Financial position of mBank Group in 2016

 

Profit and loss account of mBank Group

[G4-9] mBank Group reported a profit before tax of PLN 1,637.7 million in 2016, compared with PLN 1,617.9 million in 2015 (+PLN 19.8 million, i.e., +1.2%). Net profit attributable to the shareholders of mBank reached PLN 1,219.3 million, compared with PLN 1,301.2 million year on year (- PLN 81.9 million, i.e. -6.3%). Income tax expense amounted to PLN 415.5 million in 2016 compared to PLN 313.7 million in the previous year (+32.4%).

Summary of financial results of mBank Group is presented below.

The main drivers of the financial results of mBank Group in 2016 included:

• Increase in total income which stood at PLN 4,295.4 million. The improvement was recorded in net interest income and net fee and commission income. In 2016, mBank Group booked gains on the takeover of Visa Europe Limited by Visa Inc., whereas the income in 2015 was increased by the profit on the sale of BRE Ubezpieczania TUiR and signing of agreements accompanying the sale with AXA Group companies and the profit on the sale of shares of PZU S.A.
• Decrease in operating expenses (including amortisation) to PLN 1,963.3 million compared with 2015. In 2016, contributions and transfer to the Bank Guarantee Fund were lower - in 2015, mBank Group reported one-off costs related to payments of guaranteed funds to the deposit holders of Spółdzielczy Bank Rzemiosła i Rolnictwa in Wołomin. Additionally, mBank made contributions to the Borrowers Support Fund in 2015.
• Increase in efficiency measured by the cost / income ratio which stood at 45.7% in 2016, compared with 50.1% in 2015.
• Lower cost of risk at 46 bps, compared with 54 bps in 2015.
• Continued organic growth and business expansion as demonstrated by:
  • Increase in the individual client base in Poland, the Czech Republic and Slovakia, and clients of Orange Finance, to 5,348 thousand (+400.5 thousand clients compared with the end of 2015).
  • Increase in the number of corporate clients to 20,940 clients (+1,378 clients, compared with the end of 2015).

Net loans and advances went up by 4.2%, compared with the end of 2015, while deposits grew by 12.7%. Consequently, the loan-to-deposit ratio decreased from 96.7% at 2015 year-end to 89.4%.

Changes in the Group’s results translated into the following profitability ratios:

• Gross ROE of 13.6% (14.7% in 2015 ).
• Net ROE of 10.1% (11.8% in 2015).

mBank Group’s capital ratios increased year on year. Total capital ratio stood at 20.3% at the end of December 2016, compared with 17.3% in the previous year. Common Equity Tier 1 capital ratio reached 17.3%, compared with 14.3% at the end of 2015. Leverage ratio amounted to 8.2% at the end of December 2016, compared with 7.7% in 2015.

Income of mBank Group

Total income generated by mBank Group was PLN 4,295.4 million in 2016, compared with PLN 4,093.3 million in 2015, which represents an increase of PLN 202.0 million, i.e. 4.9%. The increase was mainly driven by improved net interest income and net fee and commission income.

Similar to 2015, the net interest income remained mBank Group’s largest income source in 2016 (66.0%). It reached PLN 2,832.9 million, compared with PLN 2,511.4 million in 2015 (+12.8%). High net interest income was mainly driven by an increase in interest income combined with a simultaneous cost reduction.

Net interest margin, calculated as a relation between net interest income and average interest-earning assets, stood at 2.3%, compared with 2.1% in 2015.

Interest income grew by PLN 212.4 million, i.e. 5.8% year on year, and amounted to PLN 3,872.9 million. Similar to 2015, loans and advances remained the main source of the Group’s interest income (71.1%). Interest income from loans and advances increased by PLN 168.6 million, i.e. 6.5% year on year, and reached PLN 2,753.2 million. The growth resulted mainly from the change in the structure of the retail loans portfolio – increasing share of high margin products, with a simultaneous decrease in the share of mortgage loans in foreign currencies characterised by lower margin. In 2016, interest income from investment securities fell by PLN 42.7 million, i.e. 5.7% due to lower average yields on T-bonds in 2016. Interest income from debt securities held for trading increased by PLN 25.9 million, i.e. 50.6%, driven by a considerable (almost seven-fold) increase in the volume of these securities in 2016. Interest income on derivatives classified into banking book amounted to PLN 196.7 million, i.e., rose by 24.9% compared with 2015, due to increased volumes of such transactions. At the same time, there was an increase in interest income concluded under the cash flow hedge accounting (+ PLN 13.3 million, i.e. +28.6%) and from cash and short-term deposits (+PLN 7.4 million, i.e., +14.9%).

Decrease in interest expenses in 2016 resulted mainly from lower interest expense arising from amounts due to customers (a decrease by PLN 57.4 million, i.e. 8.2%) due to lower interest rates on deposits and a considerable inflow of cash into current accounts of clients. Interest expense arising from amounts due to banks decreased by PLN 20.2 million, i.e., 21.2%, mainly due to the repayment of loans granted by Commerzbank Group totalling CHF 800 million. 2016 saw a decrease in interest expense arising from issue of debt securities by PLN 19.4 million, i.e. 7.3% as a result of decrease in the cost of the EMTN programme (EMTN tranche in the amount of EUR 500 million was redeemed in October 2015) and costs of debt issuance on the Polish market. At the same time, interest expense arising from subordinated debt also decreased (by PLN 10.3 million, i.e., 13%) due to repayment of the loan in the amount of CHF 200 million in June 2015.

Net fee and commission income, accounting for 21.1% of mBank Group’s total income, increased slightly year on year. It reached PLN 906.4 million in the analysed period, representing an increase of PLN 9.3 million, i.e., 1.0%.

Commission income went up by PLN 116.9 million, i.e., 8.2% year on year. Payment cards-related fees rose by PLN 19.6 million, i.e. 5.7% year on year. The increase was stimulated by a higher number of clients and issued payment cards as well as by the number and volume of transactions (value of non-cash transactions grew in 2016 by 21.2% year on year and the number of transactions rose by 27.8%). Credit- related fees and commissions surged by PLN 21.2 million, i.e., 7.4% due to the increased sales of non- mortgage loans. Commissions for agency service regarding sale of insurance products of external financial entities were by 11.4% higher in 2016, compared with 2015 (+PLN 17.0 million). Fees from brokerage activity and debt securities issues grew by 15.5%. Commissions from bank accounts rose (by PLN 4.4 million, i.e. 2,6%) as a result of a growing client base. The growth in transactional banking and a higher number of transactions translated into an increase in commissions from money transfers (+7.5%). Similarly, income from fees for cash services reported an increase (+28.7%).

Fee and commission expense grew in 2016 by PLN 107.6 million, i.e. 20.1%. The highest growth was recorded in the payment cards-related fees and commissions paid to external entities for agency service regarding the sale of the Bank’s products.

Dividend income amounted to PLN 3.3 million in 2016, compared with PLN 17.5 million in 2015. The decrease resulted from the payment of a dividend amounting to PLN 14.2 million by PZU S.A. in 2015, whereas the Bank did not hold any shares in this company in 2016.

Net trading income stood at PLN 244.6 million in 2016 and was lower by PLN 48.3 million (16.5%) year on year. The decrease in the net trading income was mainly driven by a negative other net trading income and result on hedge accounting (- PLN 25.8 million, compared with PLN 4.2 million year on year) predominantly due to the valuation of interest rate derivatives. The foreign exchange result decreased by PLN 18.3 million (-6.3%) owing to the negative valuation of currency interest rate swaps (CIRS).

Gains less losses on investment securities in 2016 stood at PLN 261.3 million in 2016, compared with PLN 314.4 million in 2015. The settlement of Visa Europe Limited takeover by Visa Inc. amounting to PLN 251.7 million was posted in 2016. In 2015, mBank Group reported gains on the sale of BRE Ubezpieczania TUiR and signing of agreements accompanying the sale with AXA Group companies amounting to PLN 194.3 million and on the sale of PZU S.A. shares totalling PLN 125.0 million.

Net other operating income (other operating income net of other operating expenses) amounted to PLN 46.9 million in 2016, which represented a decrease of PLN 13.1 million, i.e., 21.8% year on year. Net income from sale or liquidation of tangible assets, intangible assets, assets for sale and inventories generated primarily by mLocum increased by PLN 3.2 million (for more details on the results of mLocum see Chapter 6.6. “Subsidiaries of mBank Group). In 2016, net income from insurance activities was not recorded following the sale of BRE Ubezpieczenia TUiR in 2015, while net income from insurance activities in 2015 included income generated in Q1 2015 amounting to PLN 23.9 million.

Costs of mBank Group operations

Total overhead costs of mBank Group (including amortisation) stood at PLN 1,963.3 million, representing a decrease by 4.3% year on year. The decrease was driven predominantly by one-off costs incurred in 2015.

In 2016 staff-related expenses went up by PLN 21.9 million, i.e. 2.6%. The change was driven by higher remuneration costs. The number of FTEs decreased from 6,540 at the end of 2015 to 6,528 FTEs at the end of 2016.

Material costs increased in the reported period by PLN 37.5 million, i.e. by 5.9%. mBank Group reported higher material costs in the IT area in 2016, among others due to the implementation of innovative mobile banking solutions.

