Overview
- In our view, Poland-based mBank is taking significant steps to derisk its Swiss-franc-related mortgage loans.
- We expect this, alongside continued strong underlying profits and gradually receding legal costs, should lead mBank to report profitability more in line with local peers' over time.
- We also expect mBank to maintain adequate capitalization levels and sufficient additional loss-absorbing capacity (ALAC) in line with one notch of uplift above the bank's stand-alone credit profile.
- We have revised our outlook on mBank to positive from stable and affirmed our 'BBB/A-2' long- and short-term ratings along with our ratings on the bank's debt.
- The positive outlook indicates that we could raise the ratings in the next 24 months if mBank's earnings become less volatile and its capital cushion strengthens, while the bank maintains profitability commensurate with that of higher-rated peers.
Rating Action
On May 17, 2024, S&P Global Ratings revised its outlook on Poland-based mBank to positive from stable.
At the same time, we affirmed our 'BBB/A-2' long- and short-term issuer credit ratings on mBank, and our 'BBB' and 'BB+' issue ratings on the bank's senior unsecured and senior subordinated instruments.
Rationale
We expect mBank's legal costs related to its Swiss-franc-indexed loan portfolio will remain substantial but gradually recede over the next two years. Following a stream of negative rulings by Polish courts and the European Court of Justice, mBank has set aside provisions for legal costs totaling Polish zloty (PLN) 13.6 billion (about €3.2 billion) since 2018. We believe legal costs will remain substantial but gradually recede over our two-year outlook horizon. First, previous rulings of the European Court of Justice have clarified what compensation banks can expect in the event that a Swiss-franc-indexed mortgage contract is annulled. mBank has reflected this in its provisioning model, resulting in PLN6.3 billion of additional provisions in 2023 and the first quarter of 2024. Second, the bank has successfully closed about 15,000 out-of-court settlements since 2022, and 5,000 other cases have now received a final court verdict. This, together with provisions held for future potential court cases, means that legal risks on outstanding Swiss-franc-indexed mortgage loans are gradually reducing.
That said, significant sources of uncertainty on future legal costs remain, which will only be clarified over time. The main uncertainty relates to the almost 39,000 already repaid Swiss-franc-indexed mortgage contracts, of which only about 10% have been challenged in court so far. Should this proportion increase materially, the bank would likely need to take additional provisions. The second source of uncertainty relates to limitation of the period during which the bank can file claims for compensation. A recent Polish Supreme Court judgement has brought some clarity on this matter, but the exact final costs to mBank remain unclear. All in all, we currently assume in our base case for the ratings that the bank will incur PLN4 billion to PLN4.5 billion of additional Swiss-franc-related legal costs, spread over 2024-2026.
We expect strong underlying profits and gradually receding legal costs should lead mBank to report profitability more in line with that of local peers over time. Supported by higher interest rates, which we expect to only slowly subside over the next two years, mBank is delivering strong underlying profits. On the revenue side, we expect net interest income to remain elevated, although net interest margins should gradually normalize from the current extremely high levels. Loan growth should pick up in 2024, supporting net interest income and fee income growth. On the cost side, the bank's digital operating model continues to generate excellent cost efficiency, and risk costs should remain steady, supported by a benign economic environment in Poland. These strong underlying profits should persist and, as legal costs gradually recede, lead the bank to report profitability more in line with that of other Polish banks over time.
We expect mBank to maintain adequate capitalization levels. mBank has managed to absorb very high legal costs while maintaining adequate capitalization, largely due to muted asset growth and securitization transactions. We expect reported regulatory ratios to decline in 2024 but the bank to maintain a healthy buffer above requirements. Looking ahead, we consider that gradually receding legal costs and still strong underlying profits imply the bank may resume accruing capital internally. Nevertheless, we anticipate that a significant share of future profits will be distributed to shareholders.
Our rating on mBank benefits from the bank's additional bail-in-able buffers. We anticipate that mBank can maintain sufficient ALAC buffers to allow for a one-notch uplift in the rating. This is because we expect the bank can keep its ALAC above our 4% threshold of S&P Global Ratings' risk-weighted assets. This is 100 basis points above our standard threshold to reflect concentration of ALAC issuances.
Outlook
The positive outlook reflects our view that mBank is taking significant steps to derisk its Swiss-franc-related mortgage loans. We could raise the ratings in the next 24 months if mBank sees a material decline in its extraordinary legal costs and improves its reported profitability closer to the average for Polish banks.
