Good afternoon, ladies and gentlemen, and welcome to our conference that will present the results of mBank Group in the fourth quarter of 2021. Unfortunately, we are meeting again virtually, so please use the chat field to ask your questions. Today, the results will be presented by our CEO, Mr. Cezary Stypułkowski, our CFO, Mr. Andreas Böger, and our CRO, Mr. Marek Lusztyn. Chief Economist Marcin Mazurek will present the macroeconomic overview. Cezary
Well, welcome. Two major messages which started to become a routine. Our core activity is going very strong and very well. CHF risk on the horizon. We have to tackle both. 2021 was exactly the year of very strong core activity, the strongest in history. Quarter after quarter we improve. But at the same time we have to manage, you know, heritage portfolio CHF. On the major communication around the results of 2021 is that the income has grown significantly. This is 4.2%, you know, year-over-year.
Our income has grown about PLN 6 billion, consisting of some improvement year-on-year on the net interest income, and very strong performance of our fees and commissions line, which has grown by more than 25%. Basically on the fees and commission side, it's across the products and the client groups, so it's a very consistent growth resulting both from the business growth and more systematic adjustment on our fees and commissions pricing. That led to very strong and consistent cost-income ratio, which has slowed down to slightly above 40%, which is, I think, you know, sort of a dream figure for most of the banks I'm able to name. It's a very consistent process in the bank for a number of years.
We are proud that we manage the bank around the Cost-Income Ratio since many years, and I think that we have a confirmation that we can deliver on this front. Our Cost of Risk has been at 76 basis points, which is below our original expectations. We've been guiding the market around 100 basis points. The performance was slightly better. What is important is I think that the first time since I remember, our NPL has been below 4%. That's obviously resulting from some sale of the portfolio, the growth of the overall portfolio. I would say there are a number of factors, but in principle, you know, this is on the downturn.
Well, after you know all the positives, I have to come to something what is almost at a personal level a big setback because this is the first loss in my professional life. I think, you know, I'm in sort of a managerial capacity for 32 years, and I think that's the first time when I have witnessed a loss. You know, this has been resulting from very high legal reserves or provisions which we have built up vis-a-vis this heritage portfolio. Resulting mostly from the fact that we are in a still very sort of a disarrayed, non-clear legal environment where the Supreme Court basically resisted to respond or to set up the jurisprudence in this respect in Poland. The courts are lost, in my opinion.
We will be witnessing, you know, unknowns for some time, and as a consequence, we adopted more conservative approach on this issue. Not mentioning that obviously we are trying to pilot also some settlements with the clients in the environment, which is changing mostly due to the interest rate movements. When we look into the bank as a core activities of the bank, we know that our business model is very strong, well-performing, and is delivering almost 12%, you know, return on equity. In terms of the business volume expansion, I have to say the major message is that, you know, our mortgage book is growing rapidly. We sort of regained the momentum.
Some of you who follow our figures in a more stable way know that the bank has slowed down after 2015, 2016, when we've been subject to significant additional capital buffers imposed on the bank because of the Swiss franc book which we have on, you know, our balance sheet. That was the moment when I think the bank has slowed down. You know, steadily we have recovered, and 2021 was the year of the rapid growth of our mortgage book. I would say what is important, I think will be reflected in one of the slides, is our constant growth of the market share, specifically on the retail side.
On the corporate side, we are sort of more balanced, with more focus on delivering the efficiency of our customer relationship, especially with greater assets. Allocation with the prospects of stronger cross-sell and returns on the individual exposures. On the liquidity side, not that much to be reported. All the major ratios which describe or are required by the regulators are at a very high level. I remember when I joined the bank, you know, their loan-to-deposit ratio was 140%. Today, it's half of that, 70%. What is also important and worth mentioning is that the bank continues to have access to the wholesale markets. I think in this respect, we are almost unique in the market.
One that costs some money, but our ability really to continue on the very EMTN program to attract investors, in this time, you know, in the MREL-eligible format, with a green color on top. I have to say, you know, it's another confirmation that investors and the market accepts our approach and our way to deal with the wholesale markets. On the capital side, obviously, there are consequences of the loss that will be explained. It has lowered down slightly. Still, you know, in a comfortable zone, three more or less 3% above, you know, the required ratios. Well, customers like us. We have reached 5.5 million of retail customers in three markets which we operate.
Corporate book is growing as well, you know, more than 30+ thousand of clients. Finally, I think that the major achievement of 2021 in terms of, you know, how to manage the organization, is very much the fact that we have launched new strategy, but that has been covered, you know, during our sessions, I believe, in November. This is a summary of major developments. I don't want to spend time on these figures. You can read them, you know. Let's move on. Well, I would say more. This is more for the media, I believe. You know, what I would like to focus on is that mostly that due to our strategy on the with this concept of demography is destiny, we have launched this junior account for children.
It's a very interesting phenomenon in the bank that, you know, having in mind, you know, the average age of our clients and the population of clients who are reaching approximately 40-plus years, which have children. I believe that we will be benefiting out of the primary relationship with the parents with this approach. Obviously, that will not produce a lot of money, but that will stabilize in the long run our customer base and will add significant portion of young generation clients who, you know, the next generation of the management people will benefit out of these moves, which costs us some, but I would say that's the business model of the bank. We are not stealing clients from the other banks. We are attracting clients because of our premier transactionality and certain brand appeal, et cetera, et cetera.
