5. Financial position of mBank Group in 2014

5.1. Profit and loss account of mBank Group

mBank Group reported a profit before tax of PLN 1,652.7 million in 2014, compared to PLN 1,517.7 million in 2013 (+PLN 135.0 million, i.e., 8.9%). The net profit attributable to the shareholders of mBank reached PLN 1,286.7 million in 2014, compared to PLN 1,206.4 million in 2013 (+PLN 80.3 million, i.e., 6.7%).

Summary of financial results of mBank Group

 

 
PLN M 2013 2014 Change in PLN m Change in %
Total income 3,673.5 3,939.2 265.7 7.2%
Net impairment losses on loans and advances -477.8 -515.9 -38.1 8.0%
Overhead costs and amortization & depreciation -1,678.0 -1,770.6 -92.6 5.5%
Profit before income tax 1,517.7 1,652.7 135.0 8.9%
Net profit attributable to shareholders of mBank 1,206.4 1,286.7 80.3 6.7%
         
ROA net 1.1% 1.1%    
ROE gross 16.5% 16.9%    
ROE net 13.1% 13.1%    
Cost / Income ratio  45.7% 44.9%    
Net interest margin 2.2% 2.3%    
Common Equity Tier 1 ratio  14.2% 12.3%    
Total capital ratio  19.4% 14.7%    
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The main drivers of the financial results of mBank Group in 2014 included:

  • Increase of total income which stood at PLN 3,939.2 million. The increase was recorded in the core income, i.e., net interest income, net fee and commission income, as well as net trading income.
  • Increase of operating expenses (including depreciation and amortisation) to PLN 1,770.6 million.
  • Improved efficiency as measured by the cost/income ratio which stood at 44.9% at the end of 2014, compared to 45.7% at the end of 2013.
  • Stable costs of risk at 72 bps, compared to 70 bps in 2013.
  • Continued organic growth and business expansion as demonstrated by:
    • Increase of the individual client base in Poland, the Czech Republic and Slovakia, and clients of Orange Finance, to 4,689 thousand (+320 thousand clients compared to the end of 2013);
    • Increase of the number of corporate clients to 17,787 clients (+1,454 clients compared to the end of 2013).

Net loans and advances increased by 9.3% year on year in 2014 while customer deposits increased by 17.4%. Consequently, the loan to deposit ratio decreased from 110.6% at the end of 2013 to 103.0%.

The changes in the Group’s results translated into the following profitability ratios:

  • Gross ROE of 16.9% (16.5% at the end of 2013).
  • Net ROE of 13.1% (13.1% at the end of 2013).

mBank Group’s capital ratios remained high. Total capital ratio stood at 14.7% at the end of December 2014, compared to 19.4% in 2013. Common Equity Tier 1 capital ratio reached 12.2%, compared to 14.2% at the end of 2013. The change of the capital adequacy ratios in 2014 was mainly driven by the implementation of the Basel 3 methodology (e.g. deduction of net impairment losses on loans and advances from the common equity Tier 1 for the period without the approval of the PFSA to include the net income to the common equity Tier 1), as well as the retention of part of the 2013 earnings.

Income of mBank Group

Total income generated by mBank Group was PLN 3,939.2 million in 2014, compared to PLN 3,673.5 million in 2013, representing an increase of PLN 265.7 million, i.e., 7.2%. The increase was mainly driven by improved net interest income and net fee and commission income. Net trading income in 2014 also increased.

Income of mBank Group

 

 
PLN M 2013 2014 Change in PLN m Change in %
Interest income 3,950.0 3,956.3 6.3 0.2%
Interest expense -1,724.2 -1,465.6 258.6 -15.0%
Net interest income 2,225.8 2,490.7 264.9 11.9%
Fee and commission income 1,303.8 1,399.6 95.8 7.3%
Fee and commission expense -469.1 -497.9 -28.8 6.1%
Net fee and commission income 834.7 901.7 67.0 8.0%
Dividend income 26.9 20.0 -6.9 -25.7%
Net trading income 343.0 369.2 26.2 7.6%
Gains less losses from investment securities. investments in subsidiaries and associates 78.6 51.9 -26.7 -34.0%
Other operating income 374.8 346.9 -27.9 -7.4%
Other operating expenses -210.3 -241.2 -30.9 14.7%
Total income 3,673.5 3,939.2 265.7 7.2%
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Similar to 2013, net interest income remained mBank Group’s largest revenue source in 2014. It stood at PLN 2,490.7 million, compared to PLN 2,225.8 million in 2013 (+11.9%). The change was mainly driven by a decrease of interest costs by 15.0%. Interest income remained stable despite reference rate decreases carried out by the Monetary Policy Council during last two years.

The higher net interest income contributed to the interest margin generated by mBank Group. The margin, calculated as net interest income to average interest-earning assets, stood at 2.3%, compared to 2.2% in 2013.

