Moneta Money Bk

Hello and welcome to the Moneta Money Bank 1H 2023 financial results. My name is Terry and I'll be the conference operator for today's webinar. All participants will have the opportunity to ask questions today and you can do this by using the raise hand icon or the Q&A chat box, both found on your Zoom toolbar. Alternatively, if you have joined us on the phone, you can press star followed by one on your telephone keypad. Today's speakers are Mr. Thomas Burney, Mr. Jan Fritschek, and Mr. Jan Novotny, and Mr. Karl Norman-Facht. I would now like to hand over to Mr. Thomas Burney to begin. Please go ahead.

Good morning, ladies and gentlemen. I had the pleasure of covering the first part of our presentation. So if we can turn to page number two. We first cover the quarterly the quarterly result in the second quarter of the current year. We delivered net profit of 1.26 billion pounds. This is 4% quarter on quarter growth. I think more importantly. If you look at the result of the quarter, we are also delivering strong net interest income. Net interest income increased more than 6% quarter on quarter, and it exceeds the forecast that we provided to you in February, 2023. by about 180 million. So we look with confidence into second half of the year. The other positive news with respect to the quarter relates to net fees and commissions. On the quarterly basis, this category of income increased by 7.6% and this is due to strength of our distribution in asset management as well as insurance delivering a solid result. If you look at the cost base of the bank on quarterly basis, it had declined by more than 11%, even though we caught a tail end of mandatory contributions, namely to the deposit insurance fund, which had changed prices at the last minute. And we suffered a higher charge on insurance during May 2023. Nonetheless, we believe that the result is in line with our guidance and with our operating plan. During the second quarter, we incurred a risk charge of about 150 million. The first quarter was impacted by both disposal of significant NPL portfolio, which produced material gain. And also we had some releases of provisions, a very tail end of the COVID related provisioning. Now with that, I would turn to page three, where we look at the semi-annual results published this morning. If you look at the net profit, we stand at 2.5 billion crowns, rounded up by 20 million. This is, in our view, a good result in a view of guidance, which we will cover at the end of this presentation, where we increase the minimum net profit target to 4.7 billion from 4.3 billion. If we briefly cover the other categories, which will be commented upon by Jan Fricek on operating income, 5.9 billion. So in order to meet the guidance for this year, 12 billion, we have to produce additional 6.1 billion in operating income. And we're confident that the number will come in based on evolution of the second quarter. is under control. I would mind you that the 2.9 billion has in it more than 300 million of mandatory regulatory contributions, which always impact the first half of the year. This year, second quarter, as I said, we suffered additional additional charge. The semiannual cost of risk at 30 million, this is combining the excellent first quarter with the normalized second quarter charge that we have in the P&L, which I covered on the previous page. Now, if we continue to the balance sheet, If you look at our activity for past 12 months, in response to the high interest rate environment, we shifted the business model to focus on deposit gathering. The deposit gathering produces growth of 24% and the higher volume of deposits supports the growth of the net interest income. We ended up with 368 billion. Nonetheless, if you were to add The additional 2.8 billion that we placed in subordinated deposit just not included in this figure, the growth would be even higher. And I would like to underline that our growth of deposit base comes at three times the market growth. The deposit base also positively impacts the liquidity ratios where we have increased the liquidity by 120% or de facto 66 billion crowns on year to year basis. Now, if we turn to the lending base to our performing loan portfolio, it stands flat at 269 billion. This is in line with our strategy where we focus on two aspects of the loan portfolio. First aspect is underwriting high margin, high rate products. Second aspect is gradually pricing of the portfolio, both of which these aspects will be covered by Jan Novotny in his part of the presentation. Now, if we turn into the evolution of our operating platform. If you look at the operating platform, the most important development concerns employment of the bank. Last year, I believe it was in October, 2022, we announced a target of 2,500 FTEs. So we come in at the target. We are actually 11 FTEs short, but this restructuring, Money Bk Bk is related to productivity improvements or discontinuation of some business activities which we found inadequate in terms of return on capital. If you look at the other aspects of the operating platform of the positive, we reached agreement with four banks to not only share ATM infrastructure with respect to withdrawals, but we are planning to implement by the end of the year functionality of deposits. We believe that this will not only improve our cost position, contribute to CO2 reduction targets, but also broaden reach of Bonetta for those clients that need to meet the ATM infrastructure for deposits. We grow the client base and digital I will cover in separate part of the presentation. Now, with that in mind, let's take a look at the operating environment as we would like to present some key numbers. Now, if we look at page seven, the operating environment is frankly challenging. On one hand, you have economic stagnation, but the most optimistic forecasts with respect to GDP growth for this year, it comes in about half a percent. Hence, the economy is clearly slowing down. The positive factor remains with respect to unemployment because the unemployment is hardly moving up and this in our view contributes to benign credit environment to continue benign credit environment, which actually is most likely and it's very true as the metrics on risk management are at historical lows and this will be covered by Norman in his part of the presentation.

