Raiffeisen Bk In Unsp/Adr

Good afternoon, ladies and gentlemen, and welcome to the conference call of Riefensen Bank International. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Johan Strobel, Chief Executive Officer. Please go ahead.

Thank you very much. Good afternoon, ladies and gentlemen. We are happy to have you in this course talking about the half-year results. And when you look at the numbers, you immediately see that we have seen two very different quarters so far, with a strong growth in Q1. And the second quarter was very much impacted by the lockdowns in April and May. Good thing is we have seen a big up in activity in our market since May, and we are encouraged to also see this going on, this trend. On a year-on-year basis, net interest income was slightly up and net fee and commission income was stable, driven by the strong performance of the business coming into 2020. In the fee business in particular, we are pleased to report that the month of June was close to the pre-COVID levels. Loan growth was lower in Q2, largely due to lower retail lending during the lockdowns and more recently, subdued demand on the corporate side. Nevertheless, we are happy to report that retail lending in recent weeks is almost back to its pre-COVID level. The CD-1 ratio has improved by 20 basis points in the quarter to 13.2. And I would again highlight that the CD-1 ratio continues the deduction of the dividend which we want to pay or wanted to pay for 2019. If we move to our next slide, you can see the net interest margin, a substantial drop to 2.31, and this is driven by the rate reductions The Q rate drop in most of the markets and of course there is a higher volume in short-term business and repos and both together bring it down in the second quarter and therefore also in the half year. Of course, costs are an issue. And we are continuing to implement cost reduction measures as we have talked about several times. And of course, we got some more inspiration by the lockdown. So we think that reducing office space is one measure. Given the rising unemployment rate, of course, the salary pressure, the wage pressure, which we have seen in the last couple of quarters, is substantially less. Still, there is one or the other area in IT where this is continuing, as I think all competitors and all industries are continuing to invest in IT and further in digital. This has an impact, of course, also on the return on equity, which is at 5.9% currently. If we move to the next slide, what you can see here is A couple of graphs which show what I was speaking about at the beginning. The big up in activities after they have a lockdown in April and May. You see that since the end of May, we see across all our markets this recovery of activities. And this is a very good sign as this is very positive for fee and commission income. But also retail lending is back, as I mentioned before, at least in July, more than what we have seen in June so far. And of course, one... One driver for maybe not so optimistic perception of the current development comes from the traveling ban, what we still see in some of the countries. Whereas inside the countries, we see quite a lot of activities. I think another good sign for the midterm development of region is that the EU Recovery Fund is very nicely And about $80 billion, which is 20% of the allocation, goes to our region. And I think this will be another very positive support for the development in our countries. If we move to the next slide, then I think what you thinking about this how did this call it not only in terms of home office but also in banking services impact the digital development and i again can confirm this is very positive and we added a couple of functions to our mobile banking For example, onboarding, which of course was nicely appreciated that you can fully do it end to end. You do not have to visit branch or other channels. We have been successful there in a couple of countries like Albania, Bosnia, Bulgaria, Croatia, Hungary. In other countries like in Slovakia and Czech Republic, in Russia, we have this function already for a while. Virtual cards have been introduced in some markets, so that the contactless payment without physical cards is supported very much, like in Russia, in Slovakia, in Belarus, biometrics in many countries. So for the customers, I think it's a very good improvement. because of this COVID they are more aware and are using it more often than they used it before. So as I said in some of the markets this functionality was already available. We introduced our IPay which is an Android wallet for Simple and secure payments. Again, a good process and progress. And in some countries, also what we call RaiConnect, which offers additional communication means for premium and private customers. So easy video calls. easy exchange of documents, screen sharing when remotely advised customers. Coming to the next slide, which is slide eight, this is our macro outlook. And we made a couple of adjustments since last time. In essence, what we can say is that It was revised a little bit down in the euro area. We now believe in a minus 8.1% GDP development. But what is, I think, more important than this is that the development in our core markets, in CE, SE, but also in Eastern Europe, Germany, which is very important for these markets, is relatively positive and therefore we see positive impact here and we feel fine currently what we have seen or what we show in this macro outlook. With all these developments which I described briefly, I come to slide nine, which is our outlook. And here I can say that we confirm the outlook with the targets which we gave in May when we talked about the first quarter results. So we expect a modest loan growth in 2020. The provisioning ratio for the fiscal year for the full year 2020 is expected at around 75 basis points, of course. Here, it depends on our assumptions about the lockdowns, the length and the severity of the disruptions, what we're currently