The contribution to the Bank Guarantee Fund (BFG) paid by mBank Group decreased by PLN 116.4 million, compared with 2015. The reduction in the amount of charges to the BGF was driven predominantly by one- off costs incurred in 2015, which were related to a PLN 141.7 million payment of guaranteed funds to the deposit holders of Spółdzielczy Bank Rzemiosła i Rolnictwa in Wołomin. In 2016, a PLN 10.9 million transfer was made to the Bank Guarantee Fund due to the bankruptcy of Bank Spółdzielczy w Nadarzynie (Cooperative Bank in Nadarzyn). In 2015 mBank also made a contribution to the Borrowers Support Fund in the amount of PLN 52.1 million.

Amortisation charges increased in 2016 due to higher amortisation of intangible assets.

Changes to the income and costs of mBank Group contributed to a decrease in the cost / income ratio which stood at 45.7% in 2016, compared with 50.1% in 2015.

Net impairment losses on loans and advances

Net impairment losses on loans and advances in mBank Group amounted to PLN 365.4 million in 2016, compared with PLN 421.2 million in 2015, which represents a decrease by PLN 55.8 million, i.e. 13.3%. The cost of risk stood at 46 bps in 2016, compared with 54 bps in 2015.

Net impairment losses on loans and advances in the Retail Banking amounted to PLN 284.9 million in 2016, compared with PLN 224.3 million in 2015. The increase was caused by the changing sructure of the loan portfolio with the growing share of non-mortgage loans (unsecured loans) as well as depreciation of polish zloty against Swiss franc and euro.

Net impairment losses on loans and advances in Corporates and Financial Markets stood at PLN 78.2 million in 2016, compared with PLN 178.5 million in 2015. The drop in provisions reported in 2016 was caused by a release of credit risk provisions related to the sale of non-performing receivables and payment of the loan insurance by KUKE (Export Credit Insurance Corporation).

Contribution of business lines and segments to the financial results

Data based on the internal management information of mBank Group.

Financial results of mBank Group’s business lines

The Retail Banking segment made the biggest contribution (62.5%) to the profit before tax of mBank Group. The contribution of Corporates and Financial Markets constituted 36.0% of the Group’s profit before tax, including Corporate and Investment Banking (30.4%) and Financial Markets (5.6%).

 

Changes in the consolidated statement of financial position

 

Changes in assets of mBank Group

[G4-9] The assets of mBank Group increased by PLN 10,220.5 million, i.e. 8.3% in 2016. Total assets stood at PLN 133,743.5 million as at December 31, 2016.

The table below presents the change in the asset lines of mBank Group.

Loans and advances to customers retained the largest share in the balance sheet of the Group at the end of 2016. The net volume of loans and advances to customers increased by PLN 3,329.7 million, i.e. 4.2% year on year. They represented 61.1% of the balance sheet total as at December 31, 2016, compared with 63.5% at the end of 2015.

Gross loans and advances to retail customers increased by PLN 2,691.1 million, i.e. 5.8%. The volume of mortgage and housing loans increased slightly by PLN 1,184.9 million, i.e. 2.7%, mainly due to depreciation of the zloty against the Swiss franc and systematic repayments of mortgage loans, while sales decreased by 36.1% and reached PLN 2,879.4 million in 2016 compared with 4,503.0 million in 2015. In addition, in 2016, the Group granted PLN 6,128.9 million worth of non-mortgage loans, representing a 25.9% increase in sales year on year. Net of the FX effect, loans and advances to retail customers grew by 3.3% in 2016.

Gross loans and advances to corporate customers increased by PLN 727.7 million, i.e. 2.2% compared with the end of 2015. Net of reverse repo/buy sell back transactions and the FX effect, loans and advances to corporate customers increased by 3.6% against the end of 2015.

The volume of gross loans and advances to the public sector decreased by PLN 292.5 million, i.e. 19.2%.

Investment securities constituted mBank Group’s second largest asset category (23.5%). In 2016, their value increased by PLN 656.4 million, i.e. 2.1%. The government bond portfolio increased by 27.0% year on year, while the portfolio of debt instruments issued by the central bank decreased by 75.6%.

The balance of trading securities went up by PLN 3,243.1 million in 2016 primarily as a result of extending the treasury bonds portfolio.

Changes in liabilities and equity of mBank Group

The table below presents changes in liabilities and equity of the Group in 2016:

Amounts due to customers remained the dominant funding source of mBank Group. Their share in the Group’s funding structure grows systematically. They accounted for 68.4% of the Group’s liabilities and equity at the end of 2016, compared with 65.7% at the end of 2015.

Amounts due to customers increased by PLN 10,277.1 million, i.e. 12.7% to PLN 91,418.0 million in 2016.

The growth was driven by an increase of amounts due to retail clients which were higher by PLN 7,377.9 million, i.e. 16.0% compared with the end of 2015. Current accounts grew by 17.2%. Term deposits increased by 13.1%.

Throughout the year, amounts due to corporate customers increased by PLN 2,959.6 million, i.e. 8.6%. The growth was mainly driven by increased balances of current accounts (+31.3%), loans and advances received (+15.6%) and repo/sell buy back transactions (+46.3%). The volume of term deposits decreased by 27.0% in the analysed period. Excluding repo transactions, amounts due to corporate clients rose by 7.4% compared with the end of 2015.

Amounts due to other banks decreased by PLN 3,532.6 million, i.e. 29.4% to PLN 8,486.8 million compared with the end of 2015. A significant decline was observed in loans and advances received. In 2016, mBank took out loans in EUR totalling EUR 230 million and repaid a loan of CHF 800 million. The value of deposits placed by other banks with mBank, term deposits and repo transactions also declined.

The share of debt securities in issue in mBank Group’s financing structure increased from 7.2% at the end of 2015 to 9.5% at the end of 2016. Their value grew by PLN 3,714.2 million, i.e. 41.5% year on year. This change was driven mainly by the issue of covered bonds by mBank Hipoteczny worth PLN 850 million and EUR 168 million and depreciation of the zloty against the euro and the Swiss franc.

Subordinated liabilities rose by 3.0% in 2016, mainly due to changes in the Swiss franc/zloty exchange rate, as the subordinated liabilities to Commerzbank are denominated in the Swiss franc.

In 2016, equity grew by PLN 776.2 million, i.e. 6.3% as a result of an increase in retained profits, while its share in total liabilities and equity of mBank Group accounted for 9.8% at the end of 2016 (9.9% as at December 31, 2015.)

 

Retail Banking

 

[G4-4, G4-8, G4-9, FS6] mBank’s Retail Banking segment serves 5,348 thousand individual clients and microenterprises in Poland, the Czech Republic and Slovakia online, directly through the call centre, via mobile banking and other state-of-the-art technological solutions, as well as in a network of 154* branches. The Bank offers a broad range of products and services including current and savings accounts, accounts for microenterprises, credit products, deposit products, payment cards, investment products, insurance products, brokerage services, and leasing for microenterprises. In 2013, the Bank launched a modern, user-friendly online platform (New mBank) designed from scratch, which provides more than 200 new functionalities, solutions and improvements.

Key financial data (at the end of 2016):

Key business data:

* Including 138 in Poland Polsce and 16 in Czech Republic and Slovakia; excluding mFinanse (43) and mKiosks (119).

 

Summary of Retail Banking segment financial results

The Retail Banking segment generated a profit before tax of PLN 1,023.9 million in 2016, which represents a decrease by PLN 36.8 million, i.e. 3.5% year on year.

The profit before tax of Retail Banking in 2016 was driven by the following factors:

• Increase in total income by PLN 230.0 million, i.e. 9.7% year on year to PLN 2,596.0 million. Increased income from the core business: net interest income went up by PLN 196.9 million (due to the change in the structure of credit portfolio – increasing share of high margin products), and net fee and commission income was higher by PLN 10.4 million (rise in the number of payment cards issued, the number and volume of transactions as well as in lending and insurance commissions). Moreover, the increase in total income was stimulated by a rise in gains less losses from investment securities, investments in subsidiaries and associates by PLN 36.4 million, driven by the booking of the settlement of the takeover of Visa Europe Limited by Visa Inc. (in 2015 the profit was posted due to the sale of BRE Ubezpieczenia TUiR and the signing of agreements accompanying the sale with AXA Group companies).
• Increase in operating expenses (including amortisation) by PLN 31.2 million, i.e. 2.9% year on year, driven mainly by the 20.4% growth in amortisation.
• Increase in net impairment losses on loans and advances by PLN 60.7 million, i.e. 27.0% year on year caused by a change in the structure of the retail loans portfolio with the rising share of non- mortgage loans (unsecured loans) and weaker zloty against the Swiss franc and the euro.
• Tax on the Group’s balance sheet items at PLN 178.5 million.

Activity of the Retail Banking area (Bank)

Product mix, acquisition and marketing

In 2016, the number of retail banking clients of mBank rose by 400.5 thousand, mainly thanks to active acquisition, focused marketing efforts, product mix development and effective cross-selling.

