms the extremely high income-generating capacity of our operations. And as a consequence, you see at the bottom, we reached an ROE of the core group of 40%.

But with this said, let's go to Slide 21 into the details of the quarter. So Q4 2023 proved to be a very good quarter despite the impact of interest rate cuts in September and October in 2023. While I believe this slide is best to follow up also with the guidance from us, I will comment on our view for the upcoming quarters along those lines.

Starting with revenues. We generated in Q4 record high revenues, plus 7% quarter-on-quarter, thanks to effective management of the cost of deposits. NIM increased further to 4.31% in Q4. As a result, we have again seen an increased NII despite the mentioned lower interest rate levels. While we expect interest rate remains stable, 2024 in Poland, a slight decrease in NII in the upcoming quarters is, in our view, likely. We expect loan volumes rebounding, but at the same time, margins and deposits pricing might have reached its peak. Furthermore, in 2024, we may again see some negative impact of the extended credit vacations, which were [indiscernible]. However, the impact should be lower as eligibility will be limited.

A decrease of the net commission income versus Q3 resulted from increased commission expenses as for the full year. And as we're pricing towards our customers as a time back after the visible cost increases on our side, we expect a slight growth of our fees in the upcoming quarters here. All in all, we expect to defend the mark of PLN 10 billion for the total income also in 2024.

Turning to the costs. Cost is a huge focus of us, which was reflected in the group's cost to income ratio in this quarter of 27.5%. A quarter-on-quarter cost increased by 10.7% was driven by material costs in particularly the areas confiding PI and IT, personnel costs due to early increases of salaries of our staff, plus the increased employment and the higher cost of training, and last but not least, depreciation of intangible assets. In the upcoming quarters, we expect the continuation of the inflationary but also strategic cost increases on a similar level what we have seen for this year. To sum it up, despite the cost increase, we expect to stay well below our strategic target of cost/income ratio of 40% in the upcoming quarters.

On the loan loss provisions and fair value change in Q4, we increased significantly. As guided last time, this is a result, and Marek will go into details of model recalibration and LLPs for a couple of individual corporate exposures. And our strategic guidance forward-looking of around 80 basis points cost of risk remains also stable for the upcoming quarters.

On the cost of legal risk related to Swiss franc, Marek already commented on it, forward-looking, and you already saw the impact you've seen in the last quarter.

To sum up for the quarter, due to the significant cost of the Swiss franc risk plus the cost of risk in Q4, the group generated a quarterly net loss in the amount of zloty 20 million. Here, while the tax line in Q4, especially, and I also saw that there was a question, I will give some background what happened in our tax line in Q4.

We have 3 factors that had a positive impact on the income tax. The first one is tax deductible cost of settlements concluded in Q4. While we had the highest amount of settlements so far, the costs were the highest, and this is positive why we can tax deduct.

The second is the DTAs for our estimation of the Swiss franc settlement cost. So we updated our model while we are more successful than we estimated, and this also has a positive contribution in our tax line in Q4.

And the last topic of this 3 is DTA from a Supreme Court administration verdict concerning the cancellation of mortgage loan agreement in Swiss franc. We received it last year, 6th of December. And this verdict indicated that the only way to reflect cancellation is to adjust revenues received on loans for past periods as they have never been received. So the income we received in the past and the tax we paid in the past really brought it. The tax law introduces a limit to adjust this previously recognized revenues for the last 6 years. And that's what we have done as the third conclusion.

All the 3 topics have a positive impact, and the impact is circa PLN 250 million and reflected in our Q4.

While we have covered now almost the most important development, I will, this time, in the following slides, just touch about the most important topics. And if there is something missing, please don't hesitate and raise a question later on. Directly jumping to Slide 24.

You can see on this slide, the long trend continues to be negative. For Q4, we have PLN 117 billion loans to customers, and 2 observations are important on this slide from our perspective. The first one, gross loans to retail customers, visible right-hand bottom of the slide. Excluding the already mentioned rundown of the Swiss franc noncore portfolio and clearing out the FX effect, the portfolio grew by 0.5 percentage points. So our core business in retail is growing.