You know, they are growing with us. That's the major message on this front. On the ESG side, I think that there will be, I think, the devoted slide, which Marek will comment. I believe that, you know, putting aside the WOŚP, the orchestra of Christmas Charity, where we are well plugged in. You know, 10 days ago, we had this big annual event, which again proved that our customers are truly willing to contribute to the social goals and, you know, the concept of WOŚP. I think that, you know, what I will add on the is that we see ourselves as a relatively advanced green bank, and that will be supported by additional information. What is...
I think on the, I would say, technology front, important is that we have launched BLIK payment functionality, which is very convenient, you know, in the points of sales. That's the new functionality of BLIK. It's very interesting to know that our customers are making somewhere between 30%-40% of this particular type of transactions are being done by our clients, which is the ultimate confirmation how powerful and how advanced and how digital-minded our client base is. Let's move on. These are about the market shares I already referred to. A number of clients. Let's move on. Well, this is something that we are proud of.
We still claim, and our message to the market is, mBank stands for mobility, icon of mobility, you can name it, but what is the most important are the charts on the right, on the downside. I think that confirms that we have a significant number of active users. That monthly usage of our mobile platform is growing rapidly. Finally, this is also explanation of part of our cost-income ratio being very attractive, is that how much of transactions are being initiated in the digital world, and how much it contributes ultimately to the fulfilling of these transactions. Let's move on. This is a wrap-up of the financial performance.
What I want to particularly focus on, and I think it's an almost very specific Polish phenomenon, is when you look into our performance, and these are reported figures, this is the bank as a whole. You see that operating profit of the bank is still positive, despite almost PLN 2.8 billion of write-off on the legal side and PLN 878 million on the cost of risk. What really hit us were the taxes. The fact that the banking tax costs us PLN 6.8 million. Income tax on in a company which has made losses, this is a, I think, worldwide phenomenon. I don't believe that type of a taxation treatment exists in any other market which I am aware of.
With this, I will pass on Andreas.
Good. I would like to put the developments of the years in perspective over the last three years. That's on page 11. Like we also did in the last annual conferences, to comment on the income side and also on key drivers as well as on the cost side. Let's look at income. Even though net interest margin was dropping, and still dropping, obviously as an effect of the lowering interest rates during COVID times, the income in total was on a growing path for the last three years, and obviously also growing in the last year, in 2021. Let's start with net interest income. The net interest income did not only stabilize, as you see, over the last three years, but also increase in 2021.
We, in 2021, talked a lot about the bottoming out of Net Interest Income. To see that bottom without the tailwind of interest rate raises, that also happened. I would say on the last meters of 2021, with the interest rate raises that came, starting from October, obviously that gave some additional tailwind. The biggest achievement, I would say, over the last three years is clearly Net Fee and Commission Income. You see it here with +25%. For the last three years, it's even +49%. It's PLN 380 million more, and as Cezary was saying at the beginning, it's a mixed bag of things stemming from various components. I'll just give you some examples to show how diverse that also is.
On the one hand, we changed pricing on accounts. Account fees did contribute by nearly PLN 140 million to this change. Credit-related fees, PLN 77 million, foreign exchange, PLN 69 million, payment cards, PLN 55 million, money transfer, PLN 44 million. A lot of the things we actually do on a daily basis with our clients is actively and positively contributing to this higher Net Fee and Commission Income. If we look at the proportions, clearly we had lower space to maneuver on Net Interest Income. In 2019, Net Interest Income was, for example, 72% of all of our Revenues, whereas in 2021, it was 67%, so it went down. Net Fee and Commission Income increased to 31% of all Revenues, vis-à-vis 23%. That's a good mix.
We are now gearing the bank, obviously, to benefit from interest rate raises. What I think was very important for this management year, to make sure that we have a proper business model and that we can make money even in lower interest rates. That's also what we, for example, reiterated when we discussed our strategy back in November. Let's look at the cost side. cost-income ratio trending clearly downwards to, as Cezary was already saying, 40.2%. Even starting two years ago or three years ago with 42.2%, I mean, that's a very competitive cost-income ratio. To explain the drivers, on the one hand, there is higher personnel costs. Whereas 2020 had very low personnel costs, also due to lower performance-related pay.
Also in 2021, not only do we have a bit more staff, 50 more staff, but we also paid some COVID rewards to our staff because of the very good keeping up of the organization here in very tough times. We also try to even in inflationary times have a very reasonable way of managing the material costs, so that's an increase of only PLN 14 million. Within this is like PLN 25 million more IT spending, PLN 5 million more marketing spending, also PLN 5 million more costs for the KNF, but also savings in the administration area by PLN 15 million and also on consulting by 10. You see, we always gear towards having very reasonable costs here. I will later comment on this also with the outlook of higher revenues for 2022.
Clearly costs will increase, but the aim of the management board is always to have a very competitive cost-income ratio. Let's move to the next slide and talk a bit about the core and non-core bank. Cezary already mentioned it, the strong performance of the core bank. I mean, the core bank with an operating profit of PLN 2.7 billion and a net profit, that's with effective tax rate here of 27%, of PLN 1.6 billion. This is one of the best performances we have ever delivered, if not even the best performance. The ROE in the core business here on 12% still in an environment that was characterized by very low interest rates throughout the year.
