mBank SA

WSE:MBK

Q1-2025 Earnings Call

[Operator]

Good morning, ladies and gentlemen. Welcome to our conference where we will present the results of mBank Group in the first quarter of 2025. The speakers today are Mr. Pascal Ruhland, Chief Financial Officer; Mr. Marek Lusztyn, Chief Risk Officer; and Mr. Arkadiusz Balcerowski from our macro team.

Pascal let's start.

[Pascal Ruhland, executive]

Thank you very much, [ Osha ]. Good morning, and welcome to our conference call. We have started the year on a successful note and are excited to present this quarter results to you today. And let me bring the 6 main observations of the quarter into perspective.

As you can see on the slide, first and foremost, we continue to generate high sales in both customer segments, leading to a dynamic increase in balance sheet volumes. Our core loans grew by 9% year-over-year, capturing additional market share. Second, we generated revenues exceeding PLN 3 billion once again. And third, our cost-to-income ratio, including the linear contribution to the resolution fund was at an excellent level of below 30%.

Continuing on the next slide with #4, we observed positive trends in incoming and pending court cases reflected in declining cost of risk related to FX loans. This marks our fifth consecutive quarter with lower impact. Fifth, we reported a high quarterly net result and a solid return on tangible equity. Following the issuance of our AT1 capital, we believe this metric, return on tangible equity better reflects the profitability of our business. Finally, we maintain safe buffers over the minimum capital requirements, which forms the basis for our future dynamic growth.

And now let's move to the Slide 5, which represents our [indiscernible] of rating improvements. We are very proud that the top 3 rating agencies have upgraded mBank's ratings in less than 2 months. This is an unprecedented situation in the Polish banking sector. And more importantly, these changes have turned mBank us into a clear investment grade.

The rating agencies decision were driven by 3 main observations. First, improved capital position, also due to our issuance of PLN 1.5 billion of AT1. Second, reduced legal risk related to the Swiss franc mortgage loans; and third, our strong profitability and the greater earnings stability.

And with this great news, now let's dive into our financial results on Slide 7, starting with total income. The group's revenues declined marginally on a quarterly basis, but increased year-over-year. The slight quarter-over-quarter decrease in NII resulted from nonbusiness reasons, mainly the shorter interest period. Net interest margin remained almost unchanged quarter-over-quarter, but fell compared to Q1 2024 due to strong growth in interest-earning assets.

We saw an increase in net fee and commission income and in other income, driven by our active client base and the impact of updated fee tables introduced last year. Additionally, we achieved a high FX result, benefiting from high volatility in the currency markets. Looking forward, we maintain our ambitions to comfortably exceed PLN 11 billion in total income for 2025, despite expected interest rate cuts.

Moving to total costs. Total cost of the group, excluding compulsory contributions declined by 10.4% quarter-over-quarter, mainly due to the variable compensation effect in personnel costs. On an annual basis, total costs, excluding compulsory contribution increased by 9.5% due to growing employment and project-related costs. For this year, we expect cost to grow further at low double-digit pace, driven by new initiatives, wage increases and already recognized higher BFG contributions.

Regarding our cost of risk, LLP were nearly 6% lower than the previous quarter, but more than 3x higher than in Q1 2024 when we reported net releases of LLP in the corporate segment. As a result, cost of risk reached 53 basis points, so below our guidance. And for 2025, we expect still the cost of risk between 70 and 80 basis points, and Marek will provide more perspective on this later in the call.

The cost of legal risk related to loans indexed to foreign currencies recognized in Q1 reached PLN 662 million. Also here, Marek will provide more details later in our call. We maintain our view that 2025 is supposed to be the last year with a significant burden on our P&L. As a result, earnings profit before income tax is close to PLN 1 billion. The net profit was PLN 706 million, translating into an ROE of 15.6% and a return on tangible equity of 19.2%. And these ratios confirm our very strong profitability.

Skipping the next slide, and let's jump directly into our new lending business. We are very satisfied with our developments in the first quarter as all loan products show positive trends. Sales of mortgage loans increased by 6% year-over-year, driven by mBank's foreign branches. Sales in Poland remained stable year-over-year, despite a high contribution of loans disbursed under the 2% government program last year.

