Moneta Money Bk

Ladies and gentlemen, welcome to the conference call of Moneta Money Bank. At our customer's request, this conference will be recorded. As a reminder, all participants will be in the listen-only mode. After the presentation, there will be an opportunity to ask questions. If any participant has difficulties hearing the conference, please press star key followed by zero on your telephone for operator assistance. May I now hand you over to Thomas Bournie, CEO. Please go ahead.

Good morning, ladies and gentlemen. It's a pleasure to start today's quarterly presentation. We have the senior management team of Moneta, namely Karl Norman Focht, our chief risk officer, Jan Fricek, our chief financial officer, also Jan Novotny, the head of commercial banking in the bank, and Andrew Gerberer. for product and marketing. So, if you allow me, I will start on page four with the highlights. The first quarter of 2020, Moneta delivered net profit of 731 million crowns. Apart from that, we posted a very solid growth of the pre-impermanent profit at 31% on the basis of strong operating income growth in a flat cost space. We also generated lending growth of 13.1% year-on-year, and we will cover this later, what that growth originates from. On page five, five key developments, as already mentioned, operating income grew nearly 15% on the basis a fairly strong growth of net interest income and net fee commission income. Additional to that, we have successfully sold some sovereign bonds and generated 277 million crown gain on that. Our operating base remains flat. Apart from flatness when we go to branches, you will see that according to the plan we closed 16 units on the basis of strong development of our digital capabilities. On cost of risk we had posted fairly strong charge in the first quarter translating 273 basis points. The charge has inside 475 million related to COVID pandemic and Norman in the risk section will walk you through where that originates from. On liquidity, we enjoy very strong position, 44 billion of free liquidity. The LCR ratio stands at 155.6%, which is a significant improvement from year end. 2019. And on capital, we enjoyed a very solid position of 21%, mainly as a result of optimizing the capital base. We issued, as you know, Tier 2 bond in the amount of 2.6 billion in the beginning of this quarter in January. So we also had fairly good timing with distribution of that instrument. On page 6, the key financial metrics, we have posted strong growth on operating income as a combination of all components of operating income in lending and deposit-taking. You can see that the bank on year-to-year basis generated very strong liquidity. 28 billion of deposits and we had posted growth of 18 billion in excess of 18 billion of loans. On asset quality the NPR ratio has decreased to 1.9% so we have a very strong position in terms of both the relative absolute size of NPR portfolio And as you will see in Norman's part of the presentation, we also are increasing the coverage across all stages of our portfolio. On liquidity, very strong and solid position, which will further improve once we consolidate the Western Road acquisition in the second quarter of this year. And capital, I've mentioned. What is also important is that we have risk-rated assets of $128.6 billion on a year-to-year basis. This constitutes growth of 6.5% on end of year. I believe it's 2.3%. 2.4%. 2.4%. So, on page 7, just a couple of highlights on this. we've completed the acquisition on 1st of April so as an event subsequent we included here we paid cash 175 million euro the equity position of the companies we've acquired standard euro 207 million so the acquisition is equity accreted from the day one now we begin integration process of the company which constitutes of staff relocation. We actually relocated about 20% of the staff to our headquarters already. We will optimize the real estate and we hope to do it by third quarter of this year. Within next 12 months we would like to integrate IT and legally merged by the end of the year Western Road Mortgage Bank into Moneta. The Western Road Building Savings Bank will remain as a separate entity enjoying efficiencies of the Moneta's operating platform and we are working on that. This is a requirement, by the way, of the regulator that we maintain separate license for that overall as already stated previously we continue to expect integration cost in the amount of 400 million crowns split 150 million we will most likely post this year and 250 million will be posted in 2021 so the full scope and impact of Synergy is is estimated at 300 million crowns and it should come in fully in 2022 at the latest. On page 8, we show you the key metrics of the balance sheets that we've acquired. it's really 70 billion. What is notable here is that liquidity position of the bank overall will be strengthened by deposit base, the amount of 58 billion crowns, of which 31 billion are building savings which enjoy state support in form of subsidy of interest rates paid to the client. So this is an attractive product. On the lending side, we increase mortgage position by 39.6 billion crowns. So we will nearly double our market share. And there are about 18 billion crowns of other loans. Mainly, these are loans to retail, residential needs, reconstructions, etc. So this is a significant acquisition that will bring the balance sheet of Moneta to excess of 300 billion and the loan portfolio will be nearly 220 billion crowns. So it's fairly material event from the time of the IPO you actually more than double the bank. On page 9 we provide you with the financial performance in the first quarter. So Whiston Road delivered in the first quarter net profit of 118 million crowns which constitutes growth of about 36% on With respect to year-on-year basis, the overall operating income position was $376 million and cost base $226 million. Please note the regulatory charges, which are booked once per year in the first quarter, so the cost base is a little bit overstated. So all in all, both from a profitability point of view, and from balance sheet point of view the acquisition actually is fully in line with the expectations that we had during the diligence building our financial projections model and signing the SBA so this had been completed. Now let's go into the operating environment and banking markets dynamics on page 11. The COVID-related crisis has brought what we call internally a perfect storm. If we start in the upper left corner, you can see that the expectation as to GDP evolution has entirely changed. Here we use the Ministry of Finance forecast where the 2020 is expected to come in at negative 5.6% and recover in 2021 at a level of 3.1%. If we look at the ex-post key macro data, what is notable is the evolution of exchange rates. Crown considerably weakened from the quarter before to a level of 27.3 crowns per euro. So this is clearly a negative development. With respect to inflation, the inflation actually increased in the first quarter to 3.1%. Unemployment had been reported as stable. Nonetheless, signs of increasing unemployment across the board as the economic inactivity of last nine weeks had considerably impacted the Czech economy. Another key development exposed are interest rate swaps and interest rate environments altogether. If you look at the pricing of the swaps, this had declined by 100 basis points from a quarter before, reflecting the two consecutive cuts by Czech National Bank Reducing the two-week repo rate from 225 basis points to 100 basis points. So not only that we have the headwind of higher risk arising from the economic inactivity, but we also have headwind on the interest rate environment, and that also has projected itself into one-year government bond, which plummeted by 100 basis points. that about in the first quarter of this year. Now on page 12, let's cover a little bit the evolution of the banking market. First we start with the deposit market. The deposit market overall reached $4.7 billion. The market grew at 12%. Moneta performed at 18.2% growth rate. Then we split it into retail and commercial. You can see that in retail we have considerably outperformed the market. We posted a growth rate of 22.5 against market growth of 9.2. And we also have a fairly solid growth on commercial deposits at 10.5%. As you know, we don't enjoy business of large corporates, large depositors. So is based on the strength of our SME presence in the market. On page 13, we look at the evolution of the lending market, relevant lending market in Czech Republic. Moneta grew overall at 13% against the overall market growth of 6.8. Again, in the retail market, we have posted significantly stronger growth than the rest of the market. We had been growing at 19%, whereas the market was at 6.9 level. And on commercial, we are fairly in line with the market growth, posting 5.7% growth, again, 6.6% growth on a three-year basis. So we are continuing to perform in a rather strong Strong Banner. On page 16, key contractual pricing. I would like to caution these are not effective yields, but these are contractual prices. If I go