In the lowest, I think, every bank has experienced.
Yeah, absolutely. Let's not forget that these interest rate raises that started in October, that takes some time to actually filter through to the balance sheet. I think that's also a really strong sign when it comes to return on equity. Talking about the flip side of the coin, non-core obviously needs a longer explanation what happened in the last year. For this, I will hand over to our Chief Risk Officer, Marek Lusztyn, to give you more details.
Thanks, Andreas. As we have communicated previously, we have separated non-core from core on one hand to clearly demonstrate the outstanding performance of the core business, on the other hand to isolate the effect of the legacy portfolio of the Swiss franc mortgage lending. From the capital allocation perspective, the capital allocated to that non-core unit amounted to PLN 1.9 billion as of the end of December last year. On top of that, we have provisioned for legal risk in total of PLN 4.1 billion.
Which, looking at the buffer set aside for the developments of the Swiss franc issues, it gives the total amount of PLN 6 billion, which is set aside for Swiss franc mortgages. Just as a reminder, if we compare this with estimate of a potential impact of the conversion plan as was proposed by Polish FSA Chairman Jastrzębski, that would amount to PLN 5.6 billion. If we go to the next slide, please. Where we have summarized the developments of the Swiss franc issues in the last quarter.
Total value of provisions created in relation to the legal risk stood at PLN 4.1 billion, which gives us one of the highest coverage ratios among the Polish peers. The coverage ratio increased from 21 to 32 percentage points. As I said, on top of that, we have nearly PLN 2 billion of additional capital, which is set aside. The total value of the existing claims is covered more than 100% higher than it was at the end of 2020. What needs to be said as well is that the portfolio of mortgage loans in Swiss franc is reducing cumulatively at a high pace.
Year-on-year, it has decreased by 29 percentage points. Which brings us to the total value of that portfolio in total assets being significantly below 10%, actually at 7.5%. Also, what needs to be highlighted is that the piece of new court proceedings is decreasing. In Q4, we have seen slightly more than 1,300 new cases coming in, as compared with nearly 1,600 of the quarterly average of the quarters 1-3 of the previous year.
That brings us to the total cost of legal risk that we have created in 2021 of nearly PLN 2.7 billion, as compared with PLN 1 billion in 2020. That amount is composed of two main components. The most important element of that amount is linked to the increase of the provision for the individual court cases. That reflects the inflow of cases which I have alluded to. The other one in the amount of another PLN 1 billion is basically cost of potential settlements program. We are still in the pilot phase of the settlements program. As we have communicated before, it's too early to conclude on the results yet.
The pilot phase is still up. We have already created that amount in anticipation of the potential settlements program going forward. On the following slide, we also comment on the ESG aspects. ESG is element that was strongly organizing mBank in 2021. As Cezary mentioned earlier, that's a very strong driver of the way we operate and the way we interact with the clients. It has been well appreciated by Sustainalytics through its ESG rating that puts mBank in 2021 at 15.9, which means low risk.
In all practical terms, it means that we are in the top 10% of the financial industry worldwide as far as this rating is concerned. We are not only migrating ourselves into the ESG world, but also we are helping our clients in doing so. We are at the forefront of helping our clients reducing their environmental footprint through the support of their energy transition, which is demonstrated through the landmark transactions of renewable financing we have completed in 2021.
Cezary Stypułkowski was also referring to the impact that we do for society, which is not only expressed through our cooperation with the Great Orchestra of Christmas Charity that we are proudly sponsoring, but also through our contribution into the mathematical education in Poland and the support of young artists. In 2021, as we have communicated as well through the strategy presentation, we have firmly embedded the ESG values into the way mBank operates. ESG factors are incorporated into top managers' objectives. Each and every of people from this group have their part of the goals related to the ESG targets implementation. We have made progress in preserving gender diversity in the recruitment and selection processes.
As far as the responsibility of the financial health of our clients is concerned, it's super important for us as well. We make progress in improvements to our personal finance management functionalities to give our clients better control over their budgets and finances. Last but not least, it's also worth reminding that as the first Polish bank, we have independently signed the Principles for Responsible Banking of United Nations Environment Program, which also is a guiding principle for us how to be net zero fully climate neutral bank. Andreas, over to you.
Good. Thank you. Let's go into the fourth quarter. We try to be brief on the fourth quarter to give you more time for questions. The fourth quarter clearly showed this coin that has two sides with the strong business performance and then obviously dealing with the Swiss franc legacy. If you look at core revenues, core revenues in the fourth quarter are clearly at a record high. I'll also explain that later, but that's for both Net Interest Income and Net Fee and Commission Income. We've never seen it in a quarter at this high rate. Cost-Income Ratio at 36.7% is also extremely good Cost-Income Ratio. That is the one side, that's the positive side.
On the other hand, obviously most of the annual effect on the Swiss francs of the PLN 2.75 billion that we did book, we booked that in the fourth quarter, so this is why the fourth quarter is actually heavily burdened with PLN 2 billion of legal risk cost, and that it clearly left its marks. Let's go into explaining the volumes a bit and what happened behind this. That's on page 20. Let's start with loans. The loan book is slightly down over the quarter, but it's not really down. Let's not forget that the Swiss franc legal reserves are a deduction from the cross-currency amounts in the balance sheet. After adjusting for this, it's roughly flat.
