mBank S.A.
IFRS Financial Statements
2024
This document is a translation from the original Polish version. In case of any discrepancies between the Polish and English versions, the Polish version shall prevail.
mBank S.A.
IFRS Financial Statements 2024 (PLN thousand)
2
Selected financial data
The selected financial data are supplementary information to these financial statements of mBank S.A. for 2024.
PLN thousand
EUR thousand
Year ended 31 December
Year ended 31 December
SELECTED FINANCIAL DATA
2024
2023
2024
2023
I.
Interest income
13 812 412
13 996 535
3 209 054
3 090 835
II.
Fee and commission income
2 931 826
2 789 043
681 155
615 900
III.
Net trading income
168 007
75 796
39 033
16 738
IV.
Operating profit
3 385 815
1 381 252
786 631
305 020
V.
Profit before income tax
2 905 382
897 642
675 011
198 225
VI.
Net profit
2 235 675
29 322
519 417
6 475
VII.
Cash flows from operating activities
(2 024 992)
18 207 845
(470 469)
4 020 812
VIII.
Cash flows from investing activities
(722 434)
(506 756)
(167 844)
(111 906)
IX.
Cash flows from financing activities
2 705 001
2 821 803
628 456
623 135
X.
Net increase / decrease in cash and cash equivalents
(42 425)
20 522 892
(9 857)
4 532 040
XI.
Basic earnings per share (in PLN/EUR)
52.62
0.69
12.23
0.15
XII.
Diluted earnings per share (in PLN/EUR)
52.55
0.69
12.21
0.15
XIII.
Declared or paid dividend per share (in PLN/EUR)
-
-
-
-
PLN thousand
EUR thousand
As at
As at
SELECTED FINANCIAL DATA
31.12.2024
31.12.2023
31.12.2024
31.12.2023
I.
Total assets
242 268 385
222 418 476
56 697 492
51 154 203
II.
Amounts due to other banks
3 085 267
3 346 208
722 038
769 597
III.
Amounts due to customers
200 775 756
185 117 139
46 987 071
42 575 239
IV.
Equity
17 763 743
13 662 938
4 157 206
3 142 350
V.
Registered share capital
169 988
169 861
39 782
39 066
VI.
Number of shares
42 496 973
42 465 167
42 496 973
42 465 167
VII.
Book value per share (in PLN/EUR)
382.70
321.74
89.56
74.00
VIII.
Total capital ratio (%)
18.2
19.7
18.2
19.7
IX.
Tier I capital ratio (%)
16.7
17.0
16.7
17.0
X.
Common Equity Tier I capital ratio (%)
15.0
17.0
15.0
17.0
The following exchange rates were used in translating selected financial data into euro:
for items of the statement of financial position exchange rate announced by the National Bank
of Poland as at 31 December 2024: EUR 1 = PLN 4.2730 and 31 December 2023: EUR 1 = PLN 4.3480;
for items of the income statement and statement of cash flows exchange rate calculated as the
arithmetic mean of exchange rates announced by the National Bank of Poland as at the end of each month of 2024 and 2023: EUR 1 = PLN 4.3042 and EUR 1 = PLN 4.5284, respectively.
mBank S.A.
IFRS Financial Statements 2024 (PLN thousand)
3
CONTENTS
mBank S.A.
IFRS Financial Statements 2024 (PLN thousand)
4
mBank S.A.
IFRS Financial Statements 2024 (PLN thousand)
5
INCOME STATEMENT
Year ended 31 December
Note
2024
2023
Interest income, including:
5
13 812 412
13 996 535
Interest income accounted for using the effective interest method
13 503 082
13 638 349
Income similar to interest on financial assets at fair value through profit or loss
309 330
358 186
Interest expenses
5
(4 764 226)
(5 708 501)
Net interest income
9 048 186
8 288 034
Fee and commission income
6
2 931 826
2 789 043
Fee and commission expenses
6
(1 072 962)
(975 482)
Net fee and commission income
1 858 864
1 813 561
Dividend income
7
6 652
4 930
Net trading income
8
168 007
75 796
Gains or losses on non-trading financial assets mandatorily at fair value through profit or loss
9
62 291
33 026
Gains or losses on derecognition of financial assets and liabilities not measured at fair value through profit or loss
10
(5 755)
(48 428)
Other operating income
11
260 535
78 068
Impairment or reversal of impairment on financial assets not measured at fair value through profit or loss
14
(510 912)
(946 281)
Costs of legal risk related to foreign currency loans
34
(4 306 964)
(4 908 205)
Overhead costs
12
(2 514 475)
(2 310 934)
Depreciation
(509 746)
(434 273)
Other operating expenses
13
(170 868)
(264 042)
Operating profit
3 385 815
1 381 252
Tax on the Bank's balance sheet items
(730 875)
(719 651)
Share in profits of entities under the equity method
23
250 442
236 041
Profit before income tax
2 905 382
897 642
Income tax expense
15
(669 707)
(868 320)
Net profit
2 235 675
29 322
Earnings per share (in PLN)
16
52.62
0.69
Diluted earnings per share (in PLN)
16
52.55
0.69
Notes presented on pages 10–149 constitute an integral part of these Financial Statements.
mBank S.A.
IFRS Financial Statements 2024 (PLN thousand)
6
STATEMENT OF COMPREHENSIVE INCOME
Year ended 31 December
Note
2024
2023
Net profit
2 235 675
29 322
Other comprehensive income net of tax, including:
17
350 810
1 125 373
Items that may be reclassified subsequently to the income statement
359 021
1 131 805
Exchange differences on translation of foreign operations (net)
17
(5 556)
(35 990)
Cash flows hedges (net)
17
156 532
436 634
Share of other comprehensive income of entities under the equity method (net)
17
36 641
42 048
Change in valuation of debt instruments at fair value through other comprehensive income (net)
17
171 404
689 113
Items that will not be reclassified to the income statement
(8 211)
(6 432)
Actuarial gains and losses relating to post-employment benefits (net)
17
(8 211)
(6 432)
Total comprehensive income (net)
2 586 485
1 154 695
Notes presented on pages 10–149 constitute an integral part of these Financial Statements.
mBank S.A.
IFRS Financial Statements 2024 (PLN thousand)
7
STATEMENT OF FINANCIAL POSITION
ASSETS
Note
31.12.2024
31.12.2023
Cash and cash equivalents
18
36 601 484
36 641 448
Financial assets held for trading and hedging derivatives
19
1 850 456
1 767 707
Non-trading financial assets mandatorily at fair value through profit or loss, including:
20
781 069
828 268
Equity instruments
263 015
174 411
Debt securities
31 204
50 144
Loans and advances to customers
486 850
603 713
Financial assets at fair value through other comprehensive income, including:
21
49 313 947
54 464 505
Debt securities
33 405 946
36 225 947
Loans and advances to customers
15 908 001
18 238 558
Financial assets at amortised cost, including:
22
145 661 493
121 056 962
Debt securities
37 373 491
25 527 804
Loans and advances to banks
13 248 554
10 476 203
Loans and advances to customers
95 039 448
85 052 955
Investments in subsidiaries
23
2 559 341
2 196 262
Non-current assets and disposal groups classified as held for sale
24
102 810
-
Intangible assets
25
1 734 762
1 513 882
Tangible assets
26
1 112 091
1 165 892
Investment properties
27
-
111 964
Current income tax assets
58 909
40 646
Deferred income tax assets
32
776 659
761 543
Other assets
28
1 715 364
1 869 397
TOTAL ASSETS
242 268 385
222 418 476
LIABILITIES AND EQUITY
LIABILITIES
Financial liabilities held for trading and hedging derivatives
19
1 070 747
1 458 852
Financial liabilities measured at amortised cost, including:
29
216 362 457
199 677 996
Amounts due to banks
3 085 267
3 346 208
Amounts due to customers
200 775 756
185 117 139
Lease liabilities
763 400
874 242
Debt securities issued
9 062 497
7 625 479
Subordinated liabilities
2 675 537
2 714 928
Fair value changes of the hedged items in portfolio hedge of interest rate risk
19
(393 568)
(565 985)
Liabilities classified as held for sale
24
30 940
-
Provisions
31
3 202 145
2 239 144
Current income tax liabilities
235 251
198 373
Other liabilities
30
3 996 670
5 747 158
TOTAL LIABILITIES
224 504 642
208 755 538
EQUITY
Share capital
3 625 801
3 616 185
Registered share capital
37
169 988
169 861
Share premium
38
3 455 813
3 446 324
Retained earnings:
39
12 823 553
10 583 174
- Profit from the previous years
10 587 878
10 553 852
- Profit for the current year
2 235 675
29 322
Other components of equity
40
(185 611)
(536 421)
Additional components of equity
41
1 500 000
-
TOTAL EQUITY
17 763 743
13 662 938
TOTAL LIABILITIES AND EQUITY
242 268 385
222 418 476
Notes presented on pages 10–149 constitute an integral part of these Financial Statements.
mBank S.A.
IFRS Financial Statements 2024 (PLN thousand)
8
STATEMENT OF CHANGES IN EQUITY
Changes from 1 January to 31 December 2024
Share capital
Retained earnings
Registered share capital
Share premium
Profit from the previous years
Profit/loss for the current year
Other components of equity
Additional equity components
Total
Equity as at 1 January 2024
169 861
3 446 324
10 553 852
29 322
(536 421)
-
13 662 938
Transfer of profit/loss from previous year
-
-
29 322
(29 322)
-
-
-
Total comprehensive income
-
-
-
2 235 675
350 810
-
2 586 485
Net profit for the current year
-
-
-
2 235 675
-
-
2 235 675
Other comprehensive income
-
-
-
-
350 810
-
350 810
Exchange differences on translation foreign operations (net)
-
-
-
-
(5 556)
-
(5 556)
Cash flows hedges (net)
-
-
-
-
156 532
-
156 532
Share of other comprehensive income of entities under the equity method (net)
-
-
-
-
36 641
-
36 641
Change in valuation of debt instruments at fair value through other comprehensive income (net)
-
-
-
-
171 404
-
171 404
Actuarial gains and losses relating to post-employment benefits (net)
-
-
-
-
(8 211)
-
(8 211)
Changes regarding transactions with Owners of mBank S.A.
127
9 489
4 704
-
-
-
14 320
Issuance of ordinary shares
127
-
-
-
-
-
127
Value of services provided by the employees
-
-
14 193
-
-
-
14 193
Settlement of exercised options
-
9 489
(9 489)
-
-
-
-
Other changes
-
-
-
-
-
1 500 000
1 500 000
Issue of AT1 equity
-
-
-
-
-
1 500 000
1 500 000
Equity as at 31 December 2024
169 988
3 455 813
10 587 878
2 235 675
(185 611)
1 500 000
17 763 743
Changes from 1 January to 31 December 2023
Share capital
Retained earnings
Registered share capital
Share premium
Profit from the previous years
Profit/loss for the current year
Other components of equity
Additional equity components
Total
Equity as at 1 January 2024
169 734
3 435 044
11 250 936
(696 724)
(1 661 794)
-
12 497 196
Transfer of profit/loss from previous year
-
-
(696 724)
696 724
-
-
-
Total comprehensive income
-
-
-
29 322
1 125 373
-
1 154 695
Net profit for the current year
-
-
-
29 322
-
-
29 322
Other comprehensive income
-
-
-
-
1 125 373
-
1 125 373
Exchange differences on translation foreign operations (net)
-
-
-
-
(35 990)
-
(35 990)
Cash flows hedges (net)
-
-
-
-
436 634
-
436 634
Share of other comprehensive income of entities under the equity method (net)
-
-
-
-
42 048
-
42 048
Change in valuation of debt instruments at fair value through other comprehensive income (net)
-
-
-
-
689 113
-
689 113
Actuarial gains and losses relating to post-employment benefits (net)
-
-
-
-
(6 432)
-
(6 432)
Changes regarding transactions with Owners of mBank S.A.
127
11 280
(360)
-
-
-
11 047
Issuance of ordinary shares
127
-
-
-
-
-
127
Value of services provided by the employees
-
-
10 920
-
-
-
10 920
Settlement of exercised options
-
11 280
(11 280)
-
-
-
-
Equity as at 31 December 2024
169 861
3 446 324
10 553 852
29 322
(536 421)
-
13 662 938
Notes presented on pages 10–149 constitute an integral part of these Financial Statements.
mBank S.A.
IFRS Financial Statements 2024 (PLN thousand)
9
STATEMENT OF CASH FLOWS
Year ended 31 December
Note
2024
2023
Profit before income tax
2 905 382
897 642
Adjustments:
(4 930 374)
17 310 203
Income taxes paid
(764 998)
(1 090 478)
Depreciation, including depreciation of fixed assets provided under operating lease
25,26
524 586
449 655
Foreign exchange (gains) losses related to financial activities
(216 106)
(470 217)
(Gains) losses on investing activities
(284 188)
(216 570)
Change of valuation of investment in subsidiaries not measured at equity method
23
(11 401)
1 220
Dividends received
7
(6 652)
(4 930)
Interest income (income statement)
5
(13 812 412)
(13 996 535)
Interest expense (income statement)
5
4 764 226
5 708 501
Interest received
12 708 478
12 541 421
Interest paid
(5 021 163)
(5 571 466)
Changes in loans and advances to banks
(2 793 786)
3 019 245
Changes in financial assets and liabilities held for trading and hedging derivatives
194 280
1 813 390
Changes in loans and advances to customers
(7 630 215)
6 320 748
Changes in securities at fair value through other comprehensive income
3 955 661
1 236
Changes in securities at amortised cost
(11 559 145)
(5 365 698)
Changes in non-trading equity securities mandatorily at fair value through profit or loss
(13 349)
(58 130)
Changes in other assets
170 545
(350 983)
Changes in amounts due to banks
(194 096)
79 041
Changes in amounts due to customers
15 717 460
11 186 406
Changes in lease liabilities
28 893
(22 500)
Changes in issued debt securities
66 923
183 229
Changes in provisions
951 237
981 240
Changes in other liabilities
(1 705 152)
2 172 378
A. Cash flows from operating activities
(2 024 992)
18 207 845
Disposal of intangible assets and tangible fixed assets
586
35 192
Dividends received
7
6 652
4 930
Acquisition of shares in subsidiaries
23
(64 595)
(19 060)
Purchase of intangible assets and tangible fixed assets
(665 077)
(527 818)
B. Cash flows from investing activities
(722 434)
(506 756)
Issue of debt securities
29
2 556 988
4 196 675
Issue of ordinary shares
127
127
Other financial inflows
1 500 000
-
Redemption of debt securities
29
(1 007 258)
(1 015 716)
Payments due to lease agreements
(172 977)
(166 803)
Interest paid from financing activities
(171 879)
(192 480)
C. Cash flows from financing activities
2 705 001
2 821 803
Net increase / decrease in cash and cash equivalents (A+B+C)
(42 425)
20 522 892
Effect of exchange rate changes in cash and cash equivalents
2 461
(1 745)
Cash and cash equivalents at the beginning of the reporting period
36 641 448
16 120 301
Cash and cash equivalents at the end of the reporting period
18
36 601 484
36 641 448
Notes presented on pages 10–149 constitute an integral part of these Financial Statements.
mBank S.A.