The second, looking into loans and advantages to corporate clients, visible right on top of the slide, we see a decline of 4.9%. This drop was driven by the gross repo and transactions with bags, which decreased sharply in connection with the balance sheet optimization at the end is typical. Excluding this [indiscernible] transaction and also clearing FX movements, the corporate portfolio grew by 2.1% quarter-on-quarter. So also here, the core business is growing.

These are the first traces of the rebound of our loan portfolio and also then our attempts to gain higher market shares in 2024 because we expect going forward, a single-digit growth in our core retail and core corporate loan portfolio, and this should aim also for slight increases of market share.

Let's go to Slide 25, which provides them the new lending. I will deep dive on the mortgage loan development and briefly comment on the general outlook of the new sales. The sales of new mortgage loans jumped in Q4 2023. The sales were driven by the state credit 2% program, as you can see left-hand corner of the slide. We started granting 2% take mortgage loans on the 14th of September and stopped accepting the application on the last business day of 2023. We received more than 50,000 applications, and the success is based on our fast reaction. We are the first bank with a digital application system, which is known by [indiscernible] we are very fast on implementing digital solutions and also our payout process were very fast. A large part of the application has not yet been launched in 2023 and will be processed in the first quarter of 2024.

The total 2% tech mortgage loans dispersed in 2023 exceeded PLN 900 million. And we expect, of the total program, it will come up with PLN 2 billion, and therefore, we expect a significant increase in the first quarter. Due to the large scale of the same loan sales, the share of product fixed interest rate, Polish mortgage loans has increased significantly on our balance sheet and amounts to 23.5% in December 2023, and confirms our strategy to increase the fixed rate part.

Also, the new project, which is proposed by the government, [indiscernible] could, if it comes and boost further the mortgage loan market in 2024, and also, we feel well positioned to support our customers. All in all, we expect the new mortgage loan sales in Poland to increase versus 2023. And also on the nonmortgage loans, we expect a slight growth in the following quarters connecting with the lower interest rates and rising consumption.

On the corporate loan side, we expect to grow fairly over the market and the market currently expects 3%.

Corporate lending will be supported, especially then by the revising economy, which we expect for this year. So the rebound of our core loan portfolios in 2024 is set with this expectations from our side.

Slide 26, I would jump over because we talked already about our deposits, and I'm going to Slide 28. Total cost and efficiency. Quarter-on-quarter as well as year-on-year significant cost increases are visible. And it should be notable our cost increase, as I said, not just inflation driven, but also reflect many ongoing businesses and regulatory-driven projects. This results in higher expenses mostly for IT, security and marketing and additional personnel expenses from newly hired or uses or share to begin [indiscernible]. The important measure for us is to stay best in class on the efficiency. So we really will have a careful look on the cost/income ratio development of mBank Group, which currently is amounting to 28.5%. And going forward, this is the way that we believe that our cost increase will be similar to what we've seen on the growth rate in 2022 to 2023. And that is including regulatory cost increase, which I would like to comment very briefly. So for the deposit guarantee fund, we don't expect a change. But to the contribution of the resolution fund, we may see increased demand due to the replenishment of the fund after the resolution of Bank, but we have not received any official information from BFG in this respect, but this is our expectation.

And with this last G&A guidance, I'm handing over to Marek for the [indiscernible].

[Marek Lusztyn, executive]

Thanks, Pascal. So here, on the loan loss provisions and the cost of risk, in Q4 2023, the net impairment losses were higher than in the previous quarters. But as we have guided in the preceding 4 quarters, the cost of risk that we've seen in the past were unsustainably low. So we have seen a normalization in Q4 2023. And this was primarily driven by a number of one-off effects impacting both retail and corporate loan loss provisioning.

On retail side, we have seen a recalibration of the existing models and an implementation of the new qualitative criteria for -- stage 2 and that was implementation of the new prudent filter to ensure consistency with the -- of the group-wide approach. And that needs to be seen as further proof of prudent risk management, which led also to the higher loan loss provision coverage for our clients with increased risk.