In 2016, mBank considerably simplified the offer of personal accounts and withdrew the following products: eKonto, eKonto mobilne, eKonto mobilne plus and mKonto Multi. They were replaced with the eKonto account in two versions: eKonto with a standard tariff and eKonto with a plus tariff. Both accounts include a mechanism releasing the client from a debit card fee in a situation when the client makes at least five cash-less transactions a month using the card.

mBank continues its marketing campaign based on a slogan: “Follow what you borrow”, stressing clear lending rules and repayment security. The main aim of the campaign is to build awareness that mBank has an attractive credit offer and create an image of the bank boasting the simplest lending conditions. Measures taken within the Responsible Lending initiative are an inherent part of the campaign and communication, and a comprehensive credit guide, the one of its kind on the market, addressed to mBank’s clients, “Credit ABC”, is a crowning achievement of that action.

Moreover, in June 2016 mBank launched the third edition of the promotion encouraging clients to actively use mBank’s mobile application (Mobile Clients Have It Better - 3rd edition).

In 2016, mBank cooperated with a key player on e-commerce market - PayU - in the scope of granting instalment loans for online shopping, reaching high sales of this product (an increase by approx. 170% of the value of granted loans).

The development of the area of cash and instalment loans focused also on the range of cross-selling initiatives, offering clients i.a.:

• the fully remote process of consolidation of loans from other banks;
• a possibility to increase funding under a cash loan in a quick and simple way;
• an option to split payments debiting their current and savings accounts into instalments.

 

The Bank made it possible for its retail clients to apply for child benefits under the Family 500+ Programme.

In 2017, the retail banking will take up challenges based on the use of the new sources of information about clients, such as e-public administration or social media.

Offer for small and medium-sized enterprises

In the area of small and medium-sized enterprises (SME), one of the main achievements in 2016 was the launch of mAccounting developed in cooperation between mBank and SuperKsięgowa (Extor S.A.). Thanks to the exchange of basic data between banking and accounting systems, SMEs receive benefits which so far have only been available to corporate clients, including automatic monitoring of payments, quick invoicing, simplified invoice payment, analysis of business partners, electronic settlement of tax returns and up-to-date tax data.

With the aim to acquire new clients, mBank incorporated a new promotion “Good start with mBank” into the offer of company accounts. When opening a company account, the client may also order a stamp, a card holder and business cards for his/her new business. This offer is available in mBank’s outlets, and since August 2016 it has been offered via direct channels - on the Internet and in the call centre.

Moreover, in an attempt to broaden its offer for small and medium-sized enterprises, the Bank and Akademickie Inkubatory Przedsiębiorczości (Academic Business Incubators, owner of Business Link, an office network) launched a new promotion “mBusiness account plus office”. All clients who decide to open company accounts will be offered free access to Business Link infrastructure for a period of 6 months. Business Link operates 11 business development hubs available round the clock, which makes it the largest such network in Poland. The offices are located in 10 largest Polish cities. As part of the Partner’s ecosystem, the clients will have an unlimited access to the office space in the largest Polish cities and will have the chance to meet with mentors/experienced entrepreneurs who can show them possible development opportunities and help them establish valuable business relations with other businessmen, while innovative companies may seek help in finding investors.

2016 was yet another period in which mBank confirmed its leading role in the e-Commerce and m- Commerce transaction area. The Mobile mTransfer solution, making the mTransfer service available in the mobile channel, was once again appreciated by the market in the “Debut of the Year” category at Ekomersy 2015 gala. In addition, Mobile mTransfer was recognised in the Mobile Trend Awards 2016 competition and won 1st award for “Company supporting the popularisation of mobile techniques and technologies” and a Special Award - 2nd place in a vote by Internet users. For more information about awards for mBank Group in 2016, go to section 6.1. Key projects and innovations of mBank Group.

At the beginning of 2016 mBank also expanded the mPlatforma Walutowa service, an FX platform (dedicated to small and medium-sized enterprises) with individual clients segment, offering them mKantor. mKantor offers all the benefits of mPlatforma Walutowa: making transactions in two clicks, very attractive FX rates, and the possibility to make transactions via the mobile application.

In the area of financing of companies a new product was added to the product offer: an overdraft facility guaranteed by COSME (an EU programme aimed at the strengthening of competitiveness of companies), which combines higher credit amounts with attractive terms of financing. In the case of investment loans with de minimis guarantee and registered pledge, the collateral catalogue was expanded so that mortgage is no longer the main security for the loan.

In March 2016 mBank also obtained the consent of the Minister of Digital Affairs to establishing a centre of confirmation of ePUAP (electronic public administration services platform) trusted profiles, starting the process of integration of the Bank with electronic public administration services. At the same time, the Bank offered account maintenance services to limited partnerships, associations, schools and educational institutions.

Mobile application

The mobile application, launched in February 2014, has won a large group of new users over the last three years, and based on a survey of actual needs of the clients, has been enriched with a number of new features. Mobile banking services are used systematically by over 1.3 million clients, an average user does banking via mobile devices 18 times a month. The “mBank PL” application offers a wide range of convenient and unique solutions, e.g. the “loan in 30 seconds” which now accounts for 18% of overall cash loan sales.

Following the positive reception of the new features introduced in 2015, such as the payment of invoices using QR code scanning, NFC payments for Android system (available to Orange subscribers), and the option to change the authorisation limits on payment cards, mBank decided to pursue further development.

In 2016 we introduced a number of new features and improvements into the application, including:

• “mLine in a click” service, which allows clients to connect with mLine consultants directly from the application, without the need to use one’s ID and telecode;
• option to change card transaction limits;
• possibility of logging into the application with a fingerprint;
• express transfers using telephone numbers within the BLIK system;
• possibility of purchasing travel insurance (at present, 15% of travel insurance policies are bought via the application);
• “Payment Assistant” service which reminds clients of all regular payments, suggesting the amount due and the payment date and allowing them to quickly settle invoices;
• mobile Authorisation - a service allowing users to authorise transactions made in the transaction system via the mobile application. Instead of typing passwords received in a text message, all that the client needs to do is to log into the application and accept (or reject) a given transaction with one click.

In February 2016, the mobile application was ranked the best banking application in the Mobile Trends Awards competition, and in September it won the "Newsweek Friendly Bank" ranking in the “Mobile Banking” category. For more information about awards for mBank Group in 2016, go to section 6.1. Key projects and innovations of mBank Group.

Cooperation with AXA Group

In 2016 the cooperation with mBank’s strategic partner in the insurance sector, AXA Group, was continued. It started in 2015, along with the finalisation of the sale of shares in BRE Ubezpieczenia TUiR and conclusion of distribution agreements, governing long-term cooperation between mBank Group and AXA Group with regard to the distribution of insurance products.

Works are pending on intensifying cross-selling and stand-alone sales among the Bank’s clients.

In the insurance area, in 2016 the Bank made travel insurance available in the mobile channel and launched civil liability insurance (OC) and comprehensive motor insurance (AC) for small and medium-sized enterprises. Moreover, the Bank offered a new product, individual term life insurance, which is sold in the network of mBank and mFinanse.

Cooperation with Orange

It has already been two years since the joint-venture of mBank and Orange, Poland’s leading landline telephone, mobile, Internet and data transfer provider, called Orange Finanse, was launched.

At the end of 2016, the number of Orange Finanse accounts reached over 330 thousand, including approximately 100 thousand opened in 2016 alone. Orange Finanse became one of mBank’s key acquisition channels.

2016 was a period of changes in the product offer supported by marketing campaigns promoting the Orange Finanse brand among the existing and prospective clients of Orange. The key component of the new offer is the option for active users of the Bank’s services to lower their monthly phone bills in a period of up to 24 months. A new, more comprehensive credit offer was introduced in June 2016. The existing clients of Orange Finanse can now take out cash loans of up to PLN 150 thousand in all Orange stores.

In 2016, Orange Finanse was enhanced with new interesting functionalities in the mobile application and online banking. For example, by clicking a dedicated button in the mobile application, the users of all platforms can now quickly get in touch with the Bank’s contact centre, a one-of-a-kind solution on the market. Another novelty is the Payment Assistant sending text messages reminding them of upcoming transfers.

H2 2016 was marked with further efforts to improve selling competences of Orange stores’ employees. Tests of new selling scenarios and client communication methods were conducted and a series of training sessions was implemented to broaden the knowledge on Orange Finanse products.

In September, Orange Finanse ranked second in the mobile banking category of the Newsweek’s Friendly Bank ranking (mBank ranked first). This means advantage over competition in terms of easy navigation in mobile application, effective channels of communication with the Bank and services and functionalities available in the application.

For more information about the strategic cooperation with Orange, go to chapter 6.1.Key projects and innovations of mBank Group.

Development of the retail banking offer in Poland

Loans

The graph below presents the structure of the Retail Banking loan portfolio in Poland at the end of 2016:

In 2016 new sales of non-mortgage loans amounted to PLN 5,639.5 million, up by 25.3% year on year. Sales of mortgage loans in 2016 stood at PLN 2,186.9 million (including sales of mBank Hipoteczny), which represents a decrease of 36.5% year on year. The drop in sales of mortgage loans, with non-mortgage loans increasing at the same time, was mainly driven by changes in the strategy and focus on sales of higher margin products.

2016 was another year when the portfolio of non-mortgage loans granted to households grew dynamically, by PLN 1,662.4 million, i.e., 18.7% year on year. The portfolio of mortgage loans stood at PLN 34,112.7 million, with an increase by PLN 639.3 million year on year.

The NPL ratio of the mortgage loan portfolio slightly dropped year on year, and stood at 3.7% at the end of 2016.

