Bank Millennium SA

WSE:MIL

Earnings Call Analysis

Bank Millennium's Solid Q3 Performance

Bank Millennium celebrated a strong third quarter with significant improvements in key financial areas. The bank surpassed its forecast by achieving a total capital ratio of 16.6% and a 13.5% Tier 1 capital ratio, both well above the regulatory minimums, indicating a robust capital position. Additionally, their interim MREL requirement was met, with expectations to meet year-end requirements too, due to effective bond placements. The net interest income displayed a healthy growth of 3% quarter-on-quarter and 16% year-on-year, excluding credit holiday effects, underpinning revenue growth, with net profits reaching PLN 461 million over the first nine months. The cost-to-income ratio stood at an impressively low 29%, and ROE was reported at 10%, adjusted to 22.6%.

Solid Operational Performance and Capital Strength

In the strategic narrative of Bank Millennium's third-quarter results, a story unfolds of resilience and progress. Joao Bras Jorge, the CEO, together with the CFO, Fernando Bicho, delineate a bank that is not only on a solid operational footing but also fortified in its capital position. The script they've woven begins with a triumphant tone: a total capital ratio of 16.6% and a Tier 1 ratio at 13.5%, both comfortably above regulatory requirements, signifying a resolute rebound from a year prior when a recovery plan was set in motion.

Elevated Profitability and Efficiency

Bank Millennium's sound financial health is underscored by a robust net profit of PLN 461 million in the first nine months, absent extraordinary items reaching a towering PLN 2.25 billion. There's a harmony in its operations, reflected in an exceptionally low cost-to-income ratio of 29%, and the gears of profitability turn smoothly with an adjusted return on equity (ROE) of 22.6%.

Sustained Growth Amidst Rate Cuts

Despite the headwinds of rate reductions, the bank navigated the currents to deliver a 3% quarter-on-quarter and 16% year-on-year Net Interest Income (NII) growth. These are the moving parts of a financial theme that echo solid performance, further reinforcing investors' confidence in the bank's revenue-generating capabilities.

Disciplined Cost Management and Asset Quality

Focusing on the ledger's other side, a disciplined cost management approach led to a reduction in operating costs by 10%. This, in conjunction with stable operating revenues, has tuned the cost-to-income ratio to impressive efficiency. The bank also showcases prudence in maintaining a non-performing loan (NPL) ratio at a steady 4.7%, indicative of its commitment to asset quality.

Strategic Capital and Liquidity Fortification

Strategic maneuvers have bolstered the bank's capital ratios, with a noted enhancement in the core Tier 1 and total capital ratios, reinforcing the capital foundation. Moreover, a proactive approach to liquidity management is visible as the Loan-to-Deposit (LTD) ratio has decreased to 70%, and liquidity coverage ratio (LCR) has swelled to 299%, reflecting a bank that stands on a robust liquidity footing.

Customer Expansion and Digital Momentum

In a digital age, the bank strides forward with 2.98 million active customers, supported by a robust digital customer base of 2.66 million. The financial story arcs toward digitalization, with a massive 82% of cash loans originated digitally in the third quarter, highlighting the bank's successful adaptation to digital consumer trends.

Business Highlights: Retail and Corporate Growth

Bank Millennium's footprint expands in both retail and corporate domains. Retail deposits have spiked by 11%, while corporate deposits exhibit sturdy growth despite an optimized loan portfolio. The sales narrative is equally compelling with consumer loans sales surging by 19% year-on-year, reflecting a bank that has skillfully captured market demand and consumer trust.

Earnings Call Transcript 2023-Q3

[Dariusz Górski, executive]

Good afternoon, everyone. Welcome to Bank Millennium 3Q results call. We like to have Mr. Joao Bras Jorge, our Deputy Chairman of the Board and CEO; and Mr. Fernando Bicho Deputy Chairman of the Board and our CFO. We will do a slightly different agenda. I mean, the agenda will be slightly different from what we used to do in the past. First, Mr. Bras Jorge will share with us his highlights or he will share with us his views on what he regards as key points, key achievements of the bank in the quarter. Mr. Bicho will share with you or present more details of the results. And after that, we will be available for the Q&A.Thank you very much.