IFRS Financial Statements 2024 (PLN thousand)
10
EXPLANATORY NOTES TO THE FINANCIAL STATEMENTS
1. Information regarding mBank S.A.
The Bank operates under the name mBank S.A. with its registered office in Poland, 00-850 Warsaw, 18 Prosta Street, under the number KRS 0000025237, REGON 001254524, NIP 526-021-50-88.
According to the by-laws of the Bank, the scope of its business consists of providing banking services and consulting and advisory services in financial matters, as well as of conducting business activities within the scope described in its by-laws. The Bank operates within the scope of corporate, institutional and retail banking (including private banking) throughout the whole country and operates trade and investment activities as well as brokerage activities.
The Bank provides services to legal and natural persons, domestic and foreign, both in PLN and in foreign currencies.
The Bank may open and maintain accounts in Polish and foreign banks and can possess foreign exchange assets and trade in them.
The Bank conducts retail banking business in the Czech Republic and Slovakia through its foreign mBank branches in these countries.
As at 31 December 2024, the headcount of mBank S.A. amounted to 6 902 FTEs (Full Time Equivalents) (31 December 2023: 6 649 FTEs).
As at 31 December 2024, the headcount of mBank S.A. amounted to 7 798 persons (31 December 2023: 7 626 persons).
The Management Board of mBank S.A. approved these financial statements on 26 February 2025.
2. Information on relevant accounting policies
Information on principal accounting policies used in the preparation of these financial statements is set forth below. These accounting policies have been applied consistently in all periods presented.
2.1. Accounting basis
These Financial Statements of mBank S.A. have been prepared for the 12-month period ended 31 December 2024. Comparative data presented in these financial statements relate to the period of 12 months ended on 31 December 2023.
The Financial Statements of mBank S.A. have been prepared on a historical cost basis in compliance with the International Financial Reporting Standards (IFRS) as adopted for use in the European Union, except for derivative financial instruments, other financial assets and liabilities held for trading, financial assets failing SPPI test and financial assets and liabilities designated at fair value through profit or loss (FVTPL), debt, equity instruments and loans and advances to customers at fair value through other comprehensive income (FVOCI), investment properties and liabilities related to cash-settled share-based payment transactions, all of which have been measured at fair value. Non-current assets held for sale or group of these assets classified as held for sale are stated at the lower of the carrying value and fair value less costs to sell.
The data for the year 2023 presented in these mBank S.A. financial statements was audited by the auditor.
The preparation of the financial statements in compliance with IFRS requires the application of specific accounting estimates. It also requires the Management Board to use its own judgment when applying the accounting policies adopted by the Bank. The issues in relation to which a significant professional judgement is required, more complex issues, or such issues where estimates or judgments are material to the financial statements are disclosed in Note 4.
These financial statements were prepared under the assumption that all the entities of the Group continue as a going concern in the foreseeable future, i.e. in the period of at least 12 months following the reporting date.
Therefore, as of the date of approving these statements, no events that could indicate that the continuation of the operations by the Bank is endangered in the period of at least 12 months from the reporting date were identified.
The Bank also prepares consolidated financial statements in accordance with IFRS. mBank S.A. Group Consolidated Financial Statements for the year 2024 were approved on 26 February 2025.
mBank S.A.
IFRS Financial Statements 2024 (PLN thousand)
11
2.2. Interest income and expenses
All interest income and interest expenses on financial instruments carried at amortised cost using the effective interest rate method, as well as interest income from financial assets measured at fair value through other comprehensive income and interest income and interest expenses from financial instruments measured at fair value through profit or loss are recognised in the income statement.
The Bank calculates interest income using the effective interest rate on the gross carrying amount of the debt-based financial asset. In case of reclassification of a financial asset or a group of similar financial assets to Stage 3, the interest income is calculated on the amortised cost (i.e. the gross carrying amount adjusted for the loss allowance) and is recognised using the interest rate at which the future cash flows were discounted for the purpose of valuation of impairment.
Interest income includes interest and commissions received or due on account of loans, inter-bank deposits or investment securities recognised in the calculation of the effective interest rate.
Interest income, including interest on loans, is recognised in the income statement and on the other side in the statement of financial position as part of receivables from banks or from other customers.
Amounts calculated with the use of negative interest rates are qualified accordingly to interest income in case when they relate to financial liabilities, and to interest expenses when they relate to financial assets.
Income and expenses related to the interest component of the result on interest rate derivatives and resulting from current calculation of swap points on currency derivatives classified into banking book are presented in the interest results in the position Interest income/expense on derivatives classified into banking book. The banking book includes transactions, which are not concluded for trading purposes i.e. not aimed at generating a profit in a short-term period (up to 6 months) and those that do not constitute hedging a risk arising from the operations assigned into trading book.
Interest income and interest expenses related to the interest measurement component of derivatives concluded as hedging instruments under fair value hedge are presented in the interest result in the position Interest income and interest expenses on derivatives under the fair value hedge.
Interest income and interest expense related to the interest measurement component of derivatives concluded as hedging instruments under cash flow hedge are presented in the interest result in the position Interest income on derivatives under the cash flow hedge.
2.3. Fee and commission income
Fee and commission income is recognised in accordance with IFRS 15 using a five-step model for revenue recognition.
The Bank recognises at a point in time the fees charged at a point in time not related directly to origination of loans and advances. Fees for services delivered over time longer than 3 months are recognised by the Bank over time.
As the fee and commission income, the Bank treats also fees and commissions recognised over time on a straight-line basis, related to loans and advances with not established timing of cash flows, for which effective interest rate is not possible to be determined. Straight line method for those services presents fairly the timing of transfer of services because they are delivered evenly over time.
Accounting principles related to recognition of fee income from sale of assurance products bundled with loans and advances are described under Note 2.4.
Fees charged for granting of loans which are likely to be drawn down are deferred (together with the direct costs directly attributable to them) and included in the calculation of the effective interest rate charge on the loan at the time of granting.
Fees on account of syndicated loans are recognised as income at the time of closing of the process of organisation of the respective syndicate, if the Bank has not retained any part of the credit risk on its own account or has retained a part of the risk of a similar level as other participants.
Commissions and fees on account of negotiation or participation in the negotiation of a transaction on behalf of a third party, such as the acquisition of shares or other securities, or the acquisition or disposal of an enterprise, are recognised at the time of realisation of the transaction. Portfolio management fees and other fees for management, advisory and other services are recognised on the basis of service contracts, usually in proportion to the passage of time. The same principle is applied in the case of management of client assets, financial planning and custody services, which are continuously provided over an extended period of time.
Fees and commissions collected by the Bank on account of issuance, renewal and change in the limit of credit and payment cards, guarantees granted as well as opening, extension and increase of letters of credit are accounted for on a straight-line basis over the life of the product they concern.
mBank S.A.
IFRS Financial Statements 2024 (PLN thousand)
12
Fee and commissions collected by the Bank on account of cash management operations, money transfers and brokerage business activities are recognised directly in the income statement as one-off. Fees and commissions for keeping customer accounts are charged monthly and recognised at the time of collection.
In addition, fee and commission income include revenue from a fee on instalment payment for premium on insurance products sold through the Internet platform. The fee on instalment payment is settled in time in accordance with the duration of the policy.
The Bank's fee and commission income comprises also income from offering insurance products of third parties. In case of selling insurance products that are not bundled with loans, the revenues are recognised as upfront income or in majority of cases settled on a monthly basis.
2.4. Revenue and expenses from sale of insurance products bundled with loans
The Bank treats insurance products as bundled with loans, in particular when insurance product is offered to the customer only with the loan, i.e. it is not possible to purchase from the Bank the insurance product which is identical in a legal form, content and economic conditions without purchasing the loan.
Revenue and expenses from sale of insurance products bundled with loans are split into interest income and fee and commission income based on the relative fair value analysis of each of these products.
The remuneration included in interest income is recognised over time as part of effective interest rate calculation for the bundled loan. The remuneration included in fee and commission income is recognised partly as upfront income and partly deferred over time based on the analysis of the stage of completion of the service, in accordance with 5-step model from IFRS 15.
Expenses directly linked to the sale of insurance products are recognised using the same pattern as in case of income. A part of expenses is treated as an element adjusting the calculation of effective interest rate for interest income and the remaining part of expenses is recognised in fee and commission expenses as upfront cost or as cost accrued over time.
The Bank also estimates the part of remuneration which in the future will be returned due to early termination of insurance contract and appropriately decreases interest income or fee and commission income to be recognised.
2.5. Financial assets
The Bank classifies its financial assets to the following categories: financial assets valued at fair value through profit or loss, financial assets valued at fair value through other comprehensive income and financial assets valued at amortised cost. Classification of the debt financial asset to the one of the above categories takes place at its initial recognition based on business model for managing financial assets and contractual cash flow characteristics. An equity instrument is classified as a financial asset at fair value through profit or loss unless at the time of initial recognition the Bank made an irrevocable election of specific equity investments to present subsequent fair value changes in other comprehensive income.
Standardised purchases and sales of financial assets at fair value through profit or loss and measured at fair value through other comprehensive income are recognised on the settlement date the date on which the Bank delivers or receives the asset. Changes in fair value in the period between trade and settlement date with respect to assets carried at fair value are recognised in profit or loss or in other components of equity. Loans are recognised when the funds are disbursed or made available to the borrower's account.
Derecognition of financial asset is when and only when the contractual rights to the cash flows from the financial assets expire, when the Bank transfers the financial asset and the transfer qualifies for derecognition or in case of a substantial modification of financial asset.
Financial assets measured at fair value through profit or loss
A financial asset shall be measured at fair value through profit or loss unless it is measured at amortised cost or at fair value through other comprehensive income.
The Bank presents financial assets measured at fair value through profit and loss in the following positions of the statement of financial position: Financial assets held for trading and hedging derivatives and Non-trading financial assets mandatory at fair value through profit and loss. Significant accounting policies related to derivatives are included in Note 2.11.
Disposals of debt and equity securities held for trading are accounted according to the weighted average cost method.
Interest income on financial assets measured at fair value through profit or loss (Note 2.2), except for derivatives the recognition of which is described in Note 2.11, is recognised in net interest income. The valuation and result on disposal of financial assets measured at fair value through profit or loss is recognised in trading income for financial assets held for trading or in gains or losses on non-trading financial assets mandatorily at fair value through profit or loss. Methods of fair value measurement are discussed in Note 3.18.
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Financial assets measured at amortised cost
Financial assets measured at amortised cost are assets that meet both of the following conditions, unless the Bank designated them to fair value through profit or loss: the financial asset is held within a business model whose objective is to hold financial assets in order to collect contractual cash flows and contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding Financial assets at amortised cost are entered into books on the transaction date. At initial recognition, financial assets classified to this category are valued at fair value plus transaction costs that are directly attributable to the acquisition of the financial asset.
Financial assets measured at fair value through other comprehensive income
Financial assets measured at fair value through other comprehensive income are assets that meet both of the following conditions, unless the Bank designated them to fair value through profit or loss: the financial asset is held within a business model whose objective is achieved by both collecting contractual cash flows as well as selling financial assets and contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding.
Interest income and expense from financial assets measured at fair value through other comprehensive income are presented in net interest income. Gains and losses from sale of financial assets measured at fair value through other comprehensive income are presented in gains or losses from derecognition of financial assets and liabilities not measured at fair value through profit or loss.
Gains and losses arising from changes in the fair value of debt financial assets measured at fair value through other comprehensive income are recognised in other comprehensive income until the derecognition of the respective financial asset in the statement of financial position at such time, the aggregate net gain or loss previously recognised in other comprehensive income is now recognised in the income statement.
Methods of fair value measurement are discussed in Note 3.18.
Equity instruments
Investments in equity instruments are measured at fair value through profit or loss. Upon initial recognition, the Bank may make an irrevocable election to present in other comprehensive income subsequent changes in the fair value (the option of measurement at fair value through other comprehensive income) of an investment in an equity instrument that is not held for trading and does not constitute a contingent payment recognised by the Bank as part of a business combination in accordance with IFRS 3.
In the case of the financial instruments for which the option of measurement at fair value through other comprehensive income was used, all gains and losses related to change in fair value, including foreign exchange differences, are recognised in other comprehensive income. There is no possibility to reclassify them to income statement at the moment of sale of the financial instrument. Only dividends received related to these instruments are recognised in income statement when the entity’s right to receive payment is established.
Modification of contractual terms for financial assets
The Bank derecognises financial assets and re-recognises the financial assets in accordance with the measurement requirements for initial recognition in case of substantial modification of contractual terms of financial assets. The Bank defines modification as substantial when it meets one of the following criteria:
increase of the credit amount of more than 10% compared to the amount before the change,
prolongation of the contractual maturity of more than 12 months compared to the contractual maturity before change,
change of currency not provided for in the terms of the contract. Change of the currency provided for in the terms of the agreement is such a change that defines both the FX rate at which it would have place and the interest rate of the loan after the change of the currency,
change of the borrower – only if the current borrower is exempted from the debt,
change of the contractual terms influencing the SPPI test result,
change of the financed asset in case of object finance or project finance,
change of the legal form/type of financial instrument.
In case of identification of substantial modification, in the income statement the deferred income and expense related to such asset and the reversal of impairment are recognised. At the same time there is repricing of financial assets in accordance with the requirements for initial recognition. Any other modifications of contractual terms that do not cause derecognition of financial assets are treated as non-substantial modifications and the gain or loss on modification is recognised. The effect of all identified non-substantial modifications of cash flows, which do not result from financial difficulties of a borrower, are
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recognised in net interest income. The result on modification is the difference between present value of the modified cash flows discounted using the original effective interest rate and the gross carrying amount of loan before modification. Commissions received related to minor modification are settled over time using effective interest rate.
In case of substantial modification in Stage 2, for which as a consequence, a new asset classified at the date of initial recognition in Stage 1 has been recognised, the adjustment to fair value of the exposure at the initial recognition, adjusts the interest result in the subsequent periods.
In the case of contract terms’ modification as a result of a market-wide reform of interest rate benchmark, including the replacement of the interest rate benchmark with an alternative benchmark, when:
the basis for determining contractual cash flows has changed in the contract and the new basis is considered economically equivalent to the old basis, such change is recognised through a change in the effective interest rate;
changes concern other areas, or have not been considered economically equivalent, such changes are recognised on general principles, in particular they are evaluated for a substantial modification.
Purchased or originated credit impaired financial assets (POCI assets)
POCI are financial assets measured at amortised cost that at initial recognition are credit impaired. POCI are also financial assets that are credit impaired at the moment of substantial modification. At the initial recognition, POCI assets are recognised at fair value. The fair value of POCI assets at the initial recognition is calculated as present value of estimated future cash flows including credit risk discounted for the risk- free rate. After the initial recognition POCI assets are measured at amortised cost. With respect to these financial assets, the Bank uses credit adjusted effective interest rate in order to determine the amortised cost of financial asset and the interest income generated by these assets CEIR. In case of POCI exposures, the change of the expected credit losses relative to the estimated credit losses at the date of their initial recognition is recognised as an impairment loss. Its value can both reduce the gross book value of POCI exposure and increase it in the event of a decrease of expected losses relative to its value at the date of initial recognition.