clockwise on consumer lending, for all that matters, we continue to perform at 70 basis points premium against the market. You can see that the market declined in the Q1 to 8.1%, whereas Moneta generated contracts at the average rate of 8.8%. On the mortgage market, we are fully aligned with the market. In the first quarter, we were 10 basis points above, but this is the fastest growing lending category of the bank, so we are competing at the market level. The price has stabilized in the past two quarters and we expect some declines linked to both the two-week repo reduction and also to some other competitive dynamics. On the commercial deposit pricing, it continues to overperform the market. and on the retail deposit pricing you see that the overall cost of funds has gone down to 56 basis points from 63 the quarter before, so we have the first signs of the repricing that we promised in the previous quarter. Now, I would ask you to turn the page, team. And we covered The COVID-related situation in Czech Republic, and as part of this, we will provide you with some outlook on the bank's performance. Well, there are two key stakeholders, government and central banks. The government declared state of emergency on March 12th. We've been impacted, broadly speaking, by two measures. taken by the Czech government. First and foremost is the loan repayment moratorium or postponement of installments which is also including a ceiling on consumer unsecured pricing which exceeds 9% rate per annum. The ceiling, the interest rate ceiling is now constructed as a two-week repo rate plus 8% margin. So this will have some impact on repricing of some portion of our unsecured loans, namely at the level of Moneta and Moneta Auto subsidiary where we finance typically used automobiles at higher rates. The government also communicated a commitment of $100 billion of direct support and 900 billion in state guarantees provided to enterprises in order to obtain additional liquidity from the banks. We've also seen a fairly significant compensation subsidy to self-employed individuals in the Czech Republic for the months of March and April. This constitutes a potential pool of one million people that are self-employed in this country, and the government provided a postponement on payment of taxes. The central bank reduced rates two times to the level of 100 basis points. It also lowered capital requirement, namely the counter-cyclical buffer to 1% level. As you know, the counter-cyclical buffer was originally anticipated or mandated to increase 200 basis points by middle by July of this year so this is a good development however the regulator communicated a very strong message that there should be suspension of dividends from banks across the board and also the central bank had taken some measures to on the ability to deliver liquidity to the banking sector should it be needed. On page 17, we outlined measures that we have taken on multiple fronts during the COVID crisis. What is I think the most important is that we've managed very well to keep the bank operating throughout throughout this period we had more than 50% of our employees working from home 90% of our daily activities with respect to call centers were actually conducted on a flex on a home office basis so apart from that the other highlight is that we've been standing behind our customers we have worked several weekends in order to ensure access of our clients to COVID programs and we changed our policies. Apart from that, we've also built a very solid plan for additional liquidity to be garnered by the bank to support the lending activity and existing customers. I suppose most importantly, we have taken up review of our cost base and came up with 300 million cuts in the cost base. We also reduced the investment budget by 170 million in order to postpone or cancel some activities. And we have been forced to move the shareholder meeting due to the restrictions placed upon us by Czech authorities. On page 18, we had also suspended guidance. So we've built a couple of scenarios, economic scenarios going forward. If you look at the chart on the gray, you have the previous prognosis that we've used. with respect to GDP, unemployment, interest rates, and inflation rates. And then we built two scenarios, moderate. Moderate scenario is milder as it encompasses a very strong government support to the industry, and severe scenario projects a more steeper decline of the GDP in the unemployment and the period of recessionary environment is actually prolonged. These are sort of U-shaped scenarios that were built at the end of March on the basis of information that we had available at that time, which was, quite frankly, not very much. so this is the basis that we have used to actually construct on page 19 some guidance as to performance of the bank in 2020 on total operating income we expect a minimum level of 11.6 billion this could be higher this could reach perhaps 12 billion it depends very much on if and when the interest rates are cut down to zero. That's one contingency. The second contingency is actually take up of the moratorium, state-sponsored loan repayment moratorium because it includes impact on the effective interest rates in the unsecured portfolio, retail unsecured portfolio. And the third uncertainty with respect to the operating income is how much of the acquisition gain on this we will post in the second quarter of 2020 and we have taken a very conservative estimate into this number so it could be slightly higher on the cost base we are fairly confident we are confident that we can push the cost base down to a level of 5.4 billion as opposed to 5.9 that we've communicated, or 5.8 that we've communicated in the previous guidance. On the cost of risk, we foresee a range of 170 to 185 basis points where, broadly speaking, 40% of this is linked to change of the economic Economic Indicators and 60% is related to envisaged increase in defaults across the portfolio. Below, what we would like to emphasize is that this scenario sort of depends on strong government support that is $100 billion. of direct aid flowing into the economy and better parts of the $900 billion of state guarantees to be provided for SME lending. This also envisages a relatively mild unemployment of 4.1% and a relatively moderate GDP contraction. So we plan to We plan to provide more detailed guidance at the close of the second quarter when we will have a little bit more to go on that we had at this time and we will also have the ability and integration of Western Roads. into the overall guidance. So let me cover a third part of my presentation, which is strategic objectives and results. If you look at page 21, this remains pretty much the same. We are aiming across eight dimensions or seven commercial dimensions at a stellar performance. The only thing that we've altered is risk management where we would like to strengthen our ability for collection recovery restructuring and we are focusing very much on building capabilities deal with issues that will come with the worst economic performance or worsened economic performance in Czech Republic on page 22 we reiterate performance again the our target retail we are performing according to the target posting strong growth the same situation prevails on small business banking and in SME we believe that we are continuingly or continuously improving the contribution this business line generates for the bank Digital strategy is on track. We are seeing movement from the digitally initiated to branch finished to fully online digital sales. Andrew will cover it. On risk management, I have covered this. We have so far stable NPLs, and we have taken proactive, prudent view of the COVID situation. I think what today is a very respectable rate of 379 basis points. And on cost control, I believe that we continue to demonstrate commitment to manage costs. On page 23 the overall platform remains pretty much unchanged except that we have fulfilled our commitment on branch closure. Later on in the cost section you will see a two year evolution of the space, high street space that we utilized to run the model of Moneta and you see the level of efficiency On employment in the bank we have gone down by about 2% on year to year basis and you can see that we breached the 1 million client threshold as we had written off sold a lot of portfolios the customer base of the bank is moving in the right direction albeit we would like the movement to be faster and we have continuing strong utilization digital platform SmartBank that we have built and on page 24 you see movements of our customer base I think in the first quarter we were impacted we were impacted by the pandemic nonetheless we generated 19.2 of new customers. This is on top of the page. So the net amount is 92,000 customers after we take into account the churn of the customer base. You can see steady growth of 4.4% of the primary customers of the bank and as I said we are above 1 million of performing customers and This is quite important. With that, I will turn over to Andrew Gerber, who will take you through the digital distribution and services.