[Joao Jorge, executive]

Good morning and welcome. So I will use mainly the page number 4 or slide number 4 as a guidance. It's a good opportunity to go through the achievements of the bank in the last 9 months. It's very important also to highlight that it was on the third quarter of last year that we presented the situation of the bank, namely the situation that we raised the capital ratios and we launched the capital protection plan and the recovery plan. Now it's very visible, the significant improve in capital ratios at the end of September, we have a total capital ratio, 16.6%. This gives a surplus with a regulatory minimum of 4%.And we have Tier one at 13.5%, which is a surplus of 3.3% above the regulatory minimum. Also, it's, of course, relevant, the fulfillment of the MREL interim requirement and also our expectations to meet the year-end requirements due to the successful placement of EUR 500 million in bonds under our EMTN program that can fulfill the MREL requirement. Also, we had already in the beginning of this year, the execution of the leasing securitization transaction in this process. So mainly what we explained one year ago was that we would go with the internal program that would compromise that would -- cost reduction and management and management of the risk-weighted assets, some transactions as we have the securitizations in order to -- and of course, the natural also profitability quarter-by-quarter off -- from the bank to allow us to have the recovery of the capital.Things went much better than we forecast initially. So if you remember well, one year ago, we point as a target to achieve this in the summer of this year. We end up to be more successful than initial forecast, and we were able to achieve the minimal requirement of the capital already at the end of 2022. And as we informed in the beginning of this year, 2023 would be dedicating to fulfill the MREL, and this is what we achieved already. If we go to the right, so in terms of profitability, we have the fourth quarter in the row with the profitability presented by the bank. So we have year-to-date PLN 461 million and to allow us to see also how wealthy and healthy is the business model.We have PLN 2.2 billion when we exclude the non-recurrent events. With a very strong net interest income year-on-year and already positioning well the bank for off-site, of course, partially, but somehow minimizing the impact of the decrease of the interest rates that now are foreseen in the market. As you know well, we had also this transaction in terms of bancassurance. That was very important also to allow the bank to accumulate higher provisions of Swiss francs. And also, we have been showing a very good credit risk management year-to-date. In the left down, you can see also in business terms.We are very happy that [ allow ] the bank is focused in managing its recovery plan and in solving the issues in terms of capital and in terms of MREL requirements. Also, the bank was able to manage and to keep very high intensity in terms of business. So year-on-year, we have 2% mortgage portfolio growth, 5% growth of the cash loans portfolio, 9% year-on-year in terms of total deposits portfolio, showing a quite a good dynamic. But besides the numbers, also it's relevant that just two nights ago, the bank was awarded as the Best Bank in Poland through the Newsweek report for the service and the quality of services of the branch, but also the Best Bank in Poland in terms of the digital banking.For the first time also, the bank was considered in the top ranking in this case as number two, as the Best Bank for small business on the ranking that is provided and sponsored by Forbes magazine. In terms of the more the digital road map, digital road map, it's mainly with two areas. One is customer acquisition because the digitalization allows us to have a marginal cost of servings per customer much lower and because of that also the capacity to have profitable customers. It's completely different.And so as you know well, we have a target to achieve 3 million active customers in the year of -- at the end of the year of 2024. This is in our strategy. And probably, we have already 2.981 million. So we are quite confident that we will achieve the 3 million already this year. Also in terms of digitalization of the customers, we are already demonstrating 89% of digital customers. As you know, our target is 90% of digital customers. So it's digitalization of our customer base at a level of 90%. And this -- we are quite confident that we are going to achieve it.We already are in a level of 72% of loans finished in digital and even in the corporate side, that is always a little bit lagging in terms of digitalization, but we already see some signs with 61% of the corporate credit agreements being signed by digital. So we are quite happy and positive with the results that we are presenting up to now. And this is already putting us in the conclusion moments of this recovery phase that we were predicting and explaining in the last one year, quarter-by-quarter here with you.So I would pass now to Fernando.

[Fernando Bicho, executive]