Deposits and investment funds

In 2016, the balance of savings products (term deposits and savings accounts) grew by PLN 6,453.9 million, which represents a 16.4% rise compared with the end of 2015. The strong sales results in the area of savings products were possible thanks to a number of initiatives taken, including:

• implementation of the effective process of term deposits retention, which aims at retaining the base of maturing term deposits and strengthening the long-term relations with the Bank’s clients;
• special offers supporting cross-selling - promotional offer of Open-end Investment Funds combined with term deposits;
• introduction of the umbrella fund Promising mFunds (in Polish: mFundusze Dobrze Lokujące) comprising three strategies of investment funds, varying in terms of risk;
• implementation of subscriptions for investment certificates of Closed-end Investment Funds and structured certificates;
• enabling clients to invest in new subscriptions for structured deposits;
• introduction of public offering of corporate bonds for retail clients.

The balances of deposit products increased while the financial discipline was maintained.

The growth in retail clients’ deposit base was accompanied by a slight rise in spending on investment products. Due to unfavourable situation on capital markets in H1 2016, the Bank offered its clients mainly solutions characterized by low or highly-limited investment risk (e.g. structured products, money market funds). In H2 2016, the Bank conducted a subscription of the umbrella fund Promising mFunds and a subscription of investment certificates of Closed-end Investment Funds. In December 2016, the Bank participated in the public offering of corporate bonds.

At the end of 2016, retail deposits in Poland amounted to PLN 45,727.6 million compared with PLN 39,273.6 million at the end of 2015.

Cards

Since 2016, young clients of mBank have been offered new credit cards of the Mastercard Me series. Thanks to these cards, they can express their individuality and satisfy their financial needs at the same time. mBank’s card won the title of “the most innovative card in Poland”, and its commercial was hailed “the best card product commercial in Polish media” at the 2016 Polish Card Gala. Moreover, clients voted mBank one of the top three providers of “the most beautiful Polish card of the year” in 2016 in an online voting. What is so innovative about the card is the possibility of designing its layout and placing one’s own picture or a picture from the Bank’s gallery on it, or alternatively choosing a transparent card.

In 2016, the value of payment card transactions made by mBank’s retail clients exceeded PLN 26 billion, which represents a rise by 21.2% year on year. The number of transactions made by mBank clients grew by 27.8% year on year. mBank’s credit cards are also characterised by a very high average number of transactions per client. The market share of transactions made with the use of mBank’s cards stood at 12.6% at the end of September 2016.

Brokerage operations and asset management

In May 2016, the brokerage services rendered by Dom Maklerski mBanku and mWealth Management were subject to integration within the Bank, as a result of which all brokerage operations of mBank Group are currently offered through mBank Brokerage Bureau, which is an organisational unit of the Bank.

The operations of mWealth Management were taken over by mBank’s Retail Banking segment. In 2016, the Bank developed its comprehensive wealth management services including investment advisory and asset management. The assets managed by Private Banking remained stable year on year and stood at PLN 5.2 billion at the end of 2016.

The year 2016 ended with a great success in respect of the strategies managed as part of asset management services dedicated to mBank’s Private Banking clients. In the latest ranking of asset management by GG Parkiet for Q4 2016, mBank took the leading positions in almost all categories. Aggressive share strategy, sustainable growth model portfolio, stable growth model portfolio and conservative model portfolio ranked first in their categories. In acknowledgement of the top quality services, the Bank received the Euromoney award for the best private banking and wealth management offer in Poland for the eighth time.

The Brokerage Bureau of mBank (BM) provides a comprehensive offer of brokerage services to the largest Polish institutional investors (pension funds, investment funds, asset managers), foreign funds, and individual clients, i.e. retail and affluent clients. The Brokerage Bureau enables clients to trade on regulated markets in Poland and abroad as well as on the OTC (FOREX/CFD) market. As part of wealth management services, clients may use investment advisory and asset portfolio management services. The Bureau is an active player on the primary market – it prepares and conducts public offerings (IPO/SPO/ABB).

At the end of 2016, the Brokerage Bureau maintained 300.3 thousand brokerage accounts (including 5.4 thousand Forex/CFD-related accounts and 1.4 thousand accounts held by financial institutions), which represented an increase by 1.3 thousand year on year.

Retail Banking in the Czech Republic and Slovakia

In 2016, in the Czech Republic and Slovakia, mBank acquired 72.9 thousand clients (out of which 17.2 thousand clients in Slovakia, and 55.7 thousand clients on the Czech market).

The activity of mBank in the Czech Republic and Slovakia in 2016 was focused on intensifying its acquisition efforts, as well as continually building the position of a mobile bank of reference.

The offer was expanded with (as was the case in Poland) a new current and savings account for young clients, which develops alongside the client’s needs in terms of pricing and functionalities.

The branch network modernisation is on track: two new “light branch” financial centres were opened in the Czech Republic and Slovakia. Also, 12 new outlets specialising in banking services were opened as a result of cooperation with Broker Consulting, a Czech agent on the financial services market. mBank is the main banking partner in this undertaking. The cooperation also led to the introduction of two new co-branded cards: a debit and a credit card.

In addition, mBank in the Czech Republic and Slovakia also extended its offer by adding four new debit cards to the offer: gold debit card, debit phone sticker, debit card for entrepreneurs and debit card for the young. Three new credit cards were also added to the offer.

The activity of mBank in the Czech Republic and Slovakia in 2016 won several awards. mBank’s account for entrepreneurs was ranked first on the market, while mKonto account and online banking ranked second in the Zlata Koruna contest. Additionally, mBank’s mortgage loan for refinancing real estate was ranked third in the weekly newspaper Trend. Apart from that, mBank’s mobile application was yet again appreciated, this time with the Golden PCNews award, as one of the best on the Slovak market. mBank in the Czech Republic received the title of “Superbrand 2016”, becoming one of the strongest brands on the local market.

Loans and deposits

At the end of 2016, the loan portfolio of mBank clients in the Czech Republic and Slovakia stood at PLN 4,279.7 million, which represents an increase by PLN 455.7 million, i.e. 11.9% compared with the end of 2015.

The Bank pursued targeted initiatives to grow sales of non-mortgage loans. In 2016 the sales of non- mortgage loans amounted to PLN 489.4 million, up by 25.3% year on year. Sales of non-mortgage loans in the Czech Republic amounted to PLN 361.2 million, up by 24.6% year on year. At the same time, sales of non-mortgage loans in Slovakia increased by 66.1% year on year and stood at PLN 128.2 million.

Sales of mortgage loans decreased by 34.6% year on year to PLN 692.5 million in 2016. Sales of mortgage loans in the Czech Republic totalled PLN 551.0 million compared with PLN 751.3 million in 2015 (i.e. - 26.7%), while in Slovakia it stood at PLN 141.6 million (down by 54.0% year on year). The drop was the consequence of sales efforts in the area of credit products with higher margin and the changes in pricing policy of mortgage loans.

The Bank’s deposit base in the Czech Republic and Slovakia increased by PLN 1,563.5 million or 24.5%. compared to the end of 2015.

 

Corporates and Financial Markets

 

[G4-4, G4-8, G4-9, FS6] The Corporates and Financial Markets segment serves 20,940 corporate clients including large enterprises (K1 - annual sales exceeding PLN 500 million), mid- sized enterprises (K2 - annual sales of PLN 30 – 500 million) and small enterprises (K3 - annual sales below PLN 30 million) through a network of dedicated 45 branches. mBank Group’s offer of products and services for corporate clients focuses on traditional banking products and services (including corporate accounts, domestic and international money transfers, payment cards, cash services, and liquidity management products), corporate finance products, hedging instruments, equity capital market (ECM) services, debt capital market (DCM) instruments, mergers and acquisitions (M&A), leasing and factoring. The segment comprises two areas: Corporate and Investment Banking, and Financial Markets.

Key financial data (at the end of 2016):

 

Key business data:

 

Corporate and Investment Banking

Financial results

The Corporate and Investment Banking segment generated a profit before tax of PLN 498.6 million in 2016, which represents a drop by PLN 38.8 million, i.e. 7.2% year on year.

The profit before tax of Corporate and Investment Banking in 2016 was driven by the following factors:

• Stable income compared with the previous year (increase by PLN 1.3 million year on year). Increase was mainly observed in the net trading income (PLN +27.9 million, i.e. +12.9%), which was driven by higher volatility on financial markets.
• Increase in operating costs (including amortisation) by PLN 21.3 million, i.e. 3.1% in the reported period.
• Decrease of net impairment losses on loans and advances by PLN 101.2 million, i.e. 56.9% compared with 2015. The drop in provisions reported in 2016 was caused by a release of credit risk provisions related to the sale of non-performing receivables and payment of the loan insurance by KUKE (Export Credit Insurance Corporation).
• Tax on the Group’s balance sheet items at PLN 120.1 million.

Activity of Corporate and Investment Banking segment in 2016 (Bank only)

2016 was the time of a slight slowdown in economic growth, which, however, did not translate into any major deterioration in business activity and financial results of large enterprises. Moreover, banks had to operate in an environment of record-low interest rates, reduced interchange fees, increased contributions to the Bank Guarantee Fund (BFG) and a newly introduced tax from financial institutions as well as uncertainty about the size of the potential financial burden arising from CHF loans.

