Raiffeisen Bk Intl Ag Ord

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

Thank you very much for your kind introduction. Ladies and gentlemen, thank you for taking the time out of your busy day to join us today. We are happy to share with you our preliminary results for a full year 2023 and it has been indeed a very busy year. We have made progress reducing our exposure to Russia and we will discuss this in just a minute. Our balance sheet is as strong as ever. We have further improved our CT1 ratio both as a consolidated group and more importantly in the performer full write-off in Russia. Our MDA buffer improves to above 500 pips and 475 excluding Russia. Portfolio quality is excellent and despite some defaults in commercial real estate, I'm satisfied that Hannes has us in a great shape. While we cannot exclude further provisions and higher coverage ratios from there, there may eventually be room for releases when restructuring and workout is complete. Finally, liquidity remains excellent and I will touch on this in a few slides time. Operationally, we have seen good revenue growth and costs in line with our expectations. While this may be very difficult to replicate in the coming year, I am confident that we are starting the year on the right foot. Clearly, the biggest frustration for us this year has been the large amount of provisions for litigation in Poland. Here I can simply share that we are broadening our settlement program and targeting more and more borrowers. Settlements, of course, allow for a less negative outcome versus what we currently are providing for. We have updated our outlook for 2024, which I will discuss in a few minutes. Before we get into the numbers, let's go through some important items. First of all, The board will recommend the dividend of Euro 125 to be voted on at our annual shareholder meeting on 4th of April. As relates to the offer request for information, I simply wish to confirm that we have submitted everything that was requested and we await feedback. We remain absolutely confident that our systems are robust and that we are fully compliant across the Finally, I can confirm that the Strabag dividend in kind is on track. Let us move to our next slide and look at this transaction in closer detail. On December 20 of last year, we announced the acquisition of a large stake in Strabag. Thank you very much for your attention. Nor does it change our stated goal of dis-consolidating the Russian subsidiary. Our participation in Strabag will be managed as a long-term investment. Strabag is one of the largest construction companies in our region with a leading market share across most countries in Central Europe and a very solid underlying business. Considering the current limitations on dividends from Russia, I believe this is an excellent alternative. This investment will be consolidated at equity with our share of Strabag profits reflected in RBI's income statement. It is no secret that this stake was previously related to a sanctioned individual and we spent considerable time and effort diligently verifying that the proposed transaction is compliant with all applicable sanctions. We set a very high hurdle on this point and only proceeded to sign and announce the transaction after achieving sufficient comfort. We are now in the process of obtaining the required approvals and I can simply confirm that everything is on track and we have filed all the required applications. We expect to close the transaction in the first quarter and the full impact will be visible at our next quarterly update. Let's move to slide six. And this brings me to my next slide, which is an update on the Russian subsidiary. As I mentioned, the Strabag deal will help us to reduce our exposure to Russia while we continue to work towards the deconsolidation of our Russian unit. Perhaps it is also important to reiterate that the Strabag deal has no impact on the sales process. As I mentioned to you last time, we believe that a sale is still more likely than a spin-off. Both options remain available to us, of course. But for the time being, we are prioritizing a sale. There's a little more that I can say today, which you anyhow know everything already. What I would like to focus on today is the priority risking which we have executed in 2023 and will continue to do in 2024. On the balance sheet side you are familiar with the reduction of the overall lending portfolio. Specifically in Euro and US dollar loans to customers are now less than 500 million and will be run off completely. Loans to banks At this point, I'm mainly at MOEX and the CBI for Uber and to RBI for US dollar and Euro. We are actively steering a reduction in deposits, both in local currency and in Euro and US dollar. In Uber, this is mainly achieved by pricing on corporate deposits as well as in retail saving products, as well as restrictions where possible on new accounts. It should be mentioned that there are legal requirements, specifically in retail, which we are diligently abiding by. For Euro and US dollar, we have a bit more flexibility and we have made good progress. We have also been actively steering for a reduction in payments. By number of transactions, we are back to pre-war levels, which is now the cap which we have set for ourselves. By market share, we have now reduced our share by more than 50% from the peak. We have implemented strict country and industry policies, which also