Thank you. So I will continue with the details of the results of the group. On pages 6 and 7, we present key profit and loss and key balance sheet and business items. So before going to the details, we would like to highlight the still solid growth of net interest income that grew 3% quarter-on-quarter and 16% year-on-year, excluding the effect of the credit holidays. The fact that we have accumulated a net profit of PLN 461 million during the first 9 months of this year. That the net profit without extraordinary items reached PLN 2.25 billion.And also, we have an extraordinarily low cost-to-income at 29% and ROE on a reported basis of 10% and on an adjusted basis, that's 22.6%. And on the page 7, we would highlight the significant improvement in the capital ratios and especially visible in the third quarter, and we will explain in more detail in the -- later on in this presentation. So on page 8, we have this -- we are presenting the financial highlights with a solid performance of the bank during the first 9 months of the year, with the growth of the adjusted net profit, so excluding extraordinary events of 44% year-on-year.The solid growth of NII, which is supporting the overall growth of revenues and the NIM that grew 36 basis points year-on-year. And apart from the ROE and the cost-to-income that I already mentioned also keeping a strict control over the asset quality with an NPL ratio at 4.7%. On page 9, we present the status of the main indicators that were part of our strategic objectives on the Strategy 2022-2024, where it is visible that several of them are already being achieved during the current year, while others are on the right track to be achieved very soon or before the end of 2024. Moving to page 10, in the third quarter of this year, we had a net profit of PLN 103 million.So this was the fourth consecutive quarter with a positive net result for the bank and group after the period of losses that we have suffered. And this brought the accumulated net profit of the group to PLN 461 million during the first 9 months of this year despite the fact that we still have to face significant costs connected with FX mortgage portfolio. The operating income, excluding extraordinary items, grew 4% quarter-on-quarter and 14% year-on-year. On page 11, and looking at the evolution of the net interest income, it was still a good quarter in terms of NII, despite the fact that we faced in September, this 75 basis points cut of interest rates delivered by the Monetary Policy Council followed by another 25 basis points cut in October.But despite that, we had a solid growth of NII still in the third quarter by 3% quarter-on-quarter and 16% year-on-year. This was achieved through a combination of still small increase in the average yield from the loans, a steady or very slightly lower average cost of the deposits and also the fact that due to the deposits growth, also, we had a growth in interest-earning assets, which, especially the excess of liquidity was deployed in bonds and NBP bills that although depressing slightly, the NIM were supportive for the further growth of the net interest income.On the net fee and commission income, we have in the first 9 months of the year, a small drop of 2% year-on-year. In the quarter, we had a drop of 7% versus the previous quarter. But this was driven by the [Technical Difficulty] transaction. Sorry for the noise. Moving now to page 12; on the cost side, year-on-year, we have a drop of operating costs by 10%. If we exclude the regulatory costs, namely contributions to banking guarantee funds and resolution fund and also the extraordinary contribution last year to IPS, the overall cost growth was at 14% year-on-year. But the fact that we had a significant improvement of operating revenues contributed to bring down the cost-to-income ratio to a record low of 29%.The number of employees was stable, while the number of branches continues to be going slightly down as a part of the ongoing process of optimization of the branch network. The asset quality remained solid, as you can see on the page 13, the NPL ratio at 4.7%. Please note that this ratio is not helped by the denominator because actually, the loan portfolio of the bank has been shrinking in recent periods. So we do not have any support of the denominator effect for this ratio. But we still are able to keep the NPL ratio somewhere between 4.5% and 4.7%. And at the same time, continuing to benefit from relatively low cost of risk.On a yearly basis, and during the first 9 months of this year, total cost of risk was at 40 basis points over total loans and this cost of risk was essentially driven by retail portfolio because in the Corporate segment, the cost of risk is still very low. And also, let me add that in the third quarter, we did not benefit from any sale of NPLs. The two most important achievements of the quarter are shown on page 14. The first one was another significant improvement in the capital ratios of the bank and the group, bringing the core Tier 1 ratio and Tier 1 ratio to 13.5%, which is already very comfortably above the minimum regulatory requirements by 330 basis points.And second, the total capital ratio at 16.6%, also with a significant surplus of almost 4 percentage points over the minimum capital requirements. So -- this basically was the result of the incorporation in own funds of the net profit of the first half of 2023 after getting the proper consent from the Polish Financial Supervision Authority. The second, the execution of another securitization transaction this time of the leasing portfolio that was concluded in July; third, further reduction of the negative valuation of the bond portfolio in available for sale. And so the combination of these three elements, together with some further optimization of risk-weighted assets allowed us to achieve this significant improvement.The improvement in the capital position of the bank was also beneficial for the fulfillment of the MREL requirements, together with the issuance of EUR 500 million of senior non-preferred bonds that we have completed in September. And as a consequence of that, the bank fulfilled the interim MREL requirements but also is well positioned to fulfill the higher requirements that will enter into force at the end of this year. And so the bank expects to meet also the year-end 2023 MREL requirements. The liquidity indicators are very strong and further improved during the quarter. We continue to have a higher pace of growth of deposits than loans.And additionally, we have this issuance of