6. mBank Group capital and funding

6.1. mBank Group capital base

Structure of own funds including CET 1 and Tier 2 capital

The amount of capital maintained by mBank Group meets the regulatory requirements and allows for the planned business expansion at the defined risk appetite level. This is reflected in the Common Equity Tier 1 (CET 1) ratio (12.24% at the end of 2014) and the total capital ratio (TCR, 14.66% at the end of 2014), which are safely higher than the levels recommended by the PFSA at no less than 9% for the CET 1 ratio and no less than 12% for the TCR.

The Bank’s strategic objective is to maintain a stable Tier 1 level and to reduce the share of Tier 2 capital in the mBank Group’s funding structure. Currently mBank Group has a strong capital base, as reflected in its capital structure. Own funds stood at PLN 9.8 billion at the end of 2014, of which PLN 8.1 billion (84%) constituted CET 1 capital. The main components of CET 1 capital include: share premium, other reserve capital and the general risk fund. Tier 1 capital is strengthened mainly though retained earnings.

Tier 2 capital stood at PLN 1.6 billion at the end of 2014, a decrease year on year. The decrease of Tier 2 capital denominated in CHF was due to the amortisation of subordinated debt and the withdrawal of capital instruments following the effective date of CRR. The Bank plans early repayment and early redemptions of instruments with limited or no capital recognition. At the same time, the Bank intends to increase the share of Tier 2 instruments denominated in PLN in the Bank’s capital structure. In 2013, mBank successfully completed an issue of subordinated bonds in the amount of PLN 500 million. Following the approval of PFSA, the amount was added to own funds of mBank Group. CHF 90 million of subordinated bonds with a limited capital credit was repaid early in March 2014; CHF 50 million of subordinated debt with nil capital credit was partly repaid early in June 2014. The Bank issued PLN 750 million of subordinated bonds in December 2014; the PFSA approved the inclusion of the funds raised in the issue in the Bank’s supplementary capital in January 2015. Further issues of PLN subordinated debt are planned in 2015-2018. The table below presents the balances of mBank Group’s subordinated debt.




Nominal value


Maturity Date

Tier 2 Capital


400 m





70 m





90 m





170 m





80 m





500 m





750 m




* In January 2015 the PFSA agreed to include the funds raised in the issue into Tier 2 funds of the Bank

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Subordinated debt with a fixed maturity included in own funds is subject to amortisation on a daily basis over five years prior to final maturity. In addition, subordinated debt without a fixed maturity in the table above is gradually being withdrawn starting in 2014 and is included in own funds according to the percentage rate set by the PFSA for each year until the end of 2021. The percentage is 80% in 2014 and it will range from 40% to 70% in 2015 under CRR.

The current structure of the capital base derives from prior decisions regarding retained earnings and subscription right issues. In 2002-2011, mBank retained all of its earnings by decision of the General Shareholders’ Meeting, while the 2012 dividend constituted 35% of mBank’s net profit and 2013 dividend  - 67%. Those measures had a positive impact on the structure and the flexible management of capital at the Bank.


In 2012, after ten years, mBank resumed the payment of the dividend to its shareholders. In its decision recommending the dividend payment to the Supervisory Board, the Management Board of mBank mainly considers current recommendations of the Polish Financial Supervision Authority concerning dividend payments by banks. In 2014, the PFSA issued the following recommendations for banks:

  1. Banks holding a significant market share in non-financial client deposits (non-financial client deposits on the bank’s balance sheet represent more than 5% of the aggregate non-financial client deposits in the banking sector)
  2. It is recommended that a dividend up to 100% of the profit generated in 2014 may be paid by banks with a significant market share in non-financial client deposits which meet all of the following criteria:
  • the bank is not subject to a restructuring programme;
  • the Tier 1 ratio (CET1) is more than 12% (9% + 3% systemic risk buffer);
  • the total capital ratio (TCR) is more than 15.5% (12.5% + 3% systemic risk buffer);
  • the overall SREP score is 1 (good) or 2 (satisfactory);
  • the SREP capital risk score is not worse than 2 (satisfactory).
  1. Banks holding a significant market share in non-financial client deposits which have a total capital ratio (TCR) ranging from 12.5% to 15.5% may pay out 50% of the profit generated in 2014 if they meet the other criteria.
  2. Other banks:

It is recommended that a dividend up to 100% of the profit generated in 2014 may be paid by other banks which meet all of the following criteria:

  • the bank is not subject to a restructuring programme;
  • the Tier 1 ratio (CET1) is more than 9%;
  • the total capital ratio (TCR) is more than 12.5%;
  • the overall SREP score is 1 (good) or 2 (satisfactory);
  • the SREP capital risk score is not worse than 2 (satisfactory).

