mBank S.A. (MBK.WA) Q2 FY2025 Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen. Welcome to our conference where we will present the results of mBank Group in the first half of 2025. The speakers today are Mr. Cezary Kocik, Chief Executive Officer; and Mr. Pascal Ruhland, Chief Financial Officer. For the Q&A session, we will be joined by Mr. Marek Lusztyn, Chief Risk Officer; and Mr. Marcin Mazurek, Chief Economist. Cezary, let's start.

Good afternoon, ladies and gentlemen. Welcome to our conference call. In today's presentation, I will walk you through our results in the first half of 2025. And then Pascal will discuss our results for the second quarter. We are very satisfied that in the first half of 2025, we achieved excellent progress in our 4 core focus areas. First, we continued the dynamic expansion of our business volume and market shares. Second, we achieved outstanding financial results driven by strong revenue streams and focus on operational efficiency. Further, we improved our capital position. In June, we executed very successful EUR 400 million issuance of Tier 2. This is the first broadly distributed euro-denominated Tier 2 out of Poland. After obtaining consent of KNF to include the issuance into our own funds, they will support our capital base and loan growth. And last but not least, the cost of legal risk related to FX loans is going down each quarter. We are successfully reducing the risk related to this portfolio. This achievement highlights the strong performance of mBank in the first half 2025. We are confident about our ability to build on this momentum going forward. In first half 2025, we were focused on the expansion of our business volume. The sales of mortgage loans increased by 1/3 on a year-on-year basis, while on a quarterly basis, it increased by 48%. The vast majority of zloty-denominated mortgages sold in first half were fixed rated with monthly share ranging from 74% to 84%. As a result, fixed rate loans accounted for 48% of the total PLN mortgage portfolio at the end of June. Sales of non-mortgage loans in first half were higher than in the corresponding period of 2024 by 23%. In Q2, non-mortgage lending remained strong, showing an increase by nearly 5% quarter-over-quarter. Turning to corporate loans. Sales increased by 23% year-over-year with growth observed across all customer segments. The strongest growth came from structured finance loans, particularly those related to renewable energy financing. In Q2, corporate loan sales declined by 13% quarter-over-quarter, primarily due to the drop in structured finance activity following an exceptionally strong Q1. The results of our sales efforts are reflected in the growth of the loan portfolio by 9% year-over-year. We are seeing a strong activity across all client segments. In Q2 2025, the mBank's loan portfolio expanded by 4% also driven by both segments. In the retail segment, we saw a solid growth in both mortgage and non-mortgage loans, thanks to a strong increase in the new origination. As committed, we are steadily enhancing our market shares across all key products as presented on the right-hand side of the slide. These results clearly demonstrate that the growth of our household and corporate loans portfolio is outpacing the broader market, which is our major strategic priority. Now let's have a look at liability side of our balance sheet. Here, we recorded a growth of 10% year-on-year. It was primarily driven by retail current and saving accounts, which climbed by PLN 15 billion or 13% year-over-year. Corporate current accounts also contributed significantly, increasing by PLN 3 billion or 8% year-over-year. Again, we proved to be the premier transactional bank. On a quarterly basis, total deposits increased by 3% with growth recorded again in above customer segments. As shown in the chart on the right, this solid performance translated into higher market shares in household current deposits. With the loan-to-deposit ratio below 65%, we are in excellent liquidity situation. Therefore, in the area of corporate deposit, we are focused on client transactionality and satisfaction, but there is a little need for us to compete aggressively on price. For this reason, we had a small decline in the market shares in the corporate deposit this quarter. Now let's have a look at our P&L. In first half, total revenue rose by 7.1% year-over-year. All key revenue drivers, net interest income, net fee and commission income and net trading income contributed to this increase. Net interest income in the first half rose by 3.7% year-over-year after adjusting for the impact of the credit holidays in first half of 2024. This growth was supported by higher loans and deposit volume, a larger bond portfolio and effective interest rate management. Net interest margin declined slightly to 4.12%, reflecting a sharp rise in average interest-earning assets and lower yields following a rate cut. Net fee and commission income grew by 11% year-on-year, driven by increased transaction volumes, larger client base and strong product sales. Additionally, Q2 included an upfront fee of PLN 43 million from exclusive bancassurance agreement with UNIQA. Net trading income surged by 62% year-over-year, benefiting from strong foreign exchange results, thanks to high market volatility, higher gain on daily rates and hedge accounting. Net other operating income declined by 89% year-over-year