bonds. So the loan-to-deposit ratio fell to 70%, while the LCR increased to 299%. In terms of FX mortgage portfolio, we continue the efforts to reduce the absolute and relative signs of the FX mortgage portfolio, which in currency reduced by 4% quarter-on-quarter and 15% year-on-year. And we brought down the number of active loan agreements to 34,1000. At the same time, we still had a relatively high inflow of court credit in the third quarter of 1,864 but with the peak in August and already with the new number of cases slowing down considerably in September. We continue to adapt the provisions for legal risk.As we announced previously in a current report a few weeks ago, we created PLN 673 million of provisions for legal risk for the portfolio originated by Bank Millennium, bringing the total balance sheet amount of provisions to close to PLN 7 billion. The effort of reduction of this loan portfolio continue to be supported on the negotiation of amicable settlements with FX mortgage borrowers. In the third quarter, this number reached 869, bringing the total cumulative number of settlements to more than 20,000 since the beginning of this process, which represents more than one-third of the number of active loan agreements that we had at the year-end 2019.The increase of the provisioning effort translates also into an increase of the ratio of total provisions over total outstanding amount that at the end of September was at 73.5%. Moving now to the second part of the presentation and starting with the business highlights on page 18. We benefited from good dynamics of deposits, growth and customer acquisition. Customer deposits grew 9% year-on-year, supported by a growth of 11% of retail deposits, strong sales of cash loans in the first 9 months of this year, growing 19% year-on-year, a growth of 143,000 payment cards. And again, this solid growth of the number of active customers that returned at 2.98 million and active digital customers, 2.66 million.On page 19; regarding the evolution of the loan portfolio, it contracted on a net basis by 6% year-on-year or 1% if we exclude the FX mortgage loan portfolio, which, as you know, is not only reducing but also, most of the provisions are allocated to the portfolio and so accelerates, let's say, the reduction of the net loan portfolio. Having said that, it is worth noticing that the portfolio that continues to grow at a good pace is the consumer lending portfolio. And this is contributing also to the continuation of the change of the structure of the loan portfolio with more than 20% allocated to cash loans, PLN mortgage 47.3 million, while FX mortgage of Bank Millennium already below 5%.On the customer deposit side, a growth of 9% year-on-year, mainly driven by retail deposits and also worth highlighting the growth of 16% of investment products year-on-year. More details about retail on page 20. Gross loan portfolio contracted by 4% year-on-year, but excluding FX mortgage grew actually 4% year-on-year. Retail customer funds with a growth of investment products by 16% and the current and savings accounts by 4% and time deposits by 30%, which is normal taking into consideration that during the last 12 months, we had an increase in the market interest rates. In terms of sales, of course, the best performance is coming from consumer loans sales, a growth of 19% year-on-year and an origination of PLN 1.65 billion of new cash loans in the third quarter.While in mortgage, there was already a recovery from previous quarters and with a total origination of PLN 1.25 billion. Page 21, the growth of active retail customers is also followed -- it's also down on the back of a significant growth of the number of current accounts that grew 120,000 in the last 12 months and also worth noticing the solid growth of active micro business customers to 137,000. Next pages illustrate the continuous growth of the importance of digital channels. Again, the main numbers, 2.66 million active digital users, of growth of 7% year-on-year; 2.43 million active mobile banking users, a growth of 11% year-on-year; and 1.72 million BLIK users a growth of 24% year-on-year.Page 23, cash loans with 82% digital share in cash loan sales in the third quarter, and the digital channels also responsible for 37% of current account acquisition, 96% of term deposits and also important, the growth of 26% in insurance online sales in the third quarter. On Page 25, the continuation of the development and growth of our GOODIE smart shopping platform with a steady growth in terms of sales of GOODIE gift cards and in number of transactions made in Refund for Purchases and already with PLN 3 million of refunds paid to the users of the platform.Moving now to Corporate business; on one side, the lending activity was, of course, conditioned by the capital optimization and risk-weighted assets management that we have been doing during the last 12 months, but in fact, the contribution of the corporate area to the improvement of the capital ratios of the bank has been significant because apart from some contraction in the loan portfolio, actually, the securitizations that were done so far have been done with exposure to the companies and corporates, namely first in the beginning, securitization of SME loans and more recently, in July, the securitization of PLN 4 billion of leasing receivables.At the same time, we have been managing to continue to have a healthy growth in deposits from companies that grew 11% quarter-on-quarter and 3% year-on-year with a capital balance mix between current accounts and time deposits. And also despite this contraction in the loan portfolio, we continue to see a gradual improvement in the transaction activity of our customers. Page 27 shows the evolution of the sales of leasing that were also partially affected by this tight RWA management and contracted 16% year-on-year.And while factoring turnover in the first 9 months of the year was lower by 6% year-on-year. Despite this temporary reduction in the loan portfolio, we continue to invest in the offer for corporate clients as can be seen on page 28 with supporting them in the green transformation and digital solutions and especially visible this investment that we continue to do on page 29 with the launch of a new mobile app for companies in May and also with a significant progress in the digitalization of the processes in the corporate area.So these are the main highlights of the third quarter and 9 months results of Bank Millennium. And now we will be answering your questions. Thank you very much.