On the corporate side, we have seen 2 isolated cases going into the default, but we are ready to see some improvements on those going forward.

If we look at year -- year-long loan loss provisioning and cost of risk, overall, for 2023, cost of risk amounted to 93 basis points as compared to our strategic target of 80 over the midterm. And if adjusted for those one-off effects, the cost of risk in 2023 adjusted for those factors mentioned below, would amount to 73 basis points.

I repeat. Those higher cost of risk in Q4, we consider them one-offs. We don't see a deterioration of the overall quality of the portfolio, as you see from the portfolio figures also the comparisons have improved, the level of nonperforming loans remains -- it remains stable. As far as the prospects from 2024 are concerned, our outlook is moderately positive.

On the retail side, very low unemployment, and inflation going down, combined with expected salary increases, will support the LLPs and cost of risk for retail segment. On the corporate side, a pickup in GDP growth leads us to expectations on the improvement on corporate earnings. And therefore, all things considered for 2024, we maintain our strategic target for cost of risk to be around 80 basis points.

If we go to Slide 31 to finish up with our capital and liquidity position, as Cezary already alluded to, the liquidity of bank is extraordinarily high. So we have a plan of liquidity that we can employ for our clients. And also, despite this massive write-offs that we have performed in 2023 for the Swiss franc portfolio, the buffers [indiscernible] meaning regulatory ratios actually significantly improved. So as you can see, it's not only the total capital ratio that went up, but also the distance to minimum requirements was considerably higher than it was in the previous quarter and compared to year-on-year basis.

As we have already briefly commented, that stems from an extraordinary capital generation capability of the core business. Actions we have taken in order to securitize risk additional issuances performed over 2023 and significant reduction of the add-on for Swiss franc mortgage risk that, at the end of 2023, was reduced by [indiscernible] ECB to 0. That is also, by the way, the regulators see the risks in our portfolio of Swiss franc mortgages going forward.

And with this, we hand over to Marcin to comment on the outlook of the Polish economy for 2024.

[Marcin Mazurek, executive]

Thank you, and good afternoon. So basically, we are not talking right now about whether the economy is going to jump start, but we are trying to come up with ideas how fast it will be growing. So we are after the trough in economic activity.

So consumer moods are very good compared to what we've seen in the last year. Unemployment rate is very low, and it's going to be only lower. We expect GDP growth to be 3.5% in 2024. The major source of growth would be consumption. Of course, it's fully sustainable in the short term. And within the next few quarters, also the global economy is going to jump start, and also export activity is going to rebound. With that, inflation has been falling recently, but it is highly likely that it will reach a trough somewhere around March or April. And afterwards, as economy rebounds, also we will be back at some sort of inflation pressure. We are not coming back to 20% inflation, but higher single-digit numbers in the year-end are highly likely. Therefore, we do not see any risks with regard to cutting rates by the NPC. We think that rates would be stable. And we also are seeing signals from the NPC that even though inflation would be very low in March, I think it would be around 2.5%, it is not going to trigger any reaction because this come back to target would be temporary. So NPC, overall, stays quite focused.

In terms of evolution of monetary aggregates, we are still seeing a lot of deposits. But on the credit side, situation is slowly improving. Senior loan officer service are suggesting that demand for credit, both consumption credit and also investment credit is on the slide right. We stay optimistic given the fact that the leverage ratio among firms and households is low compared to the previous cycles or very low. So we are kind of positive with regard to the credit action. But of course, double-digit numbers are not going to be achieved.

As far as the government debt is concerned, yields are slowly falling, reflecting mostly the push for lower rates in the global economy. The major risk right now concerns supply. And this is linked to the fact that budget deficit is projected at quite hefty levels in 2024.

As far as zloty is concerned, we see that we are in a period of stability. We do not expect any significant depreciation going forward. Quite contrary, we expect the zloty to be a little bit stronger that would help this inflation process.