2.6. Offsetting of financial instruments
Financial assets and financial liabilities are offset and the net amount is reported in the statement of financial position when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis or realise the asset and settle the liability simultaneously. The conditions mentioned above are not satisfied and offsetting is inappropriate when: different financial instruments are used to emulate the features of a single financial instrument, financial assets and liabilities arise from financial instruments having the same risk exposure but involve different counterparties, financial or other assets are pledged as collaterals for non-recourse financial liabilities, financial assets are set aside in trust by a debtor for the purpose of discharging an obligation without those assets having been accepted by the creditor in the settlement of the obligation, or obligations incurred as a result of events giving rise to losses are expected to be recovered from a third party by virtue of a claim made under an insurance contract.
2.7. Impairment of financial assets
Financial instruments subject to estimation of expected credit losses are financial assets measured at amortised cost, financial assets measured at fair value through other comprehensive income, loan commitments if not measured at fair value through profit or loss, financial guarantee contracts if not measured at fair value through profit or loss, leases under IFRS 16, contract assets under IFRS 15.
A detailed description of issues regarding the principles of estimation of expected credit losses is presented in Note 3.3.6.
Derecognition of loan receivable
Derecognition of loan receivable can be partial (corporate banking) or total.
In case of retail banking, writing off receivables can be done when:
1. debt recovery procedure is not possible due to e.g.:
a. the claim limitation,
b. fraud – inability to identify the debtor,
c. limitation of inheritors’ liability,
d. the claim was questioned by the debtor in court.
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2. debt is irrevocable e.g.:
a. the enforcement proceedings have been completed and the whole debt was not recovered - then the unrecovered portion is written off,
b. bankruptcy proceeding has been rejected or has been completed due to debtor’s lack of liquidation assets to cover the costs of the proceedings,
c. the conclusion is that a claim is irrevocable costs of recovery are higher than recovered claim,
d. limitation of heirs' liability for inheritance debts.
Cases that meet these criteria may also be included in the process of debt portfolio sale.
In the case of corporate portfolio, writing off receivables is carried out when:
1. all options to recover the debt have been exercised:
a. bankruptcy proceedings ended, the debtor was removed from the National Court Register and the debt was not recovered in whole,
b. bankruptcy proceedings were discontinued on account of the debtor having no assets to cover the costs of the proceedings or having only enough assets to cover these costs,
c. petition for bankruptcy was dismissed on account of the debtor having insufficient assets to cover the costs of the proceedings,
d. during judicial restructuring proceedings the terms and conditions of an arrangement assuming partial cancellation of the debt were approved,
e. enforcement proceedings were considered ineffective and discontinued on account of the debtor having no assets,
f. the debt was considered irrecoverable as the costs of recovering it exceed the potential proceeds;
2. it is impossible to pursue the debt, e.g.:
a. the debtor challenges the debt in court. The debt is cancelled by a court decision,
b. the statute of limitations on the Bank's claim.
Cases that meet these criteria may also be included in the process of debt portfolio sale.
2.8. Financial guarantee contracts
The financial guarantee contract is a contract that requires the issuer to make specified payments to reimburse the holder for a loss it incurs because a specified debtor fails to make payment when due in accordance with the original or modified terms of a debt instrument.
When a financial guarantee contract is recognised initially, it is measured at the fair value. After initial recognition, an issuer of such a contract subsequently measures it at the higher of:
the amount of the loss allowance determined in accordance with IFRS 9, the methodology is described in Note 3.3.6,
the amount initially recognised less when appropriate, the cumulative amount of income recognised in accordance with the principles of IFRS 15.
2.9. Cash and cash equivalents
Cash and cash equivalents comprise items with maturities of up to three months from the date of their acquisition, including cash in hand and cash held at the Central Bank with unlimited availability for disposal and amounts due from other banks.
2.10. Sell and repurchase agreements
Repo and reverse-repo transactions are defined as selling and purchasing securities for which a commitment has been made to repurchase or resell them at a contractual date and for a specified contractual price and are recognised when the money is transferred.
Securities sold with a repurchase clause (repos or sell/buy back) are not eliminated from the statement of financial position. The liability towards the counterparty is recognised as amounts due to other banks or amounts due to customers. Securities purchased together with a resale clause (reverse repos or buy/sell back) are recognised as loans and advances to other banks or other customers, depending on their nature. For assets subject to repurchase agreements, the Bank is exposed to the same risks as those associated with holding identical assets not subject to repurchase agreements.
When concluding a repo or sell/buy back or reverse repo or buy/sell back transaction, Bank sells or buys securities with a repurchase or resale clause specifying a contractual date and price.
Securities borrowed by the Bank under reverse repo or buy/sell back transactions are not recognised in the financial statements unless they are sold to third parties. In such case the purchase and sale transactions
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are recorded in the financial statements with a gain or a loss included in trading income. The obligation to return them is recorded at fair value as liabilities from short sales of securities. Securities borrowed under buy/sell back transactions and then lent under sell/buy back transactions are not recognised as financial assets.
As a result of repo or sell/buy back transactions concluded on securities held by the Bank, financial assets are transferred in such way that they do not qualify for derecognition. Thus, the Bank retains substantially all risks and rewards of ownership of the financial assets.
2.11. Derivative financial instruments and hedge accounting
Derivative financial instruments
Derivative financial instruments are recognised at fair value from the date of transaction. Fair value is determined based on prices of instruments listed on active markets, including recent market transactions, and on the basis of valuation techniques, including models based on discounted cash flows and options pricing models, depending on which method is appropriate in the particular case. All derivative instruments with a positive fair value are recognised in the statement of financial position as assets, those with a negative value as liabilities.
In accordance with IFRS 9: (i) there is no need to separate the prepayment option from the host debt instrument for the needs of financial statements if the option’s exercise price is approximately equal on each exercise date to the amortised cost of the host debt instrument. If the prepayment option does not meet the contractual cash flow characteristic test, then the financial asset as a whole shall be classified as a financial asset measured at fair value through profit or loss; (ii) exercise price of a prepayment option reimburses the lender for an amount up to the approximate present value of lost interest for the remaining term of the host contract. Lost interest is the product of the principal amount prepaid multiplied by the interest rate differential. The interest rate differential is the excess of the effective interest rate of the host contract over the effective interest rate the entity would receive at the prepayment date if it reinvested the principal amount prepaid in a similar contract for the remaining term of the host contract.
The assessment of whether the call or put option is closely related to the host debt contract is made before separating the equity element of a host debt instrument in accordance with IAS 32.
The method of recognising the resulting fair value gain or loss depends on whether the given derivative instrument is designated as a hedging instrument, and if it is, it also depends on the nature of the hedged item. The Bank designates some derivative instruments either as fair value hedges against a recognised asset or liability or against a binding contractual obligation (fair value hedge), or as hedges against highly probable future cash flows attributable to a recognised asset or liability, or a forecasted transaction (cash flow hedge).
Due to the split of derivatives classified into banking book and into trading book, the Bank applies a different approach to the presentation of interest income/expense for each of these groups of derivatives that is described in Note 2.2. The remaining result from fair value measurement of derivatives is recognised in Net trading income.
Hedge accounting
Derivative instruments that are designated and are effective hedging instruments are subject to hedge accounting policies.
Until 30 June 2022 the Bank applied the hedge accounting requirements in accordance with IAS 39, instead of the requirements set forth in IFRS 9. Starting 1 July 2022, the Bank applies IFRS 9 requirements in the area of hedge accounting to all hedge relations except for fair value portfolio hedges of interest rate risk where the hedged item is designated as portion that is a currency amount.
The IFRS 9 also introduces the option to recognise as separate component of equity part of the fair value of the hedging derivative instrument related to time value of option, forward element of a forward contract or currency basis spread and reclassify it to profit or loss in the same periods during which the hedged expected future cash flows affect profit or loss.
2.12. Financial liabilities measured at amortised cost
Financial liabilities measured at amortised cost include borrowings, deposits taken, debt securities issued and subordinated liabilities. These liabilities are initially recognised at fair value reduced by the incurred transaction costs. After the initial recognition, these liabilities are recorded at adjusted cost of acquisition (amortised cost using the effective interest method). Any differences between the amount received (reduced by transaction costs) and the redemption value are recognised in the income statement over the period of duration of the respective agreements according to the effective interest rate method.
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2.13. Investments in subsidiaries
Investments in subsidiaries in the separate financial statements are initially recognised at cost, and then measured using the equity method, whereby the carrying amount of investments in subsidiaries is increased or decreased in order to recognise the Bank's shares in the profit or loss of the subsidiary recorded after the date of acquisition. The Bank's share in the profit or loss of the subsidiary is recognised in the income statement under the item Share in profits (losses) of entities under the equity method. Received dividends reduce the carrying amount of the investment and are recognised under Dividend income. The Bank's share in other comprehensive income of the subsidiary the Bank recognises in other comprehensive income of the Bank. Unrealised gains or losses on transactions with subsidiaries accounted for using the equity method (including, for example, expected credit losses recognised in relation to loans or guarantees granted) are eliminated. Balance sheet balances such as receivables and liabilities or deposits and loans granted to subsidiaries are not eliminated in the separate financial statements. If the Bank's share of losses exceeds the value of shares in a subsidiary, the Bank ceases to recognise its share of further losses. At the balance sheet date the Bank assesses whether there are any triggers indicating impairment of investments made in a subsidiary.
2.14. Intangible assets
The Bank measures intangible assets initially at cost. After initial recognition, intangible assets are recognised at their cost of acquisition adjusted by the costs of improvement (rearrangement, development, reconstruction or modernisation) less any accumulated amortisation and any accumulated impairment losses. Amortisation is accrued by the straight-line method taking into account the expected period of economic useful life of the respective intangible assets.
Computer software
Purchased computer software licences are capitalised in the amount of costs incurred for the purchase and adaptation for use of specific computer software. These costs are amortised on the basis of the expected useful life of the software (1.5 18 years). Expenses attached to the maintenance of computer software are expensed when incurred. Expenses directly linked to the development of identifiable and unique proprietary computer programmes controlled by the Bank, which are likely to generate economic benefits in excess of such costs expected to be gained over a period exceeding one year, are recognised as intangible assets. Direct costs comprise personnel expenses directly related to the software.
Capitalised costs attached to the development of software are amortised over the period of their estimated useful life (1.5 – 27 years).
Computer software directly connected with the functioning of specific information technology hardware is recognised as Tangible fixed assets.
2.15. Tangible fixed assets
Tangible fixed assets are carried at historical cost reduced by accumulated depreciation and accumulated impairment losses. Historical cost takes into account the expenses directly attached to the acquisition of the respective assets.
Land is not depreciated. Depreciation of other fixed assets is accounted for according to the straight-line method in order to spread their initial value reduced by the residual value over the period of their useful life which is estimated as follows for the particular categories of fixed assets:
Buildings and structures
20-40 years,
Equipment
2-20 years,
Vehicles
4-5 years,
Information technology hardware
2-10 years,
Leasehold improvements
5-20 years, no longer than the period of the lease contract,
Office equipment, furniture
2-10 years.
Land and buildings consist mainly of branch outlets and offices. Residual values estimated useful life periods and depreciation method are verified at the end of the reporting period and adjusted prospectively in accordance with the arising need.
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2.16. Investment properties
Investment properties are defined as land and buildings held for the purpose of earning rental income or because they are expected to increase in value. Investment property also includes right-of-use assets that meet the definition of investment property under IAS 40. On initial recognition, investment properties are measured at cost including directly attributable transaction costs.
In subsequent measurements, investment properties are measured at fair value. The fair value of a right-of-use that meets the definition of investment property excludes the value of expected cash outflows from lease payments, which are presented separately in the Bank's statement of financial position as a lease liability in accordance with IFRS 16.
Current income and expenses are recognised in other operating income or expenses. Remeasurement changes arising from changes in fair value are also shown under other operating income or expenses in the income statement for the period. As at the date of reclassification of the property occupied by the Bank to investment property, the difference between the carrying amount of the property determined in accordance with IAS 16 or IFRS 16 and its fair value is recognised by the Bank in the profit or loss account in the event of a decrease in the carrying amount or reversal of a previously recognised impairment loss on this property, or in other comprehensive income, in the event of an increase in the current value above the amount of the reversed impairment loss.
2.17. Non-current assets held for sale and discontinued operations
The non-current assets (or disposal group) are classified as held for sale if their carrying amount will be recovered principally through a sale transaction rather than through continuing use. For this to be the case, the asset (or group) must be available for immediate sale in its present condition subject only to terms that are usual and customary for sale of such assets and its sale must be highly probable, i.e. the appropriate level of management must be committed to a plan to sell the asset, and an active programme to locate a buyer and complete the plan must have been initiated. Further, the asset must be actively marketed for sale at a price that is reasonable in relation to its current fair value. In addition, the sale should be expected to qualify for recognition as a completed sale within one year from the date of classification.
Non-current assets held for sale are priced at the lower of carrying value and fair value less costs to sell. Assets classified in this category are not depreciated.
When criteria for classification to non-current assets held for sale are not met, the Bank ceases to classify the assets as held for sale and reclassifies them into appropriate category of assets. The Bank measures a non-current asset that ceases to be classified as held for sale (or ceases to be included in a disposal group classified as held for sale) at the lower of:
its carrying amount at a date before the asset (or disposal group) was classified as held for sale, adjusted for any depreciation, amortisation or revaluations that would have been recognised had the asset (or disposal group) not been classified as held for sale,
its recoverable amount at the date of the subsequent decision not to sell.
Discontinued operations are a component of the Bank that either has been disposed of or is classified as held for sale and represents a separate major line of business or geographical area of operation or is a subsidiary acquired exclusively with a view to resale.
The classification to this category takes places at the moment of sale or when the operation meets criteria of the operation classified as held for sale if this moment took place previously. Disposal group which is to be taken out of usage may also be classified as discontinued operation.
2.18. Deferred income tax
Liabilities or assets for deferred income tax are recognised in their full amount according to the balance sheet method in connection with the existence of temporary differences between the tax value of assets and liabilities and their carrying value. Such liabilities or assets are determined by application of the tax rates in force by virtue of law or of actual obligations at the end of the reporting period. According to expectations such tax rates applied will be in force at the time of realisation of the assets or settlement of the liabilities for deferred income tax.
The main temporary differences arise on account of impairment write-offs recognised in relation to the loss of value of credits and granted guarantees of repayment of loans, amortisation of fixed assets and intangible assets, leases, revaluation of certain financial assets and liabilities, including contracts concerning derivative instruments and forward transactions, provisions for retirement benefits and other post-employment benefits, and also deductible tax losses.
In the case of the Bank, the deferred income tax assets and liabilities are netted against each other separately for each country where the Bank conducts its business and is obliged to settle corporate income
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tax. Assets and provisions may be offset if the Bank has the right to include them simultaneously when calculating the amount of the tax liability.
The Bank discloses separately the amount of negative temporary differences (mainly on account of unused tax losses or unutilised tax allowances) in connection with which the deferred income tax asset was not recognised in the statement of financial position, and also the amount of temporary differences attached to investments in subsidiaries and associates for which no deferred income tax provision has been formed.