[Dariusz Górski, executive]

Thank you very much, Fernando. As usual, the first questions that came from the line from Mediobanca and they are quite wide and touching many areas. So just we go through them one by one, and then we'll complement with questions from the other participants. I will read these questions out so that the participants will have the benefit of knowing what the question actually is. So the first question is your bond portfolio increased meaningfully during the quarter. Could you please share with us overall duration and your strategy? Is there room to increase or it will depend on the deposit growth?

[Fernando Bicho, executive]

Yes. So as I mentioned during the presentation, we have been facing a stronger growth of deposits over loans. And on the top of that, in September, the issuance of the EUR 500 million of bonds further added up to the excess of the liquidity. We -- just to be clear, we have an excess of liquidity both in Polish zloty and in foreign currency. So regarding the overall duration we can say that the overall duration of the PLN bond portfolio, which is made up of Polish government bonds actually is around 3 years, 3-point-something years. So -- but of course, this is the average, which means that we also have a gradual is, let's say, scheduled through time.So there is not a significant concentration. And also the excess of liquidity in foreign currency, it's deployed also in Eurozone government bonds from -- if you [ solve ] range, but with a shorter duration, which tends to be between one and two years. The growth of the -- so we are -- as I said, we are facing a situation of excess of liquidity. There will be a moment in the future where we expect that the loan portfolio will start to grow again at a faster pace and that also will consume some liquidity, but it's still possible. It is still possible that in the next periods, the excess of liquidity will continue to grow, which means that, obviously, we will be deploying these in bonds and NBP bills at least temporarily.

[Dariusz Górski, executive]

The next question from the line is -- can you please share your updated rate sensitivity for 100 basis points in three months WIBOR? And specifically, they assumed pass-through to deposits.

[Fernando Bicho, executive]

So in our financial report that was today released in the morning, we are actually providing this number is on page 67. So in a scenario of a decrease of interest rates by 100 basis points, we would have a negative impact on NII of around EUR 118 million or 2.26% of the group's NII reference level, reference level being the level of the third quarter 2023 annualized. Of course, this impact is excluding the additional cost, interest cost that comes now from the issuance of the MREL bonds that was completed in September. So we did not have this cost before and also we will have. But the answer to your question is the sensitivity is 2.26%. This relatively low sensitivity is helped by the current structure of the balance sheet of the bank, where we have, let's say, the bond portfolio and also part of our loan portfolio at fixed rate that helps to, to a large extent, to immunize the bank against the cuts of interest rates that already started to happen.

[Dariusz Górski, executive]

Next question is what moving parts do you see for NII in Q4? Do you expect the contribution from Govies to increase quarter-on-quarter?

[Fernando Bicho, executive]

I think for -- in the fourth quarter and first quarter, what we will face is a gradual repricing of the assets that are directly linked to market rates. So for example, all the mortgage portfolio that is indexed to WIBOR 3 months or WIBOR 6 months will gradually reprice down and also the other parts of the business that are at floating rate like part of the corporate portfolio, part of the leasing portfolio. So this is a normal repricing process. And also the part of the excess of liquidity that is invested in NBP bills is also, of course, remunerated at a lower level.But -- and also, of course, the additional cost coming from the MREL issue. But once again, we continue -- as I already said, we continue to invest the excess of liquidity essentially in bonds and bills. So to a large extent, we don't think that there's going to be a substantial difference. We still -- we will still -- probably we already reached the top of the NII in the third quarter. Of course, we also -- we need to expect that these cuts of interest rates and the cost of the MREL issue will have already starting to have a visible impact in the fourth quarter but as I said, limited due to the fact that we have tried to protect in advance to a scenario of decreasing interest rates. Another part is also uncertainties to which extent there will be or not further cut of interest rates. There is still some uncertainty whether or not there will be further cuts of interest rates during the current year. So this is something that we will need to observe during the next months.

[Dariusz Górski, executive]

Next question. Have you swapped to variable the senior non-preferred bonds you have recently issued?

