Profit and loss account

Net Interest Income (pro-forma) in 2019 reached PLN 2,499.4 million and increased by 33.1% versus the previous year. The growth was supported by 7 months interest income of Euro Bank. Blended with Euro Bank, average Net Interest Margin (over average interest earning assets) in 4Q 2019 reached 2.94% which was 30 bps better than NIM in 4Q 2018. The growth of NIM was limited by the provision created to cover potential returns of fees on cash loans.

Net Commission Income in 2019 amounted to PLN 699.2 million, which means an increase by 5.8% y/y. Contribution of Euro Bank to this line of income was small, as most of commissions collected by this bank was recognized in interest income through effective interest rate mechanism. Insurance, loans and cards related fees grew most during the year, while capital market related ones visibly decreased.

Core Income, defined as a combination of net interest and commission income, reached the amount of PLN 3,198.5 million which means a y/y increase of 26%, partially owing to the merger.

Other Non-interest Income, which comprises FX Result, Results on Financial Operations (without interest margin on derivatives and fair value adjustment on credit portfolio) and net other operating income and costs, amounted to PLN 273.0 million in 2019 and increased visibly by 44.7% y/y. This line of results included PLN 27 million one-off tax asset recovery booked in 1Q 2019, PLN 45 million of positive revaluation of Bank Millennium’s shares in PSP company (an owner of BLIK) and PLN 32 million negative impact of provision to cover potential returns of up-front fees on cash loans. The total provision of PLN 66 million was split between Net Interest Income and Other Operating Costs.

Total operating income (pro-forma) of the Group reached PLN 3,471.5 million in 2019 and increased 27.3% y/y and was flat q/q.

Total costs in 2019 amounted to PLN 1,726.1 million translating into 36.1% increase compared to the 2018 level. Integration costs of PLN 116.3 million, related to the acquisition and merger of Euro Bank, had a strong impact on cost evolution. The BFG resolution fee increase additionally increased the costs level. When excluding one-off integration costs, the growth of the Groups’ operating costs would be 27% y/y in 2019.

Personnel costs in 2019 amounted to PLN 836.4 million and grew 31.1% compared to the previous year. This growth, apart from taking over of more than 2.4 thousand employees of Euro Bank, was also caused by the market wide high average salary increase observed in Poland for a long time. The number of the Group’s staff increased strongly as a consequence of Euro Bank acquisition to the total of 8,464 employees (full time equivalents).

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

More information about employment structure and remuneration is presented in Chapter 8 of this document.

Other administrative costs (including depreciation) in 2019 reached PLN 889.7 million and grew 41.2% y/y. Costs connected directly with the integration of Euro Bank (mainly legal, advisory and IT in the total amount of PLN 116.3 million) as well as increased BFG contribution were the main reasons for the increase. Without all these items, the yearly growth of Group’s administrative costs would be 20%.

Euro Bank acquisition resulted in a very strong increase in the number of outlets: from 361 Millennium branches year ago to total of 830 outlets as at the end of December 2019. This number included 602 own branches and 228 franchise branches.

Finishing of the Bank’s restructuring process after the merger will imply optimisation of the branch network with mergers of overlapping branches and a reduction of the number of employees. The current plan assumes a reduction of 60 branches in 2020 and 260 FTE reductions in 1Q 2020. Thus, integration expenses will still be incurred in 2020 but in materially lower amount that originally planned. For 2020 PLN 80 million integration expenses (partially as investments are planned). The Bank currently estimates total cumulative integration expenses connected with Euro Bank acquisition at below PLN 300 million. Apart from PLN 116 million integration opex in 2019, PLN 37 million was recognized in goodwill through purchase price adjustment and PLN 33 million was settled as capital expenditure. Effective accomplishment of restructuring process should allow capturing synergies in the amount of at least PLN 100 million already in 2020.

Cost-to-Income ratio in 2019 without one-offs (mainly integration costs), reached 47.4% (0.9 pp higher compared to last year level) still before synergies after merger with Euro Bank.