 The average interest rate of mBank’s deposits and loans is presented in the table below.

mBank’s average interest rate

 

 
Average interest rate in mBank
  Retail Banking Corporate and Investment Banking  mBank total
(Poland and foreign branches)
  2012 2013 2014 2012 2013 2014 2012 2013 2014
Deposits PLN 3.6% 2.5% 1.6% 4.1% 2.4% 1.9% 3.8% 2.5% 1.7%
FX 0.9% 0.9% 0.5% 0.3% 0.2% 0.2% 0.6% 0.6% 0.4%
Total loans PLN 9.8% 8.8% 8.1% 6.1% 4.5% 3.9% 7.5% 6.3% 5.8%
FX 2.1% 2.0% 2.1% 2.3% 2.3% 2.3% 2.2% 2.1% 2.1%
Mortgage loans PLN 6.1% 4.6% 4.3%            
FX 2.1% 2.0% 1.9%            
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Loans and advances to customers remained the main source of the Group’s interest income (71.6%). Despite lower annual average market interest rates in 2014, interest income from loans and advances remained stable year on year and stood at PLN 2,833.2 million. An increase in the volumes of loans contributed to the stable interest income from loans and advances. Interest income from investment securities decreased by PLN 47.6 million, i.e., 5.4% in 2014 due to lower average Treasury bond yields in 2014. Interest income from debt securities held for trading increased by PLN 4.2 million, i.e., 9.6%, driven by a higher volume of such instruments. Interest income from cash and short-term deposits decreased in 2014 (-PLN 5.5 million, i.e., 7.0%).

Interest income of mBank Group

 

 
PLN M 2013 2014 Change in PLN m Change in %
Loans and advances including the unwind of the impairment provision discount 2,841.2 2,833.2 -8.0 -0.3%
Investment securities 884.2 836.6 -47.6 -5.4%
Cash and short-term placements 78.8 73.3 -5.5 -7.0%
Trading debt securities 43.7 47.9 4.2 9.6%
Interest income on derivatives classified into banking book 88.6 138.1 49.5 55.9%
Interest income on derivatives concluded under the fair value hedge 0.2 18.4 18.2 9,100.0%
Interest income on derivatives concluded under the cash flow hedge 0.0 1.4 1.4 -
Other 13.3 7.4 -5.9 -44.4%
Total interest income  3,950.0 3,956.3 6.3 0.2%
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The decrease of interest expenses in 2014 was mainly driven by lower costs of client deposits (a decrease of PLN 241.8 million, i.e., 21.3%) due to lower average annual market interest rates in 2014. Interest expenses paid to banks decreased by PLN 64.0 million, i.e., 24.9% mainly due to the repayment of some of mBank’s loans granted by Commerzbank Group. Interest expenses on issued debt securities increased by PLN 37.3 million, i.e., 19.4% in 2014, mainly driven by the placement of EUR 1 billion euronotes under the EMTN Programme.

Net fee and commission income, accounting for 22.9% of mBank Group’s total income, increased year on year. Net fee and commission income amounted to PLN 901.7 million in 2014, representing an increase of PLN 67.0 million, i.e., 8.0% in the discussed period.

Fee and commission income of mBank Group

 

 
PLN M 2013 2014 Change in PLN m Change in %
Payment cards-related fees 413.7 413.6 -0.1 0.0%
Credit-related fees and commissions 227.6 254.3 26.7 11.7%
Commissions from insurance activity 106.6 112.6 6.0 5.6%
Fees from brokerage activity 91.6 90.5 -1.1 -1.2%
Commissions from bank accounts 155.0 157.5 2.5 1.6%
Commissions from money transfers 88.2 97.6 9.4 10.7%
Commissions due to guarantees granted and trade finance commissions 37.9 46.6 8.7 23.0%
Commissions for agency service regarding sale of products of external financial entities 77.4 92.3 14.9 19.3%
Commissions on trust and fiduciary activities 19.4 21.1 1.7 8.8%
Fees from portfolio management services and other management-related fees 14.4 13.4 -1.0 -6.9%
Other 72.0 100.1 28.1 39.0%
Total fee and commission income
 
1,303.8 1,399.6 95.8 7.3%
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Commission income increased by PLN 95.8 million, i.e., 7.3% year on year. Payment card-related commission income remained stable year on year. The reduction of interchange fees as of July 1, 2014 was offset by a higher volume and number of non-cash transactions. The volume and number of non-cash transactions increased by 18.5% and 29.7%, respectively, in 2014. Fees and commissions on loans increased due to bigger sales of non-mortgage loans. Commissions for money transfers increased (+10.7%), driven by a growing client base and a higher number of transactions. Income from the brokerage business decreased by 1.2%. The change was due to a lower volume of transactions in stocks on the Warsaw Stock Exchange (a decrease of 12.3% year on year).

Dividend income amounted to PLN 20.0 million in 2014, compared to PLN 26.9 million in 2013. The decrease was due to lower dividend payments received from PZU S.A.

Net trading income amounted to PLN 369.2 million in 2014 and was higher by PLN 26.2 million, i.e., 7.6% compared to 2013. The increase in net trading income was driven by higher other trading income (+PLN 75.7 million, i.e., 125.3%) owing to higher gains realised on interest rate instruments. The FX result decreased year on year (a decrease of PLN 49.5 million, i.e., 17.5%) due to a lower valuation of CIRS.

