Erste Group Bank Ag S/Adr

And welcome to the second quarter 2024 Results Conference Call of Arista 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 mode. 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 zero and you will be connected to an operator. I will now hand you over to your host, Thomas Samarowa, to begin today's conference. Thank you.

Thank you, Laura, for the kind introduction, and also welcome from my side to everybody who is listening in to our quarterly conference call. Today's call will be hosted by Peter Bossek, our Chief Executive Officer, Stefan Dörfler, our Chief Financial Officer, and Alexandra Haber-Latrabik, our Chief Risk Officer. They will lead you through a brief presentation highlighting the performance of the past quarter and also of the first half of 2024. after which time we will be ready to take your questions. Before handing over to Peter, the usual pointing to the disclaimer on page two is management will make a number of forward-looking statements. And with this, Peter, take it away, please.

Ladies and gentlemen, good morning and once again welcome to our second quarter 2024 conference call. This is my first investor and analyst call as the CEO of Erste Group, so before presenting to you another strong set of quarterly figures and an upgraded 2024 financial outlook, I will share with you my key priorities in managing the bank. I am on slide 4 now. I am committed to creating shareholder value by growing our business in a responsible manner. I believe that we operate in a unique footprint that provides tremendous organic growth opportunities for the next decade and beyond. I am also convinced that we can play a positive role in consolidating the banking industry in our region and, if we play it smart, also enter new markets in the eastern part of the European Union. But my commitment to you is value creation. So if our business continues to generate capital in excess of what is needed for organic growth and inorganic opportunities are not available at the right price, share buybacks will remain firmly on the agenda, most likely for some time to come. For the time being, we target completion of our 500 million share buyback by year end, complemented by a dividend of 3 euros per share for 2024. Value creation also means that I will put renewed focus on extracting more value from our digital initiatives. My concrete goal is to elevate our market-leading digital platform charge to the next level. primarily by expanding digital advice to broader sections of the client population. This will open up new fee-earning opportunities in such growth areas as asset management and pension products, as well as in the insurance business. Further product portfolio simplification will give us greater leverage in back office digitization and consequently support our efforts to operate as efficiently as possible. Accordingly, this will also be a focal point of mine. And finally, as already mentioned, we will keep an open mind when it comes to value creating in organic growth opportunities, be it driving in-market consolidation or by entering new markets. And with this, ladies and gentlemen, let's now have a look at our financial performance in the second quarter. I'm on page five now. We posted another strong quarter. Our core revenues, NII and fees, were up year on year and only trailed the exceptionally strong Q1 print by a narrow margin. NII continued to consolidate near the peak despite the ECB delivering the first rate cut, while fees confirmed the record performance of the previous quarter. Consequently, we decided to upgrade our full-year guidance for both NII and fees. We now expect NII's to stay flat in 2024 as opposed to declining by about 3%, and fees should grow by 10% rather than 5%. The other revenue items continue to perform strongly, and that is particularly true for net trading and fair value results. Nonetheless, overall revenues came in somewhat lighter in the second quarter, mainly because we posted one-off leasing income in the first quarter. Quarterly cost development was completely in line with our expectations, if anything somewhat better, despite the Austrian salary adjustments kicking in from April. Accordingly, we are now confident that we can keep the cost-to-income ratio comfortably below 50% for a second year in a row, in contrast to our previous expectations of delivering a cost-to-income ratio of about 50%. Risk costs didn't disappoint either. In fact, the quarterly print was limited to six basis points, confirming the excellent quality of our loan book. And with risk costs of 12 basis points in the first half of 2024, we now have enough evidence to also improve the full-year outlook for this item. Instead of less than 25 basis points, we are now expecting risk costs of less than 20 basis points in 2024. And with all these upgrades, we also lift the full-year profit outlook. Instead of approximately 50%, we now expect a return of tangible equity well above 15%. To conclude, 2024 shapes up to be another strong year, despite the many uncertainties that are out there. Our excellent P&L performance and outlook on slide 6 in the meantime is also reflected in the P&L dashboard. Net interest margin continued to consolidate around the level of 2.5%, fully in line with our expectations. Cost-income ratio is already well in line with our upgraded guidance. Is it that the risk-cost ratio at six basis points for the quarter and 12 basis points in the first half, supported by the release of FLI provisions and industry overlays? Alexandra will provide you more detail on this later. And with all of this, at 17.2%, we exactly match the return on tangible equity delivered in the first quarter. Our balance sheet development on page 7 already was characterized by a peak up in core business volume growth in the second quarter. We added more than €3 billion worth of loans in the first half, while customer deposits grew by more than €7 billion. This pretty much squares with our expectation that volume growth would become more robust as the year goes, and we also expect that our Austrian business will make a better contribution in the second half of 2024 than they did in the first. Consequently, we stick to our target of growing the loan book by about 5% in 2024. In terms of other balance sheet developments on the liability side, the volume of outstanding debt securities also increased as we front-loaded our funding activities into the first half, while the volume of interbank deposits declined due to the retirement of another €5 billion worth of TLTRO funds. On the asset side, central bank cash was in part redeployed into inter-bank lending, but also reduced by the already mentioned TL2 retirement. All in all, key takeaways from our balance sheet performance in the past quarter is that customer volume growth strengths are improving again. Moving to our key balance sheet indicators on slide 8, as a result of our overall strong business performance, our parameters continued to be excellent. Our loan-to-deposit ratio remained in the customer 85% to 90% range, reflecting balanced loan and deposit growth as already mentioned. Asset quality continued to be very satisfactory, with NPL ratios ending up only slightly to 2.4%. In contrast to previous quarters, defaults at the Austrian minority-owned savings banks slowed down, while CEE continued to perform very well. At the same time, NPL coverage excluding collaterals went down to about 80%, mainly on the back of releases of FLI and industry overlays, which were no longer needed. Our capital generation also remained strong in the first half, even if not really visible in the CT1 ratio, which declined slightly since the start of the year, as the full amount of the second share buyback in the amount of 500 million euros, as well as the pro rata dividend for 2024, were deducted and, of course, loan growth picked up. Let's now turn to the operating environment. I'm on slide 10 now. For 2024, our economies are projecting moderate economic growth in all our core markets that will accelerate going into 2025. Inflation has already declined a great deal and the future path will likely be determined by developments specific to individual markets. Overall, we expect inflation rates to hurrah in the low to mid single range in the CE region in the next 12 to 18 months. Despite this, it is still the expectation that rates will come down further in all geographies by year end. Our economic metrics such as unemployment, fiscal and external balances are expected to remain in good shape or improve in most of our markets. All of this should support volume growth as we progress throughout 2024 and into 2025. In terms of volume growth, and I'm on page 11 in the meantime, we also expect the retail business to make a healthy contribution. And in fact, the second quarter, we saw the first signs that this is already happening. We have seen the best level of new business volumes in housing loans since the third quarter of 2022, even though the stock was slightly down year on year. And consumer loan growth was even more pronounced, with stock being up nicely both year on year and quarter on quarter. On the liability side, our retail deposit base also edged up quarter on quarter. As regards deposit pass-through, and Stefan will be more specific on that later, retail pass-through rates continued to be more moderate than expected at the start of the rate-hiking cycle, and customers shifted fewer overnight deposits in term and saving accounts in the past quarter, helping maintain the share of current account deposits to total retail deposits comfortably above 50%. Our success story in promoting retail security savings plans as a means of building long-term wealth continued. The stock of such savings plans now tops 1.3 million, supporting long-term fee growth in our asset management business. And our market-leading digital retail platform also performed strongly in the past quarter, passing another milestone. we have now onboarded more than 10 million customers. And last but not least, our digital sales ratio in the retail business has now reached 59% with 70% of consumer loans already being sold digitally. Looking at the development in the corporate and market business on page 12, we actually see similar trends as in the retail business. Loan growth improved again. being up 1.4% and 3.5% quarter on quarter and year on year respectively. This was mainly driven by an increased loan demand by large corporates while the SME business was still lagging. In terms of sustainable lending new business volumes, we also made good progress, reaching about 80% of our annual 2.5 million euro target already in the first half of 2024. Overall, as far as corporate loan growth is concerned, We continue to be cautiously optimistic about the second half of 2024. On the liability side, we just observed the regular volatility mainly driven by the large corporate business, with corporate deposits stable year on year and up on the previous quarter. The market business continued to do well. We were involved in issuance of €92 billion worth of bonds and 130 book running mandates, generating healthy income in the security business. Asset management built on a good start to the year, with assets under management reaching an all-time high of 82.2 billion euros, supported in particular by strong net sales in the Czech Republic. This was reflected in our continued strong fee performance. On the digital front, the corporate business also made good progress. In the meantime, we have onboarded 43,000 customers to George Business in Australia alone and the first 900 in Romania, where the official launch is scheduled for this September. And now I would like to hand over to Stefan for the presentation of the quarterly operating trends.

