Dynamic Growth of BRE Bank’s Profitability

Dynamic Growth of BRE Bank’s Profitability

BRE Group’s original annual profit target exceeded after Q3. New target: PLN 490 million pre-tax PLN 403.4 million of BRE Bank’s consolidated pre-tax profit and PLN 306.0 million of net profit after Q3Up to number 2 in mortgage lending (July-August 2006)Important step in reorganising the Group structure: Agreement to sell SAMH Thanks to very good performance of the BRE Bank Group in Q1-3 2006, the Bank exceeded its original annual financial target set in February (PLN 380 million pre-tax) after the third quarter. The BRE Bank Group reported a pre-tax profit of PLN 403.4 million and a net profit of PLN 306.0 million at the end of September 2006, up 53% year on year. As announced three months ago, BRE Bank raised its annual financial target to PLN 490 million of pre-tax profit, over PLN 150 million more than reported in 2005.

The good financial performance in Q3 2006 was mainly driven by positive trends in sales. BRE Bank’s consolidated credit portfolio was up 47% year to date due to corporate lending and primarily thanks to dynamic sales of mBank and MultiBank mortgage loans. BRE Bank reported an 11% growth in corporate and retail deposits year to date. The Bank also benefited from good conditions on the financial and fx markets, generating a high trading profit. The Group subsidiaries contributed a large part (41%) of the Bank’s consolidated profits. Their profitability was up 75% year on year. A strict cost regime at the Bank and in the subsidiaries was another driver of the Group’s results. The cost/income ratio dropped to 64.0%.

“I think that BRE Bank’s Q1-3 2006 results are very positive. They are a reflection of good market conditions, but they are equally owed to internal restructuring of the corporate banking business as well as retail banking outperforming the targets. We have exceeded the original financial targets for a second consecutive year, best proof of our competitive advantage and the aspirations of all BRE Bank Group employees. The annual pre-tax profit target was raised by PLN 110 million to PLN 490 million, over PLN 150 million more than reported in 2005, which attests to our high growth rate. This makes for a good outlook of the Bank,” said Mr Sławomir Lachowski, BRE Bank’s CEO.

New Financial TargetThe BRE Bank Group reported the highest quarterly profit (PLN 154.2 million pre-tax) in Q3 2006. Thanks to dynamic sales, the high growth rate achieved in H1 continued into Q3. This year’s upward trend was sustained as the Bank exceeded its original annual financial target set in February (PLN 380 million pre-tax) after Q3 2006. The new annual financial targets include:- pre-tax profit at PLN 490 million;- pre-tax ROE at 23%;- cost/income ratio at 66%; - year-end capital adequacy ratio at ca. 10% (Group).

Moving Up to No. 2 in Mortgage LendingThe pre-tax profit of the Retail Banking Business Line was PLN 67.3 million at the end of September 2006, up by more than 3.5 times year on year. The business contributes over 16% of the BRE Group’s pre-tax profits. mBank and MultiBank won nearly 260 thousand new customers year to date. According to market publications (Parkiet daily, 18.10.2006), one in four new accounts was opened with mBank. As a result, BRE Bank crossed the mark of 1.5 million retail customers and served 1.537 million clients at the end of September 2006. The retail credit portfolio was PLN 7.1 billion, up 76% year to date, and retail deposits were over PLN 6.5 billion, up 27%.Sales of retail loans (executed contracts) grew dynamically in the past few months. According to recent market data (July-August 2006), BRE Bank moved up to number two in mortgage lending. BRE Bank took the second position both in August and in the period July-August, best proof of customers’ confidence in the Bank and its growing role in Poland’s mortgage lending market. BRE Bank (mBank and MultiBank) also reported a high mortgage lending figure in September, granting PLN 496 million of mortgage loans compared to PLN 488.5 million in July and PLN 508.6 million in August. According to estimates, BRE Bank remained the second largest supplier of loans in Q3 2006.In order to grow the sales of credit cards, mBank has launched 2 new co-branded cards issued in collaboration with the mobile phone operator Orange and the publisher Gruner+Jahr. mBank’s target is to issue approximately 200 thousand credit cards by the end of 2007. (For more information see Appendix 1).