Compared to Q4 2024, sales of mortgage loans declined by 5%, mainly due to pricing adjustments end of last year. However, we recorded an increase in sales each subsequent month. More than 80% of our Polish mortgage loans sold in Q1 were in the fixed interest rate format, which is a priority for us, as you know. The total share of fixed interest rate mortgages in the Polish mortgage loan book amounted to 43.5% to date. Sales of non-mortgage loans went up by 15% quarter-over-quarter and 22% year-over-year with increased sales recorded both in Poland and our foreign branches.

Moving to the corporate loans. The volume of newly signed loan agreements in Q1 2025 increased by 15% quarter-over-quarter and nearly 34% year-over-year. We noted an increase in all corporate loans by more than 40%, except for the trade finance with all customer segments contributing to this growth. We're on a good path to capture market share with new sales turning into future drawings. Our off-balance sheet exposure has risen significantly by 57% year-over-year.

Looking to the loan book on the next slide. We are seeing a growing loan book visible in the chart on the left. Gross loans to corporate customers increased by 10.1% quarter-over-quarter, while loan to individuals increased by 1.4% quarter-over-quarter. This strong lending activity across all segments allows us to rebuild market shares. The dynamics of loans in the Corporate segment and the Polish mortgage loans clearly outpaced the sector's development, leading to a 0.4 percentage points increase year-over-year.

Importantly, growing volumes were not achieved at the expense of lower margins. We improved margins compared to Q4 in both the Retail Banking segment and the Corporate Investment Banking segment. In the upcoming quarters, we aim to grow above the market again in both segments.

Moving to the liability side of our balance sheet. Customer deposits remained stable in Q1 '25 compared to the year-end '24. We registered an increase in retail deposits and a decrease in corporate deposits. On an annual basis, we increased our share in both households and corporate deposits. We have a higher share in current accounts, confirming that we are the premier transactional bank.

Our market share in current accounts of households grew by 0.3 percentage points, while the market share in current accounts of enterprise declined slightly. However, on the corporate side, we have already exceeded our ambition of a 10% market share. In the next quarters, a single-digit deposit growth will be driven mainly by retail deposits, supported by a growing customer base and increased wages and sales.

On Slide 12, we have our capital position. Visible in the left chart, we maintain significant buffer above the KNF minima and have built a comfortable situation with respect to capital ratios as well as MREL. On the capital side, let me point out 2 observations. First, main driver of the Tier 1 capital is the inclusion of our Q4 profit, which was close to EUR 1 billion. And second, our Tier 2 is further reduced due to regulatory amortization.

To fill up this bucket, we are aiming for the first ever Tier 2 placed in hard currency into international markets. Size is expected between EUR 300 million and EUR 400 million, and it will be conducted under our EMTN program. We do not have any pressure to execute the transaction if you see our very comfortable capital position. We are monitoring the market and are on schedule to execute the transaction during the course of 2025.

Shifting focus to the right side of the chart, our RWA development shows a 10% year-to-date increase, driven by credit risk, mainly due to business developments and operational risk, mainly due to regulatory changes, especially from the implementation of CRR 3. As a result of the implementation of CRR 3 and other regulatory changes, risk-weighted assets increased by approximately PLN 4 billion to circa 4%. The bank was prepared for an impact up to 6.5% as CRR is, as you know, a very complex change and still we don't have market practice.

The lower impact was observed in both credit risk and operational risk RWA. In '25, we expect further increases in RWA, broadly equally split between business growth and regulatory changes. Despite this, thanks to the action we have here undertaken, you see high profits and also our AT1 issuance, the bank's capital position is very strong, and we expect that at the end of the year, capital ratios will safely be above our targets.

The income section, I already have commented at the beginning of our call. Therefore, now let's directly go into the cost slide on Page 14. In Q1, the group's total costs were affected by the BFG contribution. Costs, excluding the BFG contribution decreased by 10.4% quarter-on-quarter. Main driver is the decreased real part of remuneration. Year-on-year, we see 9.5% higher costs. Also here, the main driver is personnel costs, which are higher due to increases in employment and wage increases.

Noteworthy is the BFG contribution in Q1, which amounted to PLN 215 million, so 45% on a year-on-year increase, and that was the highest figure since Q1 2022. It included PLN 190 million circa for the resolution fund and a bit more than PLN 20 million for the [ BGS ]. The normalized cost income ratio remains below 30%, and this really represents how efficient our business model is. In the following quarters, the group cost income ratio is expected to remain well below our strategic midterm target of 14%.

And with this, I'm now handing over to Marek for the deep dive on LLPs and our mortgage loan [indiscernible] developments.