Deferred income tax for the Bank is provided on assets or liabilities due to temporary differences arising from investments in subsidiaries and associates, except where, on the basis of any probable evidence, the timing of the reversal of the temporary difference is controlled by the Bank and it is possible that the difference will not reverse in the foreseeable future.
2.19. Leasing
mBank S.A. Bank as a lessee
The Bank recognises the right of use of the leased asset and a financial liability representing its obligation to make future lease payments in the amount of discounted future cash flows throughout the lease period.
The Bank as a lessee applies simplified approach and it does not apply the requirements in terms of recognition, measurement and presentation for short-term lease contracts lasting no longer than 12 months for each class of underlying asset as well as for lease contracts for which the underlying asset is of low value, i.e. less than PLN 20 thousand for separate leases. Lease payments are recognised as costs using straight-line method throughout the lease period for lease contracts for which the Bank applies simplified approach.
Perpetual usufruct right is classified as a lease according to IFRS 16 due to the occurrence of future fees for the use of this right. The Bank assumed that the lease period for this type of contracts is the remaining period of the right granted since the transition to IFRS 16.
The Bank shall determine the lease term as the non-cancellable period of a lease, together with both:
periods covered by an option to extend the lease if the Bank as a lessee is reasonably certain to exercise that option,
periods covered by an option to terminate the lease if the Bank as a lessee is reasonably certain not to exercise that option.
The Bank shall reassess whether it is reasonably certain to exercise an option to extend a lease, or not to exercise an option to terminate a lease. The Bank shall consider all relevant facts and circumstances that create an economic incentive for the lessee to exercise an option to extend a lease, or not to exercise an option to terminate a lease. The Bank shall revise the lease term if there is a change in the non-cancellable period of a lease.
At the commencement date, the Bank as a lessee shall measure the right-of-use asset at cost. The cost of right-of-use assets includes:
the amount of the initial measurement of the lease liability,
any lease payments made at or before the commencement date, less any lease incentives received,
initial direct costs incurred by the Bank as a lessee,
an estimate of the costs to be incurred by the Bank as a lessee in dismantling and removing the underlying asset, restoring the site on which it is located or restoring the underlying asset to the condition required by the terms and conditions of the lease, unless those costs are incurred to produce inventories.
At the commencement date, the Bank measures the lease liability at the present value of outstanding lease payments, discounted at the internal leasing rate or if this rate cannot be easily determined the marginal interest rate of the Bank. After initial recognition, lease liability is measured at amortised cost.
The Bank applies the marginal interest rate of lessee. As the lessee the Bank estimates the discount rate taking into account the duration and the currency of the contract.
All right-of-use assets are classified in tangible fixed assets (Note 26). Lease liabilities are presented as financial liabilities measured at amortised cost (Note 29).
Cash payments of lease liabilities are classified in statement of cash flows within financial activities. Short term lease payments, payments for leases of low-value assets and variable lease payments not included in the measurement of the lease liability are classified in statement of cash flows within operating activities.
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mBank S.A. Bank as a lessor
Operating lease
The Bank recognises the lease payments from operating leases as income on a straight-line basis or in another systematic manner. The Bank recognises costs, including depreciation, incurred in order to obtain benefits from leasing. The Bank adds the initial direct costs incurred in order to obtain operating leasing to the carrying value of the underlying asset and it recognises these costs as expenses incurred throughout the lease period on the same basis as lease revenues. The method of depreciation of leased out depreciable assets is the same as that foreseen by the normal depreciation rules adopted by the Bank with regard to similar assets, and the depreciation charges are calculated in accordance with IAS 16 and IAS 38. In order to determine whether there has been any impairment of the object of the lease, the Bank applies IAS 36.
2.20. Provisions
Loan commitments and financial guarantee contracts are subject to loan loss provisions requirements according to IFRS 9. Guarantees’ valuation method is presented in Note 2.8.
According to IAS 37, provisions are recognised when Bank has a present legal or constructive obligation as a result of past events, it is more likely that an outflow of resources will be required to settle the obligation and the amount has been reliably estimated.
2.21. Post-employment benefits and other employee benefits
Post-employment benefits
The Bank forms provisions against future liabilities on account of post-employment benefits determined on the basis of an estimation of liabilities of that type, using an actuarial model. The Bank uses a principle of recognition of actuarial gains or losses from the measurement of post-employment benefits related to changes in actuarial assumptions in other comprehensive income that will not be reclassified to the income statement. The Bank recognises service cost and net interest on the net defined benefit liability in the Overhead cost and in other interest expenses, respectively.
Equity-settled share-based payment transactions
The Bank runs programmes of remuneration based on and settled in own shares. Equity-settled share-based payment transactions are accounted for in compliance with IFRS 2. In case of the part of the programme settled in shares, the fair value of the service rendered by employees in return for options and shares granted increases the costs of the respective period corresponding to own equity. The total amount which needs to be expensed over the period when the outstanding rights of the employees for their options and shares to become exercisable are vested is determined on the basis of the fair value of the granted options and shares. There are no market vesting conditions that shall be taken into account when estimating the fair value of share options and shares at the measurement date. Non-market vesting conditions are not taken into account when estimating the fair value of share options and shares but they are taken into account through adjustment on the number of equity instruments. At the end of each reporting period, Bank revises its estimates of the number of options and shares that are expected to become exercised.
2.22. Equity
Equity consists of capital and own funds created in compliance with the respective provisions of the law, i.e., the appropriate legislative acts, the Bank by-laws.
Registered share capital
Share capital is presented at its nominal value, in accordance with the by-laws and with the entry in the business register.
Own shares
In the case of acquisition of shares in the Bank by the Bank, the amount paid reduces the value of equity as own shares until the time when they are cancelled. In the case of sale or reallocation of such shares, the payment received in return is recognised in equity.
Share premium
Share premium is formed from premium obtained from the issue of shares reduced by the attached direct costs incurred with that issue.
Costs directly connected with the issue of new shares and options reduce the proceeds from the issue recognised in equity.
Moreover, share premium takes into account the settlements related to incentive programs based on Bank’s shares.
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Retained earnings
Retained earnings include:
other supplementary capital,
other reserve capital,
general risk reserve,
undistributed profit from previous years,
profit for the current year.
Other supplementary capital, other reserve capital and general risk reserve are formed from allocations of profit and they are assigned to purposes specified in the by-laws or other regulations of the law.
Moreover, other reserve capital comprises valuation of incentive programs based on Bank’s shares.
Dividends for a given year, which have been approved by the General Meeting but not distributed at the end of the reporting period, are shown under the liabilities due to dividends payable under Other liabilities.
Other components of equity
Other components of equity result from:
valuation of financial assets at fair value through other comprehensive income,
exchange differences on translation of foreign operations,
actuarial gains and losses relating to post-employment benefits,
valuation of derivative financial instruments held for cash flow hedging in relation to the effective portion of the hedge,
cost of hedge,
the Bank’s shares of other comprehensive income of entities under the equity method,
fair value measurement of assets reclassified to investment property.
Additional equity components
Item Additional equity components includes capital bonds within the meaning of the Bond Act of 15 January 2015 classified as Additional Tier I capital.
2.23. Valuation of items denominated in foreign currencies
Functional currency and presentation currency
The items contained in financial reports of particular entities of the Bank, including foreign branches of the Bank, are valued in the currency of the basic economic environment in which the given entity conducts its business activities (“functional currency”). The financial statements are presented in the Polish zloty, which is the presentation currency of the Bank.
Transactions and balances
Transactions denominated in foreign currencies are converted to the functional currency at the exchange rate in force at the transaction date. Foreign exchange gains and losses on such transactions as well as balance sheet revaluation of monetary assets and liabilities denominated in foreign currency are recognised in the income statement.
Foreign exchange differences arising on account of such monetary items as financial assets measured at fair value through profit or loss are recognised under gains or losses arising in connection with changes of fair value. Foreign exchange differences arising on account of such monetary items as equity instruments measured at fair value through other comprehensive income are recognised in other comprehensive income.
At the end of each reporting period non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the transaction, and non- monetary items that are measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was measured. When a gain or loss on a non-monetary item is recognised in other comprehensive income, any exchange differences component of that gain or loss is recognised in other comprehensive income. Conversely, when a gain or loss on a non-monetary item is recognised in profit or loss, any exchange differences component of that gain or loss is recognised in profit or loss.
Changes in fair value of monetary items valued through other comprehensive income cover foreign exchange differences arising from valuation at amortised cost, which are recognised in the income statement.
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Items of the statement of financial position of foreign branches are converted from functional currency to the presentation currency with the application of the average exchange rate as at the end of the reporting period. Income statement items of these entities are converted to presentation currency with the application of the arithmetical mean of average exchange rates quoted by the National Bank of Poland on the last day of each month of the reporting period. Foreign exchange differences so arisen are recognised in other comprehensive income.
2.24. Trust and fiduciary activities
mBank S.A. operates trust and fiduciary activities including domestic and foreign securities and services provided to investment and pension funds.
The Bank provides custody, trustee, corporate administration, investment management and advisory services to third parties. Fee and commission income from trust and fiduciary activities is recognised in accordance with IFRS 15. In connection with these, the Bank makes decisions concerning the allocation, purchase and sale of a wide variety of financial instruments. Assets held in a fiduciary capacity are not included in these financial statements because as they do not belong to the Bank.
2.25. New standards, interpretations and amendments to published standards
These financial statements include the requirements of all the International Accounting Standards, International Financial Reporting Standards and related interpretations as endorsed by the European Union which have been issued and are binding for annual periods starting on 1 January 2024.
Standards and interpretations endorsed by the European Union
Published Standards and Interpretations which have been issued and are binding for the first time in the
reporting period covered by the financial statements
Standards and interpretations
Description of the changes
The beginning of the binding period
Impact on the Bank’s financial statements in the period of initial application
Amendments to IAS 1, Classification of liabilities as current or non-current
The amendments to IAS 1 affect the requirements for the presentation of liabilities in the financial statements. In particular, they explain one of the criteria for classifying liabilities as non-current.
1 January 2024
The application of the amended standard had no significant impact on the financial statements.
Amendments to IFRS 16 Leasing
The amendment to IFRS 16 requires a seller-lessee to subsequently measure lease liabilities arising from a leaseback in a way that it does not recognise any amount of the gain or loss that relates to the right of use it retains.
1 January 2024
The application of the amended standard had no significant impact on the financial statements.
Amendments to IAS 7 Statement of Cash Flows and IFRS 7 Financial
Instruments: Disclosures: Supplier Finance Arrangements
The amendments to IAS 7 and IFRS 7 introduce additional disclosure requirements to enhance the transparency of supplier finance arrangements and their effects on a company’s liabilities, cash flows and exposure to liquidity risk.
1 January 2024
The application of the amended standards had no significant impact on the financial statements.
Published Standards and Interpretations which have been issued but are not yet binding or have not been
adopted early
Standards and interpretations
Description of the changes
The beginning of the binding period
Impact on the Group’s financial statements in the period of initial application
Amendments to IAS 21 The Effects of Changes in Foreign Exchange Rates - Lack of Exchangeability
The amendments to IAS 21 clarify how an entity should assess the currency exchangeability and require the disclosure of information that enables users of financial statements to understand the impact of a currency not being exchangeable.
1 January 2025
The application of the amended standards will have no significant impact on the financial statements.
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Standards and interpretations not yet endorsed by the European Union
These financial statements do not include standards and interpretations listed below which await endorsement of the European Union.
Standards and interpretations
Description of the changes
The beginning of the binding period
Impact on the Bank’s financial statements in the period of initial application
IFRS 18 Presentation and Disclosure in Financial Statements
IFRS 18 aims to improve financial reporting by requiring additional defined subtotals in the statement of profit or loss, requiring disclosures about management-defined performance measures; and adding new principles for grouping (aggregation and disaggregation) of information. IFRS 18 replaces IAS 1 Presentation of Financial Statements. Requirements in IAS 1 that are unchanged have been transferred to IFRS 18 and other Standards.
1 January 2027
The application of the new standard will have no significant impact on the financial statements.
IFRS 19 Subsidiaries without Public Accountability: Disclosures
IFRS 19 permits eligible subsidiaries to use IFRS Accounting Standards with reduced disclosures. Applying IFRS 19 will reduce the costs of preparing subsidiaries’ financial statements while maintaining the usefulness of the information for users of their financial statements. A subsidiary is eligible if it does not have public accountability and its ultimate or any intermediate parent produces consolidated financial statements available for public use that comply with IFRS Accounting Standards.
1 January 2027
The standard will not apply for the purpose of preparing Group's financial statements.
Amendments to IFRS 9 and IFRS 7 – classification and measurement
Amendments to IFRS 9 and IFRS 7 relate to settling financial liabilities using an electronic payment system and assessing contractual cash flow characteristics of financial assets, including those with environmental, social and governance (ESG)-linked features.
The amendments also include the disclosure requirements relating to investments in equity instruments designated at fair value through other comprehensive income.
1 January 2026
The application of the new standard will not have a significant impact on the financial statements.
Amendments to various standards resulting from the annual review of International Financial Reporting Standards
The amendments cover IFRS 1, IFRS 7 (including implementation guidance), IFRS 9, IFRS 10 and IAS 7 and consist of improving readability, accessibility and consistency with other standards and eliminating ambiguities in selected paragraphs.
1 January 2026
The application of the amended standards will have no significant impact on the financial statements.
Amendments to IFRS 9 and IFRS 7 - contracts relating to electricity dependent on natural conditions
The changes to nature-based electricity contracts relate to requirements for the possibility to apply the own-use exemption and hedge accounting with associated disclosures. The scope of the amendments is narrow and only if the contracts meet certain characteristics, they will be subject to the amendments.
1 January 2026
The application of the amended standards will have no significant impact on the financial statements.
The interest rate benchmark reform
Since year 2021, mBank continued efforts to implement the reform of reference rates initiated by Regulation 2016/1011 of The European Parliament and of the Council of 8 June 2016 on indices used as benchmarks in financial instruments and financial contracts or to measure the performance of investment funds and amending Directives 2008/48/EC and 2014/17/EU and Regulation (EU) No 596/2014 (further “BMR”) which resulted, inter alia, in the Financial Conduct Authority’s (further “FCA”) decision to cease quoting or lose representativeness of LIBOR rates (further “IBOR reform”).
In order to effectively implement the changes resulting from the IBOR reform, a project was launched at mBank in 2020 involving Bank's units responsible for risk management, treasury, retail and corporate banking, financial markets, IT, accounting, reporting and compliance areas. The implementation of the project is supervised by the Steering Committee and the Capital, Asset and Liability Management Committee
As a result of the project, the Bank updated and implemented changes to its action plan in the event of material changes or discontinuation of an index or benchmark.
The Bank has also adjusted risk models to the new reference rates and implemented IT changes to properly handle the new reference rates as well as business relevant products and instruments based on those rates. Wherever possible appropriated fallback clauses were introduced to customer contracts.
In case of retail clients with loans with interest still calculated in 2024 based on LIBOR reference rates, the Bank proposed signing an annex changing the reference rate to an alternative rate. Signing the annex was voluntary, and in a situation where borrowers did not sign the annex, the interest rate after discontinuation of the LIBOR was set in accordance with the last value of the reference rate.
