Erste Group Bank Ag S/Adr

Hello and welcome to the first half-year 2023 results conference call of Erste Group. My name is Laura and I will be your coordinator for today's event. Please note this call is being recorded and for the duration of the call, your lines will be on listen only. However, you will have the opportunity to ask questions at the end of the call. This can be done by pressing star 1 on your telephone keypad to register your question. If you require assistance at any point, please press star 0 and you will be connected to an operator. I will now hand you over to your host, Thomas Somerowa, to begin today's conference. Thank you.

Thank you so much, Laura, and welcome to everybody who is listening in. Also on behalf of Erste Group, we follow our usual conference call routine. Today's call will be hosted by Willy Czernko, Chief Executive Officer, Stefan Dörfler, Chief Financial Officer, and Alexandra Habela-Drabek, Chief Risk Officer of Erste Group. They will lead you through a brief presentation highlighting the achievements of the past quarter and actually also of the first half of 2023, after which time we are ready to take your questions. Before handing over to Mr. Cianco, I would also like to draw your attention to the disclaimer relating to forward-looking statements on page two. And with this, I hand over to you, Willie.

Thank you, Thomas. Ladies and gentlemen, good morning from my end as well, and welcome to our quarterly conference call. We can once again present to you a strong set of figures, both for the quarter and for the first half year of 23, and as a result, upgrade our full year guidance for a second time this year. But before I talk about the future, let me start the presentation on page 4. with the development of our income statement. In short, we built on the strong start to the year by producing an even better performance in the second quarter. Strong revenue momentum continued with operating income up quarter on quarter and of course year on year. Costs developed in line with expectations and effectively there were no risk costs in the first half of the year, despite not touching our performing provisions of 900 million euros. All of this led to a strong bottom line performance in the first half of 2023, which paved the way for increased capital distribution. Accordingly, our preliminary dividend guidance for 2023 is for a payout of €2.70 per share, obviously subject to AGM approval. And this will be complemented by a share buyback worth €300 million once we receive the supervisory go-ahead, hopefully within the next few weeks. When we look at our key P&L metrics on slide five, we see that our net interest margin has started to move sideways, a clear indication that our momentum is slowing. This does not come as a surprise, but is a reflection of slightly higher deposit partial rates, partially slow asset repricing and slowing rate hike dynamics. But this notwithstanding, our fees continue to go strong, net trading and fair value results benefited from better valuations, and our costs developed as expected, all which support a further upgrade on our cost-income ratio guidance from about 51 to below 50% for 2023. The continued strong credit risk performance warrants an upgrade of our risk-cause guidance from maximum 25 basis points to maximum 10 basis points. And if you add all this up, we arrive at return on tangible equity target of higher than 15% instead of targeting the upper end of the 13% to 15% range. When it comes to the development of the balance sheet, I'm on page 6 already, we saw slightly brightening trends compared to the first quarter on the asset side, while customer deposits continued to perform strongly. And while customer loan growth was somewhat dragged down by the volatile portion of the loan book, our core retail and corporate business showed some further signs of life, despite the weaker economic backdrop. Clearly, the first-time consolidation of the Sberbank portfolio in the Czech Republic, which contributed a plus of €1.3 billion, has helped. But overall, loan growth trends are in line with our expectations, and accordingly we see no reason to change our four-year guidance for loan growth of about plus 5%. As for customer deposits, it was exactly the other way around. Volatile inflows by financial institutions and corporates actually supported growth, while our core retail and SME deposits stayed broadly stable year-to-date and actually edged up slightly quarter-on-quarter. The latter is quite remarkable, bearing in mind that our customers are still confronted with elevated, even if falling, inflation and have a multitude of investment alternatives available to them. Moving to our key balance sheet indicators on slide 7. All of them are in the green zone, if you will. Our loan-to-deposit ratio stayed stable at about 85%. Asset quality remained exceptionally strong, despite a more challenging macro backdrop. In fact, our NBL ratio improved again to historic best, and the NBL coverage is also right up there with our best levels. The CD1 ratio, including interim profit and the pro rata dividend deduction, improved to just shy of 15%, which clearly broadens our options as regards capital distribution, while the liquidity coverage improved and net stable funding ratio remained stable. The leverage ratio remained among the best in the country. As we have announced at the start of the year, we are seeking to buy back shares in the amount of €300 million in 2023 and hope to get the green light from DCB shortly. And with profitability being strong and capital build above expectations, this buyback will probably not be the last one. And with this, let's now have a look at the operating environment. I am on slide 9 now. The economic forecast for 2023 hardly changed in the second quarter. It is consensus that economic growth will be slower this year and that inflation was clearly peaked in all of our markets, but will moderate more slowly than expected earlier. and this in turn means that interest rates will probably also stay higher for longer. Currency appreciation in countries like Hungary and the Czech Republic should support the improvement in external and fiscal balances. Labor markets are expected to stay tight, somewhat slowing the disinflationary trend, but at the end of the day, they are key for maintaining consumer demand and keeping assets quality strong. In summary, the economic picture in Central and Eastern Europe should remain robust during 2023 and the outlook for 2024 is definitely for a return of solid GDP growth. Against this low but at least stable macro backdrop, the performance of our retail business has been encouraging. In terms of loan growth, we have seen further positive signs. New business volumes for consumer loans reached the best level since Q2 2022 and overall demand for housing loans was increased in the second quarter for the first time in a year. Year on year new housing loans demand is of course still down 60% but at least we are now building a bottom and in some markets we are actually moving up again. most notably in the Czech Republic, where we have seen the highest demand for housing loans in a year. I would also like to highlight Croatia, where new housing loan demand has reached a record in Q2, following Euro entry of the country. On the liability side, our retail deposit base actually increased a little quarter on quarter at a time when customers are facing declining but still significant inflationary pressures and increasingly have higher yielding investment alternatives. As regards deposit pass-through, and Stefan will be more detailed on this later, Retail bathroom rates are rising, but still moderately so, and customers, while gradually shifting some overnight deposits into term and savings accounts and to investments, of course still maintain the largest portion of their deposits in current accounts. At the same time, we posted strong growth in the stock of security savings plans. thereby confirming the positive trend that started in the second half of 22. So we are taking advantage of the growth opportunities that are available. Moving to the corporate markets business on page 11, volume trends have been mixed while the large corporate business line benefited from strong deposit inflows. SME deposits were broadly stable. In terms of lending, both large corporates and SMEs showed limited appetite for new loans, resulting in a flat loan stock on an adjusted basis. In terms of product demand, we saw a slight uptick for investment loans. while the stock of working capital loans declined somewhat. But it's a fair statement that currently there is no definitive trend on the lending side. The markets business also performed well. We were mandated in a large number of bond transactions and were among the lead banks in the largest seed transaction in a long time. I'm talking about the IPO of Romanian hydro powerhouse, Hydroelectica. Our asset management business saw stable inflows, both in retail as well as institutional segment, with assets under management rising to 74.5 billion euros, confirming that there are a growing fee opportunity in this business. And with this, I want to hand over to Stefan.