[Fernando Bicho, executive]

Yes.

[Dariusz Górski, executive]

The next question is probably more directed at Joao. How should we think about loan growth in 2024? Do we expect a recovery in demand? And would you be more active in mortgage market?

[Joao Jorge, executive]

So it's our expectation and that's also our will to increase the lending activity, particularly in corporate, not so much in mortgage. So in mortgage, we will have our market share, but without a special effort here. On corporate, we want, we want treat it's -- it's important to highlight that when you go through our mortgage corporate portfolio, you can see that the risk weighted assets, they decreased much more than the decrease of the portfolio. And then also the impact of the decrease of the portfolio was much higher than the decrease of profitability.And this is important also to see that the colleagues incorporated with a very good work, not only in terms of collaterals, but also in terms of choosing the positions that they should have versus the business that they were receiving. But it's obvious that now that we are in a more normalized situation in terms of capital we will deploy the capacities that we have. We are -- it's known that we are quite good in terms of SME and mid-corporate. This is our area of activity. And this is what we are going to do and the effort that we can -- or we hope that we will show in 2024 is growth in this area of lending, probably also with some lending in green energy, also in all of these industry transformation that Poland need probably combined also already with some investments of European funds.So these have been capabilities, people that are more around here in Poland knows the seminars that we are doing across all Poland with these themes, also the teams of experts to take these possibilities. So how to use European fans, how to also how to make investment loans for energy transformation and now take advantage of that. And so this is now what we would like to focus and is our will to have relevant evidence of growth of corporate lending, especially in these mid-SME with corporate in the next quarters to come.

[Dariusz Górski, executive]

Next question is on cost of risk and cost in general. Could you please share with us your cost of risk and cost guidance for 2024?

[Fernando Bicho, executive]

As we said before, we have been benefiting from quite low cost of risk during this year, below our expectations that we had said during -- in the beginning of this year. We see that what is happening to us is happening, in fact, to most of the other market participants. We see also low cost of risk overall in the Polish banking system and also below expectations that existed in the beginning of this year. Having said that, for the next year, we are expecting a return to, let's call it, more normal or normalized levels of cost of risk, which, in our case, should be between this range of 50 basis points to 60 basis points of our total loans that we used to guide in the past.So we think that gradually, we will come to those levels, although, of course, we need to say that the decrease of interest rates that already started will be partially supportive for the quality of the loan portfolios, right? So it's not -- not everything is negative. But anyway, we are assuming that the cost will be normalized more normalized. Regarding the cost guidance for '24; so we come from 2023 with lower year-on-year costs due to the extraordinary costs that we faced last year.For '24, we are assuming still a double-digit growth of costs due to the, let's say, still in part from -- coming from the high inflation that we have faced in the recent quarters that translate into additional inflationary pressure in terms of staff costs and also in other admin costs. And so for the time being, this -- our assumption is that the cost growth is excluding regulatory items, is still going to grow double-digit in 2024.

[Dariusz Górski, executive]

We're remaining in the area of risk. Could you please share with us -- could you please elaborate on the increasing NPE stock in Q3? What were the main drivers?

[Fernando Bicho, executive]

But I think the question is not about the ratio, it's about the stock, right? So first of all, the NPE stock in specific quarters is affected by the execution or not of sales of NPLs and also by the level of write-offs that is done in each quarter, which is not regular quarter-after-quarter. So for example, in the third quarter, we did not have sales of NPLs, which in the previous quarter helped to improve this ratio and helped to also to keep the stock of NPLs or to decrease the stock of the NPLs. So this is one thing.We will be regularly doing -- trying to do further sales of NPLs, which from time-to-time, will also help the reduction of the stock on one side and the reduction of the ratio on another. So as I said, we have been benefiting from lower cost of risk and the ratio has been stable between 4.5% and 4.7%. But of course, we are anticipating that can be still some increase in the cost of risk for the next -- for the next year, but we will manage the NPL ratio in such a way, always to keep it below 4.7%, let's say. So this is going -- so we will be managing this. And this number is going to be achieved as a combination of recovery activities, set of NPLs, write-offs and so on.

[Dariusz Górski, executive]

Next question relates to capital. Great evolution of Tier 1 capital in Q3. Are you working on further efficiency measures? When do you see the bank leaving the recovery plan?

