Hello and welcome, ladies and gentlemen. Today we will discuss the results of mBank Group in the Q2 of 2022. The results will be presented, as always, by Mr. Cezary Stypułkowski, Chief Executive Officer, Mr. Andreas Boeger, Chief Financial Officer, and Mr. Marek Lusztyn, Chief Risk Officer. The macroeconomic outlook will be presented by Mr. Marcin Mazurek, Chief Economist. Cezary, the floor is yours.
Hello and welcome. Traditionally, we will start with the presentation of our good operational results, I have to say, and financial results require, unfortunately, you know, some additional comments. On the operational side, I think the most important is that, you know, the revenue side of the bank is growing as fast as it used to, even faster, specifically on net interest income, for the obvious reasons that interest rate hikes benefit the banking sector. We continue also to grow our net fee and commission income at a pace which was characterizing, you know, our performance over the last three years, which is now 22%+ growth on a year-to-year basis.
From the reporting perspective, the cost base, which we are very proud of, that we are able to keep this, you know, disciplined, and cost income ratio is one of the most important criterions of our performance in management terms. The total cost obviously has grown, you know, significantly, mostly due to the contribution to the protection scheme, right? So-called IPS. Which was the event of the Q2 . Still the cost income ratio is below 50%, you know, from, you know, in reporting terms, 14%, it's 3%, but when we use this cost income ratio for our management purposes, we are significantly below 40%. The net profit has been stated at PLN 260 million.
This also encompasses the additional contribution to the legal costs of the Swiss franc portfolio in the magnitude of PLN 175 million. The cost of risk, relatively modest. As you know, our guidance for the year was 81 basis points. We report 62 basis points cost of risk. Our Total Capital Ratio is slightly below the levels which we used to have. That will be explained further. Currently at 16.4%. We continue to acquire or to push our or to get our clients on the mobile platform. More and more of them are mobile app users.
In terms of the coverage of our customer base by the mobile applications, we are number one in the market, and we are very proud of this. Also something that I have already announced, you know, when we've been discussing our strategy for 2025, that the kind of the next big thing in banking will be personal financial management tool. We launched some of the functionality, initial functionalities and enhanced some of the former functionalities, and we recognized 674,000 users of this new functionalities. Operationally, you know we are doing very well, but we operate in a non-friendly regulatory environment in Poland. This is a big burden for the banking sector. As you know, most of the key players in Poland are very efficient.
Most of the banks are below 50% in the cost income ratio still. The governmental interventions, if I may say, impact significantly the financial performance of the major players, including ourselves. During the course of last few months, there was a public discussion around the issue of the treatment of the mortgage borrowers in the significantly changed interest rate environment. Set of the interest rate hikes has elevated significantly the interest rate for this clientele. We recognize the fact that these clients, many of them, you know, the situation has changed very rapidly and to some extent, unexpectedly.
The cure which has been proposed by the government was basically universal type of credit holidays without any specific criteria, was very much strongly opposed by the banking sector, though we have not been successful. Not going into the details, as you maybe recall some time ago, you know, the estimates were in the magnitude of PLN 20 billion of impact on the banking sector between 2022, 2023. The banks has calculated, you know, this impact in the respective institutions. Currently, based on the reports which or reporting which the banks have done, the estimations are between PLN 12 billion and PLN 13 billion. Obviously. We are, I think, in the first week of borrowers applying for the credit holidays.
It's still very difficult to estimate the take-up. Obviously we are following what's going on. We still keep, you know, our initial estimate that between PLN 1 billion and PLN 1.4 billion will be the impact on the bank's profit before tax. Borrowers' Support Fund, this is solution which has been initiated by the banking sector already in 2016, I think. This is the tool which we believe, you know, serves clients well and should be strengthened. A strong signal from the banking sector was that we are very much prepared to operate with this fund, you know, as a major tool to support clients. The politicians have chosen different solution.
Still, the Borrowers' Support Fund, which addresses both the zloty borrowers and the foreign exchange co-borrowers, will be strengthened during the course of Q3 . The figure which was publicly discussed was PLN 1.4 billion on top of PLN 600 million, which is already in the fund. In our estimations, you know, we are supposed to put up to PLN 154 million additional contribution to this fund just as mBank. Another aspect of the proposal which has been stated by the official sector at some point was the WIBOR replacement. This issue is still being discussed. There are some declarations that the new benchmark rate potentially can be introduced at the beginning of the next year.