Clearly as always, you see on the corporate side, there is a lower seasonal usage of lines, but also repayment of loans. That is what we have seen over the last years, and we've also seen in the last quarter. Retail, you see here flat, but if you adjust retail for the Swiss franc portfolio, you will see that the mortgage loan book, for example, went up by PLN 2 billion and by PLN 2 billion equivalent in Swiss francs. That's for the ones who want to look on page 44 in the appendix. The retail loan book is actually up. What's more interesting is the new lending business on the next slide. There we see that the retail business was a bit lower than in the third quarter, but still on a very high level.
Cezary Stypułkowski was mentioning it before on mortgage loans, for example, the total 2021 sales are PLN 3.4 billion higher, so that's 38% more. We finished the year with PLN 2.9 billion, a bit less than in Q3 and Q2, but please look also at the spotty amounts. That's the blue one for individuals. We've guided already that for Czech Republic and Slovakia, we changed the pricing policy, so the Polish business here is quite strong. Even stronger when we look at market shares. The market share in new sales, for example, in the fourth quarter for the mortgage book was around 12%, with December even exceeding the 12%. That is a good trajectory. Similar thing on non-mortgage loans.
Non-mortgage loans +40% over the full year, when it comes to full year volume, not only quarter-over-quarter with the 45. Total sales PLN 2.8 billion from PLN 7.1 billion in 2020 to PLN 9.9 billion in 2021. Also fourth quarter, you see here, a bit weaker, but that's also a seasonal effect. In general, the outlook on both, especially the mortgage loans, but also the non-mortgage loans in retail remains positive, especially for the medium and for the longer term. We will need to see how interest rates movements and also clients clearly seeing how much net salary they have now on the, after Polski Ład, et cetera, will affect the first quarter sales. We in general take a positive stance towards the new sales figures here.
Going over to corporate. In corporate, the fourth quarter is always very strong. You've also seen that in the fourth quarter last year. That's also mostly due to seasonal effects because in corporates you have renewals in the last quarter. Renewals, less on the investment loan side, more also on short-term money and overdraft facilities. That's the usual effect you see here, and that also happened in the fourth quarter. General outlook also on corporate, as I was commenting on retail, corporate outlook for the full loan book, single-digit growth, maybe closer to 3% than 5%. But somewhere between 3% and 5%. As you know, and also what's part of our strategy, we're very selective when it comes to efficiency of the exposures.
The underlying transactionality of the client and the client activity and gaining new clients is actually very strong, but the appetite of giving our balance sheet for this is there clearly, but only at the right prices. Coming to leasing. Leasing was good progress, +9%. I think no further need to comment here. Let's move over to the deposit side. Obviously strong annual growth. We commented this before. PLN 22 billion more annual. That's strong. Corporates in the fourth quarter, less. That's a year-end deposit management. You know this. We do this every year. Also worked well in the fourth quarter, and on the retail side, you see steady inflows happening here with +3%. As I said, I want to be brief, so let's move to the more interesting things, the income side.
I was already saying, and it was Cezary Stypułkowski saying it, record high revenues. Let's first look at Net Interest Income. Net Interest Income, PLN 186 million higher. That is to some extent helped by volumes, but also to some extent helped by interest rates rising. I think you see on the right side, when it comes to the development of the Net Interest Income, right upper side, you see that bottoming out that we discussed over the full year from loans, for example, and also from the investment portfolio. From loans, it was in the first quarter, the bottoming out. From the investment portfolio in the second quarter. Even without higher interest rates, we clearly demonstrated that we can keep this on upward trajectory.
Net Interest Margin in the fourth quarter, also much higher at 242 basis points. That's also a good sign that we're going in the right direction. Net Fee and Commission Income here in blue did not rise that much quarter-over-quarter, but PLN 490 million is a very strong result. As I said, record, and we were even able to beat the very strong third quarter here. Two negative things here. On the one hand, net other operating income is down. That's due to some future commitments which we booked. We have a negative trading result of more than PLN 36 million in the quarter. That is mostly due to interest rate derivative valuations.
What you have in very strong rising interest rate environments, you actually have a lot of distortions in the valuations, not only on the fixed rates, but also on even floating rates. I can comment on that later if that's wanted. that actually led to a stronger decrease here. Let's not forget, in that quarter, we actually had interest rate increases in October, 40 basis points, November, 75 basis points, and December also 50 basis points. extremely strong interest rate. What is important here in terms of outlook also, we finished the year with net interest income of PLN 4.1 billion. Given what we see and what we expect, we see the net interest income for the year 2022 to finish above PLN 5 billion.
That's a PLN 900 million difference, and that would also lead total income, which was at PLN 6.1 billion, then to exceed PLN 7 billion zlotys. This is the goal to which, towards which the management is actually managing the bank. Above PLN 7 billion for total income and above PLN 5 billion for net interest income. Let me briefly finish with cost. Cost, I already said cost-income ratio at 36.7%, so quite strong. Maybe what needs some explanation is HR cost. HR cost, as I said, we paid COVID awards or rewards in the third quarter. That is why it's down quarter-over-quarter. It's up year-over-year because the performance-related pay in Q4 2020 was very low what we booked there.