experiencing. We have seen, you have seen it in the first half year, a nice development in the cost-income ratio, but one should be aware that this will be weaker, and so we, in the course of the year, So what I can still confirm is that we aim to achieve a cost-income ratio of around 55 basis points, percent in the midterm. And, yeah, it's too early to say what it will be in 2021. Profitability. Profitability. We confirm our medium-term target of 11% consolidated return on equity. And as of today, and based on our best estimates, we expect a consolidated return on equity in the mid-single digits for 2020. We confirm our CT1 ratio target of around 13% for the medium term. And we keep the payout ratio between 20% and 50% of consolidated profit. Of course, in these days, with the guidance, the requirements by the European Central Bank, It's a difficult discussion in these days to think about the dividend payment for 2019 or so. As I said, we still have deducted the full planned dividend payment, so this one euro per share from the capital. Which brings me to slide 11. I think here it's worth and you for sure have all seen that we did two issues to improve our capital structure to optimize it. I'll see the one ratio now stands at 13.2%. This issuance is of Tier 2 in June and more recently the 81 in July. They now allow us that also the Pillar 2 requirement is optimized. You see this in the numbers. And now this creates an MDA buffer of around 2.4%. And as I said before, we confirmed that the COT1 ratio of 13% is important for us. If we move to slide 12, so what you see is the quarter-on-quarter development of the COT1 ratio. We, for a while, have been discussing op risk and we have built in a requirement which comes from the treatment of the Swiss franc litigations, what we have in Poland and in Croatia. This is around 14 basis points. It's not final. It's still in discussion with the central bank, with the ECB, and we will see what the outcome is. Yeah, and then what was very positive and you have built in here in the credit risk is that The SME support factor, which in our case is around 900 million RWAs, which is about 15 basis points, was built in already. And when considering what might support the CET1 ratio as well in the course of the year, then probably the IFRS 9 transitional provision for expected credit losses could be up to 30 basis points. Yeah, of course, depending on the conversation and clarification with ECP. And yeah, the software, deduction from equity what we have in these days given the standards what we see currently in discussion will only lead to an improvement of 10 to 15 basis points and yeah there is some sovereign exposure in new currencies which doesn't have such a big impact on us but it could also improve by 7 basis points Yeah, I think that's what I should talk about on this slide. Moving to the next, which is 13. Here, I think this brings everything to the surface, what we experienced in the second quarter. As I outlined before, the Big rate cuts in many currencies had in combination with a structural change in the new business to the less to retail unsecured, more to corporates for the reduction in the net interest income by minus 6.5% and the net fee and commission income by minus 12.5%. Costs down almost 5%. Of course, there is an FX component, but also, of course, less spending. And I think the impairments at the similar level what we had in the first quarter. Same applies for the other results. And so this leads to a consolidated profit of a little bit higher than what we had in the first quarter. I think if you're in a nutshell, what we can say is the low operating result was compensated by bank levels. You know that this is front loaded to a large extent. and was very supportive to compensate. If we move to the next slide, another one to give a quick overview is operating income, fairly similar amounts between NAI drop and fees, as I said before. Bigger part of the NII drop comes from the lower rates. Of course, also there is, as we experienced, the lower FX rates in some important countries. There is a 17 million FX impact as well. Yeah, and OPEX, 41 million from other administrative expenses, whereas the staff expenses were more or less on the level of the first quarter. I think I can quickly run through the segments. Yeah, what you see is... Of course, Czech Republic felt the big drop in central bank rates, so with a reduction in NII and NIM. Yeah, and in Hungary, it's the fee income, which we can't give them there. the lower activities. If we go to the southeastern Europe, then, of course, Romania is very important for us. And here, important to say is we had low demand in April and May, but low demand is picking up substantially in June and July. which I think is good. And in Eastern Europe, yeah, here we have big rate cuts, Russia, Ukraine, Belarus, all of them. And therefore, the net interest income, as I said before, there is also an FX component in all the three markets, is down substantially. We had some hedging measures which can protect the drop in the CD1 ratio, as I mentioned before as well. Group markets, here we saw a good demand in loan business, and this was supportive also for the net interest income, which is higher than what we have seen in the first quarter. Nicely balanced between corporate markets. And also the FIs are contributing. In funding, we're on slide 19. I think what you see here is a strong development in the ratios. The reason for that is at the beginning of the second quarter, There was quite a lot of uncertainty how big the demand of corporate customers using their committed lines would be. So we strengthened our deposits. And later in the quarter, we had the issues which I already described, spoke about. And we were also... Going into the TL-TRO3, of course, here we have some expectation that we can benefit from this 50 basis points support because we are confident that we can reach the required targets. And with that, I would like to hand over to Hannes.