I don't think personally that this is doable. The discussions are being continued. The National Working Group has been established. They are in preliminary discussions, you know, about approach. The phase-out dates or the process are still being, you know, discussed and, you know, will be ultimately decided. I already made some comments on the Institutional Protection Scheme, which has been established as a public law. The banks, you know, are free to participate. Eight banks already declared their participation. The expected payments should happen as we speak, basically, because the institution responsible, which has been set up based on this public law, has been registered, I believe, you know, last week or this week. We are on the eve of setting it up.
Our contribution will amount, you know, PLN 390 billion at this moment. Obviously this situation and the governmental initiatives have impact in a variety of ways, both on the individual banks and, you know, transfer a significant portion of economic value from the banks to the borrowers. At the same time, obviously it's impacting, you know, the macro picture of Poland. I would say the most important is the potential impact on the capital base of the banking sector in Poland, consequently on the credit activity and lending activity of the Polish banks.
What is the most difficult, I believe, and will have impact in the longer run is a, you know, another aspect of moral hazard which, you know, will impact the general population with an expectation that, you know, whatever happens, you know, someone will contribute and someone will take the burden from themselves. That is something what I consider, you know, having significant impact on the paying discipline in Poland. I think that that's the reason we are so vocal to defend our position as guardians of the contractual arrangements in Poland.
As you know, this is, I'm not saying this is defensive position, but I think that the realistic evaluation of what's going on in Poland requires also on our side to show, and that's the rationale of this particular chart, to show how rapidly the overall burden for Polish banking sector, and specifically for mBank, is growing since 2016, including the banking tax, the significantly growing contributions to bank guarantee funds, payments to the Polish FSA, which tripled, and, you know, corporate income tax, which is growing despite, you know, variety of additional burdens which banks have to incur.
As a consequence, as you see, over this year, this year's, you know, the amalgamated figure of all these burdens has reached almost, you know, PLN 10 billion, 9.312 billion. Again and again, what needs to be stressed is that we are talking about one of the most efficient banking sectors in Europe, which the public burden is unable really to pay the dividends. You know, in our case, that was only once, 2017. We always hope to return back, but, you know, you have these developments like this year, which set up, if I may describe, you know, unfriendly environment for our efforts to please the investors.
As I have stated several times, the level of the effective tax rate in Poland has, I would say, exceeded 40% for number of consecutive years, and that's something what we are trying to change in the environment, which unfortunately, you know, also from the macro perspective, and I would say in this international environment is not easy to be done. Some more, I would say business achievements during the course of this quarter, I will focus just on one. Few years ago, we have set up, you know, the venture capital fund under the brand mAccelerator.
One of the initially invested companies, Digital Fingerprints, which is specialized in the security, which the bank has been using for the last three years as a tool to strengthen the security of our clients and is able to follow the patterns of the usage of the equipment, has been acquired. The company has been acquired by credit information bureau in Poland, and it is supposed to be used not only for us, but by our bank. There was I think two other banks which already have been signed up for the product, but with the intermediation of credit information bureau, this tool will be accessible to all the banks in Poland. Client base is growing.
Our market shares are pretty high, stabilizing at 8%, you know, for the retail side. That was a significant growth over the last, specifically last 2, 3 years. The corporate banking, you know, is, I would say, over the last almost 10 years, ranging between 8% and 11%, 11%-12%, depending on the product. I'm referring to the loan book and the deposits. And finally from my side, you know, well, we continue to be the, as we try to, or as we like to describe ourselves, the icon of mobility. The bank, you know, which, where clients are using mostly the mobile platform. What is worth to mention is the share of processes in retail banking, which is initiated, you know, in digital channels.
Just over last two and a half years, it has significant increase and it's reaching right now 80%, which I think is something what is very difficult to be compared to many other institutions, including also the aspirational fintechs. To summarize on my side. Oh, no, I will pass to Andreas Boeger, and Andreas Boeger will summarize the financial part.
Good. Welcome also from my side. Now it works. Okay. Sorry. I think I'll start again. Let's look at the H1 of the year, and then I'll go more into the quarters. H1 , very strong revenues. Revenue growth 45%. I would like to highlight that next to obviously Net Interest Income, there was also over the full H1 year, a strong growth in Net Fee and Commission Income that was amounting to 25%.
