Moneta Money Bk

Dear 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 a listen-only mode. After the presentation, there will be an opportunity to ask questions. If any participant has difficulty hearing the conference, please press star keys followed by zero on your telephone for operator assistance. We are now going to over to Dimash Boney, Chief Executive Officer and Chairman of the Board of Directors. Sir, please go ahead.

Good afternoon and good morning to the US-based shareholders, ladies and gentlemen. I have the pleasure to open today's conference call on our results of third quarter 2020. I would ask you to turn to page number four, where we comment highlights of our financial performance. generated operating income of 9.4 billion as of end of third quarter. This obviously includes the one-off gain that we have from the acquisition that we closed in the second quarter. The one-off gain is 1.1 billion. During the same period, we had accrued operating expenditures at the level of 4.1 billion. Additionally, the two items result in three impairment profits before loss provisioning in the amount of $5.3 billion, which represents 28.5% increase year-on-year. In terms of cost of risk due to COVID pandemic, we have elevated cost of risk, which came in at the end of the quarter at 3.1 billion. All of that summed up constitutes net profit after tax of 1.9 billion. On the next page, on page number five, we look at growth rates and sustainability ratios. In terms of deposits, the bank has grown year on year 48%. We've also expanded the lending activity by more than 46%. This makes us the fastest growing bank in the Czech Republic. With respect to quality of assets, we continue to enjoy subdued non-performing loan ratio. at the level of 1.5% and we stand also very well capitalized. We enjoy capital and equity ratio of 17.4%. On top of that, the bank commands formidable liquidity to support future growth. The liquidity coverage ratio is at 195%. So if we can turn to page seven, We wanted to share with you our medium-term targets with respect to balance sheet structure, market shares, and growth rates across the segments that we serve through our business model. If you look at retail and small business proportion in the balance sheet, we are seeking to have 75% share of the two currently. After the acquisition and as a result of organic growth, this proportion is at 69%. Then in medium term, we would like to obtain market shares of 10% in mortgages and retail deposits, respectively. We currently command 7% market share in the deposit category and 6.6% market share in mortgage category and the bank is currently experiencing record demand as of third quarter in origination of mortgages. Currently we have already pipeline of transactions in the amount of $16 billion matched with off-balance sheet commitments to our customers in the amount of $7 billion. So we are fairly well on the way to fulfill this aspiration. With respect to unsecured retail market share, this is consumer lending. We are continuing to defend market share. The minimum benchmark for us is 17.5% share. And in addition to that, we would like to obtain 5% market share in distribution of asset management. and grow our bank insurance franchise at a rate which exceeds 15%. With respect to small business targets, we would like to maintain growth at 15% in this very profitable sub-segment of the bank, expand the customer base to over 150,000 clients in the horizon of three years. On SME the growth rates are one half of the small business. This is the middle market where we would like to grow effectively with the market focusing on profitability. Speaking of profitability targets on page 8 we have both financial metrics and sustainability. So the bank aspires to deliver return on tangible equity in excess of 15%. Based on medium-term business plan, we believe that we will return to this level or slightly below this level in 2022 and subsequently over-perform it in 2023 if the assumptions that we have made in the business plan prove to be correct. And here we also portray the levels of the incremental ROEs that we wish to achieve as minimum on the respective business lines. Speaking of sustainability, we put a relatively high figure on NPR ratio because we believe that in the next 12 to 18 months we will see significant inflows into the non-performing category. due to difficulties of customers as a result of the COVID pandemic. We would like to maintain solid coverage of the portfolio. We currently have stock of provisions divided by portfolio, which we call overall coverage at 2.5%. And we set the minimum benchmark at 2. And we would like to continue with strong cover on the NPL portfolios. These numbers assume that we will continue on an annual basis to clean the balance sheet through NPL's disposals as we have been doing during this calendar year and during the previous four years that the bank has publicly traded. On client-based expansion, We would like to reach at minimum 1.5 million customers through organic growth and increase the primary customer base to 1 million from existing 648,000, namely due to cross-selling efforts, melhorating the customer base that we have purchased from Western Road. On page 9, we briefly summarize the current growth rate. If you look at development of the retail franchise, the portfolio as of end of third quarter expanded on year-to-year basis at more than 68% matched by nearly 71% increase in deposit volume. As I mentioned, we have spectacular performance on mortgages. However, on the consumer lending, we are experiencing year-to-date drops of about 30% in volume. On the right, the third quarter was slightly better. We were in the third quarter on consumer unsecured at about 90% level of 2019. Development of the small business also enjoys strong growth rates. We have 21.5% expansion in the loan portfolio. This is on the strength, amongst other things, on the strength of COVID program state guaranteed lending. And this growth rate is matched with strong growth in deposit base, which equals about 20%. 