Annual Report
2017

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Regulatory environment

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The Polish banking system is subject to special legal regulations. Its legal framework is contained in the Banking Law Act dated on August 29, 1997

This Act sets out, inter alia the principles of establishing and conducting banking activities, as well as the principles of executing banking supervision, resolution proceedings, liquidation and bankruptcy of banks.

The activities of banks in Poland are regulated by among others the Act on the National Bank of Poland, on covered bonds and mortgage banks, on the Bank Guarantee Fund, on the deposit guarantee system and on forced restructuring.

Since 2008 the banking supervision in Poland is executed by the Polish Financial Supervision Authority.

mBank is also subject to European regulations, among others on the PSD and MiFID directives – adopted by the European Parliament and the European Council – and the EMIR Regulation.

Amendments to legal acts affecting banks in Poland and changes in recommendations of the Polish Financial Supervision Authority (PFSA)

Amendments to legal acts affecting banks in Poland and changes in recommendations of the Polish Financial Supervision Authority (PFSA) are presented in the table below:

Legal act/
Recommendation		 Date of entry into force
and summary of new challenges		 Influence on the main
areas of the bank
YES – the regulation impacts on a given area
NO – the regulation does not impact on a given area, or impacts on a given area to a
very limited extent
2017

Act on the Bank Guarantee Fund, Deposit Guarantee
Scheme and Forced
Restructuring, and
accompanying regulations

October 9, 2016 In 2017 banks for the first time paid contributions to the BFG in line with the rules introduced by the Act and accompanying regulations. The main amendments referred to the modification of the basis for determining contributions to the bank guarantee fund and the resolution fund, and inclusion of the risk profile of particular institutions in the calculation of individual contributions, as well as procedures applied to make a part of contribution in the form of payment commitments.
In line with the provisions of the Act, in 2017 banks worked on the preparation of recovery plans approved by the PFSA, and provided the BFG with certain information on the basis of which the BFG drew up resolution plans for them, taking account of minimum requirements for own funds and eligible liabilities (MREL), stipulated in line with the methodology published by the BFG.
Under the Act and accompanying regulations, banks are working on the implementation of the requirements concerning the provision of specific data and information to the BFG, used in the process of forced restructuring, thus significantly expanding the reporting requirements applicable hitherto		 • Capital base
• IT & HR
Financial
result
(excluding
IT/HR costs)
• Clients and
offer
 YES
YES
YES
YES
Regulation of the
Minister of Development and Finance of 6
March 2017 on the Risk
Management System, Internal Control System,
Remuneration Policy as well as Detailed Method
for Banks’ Internal Capital Assessment		 May 2017 The Regulation governs the risk management
system, remuneration policy, the internal control system and internal capital adequacy
assessment. The Regulation defines the rules for
determination of fixed and variable components
of remuneration of risk takers. Other important
provisions of the Regulation refer to the obligation imposed on banks to implement comprehensive violation reporting systems.		 • Capital base
• IT & HR
• Financial
result
(excluding
IT/HR costs)
• Clients and
offer

NO

NO

NO

NO
Act on Trading in Financial
Instruments and
Certain Other Acts		 May 2017 As a result of the implementation of the Market
Abuse Directive (MAD) and in connection with the Market Abuse Regulation (MAR), the Amendments to the Act on Trading in Financial
Instruments and Certain Other Acts entered into
force in May 2017. They refer to the procedures
of detecting and preventing the use of confidential information and anonymous reporting of violations of the law, procedures and ethical standards in investment firms, as well as sanctions imposed by the PFSA. Another purpose of the Amendments was to adjust the regulations applicable hitherto to MAR. Another amendment, which came into force in April 2017, replaces the notions of the stock exchange market and the OTC with the single term “regulated market” and stipulates the rules of obtaining the permit for carrying out the activity on the regulated market and participating in the market.		 • Capital base
• IT & HR
• Financial
result
(excluding
IT/HR costs)
• Clients and
offer

NO

YES

NO

NO
Act on Mortgage
Credit and
Supervision of
Mortgage Credit
Intermediaries
and Agents		 July 2017 The Act regulates in detail the issues concerning the conclusion of mortgage loan agreements, i.e.
granting such a loan only in the currency in which the client receives most of his/her income,
limiting the entities authorised to grant mortgage loans only to those supervised by the PSFA (ban on loan companies) and the obligation to provide the borrower with detailed information prior to conclusion of the agreement, as well as the possibility of earlier loan settlement by the client during the agreement term and solutions for debt
restructuring in justified cases.		 • Capital base
• IT & HR
• Financial
result
(excluding
IT/HR costs)
• Clients and
offer