[Fernando Bicho, executive]

So maybe I will start. Yes, yes. We also think that this was probably a very significant achievement during this quarter and during this last 12 months -- because sometimes we understand that not everybody believed that we would improve so well and so quickly our capital position. So we reached now this Tier 1 and core Tier 1 of 13.5%. We are still continuing some additional effort in order to further increase the Tier 1 ratio and total capital ratio.And so it is possible that still another loan securitization transaction will be done in the near future, maybe still this year, which would contribute to further improvement of the capital ratios. And additionally, of course, we expect to continue to generate positive results in the future periods that then sooner or later, will also be counted for our own funds. Regarding the recovery panel, we also wrote in our financial report that the possible exit of the recovery plan will happen probably until the middle of the next year. So there will be several steps to take.We still want to see whether or not there are going to be more extraordinary factors affecting the profitability of the Polish banks and our bank, namely the potential prolongation of the credit qualities and in which conditions this will be done or not. So we still need to wait for these developments. But now that we have significant -- comfortable capital position and that we achieved the MREL requirements obviously, we expected somewhere during the -- until the end of the first half of the next year, we will be in conditions to exit the recovery plan.

[Dariusz Górski, executive]

Now we're entering into sometimes very granular questions, but let's take them as they come. Could you provide more color on 39 lawsuits by borrowers of mortgage loans in PLN for reimbursements of benefits provided under the loan agreement, page 87 of Q3 report and general update on FX mortgage loans losses, please?

[Joao Jorge, executive]

So these 39 cases that we have in Swiss franc in PLN. One is in second instance, the 38 in first instance. So the case that is in second instance, the claim was rejected by the court already. But -- so there is not a lot of information to provide yet. We are just putting the information that also we see in media and also we listen about. And because they are a small number at the moment but of course, in a country that it's possible to have the situation that we have with Swiss francs. It's obvious that we put all the reservations and our effort here is to provide as much information as is possible.The steps that have been done, we think that they are positive in terms of even the authority, KNF, certifying WIBOR as reference index to be used. But our intention here is it's -- from one side, it's too small, taking in consideration stock of the zloty portfolio that we have to be an alarming situation, but we wanted just to highlight, and we don't have a lot of information that we can say about this. In terms of the Swiss franc mortgage portfolio and litigation, so we think that the information that we brought in terms of settlements is quite positive.So it's, of course, I would like to highlight that we had 13% of the Swiss franc mortgage issued in the country or disbursed in the country 13%, but we have 30% of the settlements achievement. So it looks like we are in a good position. Of course there's more settlements we achieve more difficult and there is a smaller potential database to settle further. We were very open and clear about our initial targets. In that time, we explained that our target was 2,000 contracts, 2,000 settlements achieved and signed by quarter. For a while, we were even achieving more than these 2,000. At the moment, we are at this level of 800, 900 contracts. Our goal is to put ourselves at 1,000 level.This is what we think is feasible at the moment. We are not there yet, but this is our intention. We are working hard here. I think it's important to see, and in page 16, you can see this debt also we are settling more and more in court. So we always were very open that we always said. From one side, we have the legal strategy and we defend right of the bank and to demand capital to demand even some compensation. From another side, and I will talk a little bit about it as well about the provisions and making the process that would be as clear as possible in terms of provisioning that we will do.But we always said and we were always very clear that in our view, the solution for these problems are amicable settlements even because in our view, there is no legal ground to all of these decisions that are being taken. So what we are talking really is a social settlement that needs to be taken. And so in our view, this is what we should do. And this is what we are going to keep doing. So until the moment that still exists, one contract of Swiss francs, we will be always able to talk with the client with a proposal for an amicable settlement. And I think this is the color that I could give at the moment. Maybe I don't know if there is a question about model of provisions or something -- there is -- can you read it because then?

[Dariusz Górski, executive]

Question from RBI number 3. Have you changed your internal model assumptions regarding the set of clients [Technical Difficulty] mortgage loans going?

[Joao Jorge, executive]

So just initial clarification because I think we tried to explain this in the beginning, but it's not always very difficult. So more than the model, we don't have a model, we have a methodology. When we have a model, you are able to predict the future of a situation. When you have a methodology, you have a scientific, let's call it and professional assessment and process, how to manage the situation as it appears. And we always explain that under our methodology, we were looking for the court decisions to take the probability of losing.We will taking the flow of the cases to predict and to have -- to manage expectations and provisions for the present and future cases, and we were managing like that. We did not make a radical change, but we have been, of course, changing these positions. So we deduct the probability of capital. Also, we -- sometimes we make adjustments in terms of the potential costs of settlements. And so there is a lot of information that -- and mainly it's information as it happens. So it's -- today, a settlement is more expensive than it used to be in the past. So it means that the cost for a bank of a settlement is bigger. So we have been also processing like that. And I don't know how clear we were about the different tranches.