20%. Similar performance is noticeable on the SME franchise where the growth rate is nearly 17% on loan portfolio and 18% on core deposits. Again, this has been chiefly supported by state guaranteed lending as a result of the various COVID related programs put out by the Czech government. Here I would like to mention that in procurement of state guarantees we have about three times the natural market share and we are fairly on par with some of the large banks in Czech Republic. We also continue in development of the digital distribution capabilities where the share of digitally sourced Consumer Lending reached 42% and we are doing through fully online and branch-based online actually more volume than through the physical distribution. And what is also notable, if you look at usage on daily banking of our smart bank platform This is growing. The usage is growing at 57% rate per annum. So, this we consider to be a solid result. We have taken strong prudential position, increasing coverage of MPLs to 166% plus from year-end position where we had cover on MPLs at 109%. Apart from that, we still enjoy subdued low NPR ratio at 1.5%, and this is mainly due to our success in managing collections, but also cleaning continuously the balance sheets. And in the third quarter, we've realized sale of receivables in the nominal amount of 320 million crowns. The cost of risk year-to-date stands at 207 basis points. We still believe that the full year will come within the guided numbers, which I will come to in a minute. And we've also increased provisioning the overall cover of the portfolio to nearly 2.5% level. from 194 basis points at the year end to previous year 2019. On capital, it's according to our expectations that the car is standing at 17.4% with healthy robust 14.4% CET1 ratio and when our TFO covers The RWA density, you will see that we have substantially decreased the overall RWA density in the business model. On cost discipline, although we have nominal increase of the cost base at 9.3% on the pre-acquisition perimeter, costs are stable. and we are confident that we have locked in and we will realize 300 million in cost synergies from the Western Rope acquisition. On page 10, speaking of the acquisition, commercially, Moneta, Stavební spožitelná or Moneta Savings, a building savings bank, now takes about 12% market share in origination of state subsidized saving programs, and we consider this to be fair to good performance. We have also secured regulatory approval for combination of Moneta and Weston Road Mortgage Bank. The legal combination will take place at the end of 2020, so this is proceeding according to plan. Additionally, we have closed 18 units or we are in the process of closing 18 units of the branches that we've inherited from Westenroth and we've completed the rebranding. I've already mentioned the disposal of 370 million of nominal value under IFRS of non-performing receivables. from Whiston Road. This generated in the third quarter 74 million extraordinary gain which is split between revenue recognition and majority of it was booked into cost of risk. In the fourth quarter we put out an announcement that we sold additional 520 million and this will be subject to fourth quarter reporting. So from our perspective we have fulfilled the commitment to sell about 1 billion nominal, which we've announced at the conference at the end of second quarter 2020. Synergies I've commented, we feel very confident that this will be visible partially in the fourth quarter and fully throughout 2021, hence our business plan and our guidance. on the overall cost which we will come to in a couple of minutes. As of September 1st, we had leased nearly fully the legacy headquarters of Winston Road. Therefore, we've avoided significant restructuring charge as we do not have to impair the building. And we are proceeding with IT integration trying to rationalize the cost base there. The main project that we are running, and so far, rocking on wood, is doing very well, is on automation and integration of regulatory reporting. This is one of the major initiatives that we have, and that is to be completed at the end of the first quarter of 2021. On page 11, we show you a top-down view of the operating platforms of this site. adding 300 employees in the second quarter on the acquisition if you look at employment in the bank it is nearly flat at 2,973 FTEs you can see that the bank on the pre-acquisition perimeter reduced employment year-on-year by about 150 FTEs and we've added with the acquisition by the end of 3rd quarter 168. So we are trying to maintain discipline with respect to employment in the bank. On the branches, the number is unchanged at 160 from previous quarter. However, we have made a decision to close additional 7 units of branches by end of January 2021 and this will again bring savings of about up 40 million crowns on 2021 now basically so we are continuing to optimize and rationalize the network and the third notable changes on ATM we have pulled back the network reduced about 80 machines which were not meeting our performance requirements and we are continuing to upgrade the network as such this is visible on the contract class and deposit ATM. So if I can go to the next section, if we go to operating environment, it provides you with a bit more detail on the SICK economy. On page 13, you see going clockwise, you see that the GDP is forecasted to shrink quite considerably. the Bloomberg consensus publishes number of minus 8.2% the Czech authorities are slightly more rather more optimistic at drop of GDP at 6.7% next year figures also differ where the Bloomberg projects growth of 3.5% whilst the Czech authorities 4.5%. If you look at industrial production, we've seen three consecutive quarters in the red numbers and the production has fallen quite significantly, more than 23% in the second quarter of the year and we continue, we expect this trend to continue albeit in the third quarter at a better at a better rate than in the second quarter. Foreign trade also suffered through the COVID events. You can see that we have two quarters of drops in both import and export figures. And if you look at GDP, the government through fiscal stimulus is the only