apply to our trade finance and export finance business. This brings us to slide 7. and an overview of key figures for 2023. Group Consolidated Profit and ROE reflect another exceptional year in Russia, and our CET1 ratio reflects both the excellent profitability and the RWA management this year. More important, however, is the adjusted view, which we share with you on the lower row. Excluding Russia and Belarus, The group earned just around 1 billion euros for an ROE of 7.6%. Included here are 873 million euros of provisions for litigation in Poland. If we were to also exclude these provisions in Poland and look at the underlying earning power of the bank, or at least what the bank will look like in the future, We would have come to an ROE of around 15%. For the group excluding Russia, the CET1 ratio is now 14.6%, up from 14% a year ago. You might also choose to add 65 basis points for further operational RWA relief, which would follow a deconsolidation of the Russian business. We will discuss this again on slide 14. And of course, we expect a further 125 basis points or so from the Strabag dividend in cash. Moving to slide 8. I will again focus on the lower half of the slide and the figures excluding Russia and Belarus. Loans to customers are slightly down on the year. Also, this is largely explained by low repo and money market volumes. Co-retail and corporate lending volumes are broadly flat on the year. OPEX are in line with guidance, while the cost-income ratio remains around 50% driven by the excellent NII growth. Let's look now closer to the core revenues this year on slide 9, with NII up by over 26% on the year. On the one hand, you have a full year's benefit of higher rates across the region and the continued tailwinds from Euro rate tax. Also, in Q4, higher rates continued to feed through and in Central Europe, we benefited from our treasury and hedging. As we head into 2024 and expect different degrees of rate cuts across our markets, our NII guidance is expected to decline to somewhere between 4 billion and 4.1 billion. The biggest impact will be visible in the head office and in Hungary, where we expect to see the most rate cuts. Fee income was strong in Q4, while on a yearly basis it was broadly flat. In the head office, 2022 had benefited from higher volumes and margin on ruble payments and FX, and this trend has largely reversed in 2023. Moving to slide 10. Again, we see the loan development this year, as mentioned, the decrease on the year as well as in Q4 attributable to lower repo and money market volumes. While the core of the business remained broadly flat. As we look ahead to 2024, we can already guide to a mid-singer volume growth. Some of this will come from Bushbound 23 projects and some will come from the combination of a better economic growth and lower rates. With our very good CT1 ratio and excellent portfolio quality, we should grow in line or above the market average, depending on products and countries. On the liability side, deposits have remained broadly stable. Perhaps the only outflow worth mentioning are in head office in our group corporates and market segment. As we discussed on our last call, we do some volatility We do see some volatility in the very short-dated, very price-sensitive deposits. These have no liquidity value for us and we do not fund our business with these deposits. If anything, our rock-solid funding position means that we do not have to compete on price for these. Which brings me to my next slide and the overview of the liquidity situation across the group. I will be brief there and simply confirm that our liquidity ratios are very stable at high levels. This is true at group level, at each of our previous subsidiaries and of course in head office. We have monitored these very closely in recent quarters, attentive to the potential effect of higher rates, higher funding costs, as well as spillover effects from the war in Ukraine. In head office, Where we are largely funded by corporate and wholesale products, we continue to maintain a sizable excess liquidity position supported by long-term funding activities. As you might recall from our previous calls, we run a daily liquidity stress test in which we assume 100% customer and wholesale outflows for the next 12 months. Under these scenarios, we still would have around 5 billion of excess liquidity after 12 months. To be clear, this is achieved by having a largely matched maturity profile on the asset side and assumes a similar runoff here. This scenario is of course an extreme one, but it serves to confirm the solidity of our funding and liquidity process. Now, let's move to slide 12, the capital slide. Starting with the group CT1 development in fourth quarter, we improved from 16.5 to 17.3. And I think I don't have to run through the details here about inorganic effects, If we move to slide 13, this is the outlook for 24 for the group. We start at 17.3, and we expect to end at 17.8. This comes, of course, largely from the good cattle generation on the one hand, and the long growth, which I have already mentioned. Of course, some minor inorganic impacts will be also Included here. Moving to slide 14, a pro-formacy, the one assumption if we fully have to write off the Russian business. These assumptions are well known. We assume zero recovery, no equity in Russia. There is no subordinated debt retained by head office and cross-border exposure is less than 40 million. We also deconsolidate credit RWAs in Russia and market RWAs in Russia and those booked in head office related to our Russian subsidiaries. This is how we come to 14.6% up 60 basis points over the past year. I mentioned before there is further relief from operational RWA. This happens in a second stage following the deconsolidation of the Russian business and would provide and further 65 basis points uplift. And finally, upon the successful closing of the Strabag transaction, which we would expect to see this performer CT1 ratio increase by an expected 125 basis points at closing. We also share with you the performer capital stack, including Tier 1 and total capital requirements for the crew without Russia. 