BRE Bank Group’s Best Financial Results This Decade

BRE Bank Group’s Best Financial Results This Decade

BRE Bank’s annual consolidated profit at PLN 576.4 million pre-tax and PLN 421.3 million net BREactivation starts to generate expected results: good results of corporate bankingHighest retail banking profit ever, up by a factor of 6 YoYAnother excellent year for investment bankingRecommendation to retain the 2006 profit enabling further dynamic growth of the Bank2007 priorities: continued sales trends, strong entry into consumer finance, insurance, expansion of the retail branch network, wealth management for private banking customers, mBanka in the Czech Republic and SlovakiaMid-term financial targets The BRE Bank Group generated its best financial results this decade in 2006. The profit was PLN 576.4 million pre-tax and PLN 421.3 million net, more than 50% above the original financial targets and up 70% year on year. It was the second best financial result in 20 years of BRE Bank’s history. The results of the BRE Bank Group over the past 2 years prove that robust financial foundations were rebuilt after a period of weaker performance in 2002-2004. The good performance was owed to favourable market conditions and primarily the business efficiency of the employees of all business lines, which helped to significantly exceed the sales and financial targets. The BREactivation strategy and close contacts with Polish companies drove the good performance of corporate banking. The profits in retail banking were up by a factor of 6 year on year. Investment banking also had an excellent year: it generated significant profits and strengthened BRE Bank’s market position in this business. The Bank plans to continue the positive sales trends in 2007, aiming to achieve the financial targets of the next 3 years. The Bank plans to launch new strategic projects in 2007, including consumer finance, insurance, and wealth management. The Bank decided to launch the mBank business model in the Czech Republic and Slovakia in 2007.

With the exception of the record-high year 1999 when performance was determined by two one-off equity transactions, BRE Bank enjoyed the best year in its history in 2006 in terms of the profitability of the core business and continued activity. Profitability grew 70% in 2006 thanks to very good sales performance of all three business lines of the Bank. The profit of the retail banking business grew 500% year on year, the profit of corporate banking by 33%, and the profit of investment banking 8.4%. The loans portfolio (up by almost 50%) and deposits (up 21%) were up sharply in 2006 due to good market conditions but mainly thanks to close business relations with corporate customers as well as mBank and MultiBank retail customers. In its relations with corporate customers, BRE Bank benefited from the BREactivation strategy launched in 2005, helping to grow the profits of the line and to improve customer acquisition. BRE Bank grew its retail loans portfolio two-fold in 2006, moving to become Poland’s third largest provider of mortgage loans. The growth in sales was coupled with improvement of the cost/income ratio (down to 63.7% compared to 69.2% in 2005). BRE Bank wants to continue the positive sales trends in all of its business lines in 2007. Priority strategic initiatives include a strong entry into consumer finance and the launch of insurance and wealth management services for private banking customers. BRE Bank will expand to the Czech and Slovak market in 2007, offering banking services under the mBank business model. In view of the new strategic challenges, the BRE Bank Management Board will recommend the retention of all of the 2006 profit to enable further growth.  

Best Ever Results of Retail Banking: Profit Up by a Factor of 6 YoY
The profitability of BRE Bank’s retail banking business grew by a factor of 6 in 2006. The line’s pre-tax profit was PLN 114.7 million, contributing 20% of the BRE Group’s annual profit (compared to only 5.6% in 2005). mBank generated a pre-tax profit of PLN 72.6 million in 2006. MultiBank reported its first-ever annual profit of PLN 25.9 million pre-tax. The private banking business contributed PLN 16.8 million to BRE Bank’s annual pre-tax profit. mBank and MultiBank acquired 348 thousand customers in 2006; their combined customer base was 1,626 thousand clients. The retail loans portfolio grew 104% and reached PLN 8.2 billion in 2006 while deposits grew 38% and stood at PLN 7.1 billion. According to recent market surveys (Rzeczpospolita, 17 January 2007), BRE Bank moved to become the market’s third largest provider of mortgage loans in 2006 (see Appendix 1 for details).

BREactivation Generates Expected Results in Corporate Banking: 2.5 Thousand New Customers in 2006
BRE Bank’s corporate banking business generated a pre-tax profit of PLN 233.0 million in 2006, up 33% year on year. The line contributed 41% of the BRE Bank Group’s annual profit. The good corporate banking performance was driven by successful customer acquisition, growing corporate lending and improved portfolio quality keeping provisions below the target. BRE Bank acquired over 2.5 thousand customers in 2006 (up 33% year on year) and served 11.4 thousand corporates at the end of 2006. The fastest growing segment were SMEs using service packages (companies with annual sales below PLN 3 million per year). BRE Bank won 1,415 SME customers (up 49% year on year) and served nearly 7 thousand SMEs. Both lending to corporates (up 15%, from PLN 7.3 billion to PLN 8.4 billion) and corporate customer deposits (up 16%, from PLN 9.2 billion to PLN 10.7 billion) grew sharply in 2006. BRE Bank’s market share was 5.9% in corporate loans and 8.6% in deposits. BRE Bank launched a new Corporate Branch model in 2006 where Branches were relieved of non-core business functions and focused exclusively on sales, corporate advisory, and day-to-day customer service. The Branches have new a visual identity and functionality and will serve as modern business centres for corporate customers.
                        Another Excellent Year for Investment Banking
The investment banking business generated a pre-tax profit of PLN 215.9 million in 2006 (up 8.4% year on year). The line’s profitability was increasingly generated by reiterative transactions, including syndicated loans, debt securities issues, DI BRE transactions, fx and interest rate transactions. BRE Bank also generated high trading profits and actively sold structured products. Most importantly, the profitability of the line was driven by BRE Bank’s growing corporate and retail customers base actively trading in financial markets. The Bank pursued a strategy of reducing the proprietary investments portfolio (down PLN 98 million in 2006), which stood at PLN 278 million at cost. The Bank ranked first in issues of bank debt securities (32% market share), second in issues of corporate papers (13%), and third in short-term debt securities (13%). BRE Bank ranked first among Treasury Securities Dealers.