It is recommended that banks which do not meet the dividend payment criteria retain all profits generated in 2014 in capital.

As a consequence of the SNB decision on January 15, 2015 (for more information, please see section 4.4. Expected trends in the economy in 2015 and their impact on the banking sector) and the appreciation of the CHF rate, the PFSA announced that it considers a modification of its recommendation on the dividend payment for banks.

In addition to the PFSA recommendations described above, the Management Board also considers the Bank’s capital base and business expansion opportunities.

The table below presents information on mBank’s dividend payments since 2012.




Dividend per share

Total dividend volume (PLN m)

Dividend as a % of net profit* 









* The ratio of the total amount of dividends paid to mBank's net profit in the financial year


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Capital and liquidity norms under Basel 3 and EU regulations

The rules defined in the new capital accord Basel 3 were drafted and implemented on the basis of the lessons learned in the 2007-2009 crisis when the banking system was unable to cope with problems on its own and required an injection of external capital on an unprecedented scale.

The objective of Basel 3 is to ensure such levels, quality and structure of own funds as necessary to absorb potential losses in order to avoid recapitalisation of banks with taxpayers’ money. Basel III solutions aims to raise the importance of short-term and long-term liquidity management, to improve the safety of banks by raising capital in relation to assets, and to introduce an additional safety buffer to be used in the event of recession or threats, as well as a counter-cyclical buffer to cumulate capital in periods of fast growth of loan portfolios.

The new solutions of Basel 3 include in particular an amended definition of capital as well as the introduction of ratios for the banking sector as a whole and for individual banks. Basel III underlines the special importance of equity, which is considered a high-quality asset component.

The standards approved by the Basel Committee on Banking Supervision have been introduced into the European Union legislation in the CRD IV / CRR package. Their provisions took effect on January 1, 2014 but the CRD IV / CRR package allows for the application of certain provisions at a later date and defines a timeline for reaching the required norms within transitional periods.

As a Directive, CDR IV must be implemented in the national legislation; however, as a Regulation, CRR has a direct effect in the EU member states without the need to implement legislative amendments in their jurisdictions. CRD IV governs among others the founding of banks, capital buffers, supervision, management and corporate governance of banks and investment firms. CRR contains detailed provisions concerning among others own funds, capital requirements, liquidity and leverage. The European Banking Authority (EBA) gradually issues technical standards for CRD IV and CRR, i.e., detailed descriptions of procedures, instruments, indicators, rules, and their calibration.

MREL and TLAC and their potential impact on mBank

Global and European Regulatory framework concerning financial institutions actively addresses rules and authorities’ powers to prevent and manage banking crises. There are two concepts of indicators aiming at ensuring an appropriate level of loss absorbing capacity in banks, protecting them against insolvency and facilitating orderly resolution or recapitalisation without use of taxpayers’ funding. The minimum requirement of own funds and eligible liabilities (MREL) is a concept under BRRD Directive (for more information please see section 4.6 Changes in recommendations of the Polish Financial Supervision Authority (KNF) and legal acts concerning banks), coming into force from 2016. It requires banks to maintain a sufficient amount of bail-inable liabilities, which could be written down or converted into equity under decision of resolution. MREL is going to be expressed as percentage of eligible liabilities in total liabilities and own funds. The final limit of this indicator will be applied by resolution authority individually for each financial institution in EU. Should the minimum requirement for MREL be set at the level of 8%, as indicated in the latest Consultation Paper on EBA Regulatory Technical Standard on MREL as of November 2014, mBank is well above this limit. The second concept, total loss-absorbency capacity (TLAC), is an approach formulated by the Financial Stability Board (FSB). By definition it refers to Global Systemically Important Banks (G-SIBs) only, but according to FSB guidelines (as of July 2013 and November 2014) material subsidiaries of G-SIBs might be subject to meet this requirement in full or modified amount too, e.g. through distribution of TLAC from resolution authority to material subsidiaries in proportion to the size and risk of their exposures. mBank would potentially need to maintain the internal TLAC in a situation its major shareholder is enlisted as G-SIB (latest presence of Commerzbank on the list: 2012). Although the rationale behind TLAC is closely aligned with MREL, it differs with respect to elements of eligible liabilities and calculation method. It is going to be introduced on January 1, 2019 the soonest. Regulators’ intention is to implement MREL and GLAC to G-SIBs consistently despite some differences between these concepts.

