1.5. mBank Group before and after the financial crisis

The financial crisis, started with the crash on the American real estate market, changed the face of banking globally. In 2008 the banking sector in Poland was still characterised by intensive expansion on the market of housing loans denominated in foreign currencies, which widened the gap between loans and deposits as well as caused the capital adequacy ratio to fall. Banks were financing the increase in lending mainly by liabilities towards other banks, in particular to parent companies, which resulted in an increase in their sensitivity to the situation on the Polish and the global financial markets as well as in a deterioration in the structure of financing sources[1]. Following the collapse of Lehman Brothers on September 15, 2008 the confidence in financial markets dropped further and, consequently, liquidity decreased and financing costs for banks increased. A number of financial institutions in the world needed a substantial recapitalisation from the taxpayers’ money.

Five years after the crisis, the Polish and the global banking sectors have undergone a profound transformation. In particular, the crisis resulted in significant regulatory tightening, both on the European (among others, Basel III, the CRR/CRD IV package) and the national levels (recommendations of the PFSA), as well as in stricter supervision of the banking sector in the form of stress tests and asset quality reviews. Regulations and investors forced banks to strengthen their capital bases and to focus on stable sources of financing as well as to apply a more rigorous approach towards risk management.

In the years 2008-2014 the business model and, consequently, the balance sheet structure of mBank Group were modified. The current business model of mBank conforms to the existing and future regulatory requirements as well as enables effective reacting to new opportunities and challenges occurring on the market.



[1] Kotowicz, A. (ed.) (2009), Report on the condition of Polish banks in 2008, Warsaw: Office of the Polish Financial Supervision Authority, p. 47

1.5.1. Capitalisation

At the end of 2008 the total capital of mBank Group amounted to PLN 4,048 million, the capital adequacy ratio was 10.03% and the Common Equity Tier 1 capital ratio was 5.6%. The Bank’s capital strategy assumed an effective capital use and maintaining a relatively high share of the Tier 2 supplementary capital in foreign currency (the Swiss franc) in order to decrease the sensitivity of capital ratios to exchange rate fluctuations. The Bank has taken a number of actions to adjust its capital structure to the current and future regulatory requirements. At the end of 2014 the total capital of mBank Group amounted to PLN 11,073 million and the total capital ratio was 14.66%.

Issue of shares

In May 2010 12,371,200 mBank’s shares were issued. As a result of the issue, PLN 1,979.4 million was obtained and the Bank’s capital grew significantly, thus, increasing the security of its operations. The capital adequacy ratio of mBank Group increased to 15.9% and the Tier 1 capital ratio to 10.4% at the end of 2010. It should be emphasised that the issue attracted a lot of interest from investors, despite other competitive offers on the market. All offered shares were acquired, with an oversubscription rate of 1.6.

Issue of subordinated bonds

In December 2013 and 2014 the Bank issued subordinated bonds worth PLN 500 million and PLN 750 million. The funds from the issue in December 2013 amounting to PLN 500 million were recognised in total as Tier 2 capital. In January 2015 the PFSA gave consent to recognising as the supplementary capital the amount obtained by the Bank through the issue in December 2014 totalling PLN 750 million.

Moreover, in March 2014 the Bank conducted early redemption of subordinated bonds with a nominal value of CHF 90 million. The Bank conducted the said redemption in view of the entry into force of Regulation (EU) No 575/2013 of the European Parliament and of the Council of June 26, 2013 on prudential requirements for credit institutions and investment firms, because those bonds were not fully taken into account in calculating Tier 2 capital.

Due to the actions of the Bank and regulatory changes, the supplementary capital taken into account in calculating Tier 2 capital amounted to PLN 1.6 billion at the end of 2014. For more information on the capital structure and issue of subordinated bonds please see chapter 6. mBank Group capital and funding.

The chart below illustrates the development of capital ratios of mBank Group between 2008 and 2014.

 

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.