In case of corporate clients LIBOR USD index was replaced in loan contracts by alternative index already in 2023.
In the second half of 2022 the National Working Group on Reference Rate Reform (NGR) was established to prepare a 'roadmap' and a timetable of actions for the smooth and safe implementation of the various elements of the process leading to the replacement of the WIBOR interest rate index with a new reference index (hereinafter WIBOR reform).
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Representatives of the Ministry of Finance, the National Bank of Poland, the Office of the Financial Supervision Authority, the Bank Guarantee Fund, the Polish Development Fund, the Warsaw Stock Exchange, the National Depository for Securities, Bank Gospodarstwa Krajowego, the GPW Benchmark, and banks participate in the NGR activities.
In line with the initial decision taken by the NGR Steering Committee, the WIBOR index was to be replaced by the new index by the end of 2024. In October 2023, the NGR Steering Committee announced that it was pushing back the deadline for completing the transition from WIBOR to the new benchmark to the end of 2027 and on 10 December 2024 decided that it would be replaced by WIRF- index (POLSTR).
The key risks faced by the Bank in relation to the WIBOR are:
the risk of uncertainty regarding the transition of contracts to alternative reference rates, which could lead to an adverse change in the risk profile of these contracts,
the risk of slow adaptation of the new reference rate by the financial markets, including the delayed development of the derivatives market required to manage the interest rate risk profile.
In order to mitigate these risks, the Bank has launched a separate project for implementation of the WIBOR reform, actively participates it the NGR activities and takes advantage of the solutions developed during consultation process led by International Swaps and Derivatives Association (ISDA), Polish Bank Association and other international organisations.
The Bank has also intensified activities related to implementing required changes to WIBOR based contracts with retail and corporate customers. Particular emphasis, in order to maximise the percentage of annexed agreements was placed on effective and transparent communication of the required changes.
The Bank is also working to remove products based on the WIBOR index from its current offering and replace them with products based on alternative rates. In 2024, the Bank began selling cash and revolving loans to individual customers based on the NBP reference rate.
The table below presents the Bank’s exposure as at 31 December 2024 to material reference rates in scope of the interest rate benchmark reform for which the transition to the alternative reference rates was not yet completed.
(PLN million)
The contractual amount of non-derivative financial asset
The contractual amount of non-derivative financial liabilities
Nominal amount of derivatives as a net amount of receivables and liabilities for derivative transactions
PLN WIBOR
84 746
791
(27 746)
PLN WIBID
-
4 034
-
Total
84 746
4 825
(27 746)
The Bank currently is not offering any products based on BMR non-compliant reference rates.
The impact of the IBOR reform on hedge accounting is presented in Note 19.
2.26. Business segments
Data concerning business segments was presented in the Consolidated Financial Statements of mBank S.A. Group for the year 2024, prepared in compliance with the International Financial Reporting Standards and approved on 26 February 2025.
3. Risk Management
mBank S.A. manages risk on the basis of regulatory requirements and best market practice, by developing risk management strategies, policies and guidelines.
The risk management process is conducted at all levels of the organisational structure, starting at the levels of the Supervisory Board (including Risk Committee of the Supervisory Board) and the Bank’s Management Board, through specialised committees and organisational units responsible for risk identification, measurement, monitoring, control and reduction, down to each business unit of the Bank.
3.1. mBank risk management in 2024 – external environment
The Bank takes actions on an ongoing basis to adapt the risk management principles to changing external conditions, including changes in the law.
Changes regarding the calculation of capital requirements (CRR Regulation)
The Group monitors the regulatory changes resulting from the implementation of the updated standards of the Basel Committee on Banking Supervision into EU legislation, in particular those related to the revision of the methodologies for calculating capital requirements (so-called Basel 4). In June 2024, the CRR III/CRD VI regulatory package was published. The changes in the Regulation (EU) No. 575/2013 of the European Parliament and Council of 26 June 2013 on prudential requirements for credit institutions and
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investment firms and amending Regulation (EU) No. 648/2012 (Official Journal of the European Union, L 176/1, 2013, as amended CRR Regulation) mainly relate to the methodologies for calculating capital requirements for the different types of risk: credit risk, market risk and operational risk. In case of mBank Group particularly significant are the changes to the methods of calculating capital requirements for credit risk, due to the application of the internal rating-based approach, which is also subject to change.
The changes also translate into prudential reporting and capital adequacy disclosures. The new regulations apply from the beginning of 2025.
Amendments to the CRD IV Directive
The amended CRD foresees additional requirements for ESG risks, in the context of risk management, measurement and monitoring, economic capital calculation, or stress scenario analyses. The provisions of the CRD require transposition into local laws and will be effective from January 2026.
Updated disclosure requirements (Pillar III)
Commission Implementing Regulation (EU) 2024/3172 of 29 November 2024, which repealed Commission Implementing Regulation (EU) 2021/637, established uniform disclosure formats to implement the Basel III standards.
Uniform rules for instant payments in euro
The Bank is working on adapting to the requirements of the regulation establishing uniform rules for instant payments in euro throughout the European Union (Regulation (EU) 2024/886). The regulation aims to improve competition in the payments market, reduce market concentration and increase the choice of electronic payment methods, especially in the case of cross-border payments. This goal is to be achieved by ensuring that all payment accounts are available for instant transfers 24 hours a day, 7 days a week.
Recommendations of the Polish Financial Supervision Authority (PFSA)
In order to update good practices binding on banks, including in the context of new guidelines and requirements defined by the European supervisory authorities, taking into account regulatory solutions and practices applied in other countries, the Office of Polish Financial Supervision Authority (PFSA Office) regularly works on updating recommendations addressed to banks.
In 2024 the PFSA published updated Recommendation G on interest rate risk management. In light of the publication of the final version of the EBA Guidelines for the Management of Interest Rate Risk in the Banking Book and Credit Spread Risk in the Banking Book, amended recommendation takes into account the new requirements under the aforementioned regulations.
In 2024, the Bank has completed the process of adapting to the changes in Recommendation S on best practices for managing mortgage-backed credit exposures.
New PFSA requirement for long-term funding ratio
In accordance with earlier announcements by representatives of the PFSA Office, on 15 July 2024, the PFSA adopted a recommendation regarding the Long-Term Funding Ratio (LTFR). The purpose of this recommendation is to reduce the risk associated with the current model of financing mortgage loans by banks, in particular to reduce liquidity and interest rate risk. Currently, loan financing by banks is mainly based on retail deposits, and in particular on current accounts. The introduction of the recommendation is intended to increase the scale of financing mortgage loans with long-term debt instruments. The applied weighting system rewards instruments with longer maturities, with the highest weight assigned to maturities of at least 5 years. Issues of green debt instruments, surpluses of own funds and fixed-rate loans were also given preferential weight. The PFSA expects that banks subject to the recommendation will maintain the LFR at a level of at least 40% from 31 December 2026.
IBOR reform
The Bank has carried out work to convert LIBOR CHF, EUR, JPY, GBP and USD, which were withdrawn in accordance with the Financial Conduct Authority (FCA) announcements.
The Bank is also involved in the work of the National Working Group on Benchmark Reform (NGR), which was established in connection with the planned reform of benchmarks in Poland and, among others, is to introduce a new interest rate benchmark, for which the input data is information representing ON (overnight) transactions. The work of the NGR is aimed at ensuring the credibility, transparency and reliability of the development and application of the new reference interest rate index. The Bank has given this work a very high priority and is guided by the schedule published by the NGR.
Additional information on the impact of IBOR reform is presented in Note 2.25 and Note 19.
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EBA guidelines and standards on interest rate risk in the banking book
In October 2022, EBA published final standards and guidelines with regard to the management of interest rate risk in the banking book as part of the review of existing guidelines:
revised guidelines on the interest rate risk in the banking book (IRRBB) and credit spread risk arising from banking book activities (CSRBB); they replaced EBA Guidelines issued in 2018,
technical standards on the standardised approach and the simplified standardised approach for the assessment of IRRBB,
technical standards on supervisory outlier testing (SOT) for interest rate risk in the banking book.
The indicated regulations contain provisions and requirements for the management of IRRBB. In particular they extend the CSRBB risk management rules analogous to the current IRRBB rules, clarify the rules for calculating the sensitivity of interest income and specify the calculation of regulatory measures, including the level of regulatory limits. Additionally, Delegated Act of European Union 2024/856 from 1 December 2023 went into force on 14 May 2024 and supplemented Directive of the European Parliament and of the Council 2013/36/EU with regards to technical standards, defining large decline at 5% of Tier I capital. The Bank has adjusted internal regulation on interest rate and credit spread risk management to the regulatory requirements.
Environmental (E), social (S) and corporate governance (G) risks
Environmental (E), social (S) and governance (G) risks and related new legal regulations and technological solutions are modifying the business models of mBank Group clients. Adaptation to the dynamically changing business and regulatory environment is inevitable. mBank Group constantly monitors regulatory changes in these areas and analyse their impact on our clients.
Materialization of environmental risks can affect the Bank’s financial performance directly (e.g., through the destruction of fixed assets), but also indirectly by affecting customers (e.g. by lower economic growth, tightening of financial conditions).
In this area the principles of conduct result from legislation (mainly European) and guidelines from supervisory authorities.
Regulatory changes in the area of sustainable development (CRR III/CRD VI)
Published on 19 June 2024 in the Official Journal of the European Union, two legal acts amend the regulations of EU law which are fundamental for the functioning of banks:
Regulation (EU) 2024/1623 of the European Parliament and of the Council of 31 May 2024 amending Regulation (EU) No 575/2013 as regards requirements for credit risk, credit valuation adjustment risk, operational risk, market risk and the minimum capital threshold as Regulation CRR III,
Directive (EU) 2024/1619 of the European Parliament and of the Council of 31 May 2024 amending Directive 2013/36/EU as regards supervisory powers, sanctions, third country branches and environmental, social and corporate governance risks – as Directive CRD VI.
In the area of environmental risk resulting from the adjustment process and trends within the transformation, particularly with respect to the goals related to achieving climate neutrality, CRD VI requires the Management Board to develop a detailed plan with measurable targets and processes for monitoring financial risks arising from environmental factors in the short, medium and long term. The updated Directive CRD provides additional requirements for ESG risks in the context of risk management, measurement and monitoring, economic capital calculations or stress scenario analyses.
CRR III requires the Bank to disclose qualitative information on environmental (E), social (S) and corporate governance (G) risks and quantitative tables on environmental risks by physical risk and transition risk, in terms of:
adopted strategies and actions taken to support clients and subsidiaries in their adaptation/transformation to a sustainable economy, requiring the Bank to expand its existing processes for disclosing the above information and data,
the green asset ratio (GAR),
the Banking Book Taxonomy Alignment Ratio (BTAR), which is an extension of the GAR measure to smaller customers (who do not disclose non-financial information).
The Bank will disclose the issues mentioned above starting from June 2025.
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EBA recommendation
In the first half of 2024 the EBA has consulted on guidelines for ESG risk management “Guidelines on the management of ESG risks”. The document contains guidelines regarding internal processes and risk management that financial institutions should implement to ensure the resilience of their business model and risk profile in the short, medium, and long term. The bank should incorporate ESG risks, including environmental risks, into its regular risk management framework as a horizontal risk. To this end, it should integrate ESG risks into internal processes and include them in its reporting. The bank should also develop transformation plans in line with the adopted policies and strategies. The final document was published on 9 January 2025. The guidelines will come into effect in January 2026.
The regulatory environment concerning social risk (S) within the sustainable development context is crucial for ensuring responsible and sustainable management of the Bank's activities. The materialization of social risks can negatively impact the Bank on multiple levels, from its reputation and financial stability to regulatory compliance. The principles governing social risk management arise from current legislation, primarily at the European level, as well as from the guidelines of supervisory authorities.
The most important regulatory documents and guideline in this area, in addition to the CRR III/CRD VI directives and EBA recommendations mentioned earlier, are:
Regulation (EU) 2020/852 (EU Taxonomy Regulation), which refers to social and corporate governance issues in the criterion for minimum guarantees,
Directive (EU) 2019/882 (European Accessibility Act).
The corporate governance requirements are additionally a result of:
Commercial Companies Code, Banking Law and capital market regulations,
supervisory recommendations, including Recommendation Z on the principles of internal governance in banks and the “Corporate Governance Principles for Supervised Institutions”, issued by the PFSA and the European Banking Authority's (EBA) guidelines on internal governance,
market standards, including the “Best Practices for Companies Listed on the WSE 2021”.
In 2024, in connection with the Regulation (EU) of the European Parliament and of the Council on digital operational resilience for the financial sector (DORA) and the guidelines of the Directive (EU) of the European Parliament and of the Council on improving gender balance among directors of listed companies, the Policy for the Assessment of Qualifications (Suitability), Appointment and Dismissal of Members of the Bank’s Bodies was updated. The Bank has also updated the Policy for the Identification of Key Functions, Succession Planning, Appointment and Dismissal of Key Function Holders and Assessment of Their Suitability.
The mBank Group also reports ESG issues as part of its sustainability reporting. For 2024, disclosure is prepared for the first time in accordance with the Corporate Sustainability Reporting Directive (CSRD). It extended reporting obligations on the impact of companies on communities and the environment, also in terms of alignment with regulators' guidelines. Companies are obliged to prepare sustainability reports based on this directive.
3.2. Principles of risk management
Managing credit risk, the Bank focused on identifying factors that could significantly affect customers and the quality of the Bank's loan portfolio.
In the corporate banking area, the Bank maintained caution approach to its credit risk policies changes. At the same time, the Bank continued projects that are expected to result in the automation and simplification of the credit process.
In the retail banking area, the Bank takes into account the risks associated with the current economic situation. The situation of households and SMEs is subject to strong pressure caused by high volatility of macroeconomic and geopolitical factors. The Bank adapts to this situation by maintaining a conservative credit policy, particularly in the area of creditworthiness assessment.
Risk management roles and responsibilities in the mBank Group are organised around the three lines of defence scheme:
The first line of defence is business units (Business), which primarily pursue business goals. As part of achieving these goals, Business manages risk and capital. Business takes the risk and capital aspects into account when making all decisions within the boundaries of the risk appetite defined for the mBank Group. The Senior Line Management within the Business identifies threats in its own domain and is responsible for having effective control mechanisms in place. This means that Business is the owner of all types of risk associated with its operations (including risks related to outsourced activities);
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The second line of defence are primarily organizational units in the risk management area (Risk), Security, Data Protection Inspector and Compliance function, which create risk management strategies for each risk type, support and supervise the Business in their implementation and independently analyse and assess the risk. To ensure that the Business is supported and supervised in an objective manner, the second line of defence operates independently of the Business;
The third line of defence is Internal Audit, ensuring independent assessment of activities connected with risk management performed by the first and the second line of defence.
3.2.1. Risk culture
Risk culture is the norms, attitudes and behaviours that relate to risk awareness, risk taking, risk management and the controls that shape risk decisions.
Risk culture is a key element of effective risk management, including capital and liquidity risk management. It influences the decisions made by management and employees in the course of day-to-day operations and the risks they take.
mBank recognizes that a proper risk culture contributes to a more sustainable business model, which is especially important when banks are facing economic, financial and geopolitical difficulties. Therefore, mBank develops it, promotes it and monitors it.