Thanks very much, Peter. Good morning, everyone. Let me round off the comments Peter already made on loan volumes with page 14 by highlighting a couple of points on individual country performance. Croatia continued to do very well, maintaining the growth pattern that has started after the country joined the Euro at the start of 2023. In the Czech Republic, we saw a revival in housing loans demand, with quarterly new business volumes hitting the best level for two years, so we are increasingly optimistic that after a long base building phase, growth is back. In Romania, consumer loan placements hit a new quarterly record as a result of a targeted spring campaign. In Austria, the demand backdrop continued to be sluggish in the second quarter as mortgage customers still somewhat remained on the sidelines in expectation of political support measures for the construction industry and the relaxation of regulatory rules to be finally implemented. This has happened in the meantime. Let's see the effects in half year two, hopefully. Overall, this resulted in healthy loan growth of 1.5% quarter on quarter. And for the full year of 2024, we are therefore optimistic to achieve our target growth rate of about 5%. As for deposits, and I am on page 15 already, we have seen a return of growth after moving sideways for a couple of quarters. Our core deposit base, which includes our retail, SME and savings bank business lines, increased by 2.1% and 2.3% quarter-in-quarter and year-in-year respectively. Those deposits account for around 80% of our total customer deposits. In a quarter-on-quarter comparison, the main contributions came from Austria, the Czech Republic and Slovakia. In all these markets, growth was well balanced among business lines, while the other markets did not exhibit any significant movements other than the usual volatility. The retail deposit mix also remained favourable as the current account share of retail deposits fell only slightly to 51.9% on the back of diversification into savings and term deposits, slowing noticeably following the first rate cut in the Eurozone. This meant that retail current account deposit volume grew for the first time again in two years. The overall loan-to-deposit ratio keeps hovering around a little below 90. End of June, we were at 87.9%. Moving to page 16, we can report about NRI consolidating on a very pleasing high level. We posted another quarterly NRI print that was on par with the record levels seen in previous quarters. Central and Eastern Europe continued to perform well, while the Austrian retail and SME segments also held up reasonably solid. As deposits grew again and the shift from current account to term and savings deposits slowed. In CE, the performance in the Czech Republic and Romania is noteworthy. In the former, better volume trends, rate cuts, and a good balance sheet positioning all contributed to the excellent quarterly performance. In the latter, meaning in Romania, NII was pushed mainly by strong volume growth in customer loans. In terms of deposit pass-through in retail, in times of falling rates, it's probably more useful to look at them in conjunction with interest expense. So when we say, for example, that pass-through in the Czech Republic has increased in the past quarter from 26% to 29%, we also have to add that the effective interest paid on those deposits has already declined for the second consecutive quarter. The divergence simply comes from a timing mismatch as we compare quarterly average effective interest rates with period and central bank rates. And this is true for all countries. So, me personally, I would caution against over-interpreting rising deposit pass-through rates at this stage of the rate cycle. Taking all of this into account, we are revising upwards our NII outlook for 2024. We now believe that we can match last year's level or in other words deliver flat year-on-year NII. As indicated already in the Q1 call, and we are on page 17, the strategic business focus to strengthen our fee income fully pays off. Fees continued the strong performance in Q2, almost matching the first quarter's record level. Year on year we posted growth of 12.5% and this was attributable to increased payment services fees thanks to inflation adjustments, higher transaction volumes in Austria and increased card revenues in C. Higher fees from securities also made strong contributions on the back of higher asset under management volumes and solid new sales in most geographies. Quarter-on-quarter fees were unchanged, as higher payment fees were offset by minor declines in other fee categories. With fees being up 11.6% year-to-date, we also re-examined our 2024 fee guidance and upgraded to about 10%. Since the other operating income lines like net trading result or rental income developed to our satisfaction too, we are confident now to grow our top line in 2024 compared to 2023 in total. Let me turn to operating expenses on slide 18 now. In line with historic patterns, operating expenses declined quarter on quarter by 1.3%, as deposit insurance contributions were booked for the full year in the first quarter. The reduction was less pronounced than in the past years, as deposit insurance contributions declined significantly in 2024. On the other hand, annual salary increases in Austria, kicking in from April, pushed costs higher, as did an increase in IT expenses. The drivers for year-on-year cost updrift were similar to the quarter-on-quarter development. Higher wage payments and higher IT expenses. But even with this, year-on-year costs were only up by 2.9%, hence we are well inside our current guidance of approximately 5% cost inflation and consequently we are feeling very comfortable with this outlook for the full year. Summing up the parts of our operating performance on page 19 and adjusting Q1 for the one of leasing income booked back then, quarterly operating profit almost matched first quarter record result. All in all, we maintained our level of efficiency in the ballpark of 46%, in line with the first quarter levels. Before handing over to Alexandra, let me share my thoughts for the full year 2024 on operating results and chores. Assuming we are able to deliver our guidance for the key income and cost lines, plus supportive development of other revenues, matching or even beating 2023 operating profit is a possible scenario. Still, please bear in mind that with 5% higher costs, positive chores will likely remain out of reach. What we feel very comfortable with, though, is to upgrade the cost-income ratio guidance to below 50% for the year 2024. And with this, over to Alexandra.