net positive contributor to the GDP position. whereas across the board the situation is quite negative. Nonetheless, Czech Republic being fairly stable in terms of raising and in its capacity to borrow to finance the state deficit. On page 14, we show you dynamics of the labor market. Currently the unemployment, if we start again clockwise, The unemployment stands at 2.7%. It is heavily subdued or reduced by government programs which help to keep employment. So the next year consensus from Bloomberg is 3.8% and this is quite, I'm sorry, by the end of this year it should come to 3.8%. We think that the unemployment will get worse in the first half of 2021 rather than by the year end. If you look at labor demand, unemployed versus vacancies, there's still positive gap in demand. So demand is higher than the number of unemployed. However, this gap is being reduced quite considerably. Overall, the situation also projects itself into retail trade growth, which have been negative, rebounding in the summer. And we believe that this number will worsen again due to the restrictions that Czech Republic has instituted recently. Then if we continue on page 15, what is the situation with respect to inflation? rate forecast and currency exchange rate. If you look at the consumer price index, the numbers have peaked in August at 3.5%. We believe that the official forecast might be slightly optimistic and tend to believe more the Bloomberg consensus where the 2020 should come in at 3.4%. and we will see what the inflation will do next year. On the second part of the slide you see evolution of Tribor and the government 10-year yield evolution. So this is quite dramatic drop in both measures and below that you can see that The optimistic forecast on Freiburg as next year we do not fully share and our view is matched by views of major banks in the Czech Republic where the rates are expected to move anywhere between 5 to 25 basis points. There is one outlier there but the general consensus is that the rates will stay All of this projects itself negatively into the exchange rate. This is visible on the other part of the graph. On page 16, just very briefly, wages. The rapid growth of wages in the Czech Republic has effectively been arrested by the crisis. You can see that the median wage is flattening. The savings rate is very high in the Czech Republic. Traditionally, last year, 13.2%. We expect this figure to go to anywhere between 15% to 17% as we see it on the inflow of liquidity into the bank. And we also predict some stagnation in the purchasing power development of the Czech households. And if you look at the industry, the utilization industry in Czech Republic constitutes slightly more than 30% of the GDP. The peak was in 2008 when the industry was operating at 91% of capacity. Currently, as of July, the industry operated at capacity of 76%, which is probably not going to get better in the fourth quarter. On page 17 we give you a peek on insolvencies and bankruptcies declared by entrepreneurs and private individuals. There is nothing dramatic here. You see on the stack graph development over 2019 and 20 and the trend has been actually downward going So, nothing dramatic here. This undoubtedly is being supported by the loan repayment moratorium which expires on Monday and various measures to sustain people and to sustain individual entrepreneurs that the government is taking. So, nothing alarming yet on this front. The next section of our presentation covers Moneta's performance against the overall development of the banking market. If I could have your attention to page 19, where we look at deposits. The overall deposit market year on year expanded by 14%. As previously mentioned, Moneta delivered growth in excess of 48%, the most notable Notable growth you can observe on our retail deposits, which increased nearly by 71% against growth rate of 9.6%. On page 20, we show you the macro view, relevant credit markets. The credit market on a 12-month basis expanded by 3.7%, while we've expanded our portfolio by nearly 45%. This is again driven by close to 67% expansion on the retail front against the market background of 6%. This is obviously driven by the acquisition. It's driven by additional mortgage portfolio. It is driven by additional construction loan and refurbishment loans from Western Roads. If you look at our unsecured positions, it actually decreased somewhat due to debt sales and our change of credit standards in second quarter. On commercial loans, we have helped a more than 15% increase, and as I said, this is driven to a large degree by the acquisition and by the bank's tremendous success and traction in distributing state guaranteed loans to both small businesses and commercial clients. On the following page, page 21, we provide you traditionally with a glimpse to market pricing. These are not effective interest rates. This is contractual pricing where we continue to operate at a slight premium to the market on the unsecured Nonetheless, the premium to the market decreased to 30 basis points, and at least as of August, competitors have raised their pricing actually by 30 basis points, incorporating some additional risk into their view. However, I believe that you will see additional erosion in pricing in the following months. On mortgages, we are tracking the market and on both commercial deposits and retail deposits. We are repricing the portfolio, so you see first sign of that repricing coming through the National Bank's reports and Andrew and Jan Novotny will walk you through what is the development on the cost of funds, which is quite positive. from our perspective when we cover the balance sheet. Now, let me cover guidance and highlights of our medium-term business plan. This is set forth on page 23. If you look at 2020, we have upgraded the guidance on the operating income by 200 million. This comes chiefly from better performance than expected on net interest income, which we believe has stabilized in the third quarter and will improve in the following quarter on the basis of volumes, but not only volumes, on the basis of deposit repricing. In terms of operating