Erste Group Bank Ag S/Adr

My name is Caroline and I'll be your coordinator for today's event. Please note this call has been recorded and for the duration of the call, your answer will be on listen only mode. However, you'll have an 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 questions. If you require assistance at any point, please press star 0 and you'll be connected to an operator. I will now hand over the call to your host, Thomas Samarillo, to begin today's conference. Thank you.

Thank you very much, Caroline, and good morning to everybody who is listening in from Vienna. Today's call will be hosted, as usual, by Willy Tsianko, our Chief Executive Officer, Stefan Dörfler, our Chief Financial Officer, and Alexandra Habela-Trabek, our Chief Risk Officer. They will lead you through a brief presentation highlighting the achievements of the past year and also of the fourth quarter of 2023. And after this, we will be ready to take your questions. As usual, my housekeeping remark on forward-looking statements, you will find the disclaimer on page two. And with this, I hand over to Willi.

Yeah, thank you. Ladies and gentlemen, good morning from my end as well. And once again, welcome to our full year 2023 conference call. To cut the long story short, and I'm on page four of the presentation, 23 was an exceptional year that was marked by records. We boasted record NI, record fees, record low risk costs, but to be fair, also record expenses. Most importantly, we achieved record net profit with an excellent return on tangible equity of 17.2%. and consequently will pay a record dividend of 2.7 euros per share, as indicated earlier. On top of targeting a second share buyback in the amount of 500 million euros, following the successful completion of our first share buyback of €300 million in the middle of February. If we look at the fourth quarter in isolation, we have not seen any unexpected trends. NII started to move sideways, as we have expected. Fees continued to go strong, and risk costs benefited from releases of overlays and FLI provisions. And while we had some year-end one-offs, another resided burdened net profit. Return on tangible equity still came in at almost 15% for the quarter. So overall, both the fourth quarter and the full year of 23 were very strong, which underpins our optimism for 24. But please bear with me. I will talk in more detail about our expectation for the current year at the end of the presentation. Based on what I have just said about our excellent P&L performance, and I am on slide 5 now, our P&L dashboard does not provide any surprises. Net interest margin continued to consolidate around the level of 2.5% in line with our expectations. The cost-income ratio stayed below 50% throughout 2023, coming in at 47.6% for the full year, and with this better than our upgraded guidance. The risk-cost ratio was at zero for the final quarter of 2023 and only six basis points for the full year, also significantly better than originally guided. And with all of this, we printed a return on tangible equity in the very healthy double digits in all quarters of 2023 and once again above guidance for the full year at 17.2%. When it comes to the development of the balance sheet, I'm on page 6 already. Trends were less pronounced than in P&L, but in light of a slow growth macro backdrop, still positive. Year on year, we grew consolidated net customer loans by 2.8%. And if we look at our core retail and corporate business lines, growth was actually better at the level of 3.7% and 5.6% respectively. What tracked us down somewhat was a weaker performance at the minority-owned savings banks and the lower level of non-core business. Customer deposits volumes increased by 3.9% year-on-year, with our core retail and SME deposits being broadly stable, despite consumers being challenged by inflationary pressures. and also having ample better yielding investment alternatives. Moving to our key balance sheet indicators on slide seven, all of them remained in excellent shape throughout 23. At year end 23, our loan to deposit ratio stood at a very healthy 89%, with loans and deposits showing satisfactory growth as already mentioned. Asset quality continued to go strong even through the NPL ratio peaked up a little bit to 2.3%, although from historic lows. This was mainly due to a mild increase in defaults in Austria, primarily at the minority-owned savings banks. The decline in NPL coverage excluded collateral and somewhat exaggerated by the release of overlay and FLI provisions in the amount of €200 million. Our capital print does not require any explanations. We reached a record CTO-1 ratio of 15.7% thanks to strong profitability and muted risk-weighted asset inflation. Consequently, we have increased capital return and M&A optionality and have decided, as I already mentioned, to continue buying back shares. This time we are targeting an amount of 500 million euros following successful completion of our first buyback. And with this, let's now have a look at the operating environment. I'm on slide 9 now. 23 was not the greatest year in terms of economic performance. GDP growth was low, average inflation still high, and even though declining rapidly, internal and external balances at manageable levels in most countries. Public debt remained at moderate levels when compared to EU averages. The bright spot was clearly the labour market that was broadly untouched in the C region despite the muted economic backdrop. For 2024, we are cautiously optimistic. GDP growth should recover somewhat. Inflation is projected to decline further. The labour market should remain healthy. and internal and external balances should improve. This combination should provide room for central banks to cut rates in order to stimulate economic growth, providing a fertile ground for the return of tangible volume growth in CE and beyond. Talking about volume growth, and I'm on page 10 in the meantime, let's have a look at the latest trends in our retail business. As for housing, loan demand 23 was a year of consolidation at low levels. While there were some positive trends in one or the other quarter, or one or the other country, no clear growth trends emerged. which is also not really surprising as customers wait for rates to come down somewhat. We are more optimistic looking ahead as clearly interest rates have already entered or will enter a downward path and underlying demand drivers such as a solid employment outlook are fully intact. As for consumer loans, last quarter I reported to you that trends were encouraging and today I can confirm that volumes remained at good levels also in the fourth quarter. New business volumes for consumer loans are on track to recover to pre-2020 levels. On the liability side, our retail deposit base was broadly stable quarter on quarter. as well as year-to-date. As regards deposit pass-through, retail pass-through rates continued moving up, but still at moderate speed, and customers, while continuing to shift some overnight deposits into term and savings accounts, into investment, of course still maintain more than 50% of their deposits in current accounts. This notwithstanding, we continue to see strong growth in the stock of security savings plans, confirming the positive trend that started in the second half of 2022. Moving to the corporates and markets business on page 11, Loan growth slowed markedly in 23, but at north of 5% was still satisfactory, considering the exceptional growth performance in 22. While all business lines in the corporate segment managed to grow their loan books year on year, we saw diverging patterns in the fourth quarter, with demand being weak, particularly in the large corporate segment. But this sub-segment tends to be more volatile. Corporate customer deposits were also up year on year, but slightly down quarter on quarter, completely in line with usual volatility. The markets business also performed well. We were involved in the issuance of €153 billion worth of bonds and generated healthy income growth in both retail securities and corporate treasury sales. Our asset management business also enjoyed a good year, with assets under management growing by almost 13% to €78 billion, thanks to strong net sales, particularly in Czech Republic and Hungary. This is good news for our fee performance. And now I hand over to Stefan for the presentation of the quarterly operating trends. Stefan, please.