Thank you, Stefan. Good morning to all. Let me take you to page 20. As Peter has already mentioned, risk costs came in at six basis points for the quarter. This was supported by release of FLI and overlay provisions in the amount of €88 million. Most of the risk costs, as in previous quarters, were booked in the Austrian real estate and SME segments, primarily at the minority-owned savings banks, but also there we are talking about comparatively low risk costs. The real estate situation has improved as the NPL inflows have slowed down, and we still see high collateral levels. So while we see some defaults and rating deterioration and also expect this to continue for the rest of the year, the overall risk situation I would still call moderate in Austria. Looking at Central and Eastern Europe, I can only repeat what I've already said in the previous quarters. The risk performance there continues to be excellent. Either we posted net releases or topped up provisions only incrementally. In terms of overlays and FLI provisions, following the partial release already mentioned, we still have approximately €670 million worth on the books, and our plans to release another roughly €120 million per year end are unchanged. Taking into account our very good year-to-date performance, risk costs to repeat amounted to only 12 basis points in the first half of 2024. We are also upgrading our outlook to lower than 20 basis points for the full year. Let's now turn to asset quality on 2021. The NPL and MPL coverage ratios stayed at very good levels, even in those geographies where we have seen somewhat of an increase in MPL inflows in the past quarters, such as Austria. I already highlighted that in CE, the only noteworthy development is that the asset quality continues to be outstanding. So no further comments there. When we look at the individual segments, the development in other Austria looks a little strange, with an increase in the MPL ratio and a significant drop in coverage. The explanation is simple enough, and consequently this development is not a matter of concern to me. Most of the industry overlay provisions, this quarter 46 million euros of energy overlays, are released in this segment. At the same time, we had an NPL inflow of one exposure that has a very high level and quality of collateral, hence no additional provision was booked for this. And with this, I already hand back to Stefan.

Moving to page 22, we are communicating the one single unpleasant event of materiality in the second quarter. Other result in the second quarter was significantly worse than a year ago and unchanged quarter on quarter, despite the first quarter being seasonally weaker due to upfront booking of various regulatory costs and banking taxes. This was due to a one-off provision in the amount of 90 million euros in relation to a possible EU court decision that would retrospectively lift the Austrian Interbank VAT exemption. This booking relates to the past 10 years and more than half of this amount is affecting the minority-owned savings banks, hence limiting the impact on the consolidated bottom line. One other position worth mentioning was a top-up of around 11 million euros of the extra profit tax in Hungary. So all in all, we have been accounting for minus 129 million euros in other results in Q2. This, however, does not at all hinder us to upgrade our Return on Changeable Equity Guidance, see page 23, to greater than 15%. While it's probably a unique occurrence, the right-hand chart showing equal ROTE and EPS for Q1 and Q2 is not a mistake, but pure mathematical coincidence. Happy to describe in detail the calculation in the Q&A if really requested. What is maybe more important is that Erste Group has been able to increase its half-year-one net profit year-on-year by a remarkable 9.4% to 1.63 billion euros. Now let's move on to page 25 and wholesale funding. Wholesale funding volumes were broadly stable year-to-date as the increase in debt securities was offset by a decline in interbank deposits. While the stock of debt securities was pushed up by issuance of covered bonds and certificates of deposit, interbank term deposits declined on the back of regular TLTRO maturities. Overall, of course, our strong funding profile was still primarily built on retail deposits which, as mentioned earlier already, showed good growth in the second quarter. Summarizing the issuance activity of the Erste Group Bank AG on page 26 in the first half of 2024, I'm happy to say that we have already executed the majority of our issuance plan for 2024. In total, we issued €2.8 billion worth of paper, heavily tilted towards covered bonds. At the same time, the consolidated group retired another €1.25 billion of TLTRO funds, in the second quarter, bringing down its outstanding amount to 1.35 billion euros, which will mature by the end of this year. Let me finally mention one important and very successful transaction. In May 2024, Erste Group issued a 750 million perpetual non-call 2031-81 with a 7% coupon in combination with a tender offer based on its outstanding 5-1-8 perpetual non-call 2025, resulting in an optimization of our capital stock. Looking at Basel III capital and RWAs on page 27, one sees a year-to-date increase in CET1 capital primarily due to inclusion of interim profit, as well as higher minority interest on the back of profit at the savings banks. Other comprehensive income contributed negatively due to FX depreciation mainly of the cheque crown. AT1 capital increased year-to-date as well because of the mentioned transaction in May. Consequently, total owned funds all have been rising. Risk-weighted assets were up year-to-date, driven by business growth, increased operational risk on the back of the regular annual severity recalibration, as well as somewhat higher market risk due to interest rate risk. When we analyze the CET1 waterfall on page 28, we can summarize a very positive and reassuring development. As a result of the capital and risk-weighted asset developments I just presented, Our reported fully loaded CET1 ratio came in at 15.5%. From this, the current share buyback volume of 500 million euros and the pro rata dividend for the first half of 2024 of 1.5 euros are already fully deducted. This means that we are currently planning with a full-year dividend of €3 per share. In addition, as you already know, we plan to complete the share buyback by year-end 2024. To this date, we have already bought back approximately 20% of the €500 million target amount. And with this, I hand back to Peter for the outlook. Thank you, Stefan.