Thank you so much. So if you go to page 26, we provide a brief update on Refinanso, our fully digital mortgage platform, which we developed over the course of last year. We began to scale this business up in Q1 2020. during which we approved 626 applications and signed 161 contracts, which represents roughly 20% of the bank's total flow in mortgage refinancing. While the flow of new deals here has obviously declined dramatically since the onset of the pandemic, we will continue to invest in developing this platform as planned, as we still believe this will have an important role to play in the future of our mortgage business going forward, and perhaps even more so than would have been the case without the present crisis. Going on to page 27. We continue to see increasing adoption of the two main mobile banking platforms, Apple Pay and Google Pay, albeit at a slower rate than in the case over the last year. At the end of Q1, we had 135,000 cards active across both platforms, up 113% year-over-year, although you see the quarter-on-quarter growth has slowed as the penetration into the portfolio has increased. The same pattern is visible in the transaction volumes which are up 268.3% year-over-year. Going on to page 28, online originated lending declined year-on-year in both the retail and small business segments down 5.9% and 5.3% respectively, reflecting the broader slowdown in the unsecured lending during Q1. At the same time, the fully online component has continued to grow in both segments, up 35.1% year-over-year in retail and 48.2% year-over-year in small business. We've already maintained the available pre-approved limits for both our retail and small business clients during Q1. However, as the severity of the situation became apparent during April, we took measures to position ourselves more conservatively while still seeking to maintain the availability of credit to our existing clients. This will be visible in the second quarter where you will see some reduction in the number of limits as we avoid lending to the riskiest clients but mainly a reduction in the size of the individual limits offered to position ourselves a little bit more conservatively than we have been. On page 29, on the weekend of the 4th of April, we completed the migration of our card business from an internally managed platform hosted in Australia, which was the legacy of our previous owners, to a multi-client outsourced platform based in Frankfurt. This is a market-leading platform with 80 million accounts on file in the EMEA region for more than 30 large clients. This move will save us more than $50 million per year over the 10 year life of the agreement and also allow us to benefit from the extensive capabilities available off the shelf and therefore largely to avoid custom development. This was a very substantial exercise for us which has been in the planning since 2017 and when you consider that three weeks before the go live weekend we suddenly faced the prospect of having to re-plan everything for execution remotely. I think it's a remarkable achievement that it was delivered on time and without any major disruption to the ongoing operations of the bank. I won't dwell on the digital roadmap on page 30 except to say that we continue to increase our focus on deposit related initiatives to complement our excellent progress in credit distribution, and at the same time we're working rapidly to integrate Distinrot into the bank's propositions and services. And with that, I will hand over to Jan Prycek who will take you through the P&L development.

Thank you, Andrew. Good morning, ladies and gentlemen. Let me continue with the P&L section starting on page 32 with our profit and loss statement. In the first quarter of 2020, we have delivered consolidated net profit of 731 million which corresponds to 12.7% return on tangible equity, 3.5% down year-on-year. The overall result was negatively impacted by higher cost of risk affected by IFRS 9 adjustment of 475 million booked in Q1 amid coronavirus pandemic and worsened macroeconomic outlook. Norman will provide you with more detail about the impact later in the presentation. In the first quarter, the business reported excellent 31% growth of the profit before tax and impairment, which was delivered through operating income expansion by 14.7% and broadly flat cost base year-on-year. Nearly 15% increase of the operating income was sourced by more than 4% growth rate in both net interest income and net CM commission income category, what I will comment on the next pages. Total operating income line was also significantly supported by 277 million gain on bond sale reported within the income line of income for finance operations. On the next page, we provide you with the DuPont tree of the profit before tax over the last five quarters. As you can see on the left side, despite more than 30% growth rate of the pre-provision income, our overall result before tax declined here on year by 26%. The main reason, as I mentioned before, is the IFRS 9 profit-critical credit loss provisioning booked in the first quarter. On the right side, you can see that significantly higher cost of rates more than offset the operating income growth while operating expenses remain broadly stable year-on-year. Moving on to the further breakdown of the operating income in page 34. Net interest income reached ₹2.43 in the first quarter this year at 4.9% growth rate. This is a result of the double-digit loan portfolio growth. which more than offset the pressure on the MIM resulting from the increasing cost of funding in the first quarter of 2020. Net interest margin in the first quarter went down by 30 basis points to 3.6%. This was mainly a result of a strong growth of mortgage portfolio and lower albite stable yield on consumer loans. We will provide you with the explanation of the trend later in the balance sheet section. Net CN commission income increased by 4.3% year-on-year to 486 million, mainly supported by higher third-party commissions, and exceptional growth of the other operating income resulted from the bond sale gain of 277 million. On page 35, we continue with the decomposition of net interest income. The main driver was 8.2% growth of lending interest income amid our loan portfolio expansion, which you will see in more detail on the next page. The income growth was partially offset by higher funding costs we paid for the expanded customer deposit banks. However, in the first quarter, we observed a stabilization compared to the previous one. Other net interest income grew by 47%, primarily due to still favorable interest rate environment and higher excess liquidity in Q1 this year. On the next page, you can see the lending interest income growth broken down into drivers, where average lending portfolio expansion at 12.3% growth rate more than offset 20 basis points decline of loan portfolio yields year on year. Andrew Gerber and Jan Novotny will comment on the drivers in the balance sheet section later. Moving on to the last page of the NII breakdown. Interest expense from customer deposits increased by more than 160% which reflects our inevitable effort to strengthen our deposit base and liquidity position starting in the second half of 2019 and continuing in 2020. Here I'd like to focus your attention on the cost stabilization in the first quarter this year which resulted from our intentional repricing of 20 billion retail savings deposits down by 50 basis points effectively from the 1st January this year. Fortunately enough, we haven't seen so far any significant deficit-based erosion as the new rate was set on still very competitive level. On page 38, we continue with the evolution of Net CM Commission income reaching 486 million in the first quarter which is by 4.3% higher year-on-year. This solid growth was primarily driven by the income side going up by 6.5% which I will comment in more detail on the following page. Here, as you can see, we have decomposed the income side into the three components. Continuous expansion of the third party commission income scheme is essential part of our strategy out of the declining trend of the servicing and penalty fee income. In the first quarter, we reported excellent growth of the third party commission by almost 34%. This result was supported by newly established sales network focused exclusively on the distribution of investment funds and insurance. Transaction fees ended up by 3.3% below the last year, which is a combination of two negative effects. Firstly, new restrictions on cross-border payment fees, which came into the effect in December last year. And secondly, also lower transactional activity in March amid COVID-19 pandemic outbreak. Driver of the 6.9% decline of the servicing and penalty fee income was continuing erosion of the deposit servicing fees, while the other two subcategories remained low this table over the last five quarters. Now we move to the cost base development on page 40, where you can see that we kept our cost base broadly flat year-on-year at $1,332 million amid inflationary pressures and higher mandatory contributions to the regulatory funds. Our cost efficiency program is primarily focused on two areas. Firstly, this year we reduced the personal expenses by 1.8%, which is a function of declining number of average FTEs and also several other measures we put in place. And secondly, increasing productivity through the optimization of our physical footprint and expanding in the digital significantly contributed to 4.2% savings on administrative and other expenses year on year. Before I will provide you with more detail on the next page, let me briefly comment on evolution in other two categories. Higher regulatory charges is a pure function of our expanding funding base and depreciation and amortization line increased by 4.5% amid our investments in 2D IT infrastructure and digital. Nonetheless, we are starting to see gradual stabilization of this category. Now we can move on page 41. On the top of the page you can see development of number of branches showing that over the past 12 months we reduced the number by 31. out of which 18 were closed in the first quarter this year. What is even more important from the cost perspective is that since 2017, we reduced the leased space by nearly 30%. This was enabled by our successful expansion on the digital front as well as improving sales effectiveness per banker. On the bottom, you can see the evolution of our workforce. At the end of the first quarter 2020, we employed 2,908 FCEs which is by 158 less than a year before. And here I'd like to highlight strong track record of the management where since 2017 the bank consecutively reported quarterly reductions in number of FTEs in total by 11.7%. Obviously this trend will be interrupted for one quarter after the recent acquisition which incrementally brings almost 300 employees into Moneta. P&L section ends on page 42. with the decomposition of the depreciation and amortization charges together with evolution of the underlying fixed asset base. Reason for the overall 4.5% increase was mainly driven by higher amortization by 15.9% year-on-year. On property and equipment, we kept the balance below the last year as well as the depreciation charge and our capitalized lease commitment under IFRS 16 Decrown by 17.1% year-on-year, which is mainly driven by shorter residual lease terms of our branches and headquarter buildings. Now, ladies and gentlemen, I will hand over to Jan Novotny, who will continue with the balance sheet.