Thank you. Also, a warm welcome from my side. Before I jump into the different slides, let me start with a sort of reflection on the first half year. Please bear in mind that January and February we have been capable to conduct a very good and normal business. But when looking at the financial numbers, the first half year on the risk-cost side summed up to 312 million euros. Here it's important to notice that stage 3 is summing up only to 36% out of the 312 million euros, meaning 113 million euros. Stage 1 and stage 2 is summing up to 199 million euros. MP ratio is at 1.9%, coverage ratio is at 63.5%, means we have a very solid portfolio as it's going into this demanding situation. I have shared with you already in March our way of thinking, and this way of thinking guided us quite well when it comes to the industry approach. And of course, besides the industry classification, it is important how does the respective company do within the industry cluster. And having said all this, this led to the confirmation of our current risk outlook, which we're having around 75 basis points. Now I would like to proceed with the slides. I'm jumping to page 21, where you can see that we were capable to demonstrate still a decent growth. Please bear in mind that also part of this growth is coming from secured repo transactions, making use of the received liquidity inflow from many of our customers. I move on to page 22 to give you some further insights when it comes to the HWA developments. So you see that risk-weighted assets increased from 78.2 billion euros to 80.5 billion euros. We have provided quite some details of where this increase is coming from. So part of it is being attributed to new business. We see the first part of the rating migrations. We have included the SME supporting factor. FX is also adding, or in this case even diminishing, because we have seen a depreciation. I will not talk about this 200 million euros and 400 million euros, but maybe no 30 still on this page is the 800 increase. This is including the op risk out of Polish legal cases and adding another 400 million euros as RWA increase out of the market risk. This is easily attributed to higher hedge ratio and some higher volatility. I move on to page 23. We understood from the feedback and the intense talk we had with you that you would appreciate having a little bit more insight when it comes to the moratorium. Please bear in mind that we have different ways of how this moratorium is being structured. So you have public moratorium and you have private moratorium. For instance, in Croatia, a private moratorium was being established. In all the other countries, it is a public moratorium. Even further detailing, we have two basic regimes, meaning you could have an opt-in or an opt-out. So in Hungary, Serbia, and Kosovo, we have experienced an opt-out. So meaning, by this moratoria, how the moratoria is being styled, customers are being subject to the moratoria and they even had to do voluntary opt-out. Why is this important? Because it gives the appropriate context if you look at the total numbers of the 7.2 billion euros. And the 7.2 billion euros are more or less equally spread between retail clients, private individual segment, and also the corporate part of the presentation. What you can see further on, if you go with the column of the residual duration, if none of the current moratorium would be postponed, in six months' time, only 7% of the current portfolio would be subject to the moratorium. The third thing which is at least for me noteworthy and I'm more than willing to indicate and share with you is if you look, for instance, on the bucket on the corporate side, is that you can see that a substantial part is in the collector life spaces, and even more so that those who are being put in the moratorium or have asked for being, that they can make use of the moratorium, only 63% out of this exposure is being attributed and allocated to the state student. I move on with page 24, and here, I was sharing with you already in March our way of thinking when it comes to the industries. And I know it's a crowded slide, but let me give a trial to guide you through this page 24 and 25, because it gives quite a good insight on our way of thinking. As said, we will have different industries where you see this V-shaped recovery, U-shaped recovery, and L-shaped recovery. So this is also what is painted on the X-axis. And on the Y-axis, you can see you could have industries which have a neutral, maybe even a positive impact out of COVID. And then you have industries and part of the industries which are, of course, highly impacted. Let me give you sort of a reading example that you see our way of thinking. I think it's pretty straightforward that the entire companies acting in the food beverage industry, they have been either neutral or positively impacted by this pandemic. And of course, their shape of recovery is, if at all needed, a V-shaped one. On the other end of the spectrum, if you look at, for instance, what we have leveled here as a 3C, I think it's also pretty straightforward that this is an industry which is heavily impacted and their recovery may take quite some time. So typical industries we have allocated to this part of the matrix is airlines and airports, leisure facilities, and hotels. So that's the one thing, you know, talking about the industry classification, but this is only halfway through. So we have thought also that we were willing to share with you what is the financial status of the different companies in the different industries. And what we have done is that we have, as a sub-cohort, shown them what are the customers currently being rated with a substandard and below. If you look for a mapping to external rating agencies, this would be somewhere around a single B, single B+. And what you can see here is we have chosen the net exposure, meaning we have also deducted the collaterals received. That, of course, in total, it's summing up to some 1.7 billion euros. But meaning that our exposure to the most vulnerable industries and having clients which are heavily impacted because of their current financial standings is summing up to 1.7 billion euros. And in addition, purely stage two bookings on this portfolio is 76 million euros. But in addition, you could add our holistic stage two bookings we have done and also, of course, partly what we have reserved for macro impact. And I'm sure that there will be the one or other questions relating to the page 25. Let's move on to the page 26. Well, it's one of 58 million euros in terms of total risk provisions in the second quarter. 85 million euros must be attributed to the stage three. IFRS 9 macro is again consuming some 41 million years and we still made use of the BOST model adjustment also still in the second quarter year to date. We also made use of some 90 million years when it purely comes to this BOST model adjustment. Coming to my final slide, as I said, We have a strong portfolio. We have a strong starting point. We have an MP ratio of 1.9%, and we have a coverage ratio of 63.3%, belonging to the best banks in Europe when it comes to coverage ratio on the State 3. This was my contribution. This was my insight, and now we are more than happy to take your questions.