Upside scenario
We could upgrade mBank if it records a material reduction of legal costs, thereby making its earnings less volatile and its capital cushions more comfortable. An upgrade would also depend on the bank's underlying profitability remaining satisfactory and commensurate with that of higher-rated peers.
Downside scenario
We could revise the outlook to stable if, contrary to our base case, mBank's legal costs were to remain at levels close to those of the past two years, for instance due to further negative court rulings. We could also revise the outlook to stable if we believed the bank is unlikely to maintain a sufficient buffer of ALAC-eligible instruments commensurate with the one-notch uplift.
Ratings Score Snapshot
| To | From | |||||
|---|---|---|---|---|---|---|
| Issuer Credit Rating | BBB/Positive/A-2 | BBB/Stable/A-2 | ||||
| SACP | bbb- | bbb- | ||||
| Anchor | bbb | bbb | ||||
| Business position | Adequate (0) | Adequate (0) | ||||
| Capital and earnings | Adequate (0) | Adequate (0) | ||||
| Risk position | Moderate (-1) | Moderate (-1) | ||||
| Funding and liquidity | Adequate and adequate (0) | Adequate and adequate (0) | ||||
| Comparable ratings analysis | (0) | (0) | ||||
| Support | (1) | (1) | ||||
| ALAC support | (1) | (1) | ||||
| GRE support | (0) | (0) | ||||
| Group support | (0) | (0) | ||||
| Sovereign support | (0) | (0) | ||||
| Additional factors | (0) | (0) | ||||
| SACP--Stand-alone credit profile. ALAC--Additional loss-absorbing capacity. GRE--Government-related entity. | ||||||
Related Criteria
- Criteria | Financial Institutions | General: Risk-Adjusted Capital Framework Methodology, April 30, 2024
- General Criteria: Hybrid Capital: Methodology And Assumptions, March 2, 2022
- Criteria | Financial Institutions | General: Financial Institutions Rating Methodology, Dec. 9, 2021
- Criteria | Financial Institutions | Banks: Banking Industry Country Risk Assessment Methodology And Assumptions, Dec. 9, 2021
- General Criteria: Environmental, Social, And Governance Principles In Credit Ratings, Oct. 10, 2021
- General Criteria: Group Rating Methodology, July 1, 2019
- General Criteria: Methodology For Linking Long-Term And Short-Term Ratings, April 7, 2017
- General Criteria: Principles Of Credit Ratings, Feb. 16, 2011
Related Research
- Research Update: Poland 'A-/A-2' Foreign Currency Ratings Affirmed; Outlook Stable, May 11, 2024
- Full Analysis- Commerzbank AG, Dec. 18, 2023
- Poland's Incoming Government Faces Tough Policy Choices, Oct. 18, 2023
- Rating Actions On Three Polish Banks Reflect Differing Provisioning Needs Following ECJ Ruling, June 27, 2023
- Full Analysis- mBank S.A., May 27, 2023
Ratings List
| Ratings Affirmed | ||
|---|---|---|
|
mBank S.A. |
||
| Resolution Counterparty Rating | BBB+/--/A-2 | |
|
mBank S.A. |
||
| Senior Unsecured | BBB | |
| Senior Subordinated | BB+ | |
| Ratings Affirmed; Outlook Action | ||
| To | From | |
|
mBank S.A. |
||
| Issuer Credit Rating | BBB/Positive/A-2 | BBB/Stable/A-2 |
Certain terms used in this report, particularly certain adjectives used to express our view on rating relevant factors, have specific meanings ascribed to them in our criteria, and should therefore be read in conjunction with such criteria. Please see Ratings Criteria at www.spglobal.com/ratings for further information. A description of each of S&P Global Ratings' rating categories is contained in "S&P Global Ratings Definitions" at https://disclosure.spglobal.com/ratings/en/regulatory/article/-/view/sourceId/504352. Complete ratings information is available to RatingsDirect subscribers at www.capitaliq.com. All ratings affected by this rating action can be found on S&P Global Ratings' public website at www.spglobal.com/ratings. Alternatively, call S&P Global Ratings' Global Client Support line (44) 20-7176-7176.
| Primary Credit Analyst: | Nicolas Charnay, Frankfurt +49 69 3399 9218; nicolas.charnay@spglobal.com |
| Secondary Contact: | Heiko Verhaag, CFA, FRM, Frankfurt + 49 693 399 9215; heiko.verhaag@spglobal.com |
| Additional Contact: | Financial Institutions EMEA; Financial_Institutions_EMEA_Mailbox@spglobal.com |
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