NO

NO

NO

YES
Regulation of the
Minister of
Development and
Finance of 25 May
2017 on the
Higher Risk
Weight for
Exposures
Secured by
Mortgage on Real
Property		 December 2, 2017 The regulation assigns the risk weight of 150% to
exposures secured by mortgage on residential
real property for which the amount of the principal and/or interest instalment depends on
fluctuations of the exchange rate of a currency or
currencies other than the currencies of the debtor’s income, and the risk weight of 100% to
exposures secured with mortgage on office
premises or other types of commercial real property located on the territory of the Republic
of Poland. On September 19, 2017, the PFSA
announced that it is necessary to apply the
indicated risk weights to the entire exposure, and not only to the fully secured part.		 • Capital base
• IT & HR
• Financial
result
(excluding
IT/HR costs)
• Clients and
offer

YES

NO

NO

NO
2018
IFRS 9 January 2018 Starting from 2018, the banks applying IFRS will be obliged to apply new rules for classifying,
recognizing and evaluating financial instruments, among others, loans granted to clients. Apart from methodological and system changes, adjusting banks to the IFRS 9 requirements has a tangible impact on the capital and financial results due to the manner in which particular items of balance sheet are priced. In line with Regulation (EU) 2017/2395 of the European Parliament and of the Council of 12 December 2017 amending Regulation (EU) No 575/2013 as regards transitional arrangements for mitigating the impact of the introduction of IFRS 9 on own funds and for the large exposures treatment of certain public sector exposures denominated in the domestic currency of any Member State, banks, upon agreeing it with the regulator, will have five years (starting from 2018) to include expected credit loss provisions arising from IFRS 9 in equity.		 • Capital base
• IT & HR
• Financial
result
(excluding
IT/HR costs)
• Clients and
offer

YES

YES

YES

NO
Regulation of the
Minister of
Development and
Finance of 1
September 2017
on the System
Risk Buffer		 01.01.2018 The Regulation introduces the system risk buffer
at the level of 3% of the total exposure amount
with respect to exposures located on the territory of the Republic of Poland. The requirement applies both at a stand-alone and consolidated level.		 • Capital base
• IT & HR
• Financial
result
(excluding
IT/HR costs)
•Clients and
offer

YES

NO

NO

NO
Standpoint of the
PFSA on minimal
capital ratios 		January 1, 2018 Following the publication of the Regulation of the Minister of Development and Finance on the
system risk buffer, the Polish Financial Supervision Authority defined minimal capital
ratios for banks in 2018. They include: capital
requirement arising from CRR (6% for Tier I and 8% for TCR), additional capital requirement
arising from the mortgage loans portfolio and
combined buffer requirement, being the total of
the capital conservation buffer (1.875% in 2018
and 2.5 % from 2019), a countercyclical capital
buffer (0% in 2018), an O-SII buffer (individual
for particular banks, its values were revised and
published by the PFSA after the meeting on
December 19, 2017) and a systemic risk buffer
(3%), which replaced the capital requirements
recommended so far by the PFSA, which were
higher than those arising from CRR.		 • Capital base
• IT & HR
• Financial
result
(excluding
IT/HR costs)
• Clients and
offer

YES

NO

NO

NO
Dividend Policy 2018 The PFSA’s standpoint of November 24, 2017, on the dividend policy of commercial banks in 2018 addresses in particular the criteria for the
payment of dividend by banks with a significant
exposure to FX loans. Apart from the criteria
applied so far: lack of recovery plan activation,
positive result of supervisory review and evaluation process (BION score), adequate level
of financial leverage and fulfilment of relevant
capital requirements, banks will be obliged to
observe an individual “stress-test add-on” and
adjust the dividend rate for the indicators arising from the scale of exposure to FX housing loans.		 • Capital base
• IT & HR
• Financial
result
(excluding
IT/HR costs)
• Clients and
offer

YES

NO

NO

NO
Recommendation
H		 January 2018 Recommendation H published by the PFSA in April 2017 addresses the issue of good practices
concerning the internal control system. Pursuant to the recommendation, the internal control system, separated from the risk management system, has to be based on three lines of defence. In addition, the recommendation introduces the concept of control function and puts greater emphasis on the role of internal audit and the compliance unit in banks’ operations.		 • Capital base
• IT & HR
• Financial
result
(excluding
IT/HR costs)
• Clients and
offer