Key Performance Indicators
ROE was 26.9% pre-tax (20.8% net) in 2006, significantly above the target (18.8% pre-tax). While business operations grew dynamically, the strict cost discipline continued: the cost/income ratio was down to 63.7%, compared to the target 66%. The Group’s capital adequacy ratio was 10.39% (11.06% at the Bank). NPLs (under NBP rating) were down to 5.5% (from 8.5% in 2005). The Group’s balance sheet total grew by almost PLN 10 billion in 2006 (up 29%, to PLN 42.3 billion).

Reorganising the Structure of BRE Bank Group Subsidiaries
The BRE Bank Group’s strategic subsidiaries generated a pre-tax profit of PLN 206 million in 2006, up 50% year on year. The subsidiaries contributed 36% to the BRE Bank Group’s total profit (see Appendix 2 for details).

Priorities for 2007:  continued sales trends, strong entry into consumer finance, insurance, expansion of the retail branch network, wealth management for private banking customers, mBanka in the Czech Republic and Slovakia
BRE Bank plans to continue positive sales trends in all of its business lines in 2007. Priority strategic initiatives include a strong entry into consumer finance and the launch of insurance and wealth management services for private banking customers. For this purpose, two new Group subsidiaries were established: BRE Ubezpieczenia (insurer) and BRE Wealth Management. A new ‘mBanka’ project will be launched in 2007: a retail banking offering in the Czech Republic and Slovakia based on the mBank business model. The details of the project will be published in a few months.BRE Bank plans to intensify its consumer credit operations in 2007; next to mortgage loans, this is the fastest growing segment in Poland’s retail banking. Leveraging its extensive sales experience in retail banking and mBank’s strong brand, BRE Bank wants to expand mBank’s offering to include consumer finance products which provide much higher margins than deposits. mBank plans to expand the sales of cash loans, car loans, and credit cards, especially co-branded cards. The bank plans to sell PLN 1 billion of loans (cash and car loans) in 2008 and another PLN 800 million in 2009. The credit cards sales target is 100-120 thousand cards per year in 2007-2009, of which a half will be co-branded cards. mBank plans to have a 3.7% market share in credit cards issued and a 4.2% share in credit card debt in three years’ time. mBank’s offering will be distinguished in the market by fast and flexible sales processes and innovative products.mBank’s consumer finance strategy provides for expansion of the physical distribution network, also by opening mKiosks in locations other than shopping malls, in cities below 150 thousand. According to the plan, 100 outlets will open by 2008, combined with expansion of the mKiosk network in shopping malls (up to 90 in 2008). MultiBank will also expand its branch network which has proved very effective in sales. While growing its customer base, MultiBank wants to continue providing individualised service and leverage the growing potential of the retail market in large and medium-sized cites. MultiBank plans to launch in 2007 most of the 55 outlets scheduled to open in the next 2 years.Following the lending boom in retail banking and large-scale growth in demand for mortgage loans in 2006, BRE Bank plans to further grow its retail loans portfolio (up 49%) and to acquire ca. 370 thousand customers in 2007. In the corporate segment, BRE Bank wants to acquire ca. 1 thousand new customers with a high profit potential, and to serve ca. 12.4 thousand such customers (including 7,800 SMEs). In investment banking, BRE Bank plans to expand sales of financial market transactions, also to retail and corporate customers.

2006 Profit to Finance Further Growth
The new business projects combined with Basel II capital requirement recommendations prompted the Bank’s Management Board to recommend the forthcoming General Meeting retention of the Bank’s entire 2006 profit.  “According to our targets for the next three years, we want to keep BRE Bank’s capital adequacy safe above 10%. While we expand our business operations dynamically, we want to achieve the target without asking the shareholders to raise the equity. Therefore, I believe that the proposed retention of the 2006 profit to enable further growth is the most adequate and effective solution for investors,” said BRE Bank’s CEO Sławomir Lachowski.Importantly to investors, the dynamic growth of the Bank in 2006 helped its stock price on WSE. The closing price at the last session in 2006 was PLN 336, up 97% year to date, while WIG-20 gained 22%. Returns on BRE Bank stocks were the highest among all WSE listed banks.

Mid-term Financial Targets
“The good financial and sales results are best proof that we have rebuilt BRE Group’s robust financial foundations after a period of weaker performance in 2002-2004. I believe that all of the Bank’s stakeholders can recognise this. The confidence of BRE Bank’s investors improved over the past years also thanks to the practice of publishing short-term annual financial targets. Now we want to focus the attention of the markets on mid-term and long-term targets. Importantly, the annual pre-tax profit is only a means of reaching the key performance indicators. We will be setting financial targets in a horizon of at least 3 years from now,” said BRE CEO Sławomir Lachowski.

In view of BRE Bank’s current growth stage, the Management Board decided to publish the BRE Bank Group’s financial targets for 2007-2009:- ROE pre-tax at least 20%;- capital adequacy ratio above 10%.The Bank’s Management Board will also aim to achieve a cost/income ratio of 60% by 2009.