As far as the fundamentals are concerned, of course, there are fundamentals, and they do not change frequently. What we are seeing right now is that Poland is enjoying good press among international investors. And what is most important for me here is that there is a growing interest domestically in the fact that Poland would be able to compete on a high level with other countries. So the sentiment in Poland is improving, and it's very important because we Poles used to be -- well, quite negative with assessing what's going on in our country. So this is certainly a positive phenomenon. Thank you.

[Joanna Filipkowska, executive]

Thank you, Marcin. We received some questions from our analysts and investors. Some of them have been already commented. But let's begin with the question of Jaromir. Thank you, Jaromir, for your questions.

Two of your competitors recently announced plans to reduce their workforce. Your employment increased by 4% year-on-year in '23. What trends can we expect in the future?

[Pascal Ruhland, executive]

I'm taking this, Jaromir. So as said, we have one of the most efficient business models, and it's visible in this slide, especially that we are best in class in the cost/income ratio. We are one of the leanest banks in Poland when it comes to the number of employees. And we will definitely continue also with investing in further growth of employees in order to boost our businesses. So I do not expect any significant reductions here.

[Cezary Stypulkowski, executive]

There's one thing which should be aware was the growing number of clients moving into digital channels. So obviously, we are having shifts within our employment, plus definitely now the regulatory burden. Cost has also in terms of the growth of the workforce, opposite to some other banks, which optimize the branch network under the circumstances. We don't have that much of the expense in this respect. So I would say balancing between these 2 elements, this is the way we manage the bank. In this respect, I think that you -- just my advice to analysts, you have to look at the mBank slightly differently than for the classic network-based banks.

[Pascal Ruhland, executive]

And if you're looking to the 2 quarters and the increase we've just seen, and we also stated on the slide, IT is obviously our source of being efficient, and that has the highest share of FTEs. And second share is then on our business, and we especially focused in the retail area also to extending our SME offerings also to our international branches. And this is the second biggest FTE increase we have seen so far. So just to give you a more granular picture on why we invest in growth [indiscernible]

[Joanna Filipkowska, executive]

Thank you. Do you see any signs of rising interest of your corporate clients in investment loans?

[Pascal Ruhland, executive]

It needs to be said that it is not yet the case for the Q4 because the big increase you will see visible here on this slide is driven by structured finance yields. But in talking to our sales forces and to our clients, we expect an increased demand for 2024 on these loans.

[Joanna Filipkowska, executive]

Do you expect any material impact on capital ratios coming from new CRDCR rules? If yes, could you roughly comment on the scale of such impact?

[Marek Lusztyn, executive]

Okay. I will take this one. It will be slightly higher than today, primarily due to the operational and market risk methodology changes. But overall, we expect this not to be substantial. The overall increase in capital requirements driven by Basel IV based on current quantitative impact studies and analysis we have performed shall not exceed 5%. However, I would like to underscore that it is very preliminary. The final implementation and impact assessment has not been concluded yet, neither in mBank or in the other banks. Some of those outcomes may vary depending on the final supervisory decisions and Q&As on the number of implementation questions which are issued to the [ EDA ] as well as further risk-weighted assets optimization efforts. But overall, we don't expect this to be substantial.

[Joanna Filipkowska, executive]

Thank you. Then the last question from Olson. When is it reasonable to expect Swiss franc costs to end? Which quarter? Is it feasible to expect those to finally come to the end by second half of '24 or 2025?

[Marek Lusztyn, executive]

I mean it's very difficult to give a conclusive answer to that. If we look at the first of our Slide 16, which is currently displayed, the top right-hand side chart, if you subtract the cases incomes, which are fully diligent from the active contracts and you take into account what we have commented on the settlement progress outlook for 2024, as of now, we have roughly only 10,000 active contracts that are not yet in court and not yet settled. So if we compare this to 85,000 to start with, that's definitely way closer to the end than to the beginning.