Risk culture at mBank is part of its organizational culture. Therefore, the basis for further development of risk culture is:
mBank values define culture of trust and positive intentions: authenticity, empathy, courage, responsibility, cooperation. These values define the most important behaviours from the Bank's perspective and its further development,
Code of Conduct, which defines minimum standards that apply to all employees in relations with each other and in relations with customers and business partners.
In order to properly develop the risk culture and use properly selected tools, mBank must be aware of its current status. Therefore, mBank assesses it in a comprehensive and multi-faceted manner through the analysis of five areas, for which mBank defines indicators. The indicators can be quantitative or qualitative in order to best reflect norms, attitudes and behaviours in mBank. Indicators are created and evaluated based on internal regulations for assessing risk culture. In assessing risk culture, mBank incorporates the results of a survey examining sentiment, satisfaction and commitment among employees, which is a horizontal and qualitative component of the assessment. It reflects a broad view of relevant culture topics among all employees and at all levels of management.
Detailed rules for assessing and monitoring risk culture are described in the Risk Management Strategy and internal regulation for Risk Culture Assessment.
3.2.2. Division of responsibilities in the risk management process
Supervisory Board supervises the Bank's activities with regard to the risk management system and evaluates its adequacy and effectiveness. The Supervisory Board considers regular and comprehensive information on all important matters concerning the Bank's activities provided by the Management Board, the risks associated with its activities and the ways and effectiveness of managing these risks. In particular, the Supervisory Board approves the mBank Group Risk Management Strategy and supervises its implementation.
Risk Committee of the Supervisory Board exercises constant supervision over the credit, market, liquidity and non-financial including operational risks. In particular, the Risk Committee issues recommendations regarding approval of risk management strategies, including the Risk Management Strategy, by the Supervisory Board. In addition, the Risk Committee issues recommendations in terms of individual counterparty risk, in accordance with the parameters defined by the Supervisory Board.
Management Board of the Bank designs, implements and ensures the operation of the risk management system. In particular the Management Board defines and implements the Risk Management Strategy of the Group and is responsible for defining and implementing the principles of managing individual risk types and for their consistency with the Risk Management Strategy. The Management Board establishes the organizational structure of the Bank and allocates tasks and responsibilities to individual organizational units, ensuring the appropriate distribution of roles in the risk management. The Management Board is also responsible for developing, implementing, effectiveness and updating written strategies, policies and procedures for: risk management system, internal capital adequacy assessment process, capital management and capital planning, and internal control system.
Chief Risk Officer is responsible for integrated risk and capital management of the Bank and the Group in the scope of defining strategies and policies, measuring, controlling and independent reporting on all risk types (in particular credit risk, market risk, liquidity risk, non-financial risk including operational risk), approving limits (in accordance with internal regulations), and for processes of managing the risk of the retail credit portfolio and corporate portfolio.
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Chief Environmental Risk Officer (CERO) is responsible for developing the Bank’s environmental risk management in the scope of setting appropriate standards, overseeing the process and methodology of carbon footprint control, overseeing the internal control rules, greenwashing risk and climate stress tests.
The Committees:
The Committees of the Business and Risk Forum of mBank Group is a platform for making decisions and dialogue between organizational units in particular business lines and the risk management area in mBank and mBank and the mBank Group subsidiaries. The Business and Risk Forum is constituted by the following bodies: Retail Banking Risk Committee (KRD), Corporate and Investment Banking Risk Committee (KRK), and Financial Markets Risk Committee (KRF). The main function of the above-mentioned committees is to develop the principles of risk management and risk appetite. The Committees take decisions and make recommendations concerning in particular risk policies, processes and tools for risk assessment, risk limitation system, assessing the quality and profitability of portfolio of exposures to clients, approval of introducing new products to the offer and key aspects of selling investment products to retail banking clients.
Model Risk Committee is responsible for supervising the model risk management process, performing an informative, discussion, decision-making and legislative function in this respect.
Capital, Assets and Liabilities Committee (CALCO) is responsible for the systematic monitoring of the balance sheet structure and capital, and the allocation of funds within acceptable risks. Its purpose is to optimize financial result, as well as to shape and allocate capital in a way that maximizes return on equity of the mBank Group.
Sustainable Development Committee of mBank Group is a platform for making decisions and issuing recommendations, and dialogue on sustainable development. The Committee shapes, promotes and monitors sustainable development in the mBank Group.
Credit Committee of the mBank Group makes loan decisions and issues recommendations, and thus has an impact on the implementation of concentration risk management principles in particular in terms of exposures to individual clients and group of affiliated entities, including large exposures. The Committee shall also take decisions on debt conversion into shares, stocks, taking over properties in return for debts (applies to the Bank).
Investment Banking Committee ensures proper and effective risk management in investment transactions offered by the Brokerage Bureau. The Committee is in particular responsible for the identification and management of potential risks posed by the transaction under consideration and the fast and efficient exchange of information between the Business and the risk management area on the Bank’s strategy adopted towards the customer.
Committee for Data Quality and Information Systems Development ensures conditions for the creation, maintenance and development of an effective data quality management system and the development of information systems within the rules set out in the Bank's Data Governance procedures.
Security Committee has the power to make decisions regarding the approval of activities significant from the Bank's point of view in the terms of banking crime, cybersecurity, information protection, including its protection in IT systems, physical protection and technical security, and ensuring the continuity of the Bank's operations.
IT Architecture Committee is responsible for the effective management of IT resources in mBank and the mBank Group subsidiaries. It ensures consistency of elements and flexibility of IT solutions in the mBank Group, effective use of IT resources, optimization of the use of knowledge and experience in the field of IT and repeatability of processes carried out in the field of IT.
Foreign Branch Supervision Committee of mBank S.A. is responsible, among others, for issuing recommendations on approval of the operational strategy and the rules for stable and prudent management of a particular foreign branch of the Bank, especially with reference to credit risk.
The function of management at the strategic level and the function of control of credit, market, liquidity and operational risks and risk of models used to quantify the aforesaid risk types are performed in the risk management area supervised by the Vice-President of the Management Board, Chief Risk Officer.
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3.2.3. Internal capital and liquidity adequacy assessment process (ICAAP/ILAAP)
The mBank Group applies the internal capital adequacy assessment process (ICAAP) aimed at maintaining own funds at the level adequate to the profile and the level of risk in its operations. The ICAAP includes:
risk inventory in the mBank Group,
calculation of internal capital and own funds requirements for coverage of risk,
capital aggregation,
stress tests,
setting limits on the utilisation of capital resources,
capital planning and allocation,
monitoring consisting of permanent identification of risk involved in mBank Group operations and analysis of the level of capital for risk coverage,
annual review of the process.
The liquidity adequacy assessment process (ILAAP) implemented in mBank Group plays a key role in maintaining the Bank’s and the Group's business continuity by ensuring an appropriate liquidity and financial position. ILAAP comprises of:
Group’s liquidity and funding risk inventory,
calculation of liquidity measures, including modelling of selected banking products,
management, taking into account the stress tests, liquidity contingency plan, early warning indicators (EWI), recovery indicators (RI) and limits monitoring,
process review and assessment,
Funds Transfer Pricing (FTP) system,
model validation.
The ICAAP and ILAAP are reviewed by the Bank’s Management Board on a regular basis. Reviews of these processes are supervised by the Supervisory Board of the Bank.
Material risks in mBank Group’s operations
The Management Board is taking activities for ensuring that the Bank manages all material risks arising from the implementation of adopted business strategy of the mBank Group. Therefore, the mBank Group carries out an annual process of identifying and assessing risk materiality. All material types of risk are included in the Risk Management Strategy of mBank Group, in particular in the process of risk bearing capacity management.
The following risks were recognised as material for the Group as of 31 December 2024: credit risk, market risk, operational risk, business risk (including strategic risk), liquidity risk, compliance risk, reputational risk, risk of foreign currency credit portfolio, model risk, capital risk (including risk of excessive leverage) and securitization risk. In addition material risks include environmental risk (E) treated as a horizontal risk, i.e. one that can materialize in existing risk categories identified as part of the risk inventory process, social risk (S) and corporate governance risk (G).
3.2.4. Risk appetite
Risk appetite is defined within the mBank Group as the maximum risk, in terms of both amount and structure, which the Bank is willing and able to incur in pursuing its business objectives undergoing concern scenario.
Capital and liquidity buffers
mBank Group determines the risk appetite to ensure continued compliance with supervisory requirements on capital adequacy and liquidity, set in the European and Polish regulations. Therefore, the Group maintains capital and liquidity buffers above regulatory requirements to ensure that the Group is functioning in an uninterrupted manner in the case of negative changes in the Group or in its environment, thereby providing the ability to assure risk bearing capacity. Funding sources and capital position of the Group and liquidity risk profile both in the regulatory and economic perspective, are taken into consideration while defining the risk capacity and risk appetite. The Bank maintains capital and liquid assets on the levels ensuring to meet regulatory requirements under normal and realistic stress conditions.
The mBank Group takes proactive measures to minimise potential negative effects resulting from unexpected and sudden withdrawals of funds deposited by customers. These actions are aimed at ensuring financial stability and protecting customers' interests in the event of such situations occurring in the future. This is supported by the entire architecture of the liquidity risk management system, thanks to which the Group shapes the desired liquidity risk profile. In daily liquidity risk management, the Bank monitors liquidity and liquidity risk, using a number of early warning indicators, including those covering the intraday horizon.
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mBank Group’s risk appetite covers all significant risks and key risk concentrations embedded in its business strategy by setting appropriate capital buffers necessary in case of materialisation of selected risk factors related to existing portfolios and planned business and addressing new regulatory requirements and potential negative macroeconomic changes.
As a result of internal discussion on risk appetite, the target capital ratios and internal liquidity buffers and the horizon of survival for the mBank Group are determined. To determine the appropriate size of the liquidity buffer, a minimum level of the LCR ratio above the regulatory requirement was established.
Risk Bearing Capacity
Risk bearing capacity is expressed in terms of capital, funding resources and liquidity reserves available for allocation so as to ensure safety in baseline scenario and stress scenario. The maximum risk that mBank Group is willing and able to incur, while accepting threats resulting from mBank Group business strategy, is subject to the following conditions:
adequate risk bearing capacity must be ensured (limits must be ensured in normal conditions) in accordance with ICAAP principles,
internal targets set for regulatory capital ratios and liquidity must be observed,
financial liquidity and adequate structural liquidity of the Group must be ensured at all times in accordance with ILAAP principles.
The approach of mBank Group to the assessment and control of mBank Group risk bearing capacity covers internal and regulatory requirements.
Risk limit system
mBank applies a risk limit system in order to ensure effective allocation of risk appetite. The structure of limits translates the risk appetite into specific constraints on risks occurring in the Bank’s activity. In addition to the limits, monitoring action triggers and early warning indicators are also used to ensure the safe operation of the Bank.
3.2.5. Stress tests within ICAAP and ILAAP
Stress tests are used in the management and capital and liquidity planning of the Bank. Stress tests allow an assessment of the Bank’s resistance in the context of adverse, yet plausible scenarios of external and internal events.
The stress tests are conducted assuming scenario of unfavourable economic conditions that may adversely affect the Bank’s financial, capital and liquidity position. The macroeconomic scenarios adopted for analysis enable a comprehensive analysis of all significant types of risk and, in particular, an analysis of the impact on the Bank’s capital adequacy and liquidity.
As part of ICAAP, the Bank carries out stress tests using various scenarios, including historical scenarios, macroeconomic scenarios for economic downturn, scenarios that take into account idiosyncratic events, in the context of specific risk concentrations in the Bank. Such analyses are carried out for scenarios at various levels of severity, which are characterised by different probability levels regarding their realisation.
The ILAAP scenarios include negative idiosyncratic events, events concerning the entire market and combined scenarios. These scenarios are supplemented by a reverse scenario that identifies risk factors. In addition, an integrated scenario is carried out, which also takes into account the impact of factors derived from other types of risk. Sensitivity analyses are a key tool for assessing the sensitivity of the liquidity measure to changes in selected risk factors and help in designing and verifying the credibility of stress scenarios.
Bank carries out so called reverse stress tests, the goal of which is to identify events potentially leading to unviability of the Bank. Reverse stress tests are used for making strategic decisions concerning the acceptable risk profile of the Bank.
3.2.6. Financial results of mBank and mBank Group in the context of regulatory requirements
Bank monitors the recovery plan indicators in the areas of liquidity, capital, profitability and assets quality in accordance with the governance stipulated in the Recovery Plan for mBank Group , as well as in regard to meeting the prerequisites for triggering the recovery plan.
In line with the guidelines of European Banking Authority (EBA/GL/2021/11) on the recovery plan indicators, profitability indicators should capture any institution’s income-related aspect that could lead to a rapid deterioration in the institution’s financial position through lowered retained earnings (or losses) impacting the own funds of the institution.
The profitability of core business model of the Bank in 2024 remained at a high level. The result for 2024 was partially shaped by the recognition of additional legal risk costs associated with the foreign currency loan portfolio.
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It should be emphasised that in accordance with the applicable provisions regarding recovery plans, in particular Article 142(2) of the Banking Law, the prerequisite for triggering the recovery plan related to significant deterioration of the financial situation of the Bank and the Group has not been met.
Recovery plan indicators in other areas, i.e. liquidity, capital and assets quality demonstrate the stable and robust situation of the Bank and the Group.
3.3. Credit risk
3.3.1. Organisation of risk management
The mBank Group actively manages credit risk in order to optimise the level of profit in terms of return on risk. Analysis of the risk in the Group operations is continuous. For the purpose of identification and monitoring of credit risk, uniform credit risk management rules are applied across the Bank’s structure and its subsidiaries; they are based, among others, on separation of the credit risk assessment function and the sales function at all levels up to the Management Board. A similar approach is applied to administration of credit risk exposures as this function is performed in the risk area and the operating area and is independent from sales functions. The model of Group-wide risk management assumes participation in the process of the Bank’s risk management area organisational units as well as the Credit Committee of the mBank Group (KKG).
Decision-making for credit exposures in the corporate area
Credit decisions are consistent with the accepted internal rules. Levels of decision-making competences are determined by a decision-making matrix. The determination of level of decision-making authority for credit decision is based on EL-rating or PD-rating and total exposure on client/group of related clients. The total exposure also includes exposures on the client/group of related clients in the mBank Group subsidiaries.
For clients applying for small exposure , the amount of exposure is the only determinant of the level of decision-making.
Decision-making for credit exposures in the retail banking area
Due to a profile of retail banking clients, the accepted amount of exposure per client and standardisation of products offered to those clients, the credit decision-making process differs from that applied to corporate clients. The decision-making process is automated to a large extent, both in terms of acquiring data on the borrower from internal and external data sources, and in terms of risk assessment by means of scoring techniques and standardised decision-making criteria. The tasks, which are not automated concern mainly the verification of credit documentation and potential derogations when a decision is made with the escalation to the decision-making level in accordance with the applicable rules. In addition, in case of mortgage loans, the value of the collateral is established (standard applications evaluated internally, other with the use of external appraisal report which is additionally evaluated internally).