Thank you very much. Analyzing the loan volume trends on page 13, it helps to look at business as well as geographical segments. As Willi mentioned, the core lending business lines, retail and corporate, more or less delivered the growth guidance with 3.7% and 5.6% year-on-year increase respectively. When it comes to the performance and developments in specific countries, we have seen moderate but balanced growth in almost all countries quarter-on-quarter, while year-on-year the growth driver was clearly CEE. Growth in Austria was somewhat subdued in 2023. This was driven by higher interest rates, but also regulatory measures which limited demand and supply at the same time. Now, looking into 2024, we are slightly more optimistic for consolidated loan growth, as both lower rates and the expected moderate economic recovery should help us in reaching our growth target of 5%. As for deposits, and I'm already on page 14, we effectively have not seen any significant changes in trends in the past quarter. Our core deposit base, which includes retail, SME and savings banks business lines, edged up slightly quarter on quarter and actually remained stable year on year. Large corporate deposits were up 7% year on year, so that overall our consolidated customer deposit base grew by 3.9%. The retail deposit mix also remained favorable. We have seen a further drift towards term and savings accounts. Still, 55% of retail deposits were held at current accounts. And this fact, even with short-term interest rates expected to come down, will result in a continued healthy and high contribution of our deposit base. This brings me to page 15 and the net interest income. 2023 was the best year for NRI ever, with our key income source surpassing 7.2 billion euros. This was on top of the 2022 record performance, and clearly, higher interest rates made a big difference. Moderate deposit pass-through rates and loan growth also helped, as did significantly higher income from our bond portfolio. In the fourth quarter of 2024, 2023, sorry, we saw the first signs of consolidation with deposit pass-through rates slowly moving up further. We also posted some modification losses in Hungary and Serbia in the amount of total 20 million euros. Now, two final backward-looking remarks on NAI. First, please take into account that for the fourth quarter of 2023, both the ECB and the Czech National Bank stopped the remuneration of minimum reserve, resulting in a 28 million euro quarter-on-quarter effect, just as expected. And a relatively weak quarter four in Austria other, this is basically the holding, was due to lower money market profitability for the part which isn't anyway offset in the segment other. Now let's look into 2024. Given all the moving parts, our best estimation currently is that NII will decline by about 3%. We will certainly benefit from some tailwinds, such as loan growth and bond income. However, the key headwind is clearly the timing and magnitude of central bank rate cuts and its impact on deposit pass-through and other factors. In light of falling inflation, cuts have picked up speed in countries like the Czech Republic and just yesterday again Hungary. And with a muted economic outlook for the Eurozone, it is only a matter of time when the ECB will follow, most likely in the course of the second quarter. Still, looking at all components and based on the macro assumptions as explained by Willi, we see good chances to deliver the big figure 7 in our NII also for 2024. And finally, one important remark as far as the bottom line impact of our 2024 NRI performance is concerned. The savings banks were major NRI beneficiaries when rates went up, benefiting on both the asset and liability side. And consequently, we also bear the brand on the way down. Let's go to page 16 and fee income. we can conclude that all geographical segments and all fee types have been growing with encouraging trends 2023. This gives us confidence that we can also grow fees at the mid-single-digit level in 2024. As you know, sustainably growing our net fee and commission income generating business is a key strategic goal of Erste Group. Hence, let me share a little review of the last five years since printing exactly 2 billion Euro fee income in 2019. The result for 2023 represents a compounded annual growth rate of more than 5.7% over this period. And one can easily calculate what an extrapolation of comparable growth rates means for future results. Exactly that is our ambition. Let's move to costs on slide 17 now. Fourth quarter costs came in on the high end. As we had some seasonally higher marketing spend, as well as higher consultancy and legal costs, personal expenses were also higher on increased accruals for variable pay. In 2024, cost inflation should definitely decline from 2023 levels. as wage inflation pressures should ease, especially in Central and Eastern Europe. In Austria, wage inflation will still be pronounced, as wage adjustments follow a backward-looking approach. But even with this, we are targeting to limit the cost growth to about 5%. Moving to page 18 now. The strong revenue momentum by far outpaced the cost inflation, leading to a cost-income ratio at 47.6% for the full year 2023. Quarterly operating profit declined in the fourth quarter, as revenue momentum slowed somewhat on the back of consolidating NRI, fees performing exceptionally well, and net trading and fair value result benefiting from lower interest rates, while costs were seasonally higher, as just discussed. Now, we have talked about most Q4 developments already. One topic is still worth mentioning, the net trading and fair value income. Please remember that we have always named those income lines as kind of joker for 2023 due to the interest rate developments in the years 2022 and 2023. And to be honest, with the enormous interest rate moves in November, December 2023, the final net trading and fair value result of almost 450 million euros was even overshooting our expectations. Putting all pieces together for 2024 compared to 2023, positive operating chores are not realistic. However, a very solid operating performance is expected. Hence, we are guiding for a cost-income ratio around 50%. And with this, over to Alexandra for more information on credit risk.