costs, we've actually worsened the outlook to a maximum of 5.5 billion from 5.4 And this is due to the fact that we've incurred some additional marketing expenditures as we strive to improve performance into the third and fourth quarter of the year. As second quarter was quite disappointing on the volumes as we pulled back. So we have also, we also incorporate some restructuring charge this year. for branch closures. I said that we are closing 7 additional units in Moneta Network and this will also impact this line. On the pre-imperment profit we expect at minimum 6.5 billion of pre-imperment operating profit and on cost of risk we have lowered the guidance and this is due to the fact that as of today we have about 190 million of the 200 million gain which we have not initially incorporated into the guidance due to execution risks and uncertainty regarding demand for NPL portfolios so all in all this year we would like to achieve at minimum 2.4 billion on 2000 on the calendar year 2020. I would like to note here that we are continuing to accrue 80% of profit into the dividend into dividend potential so it's not recognized into our capital and this is visible from the capital section. We've also elected to publish our business plan which seeks to model several key assumptions. Number one, in the business plan, we have elevated cost of risk, which is using assumptions regarding the peaks in through the cycle losses that we have experienced in the bank previously since 2008, 2009. So we think we have good assumptions on the cost of risk. Second assumption in the business plan is that we are able to maintain the cost at 5.5 billion and grow it proportionately with anticipated inflation. The third big assumption of this plan is that we use the interest rate forecast of Czech National Bank, where we see increase in rates, the prognosis covering 2024 and 2025 so this provides some lift to the revenues and the fourth assumption is that we will continue in the same tax regime as we have been as we have subject to previously so all in all if you look at this horizon we are forecasting that the bank on a five year basis will make 21 billion crowns of cumulative profits and on our have 2020 we should have 2.4 billion the business plan also assumes that we will consistently accrue across the board 80% 80% of our earnings into potential dividend distribution subject to regulatory subject to regulatory XPSM so ladies and gentlemen thank you very much for I will now continue with the profit and loss development starting on page 25.

Thomas has already provided highlights of our financial performance and I will now add a bit more detail. Our 19% operating income growth is a combination of increasing NII together with gain on acquisition partially compensated by moderate decline of NETVN commission income. Our cost base increased by 9% year-on-year primarily because of the acquisition while on the pre-acquisition perimeter we recorded 1% reduction. This resulted in a strong pre-impermanence profit increase by 28.5% year-on-year. Norman will later in his session provide the detailed update of the cost of risk evolution. So let's turn the pace to the decomposition of NIR. In the third quarter, our core net interest income from lending and deposit-getter franchise increased by almost 4% against the second quarter. mainly through the reprice of our customer deposit base. Unfortunately, this positive trend was more than offset by further erosion on the other net interest income line due to the change in interest rate environment. In the second and third quarter, we lost together about 300 million in this category, comparing to the run rate of previous quarters. And in the last quarter, we expect stabilization around zero. On the next page, we provide you with the evolution of net fee and commission income reaching 500 million in the third quarter and thus remaining flat year-on-year. This shows positive development and returns to the pre-COVID level after the Q2 negatively impacted by the pandemic and related restrictions. On the right-hand side of the page, you can see year-on-year increase in both income and expenses, which is predominantly related to the acquisition. On page 28, We decompose the income side into the three parts. If I go from the bottom up, long term declining trend of the servicing and penalty fee income was finally reversed into a year on year growth of 6.8% supported by the building savings product generating stable income in form of the monthly servicing fee. Drop of transactional activity amid COVID-19 restrictions together with the regulation of cross-border payment fees resulted in 10.9% decrease of transactional income year-on-year. And finally, third-party commission income scheme expanded by 22% amid continuing solid results in distribution of insurance and investment funds further strengthened by the specialized sales force which we have deployed earlier this year. Let's flip the page to OPEX. In the third quarter, we report 19% year-on-year cost inflation driven by almost 200 million of running costs of newly consolidated entities, together with bannals related with their restructuring and integration into Moneta. On the pre-acquisition perimeter, we stayed just a tick above the third quarter last year. The 2% increase is mainly driven by higher marketing and DNA costs. all together the cost-to-income ratio for the first quarter stood at 48.5%. And on the next page, we provide evolution of the key cost drivers. Over the last four years, we closed 30% of branch units, which was enabled only by gradual expansion into the digital. And in the bottom chart, you can see a reduction of number of FTEs, again below 3,000, in the third quarter, which was achieved through solid progress in integration of acquired businesses. Currently, we report only 65 STEs above the Q1 pre-acquisition number, despite adding 280 employees of mortgage and building savings banks in the meantime. So, this concludes the profit and loss section, and I will now hand over to our Chief Commercial Banking Officer Jan Novotny, who will continue with the balance sheet development. Thank you very much Jan.