Despite the difficult economic conditions, last year had a positive impact on the volume of corporate loans and deposits. The corporate loans market grew by 5.4% year on year and the corporate deposits market grew by 8.2%. In this context, mBank’s loan volumes grew at a lower rate than the market, which was, however, offset by a significant rise in deposit volumes. This, in turn, translated into an increase in mBank’s market shares in deposits to 10.1%.

In 2016, the Bank intensified its efforts to attract new corporate clients, which resulted in record-high acquisition of companies – the corporate client base increased by 1,378 companies year on year to 20,940 clients.

The acquisition of new clients boosted the balances deposited in current accounts, which stood at PLN 11,948.1 million at the end of December 2016, representing an increase of 41.1% year on year. The high volume of current deposits is a springboard for further growth of transactional banking, which is of special relevance to the Bank with respect to the growth potential and forging of closer relations with clients.

2016 was record-breaking in terms of acquisition in the sector of small and medium-sized enterprises (SME). Over 2,500 new clients started cooperation with mBank and over half of them opted for the package offer.

The Bank continued to pursue its strategy of building long-term business relationships with clients and providing opportunities for smooth development of cooperation along with a company’s growth in many dimensions. At the same time, 200 SMEs (K3 client segment), whom mBank supported with advanced corporate banking solutions, were transferred to the K2 segment (large enterprises segment).

A number of initiatives aimed at ensuring top-quality service led to good results of customer satisfaction survey - the percentage of K3 clients who actively recommended mBank’s services to their counterparties rose by 8%.

As regards the product offer, mBank’s clients from the SME segment were granted the opportunity to obtain fixed-rate investment and mortgage financing with predictable servicing cost in the long term.

2016 was yet another year in which mBank put great emphasis on identifying clients’ needs and potential problems. Special focus on relations with the clients, which translates into the quality of relations with clients, was mirrored in levels of customer satisfaction of companies using mBank’s services, measured i.a. by a recommendation indicator – NPS (Net Promoter Score). It is the key indicator on which mBank continuously focuses in satisfaction surveys. For the corporate clients who indicated mBank as their main bank, NPS is stable. In 2016, NPS reached 36% and was higher by 6 p.p. year on year. Sound level of NPS in the Corporate and Investment Banking segment was caused by the implementation of NPS programme - mSatysfakcja project. The main goal of the project is to increase the level of genuine satisfaction of corporate clients resulting from mBank’s offer and services, focusing on clients feedback and improving relationships with them in the context of promoting one of the most significant values of mBank – client- centricity.

Products and services offered

Corporate loans

Corporate deposits

Structured finance, project finance, syndicated loans

As part of the Corporate and Investment Banking segment, the Bank offers structured and mezzanine financing, including in particular: M&A finance, project finance and syndicated finance. In 2016, the Bank was a major market player and participated in 88 syndicated and bilateral products. The Bank’s total exposure under syndicated and bilateral products stood at PLN 3,934.1 million.

De minimis guarantee

The Bank continued to perform the Portfolio Guarantee Line De Minimis (PLD) Agreement as part the government’s "Supporting Entrepreneurship through BGK Sureties and Guarantees" programme with the allocated limit for guarantees at PLN 2,200 million. As at December 31, 2016, the amount drawn under the limit reached PLN 1,612.6 million.

Moreover, based on the agreement signed with Bank Gospodarstwa Krajowego, mBank offered loans secured with guarantees to innovative enterprises from the SME sector. The guarantees were financed from the pool of the Innovative Economy Operational Programme. The pool of funds available within the programme amounted to PLN 250 million. The BGK guarantee limit for mBank stood at PLN 16.3 million and was used in full.

mBank continued to offer the portfolio guarantee line with a counter-guarantee provided by the European Investment Bank under the COSME programme (a European Union programme supporting the competitiveness of enterprises in 2014-2020). The BGK guarantee limit for mBank stands at PLN 120 million. As at December 31, 2016, the amount drawn under the limit reached PLN 51.6 million.

European Union financing

On March 16, 2016 the Bank signed a new agreement with the European Investment Bank (EIB) to open a EUR 100 million credit line dedicated to financing projects and obligations related to the production cycle of mid-caps (entities with a headcount ranging from over 250 to less than 3 thousand employees).

Corporate debt origination

The share of mBank in the non-treasury debt market at the end of December 2016 is presented in the table below.

The largest issues arranged by mBank in 2016 included bond issues of PLN 437 million for the European Investment Bank, PLN 250 million for BGK and PLN 100 million for Credit Agricole Bank Polska. Other relevant transactions included mBank Hipoteczny’s covered bonds issues of EUR 98 million and PLN 850 million. The value of outstanding debt securities issued by banks (excluding „road” bonds issued by Bank Gospodarstwa Krajowego) arranged by mBank, amounted to ca PLN 12.6 billion at the end of 2016, compared to PLN 11.3 billion at the end of 2015.

In the growing corporate bond market, mBank executed a number of new major issues, i.e. for Kruk S.A. (PLN 311 million), HB Reavis (PLN 100 million), Echo Investment (PLN 100 million), Work Service (PLN 80 million), LC Corp S.A. (PLN 65 million), Magellan S.A. (PLN 50 million and EUR 6.1 million), Archicom (PLN 55 million), Best S.A. (PLN 40 million), EGB Investment (PLN 28 million).

Transactional banking

Cash management is an area of Corporate Banking, which offers state-of-the-art solutions to facilitate planning, monitoring and management of the most liquid assets, cash processing, as well as electronic banking. The solutions facilitate daily financial operations, enhance effective cash flow management, and optimise interest income and costs.

The balances of corporate current accounts crossed the mark of PLN 12 billion for the first time in history in 2016. The year-on-year growth rate of transactional products in 2016 was as follows:

Number of domestic transfers	+16.5%
Number of outgoing foreign transfers	+12.7%
Number of direct debit transactions	+18.8%
Number of corporate cards	+11.8%
Number of prepaid corporate cards	+128.4%
Number of mCompanyNet users	+11.4%

Development of the Corporate Banking offer

Service of POS terminals

In H1 2016, mBank entered into cooperation with IT Card and Planet Pay in the area of servicing payment cards in terminals. Introduction of the service and the signing of an outsourcing agreement with IT Card, enriched mBank’s transactional banking offer.

In June 2016, mBank together with IT Card and Planet Pay signed an agreement on the provision and service of payment terminals for couriers of DPD Polska Sp. z o.o. It was the first such agreement on the Polish market under which 4.5 thousand terminals will be delivered. This transaction sets a new standard of quality and a new direction of settlements on the e-commerce market in the area of ‘cash on delivery’ mail.

Silesian City Card (ŚKUP)

The Silesian City Card (ŚKUP) is one of the largest city card projects in Poland. It was implemented by way of a public tender for the provision of a comprehensive system of city cards with payment functionality. The system was ordered by the Communication Municipal Association of the Upper Silesian Industrial District (KZK GOP), while the project is implemented by a consortium of Asseco Poland (Leader) and mBank. The project is co-financed by the European Regional Development Fund.

Since the launch of the ŚKUP system in October 2015, nearly 130 thousand personalised and bearer ŚKUP cards were issued to the inhabitants of the Silesian agglomeration, and 105 thousand bearer ŚKUP cards were delivered to points of sale with a view to issuing them to the inhabitants of the agglomeration.

Fixed-rate loan

In response to the volatile macroeconomic conditions, the environment of low interest rates and the need for maximum safety guarantee for the client, mBank introduced investment loans and mortgage products based on the fixed interest rate in its standard offer for SMEs in December 2016. The fixed rate will be applicable throughout the entire lending period and will be included directly in the agreement. The fixed rate is available for all loans in PLN, EUR and USD.

Financial Markets

Financial results

The Financial Markets segment generated a profit before tax of PLN 90.9 million in 2016, compared with PLN 80.2 million posted in 2015.

The profit before tax of Financial Markets in 2016 was driven by the following factors:

• Increase in total income by PLN 44.7 million year on year. Higher income resulted from a much higher net interest income driven mainly by higher income on derivatives classified into banking book (growing volumes of these transactions), and revenues in hedge accounting. At the same time, net trading income decreased by PLN 85.8 million due to valuation of interest rate derivatives.
• Increase in operating costs (including amortisation) at PLN 104.4 million.
• Tax on the Group’s balance sheet items at PLN 26.8 million.

Financial Markets segment activity in 2016

Since January 2016 the activities of the financial market products sales segment have been focused on increasing the activity of new clients and enlarging the Bank’s share in the markets of FX products, commodity derivatives and interest rate risk hedging transactions related to large financing projects, as well as on selling commercial securities.

