Raiffeisen Bk Intl Ag Ord

Good afternoon, ladies and gentlemen, and welcome to the Q1 2023 results conference call of Rivasen Bank International. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Johann Strobl, Chief Executive Officer. Please go ahead.

Thank you very much. Ladies and gentlemen, welcome to our Q1 2023 update call. Thank you for joining us today. We can report another good quarter with decent operating trends and a very solid balance sheet. Consolidated profit for the first quarter is 657 million for a return on equity close to 16%. More importantly, the core of the group, excluding Russia and Belarus, earned 330 million and 10.4% ROE respectively. In the first quarter, we recognized a very large portion of the bank levies and other governmental measures, and we have taken a further 69 million of provision for litigation in Poland. Risk costs outside of Russia were very low, with still very few insolvencies in our markets. Our CT1 ratio stands at 16%. You are by now familiar with our dual steering approach to the group's capital ratio excluding Russia. Assuming a full loss of the Russian equity, our CT1 ratio is 13.7% and comfortably above current requirements. On the occasion of our annual General meeting a few weeks back. We updated our shareholders and the market about our Russian business. We have spent the past year exploring a variety of options. And our focus today is on two of these, namely a sale or a spin-off. In either case, the result would be a full deconsolidation of our Russian subsidiary from the group. As we speak, we are working at full steam on both solutions. I cannot tell you today which one will be favored, as both require a complex series of approvals. In the meantime, we continue to reduce our business in Russia. After shrinking the loan book and tightly managing RWAs in Russia last year, we have also taken additional steps to reduce our payments business. As a result, we expect the revenues and earnings contribution from Russia to decrease in 2023. Another point I wish to update you today is the OFAC request for information. In February, we announced that the United States Office of Foreign Asset Control requested information relating to our payments business in light of U.S. sanctions on Russia. You're familiar with the statement we made at the time, but there are nevertheless a few points that bear repeating. We are operating fully with OFAC and have agreed a scope and timeline for the delivery of the requested information. We have agreed to deliver the requested information in three stages. We are now finalizing the second delivery package and the third one will be completed in June. Second The request for information on our sanction compliance program and exposures to Russia. This is what the OFAC seeks for. And finally, we are confident that our compliance systems are strong and we have frequently demonstrated this to our regulators and banking counterparts. We are confident that we will fully satisfy OFAC's request for information. If we turn to the next slide, I can state that we are pleased with the operating results in the first quarter, considering some of the headwinds we have shared with you during our last call. For the core of the group, excluding Russia and Belarus, NII is virtually flat. Fees in the core of the group were down 5%, largely due to seasonal factors, including the typical drop in volumes in Q1 versus Q4. Loan growth in the first quarter was muted in most of our markets and of course in Russia and Belarus we continue to reduce our business. Finally, and despite the strong inflation in our markets, the cost-income ratio for the core of the group remains near 47%. In most markets we aim to keep our OPEX growth at or below inflation. If we move to the next slide, this offers a closer look to the first quarter. And if we start with the full group view, the decrease is largely attributable to Russia. As you know, 2022 was an unordinary year for our bank there, and we have taken several measures to reduce business. This is already visible and we expect this trend to continue. More interesting for you, I assume, are the core revenues excluding Russia and Belarus. Net interest income is pretty much flat, largely due to repricing of liabilities, which is happening slower than we anticipated. Nevertheless, We are seeing some competition in local currencies in the Czech Republic, Romania and Hungary, while Euro deposits continue to benefit from rate tax. We've slightly improved our NII guidance for 2023 to around 3.6 billion. These were down in the quarter with the biggest drop in Russia due to lower volumes and margins, some of which is seasonal, but to a large extent some normalization after what was an unordinary last year. As I mentioned, we are introducing some restrictions and the Russian fee line will be lower as a consequence. In the core of the group, the drop is largely the seasonal factors which I have mentioned. Nevertheless, we have slightly increased our fee guidance for the core of the group, as you will see in the outlook slide. And now we expect these to be roughly flat versus last year. Turning to the next page, slide seven, I have already Thank you very much. Thank you. Romania saw decent corporate lending growth, also this was largely in the pipeline from Q4 and is not an indicator for the rest of the year. Going forward, we are cautious on new volumes for the rest of the year. On one hand, we continue to see low demand both in retail and in corporate where investments are slowing down. We are also selective on the underwriting. Our loan growth guidance for the year is now at around 2%. Deposits from customers were roughly flat on the quarter. We saw a reduction in health office where our very good liquidity position allows us to let low liquidity value deposits leave and we can optimize our deposit base both for cost but also for the liquidity value that they provide. In essence, we do not need to compete for concentrated, short-dated and very price sensitive deposits. We will take a closer look at head office liquidity position on the next slide. Slide 8. The liquidity position of the group. As you can see, the LCR was above 200 at the end of the first quarter. and even a touch higher as end of April. Equally important, individual network units also maintain a very high LCR ratios, typically between 200 and 300%. Our network banks are generally funded by a high