What is more important on the cost side, I think is the outlook. The outlook is what we can guide is cost will increase in mBank on the one hand on personnel costs. That's also due to inflation and salary pressure on the material cost side, also due to inflation, but also due to delivery of the strategy and due to further investing and taking money into our hands and making this bank even more successful in the core business. We also expect BFG to rise in the year 2022. The year 2021 was a bit lower, and total BFG at PLN 230 million. The year 2020 was PLN 300 million.
I think above PLN 300 million is a good proxy here. Whatever will happen on the cost side, I think what is clear, we're clearly guided by cost-income ratio, and you will see mBank with a very competitive cost-income ratio also in 2022 and in the years to follow. With this, I will hand over again to Marek to explain the risk side.
Fourth quarter 2021 led us to slightly higher write-offs for the loan loss provisions and slightly higher cost of risk, in particular in the corporate loan portfolio. We see this as more focused on legacy issues, and most of the write-offs in the corporate loan portfolio in the last quarter were done on the cases that were more historical. They were already in our defaulted portfolio before. As Cezary was alluding earlier, we made a great deal of effort last year to focus on the decrease of the non-performing loans. That jump in the LLPs in the last quarter from the corporate loan book was a sign of conservatism from our side.
We definitely do not see it as a sign of the deterioration of the quality of lending. The quality of our corporate loan book remains very good. We also do not see any early signs of the deterioration coming due to the interest rate increases also. I'm taking upfront one of the questions from the chat. It needs to be highlighted that most of the in particular investment loans that we have on the books were granted in the higher interest rate environment. We do not expect that at this level of interest rates that they will have any material impact on the increase of the cost of risk.
On this, we see a 2022 cost of risk not to be materially higher than the one of the past year. As you can see on the slide 26, we have considerably decreased the size of the impaired portfolio over 2021 by 12.5 percentage points. The NPL ratio went down to 3.9%, which by local market standards is actually very low number because the industry average is around 6%. That clean up of the portfolio through sale and write-off of impaired loans leads to a slight decrease of the coverage ratio, but it's still given the size of the NPL book remains relatively high.
As you see on the NPLs for retail, they are relatively flat compared to last quarter and last, the previous year. Can you go to the next one, please? As you may see on slide 27, a total capital ratio and the overall capital position of mBank remains
Relatively good and well-positioned for the strategy targets that we have communicated in autumn. The decrease from September to December 2021 comes mainly due to the write-off that we have discussed at length. There is also a minor component related to the revaluation of the treasury bonds portfolio due to the higher interest rates. That impact compared to some of our peers remains relatively modest. As far as the liquidity position of mBank is concerned, the liquidity ratios still remain at very high level, significantly above the Basel III requirements.
Now we hand over to Marcin.
Thank you. When we met here one year back, we expected that 2021 is going to be very demanding in terms of macroeconomic factors. In fact, it ended much better than expected. It can be estimated that GDP growth in 2021 amounted to around 5.9%, and the whole year ended with a very high note. Of course, this high growth led to some imbalances, in which the most important one is inflation. In the end of the year, it amounted to 8.6%, and it's going to hover around 8% also in 2022. On the flip side, we had improvement in the labor market. Unemployment rate declined further, and also we observed some wage pressure.
In the end of the year, consumer sentiment deteriorated. It coincided with higher inflation and of course, with interest rates increases delivered by MPC. That's why we think that 2022 is going to be slower in terms of GDP growth. We now expect 4.1% GDP growth in 2022. As far as monetary aggregates are concerned, 2021 was proved to be, I would say, very close to expectations. We had turnaround both in consumer lending and in lending to corporates. High deposit base, which we enjoyed in 2021, is going to be also repeated in 2022.
You should bear in mind the fact that it seems that we've seen the best in terms of household lending so far, and 2022 is going to be slower in that respect. Of course, on the flip side, the corporate loans are going to accelerate further in 2022. This is kind of a positive note. When you look at financial markets, you can see that bond yields increased massively in the end of the year. It was, of course, accelerated by the actions of Monetary Policy Council. So far it seems that we are close to top in yields in Poland, and from now on, we may expect some stabilization or even decreases.
As far as the zloty is concerned, zloty stayed weak in 2021, and it's going to be a little bit stronger in 2022, but not so much. Thank you.
Thank you, Marcin. Let's move to our Q&A session. Some questions have been already covered during the presentation. The first one is about capital. Do you expect KNF to restore 3% systemic risk buffer?
I don't expect this to happen in the upcoming future. I think that there are a number of factors which, in my opinion, will discourage KNF really to go rapidly. Even if they will start to consider, it will not be just 3%, you know, burden put on the banks. It will be spread across at least few quarters. I don't think that, you know, anything significant will happen during the course of 2021.
Thank you. Could you please comment on sensitivity of your FX settlement scheme to rising interest rates?
That's a big question Marek. I think that, you know, that there is also a question about the pilot, and obviously to which extent the pilot is being impacted by the fact that zloty interest rates are rising. This is something that we are trying to figure out, you know, also in dialogue with our customer base. My feeling is that, you know, we will end up with kind of a split of the customers between the ones which will continue to stay in CHF and exercise, I would say, the big unknowns of the conversion in Poland and lack of stable line of conversion in Poland, something that we continue to fight as an industry.
