Environment of mBank Group

Globally, 2018 was a time of a slow-down while market conditions in the biggest economies diverged. Boosted by a fiscal package, US growth accelerated; however, corporate sentiment and macroeconomic figures in China and the eurozone deteriorated month after month. With a combination of dwindling external demand, turbulences affecting the motor industry, and limited supply, the economies of Poland’s key trade partners in late 2018 grew at the lowest rate in several years. According to speculations, the German economy may have suffered a “technical” recession in H2 2018 (two subsequent quarters of negative growth).

For the bigger part of the year, the Polish economy remained immune to the adverse global trends. It wasn’t the first and, most likely, not the last time that Poland’s GDP grew while the German GDP fell sharply. At each time, including 2018, the trends were driven by the timeline of EU spending (mainly, investments) and were temporary. A steady decline of sentiment indicators combined with deteriorating industry and construction statistics in H2 suggest that the trade and capital links are too close for Poland to dodge the slow-down. Despite slower growth later in the year (according to our estimates, GDP growth fell from 5.2% to ca. 4.7% at the year’s end), economic results in 2018 were the best since 2008. The annual average GDP growth was 5.1% year on year in 2018.

The two key drivers of the Polish economy were private consumption and public investments. The consumer boom, which reached 5% early in the year, was generated by a good labour market (historically low unemployment), fast growing incomes of households (in particular earned by employees), unwavering consumer confidence, relatively strong migration into Poland, an active real estate market, and a solid growth of consumer lending. Public investments were largely driven by the timeline of spending.

First of all, intensive contracting of EU funds in late 2016 and in 2017 produced its results in 2018 and made up for part of the earlier delay in spending. As a consequence, public investments stepped up considerably. The growth seems to have peaked at a 30% year-on-year increase.

Second, the local government election marked a change in the investment plans of local governments: their investment budgets doubled mid-year. In fact, local government investments accounted for a half of the increase in total investments year on year. In contrast, private investments remained relatively low in 2018. According to available statistics, investments of companies with private local capital and investments of small and mid-sized enterprises were disappointingly small. In our opinion, this was largely due to a margin squeeze caused by growing costs of labour and energy in combination with harsh competition which prevented a shift of higher costs to prices. Investment plans of companies were also curtailed by a shortage of human resources, which augmented throughout 2018.

Despite some projections, inflation decreased in 2018. The annual average price index was 1.6% year on year and only 1.1% year on year in December. The mild inflation trajectory in 2018 was a result of several factors. First, after a dynamic rise in 2017, the increase of food prices in 2018 slowed down throughout the year thanks to low prices of fruits (due to very favourable weather conditions) and in the absence of a continued increase in the prices of eggs and butter. Second, fuel prices initially boosted inflation but dropped by the year’s end. Third (and perhaps most important), the price index in other categories of goods and services was disappointing and core inflation was 0.5-1%. The dynamic growth of salaries did not affect inflation, even with regard to work-intensive services. The price index in these categories remained relatively low. As a result, inflation in Poland was low, both in relation to the current phase of the cycle and in comparison to other economies of the region.

The low inflation could be explained by a number of factors: a relatively large and competitive local market, technological advancements, a surplus of margins dating back to the period of low salary raises, a stable currency. Rising electricity prices (up by several dozen percent on energy exchanges) alerted both consumers and corporates in late 2018. The rise hardly affected the prices of goods and services, and a regulatory freeze on electricity prices suggests that it will remain so in 2019, as well.

Loan volumes grew faster in 2018 than in previous years. Net of the FX effect, household loans increased 5.6% year on year (4.5% last year) while corporate loans grew 6.5% year on year (6.0% last year). Household loans certainly merit special attention.