Thank you, Stefan. Again, good morning from Vienna. And I continue now on page 19. As Willi has already mentioned, risk costs were again excellent for the fourth quarter and the full year at zero and six basis points respectively. And with this, we comfortably delivered our upgraded 2024 guidance. The fourth quarter performance was supported by release of FLI and overlay provisions in the amount of about 200 million euros. This helped mitigate higher allocations, especially at the minority-owned savings banks, as a result of increased NPL inflows, which we have expected for some time. The other segments continue to perform well, with the other Austria segment benefiting most from the release of overlay provisions. Looking into 2024, we believe that risk costs will rise, but only moderately so. Our best estimate currently is for a booking of up to 25 basis points. Let's now have a look at asset quality on page 20. After many quarters of record low NPL ratios, we have seen some more meaningful NPL inflows. As I said, especially at the minority-owned savings banks, and they are primarily driven by smaller but well-collateralized real estate projects. This pushed up the NPL ratio to 2.3%, which by historic standards is still a very benign level. NPL coverage was dragged down, first by the release of FLI and overlay provisions, as already mentioned, and as is in particular visible in the other Austria segment, as well as new NPL inflows with lower-than-average provision coverage but better collateralization. For the full year 2024, we expect coverage to go up again and then remain around comfortable levels of 90% for the year by the end of 2024. Of course, this is depending on the structure and the collateralization of the new inflows. Let's now move on page 21, and let's have a quick look at our real estate exposure, as it once again is a focus of investors. We are talking about an exposure of 45 billion euros, which equals 12% of Erste Group's total gross exposure. This figure does not include our mortgage business with private individuals buying houses or apartments. This is another 73 billion euros, which is reported under private households. We do not see any issues with this business whatsoever, as our customers have jobs, labour markets are strong, and generally speaking, our customers use these properties as their first residence. So I will leave this aside now and focus on real estate. First of all, almost 40% of this exposure belongs to minority shareholders. Notably, this business typically relates to smaller ticket real estate projects, which are executed by smaller companies who do not have as deep means to withstand major market disruptions as larger diversified operators. Secondly, residential real estate exposure accounts for more than 50% of total real estate exposure, and this business is almost exclusively an Austrian business, with an additional risk-mitigating element that almost one-third is related to very low-risk or de facto zero-risk non-profit housing associations. And importantly, of this low-risk business, Erste Bank Österreich owns 75%. Thirdly, commercial real estate, accounting for more than a third of exposure, is tilted towards lower-risk countries, such as Austria and Czechia, and also very well diversified among asset classes. And finally, I would like to repeat what I have mentioned several times in the previous quarters and years. We have been adhering to sound lending standards. Most of our exposure is income producing. Our projects are fully ring-fenced with LTVs in a conservative range of 50 to 60%. And also when looking in detail at our top 20 exposures, we see sound deal parameters with debt service coverage ratios at very comfortable levels of around 160% and LTVs on conservative levels in the range of 50 to 60%, as I've already mentioned. Consequently, we remain confident about the quality of our real estate portfolio, even if some smaller operators are facing a more challenging business environment. And with this, I hand back to Stefan.

Thank you very much. Please follow us to page 22 now. The fourth quarter other result came in weaker at minus 279 million euros, as we had a number of year-end one-off items, to mention the most important ones. We sold some bonds and reinvested the proceeds into higher-yielding assets. This cost us about 140 million euros. In addition, we booked a number of smaller impairments on such items as software, mostly in Czech Republic, and real estate in Hungary and Austria, which added up to another 60 million euros. Looking into 2024, other results could actually improve, should such one-offs not recur. We should also benefit from lower resolution fund contribution, as the single resolution fund has reached its target level at the end of 2023. This alone will mean a saving of 50 million euros in Austria. What will work against us? Those are the newly charged banking taxes in Slovakia and Romania. All in all, with this, there's a good chance that other results will improve in 2024. Since Willi has already informed you about the final return on tangible equity of 17.2% for 2023, and our guidance for 2024 remains unchanged from the Q3 call at 15%, we can skip page 23 and jump to page 25 to look at funding and capital. The overall wholesale funding was stable over the year 2023. Debt securities increased quite substantially, mostly attributable to increased MREL issuance in the form of senior preferred and non-preferred instruments. The decline in interbank deposits was attributable to decline in TLTRO balance in line with the repayment schedule. Overall, we maintain a very strong funding profile built primarily on retail deposits, as discussed already earlier. When it comes to our most recent funding and emerald issuance activities, and I'm making reference to pages 26 and 27, I would first highlight the Q4 and Q1 transactions in Czech Republic, Slovakia and Croatia. All of those contributing to the fulfillment of our fully loaded binding targets in the respective MPE resolution groups. You find a summary of the key benchmark transactions in 2023 by the holding below the updated debt maturity profile. We are on page 27. The funding spread of mitzvahs plus 50 basis points in our January 2024 covered bond transaction reflects the wider levels in this asset class you are certainly aware of. The lion's share of the remaining TLTRO balance of 6.35 billion euros at year-end 2023 will be repaid until June, the bigger part already in March. CET1 capital, and we are on page 28, is up on half year 2 profit inclusion with minority profit from savings banks also making a significant contribution. RWAs increased only moderately in 2023 and were actually down quarter on quarter. The latter was primarily the result of optimization measures that were targeting improved RWA accuracy, while the business growth-induced RWA increase was mitigated by the RWA decline from migrations to default. Last, but not at all least, let's sum up all of this with page 29 and the annual CET1 ratio waterfall. With capital growing strongly and risk-weighted assets only moderately, our CET1 ratio developed very favourably in 2023. In fact, we added almost 150 basis points to our CET1 ratio to end the year at 15.7%. As a result, our options for capital return and M&A have increased. Consequently, we have decided to go for another round of buying back shares, this time in the amount of 500 million euros. Subject to the approval of the ECB, we target to complete this transaction by year-end 2024. And of course, as already communicated, we plan to pay a regular dividend of 2.7 euros per share for the year 2023. Before handing over to Willi again for the financial outlook, let me also provide you with the details on the 300 million euro share buyback we just completed. In total, we bought back almost 8.9 million shares at an average price of 33.76 euros, all of which have already been cancelled to bring down our share count to about 420.9 million. And with this, over to Willi.