We continue to suffer from high inflation which is followed by

a materially high public budget deficits. As you can see, the public budget deficit is estimated at 295 billion crowns for this year. At mid-year, the deficit stood at 215 billion crowns. So we believe that there is more upside, I'm sorry, more downside on government spending than upside through consolidation. The consolidation package, which should reduce public spending by 150 billion in midterm is still in the parliament and pending approval. amidst fairly material obstructions, and we think that it might be altered during the parliamentary debate. If you look at the indebtedness of Czech Republic with respect to GDP, that metric seems to be continually increasing. Now, if you look at the next page, inflation, the latest number reported by Czech National Bank stood at 9.7%. the annual number is in excess of 15%. The inflation is continued to be driven by housing costs, energy, groceries, and this causes some public discourse in the media. So our view, Moneta House view is that The struggle to subdue the inflation is certainly continuing, but not yet over. And we believe that the rates will come down rather than at the end of this year by beginning of next year. That House view is framed or anchored in comments by at least three members of the Czech National Bank's board. This is the Governor and Vice Governor Freit and Mr. Prochazka. Boom caution that the markets might be too optimistic. If you look at the rates, the short-term key rate remains stable at 7%. And if we then examine the yield curve, we can see that the swap market since beginning of the year, decreased its estimate of medium and long-term rates by about 25 to 50 basis points. So the medium view is fairly optimistic on ability to subdue the inflation. So now this is with respect to the operating environment and let me cover a brief update on our digital platform. If you look at our digital platform, this actually shows the tremendous importance of it or materiality that it gained over the last five years. I recently looked at a presentation made to our staff and management. This was from 2017 where the digital platform at that time processed about 20% of all transactions. If you look at the digital platform from the perspective of first half, of this year, we did more than 40 million transactions split into three categories. Payments grow by 18%. If you look at our effort to add service and customer relationship management features, this category grows by nearly 70%. And if you look at our distribution capability through the platform, we have more than 20% growth. On the following page, we try to provide a simplified view of materiality of the digital platform with respect to distribution. Here we focus on eight key products of the bank. And if I start with deposits, if you look at the individual lines, the digital today enables 40 to 60% share. on key deposit products and so on and so forth. So this really gains materiality by every quarter. Nonetheless, the branch network still carries material part of services, certain services and distribution capabilities for the bank. On the following page, we also show you the trend of the digital branding of the digital platform on one hand, we have solid double digit growth of users unique users on the digital platform, but if you examine the growth of the mobile platform. The. mobile platform actually exceeds the 11% growth by more than double and the traffic is undoubtedly shifting onto the mobile platform. This is also visible from the share of transactions between internet banking and mobile banking, where I believe that by the end of this year, 80% of the traffic, perhaps more than 80% of the traffic will migrate onto the mobile platform. Hence, the bank is updating its investment plan as we would like to further digitize product distribution and service enablement for small businesses and SME companies. And this will be the focus of our effort during the next three years. And now very briefly on the branch network, how it complements the digital offer. If you look at the branch network, it has become largely irrelevant in terms of payment transactions. Today in the branches, we process about half a percent of the payment traffic. Nonetheless, the branches are pivotal to cash services where we process during the six months about 590,000 transactions. Nonetheless, you can see that the cash intensity within our branch network is declining. If you look at it from perspective of branch visits, we actually have good growth in branch visits because in many locations some banks discontinued to provide over-the-counter cash services. We believe that being a rural bank serving communities with less than 10,000 inhabitants. It is our responsibility to ensure that cash services are available. Nonetheless, we will continue in rationalizing the network. By the end of the year, we will close seven branch units which were selected during a mid-year review. From the perspective of loan applications, we see similar trend. The branch network reduces the number of applications it receives. This is a function of lower demand. And it's also a function of branch closures, which were realized and executed through the first quarter of this year. And with respect to number of staff that we deploy in front offices throughout the branch network, you can also see that the reduction is consistent with the 13% reduction of staff overall within within the bank. Hence, with that in mind, I will now turn over to Jan Fricek, who will provide you with detailed evolution of the P&L overall. Thank you.