share of granular retail deposits. NSFR for the group remains very high as well, reflecting a very stable stock of term funding. On the right-hand side, let's briefly discuss the liquidity profile in head office. Despite no sizable retail deposit base here, it is the most conservative liquidity position of any of our units. First, we have taken a number of measures to shore up liquidity since the start of the war last year. As of today, head office LTR stands at around 160% versus 131 nine months ago. More importantly, we monitor on a daily basis the excess liquidity under the most extreme scenario. If we assume that all liability leaves the bank at the contractual maturity, we would still have over one billion of excess liquidity after one year. I cannot think of a more cautious approach to managing liquidity, and our team have done an excellent job building up this position. If we look beyond one year, the bank is equally robust. Long-term funding, inclusive deposits above one year, and bonds exceeds our loans to customers with a residual maturity above one year. If we look at the next slide, you see the development of the CD1 ratio total group, stable. We have earmarked a dividend of 80 cents per share, which would be 27 basis points in CET1. This is deducted from the regulatory capital. And what you also see is the benefit from transitional application of IFRS 9 of around 34 basis points in Q1. If we turn to the next slide, you have an outlook to 23. Where you see, given the good earnings capacity, the RWA increase, which I have already described before, and some other impacts, I think one can say that we expect also the year-end a strong C to 1 ratio. Moving now to one of the most often asked questions, which is what is potentially The landing point at the end of Q1 was 13.7%. So this is above our internal ratio, what we have set at 13.5% for this scenario. Numbers are pretty stable here. It's a reduction on the one hand of the CT1 equity, by 4.1 billion in case of deconsolidation and on the other hand we have a 13.4 billion RWA deconsolidation. Yeah, I have to add two remarks. The one is that if we would also lose the intra-group subordinated instruments, we would have additional negative impact of 40 basis points. What you should also be made aware here is that the way operational risks or the RWA from operational risks are usually treated is a phase-out approach. So if you would have an immediate facing out of the strong revenue base, this would end another 45, 50 basis points. Moving to the next slide, which is maybe more for documentation and information, is capital ratios and the SREP. and what will happen till end of the year with some additional information on the MDA buffer and available distributable items. I think this is more for reading so I move to the next slide which is the MREL and the funding plan. I think here again with all the funding what we successfully did Already last year, but also at the beginning of this year, you see now a very good situation in the MREL numbers of the head office or the Austrian Resolution Group, I should say in a more precise way. So this is the one element. The other is that also in the network banks we have made good progress and you also see what we might need in next year 2024. To our own funding plans here, we might come with two to three additional benchmarks One could be a covered bond issuance to strengthen our liquidity profile. Another could be non-preferred senior, maybe in the second half, to maintain our loss absorbing capacity and to support our credit rating. Slide 14, an update on Russia. You see in all In all ratios, the Russian bank and the local requirements is very, very strong, be it the liquidity position, be it the C to 1 ratio. Also, the loan deposit ratio is fantastically good. So very good numbers. You are also aware of the development. So we had another drop in loans around 3% quarter on quarter. We have reduced further our net cross-border exposures, which is mainly RBI, HAL Office, to 195 million euros. You might remember this was 600 million when the war started. And you see the adjustments on the RWA. So this, of course, are moving elements. and depending on mainly where the liquidity is placed, this might increase or reduce the RWAs from the Russian entity. Coming to slide 15, the macro outlook. Yeah, small adjustments, what you see, some countries slightly improved, like our forecast for the Czech Republic, others maybe Thank you very much. Russia with minus 2, still in this shrinking environment, but a reasonable number. And given the big drop in Ukraine last year, we see a slight improvement in 2023. And of course, in 2024, we assume in all the markets improved numbers. Of course, inflation and high interest rates We will see if the impact might be even bigger. Moving to slide 16, this is also an update on our perception of inflation developments For this year and in addition to that also for next year and then for some bigger markets where we are in some expectations of interest rate developments. In some markets we already have This year, a reduction in the key rates of the central banks. Of course, here it depends on the development of the inflation, if it would come at that pace or if we would find maybe a little bit delay in the reduction of the key rates. Moving to slide 17, the guidance. So as I mentioned in the introduction, it's already here in the numbers as well. Co-revenues 3.6, the net interest income, fee income at 1.7 billion, probably loan to customers plus 2%. On the group level, the numbers would be relatively similar, but of course bigger with 5.3, 5.4 billion of NII 3.2 to 3.4 in fee and commission income as we expect further reduction in the loan book in Russia then overall it might be loan book might be flat OPEC 3 billion which leads to a cost income ratio slightly above 50 percent we have Similar number in the total group at 3.8 billion and cost income ratio somewhere between 41 and 43. You are aware of the risk costs overlay what we have built up in the past. So before we use this, the current update is, as I mentioned before, good development. So around 60 basis points, the core group and on the total group at around 90 basis points. Profitability and Consolidated Return on Equity around 10% and on total group level at 17. And the ratios I have touched already above 13.5 and 16 respectively. And with this, I hand over to Hannes.