Thank you very much, Jan. So now, please let me, together with my colleague Andrew Gerber, walk you through the balance sheet section of today's presentation. And let me start on the page 44, where you can see our balance sheet position, and it's right down to the main component at the end of Q1. We have reached almost 250 billion cheque rounds balance sheet with a very strong and balanced structure. We have also achieved a very good growth in the key category, net customer loans of almost 13% year-on-year. But as you can also see, we have, and this is even more important in the current COVID and post-COVID environment, grew up our core customer deposits category even faster than the loans, and we have achieved an excellent growth rate of 18% year-on-year. This achievement helped us to strengthen our balance sheet. You can also notice the increase on both repo and reverse repo operations, as the market is still offering unfavorable conditions for such transactions. Now let me spend a bit more time on the investment securities category and walk you through some additional information on the page 45. First of all, let me mention one important event in Q1, as we have completed very successful sale of bonds in nominal value of 3.8 billion SZK, and we have realized a gain of almost 300 million SZK. You can also see the development of the share of our bond portfolio being hedged by the interest that we have started to do in Q2 last year. And we have now oscillating around 50% of the portfolio being hedged for the last three quarters. You can also see the evolution of the balance of the securities and most importantly, on the bottom of the page, the evolution of its yield which stood at 1.8% at the end of Q1. On the next page, page 46, you can see more detailed splits of the key category, our growth-performing own portfolio, by customer segments, and again, we have achieved superior growth in all strategic areas, being it retail portfolio, small business portfolio, or even further growth in profitable portfolio in SME segments. We are able to maintain the fast growth of previous years, and the overall balance has grown up by more than 13%. Overall share of customer segments developed in line with our strategy to gradually increase the share of the retail and small business segments in line with our strategy. As you can see on the bottom of the page, we have reached 58% of the retail share from the overall monetized group exposure. Also, given the completed acquisition of this scenario, you can expect the share to grow significantly for Q2 2020. Now moving to page 47, here you can see the evolution of both loan portfolio yields and new production yields split by volumes. You can see that the intense competition, declining market rate and especially higher share of mortgages drives the shape of the curve, but I would suggest to go directly to the detailed product overview on next few pages, so let me hand over to Andrew to walk you through the key successes in retail segment. Thank you Jan.

On page 48, we've added some detail on new production volumes in our retail lending category. Overall, new production was up 1.7% year-over-year. However, this was driven by strong growth in mortgages, up 35.8% year-over-year as the result largely of a strong pipeline of deals coming into the new year. In consumer lending, on the other hand, we immediately felt the impact of the pandemic with production falling 19.2% year-over-year. Alco benefited from a stronger start to the year but also suffered a dramatic slowdown in production during March when the dealers on which we relied for distribution were essentially forced to close resulting in volumes down for the first quarter overall 2% year over year. Going to page 49, we look at the retail portfolio overall, which grew 19.2% driven by the mortgage portfolio, which was up 38.3% as a result of the strong acquisition, which you saw on the previous page. The consumer loan portfolio grew 6.6% year over year, which is slowing from 9.2% for the full year 2019. In auto and leasing, balances decreased 10.1%, driven primarily by the decline in leasing, and the revolving product declined 7.2%, continuing the long-running trend, which appears to have been somewhat exacerbated by the crisis, which has removed many of the normal opportunities to spend and also encouraged clients to think about conserving liquidity. Going on to page 53. We show the portfolio yield along with the model's new production yield, which is slightly different to the new volume rate, which we showed on page 14, but are used here to be consistent with and comparable to the portfolio yield, which we show on this page. The yield on the mortgage portfolio has stabilized at 2.1%, supported by new business yield, which appears to have bottomed out at around 2.2%. but it now remains to be seen how low interbank rates will go and how mortgage lenders will respond to this. We already see some signs of renewed price pressure in the mortgage market with some lenders beginning to reverse recent rate increases. In consumer lending, the decline in portfolio yield continues to slow, supported by stabilization in rates on new production, although again in Q1, We saw lower new volume yields as a result of increased competition for volume as the market slowed. In ALCO and Leasing, you can see the improving trend with portfolio yield increasing 140 bits year-over-year as we improved the pricing for new production. And finally, in the Cards portfolio, yields have remained broadly stable. and with that I'll hand back to Jan who will take you through the commercial section.

Thank you very much Andrew. Now let me walk you through the page 61 and summarize the key growth rates of the new production in the commercial segment. We have achieved a very good overall growth of 10.4% year-on-year and as you can see more detailed growth rates were separate through the categories on the right side of the page. We had a good growth in investment loan category where the growth rate was partially driven by additional new volumes booked thanks to several profitable medium-sized transactions. but the growth rate was also partially driven by lower production in Q1 2019 comparatively. Interestingly, the new production in SME was not much affected yet by the COVID crisis in Q1, as most of the transactions had the processing time rather in weeks than in days due to collateral appraisals, cadastral registration, etc. In contrary, small businesses already saw some drop in the new production in Q1, as here the production and the customer investment plan horizon is much shorter compared to SMEs. Last category I would like to comment is auto loans and leasing production where the business was very much influenced by the state decision to close all the cars, dealers and smarts and therefore for example for autos the new production at the end of Q1 dropped below 30% of the normal production. Now let me move to the next page and on the page 52 you can see the evolution of the commercial gross performing portfolio and again you can see a good overall growth of 5.8%. This good result was driven largely by the small business segment, where we have achieved the growth rate above 40% year-on-year. But from a portfolio perspective, it is also important to mention the growth in dispersed working capital. This is the chart in the middle bottom of the page, where the increased utilization is not driven by the increased demand for the working capital due to COVID crisis, but is driven by the growing of some well-priced larger facilities already during February, and we expect those lines to be drawn till the end of the year. Now on the page 53, specifically retail, you can see the yield evolution on both new volumes and portfolio levels. I would probably comment mainly the small business yields that have dropped to 6.7% due to a very successful TD campaign in spring. However, the campaign was stopped due to COVID situation in mid-March and the current yields in Q2 are significantly above the portfolio levels. However, with a significantly smaller new production and given the market condition, we expect to keep the status quo at least for some time. In investment loss and auto, we maintain increased pricing on the new production and working capital. The fluctuation of new volume yields is caused by limited new origination, the Euro-Citas cave-in, and on the portfolio level by already mentioned dispersed high-priced facilities. So that was the story for the lending part of the balance sheet. Now let me please hand over to Jan Fliczek to work you through our results on the liability side.