NO

NO

NO

NO
Regulation (EU)
2016/679 of the
European
Parliament and of
the Council of 27
April 2016 on the
protection of
natural persons
with regard to the
processing of
personal data and
on the free
movement of such
data, and
repealing
Directive
95/46/EC (GDPR)		 May 2018 The Regulation applies to all organisations
processing personal data and pursuing operations on the territory of the European Union. The Regulation standardizes the rules of personal data protection between countries, introduces severe penalties and sanctions for the violation of the rules and establishes responsibility for the security of personal data processing. The obligation to inform clients in an intelligible and clearly legible manner about their rights and to acquire their consent to personal data processing impacts the possibility of using these data in the business practice. One of the examples for the implementation of the regulation is the appointment of the Data Protection Inspector responsible, among others, for processing of sensitive data; the Inspector reports directly to the top management in the organisation.		 • Capital base
• IT & HR
• ▪ Financial
result
(excluding
IT/HR costs)
• Clients and
offer

NO

YES

NO

YES
Regulatory reform
of interest rate
indices 		2018 In line with Regulation (EU) 2016/1011, since
January 1, 2018, new rules of fixing, documentation and control of reference rates
have been applied on the market. The adjustment to the reform in the long term has resulted, among others, in the takeover by GPW
Benchmark of the reference rate fixing obligation in Poland from ACI (the Financial Markets Association). From February 1, 2018, GPW Benchmark, banks being fixing participants and reference rate users will be obliged to follow the principles of the New Reference Rate Documentation.		 • Capital base
• IT & HR
• Wynik finansowy (bez kosztów IT/HR)
• Klienci i oferta

NO

YES

NO

YES
MIFID II January 2018 At the beginning of 2018, the regulations of the
ESMA on the transparency requirements applied to trading venues and investment firms came into force. Their aim is to offer clients products that are better adjusted to their risk profile and provide them with a wide range of information about concluded transactions.		 • Capital base
• IT & HR
• Financial
result
(excluding
IT/HR costs)
• Clients and
offer

NO

YES

NO

YES

 

In 2017, work was ongoing to amend CRD IV/CRR and BRRD, and the amendments were consulted within the Basel IV Package. In December 2017, the Basel Committee on banking Supervision published final regulations on the reform of calculating risk-weighted assets and so-called capital floors. Additionally, at the level of the European Union institutions, work is underway to adjust the EU law to the Basel regulations and supplement the provisions in force, among others, in the scope of introducing a new category of unsecured debt in the hierarchy of claims, considered one of the instruments that qualify to MREL and TLAC.

Impact of the appreciation of the Swiss franc on the position of borrowers, the banking sector, and mBank

Proposal of the Polish Bank Association

Several days after the Swiss franc’s abrupt surge in mid-January 2015 the Polish Banks Association (ZBP) proposed solutions to help CHF borrowers repay inflated credit instalments.

The package of solutions, the so-called “Six-pack”, was implemented by banks and includes:

  • taking into account the negative CHF LIBOR,
  • narrowing the currency spread,
  • extending the repayment period at the client’s request,
  • resignation of new collateral or loan insurance from the borrowers who repay their instalments on
    time,
  • option to convert the loan using the fixing rate of the National Bank of Poland (NBP), and
  • introducing more flexible rules for restructuring mortgage loans applicable to clients.

In May 2015, ZBP followed up with new measures. Banks declared financial and organisational involvement in the introduction of additional support for clients who took out housing loans, especially loans in foreign currencies. These measures include:

  • extending the applicability period of the first ZBP package by the end of 2015 with an option to extend the applicability of certain solutions even further,
  • setting up internal stabilization funds dedicated solely to CHF borrowers,
  • allocating PLN 125 million from banks’ own resources to the Mortgage Loans Restructuring Support Fund, whose creation by way of an act is requested by the banks declaring financial support,
  • making it possible for the borrowers who took out mortgage loans in foreign currencies to meet their own housing needs to transfer mortgage collateral in order to facilitate the sale or exchange of flats.

The subsidies from internal stabilization funds would be granted if the exchange rate of the Swiss franc exceeded a pre-defined threshold. This solution would be available to the borrowers who are ready to undertake to convert their loans at a specified exchange rate and meet specific income criteria. The support would be addressed to the borrowers whose income at the time of requesting for an amending annex is below the average monthly income in the national economy and whose flat or house is not bigger than 75 or 100 square metres respectively. Another condition is regular repayment. According to the declaration signed by banks, the subsidies would be granted when the CHF exchange rate exceeded PLN 5, yet the amount of the subsidy cannot be higher than PLN 0.33 per 1 CHF. According to ZBP estimations, in 10 years the amount of subsidies paid by banks from the stabilization funds would reach approximately PLN 3.5 billion. Certain aspects of ZBP proposal were later incorporated into the Presidential Bill on the Borrowers Support Fund.