in the first half of 2025, primarily due to one-off gain of PLN 164 million in Q2 2024 related to a refund of a loan insured by KUKE. In first half 2025, the mBank's operating cost rose by 15% year-over-year. The main driver was a higher contribution to Bank Guarantee Fund, reflecting increased payments to the resolution fund and reinstatement of charges to the deposit guarantee scheme. Excluding BFG contribution, operating costs rose by 10.8% year-over-year. Staff-related expenses increased by nearly 12%, driven primarily by a rise in headcount along with a base salary adjustment. Material costs increased by 7% with the largest rise in IT, marketing, consulting and security. Depreciation was up by 13%, reflecting investments in ongoing and completed projects. Finally, our efficiency was excellent with the normalized cost-to-income ratio maintained below 30%. Now let's move on to the cost of risk. As you can see, it remains low, reflecting the high quality of our loan portfolio. Our customers continue to demonstrate a good payment discipline, supported by favorable macro environment. Cost of risk after first half stood at 46 basis points. The resilience of our asset quality is confirmed by a strong decrease of our NPL ratio to 3.5%. On the back of all these developments, the mBank net profit for first half 2025 reached PLN 1.7 billion, over 2x higher than last year. At the same time, excluding the noncore segment, the mBank's net profit reached PLN 2.8 billion. In Q2 alone, net profit rose 36% quarter-over-quarter to PLN 959 million. Consequently, the mBank's return on equity improved to 19.9% in Q2 and ROE of our core business stood at 34.1%. The mBank's return on tangible equity reached 25.3% and 22%, respectively, in Q2 and the first half of 2025. Now let's discuss our capital position. On an annual basis, our own funds increased by 17% and reached PLN 17.9 billion, driven by retained earnings and the issuance of AT1 capital. In June, we successfully issued Tier 2 bonds in the amount of EUR 400 million, which has not been included into own funds yet. After obtaining the consent from the Polish FSA, the issued subordinated bonds will improve the total capital ratio by 1.4 percentage points. At the same time, our total risk exposure amount rose by 28% to PLN 120 billion. This growth resulted from our strong business growth as well as regulatory changes, including implementation of CRR in Q1 2025. Consequently, at the end of June 2025, our CET1 reached 12.8%, Tier 1 capital ratio of 14% and the total capital ratio of 15%. These levels provide comfortable buffers above the Polish FSA minimum requirement. Let's move to a summary of legal risk related to Swiss franc mortgage loan portfolio. Slide 12 shows the positive trends are continuing in this area. First, in Q2, we significantly -- sorry, in Q2, we signed nearly 2,700 settlements with Swiss franc borrowers, bringing the total number of settlements to over 28,700 as of the end of June and currently, we have almost 30,000 such settlements. Settlements offered to borrowers involved in the legal disputes contributed to a reduction in the number of court cases. Second, Q2 marked a sixth consecutive quarter of declining inflows of a new Swiss franc related lawsuit. This decline was driven by a lower number of cases relating to active loan contracts. The number of new cases regarding repaid loans still remained at around 500. And third, the number of pending court cases continue to decline across both active and repaid loan contracts. In first half 2025, we managed to reduce the risk related to FX mortgage portfolio even further. As shown on the left-hand side, the balance sheet value of Swiss franc mortgage loans dropped to only PLN 127 million and the share in the loan portfolio fell to just 0.1%. At the same time, number of active contracts declined by over 88%, driven by 35,000 repaid contracts, 11,800 contracts closed after the final court rulings and 28,700 contracts settled with clients. As a result, at the end of June, the number of active Swiss franc contracts stood at 10,000. In Q2, we booked PLN 544 million legal risk provisions, bringing the total amount of FX-related risk cost since Q1 2018 to PLN 17.7 billion, roughly equal to mBank's own funds. Q2 was the sixth consecutive quarter of declining legal risk cost. As our current strategy horizon is coming to the end, we would like to emphasize that we deliver all financial targets that we set in 2021. In September, we intend to announce a new strategy with an updated set of targets for 2026 to 2030. Now let me summarize the key takeaways after first half of 2025. We maintained a strong momentum in both lending and deposits with annual growth of 10% for both categories. This translated into further gains in market shares. Our reported net profit increased and return on tangible equity exceeded 20%. This performance reflects our robust core revenue generation, industry-leading cost efficiency and the prudent credit risk management. The successful issuance of subordinated bonds will further strengthen our capital base, enhancing financial stability and supporting sustainable growth. We have also made steady progress in legacy Swiss franc matters. Settlements continued at a healthy pace and litigation volumes declined, enabling our gradual reduction in legal cost provision. With this, I hand over to Pascal, who will discuss the Q2.