Thank you. Good morning, ladies and gentlemen. I am now on page 15 and will continue with the profit and loss statement. In the first half of the year, Moneta delivered net profit of 2.5 billion CZK. with the operating income of 5.9 billion and delivered return on tangible equity of 18.9%. Lower revenues is driven predominantly by net interest income down by 14%. However, partly compensated by net fee and commission income growth of nearly 21% and more than double of the rates. On the cost base, we report 2.9 billion, which is just marginal increase by 4% year on year. However, this year we charged regulatory charges by 18 million higher than last year, and last year we obtained M&A cost reimbursement. On the cost of risk line, we report 30 million net cost for the first half, Such a solid result was enabled by continuing solid performance of our loan portfolio and also gain realized on NPR disposals. On the following page, we can continue with net interest income development. In the second quarter, we increased the lending income by 391 million EUR predominantly due to increased loan portfolio yield by 50 basis points. And also treasury income went up by 1300 million due to higher balance of liquidity, higher income from hedging derivatives, and also the market interest rate increased by 2.5% during the last five quarters. On the spend time, our cost of funding increased by nearly 2 billion which is a function of the deposit base expansion by 24%. And also we repriced significant portion of the deposit base to current market level. As a result of that, our net interest income declined by 300 million year on year. However, from the quarterly development, you can see that in the second quarter we increased the result versus the first quarter, which is actually in line with the projection we provided last quarter. And if we flip the page, which is already on the screen, page 17, here we show the original projection of net interest income for the last three quarters of the year. You can see that in the second quarter, we outperformed the forecasted number by 77 million, which was achieved by better-than-expected income from hedging derivatives and also small one-off gain. The projected income going forward Basically, the drivers of the projected improvement going forward remain the same. It is ongoing expansion of the deposit base with positive margin against the two-week repo and also increasing loan portfolio yield. We report net interest margin in the second quarter. We outperform the forecasted result by 10 basis points. And going forward, we project stability in this respect. On page 17, we continue with the detail about net fee and commission income. In the second quarter, as was mentioned, we increased the overall result by nearly 22%, of which the income side increased by 20%, driven by higher transactional income, and also increased income for distribution third-party products, namely insurance and asset management. Below that, you can see that expression at significantly lower rate. And this is in line with increased volume of client transaction. If we flip the page, we can provide you with more detail about the income side. In the chart on the right side, you can see that year on year we increase the income from insurance and asset management by 47%. And in the second quarter, the result reached 378 million. This represents nearly 50% of the total income in this category. And the driver is driven by improved distribution capacity and also improved commercial conditions negotiated with the insurance company. And now we can continue with the cost base on page 20. On a comparable basis, we report a stable development with 1,372 million for the second quarter this year. You can see that the higher regulatory charges book up was compensated by reduced personal costs and administrative expenses. Let me also point it out that for comparable purpose, we adjusted the figure of cost base for the second quarter last year for M&A cost reimbursement, which we obtained last year. On the next page, we provide more detail about personal expenses development. In the second quarter, we achieved a reduction by 2.6% year-on-year, predominantly due to reduced employment by nearly 13%. And this was partially only partially compensated by increased average salary and made the high single digit inflation on the labor market, the pressure coming from the labor market inflation. And we complete this section with the page number 22 where we show a decline. of administrative costs by nearly 7%. Again, this is on comparable basis. And the reduction was achieved predominantly due to lower marketing intensity in the first half of this year and small savings on other items. On the right side in the chart, you can see that the DNA charge remain broadly stable. With that, let me hand over to my colleague, Jan Novotny, who will comment on the market. Thank you.