The cost income ratio, and Cezary Stypułkowski was mentioning the cost of the IPS, but also in the Q1 , we had very high cost for BFG. The cost income ratio here, on a normalized level is 35.7. That's also really strong. That then translates into net profit of the core business here of above PLN 1 billion, and the return on equity of the core business, which is a bit shy of 20% at the print of 19.4%. Further, we have seen good growth on loans, reduced non-performing loans, and also deposits growing. The Tier 1 ratio you see here, that's a comparison half year over half year that dropped. Obviously, you know, we made a loss last year. That's also part of that.
The Tier 1 ratio is still 329 basis points above the KNF minimum. Let's go to the next slide, where I would like to bridge the quarter and the half year, because I think that we will revisit lots of these details, but what needs an explanation in this quarter is the effective tax rate. Because what we do in the effective tax rate under IAS 34 is we actually project the annual effective tax rate, and that annual effective tax rate is then reflected in the respective quarters. In the Q1 , the effective tax rate was 28.2%.
We know that the aforementioned credit vacations and also other burdens will have either hit us in the H2 or the most is to come when it comes to the credit vacations between PLN 1 billion and PLN 1.4 billion, as was said, that is to come in the H2 . We know that the projected tax rate, because the profits against the non-tax deductible parts are actually lower, so that projected tax rate will be higher. The projection for the annual tax rate is 43.4%, which meant that in Q2, in order to have H1 at 43.4%, we took like a catch-up. That results in a 61% effective tax rate. It's all very technical. We didn't pay more or less tax.
It's more of what you do under IAS 34 to smoothen that out, and it stems from that, I would say, huge shock to P&L that wasn't fully foreseeable in Q1, that we would actually have to relinquish a huge chunk of our revenues here. Maybe one thing to mention, and I'll skip the balance sheet part, but before I hand over to Marek Lusztyn on the Swiss francs, obviously you also see the CHF 175 million here, which is also an extraordinary item that we booked in the Q2 . As we discussed in the last quarters, the reserves are so high, so they have their own life. A CHF 175 million is also within what was to be expected here.
With this, Marek, I hand over to you. I hope you hit the button better than I did.
Good afternoon, everyone. Thanks, Andreas. On the next slide, you can see the dive on the Swiss franc portfolio topic. The carrying amount of the Swiss franc mortgage portfolio in H1 of 2022 was going down by 9 percentage points in Swiss franc terms. It contributes to 6.7% of the total loan portfolio of mBank at the end of June. What needs to be highlighted as well is that the inflow of the individual court cases concerning the indexation clauses in Q2 of 2022 visibly slowed down. That was actually the slowest level of inflows since like 6 quarters or so. We keep on adding provisions in response to that inflow.
The level of provisions was increased as well in 2022. Overall, it bring the coverage of portfolio to nearly 35 percentage points, which is one of the levels which is highest among the Polish peers. Going to the next slide, if we look at the total number of cushion that we have created so far for the Swiss franc issue. Taking into account the capital allocated to the non-core unit, that amounted to PLN 1.8 billion and PLN 4.4 billion of provisions for legal risk, which are currently split into the deduction from the gross assets and amount included in the bank liabilities.
This gives us PLN 6.2 billion overall allocated at the end of June for the Swiss franc portfolio. That is our non-core unit. I hand over back to Andreas on the performance of the core part.
Yeah. On the core bank, let's briefly stay on page fourteen. Some comments I already mentioned, the net profit is above PLN 1 billion, so PLN 1.15 billion nearly. The return on equity was 19.4%. Please bear in mind that this 19.4% fully includes the high BFG cost in the Q1, also the IPS cost in the Q2 . Even in the times with very high burdens here, the core business is performing very well. Obviously, in the Q3 , when the credit vacations will be reflected, that will also affect the core business. But as it stands here, you see it's a very robust business. Also we had a very successful two quarters in the core business or in the general bank.
That should not be forgotten with all the negative burdens and public pressure that we have discussed beforehand. Now I would like to go a bit into the dynamics of the quarter. Let's start with loans. Loans were growing roughly 2% in the quarter. The drivers here is on the one hand, you see the expected slowdown in retail and the also expected expansion in the corporate segment. Corporates you see here growing by a bit more than 4%. Well, that's less of an investment loan story, more of short-term loans and also a higher usage of credit lines that that show the higher carrying values here.