The growth rate of retail loans was the highest since 2012 due to consumer lending, which increased at a double-digit rate, as well as record-high mortgage loans. The quarterly production of mortgage loans (PLN 13.6 billion) was historically high for PLN loans. New lending was likely to be historically high in 2018 at over PLN 50 billion, more than in 2008. That was a direct consequence of a very active real estate market and a very strong consumer sentiment. Consumer lending, in turn, should be seen as an indicator delayed in relation to consumption: it supports consumption during a slow-down rather than boosting it in a period of accelerated growth. The structure of corporate loans changed significantly as investment loans were steadily replaced by working capital loans and overdraft facilities. On the one hand, the change was driven by a relatively small share of bank loans in investments; on the other hand, by greater demand for liquidity in view of rising salaries and more restrictive enforcement of tax regulations.

The growth rate of deposits stepped up in 2018 but it did so differently in different segments. Household deposits accelerated throughout the year and their growth rate nearly doubled (from 4.8% to 9.4% year on year) while the growth of corporate deposits followed a lateral trend (from 5.0% to 4.3% year on year). Retail deposits grew mainly due to conversions of household assets (from investment funds and financial instruments to bank deposits) despite historically low interest rates. Another boost came with the improvement of the households’ savings rate. The low growth of corporate deposits (compared to previous years) was caused by pressures on corporate financial results.

mBank Group is an active participant and often a leader of changes introduced in expectation of and in response to developments in its environment, including the area of regulations and technology. The Group employees spare no effort in proactively adjusting the offer and principles of operation to new challenges, always with an eye on building top quality relationships with stakeholders. Some of the requirements imposed on mBank and the Group subsidiaries do not affect clients directly, but still involve a heavy workload connected with adjusting internal processes. Below we discuss selected key developments significantly affecting mBank Group observed in 2018 or expected in the nearest future. Capital requirements and regulations on accounting and reporting standards have been addressed in dedicated sections of the report.

Banking sector has been greatly affected by the Act of June 10, 2016 on the Bank Guarantee Fund, Deposit Guarantee Scheme and Resolution (“BFG Act”), which transposes the Directive establishing a framework for the recovery and resolution of credit institutions (“BRR Directive”) and the Directive on deposit guarantee schemes (“DGS Directive”). In 2018, banks contributed PLN 1,240 million to the deposit guarantee scheme and PLN 960 million to the resolution fund designated to support the resolution process. Although banks may choose to make a part of their contribution in the form of payment commitments, the total amount provided to both funds constitutes a major cost item that is not tax deductible. Taking into account high market shares of mBank in terms of deposits market and total balance sheet volumes, by contributing to both funds mBank is one of major participants in the system designed to secure depositors.

In accordance with the BFG Act, in 2018 banks worked on updating their recovery plans, annually approved by the PFSA. They also provided information underlying their resolution plans drafted by the BFG, taking account of the minimum requirements for own funds and eligible liabilities (MREL) calculated in line with the methodology published by the BFG. Banks are expected to comply with MREL by January 1, 2023. The requirement and the instruments allowing banks to satisfy it are subject to modifications as the work on transposing BRRD 2 is still underway, primarily due to the amendments to the bankruptcy law and introduction of a new category of instruments, the so-called non-preferred senior debt. mBank has been closely monitoring the legislative changes in the context of existing and planned issues. Its long-standing experience as an issuer of debt securities on the domestic and international market gives mBank a clear competitive advantage over the remaining banking sector players as far as prospect compliance with MREL is concerned.

At the end of 2018, the financial market supervision underwent a transformation. On January 1, 2019, the Office of the Polish Financial Supervision Authority became a legal person under the Act of November 9, 2018 changing selected Acts with regard to strengthening the supervision over financial market and protection of investors. The Chairperson and the Authority are acting as its bodies. On December 15, 2018, the number of PFSA members was raised to 12. As before, the Office’s operation is financed by the supervised entities, while the fines imposed by the PFSA from the beginning of 2019 onwards will support the Financial Education Fund.