There will be a group of people who will take the opportunity to lower down the overall burden going through the settlement processes. We know that from PKO BP, which is the most advanced. We are too early to say, you know, what will be the outcome of our dialogue with clients in this respect, but we believe that there is a group of clients interested. There is a third group of clients who definitely see, you know, the interest rate hikes on the horizon. You know, Marcin just said it, you know, we are close to the end of the cycle, but that is still, you know, an issue which is in the public domain and is being discussed. It impacts also the mindset of clients.
We believe that there will be a group of clients who will stay and continue to service. As families know, and as we inform, this has been the best performing portfolio of loans which we have on our books. The paying discipline on the clients front didn't change. Lots of things around, you know, these portfolios I have commented, you know, since, I don't know, five years. The sort of public dynamic in the discussion around this is problematic from my perspective. I think that, you know, there will be a group of clients who will prefer to be in this environment where on one hand they are exposed to some foreign exchange risk, but at the same time they are benefiting big way from the interest rate differential.
Do you expect salaries at mBank to grow slower than inflation in 2022?
Well, I think that, you know, we all shared that between Andreas and myself. I personally don't believe that, you know, as long as the inflation horizon is not determined yet, I mean, inflation is below 10%, I think that it does not require sort of rapid adjustments. I think that, you know, the market is also differentiating. You have groups of people or professions where definitely, there is a need to address the issue. The banking sector is very sensitive to the cost of employment. You know, this is, sometimes I'm overusing comparisons, but it's like mining, you know. This is a very important component of our cost base.
We are adjusting our salaries, but I would say it's more not across the board, but rather, you know, being sensitive to groups of people who are operating in the professions which are more sensitive and more exposed to the growing level of overall salaries. I think that will be selective process. In principle, I can imagine that, you know, the cost of employment will grow. I would say one being, you know, if I would be an analyst, I would assume that, you know, the inflation needs to be covered.
Another question from Tomasz Stolarski: When do you expect deposit rates to start rising?
You?
That's a good, very good question in the context of rising interest rates. As we have also demonstrated through our liquidity ratios, we are actually, as of now, flooded with the liquidity exactly as the whole sector is. It's a matter of more how the market reacts to the rising interest rates, how much cash flow is going to be there. This liquidity component definitely plays a material role, so that would be, I'll say, too early to give a precise estimate, though.
If I may add to what Marek has said. I have mentioned that, you know, when I joined the bank, you know, the loan-to-deposit ratio of 140. It's 70 right now. Let's be realistic that mBank, you know, during this COVID-related time, was disproportionately benefiting from the inflow of money, both on the corporate and specifically retail side, which is the ultimate confirmation of what our strategy has been over a number of years, which is, you know, to be the premier best transaction bank. Definitely impacts our strategy vis-à-vis, you know, the inflows. I'm seeing right now, you know, on the TV ads, you know, some banks, you know, already moving up, you know, well, I would say in sophisticated way the interest rates.
I think, I don't think that we will be the champion in, you know, this race. I think that the bank is a very privileged position, and I think that, you know, we have learned during the last two years how to manage this part of our balance sheet. I think that, you know, in this respect, I believe that we will be managing this part in a very sophisticated way.
Thank you. New sales were lower sequentially in zloty mortgages and cash loans in Q4. Does it reflect some impact from higher rates? How should we see loan demand both in retail and corporate in the current higher rate environment? Another question from Anup Abhyankar . Can you please provide your sensitivity for the recent rate hikes?
Maybe I'll start with the volumes, because I already commented on the volumes before. Corporate, I said 3%-5% is maybe a good proxy, more 3% than 5%. Retail will still be trending upwards, but our clients are actually assessing right now what the high interest rate environment will mean for them. As I said, it's also the question of net salaries, but that to some extent will fade. We still see a healthy high single-digit% growth in retail, most likely this year. After the first quarter, we will know more. So far, the demand is still good that we're seeing behind it. Next question was? Because it was very clear.
Sensitivity of our interest rate on the interest rate hikes.
NII sensitivity?
Yes.
Well, right now, we're not publishing a new NII sensitivity, which is, by the way, a risk measure, which we publish, not a management estimate, but it's normally a good proxy. I think the PLN 900 million that I mentioned before for what we are seeing currently and how we're seeing the year, that's a good starting point. It also shows that the journey we have done from the rising interest rates, well, is clearly there with positives. We'll have to see how we can actually materialize further interest rate rises in the market.
Another question-
May I add, you know, a few sentences because this phenomenon of the fourth quarter where we have witnessed, you know, some slowdown, not only in our bank, but I think it's a reflection of two psychological phenomena, which I think we have to take into account. One is that people have been confronted with a rapid interest rate hikes, and, you know, they don't know where the end is. I think that naturally slows down, you know, the appetite. The second is that, you know, we've been on the eve of launching the Polish Deal or whatever is the right description. I believe that, you know, a number of people try to understand what the impact will be.
As we know, after the six weeks, it's still difficult to measure, but there is no doubt that there is a group of customers, including also our customers, who will be adversely impacted. I would say, you know, when people try to evaluate, you know, their position and you know, how they can move, and you know, what will be the impact, and you know, what will be the net income position and the ability we need to service the debt, people are trying to figure out. I think that that's the. In my opinion, it explains to some extent the slowdown.