81 is pretty much fully supplied and we have 23 basis points surplus on the Tier 2 bucket. Finally, the performer MDA buffer is now 475 basis points, including the Strapak dividend in kind and the full operational RWA relief. On the following slide, 15, Please find our current capital requirements. At the start of the year, our SREP increased 40 basis points, of which 12 basis points are from a higher Pillar 2 requirement and 28 basis points from the combined buffer requirement. Besides this, the increase in Pillar 2 requirement also leads to small increases in the Tier 1 and total capital requirement. Let's move to slide 16. This is the funding plans for the year ahead. Our first priority is senior non-preferred in order to support our credit ratings. We will also look to senior preferred, although the absolute amount will depend on how new lending develops. We will also be issuing out-of-order subsidiaries, in particular the Czech Republic, Slovakia and Hungary. This, of course, is to satisfy the MREL requirements under the multi-point-of-entry approach, and we are very satisfied with the market access that our network banks have demonstrated. Moving to slide 17, macro outlook. I think I do not have the rates, but we're happy to see improvements compared to 23, and these improvements will go even further better in 25. Moving to slide 18, our assumption on inflation and based on that assumption, the development of key rates. The peak we have seen, we see some more or less reductions throughout the year in the various countries depending on where they start from and the development of the inflation. Moving to slide 19, the guidance. We assume a net interest decline compared to 2023, as I mentioned before, somewhere between 4 billion and 4.1 billion, driven by lower central bank rates, some ongoing restructuring of client deposits to more expensive ones, Reduced positive impact from minimum reserve requirement interest and some higher funding costs by our MRAP issuance requirements. We see some increase in fee and commission income to 1.8 billion, and I mentioned the loan growth by around 6%. This is in the core group, so without Russia and Belarus, but you also see Group level OPEX around 3.3 billion. We see some ongoing wage pressure and impacts from the inflation. Hannes will talk about risk costs. Based on all these assumptions, we see a consolidated return on equity of around 11 billion. And before the benefit of a Strabag in kind, The flat development in the CET1 ratio at 14.6. And with this, I hand over to Hannes.

Thank you, Johann. Ladies and gentlemen, thank you for being with us today. This has been a very busy year, but I'm satisfied that we finished the year 2023 in an equally strong, maybe one even could say stronger, compared to 2022. In line with our guidance, while talking about the guidance of the Q3, We finished the year with risk costs of 297 million euros for the group excluding Russia and Belarus. The initial guidance of course was much higher and on the same barometers we have increased our overlays by nearly 60 million euros. We have increased our overlays in some areas while simultaneously using some of what we booked for commercial real estate. Going into 2024 We have 423 million euros of overlays available to us outside of Russia and Belarus, which translates itself into one year's worth of normalized risk costs. Leaving the commercial real estate portfolio aside just for a minute, the quality of the portfolio remains very strong and solid, with the average Pt unchanged in 2023 despite the challenging backdrop environment. In retail, Delinquencies remain at all-time lows, supported by a very resilient labor market. Overall, our MPE ratio remains below 2%, which I deem to be an excellent, considering the trends in the commercial real estate space, and of course, having a war in two of our countries. In the course of 2023, our external ratings have been affirmed, and we demonstrated very Decent results, to be modest here, in the EBOR stress test. We have belonged to the best third among the other market participants. We could show once again the strengths of our business model and portfolio quality, the resilient earning power of the bank, and a forward-looking approach to provisioning. Moving to the fourth quarter, of course, commercial real estate was the main driver of risk costs. And I talked about this in the third quarter already. It goes without saying that I will not discuss any individual names, but I will, of course, comment on the overall portfolio. So what have been the main drivers for the inter-commercial real estate, and we talked about this already more than one year ago, is the increasing yield environment, it's the cost