I am concluding this presentation with a recap of our improved financial outlook for 2024 on page 30. To cut a long story short, we are more optimistic across the board. We now believe that net interest income will stay flat this year as the European Central Bank is slowing cutting rates than anticipated at the start of the year. Fees have been a traditional strength of ours for years and we are happy that fees shape up even better than previously expected. We currently project fees to grow by about 10%. With this revenue outlook substantially improved and costs under control, we are also guiding the cost-income ratio lower. We are now confident we can keep this efficiency benchmark below 50% for the second year in a row. When it comes to risk costs, we continue to see an exceptionally strong performance across Central and Eastern Europe and limited provisioning requirements in Austria, resulting in an improved outlook of lower than 20 basis points for 2024. And with all of this, return on tangible equity should also come in well above 15% rather than about 15%. And last but not least, improved profitability and a lower share count put us in a strong position to raise dividend per share. We currently plan for a payout of €3 per share for 2024 business year, of course subject to AGM approval and subject to achieving our financial goals. that I just presented. And this, ladies and gentlemen, concludes our presentation remarks. Thanks for your attention, and we are now happy to take your questions.

Thank you. Ladies and gentlemen, as a reminder, if you would like to ask a question, please press star 1 on your telephone keypad. Thank you. We will now take our first question from Gabor Kemeny of Autonomous Research. Your line is open. Please go ahead.

Good morning. Thank you for the presentation and for your thoughts on strategy. On your point on inorganic growth, can you give us an example on what attributes would you see as attractive in a banking market? And having so much experience in CEE banking, what attributes would you rather avoid? And just given that there are not too many EU countries, In Eastern Europe, I wondered what your thoughts were on adding Poland to Erste's CEE footprint. The other topic I would like to ask about, please, is Czech NII, which declined in Q2. My understanding that you were positively exposed to falling interest rates in Czechia. I understand Stefan's point on... on the timing issue around repricing. But given the further decline in check rates, maybe you could give us some thoughts on how you expect the second half of the year to shape up. Thank you.

So may I start with your part of the question related to inorganic growth? And you are absolutely right. This group was built upon getting a footprint in the eastern part of the European Union 25 years ago. And we have always been interested in Poland, as you rightly mentioned, The special situation with Poland was always quite, in terms of pricing, it was quite costly. The issue is, this is still true. So, of course, we would be interested in Poland, but we definitely don't want to run in a situation where we are not creating shareholder value. So, the good thing is, that we are not under pressure to jump on inorganic growth. We are open-minded when it comes to that. We are definitely interested to enter Poland, but I can't tell you when because we are not in a situation that we can drive this part of market development.

All right. Check NI. Gabor, it's as follows. You will remember there was a small one-off in the first quarter. I think it was just double-digit around about this. And secondly, please don't underestimate the FX effect in the second quarter kicking in in Euro terms also played a role. We are seeing a clearly positive overall run rate creeping up slightly. Of course, always taking into account, you're absolutely right, and I can confirm to you that we are still seeing a clearly positive NAI sensitivity on falling rates in Czech Republic. However, let's not forget that the not insignificant part of the Jessica balance sheet on the lending side in corporates and so on is euro. So it was a total total of the sum. Overall, we are very satisfied with the NAI development in Czech Republic.

Thank you.

Thank you. And we'll now move on to our next question from Mehmet Suleim of JP Morgan. Please go ahead.

Good morning. Thank you very much for taking my question. Maybe building on Gabor's question, and thank you, Peter, for sharing your strategic priorities. It sounds like a lot of this builds on what ASTA has been doing so well recently, of course, in a positive way. But I wanted to understand better what you think could change at the bank over the next few years under your leadership, if at all. You know, be it strategic or operational, especially also taking into account your recent experience at another group in another market. Really appreciate any color there. And maybe another topic that I wanted to get your views on is loan growth. Very encouraging to see the recovery in the second quarter. But it looks like Austria is still a bit sluggish. And if I remember correctly, this is one of the big assumptions for the second half in terms of the improvement to reach the 5% growth target. So could you tell us how the dynamics are there currently? Stefan, you mentioned a couple of things, but I'd love to understand better if you're still comfortable with Austria improvement in the second half. Thank you.

Let me take the first part of the question, so what I will be focusing on over the next years to come. It's very clear that we have a very good starting position when it comes to digital banking, and it's also very clear that technology opens up a lot of opportunities over the next years to come. and what I'm strongly convinced is that we will be able at a certain point in time to offer digital advice to our retail clients and partially also to our corporate clients. You know, a typical retail bank these days is capable to handle roughly about 25% of their retail clients in handing over or giving advice in a way how I would like to see it for much more of our clients. But today you are for 75% of our clients we are just reactive because this is very much about efficiency. And using the opportunity of offering digital advice can really be a game changer in retail banking because you could offer simple advice to roughly up to 100% of your clients. Of course, only to clients who are interested in using this kind of digital advice. And this could be really a game changer in terms of transforming digital financial health for our clients, but for us also, of course, opening up a lot of fee income potential, as I mentioned during the presentation, related to asset management, pension products, things like that. Besides this importance of digital banking, where we are willing to invest in terms of technology, it's very clear that we will further broaden and build up our asset management perceptions, so to say. This is an extremely important part of our business. This is extremely important in terms of change in demography, especially in our region. We will see much bigger demand over the next years to come in terms of asset management. We would like to broaden our product offering. We would like to strengthen communication, especially with younger clients, so there are a lot of things to be done in this space. And we'll also deal with pension fund-related products and make up our mind how we can broaden our footprint in this space. And when it comes to inorganic growth, of course, as mentioned before, we are open-minded eastern part of European Union, Poland would be great, but very much depending on an opportunity which is not adding too much complexity on our table. We want to avoid headache, of course, and also only do a transaction when we can create shareholder value. But the way how we look at the footprint of our group is we are already in a great situation. So there is no need to jump desperately on any kind of deal. in the near future, if a great opportunity will come, it will come. And at the end of the day, due to the lack of capital markets in our region, I would put ourselves in a situation that every investor who is interested in this eastern part of European Union should invest in Erste Bank shares because then you get the full leverage of this region. And I think then you have a great investment in a region where you have a very high level of entrepreneurial spirit.