The EU’s General Data Protection Regulation (GDPR) that entered into force on May 25, 2018, is the source of data protection principles applicable by mBank. In accordance with GDPR mBank gives clients control over their data and ensures confidentiality and transparency of the purposes for which the data is processed. Understanding the importance of privacy and security, mBank enables clients to contact the Personal Data Inspector in mBank, mLine consultants and branch employees with this respect. For more information on how mBank protects the data of its clients, go to www.mbank.pl/rodo/.

mBank offers investment services in accordance with MIFID II, that is Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments. We provide our clients with services that suit their needs, acting honestly, fairly and professionally and always having the client’s best interest in mind. Another priority is to provide complete, fair, clear and not misleading information. As prescribed in the law, mBank classifies all its clients into three categories: retail clients, professional clients and eligible counterparties, thereby ensuring an adequate level of protection. We also inform clients them about all costs and charges connected with its services.

mBank adjusts its product offer to provide clients with top quality service and facilitate their compliance with new regulations. A good example of a pro-client service enhancement is the large-scale educational campaign designed to improve clients’ knowledge concerning the split payment mechanism implemented under the Act on Amendments to the Goods and Services Tax Act and Certain Other Acts. By June 1, 2018, mBank opened VAT accounts for its corporate clients linked to all their settlement accounts in PLN, free of charge and without the need to change the existing agreements. What is more, in anticipation of potential liquidity gaps that could have occured once the split payment mechanism was applied (as of July 1, 2018), mBank offered attractive funding solutions designed to ensure financial and operational security.

With regard to retail clients, starting from August 8, 2018, mBank has been offering the basic payment account available to all adults residing in Poland and holding no other bank account. This account allows clients to perform basic banking operations, for example to deposit or withdraw cash and make payments, which in their primary scope are free of charge. The basic payment account was introduced under the Act on Amendments to the Payment Services Act and Certain Other Acts, which implements the EU’s Payment Accounts Directive (PAD).

The second amendment, introduced by the Act dated May 10, 2018, adjusted the Polish regulations to Directive (EU) 2015/2366 of the European Parliament and of the Council of 25 November 2015 on payment services in the internal market (“PSD2”). The aim of the act is to shorten the execution times of cashless payments and foster the development of cashless economy, and at the same time, to protect clients against financial fraud in cashless transactions. The act has established a legal framework for the activity of new payment service providers – Third Party Providers (TTP) – delivering payment initiation and account information services. Greater competition on the financial market encouraged by PSD2, extending its understanding over the scope of traditional banking, poses a major challenge to mBank, but at the same time, opens up a new chance to draw on its experience in providing payment services and helping clients to manage their funds. In accordance with PSD2 mBank has been working to adjust its internal regulations, in particular, to be able to block funds on the payer’s payment account only with client’s consent concerning the exact amount of the funds, e.g. when booking a hotel or renting a car. Another change concerns gradual phasing out lists of single-use codes for transaction authentication or shortening the time for resolving complaints about payment transactions from 30 to 15 calendar days. The corporate banking clients of mBank have already been using special interfaces (API) enabling them to combine banking services with financial and accounting systems. However, PSD2 will result in an even greater openness and standardisation of these solutions and will promote the concept of managing payments and accounts held in various banks from a single access point. The API PSD2 platform used by mBank and powered by mElements allows us to incorporate mBank’s credit processes into e-commerce sales platforms for both retail clients and SMEs.

Banks which are active online face risks connected with storing personal data and threats to the security of their clients in the Internet, called cyber risk. mBank goes beyond the standard framework of cyber risk management, among others, by organising educational campaigns raising clients’ awareness of cyber risk, in particular the “Be cautious online” (“Uważni w sieci”) campaign. Under cooperation with the subsidiary from mAccelerator portfolio – Centrum Bezpieczeństwa Cyfrowego (Cyber Security Centre) – mBank provides help in case of e.g. hacker attack, viruses and other problems connected to security in the internet, not only with respect to banking services. mBank clients can benefit from this service free of charge. In addition, mBank’s website is a vast source of extensive, but at the same time clear and simple advice, which can considerably increase the security of clients. When in doubt, clients can always consult with mBank’s experts via mLine, online chat, Messenger or in a branch.