Thank you, gentlemen. Ladies and gentlemen, we may now start the Q&A session. If you wish to ask a question today, you will need to press star one on your telephone keypad. Please ensure that the mute function on your telephone is turned off or we will not receive your signal. Once again, if you wish to ask a question, you will need to press star one. If for any reason you need to remove yourself from the queue, you can do so by pressing star 2. We will pause for a brief moment in order to allow a queue to assemble. Our first question comes from Anna Marshall from Goldman Sachs.

Good afternoon. Thank you for the presentation. Two questions, please. Firstly, on dividends, could you please clarify what is the plan going forward with regards to both 2019 and 2020 earnings-related dividends? For example, you still have your AGM scheduled for the autumn, but if you're not allowed to pay 2019 dividend, Would it be assumed that payment could be made in 2021, say, together with potential payments from 2020 earnings? And on the topic of dividends from 2020 earnings, could you please confirm what was the allocation for, if any, for dividends in interim earnings in capital this quarter? So this was my first topic and my second topic on cost of risk. So you've reiterated your guidance for this year. May I ask if you have any initial thoughts on the trajectory into 2021 and into later years for cost of risk? Thank you.

Hello. Good afternoon. So starting with the dividend question, as you rightfully said, we have scheduled our shareholder meeting. We plan it for the 20th of October. Finally, the shareholder meeting, we have to deal with that. I have to say that we will discuss this topic with... with our supervisor report. We're still analyzing if there is a way at all. Frankly speaking, it gets more and more difficult. The recent meetings that we had with the So our supervisors from the ACP, it doesn't make me optimistic on that. But the important thing is that we believe that the 13% C to 1 ratio is the right one for us. So this one euro per share and the accrual what we did, the accrual is a sort of interim dividend. was about 82 million 25 cents per share. So this, in a nutshell, would be 51 basis points. But as I said, without this dividend, from all what we know as of today, we can meet this 13%. So it's an ongoing discussion with the ECB, more and more less likely outcome that we will be successful.

I'm happy to take the question on the risk-cost side. Anna, if I understood you properly, you're also asking how we think about 2021 and even beyond this. um well i think 2021 we will still see um of course an impact to the industry and to the different corporates and i have once shared with the community what is our through the cycle risk costs which we at this time flavored somewhere around the 60 basis points and i think it's for me at least a safe bet that 2021, we will still see also elevated risk costs compared to this long-term average. So I think 2021 could also be somewhere around the 75 plus minors. each and every month when talking about 2021. As also outlined in the first couple of slides, we must not forget that there's a huge amount of funds being made available. It could be spent for further infrastructure for ESG. It may also work for many of our countries. Also, for instance, on some nearshoring issues and therefore maybe 2022, we could also really be again back on either on the through the cycle risk costs or even could benefit and corporates could benefit from this huge amount of money being made available. That's the best what I can do as of today.

That's very helpful. Thank you. Our next question comes from from Concord. Please go ahead.

Hi. Thanks for your presentation. Just three questions from my side. So first of all, it's about Russian NIM. So it held up pretty well despite the rate cuts. So I was wondering if in the second half of the year we should expect any impact from that. My second question would be on wage growth because apparently there were some ease, obviously, but I was wondering if you expect this to return maybe next year. And my first question would be on net fees. You said that activity bounced back lately, so I was wondering if this would imply a level similar to what we observed in the first quarter then?

Thank you for your questions. When starting with the Russian NIM, I think if we just look at the numbers, so it's about 4.9, close to 5. Our Russian colleagues, they built some hedges and I think these hedges for this year and partly also for next year are supportive, so I would say Just out of the rate cuts what we have seen this year, the direct impact on net interest income and also on the NIM is relatively small. So I think we once said there might be a... 10 million negative impact on that but please be aware when modeling and comparing with 2019 and I think you got the flavor of the the impact of the rate cuts of 19 this is already somehow built in in the first quarter so this was about an impact of 40 million so This year, from the rate cuts in Russia, a little impact because of hedges. Next year, a little bit more because the hedges are running off. When talking about wage pressure, this has reduced substantially. So what we see compared to last year and also the first quarter of this year. I would say that there is this relatively small fraction of IT people where we still see demand and some pressure, but for the big part, It's very little now. There might be wage increases in some banks, not at all in some banks, by a very low single-digit number, and I think everywhere we have big hopes that by efficiency gains this can be compensated. When talking about the fee income, Our expectation is that in some areas we are back at the level of, in talking now more about July, at let's say 90% of what we have seen in a normal month. And also depending on the activities throughout the year, until the end of the year, I think this could be somehow an indicator of what we would expect.

Okay, thank you very much.

Thank you. And our next question comes from Gabor Chemny from Autonomous Research. Please go ahead.

Hello. My first question is on net interest income. Would you be able to quantify roughly how much income you derive from the structural hedges overall? And given that the rate cuts impact is still coming through. Shall we model, I mean for the group, some more NII erosion in the second half? And my other question is on risks. Thank you for providing the sensitivities, provision sensitivities to the macro scenarios. What I realized is that there is relatively little difference between the different scenarios In terms of provisioning, I think between the base case and the upside scenario, less than 10 basis points. In terms of stage one and stage two provisioning, could you provide some color on why is there such a low difference between the various scenarios? Thanks.