[Marek Lusztyn, executive]

Thank you, Pascal. So on Slide 15, we can see our quarterly results of credit losses and cost of risk. In Q1, the net impairment losses and fair value changes reached PLN 165 million, and they were lower than a quarter ago by roughly 6%. So consequently, the cost of risk for the group stayed at 53 basis points, which was marginally lower than cost of risk of 57 basis points seen in Q4 of 2024.

So we would like to highlight as far as cost of risk is concerned and the quality of the loan book is concerned is that on the retail side, the payment discipline of retail customers remains good. I mean, favorable macroeconomic situation, for inflation and growing wages. And most of the provisions in retail that you see on this slide are driven by the usual portfolio provisions.

On the corporate and investment banking side, which is the other segment of our business, net impairment losses and fair value changes slightly increased, but they remain low as typically in Q1 where we usually report low cost of risk in this customer segment. There might be, as for everyone else in the different parts of the world, some concerns with respect to the geopolitical situation. So I would like to provide an upfront comment to the questions that may appear that we are very closely monitoring our loan portfolio for its resilience to tariffs and potential disruptions, disruptions in the supply chains and disruptions due to the tariff consequences.

That is impaired to [indiscernible] in the industries, which are the most vulnerable to the negative impact. And so far, we see no negative implications for our corporate clients. And therefore, as far as 2025 outlook on cost of risk is concerned, we do not change the outlook, and we keep our guidance in the range between 70 and 80 basis points.

That is underscored by Slide 16, where we report the loan portfolio quality. And here on Slide 16, you can see that the nonperforming loan ratio decreased by 30 basis points, 0.3 percentage points. And at the end of March, it stood at 3.8 percentage points, which was considerably better than the Polish banking industry average. So the quality of our portfolio remained way better than the sector average that was 5.1% at the reporting period.

The group impaired loans also declined in Q1. And we have seen stable NPL ratio on the corporate loans, decreasing NPL ratio on retail that led, as I said, to the overall decrease of NPL ratio at the group level. And the LLPs that we have created in Q1 led overall also to a better positioning towards the upcoming risk as expressed through a better coverage ratio.

And if you look at the Q1 coverage ratio that's based on the provisions calculated for loans in Stage 3 and positive portfolio, it went up, including Stage 1 and Stage 2 to 73.5% that is over 2 percentage point increase compared to the end of 2024.

And this brings us to the next slide, which as Pascal has anticipated provides the usual outlook on our legal risk. And here, we are happy to present you the -- another quarter with a number of positive trends that continue with respect to the Swiss franc mortgage portfolio. You can see that the number of signed settlements consistently increased quarter after quarter.

And in Q1 2025, we are also happy to report that on a monthly basis, we were able to sign over 1,000 settlements monthly so that lead us to quarterly result of over 3,000 settlements signed in Q1 2025, which is yet another high mark of number of settlements achieved in the quarter.

And that brought the total number of settlements at the end of March to over 26,000, as you can see on slide that's displayed. And as we keep on signing settlements as we speak, I'm also happy to report that the most recent number is actually over 27,000 settlements already signed.

As we have alluded to in the previous results presentation, it's not only settlements to a non-disputed clients, but also we are directing the settlements to clients who are in court with us. And this is one of the factors that is driving down the number of Swiss franc loan contracts in court down, which you can see on the right-hand side of this slide.

And this combined with a downward trend that we see in the inflow of the new lawsuits related to the Swiss franc. As in Q1, we have registered just 771 new cases related to Swiss franc loans, which is considerably down if you compare it quarter-on-quarter, because a year ago in Q1 2024, we have scored 1,922 new lawsuits, which is considerable decrease. And last but not least, the number of all pending court cases continues to decline. And as we display on this slide, it went down by over 40% year-on-year and 20% quarter-on- quarter.

On the next slide, we have provided you with a summary of financial dimension. To that -- to that aspect, we keep on adding the provisions for this plan. The mortgage loans with PLN 662 million booked in Q1. The cumulative value of all the FX related provisions since we have started creating that amounted to over PLN 17 billion -- PLN 17.2 billion to be precise.

And as you can see also the number of active cases is significant reduced. Now we have just [ 12,700 ] active contracts 78% of then that is nearly 10,000 already in court that leaves us with just 2,800 active contracts, which are not yet settled and not yet in court, which only shows that the Swiss franc saga as it comes to that part of the portfolio is really coming to an end.