Second indication on that. I think it's clearly what we have commented on already that is our supervisor's approach to capital buffers for this portfolio because with the extraordinary capital buffer for Swiss franc mortgages reduced to the end of 2023 to 0, is also a clear indication that the end is upside. But we have also made remarks with respect to the jurisprudence and case on the number of open topics with respect to final rulings on the matter. And given the large number of the tort cases which are still open, it's very difficult for us to give you the final definite answer on that. As far as the provisioning is concerned, we will basically look at what's up there and further increases will be -- [indiscernible] data driven.

[Cezary Stypulkowski, executive]

It's worth to mention, I think is the fact that if the current active portfolio will be translated into zloty from the inception of these contracts, that will cost us [ 3.5 billion. ] That's something that is -- so if we talk about something that I used to name as a founder reaching solution as you can rationalize. And that means all the Swiss franc contracts, like contracts, are being switched into zloty from [indiscernible] that will have [ 3.5 billion. ]

So from this perspective -- and I will not exclude that there will be some rationalization of approach in [indiscernible]. That means that the new government after consolidation of its power, potential will be a good counterparty to the discussion about legislation involved. Difficult to say. They didn't announce anything on this front. But there is something that is desperately immediate in Poland. And we are, as an industry, allowing for this. Then obviously, the question is how this registration will be structured. For the time being, the only reference we have is the initial proposal or the farmers proposal policy of terminal KNF, which Marek referred to which assumed that there will be equalization of the contracts between these bank holders and zloty.

[Marek Lusztyn, executive]

And on this, it's also important to highlight and underscore what's more that this PLN 3.5 billion cost is part of PLN 8.2 billion of overall provision. So this is included in the existing PLN 8.2 billion [indiscernible] is not on top. It's part of it. But as you see from the numbers here, against the current case law and against what we see so far in the data, we are really well provisioned this 100% provisioning at the end of 2023 is one of the best in class in terms of the peer growth being the banks with materials within portfolios.

[Joanna Filipkowska, executive]

We've just received one more question on dividend. So can you comment on potential dividend policy beyond 2024?

[Cezary Stypulkowski, executive]

We continue to aspire to be at 50%. That is something that we didn't -- we haven't changed. Obviously, the circumstances are very important for us. One, I expect, which we have to take into account. I think Marek just referred to. Much depends on the level of provisioning to 2024 because obviously, we want also to retain some earnings for the future growth of the bank. So there is sort of a dependence. But strategically, the bank, the management, the Board, is declaring 50% dividend payout. We believe that the bank has its growth potential. So -- and we know how to apply the shareholders' capital. And we are returning, as you've seen, on the core business, 40%. So okay, maybe it's not sustainable, probably not. But definitely, the bank -- the profitability of our core business is very strong, and that will be possibility to employ part of of the earnings and part will be paid.

[Marek Lusztyn, executive]

And as we said, it's a reasonably ultimate solution towards the Swiss franc problem is from the regulatory point of view, a plan requisite. As you may see, there are some institutions in Poland, where this problem is relatively smaller that are given a green light for pay out the dividend given the current jurisprudence on Swiss franc. So we take once more of these removal of the extraordinary capital buffers by the kind of the ECB as an important signal into that direction.

[Joanna Filipkowska, executive]

And another question from Marta. Can you comment on potential plans for MREL instrument issue in 2024?

[Pascal Ruhland, executive]

Yes. So Slide 47 exactly. Here, you see that we are well above the limits. And we also gave you the information that the limits might be revised than in April officially when we receive them from the college also our feedback on the FX and [indiscernible], which is fading away.

But nevertheless, we said in our last transaction on the nonpreferred senior that we will be a frequent issuer. Therefore, you can expect from us, also this year, one issuance, benchmark trade up to [ 500 million, ] which would support obviously also on the MREL part, but that's our current plan despite that we're meeting very comfortable MREL limits.

[Joanna Filipkowska, executive]

Thank you. And with that, we covered all the questions. Thank you very much for the questions and for the attention. We will publish our next results at the end of April, just before the long May weekend. So thank you very much again, and have a nice day. Bye-bye.

[Cezary Stypulkowski, executive]

Thank you.

[Pascal Ruhland, executive]

Thank you.