Can I come back to the question which I answered before? When thinking about it, I might have been a little bit too short and misleading. So this 10%, which I mentioned, is not to all the elements, but only to the sensitive ones. So when looking at the broader picture, some fee incomes had been rather stable also in some part of the fee income and others less. This minus 10% is related to those FX areas which are traveling and similar like this. Also, credit card spending, again, related to traveling, and to a lesser extent, also to the loan-related business. As I said, we are close to being back on the levels what we have seen before. Now, coming to Gabor's question. I don't have it in mind. You're talking structural on the net interest income. This was your question.

Yes.

I rather would prefer to come back via our investors' relations team before I make a guess out of my head to get it better. You get it right. What we see, of course, is that in the second quarter, and you are right, that we see an overall... an overall negative impact out of the rate cuts for 2020 of about 100 million and the current estimate for 2021 is about $170 million. And I think this gives you somehow an indication what to expect in the second quarter and in the second half of the year. Sorry.

Barbara, just to be sure that I catch your question right, are you referring to the page 92 on our interim consolidated financial statement or referring to a specific page in the due course of the presentation? Well, I think this is the reason why we have made all the use of the... of all this BOST model adjustment because what we have experienced now and what we had to experience now is unprecedented when it comes to the models. And of course, on such a strong impact and we are using log normal distribution when it comes to the scaling of our scenarios, the models become rather insensitive if now the drop is minus 7 or minus 8%. But of course, you know, we realized that there will be a big impact. And we also, of course, have put down many of the industry like 3C and so forth into the stage two bucket. That is the reason why we are doing this. And for instance, our modeling up to now are what were the main ingredients. It was the GDP. It was the unemployment rate. It was the inflation rate. And it was the sovereign bond spread. In this model, you will not find up to now, but of course we are adjusting and enhancing in the industry classification. So that's the main reason why you see even there is a difference, that the difference is maybe some 100 million years between the different segments. Secondly, what is also important to know is that the duration of our asset side is somewhere around 2-2.5 years. meaning the portfolio virtually is running off swifter than you could see the impact of the different macro scenarios. This is my answer to your question why the impact purely mathematically is not as pronounced as you would have maybe assumed. Missing of the industries, but the missing of the industries in the model we have countered by including some holistic flags. And secondly, please bear in mind that the nature of our loan portfolio is a rather short one, and that's also the second reason why the difference is not as pronounced as you might have assumed.

That's helpful. Thank you.

And we can now take our next question from Alan Webhorn from Society General. Please go ahead.

Oh, hi. Thanks for the time today. Looking at the corporates and markets business, it seems that in the second quarter you had quite low provisions. Are you expecting that as the government support schemes come to an end and you see the second quarter corporate balance sheets and so on, is it reasonable to expect that there will be a further deterioration in that portfolio as we go through the rest of the year because clearly it was a very good performance in Q1. So that was one question in relating to the corporates and markets. Secondly, in terms of the short-term business, which is presumably where a lot of the expansion of the book has happened there, when should we expect that to start to contract I mean, I think in your guidance, you're talking about a modest growth in loans to customers, but on a bold basis, you're up 6.1% year on year, which is obviously quite strong. So could you just sort of try and give us some idea between what you've experienced in the first half and the guidance for the full year? that would also be helpful. Could you talk a little bit about Russia? I think the CEO of your Russian business was talking maybe a week or so ago about achieving a stable result this year. I think your comments this morning is that the result will be good in 2020 but lower. Could you just sort of clarify that a little bit for us? And then finally, from the last question on the margin impact of lower rates, can I just clarify what you're saying is that from the rate cuts that we've seen so far, you expect 100 million off net interest income for the full year, and you think that will be 170 million in 2021. I just wondered is that pre any mitigation and do you think there is mitigation that you can do or is that just a simple mathematical calculation of the rate impact? Thank you.

I can start. You know, Alan, you gave us quite a bunch of questions. Well, I may start with the group corporate markets and the rather low risk costs in the second quarter. Please bear in mind that already in the first quarter, and there was once a question, why have you leveled so many of the different clients into a stage two pre-COVID leveling? So we already in the first quarter have allocated to this segment some 25 million euros in total when it comes to the risk costs. And as you know, usually our inflow in January and February to this segment is anyway very low. So what we did in the first quarter in March is that we then have leveled different bits and pieces of the portfolio with this COVID flag. which led us to this 25 million euros increase. And yes, you're right. Currently, we see a little inflow of three bookings when it comes to this portfolio. But it's also the reason why we kept the 75 up on this around 75, because also, of course, in this part of the portfolio, we have the one or other client being exposed to this one. This is the one side of the coin. The other side of the coin is what we also currently see is that some of our clients where you could think that they are more challenged, we also see quite some repayments of these more challenged clients. And I have these detailed slides on page 25. And one big client out of these have completely repaid the outstanding. So, you know, we have effects in both directions and I think that's important to bear in mind. So we see also quite some fluctuations between stage one and stage two repayment and therefore you could say it feels like a right back but in fact we have been repaid by the client and of course we do our downgradings putting those clients and these exposures into the stage two and but at the same time here and there we also experience an early repayment. Hopefully this helps. Yeah. Yeah.