So turning to your loan growth question, Mehmet, thanks for that because it gives the opportunity to fine-tune a little bit the information here. First of all, as I indicated with my presentation statement, it really took a long time until everything was, so to say, ratified with regards to the legal environment of these supportive measures in Austria, so that we only could benefit from it towards the end of the second quarter, i.e. June numbers were already a little bit better. You saw on page 14 we put Austrian retail demand still slow in Q2 2024, but finally improving. This should indicate to you that the second half of the second quarter was already slightly better. meaning we clearly count on a substantial improvement there in the second half of the year. Let's see whether it will really come. The macro environment, let's be clear, is still not tremendously supportive. Overall, when we put our pieces of the parts together, pieces of the puzzle together and asked ourselves, do we get to the 5%? This will of course be driven mainly by CE growth. So in order to get there, CE growth has to be holding up well. FX plays also a role, as you know. So let's see where the check ground will end the year ultimately in 2024. But with a good combination of strong sea growth in countries that I mentioned and stabilizing and upward sloping Austrian growth improvement, we should be getting there. I think the CUTU numbers are very much supporting that. Thank you.

Very clear. Thanks very much.

Thank you. And we'll now move on to our next question from Jeremy Seagate of BNP. Your line is open. Please go ahead.

Thank you. First question, just continuing the discussion about net interest income, please. I just wondered if you could talk about the outlook for next year, assuming the continued rate cuts that you've talked about. And first part of the question, I guess, is are you comfortable with consensus estimates that expect around 1% growth in NII in 2025, year on year? And then the second part of the question is perhaps, What are the positives still to come through either from hedges or replication portfolios or from fixed term assets that are still repricing more slowly? Thank you.

First of all, let me use this opportunity to say something that's really kind of important to me and I really like it very much. You all definitely will remember that we had a long discussion two, three, four quarters back about what has been the peak NRI, how will it be consolidated. We were playing around with all kinds of vocabulary. And then we created at one point in time, I think it was on one roadshow, Thomas and myself said, well, a plateau is a nice picture that we would like to have in front of us. And it is. a perfect plateau and it will very likely remain a perfect plateau. So that's my answer. Obviously, I don't give you a guidance for 2025 NI today, but I would not fundamentally disagree with what the market currently is calculating. Let me put it that way. What are the positives that will be still coming through? Certainly, you indicated it, we still are very optimistic for the replication portfolio. We see it's still upward sloping. The reinvestments are clearly above levels that are expiring, and that will probably remain so for another 12 to 18 months. We will update you regularly about that. What is less effective, and this distinguishes us from some friendly competitors, I don't give you a hatching element for, let me say, an AI driver. We are basing our AI expectations and momentum, first of all and most of all, on a very clear business commitment, its volumes, its margins, and then on top of that we try to, so to say, put the cream on the cake with a smart balance sheet management but not with hedging away upside opportunities. I'm personally not a big fan of that. Of course, you have to fulfill all the regulatory interest rate limitations. But within that, I think it's our obligation to make use of the opportunities in the market. So very clear, let me say, cautiously, but optimistic outlook also for the further NI development.

Very helpful. Thank you.

Thank you. And we'll now move on to our next question from Benoit Petrac of Kaplashiru. The line is open. Please go ahead.

Yes, good morning, gentlemen. Welcome, Peter, and all the best for Union Mandate. So the first question is probably more on the capital management strategy. So it's obviously running or flying at a 15.5% to 1 ratio, which is a very strong excess capital. I was wondering if you have a view on how to basically reallocate this excess capital going forward Do you have a preference for share buyback or M&As? So just wanted to have a view on this excess capital could eventually flow back to the shareholders at some point. The second question on the strategy, sorry for the footprint, but we talked a lot about Poland. Is there any other countries thinking, for example, about Slovenia or any countries countries in the Balkans or anything special you have in mind there, or if, you know, if it's outside the existing footprint, that will only be Poland, potentially. And then on the... Yeah, coming back on the NI425, so... Because your 24 guidance implicitly tells us that NI will be a bit weakish in H2 versus H1. And I was wondering, because when you talk about the major trends, so we talk about volumes which are very positive. We talked about actually your capacity to manage the pass-through rate and also cut deposit rates. So how do you think about, yeah, a bit of an exit rate, 24? It sounds like it's not that bad. And it sounds like your guidance is a bit conservative. But I just wanted to have your view on that. Thank you.

May I start with the first part of your question in terms of excess capital? I think it's pretty much unchanged to what you have heard from us before. Our first priority is to fund organic growth, of which there is still plenty left in the tank. Secondly, we will of course continue to pay regular dividends in payout range of 40% to 50%. Whatever surplus capital is left, we will use to strengthen our footprint either by driving in-country consolidation in existing markets or contemplating entry into new markets. in the eastern part of the European Union, but only if such opportunities come at the right price and we have a high level of confidence that we can create shareholder value. If not, we will target further share buy breaks as a way to manage down our excess capital. This is very clear, and we fully get your point about the excess capital. When it comes to other countries than Poland, it's very clear that we stick to our strategy to be the bank in the eastern part of the European Union. So it's definitely not only limited to Poland, we would also look at other markets. But again, this is very much a question of the right opportunity at the right price.