Thank you very much, Johann. Good afternoon, ladies and gentlemen, and thank you for taking the time to join us this afternoon. In what has been a busy quarter for the banking sector, I'm happy to report that the first quarter has been uneventful for RBI. First of all, credit risk is very muted year to date. Risk costs in the quarter are largely the result of further overlays being booked in Russia and benign risk costs elsewhere in the group. Insolvencies are low, and we have seen very few early indicators of stress in our portfolio. We entered the year with excellent portfolio quality, And I'm satisfied that this remains very much the case today. Despite the sticky high inflation, both corporate and retail portfolios remain solid. Let me talk about the retail side. On the retail side, our underwriting always included higher rates, and consequently we have witnessed very little deterioration due to the current rates and inflation environment. We nevertheless simulate further rate hikes and double-digit inflation rates going forward, and we still see limited pressure on debt servicing ability. Furthermore, labor markets, and that's very important, are only expected to lose modestly, which of course is very much supportive. Let me also talk about the corporate side. On the corporate side, commercial real estate appears to be on everyone's mind nowadays. Our exposure is around 14 billion, less than 6% of the group's total exposure. You will find a simple breakdown in the appendix on slide 29. Please keep in mind that we have securitized over 1.5 billion years of our real estate book, so our actual exposure is in fact lower. Nevertheless, a few comments on our real estate exposure. We reviewed our portfolio towards the end of last year, already stressing for prolonged higher interest rates. This is fully reflected in our internal ratings. We also assumed a pronounced drop on average of around 25% in prices and booked around 70 million euros of overlays. Our valuations are conservative. and either include haircuts to the market values or alternative measures. In recent years we did not revise the collateral values up every quarter as real estate prices appreciated. We will be conducting another stress test in the second quarter where we will include further drop in property values and decreasing cash flows. Where necessary, we may book additional overlays. And finally, The exposure is very well diversified across the sector and geographically focused in our region. And before you ask, and I may assume that you will ask, no, we do not have any exposure to commercial real estate in the US. For the total group, we keep and leave our risk-cost guidance unchanged at 90 basis points. Let me also move away from credit risk. I'm sure you confirm that our liquidity position is exceptionally strong. And as Johann mentioned, we have excellent liquidity in each of our markets and very stable granular retail deposits. In head office, we have built the most resilient liquidity profile possible. And however you stress liquidity outflows for the next 12 months, we will still have a surplus liquidity. Another big topic nowadays everybody is talking about is interest rate risk. Interest rate risk is also very limited with asset and liability duration largely matched. We only recently started to build up fixed rate positions in currencies such as the Czech kroner and the Romanian lei. And the interest rate gap remains small. Our largest exposure is in euros. And to give you a flavor, where an immediate 200 basis point shock would have an impact of only 25 basis points in CAD1 measures. Let me now run you swiftly through the slides. I'm on page 29 where you can see the overview where we have the 93 basis points translating in 300 million euros of risk costs. As said, the most important part and the biggest part is being allocated to overlays, stage 3 bookings, summing up to 62 million euros only. And you can see that we have now over 900 million euros of stock of risk overlays. The asset quality Classifies and demonstrates by itself, having an MPE ratio of 1.5% and a very solid coverage ratio of 58.2%. I was talking about the lower insolvencies. Maybe what is also still important, you know, when looking at the right hand side of the box, In Ukraine, we have seen the one out of stage three bookings, but at the same time, we have very robust overlays already being built up. And in Russia, we have further increased these overlays by 223 million euros. Page 20 is showing the split in the different sub-components. As said, total risk costs are summing up to 301 million euros. and 278 million euros are being allocated to Russia and Belarus. But if you decompose the 301 million euros, you can see that the biggest part is coming with 176 million euros in the pillar of overlays. Let me move on to the next page on 21. While I would not like to steal your time in going very deep to explain the difference of 0.9 billion euros of risk of RWAs within a quarter, There is one important information which may have caught your attention. This is this 1.3 billion euros of inorganic effect. Well, this must be attributed to the Article 500 in the CRR, where you have to risk weight public debt, issued debt in a currency which is different to the local currency. Let me move on to page 22, talking about the Poland Swiss Bank update. While we still have 27,000 loans outstanding, we have now 10,500 litigation cases, and we have added in the first quarter another 69 million euros for provisions in litigation, and we also had to digest 17 million euros when it comes to net losses regarding annulment decisions. Leading us now to a stock of provisions for litigation of over 853 million euros.