The key initiatives which impacted on the volume of transactions and income generated from the Bank’s cooperation with clients included:

• activities aimed at using market volatility to increase the number of transactions per client. The main emphasis was put on active telephone contact with existing and new clients. Thanks to these measures, both the number of clients active on average per month and transactions concluded by dealers by phone grew respectively by 6.2% and 8.6% year on year;
• micro-enterprises served by the retail part of mBank saw intensive on-boarding activities addressed to new clients and mobilisation campaigns aimed at existing clients who make transactions on Internet currency exchange platforms. Thanks to these measures, the value of trade increased by 212.1% year on year, and over 252.5 thousand transactions were concluded;
• the Derivative Instruments Division which sells transactions in commodity derivatives adjusted the scopes of responsibilities of sellers to reach a greater group of clients in an effective way and maximise the margins, which in 2016 increased by 43.2%;
• intensive selling activities also took place in the area of project-related transactions. Conducted in collaboration with mLeasing and mBH, they produced a number of new, smaller transactions;
• measures designed to increase the sales of and margins on Treasury transactions with K0 (global companies) and K1 clients were continued resulting in a substantial increase in both margins and sales, especially on the market of FX derivatives.

mBank’s market shares in specific financial instrument markets as at 31 December 2016 are presented below:

	Treasury bills & bonds	IRS/FRA	FX Spot & Forward
mBank	16.2%	11.5%	16.1%

Financial Institutions

The Financial Markets area covers relations with financial institutions, focusing mainly on raising capital from other banks and placing excess funds with them.

As at December 30, 2016, mBank had 17 active loans in the amount of PLN 18,116 million, of which the utilized value stood at PLN 11,161 million. In 2016, two loans in CHF and one loan in EUR, amounting to PLN 6,176 million in total, were repaid at maturity. Additionally, the Bank took out two new loans in EUR in the total amount of PLN 1,017 million. The Bank’s total debt under loans from other banks was by PLN 1,812 million lower than at the end of 2015. At the exchange rates from the end of 2015, the decrease would amount to PLN 798 million.

At the end of December 2016, mBank’s exposure under loans granted to other banks reached the equivalent of PLN 129.5 million. mBank’s portfolio comprised nineteen short- and medium-term active loans granted to financial institutions from Poland and abroad.

The greatest accomplishments of the Financial Institutions Department in 2016 include:

• Obtaining further, considerable funding in the amount of EUR 100 million from the European Investment Bank (EIB) and a bilateral loan from ICBC (Europe), the Branch in Poland, totalling EUR 130 million.
• The year 2016 was also marked by further acquisition of loro accounts. The Bank managed to maintain its position as one of the leading Polish banks in handling settlements in PLN.

Moreover, in 2016 the Financial Institutions Department continued to actively support trade transactions concluded by Polish exporters by offering short-term financing to financial institutions, as well as granted financing as part of syndicated loans. At the same time, the Bank was still serving banks from the Commonwealth of Independent States (CIS) and offering them medium-term loans secured with KUKE insurance policies.

Custody Services

mBank provides services including settlement of transactions in securities registered in local and foreign markets, safe-keeping of clients’ assets, maintenance of securities accounts and registers of securities in non-public trading, maintenance of asset registers of pension funds and investment funds, monitoring the valuation of their assets, and processing corporate actions. mBank’s custody clients are mainly investment and pension funds, local and foreign financial institutions, banks offering custodian and investment services, insurance companies, asset management institutions and non-financial institutions.

2016 was a record-breaking year in terms of growth in the number of offered investment funds and in the value of registered assets. The number of investment funds for which mBank acts as depositary rose by 21.5% compared with the end of 2015, while the total value of assets of investment and pension funds increased by 19.4%.

 

Subsidiaries of mBank Group

 

Summary of financial results of mBank Group subsidiaries

[G4-4, G4-8, G4-9, FS6] mBank Group subsidiaries generated a profit before tax of PLN 301.8 million in 2016, compared to PLN 305.5 million in 2015.

The profits of the subsidiaries mLeasing, mBank Hipoteczny and mFaktoring improved in the period under review.

The table below presents the profit before tax of the subsidiaries in 2016 compared to 2015.

Business activity of selected subsidiaries

The year 2016 was a period of many unfavourable factors on the mortgage loan market, e.g. the amendment to the Act on Land and Mortgage Registers and on Mortgage applicable from April 30, 2016. At that time, restrictions regarding the establishment of a mortgage on agriculatural land were introduced, which made it impossible to obtain a loan for building a house on such land. Additionally, the Polish Financial Supervision Authority recommended that banks take into consideration the future increase in interest rates while assessing creditworthiness.

In 2016, the company reported a 35.6% decrease in sales in the mortgage loan area year on year. Except the above-mentioned factors, the decrease of mortgage loan volumes was strongly correlated with the shift in the pricing policy of the main partners of mFinanse, i.e. mBank and mBank Hipoteczny.

In 2016, mFinanse continued dynamic growth in car loan market share (+19% year on year). Since December 2015, the company has been the only sales agent for Volvo car loans in Poland. It is the second premium brand, after BMW, for which mFinanse exclusively offers this kind of financing. Thereby it became a leader on the market of loans for luxury cars.

In 2016 mFinanse continued the project of the sales network development aimed at placing new outlets in the regions with no physical presence of mBank and mFinanse. Additional 17 outlets were established in the analysed period and the company managed 98 mKiosks at the end of 2016.

The profit before tax generated by mFinanse in 2016 fell to PLN 155.4 million from PLN 242.6 million a year earlier (including a one-off gain on the sale of BRE Ubezpieczenia TUIR SA amounting to PLN 72.5 million in 2015). The profit before tax was mainly influenced by the insurance area where the company operates as the insurance agent.

The value of contracts executed in 2016 amounted to PLN 4.0 billion, compared with PLN 3.8 billion in 2015, which represents an increase of 11.1% year on year. As demand increased in 2016, the sales grew year on year, mainly driven by an increase in the sales of vehicles. In 2016, the company ranked third by aggregate volume of executed contracts (movables and real estate) with the market share of 6.9%, including the fifth position in movables and the third position in real estate. The value of contracts on movables concluded in 2016 amounted to PLN 3.9 billion compared with PLN 3.3 billion a year before (+20.4% year on year), while the value of contracts executed on real estate stood at PLN 0.1 billion compared to PLN 0.5 billion in 2015 (-78.5% year on year).

The profit before tax of mLeasing in 2016 was PLN 72.6 million representing an increase of 26.8% year on year.

The “Leasing in Retail” project continued in 2016 pursuant to the “One Bank” Strategy geared to developing a comprehensive offer for clients. The initiative is dedicated to mBank’s business clients and enables them to conclude a leasing agreement using special leasing processes. Thanks to the combined efforts of Retail Banking and mLeasing, in 2016 the company financed fixed assets of PLN 479.5 million, estimated by the purchase price.

The chart below presents the value of leasing contracts executed under the “Leasing in Retail” project:

The gross loan portfolio of mBank Hipoteczny (mBH) was PLN 9.5 billion at the end of 2016 (+27.3% year on year). That change was driven mainly by a systematic rise in the retail portfolio. Sales in this segment reached PLN 1.6 million in 2016. Moreover, in pursuit of its strategy, mBank Hipoteczny acquired from mBank (in four tranches) retail loans with a total nominal value exceeding PLN 529.4 million. The sales of commercial loans were also strong. In 2016, the total value of new contracts reached PLN 1.9 billion, which represents a surge by ca. 56% compared with 2015.

Despite the additional charge imposed on the bank in the form of a banking tax (PLN 16.7 million), in 2016, mBH reported a 12.6% increase in profit before tax year on year. The profit before tax amounted to PLN 30.2 million at the end of 2016, compared with PLN 26.8 million in 2015.

Compared with last year, the mBH’s profit was driven by the continuing growth in the credit portfolio, in particular in the retail banking segment. In the period covered by this report, the net interest income of mBH grew by 17.5%. Moreover, the Bank’s net trading income also rose considerably, stimulated by improved matching of instruments in the hedge accounting area and a significant positive result on unrealised foreign exchange differences. In addition, compared with the last year, loan loss provisions dropped by PLN 3.2 million owing to a favourable change in impairment parameters.

In 2016, mBH was very active on the debt market again, which was reflected in six issues of mortgage covered bonds worth a total of PLN 869.6 million. Both domestic (PLN 400 million) as well as foreign (EUR 98 million) institutional investors subscribed for the mortgage covered bonds. Four of the six issued series of mortgage covered bonds have fixed interest rate which makes the issue the first transaction with fixed interest rate in the history of the contemporary mortgage banking in Poland. For more information about mBH’s issue of covered bonds see chapter 5. mBank Group’s capital and funding.

In 2016, mLocum sold 254 apartments under final agreements, which is less by 24 apartments than in 2015 when it sold 278 apartments. The company's revenues amounted to PLN 103.8 million, which represents an increase by PLN 2.5 million, compared with 2015.

In 2016, mLocum posted a profit before tax of PLN 18.3 million, which is higher by 1.3% compared with PLN 18.0 million reported a year before.

In 2016, the company was growing dynamically breaking new business records. Turnover (the value of purchased invoices) was historically high at PLN 11.6 billion in 2016, an increase of 11.5% year on year. Thanks to this the company ranked eighth on the factoring market in Poland with a 7.3% market share (according to the Polish Factors Association).

The profit before tax of mFaktoring amounted to PLN 15.1 million in 2016, whereas in the previous year the company posted a loss of PLN 22.2 million, mainly due to a revaluation write-offs for a transaction under restructuring.

In 2016, mCO successfully conducted many projects aiming at optimising the processes. One of them included work on digitalisation of handling post-sale documentation by replacing documents on paper with an electronic image. Additionally, the company continued its cooperation in terms of services provided for current clients, i.e. mBank, Orange Finanse and mBank Hipoteczny.