Gains less losses on investment securities stood at PLN 51.9 million in 2014, compared to PLN 78.6 million in 2013. Similar to 2013, the Group realised gains on the sale of a Treasury bond portfolio in 2014; however, mBank Group had earned additional gains on the sale of MasterCard and VISA shares for PLN 13.4 million in 2013.

Net other operating income (other operating income net of other operating expenses) amounted to PLN 105.7 million in 2014, representing a decrease of PLN 58.8 million, i.e., 35.7% year on year. Income from released provisions decreased in 2014. At the same time, provisions were set up against legal and operational risk both in Retail Banking and in Corporate and Investment Banking. In addition, mBank Group wrote down the values of certain properties operated by the Group.

Net impairment losses on loans and advances

Net impairment losses on loans and advances in mBank Group amounted to PLN 515.9 million in 2014, compared to PLN 477.8 million in 2013, representing an increase of PLN 38.1 million, i.e., 8.0%. As a result of an increase in net impairment losses on loans and advances and an increase of the volume of loans, the annual average cost of risk in 2014 remained stable year on year. The cost of risk was 72 bps in 2014, compared to 70 bps in 2013.

Net impairment losses on loans and advances in Retail Banking increased by PLN 29.0 million, i.e., 9.7%. The increase of impairment losses on loans and advances was reported by Retail Banking in Poland due to a gradual change in the structure of loans in favour of consumer loans, combined with proactive increase of NPL coverage, amid stable asset quality.

Net impairment losses on loans and advances

 

 
PLN M 2013 2014 Change in PLN m Change in %
Retail Banking 297.7 326.7 29.0 9.7%
Corporates and Financial Markets 180.0 189.2 9.2 5.1%
Other 0.1 0.0 -0.1 -100.0%
Total net impairment losses on loans and advances 477.8 515.9 38.1 8.0%
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Net impairment losses on loans and advances in Corporates and Financial Markets stood at PLN 189.2 million in 2014, compared to PLN 180.0 million in 2013. Additional provisions were set up in 2014 against exposures of enterprises exposed to geopolitical risk in Eastern Europe.

Costs of mBank Group

In 2014, the Group continued to pursue efficiency measures and at the same time invested in future growth by implementing marketing campaigns and developing strategic initiatives.

Total overhead costs of mBank Group (including depreciation and amortisation) stood at PLN 1,770.6 million, representing an increase of 5.5% year on year.

Costs of mBank Group

 

 
PLN M 2013 2014 Change in PLN m Change in %
Staff-related expenses  808.3 844.1 35.8 4.4%
Material costs  586.7 628.8 42.1 7.2%
Taxes and fees 30.0 29.8 -0.2 -0.7%
Contributions and transfers to the Bank Guarantee Fund 58.2 70.8 12.6 21.6%
Contributions to the Social Benefits Fund  6.8 7.0 0.2 2.9%
Other 0.1 0.1 0.0 0.0%
Amortization & Depreciation 187.9 190.0 2.1 1.1%
Total costs of mBank Group 1,678.0 1,770.6 92.6 5.5%
Cost / Income ratio 45.7% 44.9% - -
Employment (FTE) 6,073 6,318 244 4.0%
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Personnel costs increased by PLN 35.8 million, i.e., 4.4% in 2014. The change was driven by higher remuneration costs as a consequence of an increased headcount of mBank Group. The number of FTEs increased from 6,073 at the end of 2013 to 6,318 FTEs at the end of 2014.

Material costs increased by PLN 40.9 million, i.e. 7.0% in the period under review. mBank Group reported higher marketing costs in 2014 among others due to advertising campaigns in Poland, the Czech Republic and Slovakia.

The contribution to the Bank Guarantee Fund (BFG) paid by mBank Group increased from PLN 58.2 million in 2013 to PLN 70.8 million in 2014. The change was driven by an additional prudential contribution to the stability fund imposed in November 2013.

Depreciation and amortisation charges increased in 2014 due to higher amortisation of intangible assets.

Changes to the income and costs of mBank Group contributed to improved efficiency measured by the cost/income ratio which stood at 44.9% at the end of 2014, compared to 45.7% in 2013.

Contribution of business lines and segments to the financial results

Data based on internal management information of mBank Group. The table below presents the results of mBank Group’s business lines.

Financial results of mBank Group’s business lines

 

 
PLN M 2013 2014 Change in PLN m Change in %
Retail Banking 958.2 1,063.7 105.5 11.0%
Corporate and Investment Banking 549.6 499.9 -49.7 -9.0%
Financial Markets -6.7 129.5 136.2 -
Other 16.6 -40.4 -57.0 -
Profit before tax of mBank Group 1,517.7 1,652.7 135.0 8.9%
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The Retail Banking segment made the biggest contribution to the profit before tax of mBank Group at 64.4%, compared to 38.1% for the Corporates and Financial Markets segment including Corporate and Investment Banking (30.2%) and Financial Markets (7.8%).