The Mortgage Loan Restructuring Support Fund has been in operation since February 19, 2016. It aims at helping mortgage borrowers, regardless of the loan currency, who found themselves in financial straits due to an adverse event such as unemployment or illness. The support would account for up to 100% of the principal and interest instalment over 12 months, but would not be higher than PLN 1,500 monthly. Except for special cases, the support would be reimbursable. The fund is financed by banks (initial value of PLN 600 million) proportionally to the volumes of their portfolios of mortgage loans to households, for which the delay in repayment exceeds 90 days. mBank’s contribution to the Fund in 2015 amounted to PLN 52.1 million.

On August 2, 2016, the Chancellery of the President published the presidential bill on refunding certain amounts due under loan and credit agreements. The act covers agreements concluded from July 1, 2000 to August 26, 2011, when the so-called Anti-Spread Act came into force, and provides for reimbursement of the currency spreads charged in this period, i.e. the difference between the reference rate (NBP buy/sell rate plus 0.5%) and the exchange rate adopted by the bank at the time of disbursement and repayment of the loan, plus 50% of statutory interest. The act applies to loans of up to PLN 350,000 per person and is addressed to individuals and entrepreneurs who did not apply depreciation charges and did not deduct interest from tax. The funds to be reimbursed will be deducted from the outstanding loan principal, and in the case of already repaid loans, the amount will be returned in cash. The act adopted a heterogeneous approach to denominated and indexed loans by  using different reference exchange rates for the two types of loans. The Chancellery of the President estimated the cost for the banking sector at PLN 3.6 4 billion.

Moreover, it was announced that an additional capital requirement for  FX mortgage loans would be imposed on banks to encourage them to voluntarily convert these loans into PLN. The requirement is supposed to be much higher than 150% (currently it is 100%) and it will increase gradually so that loans are converted over time. Should banks refuse to voluntarily convert the loans, legislative and court measures will be taken.

On September 1, 2016, NBP published its remarks about the bill. They referred, among others, to the provision on the level of the limit adopted, the fact that the act would cover repaid loans and entrepreneurs, and the name of the act. NBP also said that the implementation of the new law would cost banks more than the sponsors of the bill estimated –according to the initial estimates of NBP, the costs may be twice as high. NBP expressed its doubts about the fact that the amount of the spread refund would be calculated in a foreign currency instead of PLN as this would create an unjustified benefit for the borrowers, and consequently, inflate the costs to be borne by banks. In the opinion of NBP, there are no reasonable grounds for calculating (50% of) statutory interest on the spread refund. Another issue that NBP was concerned about was the method of setting the “reference” rate (any excess over this rate has to be refunded by banks to their clients) for indexed loans at the level of the NBP sell rate adjusted by 0.5%, whereas for denominated loans the reference rate is the NBP buy rate adjusted by 0.5%. According to NBP, in order to ensure equal treatment of borrowers who took out denominated and indexed loans, the legislator should consider replacing the NBP sell rate (adjusted by 0.5%) with the buy rate (adjusted by 0.5%) in the formula proposed in the bill.

According to PSFA, the costs of the spread refund to be borne by banks would total PLN 9.3 billion, whereas the Polish Banks Association (ZBP) estimated that the cost of implementing the act in the proposed form would stand at PLN 7.7–14 billion depending on the level of spreads applied.

On October 20, 2016, the Sejm (lower chamber of the Polish parliament) discussed the bill for the first time. The Sejm decided to refer the presidential bill to the public finance committee.

On January 13, 2017, the Financial Stability Committee (KSF) composed of the representatives of the National Bank of Poland (NBP), the Polish Financial Supervision Authority (PFSA), the Ministry of Finance and the Bank Guarantee Fund (BFG), issued a resolution on the recommendation regarding the restructuring of the FX housing loans portfolio. The Committee is of the opinion that the portfolio of FX loans does not generate any significant risk to the stability of the financial system in economic terms. The situation of the vast majority of households which took out FX loans is good, and their resilience to further exchange rate shocks is high. This stems from higher initial income buffers, the high increase in nominal wages that took place since loan origination, and low level of interest rates in foreign currencies. According to KSF, any potential invasive legal solutions that would lead to general conversion of FX housing loans, regardless of their form, are inadequate. Hence, the portfolio of FX housing loans generates a systemic risk in the context of potential consequences of the invasive legal solutions advocated in the public debate. PSFA recommended that the Minister of Finance, PSFA and BFG take actions aimed at encouraging the banking system to convert exposures in foreign currencies into the Polish zloty.