Asset quality review (AQR) and stress-testing

In 2014 the Polish Financial Sector Authority (PFSA) conducted Asset Quality Review (AQR) and stress tests in the Polish banking sector. The 15 Polish banks under review represented c. 72% of total assets of the entire banking sector. The review, conducted in accordance with the European Central Bank’s (ECB) methodology, based on the data as of December 31, 2013, was a part of a pan-European exercise of European Banking Authority in co-operation with the ECB and national authorities, and covered a sample of 123 banks in Europe. The results were announced by the PFSA and EBA on October 26, 2014.

The AQR involved an in-depth and comprehensive analysis of important segments of banking balance sheets such as corporate and retail credit exposures which are sensitive to potential significant financial and economic crisis scenarios. The review aimed at ensuring that the values of assets under investigation are appropriately represented in the banks’ financial reporting and have adequate levels of provisioning coverage. At the same time, the stress tests examined the resilience of banks’ capital buffers to a crisis scenario over a period of three years (2014-2016).

The results of AQR and stress test confirmed the resilience of the Polish banking sector to the stress situations. The minimal level of Common Equity Tier 1 for the baseline scenario in 2014-2016 was set at 8% and for the adverse scenario at 5.5%.

According to the results announced by the PFSA, under the stress test, mBank’s Common Equity Tier 1 ratio amounted to 11.08 in an adverse stress scenario and 12.41% under the baseline scenario. The results of the AQR and the stress tests show that mBank’s capital adequacy has significantly exceeded the required benchmark set out for the purposes of this exercise. 

The below chart presents the results of AQR and stress test for mBank.

6.2. mBank Group funding

The One Bank Strategy for 2012-2016 provides for optimisation of the Bank’s balance sheet in terms of its profitability and structure by increasing the share of client deposits in funding, further diversification of the funding base, and a bigger share of high-yield assets.


The figure below presents the structure of mBank Group’s sources of funding at the end of 2014.

Bond issued under the EMTN Programme

After the successful first issue of CHF bonds in October 2013 and the first eurobond issue in October 2012, mBank Group completed further issues under the EUR 3 billion EMTN Programme in 2014.

mFinance France acting as issuer (fully underwritten by mBank) issued two tranches of bonds addressed to European investors. The transactions were preceded by a road show in the major capital centres of Europe. The road show included a number of investor meetings which attracted very strong interest.

At the turn of March to April 2014, EUR 500 million of bonds maturing on April 1, 2019 were sold at 145 bps above the swap rate. The coupon is 2.375% p.a.

At the close of book building, investor subscriptions ran up to nearly a billion euros. The subscriptions on the book were very diverse: they came from more than 100 investors representing mutual funds, banks, insurers and pension funds. It should be noted that 15% of the bonds were placed with domestic institutional investors.

In November, the Bank returned to the international market with another EMTN issue, selling EUR 500 million of bonds maturing on November 26, 2021 at 145 bps above the swap rate. The coupon is 2.000% p.a.

Compared to the previous EMTN issue, the maturity was extended from 5 to 7 years but the cost of funding above the swap rate was unchanged. The improved pricing parameters combined with an extended maturity clearly suggest that investors on the international capital markets perceive mBank as a solid and reliable issuer with a presence in a stable economy.



Date of issue

Nominal value

Maturity date


4 October 2012

EUR 500 million

12 October 2015


5 September 2013

CHF 200 million

8 October 2018


22 November 2013

CZK 500 million

6 December 2018


24 March 2014

EUR 500 million

1 April 2019


20 November 2014

EUR 500 million

26 November 2021


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The success of the subsequent EMTN issues corroborates the adopted strategy and allows mBank to continue its efforts aimed to diversify the sources of funding and to ensure stable refinancing on attractive terms.