Thanks, Stefan. I'm concluding this presentation with our detailed guidance for 24. I'm on page 30. A quarter ago, we provided headline guidance for return on tangible equity of about 15%. We are still happy with this guidance, so no changes there. Let's have a look at NRI now. Our projection currently is that NRI will enter a phase of consolidation after the historic upswing of the past two years. In fact, we expect a small decline of about 3% for 2024. As Stefan already explained, our assumption is that there will be further material rate cuts in the Czech Republic and Hungary and in the coming months, and that the ECB will join the fray sometime in the second quarter. Having said that, we will also benefit from tailwinds like mid-single-digit loan growth and increasing bond income. We are confident that fees will continue to their growth path, increasing by about 5%. Cost inflation should slow materially to about 5%. And with this cost income ratio should also remain at the strong level of about 50%. We again expect risk cost to be moderate at less than 25 basis points in 2024, benefiting from further releases and impacted only by a small deterioration in asset quality. And as a good part of any operating income and risk cost impact is expected at the minority-owned savings banks, we still forecast that return on tangible equity will come in in the area of 15%, unchanged to what we said four months ago. In terms of capital return, we confirm our plan to pay a dividend of 2.7 euros per share and we target another share buyback in the amount of 500 million euros following successful completion of the first buyback in the amount of 300 million euros just two weeks ago. Any further capital allocation decisions will be led by my successor, Peter Boszak, who will take over on the 1st of July later this year. And this, ladies and gentlemen, concludes our presentation. Thanks for your attention. We are now ready to take your questions.

Sure. Thank you. As a reminder, if you would like to ask a question, please signal by pressing star 1 on your telephone keypad. We will take the first question from line Bernard Petrak from CAPTA. The line is open now. Please go ahead.

Benoit Petrac from Kepler Chevreux. Yes, first question will be on net interest income. So you go for a down 3% on NI in 2024. It's about 200 million, if I'm correct. I was wondering how much is coming from the savings banks versus the rest of the business. So if you can split the 3%. please. And also, which type of interest rate do you expect by 2024 in the different regions? That will be useful. And on capital... So you go for an approval, you aim for an approval in Q1. I guess the execution will be mostly in H1. Could you talk a bit about your intention to go further than that 500 million for the rest of the year? And also what is your kind of M&A ambition and do you see more M&A files coming in recently? And then just finally, the 15.7% CT1 ratio is a very strong level. Obviously, there's a big benefit from the savings banks in that ratio. So how can we actually assess the true excess capital as a group for the kind of shareholders and not related to the savings banks? Thank you very much.

All right. I would kick it off with the NII question and give you a rough number. Roundabout 150 is what we have in the projection for 2024 compared to 2023 NII for the savings bank segment. Interest rates end of the year. Our current house opinion is that the ECB will do a first rate cut in the amount of 25 pips in June and then follow up with another three cuts this year, so meaning a total... of 100 basis points is our current expectations. I think it's needless to say that all of that is very volatile. You are following the markets as much as we do. So this is our current estimation. By the way, combining that with a Fed cut in May is our base case. Then you were asking about our projection for the end of year, I guess also for the other currencies. The current expectation for the end of year key interest rate levels is as follows. Czech, Corona, 4%, Hungary, 2%. Between six and seven, very hard to predict. It's six, six and a half at the moment. But between six and seven, I would dare to say Romania rather on the high five levels, so meaning 575, 550 to six percent. And last but not least, also to be complete, Serbia, we expect to go down to the lower five-ish areas of five and a quarter. These are our current expectations for key rates in our geographies. And then one comment before I hand over to Willi on the M&A. share buyback look i think you are very optimistic with your timeline we will draft the we will draft the application to the ecb in the next day since we just finished the 300 million as reported and then there is a time of between three and six months usually to be expected until easy be approved since we have already kind of experience with it we hope it's on the lower end But it's not very likely that we will start already early in the second quarter. Of course, this is completely subject to the regulator's decision. And with this, I hand over to Willi.

Yeah, thank you, Stefan. I want to come back to your question with regards to M&A and additional share buyback potentials beyond the already announced 500 million euros. I think it's well understood, and I mentioned it during my presentation when we were looking at the outlook for 2024. As I said, any further capital allocation decisions will be led by my successor, Peter Bossack, who will take over as of 1st of July. I think it's well understood to leave room for the new management team to create, let's say, further steps. And it is expected that this is the only thing I want to add to that is we are totally committed to growth.

I think I forgot to answer your question regarding the savings bank's impact on capital. Yes, you're absolutely right. Since the savings bank's capital is fully consolidated in our capital ratios, they had a good contribution in the year 2023. And in terms of how it works also going forward, everything that the savings banks plan to do with the surplus and all these kind of things are fully incorporated in our plans. And we are very closely aligning all capital activities with our colleagues in the savings bank. So everything we talk about is always also reflecting their plans, decisions and projections.