Thank you very much, Cezary, and a warm welcome also from my side. Let me continue with highlighting our exceptional performance in Q2 on this slide, Slide 17. mBank Group delivered its strongest quarterly results to date, and that means achieving record revenues, achieving record operating profit and a record pretax earnings. Total revenues reached PLN 3.2 billion, marking a 5.5% increase quarter-over-quarter and a 10.6% rise year-over-year. This was driven by solid growth in net interest income, which benefited from a larger loan portfolio and improved derivative results. While the net interest margin edged down to 4.12%, our core lending and deposit activities remain resilient and continue to support our growth. Fee and commission income surged by nearly 16% quarter-over-quarter, driven in part by a one-off PLN 43 million fee from our strategic partnership with UNIQA. Excluding this, underlying fee growth was still very strong, 7%, supported by increased activities in payment cards, FX transactions and credit-related services. The net trading and other income rose by nearly PLN 30 million quarter-over-quarter, mainly due to a sale of our real estate on Królewska Street in Warsaw. Looking ahead, revenue performance will, of course, depend on the interest rate trajectory. And currently, we assume a 50 basis points cut by year-end. Therefore, we expect now full year revenues to exceed PLN 12 billion and including then a surpass of our 2024 results. On the cost side, we maintained discipline, keeping our cost-to-income ratio below 30%. While total costs rose 8% quarter-on-quarter, the main drivers are seasonal marketing and IT investments. In the second half, we expect further increases, particularly in personnel costs, lifted by recruitments and spending related to our strategic initiatives. Based on the 2 trends, our cost-to-income ratio is on the upward trajectory, but we will stay for the full year below 35%. Loan loss provisions declined sharply by 22%, reflecting a 50% reduction in the corporate segment provisioning. However, we keep our view as current geopolitical situation is uncertain and prepare for potential weakening. And therefore, as a result, we maintain our full year cost of risk guidance of around 70 basis points. The legal risk costs related to FX loans continued their downward trend as said by Cezary, PLN 544 million, and this marks now the sixth consecutive quarter of declining legal risk provisions, a trend that we have announced and is expected to continue. All of this translates into a net profit of PLN 959 million and a return on tangible equity of around 25%. These results underscore the strength of our diversified business model and our ability to deliver value in a changing rate environment. And now turning to Slide 18, and this is something we are at mBank particularly proud of. 6 months after establishing the AT1 instrument for the Polish market, we became also the first bank in Poland to conduct a public issuance of Tier 2 to international markets. The EUR 400 million issuance was met with an overwhelming demand, 9x oversubscribed with a EUR 3.6 billion order book from over 200 investors across Europe, Asia and the Middle East. This allowed us also to tighten the spread by 40 basis points versus initial guidance. It is the largest euro Tier 2 transaction from CEE region in the past 5 years. And this transaction not only strengthened our capital base, but also shows that investors have confidence in our strategy and in our financial resilience. Finally, let's take a look at our outlook and the remainder for 2025. As I already was saying, revenues supposed to exceed PLN 12 billion and surpassing 2024 levels. Our capital position will be further reinforced by the inclusion of the Tier 2 instruments and a planned securitization for the second half of the year of our corporate loan portfolio. We expect above-market loan growth in both segments to be continued. And importantly, we believe 2025 will be the final year in which FX mortgage-related legal risk materially impacts our results. So in summary, we are well positioned to deliver sustainable growth, maintain strong profitability and continue creating value for our shareholders. And let us together now conclude the presentation with an invitation to all of you an invitation to our Capital Markets Day on the 23rd of September in which we are presenting our next strategy cycle, and we would be delighted to host you at our event. Thank you for the attention, and now we are looking forward to your questions.

Thank you very much, gentlemen. Let's start the Q&A session. The first question is to Marek. What was the cause of 0.5 percentage points decrease of NPL in corporate business segment?

