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2018 Financial and Social Report

Group's Operating Income (PLN million)
2018 2017 Change y/y
Net Interest Income * 1 877.9 1 736.9 8.1%
Net Commission Income 661.1 663.6 -0.4%
Core Income 2 539.0 2 400.4 5.8%
Other Non-Interest Income */** 188.7 171.2 10.2%
Total Operating Income ** 2 727.6 2 571.6 6.1%

(*) Pro-forma data: Net Interest Income includes margin from all derivatives. From 1st January 2006 the Bank started to apply hedge accounting principles. Starting from that date, the margin from these operations is reflected in Net Interest Income. However, as this hedge accounting does not cover all the portfolio denominated in foreign currency, the Bank provides pro-forma data, which presents all margin from derivatives in Net Interest Income caption, whereas in accounting terms part of this margin (PLN 60.4 million in 2018 and PLN 40.4 million in 2017) is presented in Other Non-Interest Income. In the Bank’s opinion, such approach allows better understanding of the real evolution of this item from economic point of view.

 (**) Excludes fair value adjustment of credit portfolio (PLN 19.9 million in 2018), which is moved to pro-forma cost of risk

Net Interest Income (pro-forma) in 2018 reached PLN 1,877.9 million and presented a considerable increase by 8.1% versus the previous year. This increase was driven by growth of business volumes combined with slight improvement of Net Interest Margin to 2.59% y-t-d compared to 2.56% one year ago. In 4Q 2018 Net Interest Income crossed PLN 500 million after increasing by 4.7% vs 3Q 2018 and 12.2% vs 4Q 2017, confirming strong upward quarterly trend.

Net Commission Income in 2018 amounted to PLN 661.1 million and decreased slightly by 0.4% year-on-year. The transactional commissions (including loans and guarantees) together with bancassurance commissions presented considerable growth by PLN 26.7 million. On the other hand, fees from distribution of investment products and capital markets related decreased versus 2017 by PLN 27.9 million. Just in 4Q 2018 the entire mutual fund market in Poland (total assets under management) decreased strongly by more than PLN 18 bn.

Core Income, defined as a combination of net interest and commission income, reached the amount of PLN 2,539.0 million for 2018 which means a considerable growth of 5.8% yearly.

Other Non-interest Income, which comprise FX Result, Results on Financial Assets and Liabilities (without interest margin on derivatives and fair value adjustment of credit portfolio) and net Other Operating Income and Costs,amounted to PLN 188.7 million in 2018 and increased by 10.2% yearly.

Total operating income (pro-forma) of the Group reached PLN 2,727.6 million in 2018 and recorded robust increase by 6.1% year-on-year.

Group's Operating Costs (PLN million)
2018 2017 Change y/y
Personnel Costs (638.1) (596.5) 7.0%
Other Administrative Costs * (629.9) (606.2) 3.9%
     – of which Banking Guarantee Fund (BFG) fees (105.5) (99.3) 6.2%
     – of which financial supervision charges (6.9) (2.4) 191.5%
Total Operating Costs (1 268.0) (1 202.7) 5.4%
Cost/Income 46.50% 46.8% -0.3 p.p.

(*) including depreciation

Total costs in 2018 amounted to PLN 1,268.0 million, which means an increase by 5.4% versus the previous year.

Personnel costs in 2018 amounted to PLN 638.1 million and grew by 7.0% compared to 2017 year as a result of increase of staff remuneration and employment. The total number of employees in the Group increased by 302 employees compared to the end of 2017, of which 143 persons (FTE) due to incorporation of SKOK Piast (credit union undergoing restructuring) executed in November 2018. Moreover, employment grew in such sale channels as direct and electronic banking. Total number of employees at the end of the year reached 6,132 persons (in Full Time Equivalents).

The structure of employment of Bank Millennium Group is presented in the table below:

Employment structure (in FTEs)
31.12.2018 31.12.2017 Change y/y
Bank Millennium S.A. 5 785 5 492 5.3%
Subsidiaries 347 338 2.7%
Total Bank Millennium Group 6 132 5 830 5.2%

More information about employment structure and remuneration is presented in Chapter IX of this document.

Other administrative costs (including depreciation) in 2018 reached PLN 629.9 million and grew by 3.9% year-on-year. The biggest increase was registered in IT & telecom cost, mostly driven by spending on transaction infrastructure and client relatedservices as well as some higher other taxes and charges as well as marketing costs. Also charges to Banking Guarantee Fund and banking supervision cost increased more visibly, i.e. by PLN 10.8 million altogether compared to the previous year’s level. The contribution to BFG funds is a significant item of other administrative cost and amounted to PLN 105.5 million for 2018, including PLN 34.7 million of yearly fee for resolution fund. On the other hand, some positive impact had the decrease in rental costs bringing the annual savings of PLN 11.7 million.

Total number of Bank Millennium branches increased from 355 to 361 during last 12 months, which is a result of opening 14 “mini-branches”, located in shopping centers, and closure of some other branches (net increase by 6 outlets). Moreover, within the process of incorporation of SKOK Piast, the Bank acquired its branches, the number of which at the end of 2018 was 41. The Bank, after performing detailed analysis of those outlets, will decide about their future utilization within the whole network.

Cost efficiency of the Group improved slightly in 2018: Cost-to-Income ratio reached 46.5%i.e. lower by 0.3 p.p. versus the level recorded one year ago.

