mBank SA

WSE:MBK

Earnings Call Transcript

[Joanna Filipkowska, executive]

Good afternoon, ladies and gentlemen, welcome to our conference where we will present the results of mBank Group in 2024. The speakers today are Mr. Cezary Kocik, Chief Executive Officer; and Mr. Pascal Ruhland, Chief Financial Officer. Also, Mr. Marek Lusztyn, Chief Risk Officer; and Mr. Arkadiusz Balcerowski from our macro team will be available for the Q&A session.

Cezary, the floor is yours.

[Cezary Kocik, executive]

Thank you very much, [indiscernible]. Good afternoon, ladies and gentlemen. Welcome to our conference call for the Q4 financial results. In today's presentation, I will like -- I will walk you through our exceptional results in 2024 and share the outlook for 2025. Pascal will discuss the results for the fourth quarter.

I would like to start with a message that 2024 was an excellent year for mBank Group. There are 4 major developments that I would like to focus on. First, as we promised, we successfully returned to the growth path. We increased market share in all the strategic products and serve our clients in fulfilling their financial needs. Second, on the back of our powerful core business model, we delivered a very strong financial performance with the highest net result in the history of mBank Group. Further, we considerably improved our capital position, and we are now well equipped for our future growth. And last but not least, on Swiss franc mortgage front, we made a strong progress with signing settlements and future provisioning. We significantly reduced the remaining risk related to FX mortgage portfolio.

Our strategic priorities for 2024 focus on expanding business volumes. We increased mortgage loan sales by more than 150% compared to 2023. Mortgage loans volume exceeded PLN 10 billion, the highest level in mBank history. Sales were focused on our own client base. More than 70% of the volume was generated with existing mBank clients. We did not rely on the government initiatives to achieve this result. Less than 15% of the sales volume was part of so-called 2% safe mortgage loan program. Finally, close to 70% were in a fixed interest rate format, which is a priority for us.

Moving to non-mortgage loan sales in our retail business. Volumes increased by more than 30% and exceeded PLN 11 billion, again, a record high level. The volume of newly signed corporate loans agreement reached almost PLN 40 billion, growth of 21% year-on-year. We generated increases across our customer groups and in particular in K2 segments, representing medium and large-sized corporate.

The results of our sales efforts are reflected in the growth of the loan portfolio by 7% year-on-year. We are seeing strong activity across all the client segments. The rebound of retail lending was reflected in the annual growth of mBank's core credit portfolio of 10%, excluding Swiss franc exposures. This allowed us to start rebuilding our market position. Consequently, mBank's market shares in the mortgage loans in zolte increased by 0.5 percentage points to 8.2%. Loans and advances to the corporate clients increased by 7% year-on-year. The highest increase was in the K2 segment, but a solid growth was also noted in other client categories.

Dynamics of loan in corporate segment outpaced the sector's development. We improved market shares by 0.1 percentage points year-on-year. Our intention is to continue with this trend. I want to emphasize that growth volumes were not achieved at the expense of the lower margin as we have managed to improve the margin on both retail and corporate loans.

Now moving to liability side of our balance sheet. Here, we also grew but selectively. We don't have to fight for deposits as we have high liquidity with the loan-to-deposit ratio at 60.5%. We attracted many funds to the current account in both segments. but the growth was especially visible in current and savings accounts of our retail clients, which grew by 14% year-on-year. This is the best proof of achieving our aim to be the premier transactional bank. It also helped our funding cost and allow to increase the deposit margin in 2024. These developments are reflected in our market shares in current accounts of households and enterprises, which grew by 0.1 and 0.2 percentage points, respectively.

In 2024, our total revenues rose by 11% to PLN 12 billion, once again, the highest level in the history of mBank Group. And the main revenue source supported the growth. The key revenue driver, net interest income went up 8% year-on-year or by 10% if we adjusted for credit holidays. This impressive growth reflects our effective management of credit and deposit margin in an environment of still high interest rate. As you can see on the right-hand side, net interest margin increased from 4.18% in 2023 to 4.35% in 2024. This improvement was achieved despite interest rate cuts in autumn -- in autumn 2023 by 100 basis points in total.

Net fee and commission income also increased in 2024 and was higher by 3%. It was supported by an active client base, increasing number of transactions and volume of financial products sold as well as selective changes in the tariff table.