3.3.2. Credit Policy
Bank manages credit risk based on supervisory requirements, market best practices, Bank’s own experiences and expertise. Credit policies, established separately for retail banking and corporate banking, play the key role in the credit risk management process. Credit policies include e.g.:
target customer groups,
acceptable ratings’ levels defined by the expected loss value,
criteria for acceptance of financed subjects and collaterals,
rules for mitigating concentration risk,
rules for selected industries and customers segments.
3.3.3. Collateral accepted
Collateral accepted in the process of granting credit products
The collateral is an important part of the credit policy. The primary role of collateral is to reduce the credit risk of the transaction and provide the Bank with a realistic opportunity to repay receivables. In making a decision about granting a credit risk bearing product, the Bank strives to obtain collateral adequate to the accepted risk. The Bank accepts collateral only upon its assessment and provided it meets the condition of no significant correlation between the credibility of the debtor and the collateral value. Specific types of collateral that are required depend on the risk bearing product, the tenor of the transaction and the risk of the client.
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The most common collateral accepted are:
mortgage on real estate,
registered pledge,
transfer of receivables (cession of rights),
monetary deposit,
financial pledge,
guarantees and warranties,
cash blocked,
transfer of ownership to vehicle.
The value of real estate taken as collateral is determined on the basis of a valuation prepared by a licensed expert. Valuations submitted to the Bank is verified by a team of specialists located in the risk management area, that verifies the correctness of the market value assumptions and assesses the liquidity of the collateral. Carefully selected, most liquid flats securing retail credits can be valuated using automatically based on current transactional data.
The value of other collaterals is determined on the basis of available documents, typical for each type of collateral.
Each collateral is monitored. Frequency of monitoring depends on the type of collateral and is specified in internal regulations.
In the corporate banking area, in the case of collateral on fixed assets or financial assets, the final value of collateral is brought to a most realistic value (MRV) using Empirical Coverage Factor (ECF), which reflects the pessimistic variant of debt recovery from the collateral through forced sale. Personal collateral is assessed taking into account the financial standing of provider. The Bank assigns the risk parameter PCV (which is an equivalent of Most Realistic Value for fixed assets collateral). In cases when PD parameter of the collateral provider is equal or worse than PD parameter of the debtor, then PCV parameter is zero.
mBank has a collateral policies in the area of retail banking and corporate banking. The most important elements of these policies are:
indication of collateral preferred and unrecommended,
recommendations regarding the requirements of collateral in specific situations,
frequency of collateral monitoring,
Bank’s approach to collateral with MRV parameter equal to zero.
Collateral accepted for transactions in derivative instruments
The Bank manages the risk of derivative instruments. Credit exposures arising from concluded derivative transactions are managed as a part of clients’ general credit limits, taking into account potential impact of changes in market parameters on the value of the exposure. Existing master agreements with contractors obligate the Bank to monitor the value of exposure to the client on a daily basis and provide for additional collateral against the exposure to be contributed by the client or mBank in accordance with signed agreements. At the same time, the master agreements provide for early settlement of the transaction with the client in the event of breach of contract. mBank applies an Early Warning Process in order to monitor the usage of limits on derivatives and the Bank's ability to respond to the client when the exposure due to open derivative transactions nears the maximum limit. Moreover, taking into consideration credit risk related to a derivative limit granted to a specific client, the Bank may apply additional collaterals from the standard catalogue of collaterals applicable to credit risk products, as well as in specific situation from the expended catalogue of collaterals for credit risk products in accordance with the criteria indicated in the internal regulations of the Bank.
3.3.4. Rating system
The rating system is a key element of the credit risk management process in the corporate banking area. It consists of four main elements:
customer rating (PD-rating) – describing the probability of default (PD);
Loss Given Default (LGD) model for non-default portfolio (for default portfolio individual method of estimating recoveries is used). Model consists of the following components: recoveries from unsecured part of the credit (based on information from financial statement, contractual and customer factors), recoveries from secured part of exposure (based on collateral factors);
Exposure at Default (EAD) model, which includes Credit Conversion Factor (CCF) model and Limit Utilisation (LU) model. The components are based on contract and customer characteristics;
credit rating (EL-rating) describing expected loss (EL) and taking into consideration both customer risk (PD) and transaction risk (LGD, Loss Given Default loss resulting from default). EL can be described as PD*LGD. EL indicator is used mainly at the credit decision-making stage.
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The rating produces relative credit risk measures, both as percentages (PD%, EL%) and on a conventional scale from 1.0 to 6.5 (PD-rating, EL-rating) for corporations (sales over PLN 50 million) and SMEs (sales up to and including PLN 50 million). PD rating calculation is a strictly defined process, which comprises seven steps including: financial analysis of annual reports, financial analysis of interim figures, assessment of timeliness of presenting financial statements, analysis of qualitative risks, warning indicators, level of integration of the debtor’s group, and additional discretionary criteria. Credit rating based on expected loss (EL) is created by combining customer risk rating and transaction risk rating, which results from the value of exposure (EAD, Exposure at Default) and the character and coverage with collateral for transactions concluded with the client (LGD). LGD, described as % of EAD, is a function of possibly executed value of tangible and financial collateral and depends on the type and the value of the collateral, the type of transaction and the ratio of recovery from sources other than collateral.
The rating system used in the retail banking area is used to assess the risk of secured and non-mortgage- secured transactions against individuals and micro and small businesses. The following models operate within the retail rating system:
Loss Given Default (LGD) model, which covers the entire retail portfolio. The ultimate loss level is determined basing on integration of three components:
recovery rate for cured cases (based on mean recoveries achieved for cured defaults),
recovery rate for non-cured cases (based on contractual factors, bank-client relations and collateral characteristic),
probability of cure (based on socio-demographic factors and full product structure of contract owner).
Estimation of loss level takes place in homogenous segments, taking into account the type of product and the type of collateral. Separate models are in place for non-default and default portfolio:
Exposure at Default (EAD) model, which includes Credit Conversion Factor (CCF) model, Limit Utilisation (LU) model and Prepayments model. The components are based on contract and customer characteristics,
PD model with a modular structure, which integrates results of scoring cards dedicated to the retail area:
application scoring cards (based on socio-demographic factors, factors describing the characteristics of business activity and factors related with the specifics of the loan products held or applied for),
behavioural scoring cards (based on information on the history of credit and deposit relation with the Bank),
internal scoring card based on Credit Information Bureau data (regarding the data about liabilities held outside the Bank).
Rating systems generate probabilities of default of borrowers directly in the form of PDs expressed in percentages (continuous scale). Rating classes are created based on procedures for grouping PDs expressed in percentages on the basis of a geometric ladder (the so-called masterscale). In external reporting, the Bank uses mapping of the internal PD rating scale to external ratings. Both the process of mapping probability of default into rating classes and the way in which internal ratings are translated into external ratings are the result of using a single, common rating scale (masterscale) within the Commerzbank group. The rating scale used at the Bank is used to visualize the level of credit risk to individuals, micro and small businesses, and medium and large business entities. The mapping method is shown in the table below.
Sub- portfolio
1
2
3
4
5
6
7
8
PD rating
1.0 – 1.2
1.4
1.6
1.8
2
2.2
2.4 – 2.6
2.8
3
3.2 – 3.4
3.6 – 3.8
4
4.2 – 4.6
4.8
5
5.2 – 5.8
No rating
6.1 – 6.5
AAA
AA+
AA, AA-
A+, A
A-
BBB+
BBB
BBB-
BB+
BB
BB-
B+
B
B-
B-
CCC+ till C
Not applicable
D
S&P
Investment Grade
Sub-investment Grade
Non-investment Grade
-
Default
3.3.5. Monitoring and validation of models
All models of risk parameters applied in mBank, including, i.e. PD models (with all components), LGD models and CCF models are subject to detailed and annual monitoring by modelling units. Moreover, the models are cyclically validated by mBank’s independent Validation Unit.
The monitoring includes tests to check discriminatory power of individual models or their components, stability over time, the materiality of individual deviations of empirical values from theoretical values and the impact on portfolio parameters. The modelling unit recalibrates the respective models, i.e. in case of identification of some mismatches.
Reports on the performed monitoring/back-tests are presented to the model users and the independent Validation Unit.
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Validation
Validation is an internal, complex process of independent and objective assessment of model operation, which is consistent with the Recommendation W requirements and - in case of the AIRB method - meets the supervisory guidelines set out in the CRR. The validation rules are set out in general in the Model Management Policy and described in detail in mBank’s other internal regulations. The validated models are those that are directly or indirectly used in the assessment of capital adequacy under the AIRB approach, those directly or indirectly used in the process of calculation of provisions under IFRS 9 and others listed in the Bank's List of Models PZM.
In case of AIRB models, an independence of Validation Unit is assured in the organisational structures of the Bank or the Group’s subsidiary in relation to the units involved in the model’s construction/maintenance, i.e. the model owner and users. The Validation Unit is responsible for the validation in mBank. The scope of validation performed by the Validation Unit covers the assessment of models concept and assumptions, correctness of their construction, implementation, their application process and effectiveness, together with the status of the remedial actions taken.
Depending on the materiality and complexity of the model, as well as the type of validation task to be performed, the validation may be complex (covers both quantitative and qualitative elements) or limited (mainly focused on the quantitative analyses and selected qualitative elements). The validation results are documented in the validation report containing, in particular, an assessment used for the purpose of approving the model, and recommendations, if any, in the form of precautionary and remedial actions, about the irregularities found.
Validation tasks are performed in accordance with the annual validation plan. Both validation plan and the results of performed validation tasks are approved by the Model Risk Committee.
IRB Method Change Policy
The Bank implemented the IRB Method Change Policy approved by the Management Board. The Policy contains internal rules for the change management within the IRB approach, based on the supervisory guidelines and taking into account the organisational specifics of the Bank. The Policy specifies the stages of the change management process, defines roles and responsibilities, describes in detail the rules of classification of changes, in particular classification criteria based on the guidelines published by the European Central Bank.
3.3.6. Calculating expected credit losses
The Bank calculates expected credit losses consistently with the International Financial Reporting Standards and in accordance with Polish banking law requirements and requirements of the Polish Financial Supervision Authority.
3.3.6.1 How exposures are classified to stages
The Bank, by implementing International Financial Reporting Standards, classifies credit exposures to stages:
Stage 1 exposures for which the risk did not increase significantly since the initial recognition in the loan portfolio,
Stage 2 exposures for which, as at the reporting date, a significant deterioration in credit quality was identified compared to the date of their initial recognition,
Stage 3 – exposures for which impairment triggers were identified,
POCI (purchased or originated credit-impaired asset) assets identified as credit-impaired at initial recognition.
In the Bank the assignment of exposure to Stage 2 takes place according to the Transfer Logic algorithm, which defines the qualitative and quantitative criteria indicating a significant increase of credit risk, while the classification exposure to the Stage 3 is determined by loss-events.
Once the quantitative or qualitative criteria that were used to classify the exposure in Stage 2 at the reporting date are no longer met (the client and the exposure assigned to him or her no longer meet any of the Transfer Logic qualitative criteria or quantitative criteria), the exposure will be moved from Stage 2 to Stage 1. In case of exposures classified as forborne, the additional condition for reclassification to Stage 1 is the 24-month probation period during which the loan has a performing status.
The exposure may also be transferred from Stage 3 to Stage 2 or to Stage 1 if for each loss-events assigned to debtor, probation period has elapsed and debtor's assessment carried out after probation period, has not shown that the debtor is unlikely to fully repay its obligations without recourse to realizing security.
Probation period refers to the period in which debtor properly fulfils its obligations, calculated from the moment event leading to loss-event ceases.
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Probation period is calculated separately for each loss-event. Probation period is also maintained when the exposure due to which loss-event has occurred has been repaid, written off or sold. Probation period equals:
for distressed restructuring – 12 months,
for other loss-events – 3 months.
During probation period, the Bank assesses debtor's credit behaviour, and the exit from probation period depends on proper service.
3.3.6.1.1. Significant deterioration of credit quality (classification to Stage 2)
A significant deterioration in credit quality is recognised for the asset concerned on the basis of quantitative and qualitative criteria, with the asset being transferred to Stage 2 once at least one of such qualitative or quantitative criteria is met.
Qualitative criteria are:
the number of days of delay in paying the amount due is greater than or equal to 31 days, taking into account materiality thresholds:
the absolute threshold refers to the past due exposure amount and amounts to PLN 400 for retail exposures in Polish branch and exposures of Private Banking debtors, registered in corporate systems, CZK 2 500 for retail exposures in the foreign branch of the Bank in the Czech Republic, EUR 100 for retail exposures in the foreign branch of the Bank in Slovakia and PLN 2 000 for exposures in the area of corporate and investment banking,
the relative threshold refers to the ratio of the past due exposure amount to the total balance sheet exposure amount and amounts to 1%,
the number of days of delay in paying the amount due of exposure is greater than or equal to 91 days (without materiality thresholds),
occurrence of the Forborne performing flag (the client status shows that he or she is experiencing difficulties in repaying the loan commitment, as defined by the Bank),
threefold PD backstop indicator at least threefold increase of current PD level estimated over a 12-month horizon in relation to PD at initial recognition date,
occurrence of the Watch List flag (the Bank’s internal process designed to identify corporate clients who are subject to increased monitoring in terms of changes in credit quality, in accordance with the Watch List classification rules adopted by the Bank),
deterioration of the risk profile of the entire exposure portfolio, due to the type of product, industry or distribution channel (for retail customers).
The Bank quantifies the level of credit risk in relation to all exposures or clients for which credit exposures exists.
The quantitative criterion of the Transfer Logic is based on a significant deterioration in credit quality, which is assessed on the basis of relative and absolute long-term change in Probability of Default (PD), specified for the exposure at the reporting date, relative to the long-term PD specified on initial recognition. This factor is determined separately for the retail and corporate portfolio within the homogeneous segments in terms of probability of default events and exposure characteristics. Where relative and absolute change in long-term PD exceeds “the transition thresholds”, the exposure is moved to Stage 2. An important issue in the process of calculating the credit quality deterioration is initial date recognition consistent in the entire Bank, against which the deterioration of credit quality is examined. Initial date re-recognition is determined for the exposures for which substantial modification of contractual terms took place. Each change of initial recognition date results in recalculation taking into account the new exposure characteristics, initial PD parameter at the new initial recognition date, against which the credit quality deterioration is examined.
3.3.6.1.2. Low credit risk criteria
For exposures, whose characteristics are indicative of low credit risks (LCR), expected credit losses are always determined on a 12-month basis. Exposures designated as LCR may not be transferred from Stage 1 to Stage 2, although they can be moved from Stage 1 to Stage 3 upon being recognised as credit-impaired. The Bank applies the LCR criterion to clients from the government and central bank segment with investment grade ratings and to clients from Local Government Units segment. The LCR criteria is not used in the retail banking segment.