So when coming to your next questions, it's about Russia. I mean, I think when Sergei Munin was talking about the business, he used a general term which says stable. And if you compare half year 19 with half year 20, then I think we all can be proud to have just a minus 4%. of this development. And even if we just look at the Q2 result with 100 million profit after tax, I think this is a nice result. As I said, Net interest impact in this year because of the hedges is not that big. And commission income, new loan business for private individuals are coming back again. So here I'm I think it will be lower than it was in Euro terms last year, but still a very good result. When talking about the lower rates, the 100 million, this is a like for like. just somehow simulating the impact of the base rate cuts of the various central banks. This is the main issue. What is open, of course, is how the margin will develop, and here the picture is an broad variety. One concern is that that many banks are over-liquided with all these measures by the central bank. So here and there we might see also some pressure on some of the margins, but overall I would say that the net interest margin overall should not be lower than what we have seen in the second quarter. So maybe here and there even slightly better because the over liquidity what we have built up in the second quarter will in the course of the year be reduced.

and in terms of your loan growth guidance?

Yeah, here to give you a flavor, I mean, this is volatile, so we have seen If we take an average and compare it, we had in the second half of March and then also in early April, we had loan growth which was up to 200% of what we usually see. April was then at the end of April back to the 100 and in In May and June, we saw less demand. So overall, this gives a clear picture. And then in July, a big up again. And I think August is usually a holiday month. But I think in September, at least when I look at the pipeline, September till year end could be good again.

And would you expect that some of the short-term lending that we've seen in the corporates and markets, is that a temporary phenomenon that will dissipate? Because modest, I guess, gives you an idea of 1% to 2%, yet you'd have to have, if you even saw stable in corporates and markets in the second half, you'd probably do better than that.

Absolutely, yes. I think it comes from both sides. Of course, we have more assets because of this high inflow of deposits and the other measures, so this will be reduced. As I said before, we saw this positive pick up in the retail unsecured loan area and some expectations also in the corporate.

That was very helpful. Thank you.

We can now take on questions. I'm Olga Veselova from Bank of America. Please unmute your line.

Oh, yes, thank you. Thank you. I have two questions. My first question is about stage two loans again. Did I understand you correctly that the reason for the high share of stage two loans is the way how you classify industries? So it's a matter of your personal approach, of the group's approach to classification of loans. And that's why your stage two ratio is so high relative to CE peers. And if so, are you comfortable with the coverage of this stage two loans or you don't really look at this coverage, you prefer to look at MPE coverage? So this is my first question. My second question is about Belarus. Given there is a political unrest, temporary or untemporary, do you have a feel about a need at provisions at this stage or it's premature and you would be in wait and see mode? Thank you.

Well, on your first question, the Stage 2 has different clusters, what you can make use of. So the Stage 2, the warning is coming purely from a rating migration and that you have to shift gears from an expected loss of one year into an expected loss of a lifetime. This is what we consider the usual Stage 2 bookings, but also what you could do within the Stage 2 is that you have your collective or your forward-looking approach being conducted and considered. When talking about the different industries, what we usually label as post-model adjustment, this also makes it into this stage 2 bucketing. This is the point what I would like to share with you at this point in time. And we gave also details on the page 91 on our half-year presentation where you can see how we have done this with this stage 2. So for me it's important I was just highlighting our Stage 3 coverage because, you know, in these days where you see this strong economic deterioration, you could be challenged from many sides. And one of them is if you're being behind the curve already on your defaulted portfolio. And here I tried to rest you assured that this portfolio is well covered, which is already being leveled Stage 3. So this was my motivation for flagging good coverage on the Stage 3 side. But also, of course, we're looking at our Stage 1 and Stage 2. And on Stage 2, we make the one you have out of the downgrading and the higher implicit credit risk, changing from a one-year expected loss into a lifetime expected loss, and also having the Boston Model adjustment being covered. And yes, we have, depending on the different portfolios, we have different coverages within the stage two. And we made use of this classification to have an appropriate provision level available. When it comes to Belarus, you know, I think what we must have in mind is the one is that the political discussion was anyway already ongoing. And our rating model is considering also the country rating. So you will not find any corporate rating at the mapped rating of a single A or of a double A. because we consider, of course, the country rating as a cap. In total, we have almost 1 billion euros of corporate exposure outstanding in the country, and only some 60 million euros are related to government and corporates. Therefore, currently, we see no need to allocate any provisions. And as I said, please bear in mind, having our rating approach, that we have a country cap on our corporate rating models there is also quite some implicit stage one provisions available.

Thank you. We can now take our next question from Andrea Versalone from Exane. Please go ahead.

Good afternoon. Quite a few questions. The first one is I want to go back to your comments on the NII decline connected to rate cuts, as I didn't fully understand it. You said 100 this year, 170 next year. Now, first question is, is 70 incremental or is 170 incremental for next year? Second point is out of these 100 on an annualized basis, how much is already baked in Q2? And third, are the edges mainly in Russia or there's other countries where you have substantial edges and therefore we won't see much until they expire? And fourth, also related to this question, you said you still have partial edging. in 2021 so that would imply everything else being equal that there is a further drop in 2022 um correct then uh on a um two separate questions not on interest income if you have an idea of how much the contribution to the deposit guarantee scheme in Austria will increase by next year. And last, is there anything to flag in terms of procyclicality and regulatory headwinds going forward? You had some already this quarter which you had flagged. I'm just wondering if there's more for the remainder of the year or next year. Thank you.

