1.5.2 Financing of operations

In 2008 the main source of financing of mBank’s operations, apart from deposits of retail and corporate clients, were medium- and long-term loans denominated in foreign currencies, taken out with mBank’s strategic investor, Commerzbank, and with other banks. The loans were extended mainly in CHF and EUR and financed lending in those currencies. Simultaneously, the loan to deposit ratio of mBank Group was one of the highest on the market and amounted to 138% at the end of 2008.

The “One Bank” Strategy for the years 2012-2016 aims at optimising the Bank’s balance sheet with regard to its profitability and structure by increasing the share of client deposit financing, further diversification of the financing base and increasing the share of assets with higher profitability. The expiring loans taken out with Commerzbank are not being renewed and the Bank is focusing on long-term sources of financing by issuing bonds and covered bonds.

EMTN issue programme

In 2012 BRE Finance France S.A. (as the issuer, currently mFinance France) and mBank (as the issue underwriter) signed an agreement on a Euro Medium Term Notes (EMTN) issue programme for a total amount of up to EUR 2 billion, increased to EUR 3 billion in 2014. The aim of the programme is the issue of debt securities in many tranches and currencies, with a diversified interest structure. For more information on the issue of bonds within the EMTN programme please see chapter 6. mBank Group capital and funding.

Increasing the share of client deposit financing

In view of the relatively high share of mortgage loans denominated in CHF and their financing with loans in that currency, the loan to deposit ratio of mBank Group was one of the highest in the Polish banking sector. The “One Bank” Strategy aims at lowering that ratio and the target level set during the preparation of the strategy was 115% in 2016. At the end of 2014, the level was lowered even to 103%, which means that the Bank’s strategy with regard to acquiring client deposits proved to be effective. The Bank does not apply an aggressive pricing policy, but focuses on acquiring new clients and maintaining the present ones as well as on encouraging them to choose mBank as their first-choice bank. The chart below illustrates the development of the loan to deposit ratio of mBank Group in the years 2008-2014.

 

Issue of covered bonds

With a view to diversifying the sources and lowering the costs of financing, mBank Hipoteczny (mBH) increased its activity on the market of covered bond issues. mBH is the leader on that market with a share of 73.4% as at the end of December 2014. The value of the covered bonds issued in 2014 exceeded PLN 1 billion and was the highest in the Bank’s history; the total nominal value of the covered bonds issued by mBH amounted to PLN 3,027 million at the end of 2014. Issue of covered bonds is a significant part of the Bank’s strategy with regard to changes in the balance sheet structure and to the diversification of its financing sources. Major changes occur also in the legal environment. On August 26, 2014 the Council of Ministers adopted assumptions to the draft of the act on amendments to the act on covered bonds and mortgage banks and to some other acts proposed by the Ministry of Finance. In the opinion of the Bank, changes included in the assumptions to the act on covered bonds and mortgage banks should have a positive impact on the development of the covered bond market in Poland. Ultimately, covered bonds are to be the dominant source of financing of mBank’s mortgage loans. For more information on the issue of covered bonds of mBank Hipoteczny see chapter 6. mBank Group capital and funding.

The effects of the above-mentioned actions taken by mBank Group in recent years are illustrated by the chart below which presents the evolution of the financing profile of mBank Group in the years 2008-2014.

 

Decreasing the share of mortgage loans denominated in foreign currencies

Addressing the market needs and using the financing in the form of medium- and long-term loans taken out with the parent company, in the years 2003-2011 mBank was offering its retail clients mortgage loans denominated in foreign currencies, mostly in the Swiss franc (CHF). The biggest increase in those loans occurred in the years 2008-2009, but, starting from 2010, the sales of such loans were gradually limited and in August 2011 the sales of loans denominated in CHF were stopped completely. Therefore, the portfolio of mortgage loans denominated in CHF is decreasing gradually — annually, the portfolio shrinks by CHF 350-400 million. The chart below shows the value of the portfolio of those loans and its significant decrease starting from 2010.

 

Thanks to the actions taken by mBank Group in the period after the financial crisis, described in this chapter, the Bank has not only more liquid and diversified financing, but also a stronger capital base, which is being additionally improved by the growing profits thanks to their full or partial retention.