Thank you, Jan. I'm now on page 54. In the first quarter of 2020, our funding base continues to grow in overall by 24.4% year-on-year. In retail, we achieved 22.5% growth rate, which was primarily delivered through attractive savings propositions offered during the summer of 2019. In commercial, we can see a growth of 10.5%, which was mainly caused by term deposits further improving our liquidity. And finally, more than 50% growth in the wholesale, reflected by almost 10 billion higher volume of opportunistic repo operations, we reported at the end of the first quarter this year in comparison with the last year. Plus, in September and January, we issued tier 2 bonds in total amount of 4.6 billion also reported within the wholesale line. On page 55, as you can see, we entered the COVID-19 pandemic with the health sale and strong liquidity position reporting LCR nearly 56% above the regulatory requirement. Please note that this number was already adjusted for the anticipated settlement of the purchase price for the external. On the right side, you can see that the highly liquid assets increased by 17.7% year-on-year, mainly caused by the deposit base expansion, while the net outflows increased by only 4% in the same time. On the next page, there is the first decomposition of their cost of funds. Even though overall cost of funds increased by 32 basis points year-on-year, we can see a stabilization in the first quarter of 2016. Lower cost of customer deposits was mainly driven by successful repricing of savings deposits in retail, while commercial segments remained stable over the last three quarters. And wholesale funding costs increased by 80 basis points year-on-year, which is driven by higher cost of opportunistic repo operations as well as newly issued tier 2 bonds. Page 57 summarizes development of the retail deposit base. Drivers of the year-on-year growth I have already explained. On this page, I'd like to highlight gradually changing composition towards more costly savings accounts where we achieve more than 46% increase of the balance while the current account remains stable. Our limited ability to expand current account's balance was mainly caused by more attractive savings account propositions, whether offered by us or other market competitors. However, recent cuts of the two-week repo rate might reverse the trend going forward in favor of more beneficial current accounts. Cost differential between these two products is provided on the following page. While the cost of current accounts remains stable at two basis points, Cost of the savings and term deposits jumped up by 48 basis points year-on-year. Visible decline in the first quarter this year is a positive effect of the repricing of savings accounts, which I have mentioned before. I'm now on page 59, showing commercial deposit base expansion by 10.5% year-on-year. which was primarily driven by increasing balance of term deposits from financial institutions, namely insurance companies or pension funds accompanied by growth in both current as well as saving account propositions. Breakdown of the cost of commercial deposit be present in the following page. Here you can see that commercial cost of funds remained stable compared to the previous quarter, however, was up by 21 basis points year-on-year. Cost of current accounts oscillates between 6 and 7 basis points, while the cost of savings and temp deposits increased by 54 basis points due to gradual stabilization over the last three quarters. We continue on page 61 with the wholesale funding overview. The significant volatility of balances quarter to quarter can be explained by the opportunistic repo operations, and apart from the repo operations, The wholesale funding expansion is also driven by issuance of the sub-debt together with the external financing engaged for Moneta Auto in total amount of 2 billion CZK. And we complete this section on page 62 with the wholesale cost of funding overview. The cost of Ripple operations has dropped in the first quarter this year. The cost of other funds increased in the same time by another 68 basis points mainly due to additional issuance of the Tier 2 bonds. So, this concludes the balance sheet section and now I will hand over to Norman who will take you through the risk metrics and asset quality.

Thank you Jan. Good morning. We announced page 64, the overview of cost of risk in the first quarter 2020. Now, due to COVID-19 and the expected adverse impact on the practical economic development, adjustments of the key macro variables, in particular unemployment rate and GDP of our ISF-9 provisioning models were made, which led to a significant increase of cost of risk compared to the first quarter last year, but we also still benefited from significant gains from NPL sales. As a result of that Q1 2020 cost of risk amounted to 684 million or 1.73% compared to the net release of 14 million or 4 basis points back in Q1 2019. If you look at our key customer segments, retail software risk amounted to 1.66% and commercial 1.81, or in absolute numbers, 379 million sheikh rounds for retail and 305 million for the commercial segment. The impact of COVID-19 related measures like the payment holiday as well as the adjustment to the macro variables amounted to 120 basis points or 475 million sheikh rounds. The cost of risk adjusted for that, in fact, would have been 53 basis points, which is comparable to the Q4 2019 number, which was 56 basis points, which actually at that time was worse than in the first quarter of this year. As a result of the significant hookup of provisions, also our total MPL coverage increased by more than 10 percentage points from 108% to close to 119% at the end of Q1. Moving to page 65, I would like to provide you with a more granular overview of what was within the 475 million hookups due to COVID and the macroeconomic changes which we have made. There are three key components. The first one is the core model drilling impact which amounts to 350 million check rounds. This is driven by the increased PDs which in turn moves migrations between stage 1 and stage 2. and also an increase of underlying coverage in those two stages. The second impact is related to the reclassification of some of our larger commercial customers, where we see an adverse impact resulting from the economic downturn. So here we move them from stage one to stage two, a total provisioning impact of 80.1 million. And last but not least, the third impact, this is related to the loan moratorium which was granted in the course of March and April. Here, we saw a hookup of 44 million. Now, also the bulk of these exposures decided to remain in stage one. also in line with the recommendations of EVA and regulated, but we have embedded a model of increased risk within the saving algorithm and around 15% of those who were granted payment moratoriums moved and were reclassified to Phase 2, which in turn led to defaulted full-time hookups. Moving to Phase 66. Here we have an overview of gross loan portfolio balances and the MTL balances. While the gross loan balances increased by 13% year-over-year, most importantly within the retail segment, the MTL ratio increased only by 6.5%. If you look at the overall MTL ratio, this drops from 2% to 1.9% at the end of Q1. and if you look at lockdown sheet MJLs here we saw even a more pronounced drop of more than 85% and we ended up with a balance of around 149 at the end of Q1. Moving to page 67 here you see an evolution of the inflows and outflows of MJLs over the last four quarters. I think it's the same positive picture. and it shows that the percentage of the NPL formation expressed as an average of performing retrieval remains very stable on the level of 0.5% over the last two quarters. Moving to page 68 and also the subsequent pages, here we would like to give you a bit more granular overview of what happened actually within the three stages and the migrations underneath. So on day 68, as you can see here, the balances and coverages in stage 1 and 2 are largely driven by COVID-19 and anticipated worsening of the macro, which led to higher CDs for the DRS-9 model. The biggest changes can be noticed in stage 2. where we saw a significant inflow from stage 1 to stage 2. The increase was more than 120% year-over-year and balances more than doubled quarter-over-quarter and now stands at more than 8.9 billion cheque crowns. The underlying provisioning balances increased by more than 93% to 681 million. Stage 3 balances increased by 6.5% year-over-year, where the balances dropped from 67% to close to 66%, which reflects the fairly young ageing structure of the MGLs and also partially a higher share of secured receivables requiring lower provisioning coverages.