Great. Thank you very much.

Thank you. We will take the next question from line Gabo Camney from Autonomous Research. The line is open now. Please go ahead.

Hi. Thanks for the presentation. First question is on loan growth. You target 5%. Can you elaborate on how you see the dynamics separately in Austria and in CEE, please. I presume you expect quicker growth in CEE, but some color here would be helpful. On the NII guide for 2024, the 3% decline, can you give us a sense how much, terming out, you have budgeted? I think your share of demand deposits dropped 5 percentage points to 55%. last year, it would be useful to have a comparable figure. And then my last question is, I understand much will depend on the priorities of Mr. Bosek later this year, but just looking through the region, do you see potentially larger assets which might be relevant M&A targets for Erste? Thank you.

Gabor, let me start with your first question, the loan growth we would expect. I want to focus on two regions. When it comes to the C region, definitely we expect, let me start with that. Our guidance had clearly, let's say, outlined we would see a loan growth of around 5%. When it comes to CE, we see predominantly a loan growth that is supporting us within the SME business. This has a lot to do with the transition of the economy. Here, there is definitely a need that we are present as a liquidity provider, so we see here loan growth. When it comes to Austria... Here, first of all, I see further growth opportunities in mortgage business. I think you are aware about the fact that the Austrian government just recently announced a huge package to support the construction industry and by that also to support the mortgage business with private households. So we see a strong stimulus, especially in the second half of 2024, also supported by, to be expected, rate cuts.

Thank you very much. Really, I will address the question. I hope I heard it correctly, Gabor. I think your question was about further development of the ratio between current accounts and term deposits. I think it's a fair answer to simply say we expect more or less a continuation of the latest 2023 trends. So that's what we expect. Obviously, once the curve, so to say, turns to sharper rate cuts, We will revisit it and we'll certainly report then in Q1 or later Q2 about what we expect. And then I would like to mention regarding the loan growth, just adding to what Willi has just been elaborating on. Of course, the further we go, the more important loan growth and loan volume will be for our NI development. That's needless to say. So I would say that The end of year 2023 volume is the basis of our current assumptions. Going further into the second half of the year, it will be important to see how the volumes and, of course, also the net interest margins will develop. And we will talk about it and report later on. So that's the statement I would make at this moment.

back to the M&A question, I simply want to refer again to that what I said at the very beginning. I want to leave it to the new management team led by PETA. So I think it's well understood. We're screening the market, but there is nothing concrete right now.

Understood. Thank you.

Thank you. We will take the next question from line Mehmet Sevin from JP Morgan. The line is open now. Please go ahead.

Good morning. Thank you for your time. I have a couple of questions, firstly on MII, coming back to the guidance for 2024. Are you able to give us a sensitivity to various interest rate cuts across the region, and especially breaking it down by country, given the different... moving the different cycles in different countries, and particularly, for example, places like Czech Republic, where initially rate cuts may be positive and then may turn negative, etc. So any color you may give on that will be helpful. Similarly, maybe on that topic, the Czech NII seems to have expanded quite nicely in the fourth quarter, and that's despite the impact from minimum reserves. So, could you give us some color on what has driven that and how do you see the trajectory there going forward? And maybe two more, if I may. One on the NPL ratio. I understand, obviously, that that is mostly driven by Austria. But can you give us any more color? What's driving this? What segments maybe? And is that related at all to the CRE portfolio, particularly in the savings banks? And it seems like the cost of risk guidance for 2024 has some impact coming from savings banks as well. So if you could give us any further color on that, that would be very helpful. Thank you.

Yeah, thank you, Mehmet. Let me address the NI sensitivity question right away. the well i think what is very important that we have that we distinguish between country indications and currency indications why is that uh while of course the euro countries uh austria slovakia and croatia are clearly all euro or i would say 95 99 euro if we if we consider the the dollar exposure on holding um in the countries which have their own local currency On the corporate and wholesale lending, there is a significant euro share. So therefore, let me be very specifically distinguishing between country indications and currency indications. So when it comes to the currency sensitivities, I already was referring to the savings banks, so nothing to add there. The total sensitivity, including this roundabout 150 million projection in the year 2024 for savings banks, is for around 300 million for a full percentage point savings. annualized. It's very important to mention, because depending on the timing of certain cuts in the ECB, you have to then calculate the respective impact on the year, which is anyway clear to you. You are right with your assumption that the effect in Czech currency is in principle positive. So the dimension is around 60 to 80 million. However, It's very important also how the pace of the Czech National Bank rate cuts actually materializes. I think it's for obvious reasons because the adjustment of the respective business interest rate is not always at the same speed as the key rate. So, I don't know, for example, Czech National Bank placements are reacting immediately while our current accounts, sorry, are not immediately reacting. So the point I'm making, it is net positive, clearly net positive. I'm in general optimistic for the Czech NII for 2024. However, the pace might be here and there favorable and here and there not so favorable. Q4 Czech NII, that's I think the main feature and also the stuff you have to watch going forward. is that the migration from current to term accounts more or less has stopped in Czech Republic for obvious reasons. Rate cuts have been starting. Those people who shifted their money have done that in the course of the year 2023. And we clearly see a stabilization and actually a growth of the NRI now on the upcoming months. We'll not go in one linear line, but we are quite optimistic for the Czech market. And just to round up the picture, All the other currencies, in particular, lei in Romania, Hungarian foreign and other currencies are playing a minor role compared to the numbers I gave you.

