Summary of consolidated Group results in 2021

In 2021, Bank Millennium S.A. Capital Group’s (the ‘Bank’, the ‘BM Group’) posted a consolidated net loss of PLN1,332 million. This followed net profit of PLN23 million in the preceding year. Year 2021 was to some extent a mirror image of the year 2020, when due to direct and indirect impact of COVID-19 pandemic and increasingly challenging economic background, operating results of the BM Group and its peers were deteriorating as the year progressed. In contrast, after a slow start, 2021 brought a gradual recovery of the business and as a result record high operating (ex-FX mortgage related costs) quarterly profit of BM Group in 4Q21.

Having said that, it is important to stress that it was again costs related to FX-mortgage portfolio originated by Bank Millennium (provisions related to legal risk, costs of conversions to PLN mortgages or early conversions both agreed on negotiated terms with FX-mortgage borrowers – ‘amicable conversions’ – and legal costs among others) that were the main burdens on bottom line and the main reasons for the BM Group’s net loss in 2021. Totalling PLN2,430 million post tax (legal risk provisions alone: PLN2,082 million) these compared to PLN673 million (PLN614 million) in 2020. Adjusted for these, BM Group would in 2021 report record high net profit of PLN1,098 million, compared to adjusted net profit of PLN695 million in 2020.

Full year 2021 net profit adjusted for all extraordinary items (above mentioned FX-mortgage related costs, revaluation of Visa shares and provision against a corporate court case) stood at PLN1,123 million, up 46% y/y. Adjusted ROE of 13.8% compared to 8.4% in 2020.

* adjusted for provisions against legal risk, legal costs related to FX-mortgages and costs of amicable conversions

The significant increase in the above-mentioned FX-mortgage related costs resulted from more conservative inputs into the Bank’s provisioning methodology, reflecting, inter alia, a more challenging environment, significantly higher number of amicable conversions and finally higher legal costs, due counterclaims, among others.

2021 overall brought a significant increase of the number of individual lawsuits related to loan agreements originated by the Bank. These reached 11,070 at end of December 2021 compared to 5,018 at YE20. The inflow of new cases against the Bank was not linear during the year with 3Q21 bringing the thus far highest number (1,762) and inflow in 4Q21 remaining high but lower than in the two preceding quarters. At the same time, negative court verdicts for banks continued (details regarding litigations against the BM Group can be found further in the report).

* Legal risk provisions/gross FX mortgage book (ex-EB portfolio in case of BM), ** average of nine largest banks listed at WSE w/o PKO BP’s 4Q20 provisions for ‘KNF conversions’

At the same time, the Bank continued to be open to its customers in order to reach amicable solutions regarding FX-mortgages on negotiated terms. As a result of these negotiations and other natural drivers, in 2021 the number of active FX-mortgage loans decreased by over 10,000, compared to over 57,800 active loans agreements at the end of 2020. In recent quarters (and in 2021 overall), the reduction of the number of active FX-mortgage loans was higher than the inflow of new individual court cases against the Bank.

It is worth to highlight that 2021 was another ‘non-linear’ year for both BM Group and Poland’s banking sector overall. Similarly to the previous year, year 2021 brought significant swings in Poland’s macroeconomic background and as a result volatility in our business. Early part of the year remained under the influence ultra-low interest rates, was marred by the second wave of the pandemic and negative macroeconomic background. Summer months saw wave of coronavirus tapering out, relaxation of pandemic restrictions and fast recovery of economic activity. Finally, the second part of the year was chiefly under the influence of soaring inflation (and the resulting late albeit vigorous start of the rate tightening cycle) with the third wave of pandemic taking only small (if any) some toll on the bank’s operating activity and business.

As result of these factors and trends, 4Q21 was the strongest quarter in the year as far as operating results are concerned. The improvement of our operating results in the quarter was of such a high magnitude that, in many metrics, full year 2021 results finished above the respective levels in 2020. Reported quarterly revenues were up 4% y/y in 4Q21 (2021: up 2% y/y), while opex (excluding charges for Banking Guarantee Fund (‘BFG’) and legal costs) was flat y/y (2021: down 7% y/y). Core income was particularly strong in the period with the 13% q/q increase taking the y/y growth of full year 2021 core revenues to 6% from 2% in 9M21 and -1% in 1H21. NII, the main driver, increased 15% q/q to above pre-pandemic levels, while full year 2021 NII grew 5% y/y following the 1% y/y contraction in 9M21. This strong performance was driven by a combination of higher interest rates (average 3M WIBOR of 1.53% in 4Q21 compared to 0.22% in 3Q21) and solid 3% q/q growth of loans (ex-FX mortgage portfolio). Record high disbursements of PLN mortgages (4Q21: PLN2.8 billion, up 33% y/y, 2021: PLN9.8bn, up 46% y/y) and much accelerated originations in leasing (4Q21: PLN1.1 billion, up 39% y/y, 2021: PLN3.9 billion, up 57% y/y) were the key contributors. In 2021 overall, the Bank’s market share in originations of mortgages reached 12.5% (2020: 12.2%), putting us at #3 position on the market (2020: #4).

Key points of Group BM results in 2021:

The key developments in the last twelve months that drove the y/y improvement of the results and which, we believe, are particularly worth highlighting are as follows:

• much accelerated recovery of NII with 4Q21 bringing 15% q/q growth to 108% of the previous record high NII of 4Q19; in 2021 overall NII grew 5% y/y;
• accelerated improvement of quarterly NIM (298bps in 4Q21 from 261bps in 3Q21, to just 1bp below the 3Q19 peak of 299bps and 49bps up from the low of 249bps in 3Q20); full year 2021 NIM stood at 270bps compared to 261bps in 2020;

• above-market loan growth (net loans +7% y/y in 2021) despite strong reduction of the FX-mortgage portfolio; solid originations of retail loans played a key role but the 4% y/y growth of the corporate book overall (leasing portfolio up by noteworthy 7% y/y) also had a positive contribution; disbursements of mortgages in 4Q21 reached a new all time high of PLN2.8bn, up 33% y/y (2021: PLN9.8bn, up 46% y/y) with market share in originations of 13.3% vs. 12.2% in 4Q20 (2021: 12.5% vs. 12.2% in 2020); 4Q21 origination of cash loans of PLN1.3bn, though down q/q, remained well above this in the respective period of last year (2021: PLN5.6bn, up 21% y/y); on a separate count our gross FX-mortgage book contracted 28% y/y due to a combination of repayments, provisioning (in line with IFRS9 most of legal risk provisions are booked against gross value of loans under court proceedings) and amicable conversions (pure gross FX-mortgages ex-EB in CHF down 17% y/y); as a result, the share of FX-mortgages in total gross loans decreased to 12.4% (BM originated: 11.4%) from 18.3% (17.0%) at YE20;

• improving cost efficiency owing to a combination of a steady increase in the digitalisation of our business and relations with clients with strong cost response to revenue pressures earlier in the year; falling headcount (number of active employees down 357 or 5% since YE20), ongoing optimisation of our physical distribution network (own branches down by 37 units or 8% in the last twelve months) complemented the increasing share of digital services (digital customers: nearly 2.3 million, up 10% y/y, number of active mobile customers: 1.9 million, up 16% y/y); cost optimisation initiatives not only resulted nominal reduction of opex but also translated into much improved cost efficiency; reported C/I ratio in 2021 dropped to 46.2% from 49.0% in 2020, C/I adjusted excluding BFG, FV portfolio, costs of amicable conversions offered to FX-mortgage borrowers and netting-off of FX-mortgage provisions on f.EB book dropped y/y to 39.4% from 43.5% in 2020;