Moving on to the cost of the group. In 2024, operating costs increased by 10% year-on-year. The increase in staff cost by 12% was a function of wage increases and development of employment in the group. It was a result of expanding volumes and scale of operations. Material costs went up by 9% year-on-year, mainly driven by higher spending on IT, consulting and marketing due to business and regulatory projects. Depreciation increased by 16% year-on-year due to high investment expenditures in 2024 and in the previous years, mainly in IT. Regulatory costs declined in 2024 compared to the previous years due to the lower contribution to the resolution fund of BFG. However, the dynamics of cost was lower than the dynamic of revenues. Therefore, we are proud of our excellent efficiency. The reported cost/income ratio of mBank remained below 30%. It even improved slightly versus last year.

Going to our cost of risk. In 2024, net impairment losses and fair value change on loans reached PLN 585 million and were lower than in 2023 by 47%. Consequently, the cost of risk of the group in 2024 reached 49 basis points compared to 93 basis points in 2023. This is well below our strategic midterm guidance of 80 basis points.

A significant improvement of cost of risk was driven by good portfolio performance and improving financial standing of clients, adjustment of credit risk valuation in connection with constructive macroeconomic environment, efficient management of collection and restructuring of the corporate portfolio processes, together with NPL sales transaction and a lack of one-off factors, which adversely affected cost of risk in 2023. The resilience of our asset quality is confirmed by lower NPL ratio of 4.1% and adequate coverage ratio of 71.4%.

On the back of all this development, mBank's net profit in 2024 reached PLN 2.2 billion. This is the best bottom line of mBank ever recorded. Moreover, we achieved this result despite a burden of PLN 4.3 billion of legal risk related to FX loan. This result was also supported by the recognition of deferred tax asset in the amount of PLN 390 million recognized in Q4.

Pascal will discuss the details later in course of his presentation. We are particularly proud of the performance of our core business, which excludes the FX mortgage segment. In 2024, it generated a net profit of PLN 5.6 billion, representing a return on equity of 39.7%. The return on equity of the entire group, which includes the noncore FX portfolio stood at 14.8%. Return on equity is a function of not only our net income, but also the equity base, which has grown in 2024.

Last year, we intensified our efforts to strengthen our capital position to contract a significant increase of our risk-weighted assets. This growth was primarily driven by 2 factors: the increase of business volumes and model changes, about which we guided the market in our previous presentation and financial statements. In order to particularly counteract the growth in risk-weighted assets, the bank executed a securitization transaction, which we concluded in November. It was our fourth transaction, and it was based on a corporate portfolio in the amount of PLN 5.2 billion and improved our total capital ratio by 0.4 percentage points.

In addition, we supported our capital ratio by increasing our own funds. First, through the inclusion of Q1, Q2 and Q3 net profit; and second, our landmark additional Tier 1 issuance of PLN 1.5 billion, which we closed in December. This transaction improved our total capital ratio by around 1.5 percentage points. Our capital ratios at the end of 2024 were at the level of 14.5% for Tier 1 and 15.9% for TCR. Buffers above regulatory requirements were high and reached 5.4% for T1 and 4.8% for TCR.

Additionally, mBank Group's capital management strategy was updated in 2024 to reflect a decision that no dividend will be paid out from the profit end in 2025 in order to allocate it for further loan expansion.

Let's move to the summary of legal risk related to Swiss franc mortgage loans portfolio. Slide 12 presents several positive trends that we are very pleased to observe. First, a downward trend in the inflow of new lawsuits related to Swiss franc loans. In Q4, we registered 871 new cases. What is especially positive, both active and prepaid contracts contributed to this trend. The number of cases regarding prepaid contracts declined for the first time in Q4 2024.

All in all, the inflow of new cases in Q4 was 31% lower quarter-on-quarter and 63% lower year-on-year. Second, also the number of all pending court cases declined significantly. And again, the decline concerns both active and prepaid loans. And third, the number of signed settlements increased in each subsequent quarter of 2024. And in Q4, we reached 3,400 settlements. It's the highest number so far. This brought the total number of settlements at the end of 2024 to 22,900. It's also important to add that recent proposal of settlements directed to disputed Swiss franc borrowers supported the increase of contracts in the court.

In 2024, our protections against legal risk of Swiss franc portfolio strengthened materially by booking further significant cost of legal risk related to FX mortgage loans in the amount of substantial buffer to be utilized for continuation of settlements and expected negative final court verdict.