I think the retail story is best explained on the next slide, when it comes to the new lending business, because there it's important to understand both sides of that story. If you look at mortgage loans, sales are down, and they're down significantly. I mean, on mortgage loans, next to what we discussed on credit vacations, I think it's fair to say there is a shock to the market here. On the one hand, there are higher interest rates, on the other hand, we have the matter of credit vacations. We need to see how the production in the next quarters will actually pan out. We expect that the Q3 will be significantly lower than the Q2 in the sales. From Q4 onwards, it might pick up because.
Q4, it might pick up again, because clearly in our client profile, the demographic profile we have with the client base, that's very benign. People would actually like to finance houses. But let's not forget the complexities of these credit vacations, also for the whole housing market. If you are having an asset, i.e., your house, and that is financed, and you were planning to maybe change houses or sell the house in the next 18 months, well, if you know you are subject to credit vacations and you can select them, we expect also the turnover in the whole housing market, i.e., also for new market entrants, that will need to be seen how that pans out.
The mortgage market in Poland will most likely have different dynamics in the last 18 months than what it had in the last decades. Now I move to non-mortgage loans. For non-mortgage loan sales, you see here still on a high level. We also expect the high level to continue. Well, Q3, we expect the market to go down a bit. We will also go down a bit. It's also vacation time. That's what you often see. We expect the non-mortgage loan sales to be more kind of ordinary business vis-à-vis the mortgage loans, where I said, that's clearly something that will go down. On corporate loans, maybe let's just give the outlook. I mean, I've stated before, we see the carrying values, they are quite high.
Usage of credit lines, business is good. The economy is still in good shape. On the other hand, we have inflation. Working capital needs to be financed, but we also have a bit less investment loans. We continue to be selective in the client base and the business that we do. I think a good proxy for the overall volume of the corporate book is a high single-digit growth over the year. We were starting the year with more thinking of a low single-digit growth, but we would say it's more of a high single-digit growth. Let's move briefly to deposits. Well, there we've seen a slight decline. The slight decline is around 1%. That's in line with what we also see in the market.
Please remember, we were starting with a loan-to-deposit ratio below 75%. We were also not immediately the ones who were rushing to first pay for deposits. Loan-to-deposit ratio is at 77%, so we have a better usage of the balance sheet right now. Market is slowly finding also its equilibrium in terms of paying for deposits, and we expect the deposit base to be stable in the future. What you have, you have some changes in between. Some people change from various account models into others. You have shifts between current accounts, savings accounts, and term deposits, but the overall deposit base, we expect to be stable. Let's move over to income, where we have seen historically high core income.
We already discussed this last quarter, where it was nearly PLN 2.1 billion core income, i.e., Net Interest Income and Net Fee and Commission Income. The green and the blue bar. We're now at PLN 2.24 billion. That's a good increase. Let's look at the drivers. We discussed that the interest rate environment helps. Net Interest Margin is at 354 basis points. That means that Net Interest Income is at PLN 1.69 billion. Again, another 12% stronger than in the quarter before. Obviously, the question is, what is the outlook here? Well, the outlook is that is a good basis. We don't expect further substantial growth.
It might still grow, but give or take, new interest rate rises, if they were to come, would not really translate fully into new NII. We would have to pay that gain actually out to the market. That's already a very good level here. What is also on a very good level is Net Fee and Commission Income. What you see, -7% here vis-à-vis the last quarter. Let's remember, the last quarter actually had PLN 37 million in deposit fee in there, which is a one-off, which we take in the Q1 . Obviously that doesn't repeat in the second quarter.
What we have seen, and you see this also on the bottom right, is that the brokerage business, obviously capital markets, new issuances and that kind of business that was weaker in the quarter, that is down by PLN 17 million. Brokerage down to PLN 41 million here, the overall brokerage fees. If you add up these two things, you come to PLN 54 million. That's already a higher drop than the PLN 42 million drop that you've seen. It means that the rest in NFCI is going on full steam and is actually going well. Maybe to explain one last thing here, you see a minus PLN 91 million here in the gains, less losses from financial assets and liabilities. That's a mixed bag of things.
Also in the background of a high interest rate environment, for example, we did a revaluation of the non-listed stakes we have. We have a stake in, for example, BLIK, PSP, in BIK and in KIR. We attached higher discount rates there, so that was a PLN 54 million valuation loss we booked here. But also, in part is the Visa shares, and it also contains a bit less than PLN 30 million loss on the sales of treasury bonds that we did. With this, I would move to cost. On the cost side, I think the dominating topic is actually the well, the black box here. The black colored box, it's not a black box anymore. We know it's PLN 319.8 million what we pay for the IPS.