Okay, I think the markets, it was all done. Perfect, perfect, perfect. All right, NRI 2025. Benoit, look, on top of what I said already, answering Jeremy's question, let me maybe build on your thought, which of course is perfectly right, that if we guide for a flat NRI in 2024 in total, that means that the second half of the year, 2024, would be weaker than the first half. That's correct. There is no doubt about it. And then how do you get then to a kind of good flat plateau for 2025? I think that's the way I could summarize your question. I think there is two thoughts behind. First, as you perfectly indicated already, it's volumes. So with volumes picking up and you know about our macro view, this should give us strong tailwinds into the later parts of 2024, beginning of 2025, but then also having a stronger effect on 2025 in the longer run. So that's one effect. So probably if you ask me today, then probably NII mix in 2025 might be differently, so to say, distributed over the year. That's the one element. And the other element is, And we will definitely invest some thoughts around that. You named the second half of the year as conservative, ending as a full year flat. Well, frankly speaking, we wouldn't have been discussing it in that way a half a year ago, that's for sure, because expectations were quite significantly different. We today expect the ECB to deliver September and December cuts. We are not fully certain whether they will deliver a third one in October. Will this have a major impact on NRI in the second half of the year? No. Will it have rather a reducing one? Yes. So let us build the 2025 outlook later on in the year and then get back to some first indications of a guidance after the Q3.

hear us? Yes, we can hear you. So we are online again.

Yes, you're online again. And Benoit, you can proceed. Thank you.

Yes, Benoit, I would ask you simply, or I would ask Stefan to repeat again the answer to the NII question of Benoit.

Yes, because I have no clue when we lost connection, but that gives me the opportunity to do it in a better version insofar that I keep it short. And the answer is that very much we are building our assumption going forward on the one hand of a stable, even still upward-sloping replication portfolio, but especially volumes. And, of course, we will have, and I'm sure we'll have those with you, intensive discussions about where margins are going to head. We know and you see it in our NIM that we were able to keep it in this 2.4%, 2.5% area, which is very reassuring. But in the same moment, it will be showing only as we go if this is also possible on the way forward in a lower rate environment.

Thank you.

Thank you. And we'll now move on to our next question from Johannes Thormann of HSBC. Your line is open. Please go ahead.

Morning, everybody. Three questions from my side, please. First of all, we had 17% return on tangible in the first two quarters of 2024. What deterioration do you expect to get to an average more than 15% in the full year? What has to happen in the second half of the year? Secondly, regarding your deposit strategy, you go for 5% loan growth, but the loan-to-deposit ratio is below 90%. So do you target defensive measures to keep the deposit base low, or are you rather, because every deposit is basically profit-contributing, maybe at a lower margin, still target deposit growth in the next years? And last but not least, just on the FLI question, Let me try to satisfy you with two super short questions.

First of all, Greater than 15 is also 17. So 16 is greater than 15, 18 is greater than 15, 7 is greater than 15. And we are always a little bit cautious with our return on tangible equity guidance because the denominator, i.e. the volume of equity, plays a significant role in delivering the number. That's as simple as that. Number two, deposit growth. Yes, we are aiming deposit growth because for our overall business model, a good balance between stable core deposits and good loan growth is the key factor. So it's not about growing either or. It's about keeping this very nice and stable level that Vito also indicated in his presentation that I repeated. So we feel very comfortable in this area, 85 to the low 90s. That's a great area to do our business. for loan-to-deposit ratio.

On your question on FLI, and bear in mind we're always talking FLI and stage overlay together. For this year, as you remember, roughly 200 million releases expected, 88 we did, another 120 expected until year-end. And for 2025, as you rightly recalled, we still expect roughly the similar level, maybe a little less, some 170, 180 million, but unchanged expectation.

Okay, thank you.

Thank you. And we'll now take our next question from Chris Hallam of Goldman Sachs. Please go ahead.

Thank you for taking my question. So, first, on NII again, you talked about the importance of volumes for that 2025 year-over-year bridge. In terms of loan demand, You said SMEs are lagging, whereas you're seeing increased demand from large corporates. Is that picture, I guess, consistent across your footprint? When do you expect SME demand maybe to pick up, and how do you see the various volume drivers in 25 versus 24? And then second question, Peter, I think the points around how you prioritize excess capital deployment are very clear. But should we assume that that's an annual process, i.e. at the end of each year, if there hasn't been a deal, we see a buyback to reset the CET1 level? Or alternatively, would you feel comfortable building up a bigger capital pile over more than a 12-month period to give yourselves more options on the M&A side?

Yeah, Chris, first, I think you halfway already answered your question as part of the question already. Yes, we are counting, and obviously, while we, of course, at... um hopefully quite some some good additional additional alpha we are depending on the macro environment it's crystal clear when it comes to the midterm growth we cannot decouple and we also don't want to decouple because we are a full part of the of the economies in our in our region if you look at the at our macro expectations, then the year 2025 growth rates are in most of the countries substantially, substantially up from 2024 and that should obviously support also the SME loan volume growth that you are pointing to. We don't have detailed planning for the growth details on segments yet. We will do that, of course, as always in Q3 and happy to address it in more detail than in the Q3 call. But definitely you are right that we are building the volume growth on an improving macro environment, among other factors.

I think part of the question about capital distribution, from my perspective, this should be kind of yearly exercise. So it's relatively clear that we don't want to build up endless capital. and I think it's healthy to have this kind of yearly look at opportunities, and if we have excess capital, then go back to a share buyback if we don't find opportunities in the markets. Of course, then we are taking a risk that we see a great transaction, which would be volume-wise bigger than we have in terms of excess capital, but then we just have to go to the markets.

Mr. Clay, thank you very much.

And we'll now take our next question from Simon Ellis of Citibank. Your line is open. Please go ahead.

Oh, thanks. Thanks very much for the opportunity. And welcome back, Peter. Actually, my question would be for Peter. I'd be interested in knowing, you know, you used to be at the group a while back. You've come back. You know, what surprised you, I guess, positively, potentially negatively? You know, what's changed as a group? I'd just be interested in hearing your impressions. And then concerning your strategic priorities to kind of bring George to the next level, can you maybe just elaborate a bit more on that and link that to the sustainability of the very strong fee income that we're seeing? I mean, do you think you'll be able to sustain 10% fee growth going forward? And then one last technical question, I guess more for Stefan. I see that the AT1 coupon deduction has increased. Can you just tell us what you expect the AT1 coupon deduction to be for the full year this year and for the full year next year, assuming no further issuance?