Then to your questions on risk costs, you perfectly described it already on the influence of the Austrian real estate financing, which is especially financed in the savings banks. I would like to draw your attention once again on page 21. where you can see the exposure distribution. And there you can see that on real estate, 16.1 billion is booked in the minority-owned savings bank. So this is the explanation why we see the impact mainly there. The impact, as I already briefly indicated in my presentation, is in smaller and medium-sized real estate developers in the area of residential real estate, but really smaller and medium-sized companies which do not have as strong ratios as the bigger players which we are financing in other areas. CEE also now derived from page 22 with a very low share on real estate in our bank and also no troubles so far that we see there. So savings banks impact on the NPL increase in 23 was considerable. So the net new NPL inflow was even slightly above 900 million from the savings banks alone. On risk costs, the share in the SE figures 23 was also very high from the savings banks for 24 going forward. When you take our guidance of up to 25, savings banks would be included with basis points above this figure. So CEE lower, savings banks higher.

That's very helpful. Thank you.

Thank you. We will take the next question from line. Join us, Tom, and from HSBC. The line is open now. Please go ahead.

Morning, everybody. Some follow-up questions. First of all, on the net interest income, you only talk about the risk factor. for this year of going down. And sorry to say, but your guidance has been initially wrong in all of the last three years. So could you elaborate a bit more on the upside risk for NII and what could happen to deposit flows if they grow stronger than expected? You also argued that you took some losses in Q4 to invest into higher-yielding assets. What's the impact on this? So that's the first question. Secondly, on the uptick in NPL by industries, could you elaborate a bit on which industries you have seen the uptick in and what has been driving this? And also on your 25-bit risk-cost guidance, which is basically above the average of the last five years, not seen in any of the years in the last 10 years except for 2020. What needs to happen to get to 25 pips, especially as you just described, the real estate risk of probably being a minor risk for your group? Thank you.

Thanks very much for your question and you are about right. We have been below what actually we could deliver in 2022 and 2023 in the respective beginnings of the year. That's correct. We have been adjusting then over the year to the very dynamic interest rate development. I think it's fair to say that we are in a different situation now when it comes to development of interest rates in terms of direction, as well as in terms of margins, most likely. But yes, let me name the positives. Of course, you are perfectly right that there are a couple of potential tailwinds. I mentioned already in the presentation. One is, and again, very, very good development in the interest on our investment book. We're talking about 1.5 plus billion in the meanwhile. You remember, we were below 1.5 before the rate hike cycle started. Second element is definitely loan growth, which picks up more swiftly than we would currently anticipate. This is something which would help not only for the later part of 2024, but certainly also for projections going into the year 2025. And last but not least, I followed the programs of the usual broadcasters this morning. There is a huge discussion currently about whether for the reason that they have to wait for data on wage inflation, the ECB might be inclined to wait until Q3. Should this happen, you can immediately add a couple of, let's say, 50, 100, 150, 200 million euros to our NI, and then we would be flattish. definitely a projection that is also not out of bounds. Yeah, that's where we are. That's why we used a very precise wording that given current assumptions, given current anticipations, this is where the numbers lead us to, but that there is a certain range around this base case is absolutely correct, and I can only confirm this.

Okay, thank you.

On the NPL uptick, it's... Not only, but to a considerable extent, this we expect to be driven by Austrian real estate business, which usually has higher volumes, but a very good level of collateralization. So the impact on risk costs from real estate, yes, there will be some, but not to the extent as we expected for the NPL volume overall. Okay. Retail currently still very strong, also given the strong labor market. So on retail, we would not expect a major change in a very, very healthy portfolio, but also with some, of course, some prudent assumptions for 24-hour guidance. And then it's a mix. We have, as you know, we have for a good reason built stage overlays For the cyclical industry, which we still have in our books, some smaller construction companies, as we all know, are struggling. So a mix of the, let's say, usual suspect industries in such an environment. A further comment on the 25 pips on top of what I've already said, this is really very difficult. It's very, very early in the year. And as you have seen, we are guiding for below 25 pips or up to 25 pips, which, yes, you're right, is above the recent years. However, once again, it's very early in the year. Macroeconomic outlook is not as volatile as it has been, but we think it's good to remain cautious.

Thank you. As a reminder, if you would like to ask a question, please signal by pressing star 1 on your telephone keypad. We will take the next question from line Ricardo Rovary from Mediobanca. The line is open now. Please go ahead.

Thanks. Thanks for taking my questions. One, to start with on an AI, just correct me if I got it wrong. You stated, Stefan, that you expect the trend that you have seen in switching from current accounts to term deposits in Austria in 2024 to go on more or less as we have seen in 2023. While in Czech Republic you stated the patent rates are being cut, you see this trend having stopped and the situation is somehow reversing. Now, provided I understood it correctly, my question here is why, given the rates will go down at some point in the euro area too, why the Austrians should invest behave completely different than the Czechs. Why the Czechs are not moving to turn the parties because the rates are being cut, and why should the Austrians keep doing it when the rates are being cut in the Euro area too? That's the question. The second question is, these modification losses that we have seen in Hungary and Serbia, are those one-offs or... or something that may happen from time to time. Another question. Another question I have is for Alexandra. In the 25 basis point risk-cost guidance, is there any use of FLI's allocation out of the 740 that are still left on the balance sheet? And then I have a question on RWA optimization. You, Stefan, mentioned that you want to keep optimizing RWA, keep working on them. Is there anything that may have a material impact on RWA? And then if you can give us an idea if there's going to be any impact on Basel IV, on the beginning of 2025, on the first application of Basel IV. Then the 2.7... Euro dividend that you mentioned in your slide in the guidance, sorry, it's not clear to me, does that refer to 2024 too? Or is it just a reminder of what you will pay in 2023? And then, again on capital, I mean, you start from 15.7. Your payout is going to be 40 to 50%. The buyback will consume 30, 35 basis points. I mean, you will continue to stay well ahead of the above 14%, which to me means 14 point something. What's the real commitment of the bank to bring this number down to 14%? Because with 40, 50% payout, that number will continue to go up indefinitely, forever. So I was wondering, what is the real commitment here of the bank to bring it to a more normal level? That's it. Thanks.