That IPS payment is reflected fully in the Q2 . Against this, we didn't accrue BFG charges when it comes to deposit guarantee scheme because there is an expectation that in the next quarters we will not pay that respective PLN 51.7 million. You see that on what we booked in Q1 so that we didn't book in this quarter. We also don't expect that to book in the third and Q4 , and it needs to be seen if that holds, but that's our expectation that it should not be charged. Maybe the second thing to be explained here is material cost. All other things I think are in line with expectations. The material cost is a bit higher by PLN 25 million.
Just to give you three examples that actually add up to this PLN 25 million: PLN 11 million IT, PLN 9 million marketing and PLN 5 million for consulting and projects. That roughly gives you the PLN 25 million increase in the material cost here. To maybe finish that view is obviously the cost-income ratio. You see that distortion in the quarter, 47.3%. Well, that's IPS driven. You will see a further distortion in Q3 because we will lack revenues in an amount equivalent to what we book on the credit vacations. In general, Cezary Stypułkowski said that the bank is run, if you take that noise out, below 40% cost-income ratio. If you even take the whole BFG, IPS, everything out, the bank is even run currently at a cost-income ratio below 30%, before these compulsory contributions.
With this, I will end, and hand over to Marek Lusztyn.
Thanks, Andreas. I'm moving to the part on risk and capital. Risk and capital management in the Q2 was exactly how it should be in banking. That is very boring, so there is not much to comment. As you see, the net impairment losses and fair value changes quarter-over-quarter were going down by 27%. The write-off was PLN 195 million. This brought us to the quarterly cost of risk at 62 basis points. Year-to-date cost of risk at 76 basis points.
It is roughly in line with the guidance that we were providing so far for the cost of risk in terms of 80-90 basis points, which we keep so far, unless any kind of stress event related to the geopolitical situation happens. Moving to the next slide. Loan portfolio quality, quarter to quarter, very stable. Almost no changes with respect to the value of the impaired loans portfolio. 1 percentage point up quarter to quarter. The coverage ratio almost unchanged quarter to quarter. Same applies for the NPL ratios at the bank level and segment wise.
The NPL ratio of mortgage loan portfolio, as you see on the side, quarter-over-quarter is going a bit up, but this is primarily driven by the Swiss franc legacy portfolio. As far as the Polish mortgage portfolio is concerned, the NPL ratio was 0.7 percentage points, and that was actually even better than before the pandemic, as in at the end of 2020 stood at 0.96%. Going to the next slide, capital and liquidity position. The capital ratio is slightly up quarter-over-quarter. At the end of Q2, it stood at 16.38%. That was 321 basis points above the minimum regulatory requirement at that moment.
The total risk exposure amount almost no change quarter-to-quarter as well. As far as liquidity ratios are concerned, they were also well above the new regulatory requirements and one of the best in sector. With that, I hand over to Marcin for the macro update and outlook.
Thank you, Marek. I guess that during today's presentation, we've heard a lot the word headwind. Headwinds are the, I would say, dominant force also in the economy. Right now we are seeing that consumers are under constant and broadening pressure to limit their expenditures. So far, we haven't seen that in real figures, but in the last few months, it's becoming more and more visible. It's safe to assume that consumer spending will be even lower in coming quarters because consumers start to crack under higher prices, negative real wages, and also uncertainty connected to almost everything. Last but not least, higher interest rate. At the same time, still unemployment indicators look good, but they have some kind of inertia.
As soon as the economy deteriorates, unemployment rate should go a bit higher, and we expect this. Turning to this, the cycle and the GDP growth, I think that everything is evolving according to the recently presented forecasts. Because the economy is slowing down, it's not going to be visible this year because the starting point was very high. This year we expect the economy to turn out at 4.6% growth. The most important I think is the next year when we'll are going to see a cyclical bottom, not much above 0. At the same time, we are facing very high inflation. Recent readings were above 15%.
Right now, we've entered a period in which inflation is set to stabilize. Yet, we haven't seen the top because the top would be generated in the Q1 of 2023 by energy price increases that are set to be expected by the Polish watchdog. On monetary aggregates, I guess Andreas pointed out the most important developments here, because we are seeing that still corporate credit is growing, but it's mostly because of current financing. The demand for investment credit is falling. Well, the whole volume has still some juice left, but it's going to decelerate into year-end and in 2023. At the same time, we are seeing visible symptoms of a slowdown in household loans.