With cumulative amount of the legal provisions at PLN 16.5 billion and coverage ratio of 147% above most of the peers, mBank has come much closer to the end of the detrimental Swiss franc.

During last several years, we saw a major reduction of Swiss franc mortgage exposure. It was achieved, thanks to substantial provisioning and strong focus on signing settlements with clients. Consequently, the share of Swiss franc mortgage loans in the total loan portfolio shrunk to only 0.5% at the end of 2024 from almost 24% in 2015. Also, the number of active Swiss franc contracts has been systematically falling. As you can see, it was reduced by more than 80% in 3 ways. 37,400 have been repaid, more than 8,800 were closed with the final court verdicts. And 22,900 contracts were closed after signing settlements with borrowers. As a result, at the end of 2024, we had 16,400 active Swiss franc contracts and already 77% of them were in court.

Now let me summarize the key takeaways after 2024. First, after a subdued period, we returned to the dynamic volume growth and expansion of mortgages, consumer and corporate lending. Loan growth was recorded in both business segments. Second, thanks to excellent performance of our core business, we achieved the highest ever net profit despite still elevated FX legal risk costs. Third, we paved the way for further expansion of the group. We strengthened our capital position, thanks to a landmark issuance of AT1 instruments and the fourth securitization transaction. And last but not least, we significantly reduced risk related to our FX mortgage loans.

The high level of provisions, rising number of settlements with clients and the declining shares of passive population indicate good protection against the uncertain related to this portfolio. This, in conjunction with the positive trends in the inflow of new cases allow us to be more optimistic about the end of this long-lasting saga.

Coming to the end of my presentation, I would like to share some thoughts about expectation for 2025. First, we want to generate revenues above PLN 11 billion, which is only slightly lower than 2024 level. Our base case scenario assumes interest rate cuts in 2025, which we show on Slide 25. If this scenario materialize, the net interest income is likely to decrease somewhat. But if the rates stay high for longer, it will be very positive for us. Net fees should increase due to growing customer base and higher transactionality.

Second, we will continue our efforts to strengthen our capital base. We will increase further due to planet Tier 2 issuance and strong profit generation. We also intend to be active in the area of securitization.

Third, having a safe capital position, we want to continue expansion of volumes and gain market shares. Both corporate loans and retail loan portfolio should grow at faster pace than the market. Corporate lending will be supported by further inflow of EU funds and investment of Polish companies in energy transformation. The attractive demographic profile of our retail customer base will further support lending to this client segment.

And finally, we expect 2025 to be the last year in which legal risk provision related to FX mortgage loans will materially burden the group's financial results. We expect the cost in 2025 to be lower than in 2024.

With this, I hand over to Pascal, who will discuss with you Q4 results.

[Pascal Ruhland, executive]

Thank you very much, Charles, and also hello from my side. 2024 was clearly an outstanding year for us, as heard from [Charles], and I will be brief in highlighting the main developments of the fourth quarter with the aim to complement the messages from [Charles]. For this, I'm going to focus on the P&L today and on the capital development.

And now let's start with Slide 18, and I will share the 4 highlights of the quarter. First, we have, for the second time ever, achieved more than PLN 3 billion of revenues in just 1 quarter, and this is extraordinary. Second, despite seasonal cost increases, we maintained our cost/income ratio below 30%. This shows our very efficient business model. Third, our cost of risk of below, again, 60 basis points, confirming the high asset quality in our books. And fourth, all this leads to the highest ever quarterly net profit of close to PLN 1 billion despite PLN 932 million legal reserve increase.

Extraordinary in this quarter is our tax line, which I would like to explain in a bit more detail, and it gets technical, but I guess this 1 to 2 minutes is spent wisely. On this slide, you see at the bottom that we have recognized PLN 390 million deferred tax assets in connection with the mortgage loan-related risk. And as you know, according to the tax law, provisions for legal risk are ultimately nontax deductible items. Therefore, we excluded them while calculating the tax charge for the year. This led in previous quarters to a very high effective tax rate of around 40%, which are every time highlight towards you and also try to explain.