Group's Net Profit (PLN million)
2018 2017 Change y/y
Operating Income 2 727.6 2 571.6 6.1%
Operating Costs * (1 268.0) (1 202.7) 5.4%
Impairment provisions and other cost of risk ** (236.6) (255.4) -7.4%
Operating Profit 1 223.1 1 113.5 9.8%
Banking tax (198.5) (188.3) 5.4%
Pre-income tax Profit 1 024.6 925.2 10.7%
Income tax (264.0) (244.0) 8.2%
Net Profit 760.7 681.2 11.7%

(*) without impairment provisions for financial and non-financial assets

(**) includes fair value adjustment of loans presented at fair value through profit and loss (PLN 19.9 million) and result from modification (PLN 14.2 million) in 2018

Total cost of risk (pro-forma), whichcomprises net impairment provisions, fair value adjustment (of part of credit portfolio) and result on modifications, bore by the Group in 2018, amounted to PLN 236.6 million and were 7.4% lower than this cost recognized in 2017. The charges for retail segment stood at PLN 176.9 million and were slightly higher than in the previous year while for corporate segment and other amounted to PLN 59.7 million and decreased yearly by PLN 23.3 million. In relative terms, cost of risk (i.e. net charges to average net loans) in 2018 reached 48 bps level (i.e. 6 bps lower when compared to 2017).

 

Operating profit, as the difference between operating income and costs (including costs of risk), reached PLN 1,223.1 million and increased by 9.8% compared to the previous year, as a consequence of evolution of all described above elements. Then banking tax grew by 5.4% yearly (higher assets) and income tax grew by 8.2% (higher income). When summing both taxes (PLN 463 million) and VAT paid by the Bank (PLN 30 million), effective tax rate reached 40% of operating profit. Additionally, if adding other obligatory payments for public purpose (BFG contribution and KNF costs), effective tax rate increases to 45%. It is also worth mentioning, that due to the cut of obligatory reserve remuneration, done by NBP since January 2018, operating profit of the Bank in 2018 year fell by PLN 17 million.

Gross profit before income tax in 2018 amounted to PLN 1,024.6 million and increased by 10.7% yearly.

Net Profit reported in 2018 amounted to PLN 760.7 million and was 11.7% higher than an year ago. This was the highest yearly profit in Bank’s entire history.

 

The key relative measures of Group’s profitability based on net profit generated in 2018 were the following:

  • Return on Assets (ROA) of 1.0%
  • Return on Equity (ROE) of 9.6%

 

The breakdown of Group’s Net Profit by the Group’s companies is presented in the table below:

Group's profit structure (PLN million)
2018
Bank Millennium 722.3
Millennium Leasing 40.0
Millennium Dom Maklerski (brokerage house) 10.7
Millennium TFI (mutual fund) 14.3
Other consolidated companies 38.0
Summarised profits 825.3
Consolidation eliminations (64.6)
Consolidated Net Profit of the Group 760.7

Bank's Profit and Loss Account

The evolution of key Profit and Loss Account items of the Bank in 2018, presented in the below tables, was similar to those of the consolidated Capital Group.

Bank's Operating Income (PLN million)
2018 2017 Change y/y
Net Interest Income 1 716.7 1 598.1 7.4%
Net Commission Income 558.1 552.7 1.0%
Core Income * 2 274.8 2 150.7 5.8%
Other Non-Interest Income ** 293.5 275.5 6.5%
of which dividends 56.4 74.6 -24.3%
Total Operating Income ** 2 568.3 2 426.2 5.9%

(*) Sum of Net Interest Income and Net Commission Income.

(**) Excludes fair value adjustment of credit portfolio (PLN 19.9 million in 2018), which is moved to cost of risk

Net Interest Income of the Bank, as in the Group case, recorded considerable growth of 7.4% y/y. Net Commission Income, as opposite to the Group’s income, managed to increase, by 1% year-on-year, as the contribution of income from investment products and capital markets had not such negative impact as in the Group’s case (including results of mutual funds and brokerage subsidiaries). As a result of the above, Core Income grew by 5.8% year-on-year reaching PLN 2,275 million for 2018.

Other Non-Interest Income of the Bank for 2018 amounted to PLN 293.5 million. Important component of this item are dividends, mostly from subordinated companies of the Capital Group (which are eliminated on the Group’s statements level). The dividend income reached PLN 56.4 million in 2018 recording the decrease of 24.3% year-on-year. This however, was compensated by the growth of other components of Non-Interest Income, especially related to the result on financial assets and liabilities. As a result Non-Interest Income grew by 6.5% year-on-year.

Total Operating Income of the Bank for 2018 amounted to PLN 2,568.3 million and presented increase by 5.9% year-on-year– a similar growth pace as in the Group’s case.

Bank's Net Profit (PLN million)
2018 2017 Change y/y
Operating Income 2 568.3 2 426.2 5.9%
Operating Costs * (1 205.3) (1 141.9) 5.6%
Impairment provisions and other cost of risk ** (205.6) (231.1) -11.0%
Banking tax (198.5) (188.3) 5.4%
Pre-income tax Profit 958.9 864.9 10.9%
Income tax (236.6) (215.9) 9.6%
Net Profit 722.3 648.9 11.3%

(*) without impairment provisions for financial and non-financial assets

(**) includes fair value adjustment of loans presented at fair value through profit and loss (PLN 19.9 million) and result from modification (PLN 14.2 million) in 2018

The growth of Bank’s Operating Costs in 2018 was 5.6% year-on-year and was similar as in the Group. The costs amounted to PLN 1,205.3 million in the reporting year. Cost-to-Income ratio for 2018 for the Bank reached 46.9%.

Impairment provisions and other cost of riskamounted to PLN 205.6 million in 2018 and fell by 11% year-on-year i.e. higher scale of decrease than for the consolidated Group.

Net profit of the Bank for 2018 amounted to PLN 722.3 million and presented an increase of 11.3% year-on-year. Return on Bank’s Assets (ROA) reached 1.0%.