Investment Banking Driven by Recurring Corporate Transactions
The Investment Banking Business Line reported a pre-tax profit of PLN 166.7 million in Q1-3 2006, up 42% year on year. BRE Bank benefited from good conditions on the financial and fx markets in Q3 2006, generating a high trading profit. Transactions with customers, especially corporate customers, generated 67% of the trading profit. The share of recurring transactions was growing, including transactions with customers, issues of debt securities, project finance, Treasury transactions, and DI BRE (BRE Bank Securities) trading. The Bank’s proprietary investments portfolio was PLN 279.1 million at cost at the end of Q3 2006, down 25.8% (PLN 97.1 million) year to date,BRE Bank remained a market leader in non-Treasury debt. According to Fitch Polska, BRE Bank ranked number one in issues of bank bonds (27.4% market share), second in issues of corporate bonds (12.6%), and third in issues of short-term debt (15.6%) at the end of September 2006.

Corporate Banking: SME ExpansionBRE Bank’s Corporate Banking Business Line reported a pre-tax profit of PLN 154.0 million in January-September 2006. The high profitability was helped by active acquisition of new corporate customers and their growing demand for the Bank’s credit products. The Bank won 1.7 thousand new corporate customers, up 23% year on year. A vast majority of new customers are SMEs (small and medium-sized enterprises) with annual sales over PLN 3 million. BRE Bank attracted nearly 1 thousand new customers using SME product packages year to date and currently serves 6.7 thousand SMEs using packages. Corporate customers’ demand for credit products was growing fast. Sales of EFFECT packages featuring credit products to SMEs were up by 2.5 times in Q1-3 2006 year on year. As a result, BRE Bank’s corporate credit portfolio was PLN 10.5 billion, up 9.4% year to date, while BRE Bank’s market share was 6.4% compared to 6.3% at the end of June 2006 and 5.8% at the end of 2005. BRE Bank had an even stronger position in the corporate deposits market (8.6% compared to 8.4% in H1 2006). BRE Bank’s corporate deposits totalled PLN 15.3 billion at the end of September 2006, up by approximately 6.7% year to date.

Reorganising the BRE Bank Group Structure
The strategic BRE Bank Group subsidiaries reported a pre-tax profit of PLN 165.8 million in Q1-3 2006, up 75% year on year. They contributed 41% of the BRE Bank Group’s profitability.As another step in reorganising the Group structure, BRE Bank signed in late September 2006 an agreement to sell 100% of shares of SKARBIEC Asset Management Holding. New subsidiaries, BRE Ubezpieczenia and BRE Wealth Management, will go operational in early 2007. (For more information see Appendix 2). Key Performance IndicatorsThe consolidated ROE was 25.2% pre-tax (20.3% net) at the end of September 2006. The cost regime was sustained: the cost/income ratio dropped to 64.0%, which was much less than a year earlier (67.9%). The Group’s capital adequacy ratio was 9.95% (10.69% for the Bank). The NPL ratio (under the NBP rating) fell to 5.6% (from 6.1% at the end of June 2006). The Group’s balance sheet total grew in Q1-3 2006 by 20% (by PLN 6.5 billion, to PLN 39.3 billion).

SummaryThanks to very good financial performance in Q1-3 2006, the BRE Bank Group’s annual financial target was raised by PLN 110 million to PLN 490 million of pre-tax profit. The new annual profit target is over PLN 150 million year more than reported in 2005, which attests to fast growth in the core business and a consistent policy of the BRE Group’s organic growth. While reorganising the Group structure, BRE Bank is preparing to further strengthen its market position. With this goal in mind, the Bank will launch new subsidiaries in 2007, including BRE Ubezpieczenia (supplier of property insurance and later also life assurance) and BRE Wealth Management, whose business will bring a new quality into the private banking market.

BRE Bank’s growing financial results and new strategic initiatives have been acknowledged by the markets and investors. On 26 October 2006, BRE Bank’s stocks traded at PLN 281, a new historical high. BRE Bank’s stocks gained 66% year to date while the WIG-Banks index rose 37%. According to the stock market paper Parkiet (23 October 2006), BRE Bank’s stocks were the best investment among all listed banks in Central and Eastern Europe.

BRE Bank’s 2006 pre-tax profit target of PLN 490 million is another step towards the overarching objective of raising the Bank’s performance indicators, market share, and quality of services and advisory provided by its experts. The dynamics of profits over the past 2 years opens the way to further growth in the nearest future.