Total cost of risk, which comprises net impairment provisions, fair value adjustment (of part of credit portfolio) and result on modifications, bore by the Group in 2019 amounted to PLN 439 million and was 86% higher than in 2018. Impairment losses of 2019 were inflated by PLN 88.6 million initial provisioning on the fair value of Euro Bank performing portfolio as part of IFRS9 impact related to Day 1 acquisition. Without these one-off provisions, the total cost of risk grew 48% y/y to PLN 350.4 million, including PLN 255.8 million on ‘old’ Millennium Group’s portfolio and PLN 94.6 million on Euro Bank’s portfolio.

Risk charges for retail segment stood at PLN 354.5 million (PLN 265.9 million without Day 1 impact), while for the corporate segment and other they amounted to PLN 85.0 million. In relative terms, the cost of risk (i.e. net charges to average net loans) reached 57 bps level (without Day 1 provisions) compared to 48 bps in 2018, influenced by the higher share of consumer loans in the total loan portfolio. Cost of risk for ‘old’ Millennium Group (without Euro Bank) in 2019 stood at the same level as a year ago: 48 bps.

Besides write-offs for credit risk, in Q4 2019 the Bank created a provision for legal risk involved with FX mortgages in the amount of PLN 223.1 million, which encumbered the result before taxes.

Pre-income tax profit in 2019 amounted to PLN 835.3 million and decreased by 18.5% vs. 2018 as a consequence of due to aforementioned one-offs i.e. provisions for legal risk of FX mortgages, costs of integration and provisions for Euro Bank’s portfolio. Additionally profit was adversely affected by higher BFG fees and growth of banking tax 25% in annual terms.

Net Profit reported in 2019 amounted to PLN 560.7 million and was 26.3% lower than a year ago. Net profit of the year 2019 adjusted for the abovementioned one-offs (mainly integration costs and extra provisions) would reach PLN 889.1 million and would be up 16.9% y/y.

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

• Return on Assets (ROA) reported of 0.7%
• Reported full year Return on Equity (ROE) stood at 6.4%, but when adjusted for one-offs it reached 10.2% (i.e. a higher level than the 9.6% reported in 2018).

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

Changes of particular key items of the Bank’s Profit and Loss Account in 2019 are shown in the table below.

The Bank’s 2019 net interest income, as in the Group’s case, saw significant growth by 22.3% y/y, partly in result of the takeover from October 2019 of Euro Bank. Net commission income grew 6.3% year-on-year, thus slightly more than in case of the Group, because the decrease of income on investment and capital market products did not have such a strong adverse impact on result as in the Group’s case (which reflected results generated by subsidiaries dealing with management of mutual funds as well as brokerage activity). In view of the above, core business result grew 18.4% year-on-year to reach PLN 2,693.4 million in 2019.

Other non-interest income of the Bank in 2019 stood at PLN 390.7 million. This item includes dividends, largely from the Capital Group’s subsidiaries (eliminated in reports on Group level). Dividend income in 2019 reached PLN 45.2 million, which means a 19.2% y/y decline. This drop was offset by increase of other non-interest incomes, especially net income on financial assets and liabilities. In result the Bank’s non-interest income grew 33.1% year-on-year.

The Bank’s total operating income in 2019 was PLN 3,084.1 million, which represents a strong 20.1% y/y growth.

The Bank’s operating costs reached the total amount of PLN 1,520.9 million in 2019. Growth of the Bank’s costs was 26.2% year-on-year and was much lower vs the growth rate of costs for the whole Group, which began consolidation of Euro Bank back in June 2019. As in the Group’s case, which was described above in this text, the growth of operating costs resulted largely from one-off costs incurred in relation to Euro Bank’s integration, but also from the increase of BFG resolution fund fee. 2019 cost/income ratio for the Bank was 49.3%.

Impairment write-offs and other costs of risk of the Bank were PLN 235.1 million in 2019, which means a 14.4% per annum growth caused largely by the Euro Bank acquisition.

Besides provisions for credit risk, in Q4 2019 the Bank created a provision for legal risk involved with FX mortgages in the amount of PLN 223.1 million, which encumbered the result before taxes.

The Bank’s pre-tax profit in 2019 was PLN 867.9 million and was 9.5% lower than in 2018 due to the growth rate of all components described above as well as owing to increase of banking tax by 19.4% in annual terms.

The Bank’s 2019 net profit was PLN 600.7 million, which means a 16.8% year-on-year decrease. Return on the Bank’s assets (ROA) reached 0.7%