[Fernando Bicho, executive]

So I can just add that regarding the inflow of the court cases, obviously, the inflow that we are estimating for the future is divided between active loans and also a smaller part connected with repaid loans. In our report that we released today, we provide a lot of details. I think that the most important is that in the current methodology, we are already covering 77% of the current number of active loan agreements.So this is important and this -- and so we might hear an adjustment, more conservative adjustment already also again during the third quarter. Regarding the repaid loans, we also have an estimation for the future, which did not change much versus the previous quarter because we still also do not observe, let's say, a trend of increased flow of the number of repaid loans going to the court. For us, what matters is not the percentage is the absolute number that is coming in each period. And this is what we are -- this is what we are tracking.

[Dariusz Górski, executive]

Well, there's also a handful of other questions relating to the Swiss portfolio and provisioning and so on. One is about -- it's a question from Max. Could you tell us the vintages of repaid loans? And how many of the 45,000 were repaid pre-2015?

[Fernando Bicho, executive]

It was above 60% of the total.

[Dariusz Górski, executive]

Do you see any increase in activity of clients, legal firms in terms of questioning PLN cash loans?

[Joao Jorge, executive]

Slightly, but we are more trying to understand by the rest of the market. So we don't see a [indiscernible] yet but we are trying to assess this is a very -- unfortunately, a very new recent trend, and that was even learned by or alerted by the presentation to investors or to analysts from one of the companies that dedicates to this business. It's a little bit early to assess, but we just hope that this will not be another problem for the Polish banking system. But it's early for us to assess our own case. So we are more learning these from the press and from the comments of the colleagues of other banks.

[Dariusz Górski, executive]

Drifting moving towards an end. Were you joined the subsidized mortgage lending scheme? This is the usual or repetitive question, but.

[Joao Jorge, executive]

But we will see now. So it's also a lot about capacity. It looks like a very complex product in beginning. I think we will wait also to see if there is changes in the policies due to new potential new government because sometimes with new people, new subsidies or new projects will come. And I remember that there was a parallel proposal that was not 2% but 0%, but with different criteria. So I think this -- this we will wait and see. But if there is a continuity we will consider.

[Dariusz Górski, executive]

Finish off the Swiss franc portfolio related questions. Do you observe any pickup in questioning and already signed settlements for Swiss franc?

[Joao Jorge, executive]

No.

[Dariusz Górski, executive]

All right. Moving away from Swiss. The last two questions that we have. One is what is the outlook for insurance fees going forward? That's a question from RBI.

[Fernando Bicho, executive]

I think here the answer is on one side, we have, of course, the impact of the fact that we sold 80% of our subsidiary, where agency services are provided. And so of course -- and we have a long-term agreement also with different characteristics with Europe. So on the other side we also have business plans for the future to continue to grow in the insurance business. So I think that for the time being, it's better to look at the third quarter as a basis for what can be regular income from insurance until -- because we will need a little bit more time to see the progress in terms of further development and further sales.

[Dariusz Górski, executive]

[indiscernible] to highlight also the recommendation new, which governs the subjects in the first mid-'24 -- so you will see impact of this regulation on other banks as well? Final question, this is a question asked by Stefan or Stefan, in Polish, but I would translate it to you, was the last case against real estate or actually a construction company and its -- and the payment of the penalty of fine booked in the results. Yes, it was. You can find details of this in '21. I believe it was given [indiscernible]. All right, it looks like we have answered all the questions that we have received. Thank you very much for the questions.

[Joao Jorge, executive]

Now just to tell -- I would like to say thank you for all the analysts that were covering us during this recent year. Of course, some were more skeptical but some were very confident about our capability to make this change of the situation and sometimes even having the capacity to predict more what we would be achieving than we were believing ourselves and -- but sometimes, it's -- there are always the people that don't see the picture. It's the people that are too far away or the people that sometimes are too close. And sometimes the ones that are outside but close enough are the ones that have this capacity. And so it's just -- it was very encouraging, reading a lot of your notes and a lot of your views for the bank. So just to thank this confidence that the majority of the analysts had in the bank.

[Dariusz Górski, executive]

Joao, thank you very much, the viewers and the participants. As usual, you may expect from us to report our fourth quarter at the turn of January and February. We are still due to report or provide the reporting dates, but expect this from us shortly. Otherwise, thank you very much, and see you in three months. Thank you.