Okay, Ricardo, I really tried to follow all the points you were making, and you simply jump in once more if I forget something super important. Number one, behavior different between Czech and Austrian clients. Well, I think there are three effects which are simply distinguishing the two country situations. Number one, it's 7% versus 4%. Yeah, I think it's simply a big, big difference in terms of magnitude. So the attractiveness of term deposits in Czech Republic, especially in longer maturities, is in the meanwhile for the customers already quite low. We are watching this really and monitoring this on a client level. The other point that comes into that, there is still a significantly... higher volume in current accounts in Austria. So there's simply more volume still to be shifted. And last but not least, we simply believe that people will react to the expected, so to say, rate cut discussion, which is, of course, also in the Austrian press, and move certain volumes that they still have not moved this will certainly then also slow down once once the offerings are either coming down partially this already happened or the rate cuts really materialize modification losses look uh yes and no it's clearly a one-off uh for for now but it's very hard to predict what kind of interventions especially in the countries you were mentioning that i was presenting might happen also going forward. So if there are moratoria, if there are certain caps, be it on the retail or SME area, then we have to provide for it and we have to follow the respective accounting rules to book it. So in that sense, it's a clear one-off, but whether this might on the political front repeat and force us again in the future to certain bookings, it's very difficult to predict. And let me, I think there was a couple of risk points I hand over to Alexander in a minute, but let me finish my part. So 2.7, of course, 2023. So we don't make any statement for 2024 yet. You can definitely expect us to fully stick to our overall dividend policy. But when and when we will communicate is also clear after the half year numbers. We will communicate our intention for the dividend 2024. RWA accuracy, this was mainly an exercise of data quality. We have improved data quality on all fields, in all countries, in all data components, and that helped us a lot. No, the answer is don't expect any leapfrogging jump anywhere. Our projections are very optimistic for our... capital build but not for any kind of huge so to say changes there on the on the so to say accuracy front which brings me to the last point which is expected that you would be asking that we will definitely still after paying out the dividend after hopefully then also executing the share buyback as intended. We will have surplus capital and beyond the 14%. This is a fact. You are completely right. And as Vili already mentioned, this will be up to Peter Boszek together with us to formulate statements in this direction, what he's intending to do regarding potential M&A considerations or maybe other use of surplus capital.

That's clear. Just a quick on Basel IV.

Yes, let me compliment what Stefan said on RWA with Basel IV. So we can again, once again, confirm our expectation for Basel IV. We do not at all expect a negative impact, rather even a slightly positive one, taking everything into account, market risk, op risk and credit risk. And the slight relief that we expect is driven by credit risk RWA. And on your question on risk costs, I can be very brief. Yes, we are expecting also for 2024 a partial use of FLIs and overlays roughly in the range of this year of 200 million, maybe up to 250, but quite similar to this year.

And since I tried to run through all the points you mentioned, I forgot to mention one very important element. I think we have discussed a couple of times the granularity of our deposit base. And here, of course, is a big difference between the Austrian client base and the C client base. So simply the amounts that single customers are holding with us are higher, which... leads us to the expectations that they might be more inclined to shift to higher yielding allocation. That's another argument which has been proven right in the last two, three quarters. Thank you.

Thanks a lot. Very clear. Thanks.

We will take the next question from Line Hugo Cruz from KBW. The line is open now. Please go ahead.

Thank you very much for the time. I have three questions. The slide on fees mentioned some repricing on payment fees. I wonder if you could quantify that repricing and if it's something that could be repeated in 2024. The second question, on your OPEX guidance, what wage inflation do you assume for Austria and for CEA? And third question, I think when you gave the NAI sensitivity of 300 million, I understood that was just for the savings banks. If that's the case, can you give a euro sensitivity for the entire business? You know, you mentioned, you know, a lot of the loan bookings is also in euros. So what would be the sensitivity overall for rate cuts in euros? Thank you.

Let me start with the first question, repricing on payment fees. This is done, let's say, country by country, simply an inflation adjustment. That is embedded.

um thanks hugo for for uh asking again about um euro sensitivity because uh this reduces the risk that i misunderstood the 300 full year euro annualized impact is of course for the total total group yeah and 150 out of that roughly 140 to 150 is uh coming from savings banks that's what i wanted to bring across so thanks for the clarifying question and did you have another point I don't remember now. OPEX. OPEX, yes. Thank you very much. Wage inflation. Thanks, Willi. The OPEX includes an expectation to land on the Austrian bargaining roundabout the average inflation of the year 2023, which was 7.8%. Currently, the bargaining is ongoing. We have signals from the updates that we get. I think, Willi, you got one this morning. Yeah. that we will probably land somewhere there, plus minus 0.1, 0.2 percent. Of course, it's not yet finished, so we can't say anything for certainty. This will, just as a reminder, this will kick in with April 1st. So you have about 75 percent of this impact you have in the PEREX costs in the year 2024 in Austria.

Thank you very much.

Thank you. We will take the next question from Chris Haddam from Goldman Sachs. The line is open now. Please go ahead.