Thank you, Jan. Good morning, ladies and gentlemen. I have a pleasure to walk you through the next section of today's presentation, which is the balance sheet development section. Let me start on the page 24, where you can see the evolution of our balance sheet for both asset and liability side. You can see that the very steep growth of more than 15% year-on-year is driven by a very successful deposit gathering campaign. In the key category of core custom deposit, we have achieved 24% year-on-year growth, and this growth contributes quite significantly to the improvement of the interest income generation capacity. We have also slowed down our growth in net customer loan portfolio as we have focused mainly on the repricing of the current portfolio plus we are focusing on originating especially the high yielding products. Overall balance sheet have reached 423.8 billion check rounds and we will continue to grow the balance sheet according to our strategy. Now let me move to the page number 25, where we are showing the total gross performing loan portfolio split per segment. As you could see on the previous slide, the portfolio grew up by 0.8% year on year and has reached 269.2 billion check rounds with a slight decrease in the retail share, very stable share of the SME portfolio of 27% and continuous growth in high yielding small business where we reach almost 13 billion check rounds in assets. In appendix, you can also see the detailed product split in each category. Now on the page 26, the next page, you can find the evolution of our loan portfolio yield for the last four quarters with the solid line depicting the portfolio yield and the dotted line depicting the yield, including the hedge results. Overall year is already at 5.2%, thanks to a significant focus on the reprice of current deals at Refix, new origination at the high level, and also increased interest rates for hedging of the portfolio. You can also see the split on the right side of the page for the retail and commercial part. Retail at 4.9%, commercial already at 5.8%, both continuously growing. On the next two pages, pages 27 and 28, you can see the detailed analysis of the yield evolution. This is just a small remark. On those slides, the dotted line shows the new origination yield, and the solid line shows the portfolio yield. Across both pages, you can see that we are keeping the new volume significantly above the portfolio level switch, together with the repricing efforts, supports portfolio growth for both retails and commercial products. Now, talking about the repricing of a current portfolio, let me please move to slide number 29, where you can see the detail split of the portfolio into variable rate, fixed maturity, and fixed refictation period. And as you can see, there is a huge portion of a portfolio which will reprice in the future. It's 29% within the next 12 months, 47% within the next 24 months, and more than 70% in the next 36 months. This all creates an additional room for NII improvement in the next three years. Now let me move to the funding base section. On the page 30, we are showing the steep growth of our customer deposit base with almost 24% growth year on year. This is a very big success of our strategy in last few quarters, and it helps not only to increase the profitability, but also to improve even further our excellent liquidity position in a very healthy and granular structure with 73% share in retail, 22% share in commercial, and only 5% in the wholesale category. On the next page, page 31, you can see the decomposition of the cost of funds in more detail per product. You can also see that the growth of cost of funds have significantly slowed down in the last two quarters, and we expect further slowing down going forward. There's an expectation of private decrease either at the end of 2023 or beginning of 2024. So that was all from my side. Thank you very much for your attention. And I will hand over back to Jan Fricek to walk you through the liquidity and interest rate management section of today's presentation. Thank you very much.

Thank you. Let me briefly comment on the liquidity and interest rate management. I start on page 33. This was already mentioned by Mr. Spurny at the beginning. At the end of the second quarter, Our position in high quality liquid assets stood at 120 billion, and this is more than 100% or actually 120% up year on year. If we compare this position against the core custom deposit base, the share increased from 18% last year to 33%. And also on this page it is visible that our strong liquidity position of the balance sheet has been improved from 88% loan to deposit ratio to 73% in the second quarter this year. And on the following page, we provide a structural picture of our balance sheet from the interest rate sensitivity point of view. You can see that at the end of the second quarter, we maintained 177 billion of S-fielding variable interest rate. This constitutes a share of 43% against 23% share reported last year. These assets predominantly consist of liquidity placed at the central bank, loan portfolio with variable interest rate and also fixed rate loans, swapped to variable through hedging derivatives. In the liability side, we reported a position of 226 billion with variable interest rate. And these liabilities predominantly consist of savings accounts, which we are contractually able or capable to reprice within three months. As a result of this structure, we estimate that a reduction of two-week repo rate by 100 basis funds will bring us 485 million of incremental net interest income. With that, let me hand over to Karl-Norman Peck.