Yeah, as I said, the assumption of the 100 million impact is based on just the key rate cuts by the various central banks. And as we have the impact only, one might say, in the second half of the year, as there is some lagging when repricing assets, the 170, then 421 is on a full year base.

So 170 is still to come, all of it? Still to come.

That's compared to what we had before the rate. So if you say we have 100 this year, then next year it's another 70. So somehow incremental.

So it's 70 incremental, but you said that of the 100 for 2020, basically none of it has happened yet or not a significant amount. So it's all coming still in H2. That's what you're telling us, right?

the bigger part comes in the second half. Absolutely, yes. We have seen, as I said before, we have seen something in the... You know, if you compare the first quarter with the second quarter, you have this drop already partly in the... in the second quarter and then here you have to be aware that you have effects impact as well in the first quarter and when talking about the 100 this is the pure net interest impact yeah but these are big numbers so it does make a difference if everything equal we knock 100 for H2

or we knock less than 100. So if the guidance for the year is 100, it can't be 100.

Yes, the cuts what we see in 2020, so recently the overall impact is 100. We have in Russia, as I said before, it's only about 10 in 20 and more to come about 40 in 21. And as I said before, you have to be careful because there is a lagging effect also from the 19 cut, which on the full year base in 2020 in Russia is estimated at about 40 million. Of course, this is now a little bit difficult as we split the various rate cuts in their impact. When talking about other countries, you mentioned the Czech Republic. Here the impact is, of course, the biggest one and also the drop in the net interest margin is bigger than everywhere else. And it's a huge drop. In the Czech Republic, we had a 2.4 net interest margin in 2019. In the first half, we have 2.2. And in the second half, it will go down to 2.0. So this gives the explanation why we have such a substantial drop and others with also negative impact is Romania with minus 10 million expected for 2020. The reason for that is the ROBO is more the important one than the central bank rate here. And of course, there is some delay in adjustment. So if you compare 2020 with 2021, you would have a substantial impact of 25 million for 2021 out of this assumed 100 basis points. Another one with a big negative impact is the rate cut. And the impact is about 13 million in 2020 and about 15 in 2021. And the biggest, as I said, is in the Czech Republic. I think here we already had in the second quarter a 20 million negative impact. And this you can multiply, I would say, by two or so for the rest of the year. So then you have additional something like 40. And for next year, this then might be even higher, about 80 or so, maybe slightly more. And this is what we said to make it clear. This is a sort of simulation under the assumption that all the other elements are stable, meaning that the balance sheet structure and the margins, especially in the long area, as in the deposit area in some countries, there is no margin anymore. So this was the NII explanation. I hope I got it. Of course, one might find some counterbalancing impact if we will be able to change a little bit the structure we have mentioned in the answer before, a reduced short-term no-risk repo business and more in the private individual sector, for example. Deposit insurance, I think it's too early to say. what we expect. You were referring to this case in Austria. This will have an impact over the next five years. We have to fill it up. We have two problem cases with probably little recovery, so it's too early to say, but let's assume it's a couple of millions. Four or five. It depends on the recovery, what we can expect over time. In addition, so we had 7 million, and this might be maybe up to double. I still hope for less.

And on capital?

Here I didn't fully get the regulatory increase on OPEX or what?

No, it's a broad question. So you had flagged more or less what then happened in Q2 in terms of factoring the FX risk in operational risk. I'm just wondering if you already know that additional negative headwinds such as this one are still coming. I don't think so. Just checking.

At least on the credit card? On the credit risk side and on the market risk side, we are currently not aware of any other things which are noteworthy to be shared. We have shared on the first page, you know, Like also this deduction of the software items. But I think we have seen in the first half year the biggest impact with the SME supporting factors and also the op risk what we have clearly and transparently shared with the market. But we are currently not aware as of August that there are any other pro-cyclical increases or decreases to be expected in a magnitude which are decent to reflect right now. But Johan is now raising his hand.

I think what I understand from your question is that I made a remark that the operational risk impact, which was 14 basis points in the second quarter, I mean, this is our best modeling effort to build in the Swiss francs, but it needs the approval of the Central Bank and the European Central Bank. So there might be some risk that at the end they do not fully... approve our approach but require something more. But I would expect that's it because also we lack the final approval. There had been some discussions already about that.

Okay, thank you. We can now take our next question from Tobias Lucis from Kepler-Cheroux.