Very good point. Thanks for that question. That decline of corporate nonperforming loans is actually driven by a number of factors. First of all, is a strong increase of the corporate portfolio to start with, that was growing by PLN 2.5 billion quarter-on-quarter that improves the denominator, but also there was an impact on nominator because we have seen a decline in impaired corporate loans by nearly PLN 300 million, which was supported by the sale of nonperforming corporate loans by over PLN 100 million combined with successful restructuring activities. So all in, we are working both on the nominator and the denominator of that figure, successfully bringing 3.5% only.

Next question, does mBank meet SOT NII and long-term funding ratio requirements?

Yes. Let me take this question. So I'm starting off with the long-term funding ratio. And as you know, we are one of the most frequent issuer into the markets also shown now recently. And I just want to announce that this is nothing of a concern for us because we already meet today the thresholds, which come into place end of 2026 on the long-term funding ratio. And a similar answer to SOT NII because also here, we meet very comfortably the thresholds. So also something which is not a concern from our perspective.

Okay. Can you give us some -- sorry, not this one. What is the outlook for net fees and commissions in upcoming quarters?

Yes. On the net fee and commissions, as we have announced since a few quarters, we now see that our business model is continuing in terms of delivering step-by-step further fees. And now we have seen a quarter which was extraordinarily good. And I also explained it was driven by a one-off. So if you would exclude this one-off of UNIQA of around PLN 40 million, we expect to exceed also the next 2 quarters, the PLN 500 million fees, and it should be then a positive contribution step by step.

And the next question, the same question about the outlook for operating expenses in upcoming quarters?

Yes. On the operating expenses, we have guided that it will further be on the rise due to especially our additional demand for colleagues who support us, especially in the IT, but also in the sales force, and that will increase the operating expenses forward-looking. Nevertheless, as we also guide that our business is very well developing, we see our cost-to-income ratio very much, I would say, competitive and keeping our very good position, and we expect that the full year will stay below 35%.

Next question from Kamil Stolarski. What is your opinion about attractiveness of Polish zloty mortgages for banks? Some banks, for example, BNP, Millennium seem less willing to originate mortgages.

So in our opinion, just being the big universal bank without offering mortgage loans, it's almost not possible. So we believe that the product itself is attractive and it's connected with a future cross-selling to our customers. But of course, we very carefully observe a legal environment because this is a Polish phenomena that we are not afraid of credit risk in terms of mortgage risk, we are only thinking about the legal risk. And -- but we still believe that the worst is behind us and Swiss franc saga is going to the end. And we also very carefully look at [indiscernible] cases. But up to now, we believe that there is not an interest to anybody, especially country and society to causes financial crisis, and we see the full support from state, from supervisory institution. And that's why we believe that we will continue -- but if it is a core product and without offering the mortgage, we will see a huge churn. And after we spend the money for acquisition of customers, we will lose them to competitors. So for us, it's a core product in our offer, and we are going to continue.

Can you give us some details about salary adjustment mentioned before?

So just a slight increase, which still we had quite significant inflation. So it was just only -- and we always do something that we spread our increases for 2 years. We are not doing everything in one shot. So it was, I would say, punctual increases with -- just to come up with the inflation level, but not for everybody equally, but only for the most valuable employees. So this was a normal increase, which we, in some amount experience each year.

Okay. Next question about K1 volumes. Is the level of K1 volume sustainable rebound in Q1? Or was there any extraordinary effect?

In volumes, in K1, I believe that we are at the beginning because for these many years, the K1 segment was artificially reduced by us, especially the lending activities due to our equity constraints. And as we said now once we solved equity problem in our bank and also reduce the Swiss franc risk, we want to grow in terms of market shares. And this is not concentrated on a specific segment or a group of customers. We just would like to grow both and enlarge our market shares in each categories and each segment. So that I believe that we will continue.

Next question on capital impact and risk-weighted assets. Is there anything special in the second half outlook for risk-weighted asset growth for the second half of 2025?