On page 69 here, portfolio balances are shown separately for retail and commercial.

Year-over-year, Stage 1 retail receivables increased by more than 17%, and the biggest driver is mortgages, and we will see this on the next page, where its commercial grew by 1.2% year-over-year. As for stage 2, again due to Covid the macro adjustments we saw an increase north of 100%. In retail it increased from close to 1.7 billion at the end of last year to 3.4 billion and in commercial from 2.6 billion to 5.5 billion at the end of Q1. And by the stage 3 concerns here, we saw an increase in retail by 9.5% and in commercial an increase by 1.4%. Moving to page 17, here we have a breakdown. Within retail, on the left-hand side, we have the secured products, which is the residential mortgages portfolio, and on the right-hand side, the secured cross-loan portfolio balances. Residential Mortgages grew in stage 1 by almost 36% where stage 2 increased by more than 140% since the mortgage shows a higher sensitivity on taking changes. Stage 3 receivables dropped by 60%. and coverages overall across all three stages remain fairly stable and on a fairly low level due to low LGDs which is also reflected in the observed very low through the cycle cost of risk which we have seen for mortgages in the last 12 years. Retail unsecured sales through balances increased by 10% and by 12.8% in stage three respectively and stage three coverages have been stable over the last three quarters. Moving to page 71, that's the last page on the staging overview. Here we show an overview of the commercial book. On the left-hand side, you have the so-called individually managed cross-loan portfolio balances. On the left-hand side, the so-called full managed, which includes the small business, most of Moneta Leasing and Moneta Auto. Again, you can see the Stage 1 balances increased by 1.2% in both sub-segments. Again, Stage 2 driven to COVID by more than 110 with respect to the 120%. and in the Phase 3, in the individually managed we saw even a drop of the balances by 12.5% and in the pool managed we saw an increase by more than 13% year-over-year. Coverage underneath remains fairly stable over the last couple of quarters. And last but not least, this is very important also to give you an overview of what happened on the payment moratorium for the last two months. What you can see here on page 72 is an overview of the penetration levels on the left-hand side for the retail portfolio, on the right-hand side for the commercial portfolio. We have broken it down to what has happened until the end of March and also the most recent data, which is the 27th of April. So all aims 16% of our retail customers asked for the payment moratorium and the commercial segment is altogether 12%. If you take this together, combined, the balances underneath are 22.5 billion cheque rounds, which were subject to the payment moratorium until the 27th of April. And with that, I will hand over to Thomas.

just briefly on capital structure if you turn to page 74 we did detect the requirement regulatory requirement and the structure and where our overall target stands so we have decreased the capital target of the bank to from 15.9 to 14.9 percent and this is driven as I mentioned already by the counter cyclical buffer decrease as communicated by Czech National Bank. On page 75 you have an overview of our accounting and regulatory equity positions. On accounting we have 25.5 billion so you can see that year on year the decrease is about 1.2% and from regulatory equity perspective you can see how we have optimized the position through issuance of the tier 2 bonds initially 2 billion now in total 4.6 billion so the regulatory equity is 27 billion enabling us the very comfortable total Capital Adequacy Ratio of 21%. In the second quarter, we expect to be in the range of 17.5 to 18%, including consolidation of this window. And then on the right hand, on the bottom right hand, we show you the RWA density evolution on year-to-year basis. This actually declined quite considerably. by 9.4% and we stand at 63% on the loan portfolio and the regulatory number is just below that. On page 76 we show you evolution of free capital and excess capital and and evolution of the RWA since the beginning of the year. So starting with RWA we have growth of 2.4% which is quite good taking into account how the bank grows overall. On the walk you can see that you can see the increases coming from credit risk categories and the overall development. On excess capital, we currently, prior to the acquisition of Western Rock, we had almost 8.2 billion of excess over the legal requirement. So again, we have plenty of capital to absorb Western Rock and to continue to continue in expanding the bank's activity. I think at the closure of the presentation, what is important is that we try to provide you a view on how the total operating income will evolve at 11.6 billion crowns or likely higher. The 11.6 is the absolute minimum. On the cost base of the bank, we have fairly aspirational goal to take the cost base to $5.4 billion, which is significantly below the now canceled guidance published on February 26th. On the cost of risk, we would like to stay in the range of $170 billion. 170 basis points and slightly higher as communicated in the COVID pandemic section. Overall, I am extremely thankful to my colleagues and to the staff of the bank because we've operated continuously under very difficult circumstances during the first quarter and I would like to reiterates that apart from keeping the bank operating well, we've accomplished two strategic goals, which is acquisition of Eastern Road. We have bought it at a lower price and we've completed a high value added project on migration of the card ecosystem onto a new provider. which will provide estimated cost benefit of 50 million crowns per year. So now everything depends on how the Czech government will support the Czech economy and mitigate the impact on Kresa. Thank you very much and we are open to your questions.

So we will now begin our question and answer session. If you have a question for our speakers, please dial 0 and 1 on your telephone keypad now to enter the queue. Once your name has been announced, you can ask the question. If you find your question is answered before the situation speaks, you can dial 0 and 2 to cancel your question. If you are using speaker equipment today, please lift the handset before making your selection. One moment please for the first question. The first question is from Emma Marshall of Goldman Sachs. Your line is now open.

Good morning. Thank you for the presentation. Two questions, please. Firstly, on cost of risk, could you please indicate what the cost of risk guidance would have been if you were to assume the adverse scenario that you showed in the presentation? and also in case they were no support measures from the point of view of customers like repayment and moratorium and so on also in case you already have some sort of indications in terms of cost of risk for 2021 at least directionally more specific so that is my first group of questions and the second one is on dividend policy How do you foresee the resumption of dividend costs in terms of interim dividends, special dividends, dividend from 2020? Thank you.