They are going possibly under zero, led by mortgage loans, in this year. As far as the financial markets are concerned, it is safe to assume that we've seen the top in government bond yields and we are not likely to revisit these levels. Also, it is safe to say that it's not that the worst is already behind us because as we are entering something resembling recession, credit risk assessment of investors may go up. At the same time, zloty stays relatively weak. So far it was mostly reflecting risk aversion and some weaker fundamentals. Right now, this weakness is also portraying cyclical characteristics of the zloty. Over time, there are some prospects for appreciation of the currency.
Still, as we are repeatedly saying, there is no potential for a huge appreciation. The zloty can be only a bit stronger in the medium term. Thank you.
Thank you, Marcin. Now let's start the Q&A session. I will start with the questions about credit holidays. What is the current participation in the credit holidays? And also, what number of PLN mortgages is eligible for credit holidays? As far as mBank Polish zloty mortgage portfolio is concerned, we estimate that roughly 90% of the portfolio is eligible for the holidays program. We are just after a couple of days when clients can submit the motions. We know that there were different ways of submitting the motions in the different institutions. We see a relatively high interest of our clients to apply for the moratoria.
The number of applications we have received so far confirms that basically the initial estimate between 60% and 80% that we have presented to the market is still valid.
Interestingly enough, you know, some of the clients do not apply for the full package, but you know, for some relief, not exercising full eight installments to be forgiven.
How confident are you in your capital buffer against deteriorating outlook, looming regulatory costs, and ongoing FX loan saga?
Well, the capital buffer, as I said, is 329 basis points over Tier 1 minimum. That is a very strong capital base. We are seeing headwinds as we discussed, so that's on the cost side, but also on the revenue side, i.e., the credit vacations. On this, obviously against this we will also earn. That's the one thing, because I've seen there's also a further question on the capital hit from credit vacations. The intention needs to be that we should have a buffer against other unforeseen things. When it comes to the burdens of the banking system, we are actually of the opinion that actually the capacity to bear further burdens is exhausted.
We also, as mBank, need to be mindful of further developments that might come on Swiss francs. Against this, the 329 is a good starting point. You know that we are also doing active balance sheet management. We did a securitization, for example, also, recently, so we are further working on keeping a strong capitalization.
Should we expect higher provisions in Q3, given your expected review of methodology? Any update on FX mortgage related provisions ahead? At what provisions level already at 35% in Q2 will you be comfortable? Another similar question, what is the likelihood or risk for the coverage ratio of FX mortgage book to go above 50%?
As we have explained at length in the financial report, as well as we have elaborated extensively during the previous investor calls, the jurisprudence on the Swiss franc mortgages is not yet, like, fully crystallized. We are still expecting breakthrough verdicts from the European Court of Justice, among others, which are expected towards the end of 2023. That is also answering one of the questions from the Q&A list. Therefore, taking this into account, it is difficult to answer what is the ultimate level of provisioning. The current level of provisioning that we have, if you combine the 4.4 that has been already reserved, plus 1.8, which is the capital allocated for non-core portfolio.
It's nearly equivalent to all of Swiss franc denominated mortgages being converted to the Polish zloty at the original FX rate. To so-called Chairman Jastrzębski proposal. Given the circumstances, we are of the opinion that at this stage it is the farthest reaching economically justified level of provisioning. As we explained at length in the report, every quarter we carefully look at the developments. We look at the incoming court cases, we look at the verdicts, and we adjust the methodology and the provisioning to accommodate for those developments.
At this stage, we believe that the current level of provisioning is adequate, but we cannot exclude that the revision of the model will bring some further considerations.
Marek has said, there is still, you know, a lot of unknowns and crystallizing, you know, the jurisprudence will take some time. Managing, you know, the past, you know, this heritage portfolio and managing also the future requires some reasonable balancing. You know, that's the reason that after, you know, some months of operating with the methodology which we has announced two years ago, I think that we are coming to the point where we need to have a fresh look into this, to reflect in our steps better what is more on horizon and not what are the historicals.
Now maybe on cost of risk. Do you expect material increase in cost of risk in the coming quarters?
We don't expect material increase in the cost of risk in the coming quarters. We believe that 80-90 basis points is still a good guidance, and it's like basically the healthy cost of risk that mBank also experienced in the past. We have carefully reviewed the portfolio. We believe that our loan book is well-positioned for the headwinds ahead that we have discussed at length. Also looking at the potential stress coming from deterioration of the gas availability for Poland, answering to one of the other questions from the Q&A that is linked to that. We don't expect material increase in our level of provisioning.