So now the big question is, what has changed this time so massively in the fourth quarter? And I would like to explain the 2 main reasons. First, due to a regulation by the Minister of Finance, it was possible until 2024 to benefit from a corporate income tax relief with regards to the settlements. So in other words, settlements until 2024 have been tax deductible, but this was limited to '24. In December '24, the extension of this relief until '26 was issued. And as a consequence, we have recognized deferred tax assets for our expected settlements. This resulted then in a significant DTA increase.

The second significant effect, which was driving the tax line stems from the ruling that the Swiss franc-related contracts are seen as invalid, which means they have never existed. This leads to the taxation conclusion that tax paid in the past for income, which we have received from those loans would have never been paid. That means that we can lower our current taxable revenues by the value of previously recognized incomes.

In the previous periods, we have started the correction, but in Q4, we have widened the calculation method and the result is the second time here a positive DTA effect. And to sum this up, the tax line shows an extraordinary but one-off like positive recognition of deferred tax assets, which supports the net profit of 2024.

And with this in mind, let's go to the P&L slide, Slide 19. Total income of the group declined by 3.3% quarter-on-quarter. However, excluding the impact of credit holidays, we remain stable, which brings me to the conclusion of not going into further details here. But what I would like to stress is forward-looking with respect to the total income. I need to emphasize once more what [Charles] has already said. For 2025, we expect a rate cut cycle of 175 basis points as basis for our guidance. Therefore, [Charles] pointed out, we guide lower total income than in 2024 on the back of this guidance. If the interest rate cut will be less harsh, we are going to benefit. And if you compare our current assumption with 175 basis points versus forward rates, you would see that there is a big difference currently because the forward rates would assume roughly 100 basis points cut.

Moving to the cost of the group. Total costs increased by 11.3%, mainly due to year-end provisions and one-offs. For the coming year, we expect the cost to go further with low double-digit pace, driven by new initiatives, inflation-related pressure and higher BFG contributions.

Going to the cost of risk. LLPs and fair value changes decreased by 8.4% quarter-on-quarter. But we see for 2025 kind of normalization. So we expect the cost of risk at around 70 to 80 basis points. The cost of legal risk related to FX loan, I jump over while [Charles] covered it and also the very strong net profit, which is supported by the extraordinary tax effect, which I explained already is known to you.

Let's go on Slide 20. Here, we have our capital position. As you can see in the upper chart, we maintain significant buffers above the KNF minima and have built a comfortable situation for capturing growth. On this chart, on the upper right, I would like to highlight 2 topics. First, in green, you see our latest AT1 transaction reflected. And here, on behalf of all of us, we are sitting here, our personal thanks to all investors whom have made history with us on this trade. This was an extraordinary debut, oversubscribed and the first AT1 out of the public market in Poland.

Second, in orange, you see the amortization of our Tier 2. The amortization is also the reason why we are aiming for a transaction in the first half of the year to build up further our capital stack. With this transaction, we aim again for something historic because we aim for the first ever placed Tier 2 out of Poland into international markets. The size will be at least PLN 300 million equivalent and the issuance will be conducted from our international EMTN program. And of course, we count on you, our international investor base.

Moving to the bottom of the chart and the RWA development. In Q4, the total risk exposure increased by PLN 5.3 billion quarter-on-quarter. Main driver was the implementation of model changes following the new definition of default. RWA has increased by PLN 7.2 billion. This impact was by PLN 1 billion higher than guided in the last quarter due to the structure and magnitude of the limitations set by the regulator. These increases were partly offset by the launch of another securitization, as [Charles] was pointing it out, which resulted in a release of PLN 2.5 billion RWA.

For '25, we expect further regulatory RWA inflation, especially due to CRR3, which is expected to increase our RWAs by around 6.5%. As you know, key technical standards are still as a draft stage, and therefore, the final number is uncertain, but this is the best guidance we can give from today's perspective.

Nevertheless, as said also in the last quarters, we expect to stay above our strategic target of minimum 2.5% buffer above CET1 requirements despite massive growth ambitions and regulatory changes. Our presentation of today with the best net result in history of mBank.

We want to conclude with the next slide, which shows we are delivering despite massive headwinds of the Swiss franc-related risk on all our targets. Thank you for your attention and your time, and the 3 of us are now looking forward to the questions.

[Joanna Filipkowska, executive]

Thank you very much, gentlemen. We have several questions here. So the first one are for the [Charles]. Are there any concerns regarding the potential acquisition of Commerzbank by UniCredit? And what would be an impact for mBank?