Recommendations for the Minister of Finance:

  • Increasing the risk weight for FX loans immediately, from current 100% to 150%.
  • Increasing the minimum LGD (Loss Given Default) for FX mortgage loans.
  • Introducing changes in the Borrowers Support Fund to increase the use of the fund. The resources could be used to support voluntary restructuring.
  • Neutralising the excessive tax burden arising from the restructuring of CHF loans.
  • Introducing a systemic risk buffer at the level of 3% applicable to all exposures (within the existing capital buffers).

Recommendations for PSFA:

  • Updating the supervisory review and evaluation process (Polish: BION) methodology and expanding it with rules, which will make it possible to assign an appropriate capital add on to relevant risk factors.
  • Supplementing the additional capital requirements applied currently in the 2nd pillar, which are related to operational risk, market risk and risk of cross default
  • Issuing a set of good practices for the restructuring of FX loans, stipulating:
    • that it is neces ary to identify all risk and cost types
    • that excessive concentration of FX housing loans and the risk relatedto these loans may lead to the conclusion that there is no guara tee of safe and stable management of the bank
    • that, as far as the stability of the sector is concerned, it is justified to actively restructure the portfolio of FX loans by meansof individual agreements with borrowers
    • that the restructuring processshould be conducted in an organised way so that it does not threat n the appropriate levels of regulatory capital
    • that banks are obliged to draw up plans for the restru turing process
    • effective incentives to restructuring for banks and borrowers, makin it possible to waive any future claims in exchange for more favourable conditions of restructuring
    • desira le practices accompanying the restructuring process
    • and taking into account the opinion of the European Central Bank regarding bills on FX
      housing loans

Recommendations for BFG:

  • Taking account of the risk arising from FX housing loans in the method of calculating contributions to the banks’ guarantee fund.

Owing to insignificant utilization of the Borrower Support Fund, on August 2, 2017, the Chancellery of the President presented a bill aiming to modify the mechanism of providing financial support to borrowers who took out a housing loan heavily burdening their household budget, and to introduce a new instrument supporting voluntary restructuring of loans in foreign currencies.

The draft act provides for setting up two special funds within the Borrower Support Fund: Supporting and Restructuring Fund. The Supporting Fund would take over the current functions of the Borrower Support Fund, and the Restructuring Fund would support a voluntary conversion of housing loans in foreign currencies.

The bill also includes the proposals for increasing the limit of subsidies from the Supporting Fund up to PLN 2,000, decreasing the DtL ratio from 60% to 50% and increasing the income threshold up to which the borrower is entitled to support. Contributions to the Bank Guarantee Fund made by banks with FX housing loans portfolios would total up to 1% of the value of the portfolio of loans with overdue above 90 days.

The maximum contributions of banks to the new Restructuring Fund were defined at 2% of exposures to mortgage loans in foreign currencies p.a. Banks would have six months to propose their clients loan conversion, and contributions made by banks to the fund would cover the loss in the balance sheet value of the loan before and after the voluntary restructuring. The funds that have not been used would be provided to other banks proportionally to their contributions. The value of contributions would be defined by the Financial Stability Committee, and the Polish Financial Supervision Authority may issue a recommendation stipulating the order in which particular housing loans would be subject to restructuring.

On October 13, 2017, the Sejm discussed the bill for the first time.

In response to market demand, based on funding provided by its parent entity in the form of mediumterm and long-term loans, mBank offered mortgage loans in foreign currencies, mainly the Swiss franc (CHF), to its retail clients in 2003-2011. The volume of these loans grew the fastest in 2008 2009; their sales started going down gradually as of 2010; finally, the sale of CHF loans was discontinued in August 2011. Consequently, the CHF mortgage loan portfolio has been falling steadily, by ca. CHF 350 million p.a., with a part of this amount being repaid in the form of early payments. At the end of 2017, the value of the portfolio of CHF mortgage loans granted to individual clients stood at CHF 4.2 billion (PLN 14.9 billion). The mortgage loan portfolio of mBank Group stands out as the best-quality credit product of the bank. The non-performing loans ratio (NPL) totalled 3.3% at the end of 2017, while for the entire sector it stood at 6.8%.

mBank is a party to lawsuits over foreign currency loans brought against it by clients who took out such loans. It should be stressed that courts have not been unanimous when settling FX loan cases, yet the vast majority of final and binding rulings issued so far have been in favour of the bank. All final and binding rulings are followed by the bank. The Office of Competition and Consumer Protection (UOKiK) has been pursuing a number of preliminary investigations into mBank, in particular with regard to the so called durable medium, low down payment insurance and foreign exchange risk notification for clients. Some of these investigations are carried out with regard to several banks simultaneously. mBank has been cooperating with UOKiK and other authorities as well, providing them with all necessary information.

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