We have done a stress test on that, and even in the situation of the full closure of the gas to Europe. We would expect our cost of risk not to go up more than 10 basis points in 2022.
Thank you. Commerzbank planned mBank to contribute some EUR 600 million to group's revenue by 2024. That looks now a very optimistic scenario. Could you please comment on mBank's revenue trajectory?
Good. On this, the revenue trajectory is intact. Commerzbank at one point made a statement of PLN 600 million against their original strategy in 2024. The figure needs to be reconciled with Commerzbank, what the starting point here is. When it comes to the inputs that mBank has in this and the increment, that still holds, and I think it was PLN 600 million delta, obviously, because in the Q1 we—in the H1 , we already had more than PLN 4 billion zlotys of revenue. That delta is to be more discussed with Commerzbank Group.
For us, the long-term trajectory and also the long-term trajectories that we set when we put out the strategy last year, when it comes to the growth rates and what would actually result from that, all of that is intact.
What is the level of MREL-eligible funding needs for 2022 and 2023?
On MREL and the minimum MREL, we have, you see, I think on page 37, it's stated that we're currently fulfilling all MREL requirements. The MREL requirements will phase in over time. In order to, in the future, also fulfill these higher than phased-in requirements, the plan for MREL in general is like what we did last year when we issued EUR 500 million to each year tap the market by roughly EUR 500 million to maybe even EUR 700 million, but let's say to EUR 500 million euros plus. We are also monitoring the market here. We're willing to issue.
On the one hand, the war in Ukraine, but also on the other hand, domestic discussions around the credit vacations and around the complexities on which we spent the first 15 minutes of this meeting make the market currently very difficult to access funds there. As I said, we are continuously monitoring. Currently, it's fine, and against phasing in, we will in the future have to issue.
I have to add that I believe that there will be a reflection on the phasing in of the MREL in between 2022 and 2023, can be revisited by the respective regulators.
Now, net interest margin. You sound a little bit more bearish on the NII, net interest margin outlook compared to your peers. Other banks rather expect further improvement, excluding credit holidays. What may be the reason? Another one on NIM, when mBank expects its NIM to peak in this interest rate cycle?
Yep. I think they're both clearly related. As I said, we don't expect it to substantially increase. There might still be increases. If others are more positive, well, then they are more positive. We try to have a conservative assessment here. There is some more leeway, but the historical jumps we have seen over the last quarters, obviously they're not in the book anymore. That's what we can deliver. 354 basis points of NIM is strong. As I said, it might be stronger, but there will be no huge jumps there.
Another one's connected to interest income and costs. Could you please shed more light on your deposit repricing and outlook in the H2 ?
On deposits, you see it here. You see here the blue line on the right side, you see how much we actually pay for deposits. You clearly see that we clearly have started to pay for deposits. That's also an interesting narrative that somehow is the banks don't pay for deposits. Well, we are paying, but we're paying where we see it as adequate. The deposit structure plays also a very important role. The benefit that mBank in general has is that a lot of our deposits are operational, transactional. That's part of the technology also we offer that the transactionality is very easy with us, and that means a lot of money is on current accounts for transactional purposes.
That's the one where the pricing pressure is smaller, I would say. On the other hand, what we had interest rate raises and that equilibrium in what you pay as a market also for deposits is different to high frequency trading, where maybe equilibrium is done in milliseconds. This comes over time. That means we expect that the interest expense on deposits will also further rise in the future. That's also a part why, for example, further rises in rises in interest rates will not one for one translate into higher net interest income at mBank.
Did you increase the scale of your hedging as first? The negative impact on NII was PLN 240 million in the Q2 versus PLN 59 million in the Q1 . Second, in the management board report, you present the negative impact of PLN 62 million zloty for 100 pips increase of interest rates.
Yeah. I mean, on this when it comes to the hedging. What we do is, for example, look at how we can model certain balance sheet items. As you have seen during the COVID crisis, when interest rates were dropping from 150 to 10 basis points, our Net Interest Income did not drop at all. That on the one hand, was a function of us printing more business, but with this, you can actually not make up for 150 basis points down to 10 basis points. We have a fixed receiver position that's a rolling position that we have strategically on the balance sheet. Against this, we actually pay floating rate into the derivatives.