Good morning, everybody. So, first question is on the speed of the buyback. The previous 300 million buyback took six months. So, I guess we could assume a 500 million program would take about 10 months. You've mentioned three to six months for ECB approval. So, that gets us to early 2025. for this 500 million to be completed. Is that fair? Or do you intend to run a faster buyback program this year compared to last year, which would then obviously enable a second tranche later in 2024? I know the next capital deployment decision you mentioned is for the next CEO, but I think the intended speed on the 500 million is something you would probably already be planning on. And then second, I know it's very, very early to be asking about 2025 NII, but I guess I'll try anyway. If we think about the guide for 7 billion-ish this year, is the H2 or the Q4 run rate implied in that number the right figure to use as a starting point for 2025?

The last sentence was...

Just about the run rate for 2025 NII. So if we take your 2024 guidance and think about what that implies for the second half of this year, if that's the right starting point to go for 2025 NII modelling.

So, share buyback, so to say, speed first. Very clear statement. That's why I said it in the presentation. We want to finish by Q4. Why are we so, so to say, cautious with the timeline? We can't and we don't want to influence in any form the regulator and its decision-making process. They will deliver a decision most likely somewhere between three and six months time. And then we will execute. There is no RFP yet drafted how we will change potentially the execution patterns. But the clear goal is to finish within this year. Again, anything much, much earlier than Q3, Q4 is simply not realistic given the timeline of the events. And 2025, well, it's simply too early. Let me just give you run rates for what we can observe. Q4, as you know, was impacted by one or the other. We would see the kind of regular NII run rate for the quarterly Q4 at 1.820 to 1.840. That's probably a realistic starting point as long as we don't see Euro rate cuts around. And this is kind of what we are looking at currently in the first quarter, always considering, of course, certain events. around day counts, but that's a good run rate you can count on for time being, but 2025, sorry, please ask you for understanding. It's really too early. Later in the year, we will talk about it.

Thank you very much.

Thank you. We will take the next question from line Krishna Doba Dubey from Barclays. The line is open now. Please go ahead.

Hi. Thanks for taking my question, actually. I have a couple, actually. So the first one is on the NIA. I just wanted to check if your NIA guidance of minus 3% down, does it include the MRR for euro as well as for Czech Republic at the same level, or are you being conservative and you're assuming a slightly higher... MRR. And an aligned question on the NII, I guess. In the Hungary, there are cap, interest rate caps, which are being there on the market. Given the rate cuts are currently happening, do you see a positive sign for your NII on this? And second question I have is on the risk-weighted assets. is there any model update impact that we should be aware of for this year? I believe you've already talked about there is no Basel IV impact that you've talked, but I guess is there anything which we should be aware of, any positive or negative impacts on the IWA's?

Okay. First of all, minimum reserve requirements, remuneration, we expect to be on the same level as we currently have. No improvement, no deterioration. That's our assumption. Should there be a change, obviously this will have a certain impact. We will immediately quantify in our communication to you. Second thing, on RWAs, no, nothing spectacular. I think we have communicated multiple times, and I'm sure Alexander would confirm that, that we are among those who will not be impacted negatively by Basel IV. On a net basis, we still are cautiously optimistic that we will have even a certain relief, but nothing which will change the overall picture substantially.

And just that also not from any other area is a special model assumption. So nothing special to expect on this front.

Yeah, and then Hungary, the interest rate caps don't have a huge impact on the situation. To be honest, I'm not dramatically positive on Hungarian NRI, to be honest. The Hungarian result overall was fantastic in 2023. That was mainly on the back of the fair value loans, as you know, this famous baby loan. Hungary will for sure deliver a solid result again, but it's not... the country where we expect the NRI to rise strongly.

Thanks. I just have two small follow-ups, actually. I think it's just a follow-up from the previous questions, actually. So one on the collective wage agreement. I guess if I've missed, did you guide to any number for Austria or no?

Yes, guiding is maybe the wrong word here. We are just watching. We are not involved in that directly, of course, as a board. We are watching the negotiations. There was a press communication yesterday by both the employers and the unions. From our experience, this is all kind of circulating around the expected level of the inflation rate of 2023. So that's what we currently expect. Willy is updated on an ongoing basis on that, and that's what he told me in the morning. I think it's realistic.

So there's an expectation they should come to reside to an alignment latest next week.

Sure. Thanks a lot.

We will take the next question from Ricardo Rory from Mediobank. The line is open now. Please go ahead.

Thanks for taking my follow-up. Just a quick one. On the bank levies, what is embedded in your guidance, especially with reference to the resolution fund? Do you expect this to go away, at least partially? In general, what should we expect from this next year?

Well, everything we know at this moment in time, Ricardo, is in. So the full impact of the Slovak, Romanian, of course, already existing Hungarian banking tax, as well as the Czech and Austrian situation is all fully in. And everything that is known at this point in time is included in our communication as of today.

And Stefan, sorry, the resolution fund, the contribution to the resolution fund is... Where do we stand here? Do you expect this to stay unchanged?

No, no, no. That's what I said in my presentation. That's why I said we try to incorporate everything we know as of now. We got already an official letter from the Single Resolution Board that for the Euro Single Resolution Fund there are no regular payments necessary in the course of the year 2024 for the reason that it has been completely filled. That was the 50 million I mentioned in the presentation that we have as a better other operating result here. How this will turn out in the other countries slash other currencies, we don't know yet because we don't have any official information about any changes. So could be... that there is a little bit more upside for us because there is very, very unlikely that our contribution would be higher than last year. This is nearly impossible, but it could be lower, but we don't know yet.

Okay, okay. That's clear. Thanks.

Thank you. There appears no further question at this time. I will hand it back over to your host. Mr. Whaley can go to foreclosing remarks.

Yeah, thank you. Thank you very much. First of all, thank you for attending the conference. And then I should not forget to mention we're going to present our first quarter results, 24, end of April, concretely on the 30th of April, 24. Thank you. Have a nice day. Have a nice week.

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