Thank you. Thank you, Jan. We are now covering the risk section, and we start on page 36 with an overview of cost of risk. So in the first half of this year, we recorded a net creation of provisions of 30 million or two basis points. The commercial book produced a book up of 31 million, where the retail portfolio showed, mainly thanks to MPL sales, a net release of 1 million cheque rounds. Compared to the first half of 22, where we significantly benefited from upgraded COVID-related receivables, the first six months of this year were influenced by MPL sales having a positive impact on the cost of risk line in the amount of 249 million. And apart from the aforementioned sales of non-performing loans, the other main drivers of this positive result are so far observed solid core performance and good payment morale of previously downgraded receivables. On the following page 37, here we show five snapshots of the development of the loan portfolio, loan loss allowances, and overall coverages, while The gross receivables grew by around 1.8 billion year-over-year. Loan loss allowances dropped by around 300 million, largely driven by a drop in our MPL stock. With regard to the total stock of provisions in the amount of almost 4.8 billion, you can see then that more than 900 million constitute managerial overlays addressing increased risks stemming from high inflationary environment and high interest rates. And as for the overall coverage, this dropped from 1.9% a year ago to 1.75%, which is largely driven by the reduction of our MPL stock in the reporting period. Moving to the next page, page 38. Here we show the development of MPL in and outflows since June 22. The second quarter of this year showed an NPL formation of 960 million, which was lower than the 1 billion formation we observed in Q1. However, due to lower NPL sales in the second quarter compared to Q1, this led to a minor net NPL formation of a bit more than 60 million J crowns. And as for the MPL stock, this decreased from 3.8 billion a year ago and currently stands at 3.6 billion at the end of June. Going to page 39 here, we have a more detailed overview of how the MPL stock evolved in the last five quarters. So year over year, both the retail as well as the commercial MPL stock show drops and stood at close to 2.8 billion for the retail hook. and 800 million for commercial respectively. And as for the MPL ratio, it's dropped from 1.4% a year ago to 1.3%, which is identical to what we reported in the first quarter. And the last page of the risk section, page 40, here we have an overview of how our delinquency rates developed. Across all buckets, as you can see here, delinquency rates continues to stay on a comparatively low level and are still well below levels seen before 2020. So summarizing the risk section, I would say the core message is that the performance of the credit portfolio remains solid, judging from the fairly low delinquency rates observed so far. Based on the most recent macro releases, inflation dropped below 10% already in June, and is expected to continue declining in coming months. On the other hand side, key metrics around consumption and trade still show a rather mixed picture. So far, it seems that the challenging macro environment has not influenced the labor market yet. However, to which extent this will stay like that remains to be seen. So on the back of the so far positive development of the core credit risk metrics, we are lowering our guidance of cost of risk for the full year from the current 25 to 45 basis points to 15 to 35 basis points. We of course will continue monitoring portfolio performance metrics against the macro and the pertaining stock of provisions, and this will be subject to reviews going forward. And with that, I hand over back to Jan Fritschek. Thank you.

Thank you, Norman. Let me go through the capital management section. I start on page 42 with the overview of capital requirements on individual and consolidated levels. In the second quarter, Czech National Bank decided to reduce the country's cyclical buffer by 25 basis points effectively from the 1st of July. And with that, our capital management target on a consolidated level decreased to 16.35%. This is including 1% management buffer and is expected to remain the same for the rest of the year. While on the individual basis, our capital target on MREL currently stands at 20.85% and is expected to increase to 22.95% by year end due to higher MREL requirements. Following page, we show our capital adequacy, development of capital adequacy on both levels, where you can see that both positions are well above the respective capital management target or even requirement. And on the following two pages, we go into more detail view on both capital positions, starting on page 44 with the individual level at the end of the second quarter, our regulatory capital stood at 38.8 billion, and this is including Camrel, the tier two instrument. The increase in the second quarter was achieved by successful distribution of subordinated deposit of 2.8 billion crowns, which was already mentioned, and this instrument is reported as a tier two. The MREL adequacy ratio, which is reported below 23.7%, is well above the current capital target. However, and this is even more important, it is by 75 basis points above the expected capital target on MREL at year-end. With that, our capital position is large enough or provides sufficient sufficient cushion against the requirement will continue accruing 80% of our consolidated net profit for future dividends. And on page 45, we completed this section with the consolidated view. Our regulatory capital on consolidated level stood at 33.8 billion at the end of the second quarter. And since the incremental tier two instrument is predominantly utilized on the individual level to cover the real requirement, we decided to show excess capital on a tier one capital level as it better represents our dividend capacity. From the chart in the bottom on the right, With the excess capital development, you can see dividend accrual of 2 billion, which represents 80% of consolidated net profit. And besides that, we maintain excess capital of 3.3 billion. These amounts together of 5.3 billion represents our available capital for future dividend and growth. This also, if we compare it to or if we divide it by number of shares, it is 10 and a half crowns per share. With that, I will hand over to Mr. Spourny for final remarks and update of guidance. Thank you.