mBank, participating in the fixing of WIBID and WIBOR reference rates, has been closely observing developments in the area of indices used as benchmarks in financial instruments and financial agreements, arising from the requirements laid down in Regulation (EU) 2016/1011 of the European Parliament and of the Council of 8 June 2016 (Benchmark Market Regulation, BMR). In force since February 2018, the regulation orders that benchmarks be calculated based on actual market transactions. In Poland, the responsibility for adjusting indices by the end of the transitional period, i.e. by the end of 2019, rests with GPW Benchmark S.A., a company in charge of building and developing a portfolio of Polish financial market benchmarks. mBank, being a party to international transactions, has been also watching the evolution of benchmarks on other markets in order to ensure business continuity.

mBank has been continuously watching the developments connected with the Brexit process and its rules, bearing in mind potential adjustments depending on the ultimate scenario of Britain’s exit from the European Union. For many months, mBank’s efforts to rise to the challenge arising from Brexit, that is to maintain business continuity on the international market and support clients in the process, has been absorbing various units of the bank.

Interest rates in Poland have never been lower: the NBP reference rate stands at 1.5% and 3M WIBOR reached 1.72% at the end of December 2018. Despite the pressure put on net interest income by low interest rates, mBank managed to improve its performance by introducing a favourable product structure and optimising its funding costs.

Another factor adversely affecting banks’ performance is the tax on certain financial institutions (“bank tax”) charged at 0.44% of assets annually. 2018 was the second full year when the tax was collected from banks. In 2018 mBank Group paid a total of PLN 401.8 million on account of the banking tax.

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”, is still valid at mBank and includes:

Moreover, we facilitate our clients to buy a new flat without the need to repay the remaining FX loan (so called „release of the mortgage”). The loan is repaid according to the existing rules, including the same margin. More information on mBank’s webpage www.mbank.pl/indywidualny/kredyty/kredyty-hipoteczne/informacje-na-temat-wsparcia/.

Since February 19, 2016 the Mortgage Loan Restructuring Support Fund has been in operation. 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.

Currently, parliamentary commission is working on several draft bills related to foreign currency loans.

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.

Detailed information concerning proceedings before a court, arbitration body or public administration authority are described in the Note 33 of the mBank S.A. Group IFRS Consolidated Financial Statements 2018.

Our objective is to provide an attractive offer to a wide range of clients while achieving business and financial goals. This is reflected in the development dynamics in particular areas: the non-mortgage loan portfolio for retail clients in 2018 increased by 15.4% at mBank compared to 7.2% for the sector (based on NBP comparable data). Market share in the mortgage loans segment remained at 6.9% throughout the year despite a significant acceleration of the acquisition in the bank and favourable market conditions. This resulted primarily from significant decline of FX mortgage loans portfolio.

The market position and shares of mBank and selected subsidiaries at the end of periods are illustrated in the following table:

¹ mBank Group ratios calculated as defined in chapter 6. Financial position of mBank Group and mBank in 2018, except for Net Interest Margin which was adjusted to sector calculation (net interest income divided by average total assets). 

Sector data as at December 31, 2018. Sector ratios calculated based on the monthly data of banking sector published by PFSA banking sector together with branches of credit institutions):

Net interest margin: net interest income divided by average total assets (calculated based on the end-of-month data)

Cost/Income ratio (incl. banking tax): total costs (sum of administration costs and depreciation) divided by net total operating income.

Return on assets: profit for the year divided by average total assets (calculated based on the end-of-month data)

Return on equity: profit for the year divided by average total equity (calculated based on the end-of-month data)

Loan to deposit ratio: sum of loans and advances at amortised cost, loans and advances/other receivables at fair value through other comprehensive income and loans and advances/other receivables designated at fair value through profit or loss divided by deposits (measured at amortised cost) as of the end of period.

²2017 market share updated compared to value presented in the Management Board Report on Performance of mBank S.A. Group in 2017 due to update of data by the Polish Factors Association.

³Excluding “road bonds” issued by Bank Gospodarstwa Krajowego (BGK).