And this brings me to the summary slides. On Slide 19 on the slide that you are very familiar with, we demonstrate the profitability of the core business. And as Pascal opened up with the core business of the group continued in Q1, its excellent performance. In Q1, it generated PLN 1.2 billion of net profit, which translates into ROE of 28.1%.

And following the issuance of the AT1 capital, as we have shown earlier, we have introduced new metrics to better reflect the profitability of our business that is return on tangible equity. ROE that also follows a number of European players that who after the issuance of AT1 capital from ROE to ROTE metrics. And for those of you that are not familiar with the metrics, that's basically net profit less the coupon on AT1 bonds by the average tangible equity. And that metric are as far as Q1 is concerned, reached 19.2% compared to ROE of 15.6%, which in both dimensions is actually super excellent results.

And to wrap up on Slide 20, we present key takeaways after Q1 results. Summing up, that was yet again, excellent quarter as it comes to mBank business and 4 main developments that we are particularly proud of that I would like to highlight as far as management team is concerned is, first of all, we keep on delivering on our promise to grow the volumes and market shares.

Second, both our core business and reported profitability remained at excellent levels. Third, we maintain best-in-class efficiency, thanks to a strong profit generation capacity and disciplined cost management. And finally, looking ahead into what remains of 2025. 2025, we remain optimistic about time ahead, and we remain optimistic about the imminent closure of the long-lasting Swiss franc.

And with that, we are happy to take questions.

[Operator]

First, let's listen to Arkadiusz Balcerowski on the macroeconomic view.

[Arkadiusz Balcerowski, executive]

Thank you. Good morning.

[Marek Lusztyn, executive]

And Arkadiusz apologies for forgetting on your part and yourself demonstrating how well Polish economy is navigating through this difficult geopolitical situation.

[Arkadiusz Balcerowski, executive]

No problem. Sure. So let me start with the fact that we still keep our forecast of -- keep with 8% growth of GDP this year. And as you can see in the first chart, consumer confidence remains quite well. However, it has stopped rising anymore. And in the vein, we still receive consumption growth similarly, and we expect consumer growth to be close to the level we reached in 2024.

And we have 2 forces. On the one side, we have lower growth of real wages. And on the other side, we have lower propensity of consumers to just save. So overall, we expect that this will conclude -- this will result in a quite stable growth above 3% in the consumption this year.

On the other side, we have forecast very strong growth in terms of investment, and we expect investment to be just below 10% this year. We expect that this will be driven by both lower interest rates and especially more utilization of EU funds.

As you can see on the chart on the -- on my right-hand side, inflation is set to decline over 2025. Inflation topped just below 5% over the first quarter. And now we expect it to be substantially lower going forward. And with that we expect in April inflation to slow down to just around 4%. That means a significant deceleration compared to 5% -- almost 5% reached in March.

Accordingly, as a result, we adjusted our inflation -- our interest rate pass accordingly. And now we expect 50 basis point cuts in the second quarter before resuming rate cuts at the beginning of 2026. And overall, we still expect the terminal rate in Poland to be around 4% with some probability that it will be a bit lower than that level.

The next slide, I will say that we expect still quite an increase in terms of corporate loans and household loans. Of course, household loans should be increased both -- should benefit both from lower interest rates, which should increase consumers' credit worthiness and possible another program from the government to encourage consumers to buy a new house, but the jury is still out on this -- in this front.

In terms of markets, we have seen recently quite a substantial slowdown -- quite a substantial decrease in terms of bond yields. This was connected to the change in NBP through rhetoric, which suggests that interest rates will be bring -- will be brought down substantially over the coming months.

And the last one and zloty behaved differently against -- it depreciated against the euro as a result of the change in market pricing of interest rates in Poland, and it went up against the dollar as a result of the widespread weakness of the latter. So we now expect zloty to be quite stable for now, and then gradual depreciation against the euro is likely according to our forecast.

And the last slide sums up our projections. Thank you.

[Operator]

Thank you, Ark. So now we are happy to take questions. The first one is from Kamil Stolarski about our loan growth, your loan growth trends above market. mBank seems more successful in loan growth. What would you attribute this to?

[Pascal Ruhland, executive]

I'm taking the question. Thanks, first of all, for recognizing that. And the answer is kind of simple because mBank is set up for organic growth. With the small pause with respect to the Swiss franc heavy weighting on our capital, you saw decades that the brand mBank and also all our colleagues have shown that the organic growth idea is embedded in the DNA.