Sales revenues in 2016 stood at PLN 34.6 million, compared with PLN 35.7 million in 2015. Reduced revenues in the current year resulted mainly from lower revenues from mBank service connected with the decrease in the serviced volumes.

In 2016, mCO posted a loss of PLN 59.6 thousand, compared with PLN 49.8 thousand of profit before tax in 2015. Negative financial result in 2016 was mainly driven by impairment losses of the value of real estate owned by the company.

 

mBank Group capital base

 

Structure of own funds including CET 1 and Tier 2 capital

The amount of capital maintained by mBank Group and by mBank meets the regulatory requirements and allows for the planned business expansion at a defined risk appetite level. This is reflected in the Common Equity Tier 1 capital ratio (20.6% at the stand-alone level and 17.3% at the consolidated level at the end of 2016) and the total capital ratio (24.1% at the stand-alone level and 20.3% at the consolidated level at the end of 2016), which are above the levels recommended in 2016 by the Polish Financial Supervision Authority. According to the PFSA requirements, at the end of 2016, the Tier 1 ratio should not be below 13.61% for mBank and 13.19% for mBank Group. The required stand-alone total capital ratio stood at 17.56% for mBank and 17.00% for mBank Group.

The required level of capital ratios include capital buffers introduced in 2016 under the Act on Macroprudential Supervision over the Financial System and Crisis Management in the Financial System: the capital conservation buffer at 1.25 p.p. and the other systemically important institution buffer at 0.50 p.p., as well as an additional capital requirement securing the risk related to the foreign currency mortgage loans for households at 3.25 p.p. for the total capital ratio at the consolidated level, and at 3.81 p.p. at the stand-alone level. The additional capital requirement should consist in 75% of Tier 1 capital.

The capital ratios of the Group in 2016 were driven by the following factors:

• inclusion in Common Equity Tier 1 capital the remaining part of the net profit of mBank Group for the year 2015, not included in Common Equity Tier 1 capital on the basis of the PFSA decision obtained in 2015;
• inclusion in Common Equity Tier 1 capital the verified net profit of the mBank Group for the first, second and third quarters of the year 2016, net of expected charges and dividends, on the basis of the PFSA decisions from June 21, 2016, September 7, 2016 and December 14, 2016 respectively;
• classification of capital instruments issued within incentive programs in the period from January 1, 2016, till July 31, 2016, as instruments in Common Equity Tier 1 capital;
• change of calculation methodology for the additional value adjustments deducted from Common Equity Tier 1 capital;
• change of the limit for unrealized gains measured at the fair value included in the own funds calculation from 40% in 2015 to 60% in 2016;
• change of the limit for grandfathered subordinated instruments included in the own funds;
• adjustment of the application of the regulatory floor to the requirements of article 500 of the CRR Regulation, also complying with the provisions of the ITS Regulation. The adjustment was implemented to ensure a full comparability, transparency and compliance of the Bank's capital position presented in the financial statement and regulatory reporting with the approach used by the EU parent institution (Commerzbank AG) and observed in other EU member states. The method used by the Bank in the past followed the local authorities' approach to the issue at hand. The KNF within correspondence conducted by the Bank on the subject of the abovementioned adjustment, stated that it is not coherent with the local regulatory approach to own funds assessment which has been used so far and is still expected to be used;
• extensions of the AIRB approach and the changes of the AIRB models:
  • the implementation of the material change to the internal corporate LGD model (having satisfied the suspensive conditions) for which the Bank obtained the joint consent of the European Central Bank and of the PFSA on September 15, 2016;
  • the receipt on July 26, 2016 of an official confirmation from the European Central Bank and the PFSA regarding the Bank's fulfilment of the high significance conditions stipulated in the conditional consent to apply the internal rating based approach to the calculation of the capital charge for credit risk for the credit exposures of the subsidiary mLeasing;
• expansion of the mBank Group business activity;
• depreciation of the Polish currency against the foreign currencies.

mBank Group has a strong capital base, as reflected in its capital structure. Own funds stood at PLN 13.2 billion at the end of 2016, of which PLN 11.3 billion (85%) constituted CET 1 capital. The main components of CET 1 capital include: share premium, other reserve capital and undistributed profit from previous years. Tier 1 capital is strengthened mainly through retained earnings.

Tier 2 capital stood at PLN 1.9 billion at the end of 2016, which represents a decrease by PLN 115 million year on year. The decrease in Tier 2 capital was driven by a regulatory change of the limit for subordinated loans with indeterminate maturity dates, included in Tier 2 capital in accordance with the principles of acquired rights (a decrease from 70% in 2015 to 60% in 2016).

The table below presents the balances of mBank Group’s subordinated debt as at December 31, 2016.

Subordinated debt with a fixed maturity included in own funds is subject to amortisation on a daily basis over five years prior to final maturity. In addition, subordinated debt without a fixed maturity in the table above is being gradually withdrawn and is included in own funds using the principles of acquired rights and the limits set by the Polish Financial Supervision Authority in respect of the principles of acquired rights in the transitional period from January 1, 2014, to December 31, 2021. The current structure of the Bank’s capital base derives from prior decisions regarding retained earnings and additional capital increases. Between 2002 and 2011 mBank retained all of its earnings by decision of the General Shareholders’ Meeting, while the 2012 dividend constituted 35% of mBank’s net profit followed by a 67% dividend payment in 2013. The profit for 2014 and 2015 was included in whole in the Bank’s own funds. More information on capital adequacy can be found in Note 49 to the Financial Statements of mBank S.A. Group under the International Financial Reporting Standards for 2016.

Capital and liquidity norms under Basel III and EU regulations

The recommendations of the Basel Committee put forward in the new capital accord Basel III form the basis for strengthening the capital base, tightening liquidity requirements, and maintaining the acceptable level of leverage in financial institutions. The primary objective of Basel III is to ensure such levels of own funds as are necessary to effectively manage an institution, even in financial distress, without the need for a bailout with taxpayers’ money.

The recommendations of Basel III have been introduced into the European Union legislation in the CRD IV / CRR package, which took effect on January 1, 2014, subject to respective transitional periods. Moreover, the European Banking Authority (EBA) gradually issues technical standards for CRD IV and CRR, i.e. detailed descriptions of procedures, instruments, indicators, rules, and their calibration, making it possible for financial institutions to fully implement the requirements imposed on their capital, liquidity, as well as corporate governance and management standards. CRR has a direct effect in the EU member states without the need to implement legislative amendments in their jurisdictions. CRD IV was transposed into the Polish law in 2015 by the Act on Macro-prudential Supervision of the Financial System and Crisis Management in the Financial System, whereby the regulations applicable so far were amended accordingly. The experience regarding Basel III implementation gathered over the last few years and ongoing market and economic changes have forced regulators to review the existing approach. The proposed amendments refer to, among others, capital requirements calculation, reporting, the minimum leverage ratio, and the net stable funding ratio. The CRD / CRR package is also likely to be extended by the provisions on recovery and resolution (including BRRD) by taking account of the requirements for bail-inable liabilities (TLAC, MREL).

One of the most important practical elements of how the requirements under CRD IV / CRR, transposed into the Polish law by the Act on Macro-prudential Supervision, impact on banks in Poland is the imposition of capital buffers on Polish lenders. These include:

• capital conservation buffer - designed to ensure that banks build up capital buffers outside periods of stress to cover potential losses in the period of financial distress. The target for this buffer has been set at the level of 1.25% of total risk exposure amount (TREA) since January 1, 2016, and will rise to 1.875% from 2018 to finally reach the CRD IV level of 2.5% from 2019;
• buffer for Globally Systemically Important Institutions (G-SII) or Other Systemically Important Institutions (O-SII) – maintained by institutions characterized by a major scale of activities and significant contribution to systemic risk. The maximum level of O-SII buffer is 2.0%, while the upper limit for G-SII is set at the level of 3.5%. In October 2016, the PFSA considered mBank an O-SII and imposed a buffer of 0.5%;
• systemic risk buffer - set in order to prevent and limit long-term non-cyclical systemic risk. The Ministry of Finance can set a maximum buffer of 5% of TREA. A proposal to impose the buffer was for the first time put forward by the Financial Stability Committee (KSF) in January 2017. As of the date of this report, the final level and effective date of the buffer are unknown;
• countercyclical buffer - maintained to counteract the adverse effects of the economic cycle on banks’ lending activity. It aims at making the supply of credit less volatile. The maximum level of this buffer is 2.5%. The currently applicable buffer set by the KSF is 0%.

Dividend

In 2012, after ten years, mBank resumed the payment of the dividend to its shareholders. The ability to pay out dividends is provided for in the Mobile Bank Strategy of mBank Group for 2016-2020. However, in its decision recommending the dividend payment to the Supervisory Board, the Management Board of mBank mainly considers current recommendations of the Polish Financial Supervision Authority concerning dividend payments by banks. In 2016, the PFSA issued the recommendation that a dividend could be paid only by banks meeting the criteria below:

• the bank is not subject to a restructuring programme;
• the bank performed well in the Supervisory Review and Evaluation Process – final BION score not worse than 2.5 (master scale – score 1 or 2);
• with financial leverage (LR) level higher than 5%;
• when Tier 1 ratio is higher than the minimum value set for this ratio increased by security capital, i.e.:
  • for OSII banks – banks with Tier 1 ratio exceeding 13.25% + 0.75%*add-on + OSII buffer;
  • for other commercial banks – banks with Tier 1 ratio exceeding 11.25% + 0.75%*add-on;
• banks with a Total Capital Ratio exceeding 13.25% + add-on + OSII buffer.