Anna, let me try to do it in reverse order. On dividend policy, we are committed to pay dividends. We hope, trust, that come third quarter we will be able to reassess the situation and return back to normal. So the working hypothesis is that we would first settle the balance of the 2019 dividend and we would consider adding to it an interim dividend for first half of 2020. This depends on the bank remaining profitable. This depends on the bank remaining liquid and this depends on the bank remaining above the capital adequacy target that we have communicated today, which is 14.9. So I would say that the probabilities that we will satisfy these components of consideration are very high. And lastly, it depends on our ability to manage the discussion with the Czech regulator, the Czech National Bank, not to prevent us from doing so. So we are committed to this, and we will do anything and everything possible to reverse the situation, provided that these conditions are satisfied. On the moratorium overall, We are currently at the level of 32.5 billion. This is the number as of yesterday. We expect that the number could go up to anywhere between 35 to 40. Whereas we used to see 2,000 applications flowing into the bank on a daily basis, now we are reaching a level of 500 and the inflow is considerably decreasing, so we think that we are actually seeing an end of the moratorium. And I would like to stress one thing which doesn't come out of the numbers. The fact that we've provided the voluntary moratorium which is structured for three months, we have actually mitigated the situation quite considerably. Because if you look at the penetration, there are two moratoriums. One is the voluntary that we initiated on March 19th. And then there is the state-legislated, which was initiated on April 12th. So far, the state is less than 10% or thereabouts in terms of impacted portfolios. So the voluntary is shorter. It's for three months. and the voluntary doesn't include the interest rate ceiling of 9%. So, as long as the clients do not ask again, we will not have to change the price in both the term and the interest rate matters quite considerably. On cost of risk, absolutely no view to communicate today on 2021 and we don't want to speculate on the severe I'll on the video scenario I'll because at the moment any shade of the scenario that we will create the is really highly subjective no one I'll no one knows what the what though would go come we have tried to communicate what is our intent on the cost of risk in order to maintain a prudent position in terms of charges that we take, in terms of coverages that we maintain. And maybe Norman wants to add a couple of words, but I don't want to speculate on, you know, a U-shaped, long, prolonged scenario because we are not at that moment as of today. Okay.

Just a few additional points to give some more flavor to the uncertainties which we are facing apart from the overall microeconomy outlook. If you take the payment moratorium as such, what does it do essentially? It is greasing the portfolio and also prevents banks from getting valuable portfolio data, who is becoming delinquent and who not, because all the customers will stay current as long as they use the payment moratorium. and it goes until the end of October the 8th. So this is number one. So what we have to find out is how we can protect customers without knowing whether they become delinquent or not but using other tools to see who is most likely to stay current in which customers are going to default. This is the challenge number one. Challenge number two, unemployment rate which is extremely critical also within our IFRS 9 model. If you look at the data for Q1, we still haven't seen any kick-up of unimportant rates so far, but obviously it will increase, but the question is when it is going to increase and to which magnitude. So far, customers have benefited now from the moratorium on the one hand side, but also from the government-sponsored programs like Club Abikelt, support for entrepreneurs, but also companies, which will probably delaying potential layoffs of the workforce in businesses. So as long as this lasts, the less likely it is that you will see major layoffs, but if the government sponsored programs will not work overseas at one stage, because they cannot be continued and carried on ad infinitum, then probably you will see major layoffs, and this will obviously translate into higher forward-looking cities due to the ISF-9 model. So I think these are the two current key challenges which I see in particular for the retail unsecured portfolio, because it's very much depending on the actual anticipated future and point rate.

I would also add one very important thing. The moratorium on retail expires at the end of October. Then, if you look at the odds of default in our unsecured portfolio, we actually have uh... around fifty percent penetration through payment protection insurance so if people then lose their jobs and are unable to pay us the odds are sixty percent of them can claim the benefit of the insurance and the insurance will cover six payments so we are anticipating in whatever thinking that we have today that the peak of default we will actually see towards mid of next year and beyond. So until then, under whatever scenario, we are actually well protected. But philosophically, the management has the position that as we have a very strong provisioning capacity as we generate a very good pre-impermanent income, we will take more or less conservative position on provisioning given the magnitude of uncertainty and difficulties with models that were not built for this situation. So from conservativeness point of view, if there were a scale 0 to 10, we are six and a half to seven on that scale.

Maybe one more point on the new IFRS 9 world with the forward-looking expected losses. This is the first time that it's going to be tested. And those who invented that, I'm not quite sure whether they all had in mind the crisis of that magnitude and of that nature, which is a global crisis. And so I think what will also be necessary to review IFRS 9 models and then apply differently across markets and countries. So I think a review of IFRS 9 models also will be very important to understand what's the crisis of that magnitude and potentially also lasting for a long period of time. is going to do with the model. So I think it goes hand in hand. Model understanding, model review together with the macro which we're going to observe and put the adjustments into the model as we move forward.

That's very helpful. Thank you. The next question is from Simon Ellis of CBank. Your line is now open.

Oh, hi. Thanks very much for the call. Your presentation is very comprehensive. Anna Marshall always asks questions first. It's hard to come up with new questions. My question would actually be more technical on the capital. I think you mentioned that you have part of last year's profit included in the first quarter CT1 and some of the first quarter profit. Can you just clarify what actually you've included there? And what is the, if any, dividend deductions that you'll be making on a quarterly basis if you do intend to reinstate the dividend later this year? Or are you, for the time being, just accruing all of the quarterly profits into this E2-1? That would be my first question, and then I have one other.

Okay. Hello, Niles. This is Yannick speaking. So, are you guiding? Sorry.

Either one's fine.

I apologize. For you, Nelly. Yeah, Nelly. Do your question. The retained net profit of the previous year is automatically included in the regulatory capital in the first quarter next year. So 1.7 billion of suspended dividend was automatically included in the regulatory capital in Q1 2019, which pretty much... constitutes the growth. However, of the Q1 profit this year, out of that 730 million, we have asked Czech National Bank to include 20% of that into the capital, expecting that the 80% of the net profit will be available for future or for distribution as a dividend in the future.

And I would add, Simon, One more thing. When we paid the interim dividend in 2019, we paid it in December. Technically, that was paid out of retained earnings of 2018, which were included in the capital because of a quirk in Czech legislation. It has to have full... financials audited in order to pay the dividend so this should not be the fact that we automatically include the retained profit of 2019 should not be taken as any signal of significance because the interim dividend in mid-year always comes from the previous year's retained earnings so it means absolutely nothing what means a lot is that the first quarter profit, the second quarter profit, the third quarter profit, if there are any, will always be included at a low rate in order to have a position for, let's say, constructive debate with regulators so that we are consistent in this approach and we have not changed that approach. That is the significant signal.

Okay, so going forward, it sounds like you'll ask for roughly 20%. of quarterly earnings to be included. That's clear. Thanks. And then my other question would just be back on the moratorium. You're not capitalizing interest, right? So do you expect an MPB fifth? Would that go through, I guess, NII, net interest income? And what magnitude?

If you look at the guidance, the 900 million decrease from the previously guided 12.5 billion of operating income. We have 12.6 and the interest which is incurred on the voluntary moratorium is repaid through additional additional installment. So effectively the three month delay on the voluntary results in because there are sort of two installments attached at the end of the loan.

In practice, the way it works is that the interest is collected at the end of the three-month repayment holiday. So in effect, it's very similar to capitalizing it after the end of the three-month repayment holiday on the voluntary scheme.

On the state it works differently.