Very well, on the basis of the result, we elected to upgrade the guidance. Excuse me. We upgrade not only 2023, but we have also based on the current knowledge adjusted the following four years. So this year, the minimum target that we would like to deliver concerns 4.7 billion. This is on the basis of adjusting some of the metrics, namely the cost of risk, as we believe that the cost of risk will come in in the range of 15 to 35 basis points provided that we do not have some systemic or isolated event that would change that. If you look at the five-year guidance on the following page, we also illustrate the five-year guidance against the previous five-year result. In the period between 2018 and 2020, the, what was it, 22, the bank made 20 billion. This includes the COVID year when we made significant provisioning charge against the potentially anticipatory charge with respect to COVID. So one could argue that it's not fully compatible, but these are the factual numbers. The minimum five-year cumulative target that we would like to deliver, and I stress the word minimum, is 25.4 billion. So this constitutes a relative growth in cumulative earnings of 27%. And it also includes the three years when the windfall slash war tax will be levied upon the banking sector. Now, if we turn a page, we also disclose the key assumptions under the guidance and on following page, we also disclose the minimum thresholds with respect to performing loan portfolio and deposits. Here, I would like to comment, that we typically provide the guidance with the view that we would like to over-perform it on annual basis by a certain margin. Hence, there is a degree of conservatism on the lending side. I would say we are being super conservative nonetheless. This guidance is framed in a very aspirational plan how to increase market share on the deposit gathering in the Czech Republic. So with that in mind, our perspective is roughly the following. We have made 2.5 billion crowns during the first two quarters of the year. We have accrued about 2 billion for shareholder distribution. The shareholder distribution is unimpeded by the requirement as we have successfully removed that obstacle through placement of 2.8 billion of eligible instruments. So this pertains to the larger picture. If you look at the micro components of the larger picture, we have a positive trend on NII. which had returned to growth and we expect to continue in that performance. We likewise expect to continue the performance at the level of net fee commission income. We are confident that the cost base of the bank is under control, meeting the employment target and prospectively seeking to implement additional cost reduction charges, which is closure of seven branch units, which will impact the result of 2024. And we are also consolidating headquarters space subject to successful execution. This should also have marginal positive impact on the core space. We are confident with respect to the best metrics of the risk performance. Nonetheless, if the stagnation of the economy continues for longer period of time, we believe that the cost of risk picture deteriorate. Nonetheless, the guidance calls for 400 million additional profit for the current year. Thank you for your patience and we will answer your questions as best as we can. Thank you very much.

Thank you. If you would like to ask a question, please use the raise hand icon or use the Q&A chat box both found on your Zoom toolbar. Alternatively, if you've joined us on the phone, please press star followed by one on your telephone keypad. The first question comes from Simon Nellis of Citigroup. Please go ahead. Your line is now open.

Oh, hi, gentlemen. Thanks. Thanks for the opportunity. Yeah, my first question would be just around the tax rate. I see that you're looking for the tax rate, effective tax rate to go up by 50 basis points. But I think the statutory rate is going up by 200 basis points. So can you just... Describe why you think the effective tax rate will stay so much lower than the statutory. And also, do you see any risks on that front, given the fiscal position? And then my second question would just be about your loan growth aspirations for next year, I think that you outlined on slide 50. So it seems like you're expecting a contraction in gross loans, if you could just unpack what's driving that, what's behind that.

Right. I think if you look at the statutory rate and our projection, this is simply a function of increased increased size of the investment securities where we obtain benefit of income tax exempt interest income which we received from those securities. So this mitigates the the tax increase. Simon, on loan growth next year, frankly, if you look at the guidance, we don't expect any. as we want to see how the environment will pan out or turn out in the next six months. But broadly, on the lending policy of the bank, we've adjusted thresholds for minimum living expenditures. We adjusted some other prudential aspects of our underwriting model on retail. And secondly, I think we are exercising caution on even on the on the SME side. So in the current environment where we believe the jury is still out, how things will behave in the second half of the year and first quarter of next year. For the moment, we are keeping the plan flat on the size of the lending base. change, and if it changes, we will accordingly communicate the change in policy.