Yes, this is the one for me. So basically, in first half of 2025, we had implemented a number of changes driven by regulatory requirements, and that was a mix of CRR III implementation that led to around PLN 3 billion increase in our risk-weighted assets. And there were also some minor changes coming into the internal models on the back of supervisory recommendations coming from both KNF and ECB. As you may recall, we are on the group-wide set of internal models for credit risk. And as it comes to the outlook for the second half of 2025, we do not expect anything material at this stage, but also please be mindful that we remain in the decision process with authorities on some model changes related to the implementation of certain recalibrations in the definitions of default. And as typically comes with such a regulatory approval, there is some uncertainty that is related to what the regulators may ask us to do as it comes to model changes. But a part of that, we do not expect anything else than that. And at the same time, the timing and the details of that supervisory decision remain at this stage, uncertain.

Was effective tax rate a bit higher than usual in the second quarter?

I mean, if you compare it, obviously, you see that it's a bit higher. But here, I want to make 2 statements very strong. So first of all, if you would deduct the special item of Swiss franc from our side, which is very much distorting the ETR, then a fair assumption of the ETR for us is, as for most corporates around 25%. And while items we have on our P&L, especially the Swiss franc in the vast majority, not tax deductible, you see then the distortion happening in our ETR. And for sure, on our side, the biggest one is the FX loans, which are distorting. So nothing extraordinary to report on this quarter, but just an explanation why our tax rate is fluctuating and driver is Swiss franc mortgage loan legal risk.

Any other one-offs in fees in the second quarter?

No, in the fee side, we see just a trend, I would say, from all our businesses, nothing which extraordinary like we would have had with UNIQA, which was around PLN 40 million is they're repeating. It's our flow.

Can you provide a rough 2026 outlook on revenues and target loan growth?

And here, we invite you to our Strategy Day on the 23rd of September, where we also will give you then -- next to our strategic cycle together then with the strategic cycle and ambition level for the next years.

Does the bank make provisions for unauthorized customer transactions, case Millennium and provisions for [ Escaben ]? If so, how much?

Okay. This is the one I will take. So on unauthorized transactions, we have created roughly PLN 21 million of provisions for the potential refunds to the customers for past unauthorized transactions. And we are in the process of discussing with authorities with respect to the binding decision for the proceedings. As of now, this provision amount corresponds to the terms that we have included in our application to the authorities. And as it comes to the second part of that question that is free loan sanction, we are creating provisions for individual cases. As it comes to first and second quarter of 2025, we have created PLN 6.8 million of provisions in Q1 and PLN 5.8 million of provisions in Q2 for free loan sanction. And the overall amount for free loan sanction provisions stands at PLN 34 million as of now.

What is your take on outlook for savings and investment products? Deposits keep growing visibly faster than loans. What changes do you anticipate for brokerage business?

So I believe that in terms of the dynamic, the dynamics are very similar. Of course, deposits are bigger than loans in our balance sheet. So in absolute values, yes, that's right. But we are gradually shifting from this -- that we collected more deposit than loans. As we said, the last 4 years, we were in a capital constraint. So it was very difficult to grow in terms of loan book with the same speed like in terms of deposits. But now we try to change it. Of course, there is also the market, and we have to look at the macro aggregates that still deposits are growing in Poland relatively faster than loans. And this is also what we need to bear in mind. But of course, we would like to have a little bit higher loan-to-deposit ratio than 65%, and this is what we will see in the bank in the future. In terms of brokerage business, I believe that -- in terms of the acquisition of new customers and also from activity that required on our platform, we are very satisfied. So in terms of brokerage house, we just want to continue in the same direction in we are because also the product offer is complete. So that -- we don't see any changes in front of us in terms of a brokerage hub.

Can you please comment on the profitability of your contract for difference product?

Yes. Here, we are not different than, I would say, other market participants. So with this, we would keep it.

And I think the last one, what is your view on competitive environment now? And what do you think about as a group transaction with Banco Santander. Is it going to change the landscape?

In my personal opinion, not because the Santander is because it still hasn't changed the name. So a very efficient bank. And we believe that -- as they state also a very reputable bank. So it is rather the change of heads between 2 groups. And -- but on operational level, this unit, which we still call Santander Polska will be the same efficient that it used to be in the past. So for us, it's not significant change, maybe just in terms of a small group of Spanish and German/Austria customers, there will be something which we need to look carefully. But generally, we expect that it will continue more or less as it used in the past.

Thank you. It was the last question. So thank you very much for your questions and attention. And we hope to see you in September. Have a good day.

Thank you very much.

Thank you very much.

See you soon.