It is recommended that banks which meet all the above criteria can pay out up to 50% of the generated profit.

It is also recommended that up to 100% of the generated profit can be paid out by banks which meet the supervisory expectations as regards the minimum level of the Total Capital Ratio (TCR), taking into account the security capital, i.e.:

• OSII banks – with the Total Capital Ratio (TCR) exceeding 16.25% + add-on + OSII buffer;
• other commercial banks – with the Total Capital Ratio (TCR) exceeding 14.25% + add-on.

Moreover, banks with significant exposures to FX housing loans for households (i.e. banks in which the share of FX housing loans for households in the portfolio of receivables from the non-financial sector exceeds 5%) adjust the dividend rate based on two additional criteria:

Criterion 1 (C1) – based on the share of FX housing loans for households in the whole portfolio of receivables from the non-financial sector.
Criterion 2 (C2) – based on the share of FX housing loans granted in 2007 and 2008 (loans determining the amount of banks’ losses in the case of implementation of any statutory solutions) in the portfolio of FX housing loans for households.
Relevant adjustments are made depending on the value of a bank’s portfolio:

• Criterion 1
  
  • banks with the share exceeding 10% – dividend rate adjustment by 20%;
  • banks with the share exceeding 20% – dividend rate adjustment by 30%;
  • banks with the share exceeding 30% – dividend rate adjustment by 50%;
• Criterion 2
  • banks with the share exceeding 20% – dividend rate adjustment by 30%;
  • banks with the share exceeding 50% – dividend rate adjustment by 50%.

Whenever a bank with undistributed profit from previous years intends to pay out dividend, it is obliged to report this plan to the Polish Financial Supervision Authority which will assess it on an individual basis. Only banks which meet the criteria for paying out dividends may apply for such consent.

The table below presents information on mBank’s dividend payments since 2012.

MREL and TLAC and their potential impact on mBank

Apart from the capital base requirements, financial institutions will soon be required to comply with regulations concerning loss-absorbing liabilities: MREL (the minimum requirement for own funds and eligible liabilities) and TLAC (the Total Loss Absorbing Capacity). Both of these ratios address the need to ensure adequate level of funding, which can be converted into capital in case of financial distress, and consequently enable resolution without use of taxpayers’ money.

The minimum requirement for own funds and eligible liabilities (MREL) is stipulated in BRRD. MREL constitutes a regulatory tool aiming at structuring an institution’s liabilities in a way allowing effective bail- in of a sufficient amount of liabilities, avoiding contagion or a bank run. It will be set for each institution on a case-by-case basis by a resolution authority (in Poland BFG), taking into account both common criteria stipulated in regulations and the resolution authority’s assessment. MREL-eligible liabilities will be limited to issued and fully paid-up instruments, which are not secured or guaranteed by the institution itself, with maturity of at least one year. Covered deposits are excluded from the ratio calculation. MREL applies to all banks in the EU and, according to current regulations, refers to the total balance sheet volume. MREL has been implemented into the Polish law by the Act on the Bank Guarantee Fund, Deposit Guarantee Scheme and Resolution (“BFG Act”). The date of MREL imposition and a potential transitional period will depend on the Bank Guarantee Fund’s decisions made in the course of devising resolution plans for individual institutions.

 

mBank Group funding

 

The “One Bank” Strategy for 2012-2016 provided for optimisation of the Bank’s balance sheet in terms of its profitability and structure by increasing the share of client deposits in funding, further diversification of the funding base, and a bigger share of high-yield assets. The “Mobile Bank” Strategy provides for the strengthening of the funding profile due to the increasing volume of covered bonds and transaction deposits and maintaining the loan-to-deposit ratio on the level of slightly above 100% every year.

The graph below presents the structure of mBank Group’s sources of funding at the end of 2016.

Bond issued under the EMTN Programme

After the successful first eurobond issue in October 2012 and issue of CHF bonds in October 2013, mBank Group completed further issues under the EUR 3 billion EMTN Programme in 2014. In 2015, there were no issues under the EMTN Programme, whereas on October 12, 2015, bonds worth EUR 500 million were repaid. On September 21, 2016, mBank, through its foreign subsidiary mFinance France, completed the sixth issue of bonds with a nominal value of EUR 500 million, maturing in 2020.

The following table presents a summary of outstanding tranches:

mBank continues its efforts aimed to diversify the sources of funding and to ensure stable refinancing on attractive terms.

Activity on the covered bond market

mBank Hipoteczny (mBH) is one of three mortgage banks operating on the Polish market (the other two are Pekao Bank Hipoteczny and PKO Bank Hipoteczny) and the largest issuer of covered bonds with a 50.2% market share at the end of 2016.

Covered bond issues conducted by mBank Hipoteczny constitute an important part of mBank Group’s funding strategy. The scale of mBH’s issuing activity in 2016 and the parameters of individual issues mark a significant change in the policy of the Bank, whose main function is to raise funding and refinance long- term mortgage loans through covered bond issues. The main focus is on narrowing the maturity gap between assets and liabilities, reducing the currency gap, and cutting the cost of new funding.

mBank Hipoteczny placed eight issues of mortgage covered bonds in the total nominal amount of approximately PLN 1.6 billion as of December 31, 2016, including two private placements in the amount of approximately PLN 710 million.

The four issues denominated in the Polish currency were worth PLN 850 million. What is important in this context is that two out of the four issues in PLN were the first fixed interest transactions in the modern history of Polish mortgage banking. The four issues conducted in EUR were worth EUR 168 million, out of which two series (HPE14 and HPE15) had maturities of 10 years.

The total value of the mortgage covered bonds of the Bank that can be publicly traded stood at approximately PLN 4.6 billion at the end of 2016, which (according to the Bank’s estimates) accounts for 50.2% of the Polish mortgage covered bond market.

At the end of 2016, the Bank had no liabilities on account of public covered bonds. It does not plan to conduct any issues of such instruments either. Covered bonds issued by mBank Hipoteczny are characterised by low investment risk, which is a result of the statutory obligation to apply complex security mechanisms while issuing and trading in such instruments. This has been proven by the ratings of the Bank’s mortgage covered bonds assigned by Fitch Ratings Ltd. On July 1, 2016, the rating of mortgage covered bonds was upgraded from BBB+ to A.

A summary of mBH activity in 2016 is presented in the following table.

Legislative changes concerning covered bonds and mortgage banks

The amended Act on Covered Bonds and Mortgage Banks and Certain Other Acts entered into force on January 1, 2016. The new law aims at improving the security of investments in covered bonds and the protection offered to covered bond holders, as well as increasing the market demand and supply.

The amendment outlines the bankruptcy process of mortgage banks and sets out detailed rules of satisfying claims under covered bonds and using assets entered into the collateral register. In accordance with the amended act, each covered bond creditor will have the same rights to a separate pool of bankruptcy assets. Moreover, the legislator envisaged also a soft bullet mechanism (the maturity of all outstanding covered bonds is extended by twelve months, provided that coupon payments are continued on a regular basis) and a conditional pass through mechanism (partial repayments of covered bonds are made in relation to inflows from the cover assets) triggered by a shortage of collateral in the register. The clarification of the rules of satisfying creditors’ claims under covered bonds issued by a bankrupt bank will largely increase the safety of investors and the certainty of trading.

Under the new law mortgage banks are subject to the requirement to hold statutory over-collateralisation of covered bonds equal to at least 10% of the value of issue and to hold a liquidity buffer necessary to cover interest on covered bonds for a period of 6 months. In accordance with the amended regulations, the value of issued covered bonds will be increased to 80% of the mortgage lending value of property for retail mortgage loans, up from the previous cap of 60% (which remains in force for commercial mortgage loans), which will allow banks to increase the value of their mortgage bond issues.

In addition, covered bonds became more attractive to investors, in particular foreign investors, thanks to the amended tax regulations under which interest on covered bonds is exempted from taxation at source. In turn, the amendments to the Act on Organisation and Operation of Pension Funds and the Act on Co- operative Savings and Loan Associations will expand the opportunities for open-end pension funds and co- operative savings and loan associations to invest in covered bonds.

The amendments improved ratings of covered bonds, which resulted in upgrading the rating of covered bonds assigned by Fitch Ratings, which on July 1, 2016 upgraded the rating of mortgage covered bonds issued by mBank Hipoteczny from BBB+ to A, thus reducing the cost of refinancing mortgage banks’ operations.

Regulation (EU) No 596/2014 of the European Parliament and of the Council on market abuse (market abuse regulation), imposing on issuers, including mortgage banks, additional requirements relating to disclosure of inside information, took effect on July 3, 2016.

Amendments to the Act on the Bank Guarantee Fund came into force on October 8. The amended Act introduces the Bank Recovery and Resolution Directive (BRRD) and the Deposit Guarantee Schemes Directive (DGSD) to the Polish legal framework. Under the amended Act, mortgage banks are not allowed to receive deposits and other guaranteed funds. In accordance with the Act, covered bonds and maintenance of eligible liabilities are excluded from the scope of the bail-in tool. BFG is working on the final assumptions of the resolution procedures relating to mortgage banks.