Thanks very clear. Actually just one more if I could. The increase in insurance commission was pretty impressive up 60% year on year and the second quarter. And you also just elaborate on on that and is that sustainable growth do you expect continuation of

I think the growth will taper off. If you look at next year, it will certainly be slower than this year. Throughout the closing stage of 2022, I put incredible pressure, and my colleagues can testify if you wish, to that to improve distribution of pension fund insurance. This increased more than 200% year on year, or close to 200% year on year. We've also elected to renegotiate the terms and conditions amongst our insurance partners. And we were successful in that to the amazement of some market participants. And we also implemented significant changes into incentive schemes of the bank. So the incentive schemes are now dependent about 40% if I simplify it on lending and 60% on fees and deposit volumes. Whilst if you look at two years ago, everything was geared about 80% towards performance on lending. So we have entirely changed the tag. and next year I expect that this will taper off because people it took some time for our people to adjust to this change and like with everything else sometimes you mind the potential you harvest the low-hanging fruit and then it will become a bit of a steeper going up the hill. So I don't want to commit to the same growth on NFCs. This growth is part and parcel of our effort to adjust the business model to the current conditions. And we will, as always, remain very flexible to whatever happens in the market.

Super. And sorry, just on the insurance, what's the key product that you've been selling? Is it mostly non-life?

We sell credit products. We sell identity protection products. This category is broadly stable. The main advance we've made is in pension fund distribution and in life insurance distribution.

Got it. Super. Thanks so much.

The next question on the line comes from Thomas Unger of Earth Group, please go ahead, your line is now open.

Hi, thank you very much for taking my questions also. Firstly, I would like to ask you on your expectations for windfall taxes, how do these expectations, your projections for the year end, how have they changed with your new guidance, with the upgrade and guidance in net profit? That would be my first question. The second question is on NII. Now, your projections that you had for the quarters Q2 to Q4 for 2023, you left Q3 and Q4 unchanged despite the fairly significant beats now in Q2. Does that mean that you view the beat or the performance now in Q2 as a one-off? I know I understand that you said that mostly came from hedging derivatives and a small one-off, but I'd like to have your view on what you think has changed for the coming quarters and underlying trends, or if it's all according to expectations. Jack Coldrick, And lastly, on the risk risk costs and the management overlay that now stands at 931 million at the end of the first half if the the risk environment stays the same for the next two quarters Q3 and four. What do you expect to do with this management overlay? Do you reallocate your role forward or would you expect to release? I understand that it is very uncertain how the environment will develop in the next two quarters, but I'd like to have your view on this. Thank you.

Thomas, I'm the NII. and the forecast that we provided. I would start with saying that I think we are the only bank in the Central Eastern European perimeter that provides forecasts like that so clearly to both analysts and investors. We elected not to change it. in order to have some space for over performance. It's as clear as that. What has fundamentally changed is that we added moral subordinated deposit, which carries 7% interest rates. So this is higher expense. um so this one is negative uh second one which is positive is that we are repricing the portfolio year to date at mid-year we underwrote we replaced about 21 billion of volume in our loan portfolio subject to new rates. This is visible from the pages that were presented by Jan Novotny. So this one is a positive. Third one, we have some volume that originated in the second quarter, which will actually produce results only in the third quarter because that's the nature of that. So we feel confident with respect to the forecast we provided and frankly, We are not really at liberty to provide more than that because we think that we have to keep some margin of error in order to manage the performance according to your expectation, your expectation in plural. With respect to management overlays, we are back testing these. Currently, the policy Uncertainty. Whether we do something with it I would say the probability is low. We are looking at the year from the prism of the guidance that we've provided and the guidance is very clear on the range of cost of risk. and from the guidance it is clear that we will not we will not under the current circumstances which could change but under the current circumstances we have no plan to touch it with that in mind the overlays are regularly back tested and the back tests are typically done in and they are done in conjunction with the external auditor. So if anything is done, it will be subject to the back test. And obviously we cannot comment on that until we do the back test. So I would leave it at that, if you don't mind.