On the state scheme we are obliged to hold the unpaid interest in a separate pocket until the very end of the loan, until the final repayment or until early prepayment and effectively have this as a separate outstanding which is not interest bearing for the remaining period. So it's the last thing to be repaid.

And hence the philosophy and hence my statement that we actually save the bank a lot of money. Because on the state scheme you are not allowed to charge interest on the deferred interest which is held until the end of the loan. So the fact that we have penetration of about 10% of the total deferred by the state is very cost-saving. because the politicians as they always do created a scheme which pushes part of the losses onto us so by providing the voluntary scheme we actually minimize the decrease of net present value hence we also minimize the potential write-off of the variable distribution costs which are capitalized on our balance sheets and amortized through the effective interest rate so when at the height of the crisis we actually conceived the plan how to provide an alternative to our clients which is more symmetrical from interest points of view and now we face also the uncertainty and this is linked to the guidance of how many people will opt later on for the additional three months that the states Loan Repayment Moratorium offers them, i.e., the length, the difference between six and three months, six states versus three months voluntary. This gets a little bit technical, but the economic impact, given the anticipated volume of $35 to $40 billion under the moratorium, is actually quite considerable.

And how much roughly would that be if, I don't know, all the customers came back and asked for another three-month extension under the state program?

I'm afraid we don't have the number at the ready now, but it's in hundreds of millions. Okay. And we can give you an indication. We never cared to actually calculate this, but back of the envelope calculations is The interest that you charge increases and the fact that you have to backload it into the loan and you can't charge any interest on it actually amount to providing free loan interest interest free loan at a loss to each customer and the calculation is actually quite difficult because you need to understand not only the penetration of the moratorium but the average duration of that portfolio and the other impact that it has is that it significantly reduces the MPV of the loan so whatever you carry on your balance sheet in terms of capitalized commissions that you've previously paid to distribution agents, you have to write off actually. So there is a double whammy of a negative impact.

Maybe just to complement and even a little bit more complicated, this applies to retail and small business. Regarding the legal entities, we can postpone only the repayment of a loan, but the customer still has to charge and pay in the interest. So it is a bit complicated.

So they've created a fairly big complexity, not only intellectual complexity, but also there is implementation cost to all of this because you have to augment the operating platforms based on product line. And then you also have to slice it by customer segment or legal definition of your customer. So It was not a small task in here. I'm really grateful to my colleagues, both management and staff of the bank, because if you look at us, we are able to effectively turn each request into loan deferral within 24 hours today. So we've automated 85% of the workload behind it, and we have many permutations on the same team. because of how the legislation has been written on the government on the government loan repayment moratorium so this was a huge pressure on the bank operationally thank you very much the last question is from Anton Novacek of HSC your line is now open

Thank you for the call. I have two simple questions, one on revenues and one on cost. Can you please confirm that your operating income guidance includes 100 bids more of policy rate cuts and also does it include further gains on the bond portfolio?

Of course it does.

Okay, and what is the Wustenglot acquisition gain assumed to be? If I remember well, it was around 500 million?

Well, it's anywhere between 500 and 825 million crowns depending upon the fair market value calculation and the 825 is simply taken as a difference between the consideration paid and the book value available at the moment of acquisition. It's highly unlikely that we would go, we would agree to fair market value calculation which is above the book price, the net book value. So 825 is the delta between the cash paid and the net book value. The 500 is a considerable, let's say, estimate, conservative estimate that the share market value is lower than the book value of the entity. And we simply don't know the answer to what it is because we are currently working with to establish the calculation. we will have to discuss the calculation with our auditor D. Lloyd to agree to it. So it could be anywhere there. That's why I said that the operating income guidance is 7.6 and that has built an assumption of 500 million gain on the acquisition. If the gain were to be 8.25 than the guidance would obviously be $325 million higher than that but we don't want to commit to that because we simply don't know the answer.

Okay, thank you. And on costs, how do you think about the $300 million savings? Does it mean some of these costs will show up next year or is it a permanent, so to speak, reduction?

The cost is %uh the 300 million the in the whole day the temporary reduction because it constituted the very significant the very significant reduction of discretionary spending I'll for instance the it got our marketing budget by a close to 40 percent all for on the on the three-quarter uncommitted basis so whatever haven't spent in the first quarter we cut quite significantly so and many of the other cuts are considered by the management as temporary because we simply respond to a situation where some of the projects that we have to do are being postponed into 2021 as we want to conserve the free impairment profit capacity of the bank to finance whatever risk charges it has to make to maintain conservative position and still remain profitable and still maintain ability to pay dividends. So it is at the moment, at the moment it is temporary. In the medium term, I think if you take the guidance published on February 6th, this remains our target medium term. As medium term, we would like to make 5 billion crowns in net profit.

Okay, thank you very much.

Okay, so I hand back to the speakers for the conclusion.

Okay, do we have any more questions from the audience, please?

There's one question from Miro Gebshosa of CTO Security. Your line is now open.

Hello, everyone. Can you hear me? Yes. Hello? Hello? Okay, I'm sorry. Yes, I'm calling from my mobile and I have really some troubles following the call. I have some of the questions, but really quickly. What is the source of the difference between the original guidance on the operating revenue and the current guidance? Is it coming from the downward adjustment in the NPV of the moratorium Included Loans, that's question number one. Question number two, can you repeat what's the total badwill following the 15 Roth acquisition? And question number three, did you incorporate any further rate cuts in your operating income guidance for this year? Thank you.

I'm sorry I told these coverages, but here that got on the operating income is coming mainly the of the interest rate this is the main for and there are yet the operating income guidance a you additional got down to 0 and if you look at the moderate there scenario you actually have the timing the cup in the third quarter 2020 down to 0. So we anticipate 0 interest rate with this guidance. On the bad will, as you call it, the range is 500 to 825. 825 million constitutes the difference between price paid and the net book value of this general at the time of acquisition. And as I said, we are working with an auditor an advisor to establish the Fed market value. So it could be anywhere between 500 and 825 million as we've communicated.

And our aim is to book the gain in the second quarter and we congratulate Vytautas for the first time.

And the rate cut outlook?

The rate cut outlook is published on the page 18. In the presentation you can see the timing of the cut. The draft of the moderate scenario and the severe scenario both are clearly disclosed in the presentation.

On page 18 on the right side button chart shows that to be separate should go down to to zero in the third quarter in the series scenario and in the fourth quarter in the moderate scenario.

Thank you very much.

Daniel for the question So we would like to thank you all to participate on the telephone our objective is to provide a wider presentation so we apologize that it took a bit longer but we wanted to provide you with additional detail on production of loans and deposits in the bank and also the COVID related outlook and in the risk section we expanded the breakdown of the staging and in the appendices of the presentation we also have migration figures how does migration look between different stages we are grateful for your participation and we are looking forward to the next quarter's call and we'll provide you with additional detail and we will publish Relatively soon our next anticipated date for the regular shareholder meeting. We haven't said it, but we hope to hold it in the month of June 2020 as we were forced to cancel the April shareholder meeting. Thank you very much. Have a good day. And we are looking forward to the next conference that we have. Thanks.

Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect now.