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3.3.6.1.3. Impairment triggers - corporate portfolio
The list of definite loss events in corporate portfolio:
the number of days past due of the principal, interest or fees is over 90 days (in the case of exposures to banks over 14 days). Number of days past due is calculated at the debtor level and commences when both absolute and relative materiality thresholds have been exceeded, where:
absolute threshold refers to the sum of all overdue amounts related to the debtor's liabilities towards the Bank and amounts to PLN 2 000 for corporate and investment banking debtors and PLN 400 for Private Banking debtors registered in corporate systems,
relative threshold refers to the ratio of all overdue amounts related to the debtor's liabilities towards the Bank to the sum of balance sheet exposures related to given debtor and amounts to 1%,
the Bank's sale of the credit obligation with material economic loss related to change in creditworthiness of the debtor,
the Bank performed distressed restructuring (the materiality threshold from which the Bank considers a diminished financial obligation to be defaulted is 1%),
information about enforcement proceedings instigated against a debtor in the amount which in the Bank’s opinion is likely to result in a loss of creditworthiness,
information about a petition for bankruptcy, liquidation of a debtor, dissolution or annulment of a company, or about appointment of a guardian,
declaration of bankruptcy of a debtor or acquiring by him a similar legal protection resulting in his evasion of or delay in repayment of credit obligations towards the Bank, the parent or subsidiary entity of the Bank,
information about dismissal of a petition for bankruptcy of a debtor on grounds that the assets of the debtor are insufficient or are only sufficient to cover the costs of bankruptcy proceedings,
debtor’s failure to repay the amount of surety provided by the Government,
termination of part or whole credit agreement by the Bank or the beginning of restructuring/collection procedures,
fraud (embezzlement) of the debtor,
the Bank expecting suffering a loss on the client,
occurrence of cross default,
information on filing a restructuring petition or instigating a restructuring proceeding with regard to a debtor within the meaning of the Restructuring Law Act,
information on major financial problems suffered by a debtor.
In addition the Bank identifies loss-events specific to individual categories of entities, and so-called ‘soft’ loss events, introduced in order to signal situations, which may result in the loss of the debtor's ability to repay loan to the Bank. In the event of their occurrence, an in-depth analysis (taking into account the specificity of the entity’s operations) is performed and individual decision on the classification of the exposure to one of the stages is made.
3.3.6.1.4. Impairment triggers - retail receivables
The list of definite loss events in retail portfolio:
the number of days past due of the principal, interest or fees is over 90 days. Number of days past due is calculated at the debtor level and commences when both absolute and relative materiality thresholds have been exceeded, where:
absolute threshold refers to the sum of all overdue amounts related to the debtor's liabilities towards the Bank and amounts to PLN 400 for Polish branch, CZK 2 500 for the foreign branch of the Bank in the Czech Republic and EUR 100 for the foreign branch of the Bank in Slovakia,
relative threshold refers to the ratio of all overdue amounts related to the debtor's liabilities towards the Bank to the sum of balance sheet exposures related to given debtor and amounts to 1%,
the Bank performed distressed restructuring (the materiality threshold from which the Bank considers a diminished financial obligation to be defaulted is 1%),
termination of the agreement by the Bank in the event of breach of the loan agreement by the debtor,
obtaining information on the submission of a petition for consumer bankruptcy by the debtor, conducting court proceedings in this matter or a judgment by the court of consumer bankruptcy,
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obtaining information about the submission of an application by the debtor to initiate or to conduct bankruptcy/restructuring proceedings against the debtor, which, in the Bank's opinion, may result in delay or failure to repay the liability,
recognition of the contract as fraudulent,
Bank's sale of the credit obligation with material economic loss related to change in creditworthiness of the debtor,
uncollectable status of debt,
pay out of low-down payment insurance by insurance companies,
occurrence of cross default.
3.3.6.2. Calculation of expected credit losses
Expected credit losses (ECL) are measured at the level of a single contract or exposure (agreement). In the portfolio approach, expected credit losses are the product of multiplication of value of PD, LGD and EAD estimated individually for each exposure and the final value of expected credit losses is the sum of expected credit losses in particular periods discounted with the effective interest rate. The calculation of expected credit losses does not use a collective approach (assigning one parameter value to selected portfolios).
In order to calculate the Lifetime PD parameter, an estimation was used in which the explanatory variable is the cumulative default-rate. In this procedure, using linear regression calculated by the least squares method, a Weibull distribution curve is fitted to the empirical data. Estimates are made separately for the retail and corporate portfolio within the homogeneous segments in terms of client and exposure characteristics. In order to determine Lifetime PD values that take into account macroeconomic expectations, a scaling factor, known as the z-factor, is additionally determined. Z-factor aims to adjust the average observed Lifetime PD values to values that reflect expectations about the development of future macroeconomic conditions. The scaling factor determines the phase of the business cycle in which the economy will be in the next years of the forecast by comparing the expected values of default rates to long-term averages.
For the purposes of calculating the long-term LGD parameter, the dependent variable in the form of a loss ratio calculated using the discounted cash flow method (workout approach) was determined. To determine the estimates, a set of statistical methods was used, consisting of e.g. fractional regression, linear regression, mean in pools, or regression trees. Estimates are made separately for the retail and corporate portfolios within homogeneous segments with the use of customer and exposure characteristics. During the estimation, macroeconomic expectations were also used, which adjusted the model values based on customer- and contract-level variables.
In order to calculate the long-term EAD parameter, a set of two dependent variables was used in the form of the future utilisation of the limit (Limit Utilisation - LU) and the credit conversion factor (CCF). Model values were determined using regression trees based on client- and contract-level specific variables. In the segments in which the analyses indicated the statistical significance of macroeconomic expectations, they were included in the EAD models.
If on the reporting date the exposure credit risk did not increase significantly since the initial recognition, expected credit losses are calculated in the minimum horizon of 12-month horizon and horizon to maturity. If the exposure credit risk increased significantly since the initial recognition (exposure is in Stage 2), the Bank calculates expected credit losses in the life-time horizon (Lt ECL). The parameters used to calculate an expected credit loss in Stage 1 are identical to those used to calculate a long-term credit loss in Stage 2 for t=1, where ‘t’ stands for the first year of the forecast.
The individual approach concerns all balance sheet and off-balance sheet credit exposures with an impairment in the corporate loan portfolio and Private Banking loan portfolio, which is registered in corporate systems. The expected credit losses are calculated as a difference between the value of exposure and the present value of the estimated future cash flows discounted with the effective interest rate. The method of calculating the expected recoveries takes place in scenarios and depends on the Bank’s chosen strategy for the client. In case of restructuring strategy, considered scenarios are developed for exposures and assume a significant share of recoveries from the customer’s own payments. In case of debt collection strategy, the scenarios are developed for each recovery source (collateral) separately. The Bank identifies scenarios on the level of exposure/recovery source, minimum 2 scenarios are considered obligatory, with additional condition that one of them reflects a partial loss on exposure/recovery source. Weight of particular scenarios results from an expert assessment of the likelihood of scenarios based on the relevant facts of the case, in particular, on existing security and their type, client's financial situation, client’s willingness to cooperate, the risks that may occur in the case and micro- and macroeconomic factors.
For the valuation of expected credit losses the Bank uses data contained in the Bank's transaction systems and implemented in dedicated tools.
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3.3.6.2.1. Use of macroeconomics scenarios in ECL estimation
The Bank is required to set an expected credit loss in a way which meets the expectations for various forward-looking macroeconomic scenarios. In case of portfolio estimation of ECL, the non-linearity factor (NLF) is set in order to adjust the value of an expected credit loss (calculated every month). The value of NLF is used as scaling factors for individual ECLs. The NLF factor is determined separately for retail and corporate segments at least once a year. NLFs are used as scaling factors for individual ECLs that are determined at the level of individual exposures in each segment. NLFs are calculated based on results from three simulation calculations at the same reporting date, which result from relevant macroeconomic scenarios. In particular, NLF for a given segment is calculated as:
probability-weighted average of the expected loss from three macroeconomic scenarios (‘average estimation’) comprising: baseline scenario, optimistic scenario, pessimistic scenario. The weights of scenarios are consistent with probabilities of realisation each scenario 60% for base, 20% for optimistic and 20% for pessimistic,
divided by the expected loss determined under baseline scenario (reference estimate).
Simulation calculations, whose results are used to calculate NLF, are carried out on the basis of the same input data on exposure characteristics, but involve different risk parameter vectors, if the macroeconomic expectations defined in the scenarios are such as to affect the value of these parameters.
Additionally, the inclusion of forward-looking information takes place in the models of all three credit risk parameters estimated in the lifetime horizon (Lt PD, Lt EAD, Lt LGD). In the estimates the Bank uses, among others, generally available macroeconomic (GDP, employment in the enterprise sector, unemployment rate, level of export/import, salaries, monetary financial institutions receivables from households), expectations regarding exchange rates, as well as changes in property prices, separately for residential and commercial properties.
In the case of individual ECL estimation, each time, based on an expert assessment, the Bank estimates the impact of macroeconomic factors and other general factors (e.g. the Bank's previous cooperation with the borrower, the nature of the product) on the probability of the adopted scenarios in the calculation of the estimated loss and on the assumed amounts and dates of inflow from operating cash flows and from collateral. This is done through a comprehensive expert assessment of above factors. Macroeconomic factors used in individual ECL estimation are based on assumptions for budget forecasts and financial plans used for management and reporting at mBank. In addition, in terms of macroeconomic factors, conclusions from industry analyses prepared at the Bank are taken into account, in particular conclusions from expert assessments of industries prepared for the purpose of determining the Bank's industry limits, as well as from the assessment of industry prospects and the assessment of the attractiveness of a specific sector. Future economic conditions may not be taken into account in the process of estimating ECL if the Bank does not identify connection between macroeconomic factors and the level of expected loss.
3.3.6.2.2. Significant model and methodological changes
In 2024, the following significant changes to models and methodologies used to determine expected credit risk losses took place:
In the first half of 2024:
Updating the macroeconomic indicators in the expected credit loss model. The aforementioned change consisted in determining the default rate levels of the respective portfolios on the basis of new econometric models based on the latest macroeconomic forecasts and then including these levels in the estimates of the long-term probability of default. For the long-term loss model the values of macroeconomic factors were updated,
Recalibration of the long-term default probability model consisting of re-estimation of the model parameters with the data sample expanded to include observations from the most recent periods,
Recalibration of the long-term loss model for the specialized lending portfolio involving adjusting it to the most recent data available for the recovery process and taking into account updated sensitivity to the economic environment,
Recalibration of the long-term loss model for the mBank branches in Czech Republic and Slovakia consisting of re-estimation of the model parameters with the data sample expanded to include observations from the most recent periods and taking into account the impact of the economic environment on the long-term loss model.
The impact of these changes on the level of expected credit loss was recognized as a release of provisions in the amount of PLN 86.3 million (positive impact on the result).
mBank S.A.
IFRS Financial Statements 2024 (PLN thousand)
40
In the second half of 2024:
Updating the macroeconomic indicators in the long-term PD model. The aforementioned change consisted in determining the default rate levels of the respective portfolios based on the latest macroeconomic forecasts and then including these levels in the estimates of the long-term probability of default,
Recalibration of the long-term loss model for the corporate and mBank retail portfolios involving adjusting it to the most recent data available for the recovery process.
The impact of these changes on the level of expected credit loss was recognized as a release of provisions in the amount of PLN 6.7 million (positive impact on the result).
3.3.6.3. Credit risk costs coverage of individual sub-portfolios
The tables below show the percentage of the Bank’s balance sheet and off-balance sheet items relating to loans and advances, guarantees and letters of credit to individuals, corporate entities and public sector and the coverage of the exposure with credit risk costs for each of the Bank’s internal rating categories (the description of rating model is included in Note 3.3.4).
Portfolio measured at amortised cost
31.12.2024
31.12.2023
Sub - portfolio
Exposure (%)
Provision coverage (%)
Exposure (%)
Provision coverage (%)
1
7.06
0.01
6.44
0.01
2
40.79
0.06
34.88
0.04
3
11.98
0.18
13.13
0.18
4
27.87
0.97
25.41
0.57
5
6.69
2.88
14.04
2.38
6
0.56
6.01
0.46
7.71
7
1.10
14.25
1.62
14.44
8
1.18
0.09
1.03
0.09
default
2.77
52.02
2.99
54.88
Total
100.00
2.14
100.00
2.43
As at 31 December 2024, 47.85% of the loans and advances portfolio for balance sheet and off-balance sheet exposures is categorised in the top two grades of the internal rating system (31 December 2023: 41.32%).
Portfolio measured at fair value through other comprehensive income
31.12.2024
31.12.2023
Sub - portfolio
Exposure (%)
Provision coverage (%)
Exposure (%)
Provision coverage (%)
1
7.09
0.01
0.18
0.01
2
79.63
0.09
81.99
0.08
3
6.97
0.47
10.89
0.40
4
3.18
1.22
4.16
1.17
5
1.11
2.87
1.23
3.07
6
0.11
4.14
0.12
5.08
7
0.69
7.64
0.58
8.84
default
1.22
22.27
0.85
23.13
Total
100.00
0.50
100.00
0.45
As at 31 December 2024, 86.72% of the loans and advances is categorised in the top two grades of the internal rating system (31 December 2023: 82.17%).
3.3.7. Fair value for credit assets
If the conditions for the measurement of a credit asset at amortised cost (IFRS 9, par. 4.1.2) are not met, then it is measured at fair value through profit and loss or at fair value through other comprehensive income.
mBank S.A.
IFRS Financial Statements 2024 (PLN thousand)
41
3.3.7.1. Fair value valuation of non-impaired credit assets
The valuation for non-impaired exposure is based on its discounted estimated future cash flows.
Future cash flows are determined taking into account:
repayment schedule, and in the absence of a schedule (revolving products) - based on a statistical estimation of the annual credit limit utilisation in expected behavioural exposure period,
time value of money, based on risk-free interest rates set in the process of forecasting interest flows,
cash flows amount and their schedule fluctuations stemming from the option of prepayment (early partial or full repayment of the principal) included in the loan agreement by application of prepayment factors,
uncertainty of cash flows resulting from credit risk throughout the forecasted lifetime of the exposure by modification of contract flows using multi-year credit risk parameters Lt PD and Lt LGD,
other factors that would be taken into consideration by the potential exposure buyer (overhead costs and the profit margin expected by market participants) during the process of calibration of the discount rate used in the valuation process.
Due to requirements of IFRS 13 for the exposures for which there are no quotes on an active market, the Bank calibrates the discount rate based on fair value at the date of the initial recognition (i.e. the cost price of exposure). Calibration margin reflects market valuation of costs related to maintaining exposures in the portfolio and market expectations about profit margin realised on similar exposures.
3.3.7.2. Fair value valuation of impaired credit assets
Impaired credit assets are valuated based on expected recoveries. In case of retail exposures the valuation is reflected by LGD parameters, and in case of corporate exposures it refers to individual recovery scenarios.
3.3.8. Repossessed collateral
Assets repossessed for debts classified as assets held for sale shall be put up for sale on an appropriate market and sold at the soonest possible date. The process of selling collaterals repossessed by the Bank is arranged in line with the policies and procedures specified for individual types of repossessed collaterals. In 2024 and 2023, the Bank did not have any repossessed collaterals that were difficult to sell.
3.3.9. Bank Forbearance Policy
Definition
The Bank's forbearance policy