mBank Group capital base

This is reflected in the Common Equity Tier 1 capital ratio (21.5% at the stand-alone level and 18.3% at the consolidated level at the end of 2017) and the Total Capital Ratio (24.6% at the stand-alone level and 21.0% at the consolidated level at the end of 2017), which are above the levels recommended in 2017 by the Polish Financial Supervision Authority (PFSA). According to the PFSA requirements, Tier 1 ratio should not be below 14.09% for mBank and 13.67% for mBank Group, as at the end of 2017. The required standalone Total Capital Ratio stood at 18.12% for mBank and 17.55% for mBank Group.

The required levels of capital ratios include the 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 of 1.88% and the other systemically important institution buffer of 0.75%, as well as an additional capital requirement to hedge against the risk related to the foreign currency mortgage loans for households of 3.53% for the Total Capital Ratio at the consolidated level, and of 4.10% at the stand-alone level. At least 75% of the additional capital requirement should be Tier 1 capital.

mBank Group has a strong capital base, as reflected in its capital structure. At the consolidated level, own funds stood at PLN 14.3 billion at the end of 2017, out of which PLN 12.5 billion (87%) was Tier 1 capital. The main components of Tier 1 include: share capital, share premium, other reserve capital, undistributed profit from previous years, funds for general banking risk, recognized current profits and accumulated other comprehensive income. Tier 1 is strengthened mainly through retained earnings.

Tier 2 capital stood at PLN 1.8 billion at the end of 2017, which represents a decrease of PLN 115.2 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 (perpetual) grandfathered as Tier 2 (a decrease from 60% in 2016 to 50% in 2017).

The table below presents the balances of mBank Group’s subordinated debt as at December 31, 2017.

Subordinated debt with a fixed maturity included in own funds is amortised on a daily basis for five years prior to final maturity. In addition, subordinated debt with indeterminate maturity in the table above is being gradually withdrawn and is included in own funds in line with grandfathering eligibility and limits as laid down in CRR in respect of the grandfathering in the transitional period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 Annual General Meeting, while the 2012 dividend made up 35% of mBank’s net profit followed by a 67% dividend payment in 2013. The profit for 2014, 2015 and 2016 was included in whole in the bank’s own funds. More information in the chapter related to Capital adequacy .

In July 2017, BFG published a methodology for calculating MREL at its website, at the same time setting a transitional period for banks to make necessary adjustments in order to meet the requirement imposed by the resolution authority by January 1, 2023. Banks received their individual MREL levels as part of development of their resolution plans. The individual levels depend on, among other things, the resolution strategy adopted for a given bank: write down or conversion of liabilities, takeover or liquidation under normal insolvency proceedings. MREL determines the relation between the amount for loss coverage combined with the amount for recapitalisation and the total amount of own funds and liabilities. 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 calculation. In addition, BFG formulated its expectations as regards MREL eligible liabilities, which shall be purchased by professional investors at a nominal value per unit not lower than EUR 100,000. Until a new category of unsecured debt in the hierarchy of claims is established, own funds and subordinated liabilities may be used to achieve the required MREL. The BFG methodology may be subject to further changes due to the implementation of the planned amendments to BRRD and the CRR/CRD IV package. The schedule for banks’ adjustments to meet MREL will be determined in individual consultations with the resolution authority concerning the consolidation level and structure of MREL-eligible instruments in terms of their supply and demand, which is largely dependent on the domestic legal regulations on the issue of debt instruments.

Such a policy is a part of 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 2017, 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%;
• with Tier 1 ratio is not lower than the minimum value set for this ratio increased by 1.5%: 6% + 75%*add-on + the combined buffer requirement + 1.5%;
• with Total Capital Ratio not lower than the minimum set for this value increased by 1.5%: 8% + addon + the combined buffer requirement + 1.5%;

It is recommended that banks which meet all the above criteria can pay out up to 50% of the generated profit in 2017.

Moreover, it is recommended to pay out dividend up to:

• 75% of the profit generated in 2017 by banks meeting all of the above criteria, as well as the requirement for a buffer at the target level, i.e. 2.5% of the total risk exposure,
• 100% of the profit generated in 2017 by banks meeting all of the above criteria (including Conservation Capital Buffer at the require d level), taking into account, within capital criteria, the bank’s sensitivity to an unfavorable macroeconomic scenario (ST – an individual add-on measuring bank’s sensitivity for unfavorable macroeconomic scenario defined as: the difference between TCR in the reference scenario and TCR in the shock scenario including supervisory adjustments (in stress tests conducted by the PFSA).

For banks with exposure to FX housing loans for households the dividend rate should be adjusted based on following criteria:

Criterion 1 – based on the share of FX housing loans for households in the whole portfolio of receivables from the non-financial sector:

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

Criterion 2 – based on the share of FX housing loans granted in 2007 and 2008 in the portfolio of FX
housing loans for households:

• banks with the share exceeding 20% – dividend rate adjustment by 30 p.p.;
• banks with the share exceeding 50% – dividend rate adjustment by 50 p.p.

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.