So if I may start on a very personal note, I mean, coming back to Erste Group, it's just amazing how strong the balance sheet is, how healthy the loan portfolio is. We are doing great in liquidity. And I think what even is much more now for me able to recognize is the high level of experience within the group. And this is much easier to see when you are outside than when you are growing up in this environment. And I am extremely happy to be back and I think we are in such a strong position. We have this footprint which is really perfectly set up for success in terms of growth that I am very excited to be here again. I enjoy it very much and I am looking very much forward to work with my colleagues. on developing our business model further and building the strongest bank in the eastern part of the European Union. Your second part of the question was related to George, exactly. As mentioned before, I see a huge opportunity in building up digital advice. And it should not be something super complicated. It should be easy to follow. It should be easy to follow for clients. You know we are very much in this financial health concept. So there should be a clear path for clients how to build up their financial success and to be financially healthy. And, of course, this will generate additional fee income opportunities related to asset management, pension products, but also insurance products. It's too early to come up with a forecast for 10% yearly growth in the fee income, but we will definitely be very ambitious when it comes to fee income, driven by further expansion of digital banking. And I think these 10 million users on George are really a great starting point. So I think we're really in a great situation.

Let me pick up this last point briefly, if I may. I think, Simon, you know very well that we've always been pointing to the ingredients, so to say, of the fee growth, that 10%, with all optimism that we are sharing here, is probably as a compounded annual growth rate a little bit beyond what can be expected in a normalizing inflation environment. What I would like to point to is that in 2019 we were holding our capital markets day and we had 2 billion euros fee income at the end of 2019. With our current guidance, we will finish the year ballpark around 2.9 somewhere. Give or take, of course, no one knows exactly how the second half will go. But you can derive a compounded annual growth rate from that very easily. And I would say, adjusted for the inflationary environment, this is definitely the lower bound of our ambitions going forward. And as Peter pointed out, with the initiatives and the investments that we are undertaking. We definitely are over time able and also very much committed to beat this average growth at 10% with all optimism. You should not build into the model for every single year. 81, the number for 2024 we expect to be 90 million. What could have been influencing your observed number here or there? is the fact that we had two capital markets activities in that field in September 2023 and in May 2024 with the respective buyback combined with our new issuance. We will look it up in more detail. Somewhere between 90 and 120 is the number, but we are coming back to you with the precise number expectation for the respective businesses, if we may. Okay?

Thank you. Thank you very much, sir.

Thank you. And we'll now move on to our next question from Ricardo Rivera of Medibunker. Please go ahead.

Thank you. Thank you very much for taking my questions. Sorry to get back again on M&A. The history of AERSTE, and you have been part of this history over the past couple of decades, has always been expanding in to see but being one of the largest banks in the country where you entered. You are kind of number one in Czechia, kind of number one in Slovakia. You are very large in Romania, and we could go on, unlike some other European banks that decided to go along a different route. So my point, when it comes to Poland, sorry, Poland is a 40 million population country. It's a big country. So if you had to look at Poland, would you be happy, let's say, to enter without being a price setter, so without being one of the largest banks in the country and being maybe the bank number five, number six, number seven, whatever it is, just to get in? Or would you stick to the history of being a price setter whenever you enter a different market? And still on this topic, and correct me if I'm wrong, on the bank assurance side, you've got JVs, if I'm not mistaken. If this is the case, instead of looking at Poland or Slovenia or whatever, But you can see that buying back those JVs and maybe, you know, exploit all the benefits that the Danish compromise is giving banks, you know, internalizing all the margins where maybe are relatively... small capital consumption. And could it eventually be George a way to enter Poland instead of investing billions to enter the market or anywhere else than Poland? Is George a possible way to try to put a foot into a new market? And the last question I have is a couple of questions, if I may. The first one is on Basel IV. Given that it's coming in less than six months, I'm just wondering if you can refresh us on what the impact is expected to be in January 25 and fully loaded, when the output floor will be fully phased. And then I have a question for Alexandra. You are reducing the guidance on risk costs with manufacturing in Europe. is going over, it's kind of crumbling, starting with Germany. And I was wondering, and the automotive industry looks to be part of it, the weakness in manufacturing. Automotive is relatively important in Slovakia, in Hungary, in Serbia, well, in the Czech Republic too. So I was wondering if this is of any concern for you in your guidance. Thanks.

May I start answering your question about Poland? So in general, I would say I would be very opportunistic depending on the market opportunities. But having said that, I think... when you are too small in in a country it takes ages to build up a bigger footprint this is this is a 15 to 25 years exercise um so it shouldn't be definitely too small having said that on the other hand you know uh polish banking is quite expensive so we should also not run in a transaction where where we are paying much too much and taking a huge risk of execution. So this is also not what we have in mind. So I can imagine that you're not 100% satisfied with my answer, but let's take it, we are opportunistic when it comes to that. Your second question related to bank issuance, I didn't fully get the topic with the JVE because we don't have a JVE with VIG. We have a long-lasting cooperation agreement which is related to us selling insurance products as a preferred partner for VIG and then on the other side we have an asset management agreement that we are doing a lot of asset management for VIG. This works quite well. I think you are aware that we have ambitious plans related to fee income to further improve. We are in a constant dialogue with our colleagues in VIG how to further improve our cooperation. From my perspective, this is a great fit to our financial health approach and we are very happy how it works with VIG. Using George to enter Poland or another market, To be fair, this was something I had in mind several years ago, but monitoring now the market and also seeing the experience of these purely digital banks like Revolut, like Number26, you see how much marketing money you have to spend to build up a trusted brand in a new market. And there is still something where clients want to see a physical, so to say, footprint of a bank This doesn't mean necessarily that they visit our branches every day, but it's a completely different game when you have a very strong digital footprint and a branch footprint. This is something related to psychology, obviously, which is extremely important for our clients. So I don't believe in entering a market only in a digital way.

Good, then I take over with the question on Basel IV, Ricardo. Basel IV, I can confirm, and you all will recall that we said the impact is expected, the overall impact is expected to be neutral to slightly positive. When I talk about the overall impact, it's covering credit risk, market risk, and op risk. When we now talk about the shift of the FATP by one year, the expected updrift of market risk will come later. So we would see in the first phase a decrease of total RWA. So overall credit risk will go down, op risk will go up and partially offset this decrease, not fully, and then when FRDP kicks in, overall we will see this overall neutral, maybe still some positive impact. So unchanged, only the timing given the changes from the regulatory side is different. When I go to automotive, our total exposure in the automotive industry is around 8 billion, which is 2% of the total group exposure. So the overall exposure is not huge. We have it mainly in Austria and Czech Republic, not in Slovakia. As you said, yes, in Slovakia there is automotive industry, but in our portfolio overall it's not playing a significant role. The composition of the automotive exposure is very stable over the last years, so we started already some time ago to concentrate on the OEMs and OESs, so really a tier one and high quality portfolio. This has not changed. And yes, we see some smaller companies struggling, some tier three suppliers, but they make up for such a small amount of our exposure. So giving a very direct answer to your question, no, it's not causing any concern for me regarding our risk-cost guidance.