Sure, thank you very much. And then maybe you comments on the windfall tax.

On the windfall tax, it will be marginal at best.

Okay, thank you very much.

The next question on the line comes from Mehmet Seven from JP Morgan. Please go ahead. Your line is now open.

Good morning. Thank you very much for taking my questions. I'll just have a couple follow up questions on your deposit base, please. So first of all, as you're getting close to your deposit volume target for the full year, how are you thinking about your ongoing campaign, particularly in terms of deposit pricing and assuming no change in the policy rates? What would you expect core deposit funding costs to peak? And how would it continue from that point onwards? And maybe on the deposit growth guidance beyond 2023, it still implies some very strong growth at 5% CAGR through 2027. Does this mainly reflect your expectations for a rebound in the market in general? Or do you intend to continue to grow faster than the market as you've been doing so far? And if so, can I ask why so particularly in the context of subdued long growth expectations. Thank you.

As long as we can raise deposits at marginal marginal which is favorable against the short term rates, we will continue to do that. Because if you look at the turnaround in the NII is driven by largely by the liquidity position of the bank. So this is part and parcel of transformation of the business model to adjust to the high interest rate environment. And as long as the high interest rate environment prevails, we will seek to continue with that strategy apart from the fact that it supports the value of Moneta franchises. The customers see us as one of the fair banks, and this is Let's say proven by the fact that tonight we will receive a very important public award, which is subject to voting by public, not by some expert panels. And our policy annoys competitors, which is a derivative benefit. to what we are doing. So we will continue with that. We expect the year end cost of funding at 3.6%, so the full year number should be at 3.5%, we believe. And this has margin of conservatism. It is obvious that if we If we are not able to continue to doing this at a marginal profit, which doesn't consume capital, we will alter that policy. So you can say it's short-term unsustainable. We believe it's sustainable until the first quarter of next year. And yes, we are close to the target. However, short of it, by about 20 billion. Hence we have to raise additional 20 billion in order to meet the target. So I wouldn't be too optimistic to say we are at it. And we don't know what the large banks are going to do because based on my discussions with journalists from Reuters and other media outlets, we are significantly annoying the competition with the approach as we have the distribution power as opposed to small banks which are paying a lot higher rates than we are. But this is our tactical approach to the current market conditions and it has been obvious for the last nine months.

Rick, that's all very helpful. Thank you very much.

And just to add maybe a comment on the asset side, we expect to reprice this year till the end of the year about anywhere between 20 to 25 billion. So it's not only that we are increasing the cost of deposits, but we will actually improve the yield on the portfolio quite substantially till the end of the year.

Thank you. Our next question is a written question submitted from Tej Kiran Magesh of White Oak Capital Management. The question is, how are the 2.8 billion Czech Koruna subordinated deposits in June 2023 different from additional tier one securities? Who are these investors and what are the salient differences between these deposits at 81 bonds?

Ms. Africek will cover the question.

First of all, this separated deposit is classified as a tier two instrument from the central bank or regulation point of view. And this is superior to the CET1 and it's subordinated to the MREL instrument, which we also have on the balance sheet. We currently do not have 81 bond. So from that perspective, this is the subordination potential is irrelevant. And from the customer or investor's point of view, this was purely a retail product. So we distributed the product amongst the retail customers. The supplemented deposit is for five years and it provides a fixed interest rate coupon at 7%.

and it's priced advantageously.

It's priced advantageously against the estimated spread over the swap rate, which we obtained from several investment banks.

And we didn't suffer distribution costs.

And also we achieved the lower distribution cost through the distribution, through our internal distribution capacity. and we avoid paying a rich price to external distribution.

Thank you. As a reminder, if you would like to ask a question, please use the raise hand icon or the Q&A chat box. And if you've joined us on the phone, please press star followed by one. We currently have no further questions. So I'll hand back to Mr. Thomas for closing remarks.

Thank you very much for your questions. Thank you very much for your patience with us. The remark is very simple. We have delivered two and a half. The minimum target is 4.7. This constitutes 400 million Improvement over what we've estimated in February 2023. We hope to, we actually trust to deliver it and hope to deliver perhaps more. We look forward to next event that we will have subject to end of third quarter. Thank you very much and all the best to all of you.

This concludes today's webinar. Thank you all for joining. You may now disconnect from the call.