I think it was either Andreas or Marek. I believe that after the first quarter, we will be much better equipped to understand, you know, which groups of clients are sort of losing the propensity to borrow or which clients will feel, you know, more comfortable, you know, to be active in the market. This is to some extent also related to some other legal initiatives, which potentially will limit access to non-banking shadow, whatever is the right description, lenders. I think that we will be. You know, the first half of the year will be, in this respect, relatively turbulent. I don't think that we know. Currently, we have all the, let's call it ingredients of ability to evaluate the dynamic of the market.
Thank you. Do you see growing interest for fixed rate mortgages? If yes, how big is the portfolio? What % of new credit sold is on fixed rate term?
Okay, I will take this one. We don't see much of an interest for fixed rate mortgages. I mean, we have them on the offer since quite some time. What needs to be said is that the demand from the client side is very much linked to the steepness of the yield curve. At the times when the Polish 10-year yield curve was kind of flattish, the demand was relatively higher. Now with this quite steep yield curve, that demand for fixed rate mortgages significantly subdued. We don't see much of a new sales going on as we speak, on the fixed rate. Clients are much more focused on the current level of installment than the interest rates that is fixed.
I think maybe one more comment on the fixed rate. I think would be really important in Poland for the whole market is to have a clearer guideline or a clearer legal situation when it comes to also prepayments. Because, for the Polish banks, obviously, we offer fixed rate mortgages, but in fixed rate mortgages, we need to factor in the prepayment risk, and that's obviously then in the end, paid by the client.
We understand that consumer protection is there to protect the consumer, but if it comes at a burden for the consumer because it needs to be priced in, it needs to be seen how reasonable that is and where actually a way in the middle is that actually to actually go into from a client side and also from a bank side. As I said, we clearly offer, every client can have a fixed rate loan. We also have some campaigns on fixed rate loans. As Marek was saying, it's that traction could be better there.
Yeah. The historical development was that this is the country of the floating rate for a number of reasons I don't want to go into details. Marcin is better equipped than myself. I think that the lack of understanding of the dependencies, also by the regulators, lead to the situation that, you know, without being able to charge client for the prepayment in this environment, we have to price it, as Andreas has said. That makes, you know, the fixed rate being perceived, like, very expensive.
You know, you cannot just manage the type of dilemma of the client, you know, by benevolence. That's something what specifically I misunderstand, and you have also to explain to the decision makers and to the regulators that, you know, if the customer, you know, comes to conclude that he want to prepay, well, we have a balance sheet. We need to manage the balance sheet and also the consequences. That's the major factor which I believe, you know, leads to the situation that instead of having, you know, growing portfolio of fixed rate, we are exposed to the lowering demand and interest on the client side.
Next question is on our legal provisions. Do you think the current 32% coverage on FX mortgages are sufficient? Why have you kept the probability of losing the FX mortgage case in your model unchanged at 50%, given that the losing probability has significantly risen in the past year?
Yeah. Maybe I will just respond to the so-called probability of default. Okay, we have still, you know, comparing the 13,000 cases vis-à-vis approximately 400, you know, rulings on these cases. It's not a proxy at this moment. One have to be realistic that, you know, under the normal circumstances, if the judiciary would be more stable and not tortured by, you know, constant structural problems and, you know, the quasi reforms, one could expect that, you know, the jurisprudence is being built. There is a particular way how it operates in the stable environment. We do not have that type of environment. We fundamentally disagree still with this rulings by the universal courts, first and second round.
We believe that this requires still, you know, fighting in the courts to build up, you know, the solid line of jurisprudence, which requires active role of Supreme Court. There is still on the horizon the number of cases which have been questions to the European Tribunal. The probabilities based on the current law, in my opinion, do not support, you know, the change. One have, though, to be realistic, you know. There is, you know, sort of a tendency which, by the way, undermines some paradigms of functioning of the banking. I will give you one example. You know, one line was that the banks are using, you know, their own FX quotations, and that's the...
That was a deterioration of the customer position with the consequences of annulment of the contracts. I think we have a new phenomenon that when in principle, these contracts, which are named contracts coming out of the banking law, are sort of socially,
Unjust.
Yeah, socially unjust. Well, it is a result of monetary policies in Poland. You know, if you compare the Czech koruna vis-à-vis Swiss franc, it didn't move. In some cases it appreciated. I would say between 2015 and today, it has appreciated. So the customers are not victims of the bank. They are victims of the monetary policies in this particular, you know, related to this currency. So you have a number of factors. We are, though, you know, I'm, some people who know me better know that I'm sometimes quoting Hegel, what's real is rational. So I have to reflect the realities of the current situation. That's the reason that we think has increased so significantly the provisions.
In this PLN 1 billion sort of, you know, semi pre-allocated for the settlements, there is a space from my perspective. To be perfectly honest, I think that, you know, it will take still significant time while we will, in Poland, start to understand what are the legalities around this issue. It's not finalized. It's not finished yet. It will be very detrimental if this current sort of capricious or one-sided line of jurisprudence will survive because it will have impact also on the zloty loans at some point.
What's important to highlight in the overall discussion is that more and more this concept of the social justice is at play in the Swiss franc discussion.
Mm-hmm.
We see occasionally verdicts which are actually putting Swiss franc borrowers at a serious advantage over the Polish zloty borrowers of the mortgages from the same time. The question here from that social justice perspective is it really socially just that a group of borrowers is at a significant advantage over the rest of the population, in particular those that were taking similar products in the different currencies?