Very good. Very clear. Very clear answers. Thank you very much.

Thank you. And we'll now take our next question from Hugo Cruz of KEBW. Please go ahead.

Thank you for the time. I wanted to ask mainly about OPEX. You know, you talk about increasing investments in digital and asset management. And before we get to that, 2024 as well. So, you know, your OPEX is growing for itself, I think, around 3% year-on-year. You're vying for five. So is there room to beat here? or you're already front-loading some investments in digital and asset management. And so when I look at consensus, you know, do you expect, you know, you see you're coming in, could we see a bit of a change of strategy that could lead to a step up in costs or not? And then a quick question, you know, you already did 18 million, I think, of overlay releases in 2Q. Any particular reason why you decide to do it now in 2Q? Yeah, that's it. Thank you.

May I start with the first part of your question? When it comes to investments in technology and asset management, of course we will invest, so to say, in further growth opportunities. This is completely clear. Having said that, I think we are already on a level of investments, especially when it comes in terms of technology, don't expect us now to completely overshoot this level. It's much more now running a strategy process during summer, coming up with a little bit more concrete topics in autumn. But, of course, in terms of investments, we will also look that the strategy is reflected in our investment portfolio. It's also the question what are things we can give up on to further invest, because we have a clear investment strategy. There could be some additional investments, but not in a way that this will move the needle completely, just to be very clear on that. So in the second part of the question...

on FLI. When I understood you correctly, it's on the timing, why we did the release of energy overlays. So overall, FLI update and overlay review is a regular exercise, which we also performed in Q2, and there are some defined trigger levels, and when you hit these trigger levels, then also, of course, also in line with our auditors, then we take this release action. So nothing extraordinary, just a part of our regular exercise and hitting, in a positive sense, hitting the trigger levels which then resulted in the release.

Thank you very much.

Thank you. And we'll now take our next question from Martin Nemes of UBS. Your line is open. Please go ahead.

Martin Nemes Yes, good morning. Thanks for the presentation, and welcome back, Peter. I have a couple of questions, please. The first one would go back to capital allocation. I think you're being crystal clear on the practical preference for organic growth, but not at all price, clearly intent to create shareholder value, and you alluded to the annual assessment on capital allocation. very clearly, does that mean that you're planning the next assessment only with fully results, i.e. sometime early in 2025, and you're content with an elevated level of excess capital in the meantime? The second question would be on consolidation in existing markets. I would love to hear your thoughts. Where do you see opportunities here? Which markets are the most attractive where you would like to deploy capital? And the last question would be on the credit RWA lease increase that we saw in the second quarter, almost $5 billion on business growth mainly and methodology effects. Could you clarify what those methodology effects were and whether we should expect anything similar in the second half of the year and in 2025? Thank you.

My answer to the first part of your question is clearly yes. So in the second part of your question, in terms of inorganic growth in our existing markets, I mean, Czech Republic is doing very well. We would also, of course, look at additional opportunities in Slovakia. We did already a lot in Hungary. In our countries we are quite happy how we are doing, so we would be absolutely willing to look at opportunities.

Yes, on your question on credit risk RWA. So in Q2, the increase was roughly $3 billion. I assume you referred to the first half with this five. On the methodological effects, we had... we had a PD model change for local corporates. So there are a couple of smaller methodological effects here. So PD model change for local corporates, some PD model change for banks, which resulted in a removal of an add-on, So it's a mix of various topics, nothing huge. And this also answers your question to the second half. In the second half, the expected increase in credit risk, RWA, will be mainly contributed to the expected loan growth. and no methodological changes. What we never can rule out, you know, some small, as I said, very small impacts, but nothing major expected.

Very clear. Thank you.

Thank you. And we'll now take our next question from Joanne Sikameg of RBI. Your line is open. Please go ahead.

Thank you very much. Good morning. I have just two questions. First one on Hungary. I think you booked 11 million regarding this higher windfall tax. And maybe can you share with you what's the outlook for the second half of the year and maybe for 2025 when it comes to these changes of the overall taxation regime in Hungary? And also we recently heard there is some speculation on revision of windfall tax in Czech Republic, whether maybe you can share your thoughts or insights on that. Thank you very much.

Yeah, thanks. First of all, on Hungary, yes, you're right. 11 is what I mentioned in the... in the presentation and then, as you perfectly well know, it's not so easy with all the moving parts on Hungarian taxation to really specify in detail what in what period will happen. But we have an effect out of the regular bank tax, then we have the windfall tax and then the FTT. which has been increased equally, so we are currently assuming that the impact on the full year 2024 will be somewhere in the area of 30, 35, which most of it is already booked. However, let's be clear, if everything is implemented as currently indicated by the government, the impact in the full year 2025 could be quite substantially higher in total. So we're talking about, sorry for giving you a relatively broad range, 60 to 90. That was what we have currently in our assumptions. But as you very well know, you have to go then really into the details of what can be passed on, what is pre-tax, what is after tax and so on. I think you know this Hungarian game as well as we do. The second thing is on Czech Republic. My understanding, and I'm following, of course, the market talk and the press releases and everything, my understanding is that the windfall tax, which was created back a couple of years ago in Czech Republic, will still be around for one more year and then expire. There were some media speculations about considerations of the government about a different kind of bank levy, To all my knowledge, nothing has been materializing so far concretely. As you can imagine, we are in close contact with our local management. So nothing concrete that we would expect to happen. Definitely nothing relevant for the year 2024. Obviously, we can't forecast political considerations for a longer future. Thank you. Super.

Thanks a lot. Thank you. That was our last question. I will now hand it back to Peter Boswick for closing remarks. Thank you.

Thank you all very much for your questions. On a personal note, thank you very much for the warm welcome. Very much looking forward to talk to you again with our results for the third quarter of 2024 on the 31st of October. Thank you so much.