[Cezary Kocik, executive]

We never comment as fact or situation of our main shareholders. And -- but the Commerzbank -- UniCredit is not present in Poland, and they don't have any significant operation here. So -- and I believe that having such assets for everybody would be a good thing. And we are focused on our organic growth and development. We try to increase our profits, revenues. And so we are doing our job, and we do not speculate about Commerzbank and UniCredit situations.

[Joanna Filipkowska, executive]

How do you assess the risk related to free loan sanction? How is the current statistics?

[Cezary Kocik, executive]

For mBank, at this moment, we just have 46 final verdicts. Out of them, 44 is positive for mBank. So just only 2 are negative. And we still have pending a little bit more than 600 cases. So up to now, the verdicts in court are favorable for us. But of course, we are waiting for some judgment in Brussels and looking very carefully for the situation.

But of course, I would like to underline that in a scale and the duration is a completely different portfolio than the Swiss franc mortgage loans. And we are very careful and watch it almost on a weekly basis, analyze everything what is going on, on the market. But at this moment, we are quite calm about that, and we do not believe that it will be similar scale to Swiss franc problem. It can be, of course, some burden for us, but not comparable to Swiss franc.

[Joanna Filipkowska, executive]

I will only add that we will show the statistics regarding the preowned sanction in our financial statements for 2024. The next question about risk-weighted assets. Is the increase in risk-weighted assets in Q4 '24 already in the full impact of the new CRR/CRD regulations? If not, what further impact might there be in Q1 '25?

[Pascal Ruhland, executive]

We have given in my speech, and I guess this question was arrived earlier that under CRR, we expect an additional effect in 2025, and we currently assume 6.5%.

[Joanna Filipkowska, executive]

The next one, what is your guidance for operating cost and cost of risk for '25?

[Pascal Ruhland, executive]

On the operating costs, I'm taking it and Marek will then on the cost of risk. But on the operating costs, we expect a low double-digit cost increase for 2025, which is kind of similar to what we have seen this year. And it is especially driven by new initiatives because obviously, we are aiming also for more. The second thing is that we still have inflation, and this will pressure our costs as well. And last but not least, we expect to pay more on the BFG contribution. And this is, I would say, a bigger one because here, it will double on our side if we take the latest information from the President of the BFG, who was announcing that the collection will be around PLN 3 billion.

And if you compare that we currently are paying 10% of it, we are roughly around PLN 300 million, which doubles then in 2025 versus 2024.

[Marek Lusztyn, executive]

On the credit risk side, 2024 was an extraordinary year with no single one-off negatively impacting the cost of risk. So we consider it to be rather an outlier. For 2023, we were having a couple of outliers on the other tail. Going forward, for 2025, we expect cost of risk to be below our strategic target of 80 basis points. And beyond 2025, we expect the cost of risk to be within our strategic target in the range of 70 to 80 basis points.

I would like to highlight that our asset quality is expected to be resilient. It will be supported by a relatively low inflation, expected cut of interest rates and the further growth of the GDP, which should improve the business environment for our business clients.

On the retail portfolio side, we expect that it will be positively impacted by rising income of household and stable low unemployment rate. On the corporate side, in turn, we also see some positive news coming from the better economic conditions supported, for example, by the funds coming from the recovery plan. So all in, as I said at the opening, we expect cost of risk 2025 and beyond to be in the range of 70 to 80 basis points.

[Joanna Filipkowska, executive]

Thank you very much. And the last question from what amount do you treat the impact on results as material burden?

[Pascal Ruhland, executive]

So I mean, the question might be facing what is material in 2026. And when we talk about the Swiss franc mortgage loan, so I would interpret it in this direction. And if you ask this question, I would give you the following answer that we treat it as immaterial if we are not anymore reporting separately as a noncore on the Swiss franc.

And this is what we are aiming for closing by end of 2025 in order to have then this P&L burden, obviously not anymore in the following years. But this means operational-wise, it's not the case because in order to settle all the cases in order to have them, this will take longer. But P&L-wise, we believe that 2025 is in the vast majority of the last year, which significantly will burden our P&L.

[Joanna Filipkowska, executive]

Thank you very much. This concludes our Q&A session. So thank you very much for your attention and for the questions, and have a great day.

[Cezary Kocik, executive]

Thank you very much.

[Pascal Ruhland, executive]

Thank you very much. See you soon.