Activity on the covered bond market

mBank Hipoteczny (mBH) is one of two mortgage banks currently active on the Polish market (next to Pekao Bank Hipoteczny) and the leader in covered bond issues with a market share of 73.4% at the end of December 2014. In 2014, mBank Hipoteczny became a more active player on the debt securities market. mBH placed eight series of covered bonds during the year. The total nominal value of the covered bonds in issue was PLN 1,014 million. Consequently, mBH successfully achieved its target of issuing PLN 1 billion of mortgage bonds in 2014.

It was the best year in the fifteen-year history of mBank Hipoteczny as measured both by the number of issued series of covered bonds and their total value. The value of new covered bonds issued by mBH and the outstanding covered bonds on the market crossed the mark of PLN 3 billion for the first time in history.

In subsequent series, the issue parameters of new issues of covered bonds introduced to trading changed substantially. Previous series denominated mainly in PLN had relatively short maturities as well as floating interest rates. Compared to the 2014 issues, the policy of the bank was modified as its main function is to raise funding and to refinance long-term mortgage loans. The main focus is on narrowing the maturity gap of assets and liabilities, reducing the currency gap, and largely cutting the cost of new funding.

In late February 2014, mBH issued the first series of 15-year EUR covered bonds. Their maturity is among the longest maturities of corporate debt ever issued by Polish issuers. The success of the issue was not a one-off event, as demonstrated by another two 15-year covered bond issues. Each next series met growing demand of foreign investors, as reflected in the growing nominal value of issued covered bonds, from EUR 8.0 million to EUR 20.0 million. Each series bears interest at a fixed rate.

At the turn of July to August 2014, mBH issued two series of PLN covered bonds. The Bank was originally planning to issue up to PLN 200 million of HPA22 series covered bonds. Faced with strong interest from domestic financial market players, mBH decided to raise the nominal value of the HPA22 series to PLN 300 million and arranged an issue of the HPA23 series. As a result, mBank Hipoteczny raised PLN 500 million in total. This was the largest sale of covered bonds in the history of Poland’s mortgage banking.

To take advantage of the positive foreign investor sentiment, mBH raised another EUR 70 million in two transactions closed in Q4 2014. Table presenting information on all covered bond issues completed on 2014 is presented in section 2.3 Key projects of mBank Group.

Compared to the previous issues, the success of the 2014 transactions should be seen in the context of the falling interest margin and the extended maturity of the instruments. This results in a significant reduction of the cost of funding and a much better match of the maturities and currencies of the Bank’s assets and liabilities.

Legislative changes concerning covered bonds

On August 26, 2014, the Council of Ministers approved the assumptions for a draft act on covered bonds and mortgage banks which aims to improve protection of covered bond holders, reduce the cost of bond issues, and narrow the maturity gap of assets and liabilities on the balance sheets of mortgage banks.

The assumptions define the rules of satisfying the claims of covered bond holders and describe the bankruptcy process of mortgage banks, which should strengthen the safety of covered bond holders and reduce the cost of funding with covered bonds.

Mortgage banks will also be in a position to increase the value of issued covered bonds to 80% of the mortgage lending value of property for retail mortgage loans for individuals, compared to the current cap of 60%. In addition, the proposed amendments will simplify entries into the mortgage register under mortgage banks’ claims.

Mortgage banks will be subject to the requirement to hold statutory over-collateralisation of covered bonds equal at least to 10% of the value of issue and to hold a liquidity buffer necessary to cover interest on covered bonds for a period of 6 months.

The proposed amendments will improve credit ratings, which will reduce the cost of funding with covered bonds.

The Bankruptcy and Restructuring Act will also be amended. The proposed solutions clarify the rules of satisfying claims under covered bonds and using assets entered into the collateral register. Each covered bond creditor will have the same rights to a separate pool of bankruptcy assets. The clarification of the rules of satisfying creditors’ claims under covered bonds will largely increase the safety of investors and the certainty of trading.

Amendments are also planned in the Personal Income Tax Act including among others exemption of interest on covered bonds from taxation at the source and the equitable position of loans granted by mortgage bonds and purchased loans. The Corporate Income Tax Act is also proposed to be amended. Amendments of the Act on Organisation and Operation of Pension Funds and the Act on Co-operative Savings and Loan Associations will expand the opportunities for investment in covered bonds for pension funds and co-operative savings and loan associations.

The expected effective date of the new regulations is in the course of 2015.