The floating rates into the derivatives, well, the huge jump actually we also have seen in the last quarters, and especially in Q2 for the full quarter, we actually had quite a high three-month WIBOR. That's the interest expense part you then see here on the slide. The derivative volume itself against it, because that was the question if there is a change in strategy. There is no change in strategy. It's just right now the respective yeah floating legs filtering through.
The mortgage NPL ratio is up again in the Q2 . Can you please comment on key drivers?
As I alluded to earlier, that is mostly driven by the non-core portfolio that is much more mature. If we look at the zloty portfolio, the NPL ratio at the end of June stood at 0.7%, 70 basis points. That is very small for this type of book. Starting from the next quarter, we will start showing the NPL ratios for the mortgages of core and non-core separately just to make it clearer. Thanks for the question.
My feeling is that, you know, between 2016 and 2022, we shrink our Swiss franc portfolio from CHF 5 billion to CHF 2 billion. Naturally, the contribution of non-performing will rise.
Can you please provide details on mortgage production in the Q3 ? Do you expect portfolio to be flat this year? Do you experience elevated level of repayments?
Yeah. Let's maybe first start with the repayments. We expect elevated prepayments because we're also seeing that. We to some extent also reflected this in NII in a conservative assumption on the prepayments, the so-called small tour. That's also part here on of the approach. When it comes to the prepayments, I think it's a very, very important point to monitor over the next quarters because clearly the credit vacations about which we spoke are so I would say blunt instrument that is not really looking at the need of the client and at the cash flow need. There is a certain push that it would be wise that people actually take the credit vacation as prepayment.
I think with this, taking the cash that is gained and then investing it into a prepayment where the money is then kind of stuck from a cash flow perspective for a decade plus would definitely mean that the client did not need the credit vacation at all. That will be a very interesting point to monitor, but we expect clients to be smart, and to look at the optionalities they have, and some of them will think it's smart to do a prepayment. Some of them will think it's smart to not take a credit vacation, take one, or do something with it. We, in general, given a higher interest rate environment, expect prepayment, plus also with the credit vacations, expect more prepayments. We will actually see that, I think over time.
When it comes to the mortgage production in the Q3 , as I said, given the circumstances, and also given the unclear situation that I think exists or will exist on the housing market, you're being unclear if you should right now sell your house or if the house should go on the market. We will just see less activity. There will be less opportunity for non-incumbents to actually buy real estate, and we would be cautious, and we think the Q3 production will be significantly down still also from Q2 .
Thank you. How serious is windfall tax threat in Poland? Government track record suggests that this cannot be ignored, especially after Spain, Hungary, and even Czech Republic consider such tax or already introduced. Could this potentially be a risk for 2023?
With the polls, I would say things are unpredictable. There is a lot of unknowns in the Polish political environment. We are approaching the election season, and this is something which will be a significant unknown shadowing, you know, what can happen, you know, within next few quarters. I personally consider this a remote perspective. But since there is this kind of a fashion across Europe, one cannot exclude that, since there are no copyrights on this issue, you know, things like that can come to us as well.
Now, I think the last question may be a bit more positive.
Though if I may add one thing. The space for the taxation of the windfall type of revenues which we-
Profits
...profits, to be perfectly honest, seems to be very small. The benefits, you know, interestingly enough, in some other markets, you know, the governments came to conclusion that, you know, they want to take part of this, you know, can cash it out, you know, directly to the government pockets. In our case, you know, as it was already mentioned, the transfer is going directly to the borrowers. Space for, you know, additional taxation seems to be very small.
Among a slew of headwinds Polish banks are facing in the next few quarters, could you comment or name any positives for the sector whose investability status has deteriorated massively recently?
Well, the most positive is that the business model of the bank like ourselves, you know, not only us, plus, the level of effectiveness of Polish banks is very strong. This is the most important buffer against, you know, all the odds. I think that that's a very positive development that over the years, we have built up institutions which are pretty resistant to what's going on, both in terms of the market developments and I would say, how to describe this, variety of excesses also on the regulatory front.
At the end of the day, if you look at slide 14, that summarizes the performance of the core business of mBank, we are talking about the franchise and the business model that brings nearly 20% ROE. That is significantly above cost of equity with cost-income ratio, which is not only one of the best-in-class in the local market, but one of the best-in-class in Europe or in the world even. If it was not for the legacy portfolio and the regulatory headwinds that we have seen in the last couple of months, that would be one of the best banks to invest in the world.
Thank you very much. I think we covered all the questions. Thank you for your attention, and have a nice rest of the summer.
Very important.
Bye-bye.