And that is, I would say, the clearest answer we can give, plus obviously, that we see our clients like our services, and we really want to show that the clients are in the center of everything we do. And therefore, we also can keep margins still on a very decent level despite this growth, which shows that there is value what we offer.

[Operator]

Okay. Let's continue with Kamil's questions. Do you reiterate that 2025 should be the final year of material Swiss franc provisions?

[Pascal Ruhland, executive]

Yes. As Marek was showing, I mean, we are very satisfied with the current developments and trends because we -- with our successful settlement offers, really can put an end of this saga. And therefore, we reinvent, and I also said it in the beginning, we believe that this is the last year of a significant burden P&L-wise on the topic for us.

[Operator]

Another question of Kamil. What is behind the guided double-digit cost growth? Do you expect double-digit growth in personnel cost?

[Pascal Ruhland, executive]

So first of all, the cost growth double digit is also impacted by the BFG contribution, which is, as I announced it, close to 50% higher than the year before. But also, it is visible that our personnel costs growing and also, we announced that we expect that not just the wages are growing, also we expect that we have further employment due to our ambitions to have new projects and also higher sales forces, but also to cope with regulatory projects.

[Operator]

And a question of on Jaromir Szortyka, on CRR 3, this 4% increase in risk-weighted assets, is this the full effect or this -- or there will be some further increases in risk-weighted assets in the future? If so, could you provide the fully loaded impact.

[Marek Lusztyn, executive]

Okay. So maybe I'll take this one. On CRR, that is actually a fully loaded impact from today's perspective. But please note that as it comes to the overall capital path for 2025 and onwards, certain uncertainty exists with respect to the 2 factors, which are somehow difficult not only for us but for the industry to predict.

First of all, under the new regulatory regime that went live in 2025, a number of so-called regulatory technical standards for the European banking authority are still making not yet issued and they may impact the calculation going forward for us as well as for the peers.

And as it comes to further uncertainty related to the regulatory decisions as internal model based for credit risk bank, we may also expect some regulatory conditions with respect to the model changes approvals going forward. And this may drive potential uncertainty with respect to the capital. Anyway, we expect this to be minor. And as far as the part of the question is concerned, that is a fully loaded impact.

[Operator]

The next questions are from [indiscernible]. What is the level of [indiscernible] long-term financing ratio and the sensitivity of NII to changes in interest rates and soft NII?

[Pascal Ruhland, executive]

So I try to split out this question. So on the long-term funding ratio, as you know, we are one of the most frequent issuers into the market. We're not publishing the current number, but we have commented also in the past that we already met the long-term funding ratio, and therefore, it is not a concern for us.

Then moving to the sensitivity of our NII and the static balance sheet approach that we are taking, and all the banks are taking. And our current 100 basis points cut scenario by end of March is PLN 670 million roughly. But you also need to keep in mind every time that we are banking with our foreign locations and also while our corporate customers kind of very internationally banking with us in several currencies.

So out of this PLN 670 million, PLN 400 million would be the effect with respect to the Polish Central Bank rate. And if you compare the overall NII contribution of the last 12 months to our sensitivity, we are talking about circa 7%. And then the last question was on zolty delta NII. And here, I just also can -- like with the long-term funding ratio, we very comfortably meet this regulatory threshold. Therefore, it's also less of a concern internally for us.

[Operator]

And question from [indiscernible]. Could you explain PLN 48 million loan loss provisions reversal in noncore segment? It happened second quarter in a row. Will it continue in the next quarters?

[Marek Lusztyn, executive]

Okay. I'll take this one. So that's kind of a technical shift, if I may use that term. Since the credit provisions are booked against the active credit balance that remain on the balance sheet. So as we are -- the writing of the residual part of the active Swiss franc loan portfolio, this one is reduced and to an extent is reflected in the increase of the legal risk provisions. So with diminishing magnitude, one may expect this to continue in the next quarters to an extent to reach the active part of the balance sheet for Swiss franc loan portfolio still exists.

[Operator]

Thank you. And it seems the last question will be again from Kamil Stolarski. When could we expect a strategy update? What could be the pillars of the new strategy?

[Pascal Ruhland, executive]

Yes. Very good question. So you can expect that we elaborate that in detail in September this year.

[Operator]

So that ends our Q&A session. Thank you very much. Have a good day and great [ mayuka ].

[Pascal Ruhland, executive]

Yes. Have a lovely [ mayuka ]. Thank you very much. See you soon.

[Marek Lusztyn, executive]

Thank you, everybody. Thanks a lot.