of build, and for some sub-segments, of course, demand was also impacted. Just think about the office market. Well, you know and you're aware of and I shared it with you that we have conducted two internal stress tests on our commercial real estate exposure over the last 18 months and we are confident that our valuations are up to date. Many of our exposures are being backed by solid cash flows which have also been confirmed in our internal stress tests. Furthermore so, we are very confident and comfortable with the coverage of our defaulted exposure. And as Johann mentioned in the introduction, we may still see some provisions in the coming quarters, including some additional overlays as we proceed with caution. In Q4, taking away one of your potential questions, we made use of 74 million euros of commercial real estate overlays available to us and still have another further 83 million euros Just been talking about commercial real estate of overlays available. Well, those of you who have followed us for some time will know that we are reluctant to sell non-performing exposures and we prefer to restructure or work out the projects in-house. Our direct record shows that this achieves a much higher recovery rate and I expect this time to be no different. Allow me one more last comment on commercial real estate. You have noticed the drop in our group coverage ratio and this is largely explained by the fact that commercial real estate defaults usually require lower provisioning due to the collateral and guarantee we have. We also benefit from other mitigants such as securitization. This simply means that the inflow of commercial real estate defaulted exposure reduces the average coverage ratio to the portfolio. Let me add one more Remark on this slide. If we talk about coverage ratio, it's just the coverage ratio of the defaulted line, defaulted exposure compared to the individual loan loss provisions. So we are not including in this calculation our collaterals, nor do we include our guarantees, nor do we include our overlays, what we have created. Let me have a look into 2024. Yes, of course, here and there the one or other challenging backdrop may still persist, and we will remain cautious in our underwriting. We will continue the provision on a forward-looking basis and making full use of our overlays, reacting quickly as issues arise, and focusing on our portfolio quality. We will proactively look to engage with our customers when needed, and as mentioned, restructure and work out in-house. Having said all this, These lead us to a risk-cost guidance on the entire group of 60 basis points, and if you would exclude Russia and Belarus, we would come to a risk-cost guidance of 50 basis points. Let me move on to the next page. Well, you can recognize some small changes in stage 1 and stage 2, with some benefit from model updates in retail portfolio, while at the same time we took a few additional provisions here The improved outlook across the region, mainly in C, allows us to release some provisions. As you mentioned, as just mentioned, we made use of some 74 million euros of commercial real estate overlays in the quarter. In essence, releasing them here and booking on equal amount under State 3. At the same time, we also booked additional overlays in Ukraine and to a less extent in Hungary, where despite the improving outlook, we chose to Exercise Caution Finally, State 3 here largely reflects commercial real estate provisioning. And as mentioned, the Euro 256 million euros show here include also the use of overlays. If we take a look at the full year provisioning composition as expected, State 3 was the primary driver, but nicely offset by some macro releases. More importantly, Our stock of overlays is untouched and still fully available to us in the future. Let me move on to page 23. You can see that our risk-weighted assets have developed from 97.3 billion euros down to 93.7 billion euros. And I would just like to earmark two very important pillars in this beautiful chart. The one is the inorganic relief. So where does this inorganic relief come from? We have benefited from the final approval received when we have introduced an IRB approach to Bausch-Bacasse. We also changed our IRB model from the sovereign model. We switched back to the standard approach. And on the op-risk, you see an uplift of 2.5 billion euros. And this comes just with the point on how op-risk RWAs are being calculated. You take the three years observation period, so we lost One year of observation period, we added another one, meaning 2023. Having this very strong GI dynamics, this is causing then higher op risk AWAs. Well, we talked very much about our SwissRank provisions we had to grade on the SwissRank Poland portfolio. So I'm now on page 24. So if you look to the total amount of litigation stocks available, We have now piled up 1.6 billion euros. We have in total 25,800 Swissbrink loan cases outstanding, whereas already 13,600 are being under litigated cases. We always look, of course, also what is the CAD1 equivalent, what is being held against this portfolio, so you go with the one-hand side with the litigation provisions being available to us, and also We are in the market with a settlement offer which goes very much in line with the KNF proposal. Well, page 25 is well known to you and is more for documentation issues. Having said all this, we are now eager to take your questions. Thank you.