Because as I said, some of the verdicts are definitely putting Swiss franc borrowers at the advantage of the Polish zloty mortgage holders. As Cezary Stypułkowski mentioned before, the legalities, in particular the ones carving in stone the jurisprudence coming from neither the Supreme Court of Poland nor the Court of Justice of the European Union are cleared. Therefore, based on this very small number of inconsistent between themselves verdicts that we have received so far, we believe that it is not a good proxy of the ultimate outcomes.
When we look at the overall level of the provisioning that is done for this portfolio, and we refer to the KNF chairman proposal that, just to remind, was to treat those loans as if they were originally granted in Polish zloty. The amount of provisions we have created is basically to the tune of the amount that we would have lost if all of those active loans were converted into zloty at the original FX rate. In the context of that social justice that I started my speech with, we have already commented that basically we think that that amount is the farthest-reaching economically justified cost for the conversion of that portfolio. That for us is before tax PLN 5.6 billion.
We have PLN 6 billion allocated for this program as of now. Now, there is also a question on taxation. Since we are on that very topic, I will also maybe ask Andreas to finalize that on the tax impact of the potential court litigations and settlements.
Yeah. Yeah. That's obviously a debate that's out there. On the one hand, for the court litigations, but also for the settlements. What we have taken so far, the stance we have is that we, against our legal provisions, did not book any deferred tax assets. Obviously we're working towards solutions there. When you compare the PLN 6 billion, Marek, I think is a good anchor here. The PLN 4.1 billion plus the PLN 1.9 billion capital against a potential PLN 5.6 billion Jastrzębski amount. I think you would in the industry see that this PLN 5.6 billion normally gets DTA attached, so then actually goes down by 19%. That's also a comparison.
We so far in what we did a conservative stance and did not assume any DTAs there. Clearly the works are going on in the overall industry of this and a bit more clarity is also on the horizon. There has been a communication from the Ministry of Finance, so that provides a good first step.
Thank you. How has been the FX borrowers response to the launched pilot settlement program by mBank? Should we expect higher provisions for potential settlement in future quarters, given that one billion provisions taken in Q4 represent just one-third of the expected amount for all borrowers?
This is too early, really, to respond to this question. We are still investigating this. Basically, technically, we are in second month. Effectively, having in mind, you know, the Christmas time, I think that, you know, January is the first round. We are not prepared to answer the question yet.
Do you observe earlier full or partial mortgage repayments due to rising interest rates?
As of now, we don't observe early repayments on the mortgage loans. It needs to be said that the current interest rate levels is actually not really a factor that, in our view, would trigger early repayments, as most of our Polish zloty mortgage book was actually originated at the interest rate levels, which are similar to those that we see as of today or even higher. That is definitely a phenomenon that we will be closely looking at for the months and quarters to come, in light of the expected Polish zloty interest rate trajectory. As of now, we don't see the volume shrinking because of that.
Thank you. Taking into account that Swiss franc loans decreased to below 10% of loan portfolio, do you expect that Pillar 2 requirement would be dropped in 2022?
Yeah. It's good to see the portfolio trending downwards. We for 2022 don't expect that yet to happen because the 10% also is on a bit of a different basis when it comes to calculating that. We are over the next years getting much closer to that threshold. Then on the basis of stability of KNF rules in some years we can talk about this. For 2022 it's not what we expect to happen.
Could you please comment on impact of rising yields on capital?
Yes. Q4 2021 impact of repricing of the treasury bonds in the portfolio was roughly 44 basis points on our CET1 ratio.
How many of 13,000 lawsuits were filed by clients who had already fully repaid their Swiss franc loans?
We need to revert to this one.
Yeah. My feeling is that was a couple of 100, but-
Yeah. It's a very small-
Small number.
It's very small.
100. That was the figure which is on my mind. You know, if someone is interested, obviously we'll provide the exact figure.
There are a few questions about our sensitivity to interest rate hikes, but I think we've already.
We covered it, yeah.
Covered that. Another one on Swiss franc provisions. What should we assume for Swiss franc provisions in 2022 and 2023?
I think we have already answered that as well. It largely depends on the development of the jurisprudence. As we said, the current level of provisioning, it is the farthest reaching economically justified level of provisioning. It's equivalent to the treatment of all the active loans as if they were originally granted in zloty. Anything that goes beyond that level would mean that, as I said, the significant group of Swiss franc borrowers would be considerably better treatment than everyone else that was taking the loans at the time.
Exactly. I think just for the analysts, obviously the stack is now at PLN 4.1 billion. That's quite high. We will in each quarter have different inputs. You will see something in that line item happening. In terms of increasing the provisions, it's currently not foreseen.
Thank you. I think the last question on ESG. What are the reasons behind the decrease in the MSCI ESG rating to BBB in 2021?
Okay, thanks for spotting this one. Honestly saying, we were not happy seeing it, but it is largely driven by the MSCI change of the methodology. They have extended the scope of the inputs they take into the rating model. Namely, they have extended the scope to look more on the ethical aspects and the corporate behavior, where last year we were not elaborating that much in our disclosure. We are on the case, so going forward we expect that to improve as well.
Thank you very much for your questions, and your attention. We covered all the questions. That's all for today. We hope to see you in May. Thank you very much. Goodbye.
Thank you very much.