Yes, good afternoon. Thanks for this presentation. A quick follow-up on my side as well. Firstly, I have to dig on NAI again. Thanks for the details around the rate cuts. But to get the full picture, could you please give us the net GLP-03 take-up that you have? And if I understood you correctly, you said that you will... try to earn more than the 50-bit carry. Is that fair to say? Is there a kind of calculation you made for the next 12 months? So will that go up into the 100-bit sphere eventually? Secondly, with regards to the rating migration again, so I fully appreciate that you have basically the highest coverage ratio of the Stage 3 loans. However, you put a lot of your nominal exposure from stage 1 to stage 2, especially in Q1. Now you continue with a high number in Q2. The only thing I realized was that compared to the European average, which basically increased the coverage ratio of stage 2 by 20% from Q1 to Q2, you basically went the opposite direction. Here again, is that just the difference between, let's say, double B-plus loans versus eventually B-minus or triple C loans that we see potentially in competitor's book? Or what is your general idea behind the total coverage here? Sorry if you have to reiterate what you already said on that point. And finally, lastly, With regards to the various countries and your real estate exposure, which you nicely broke down on page 24, you categorized that as a kind of 3B category with $7.6 billion. I was just wondering if you could give a bit more flavor to either the product mix between office and real development and retail, which you see at risk, and or geographies where you see the highest risk regards to real estate. And as a last one, it would be interesting to know if you rather see just some valuation pressures for your real estate book or if you really expect here customers to actually default. Thank you.

Well, thanks for all your questions. I already was asked today regarding our risk costs in the second quarter. I think we were already in the first quarter making use of the IFRS framework quite nicely. and already making use of some of this post-model adjustment and putting some of the different corporates and industry into this stage two. And therefore, stage two provisioning in the second quarter might be less pronounced than compared to some of our competitors. I think that's the one important thing when looking at the different dynamics. What you also have to bear in mind is that, of course, because of the rating migration, you get a release on the stage one because then you have to book up for stage two if you do the re-rating. And what is maybe also interesting for you to see is, in total, we have, of course, based on the different industry approaches, We have done quite detailed credit risk work and what you can see that those which we have leveled on this 3B, 3C categories, you would see already as of today on average a rating down notch of 1.6. So, meaning that's the reason why we also have a substantial share of Stage 2 bookings respected to these industries and even further on which I have shown on page 25 or that we have shown on page 25, all these exposures are being subject to a Stage 2 coverage, so to say. This was the first question when it comes to stage one, stage two, and the dynamics in the first quarter and the second quarter. As I said, we have been an early mover when it comes to this making use of the framework. The second one, when it comes to the real estate, there are a couple of things to be considered. When we talk about real estate, and colleagues will now look up the numbers, maybe we have to revert back to you with the exact figures. But in the end of the day, what we're talking about is institutional real estate, meaning we're talking about offices, we're talking about hotels, we're talking about warehouses. I think these would be the most important ones, what to be considered and also giving the respective guidance. Well, on HOTL, I can tell you out of my mind, because this question is not coming in the first time, we have about an exposure of 1 billion euros. But our underwriting standard when it comes to the financing of HOTL is rather strict, or I would even say very strict. And we have an LTV, and don't nail me down on the exact number on this portfolio, some around 50. With some of the others, we even go down further when it comes to the LTV. You could even call it a rather robust and prudent risk approach when it comes to the financing. And some of these exposures, they are really in the super city center, now talking about this 1 billion. And they are prudently financed with a low LTV. And we could just easily also do a sort of modification of the terms and condition because these are really best-in-class spots where you can find these exposures. So yes, we would see a deterioration. We might see the one or other downgrade even in this portfolio. Let's see how the day curve comes back. But from a pure NPL state three bookings, I'm currently not super heavily scared. What is also maybe important when we talk about the entire real estate part, what you can see here of the 7.6 billion euros having a net exposure of 5.2, that we also have conducted in 2008 and in 2019 a securitization exactly covering this portfolio. And if my memory serves me right, the current outstanding of the securitization still sums up to some 1.2, 1.3 billion euros. So meaning that we have acted properly already in 2008 and 2019 mitigating part of the potential migration risk. Coming back to your question when it comes to real estate, I was talking about the hotel part and then of course you still have also offices and warehouses. Well, on offices, this is a very interesting discussion. It depends with whom you discuss. There are some saying, well, don't worry, offices in the city center will still be needed and even more space is needed because you need to have the social distancing. That's the one part of the arguments being used. The other one is, of course, well, there will be an adjustment because now industry was proven that we also can do some home offices. So I belong rather to the second camp. But this is too early that you already see these adjustments that their offices are being put back here. And again here, if you have a very good location, well, then it might be refurbished and used for something different. Then coming to the last category. its warehouses. Of course, you could also talk about residential real estate. This would be the fourth category. But when talking about warehouses, you could have two or three beliefs. The one is if we believe in this nearshoring. So now Europe was demonstrated that A big part of the value chain of production is not anymore in Europe. And this just-in-time delivery also was proven that this may be sometimes being on the edge. So this could mean that in this part of the portfolio, meaning warehouses, that some of the corporates... feel the need of having a little bit more stock available could be even supportive for this part of the portfolio. And then last but not least, coming with the residential real estate, here would be the counter-argument for the office building. Because you could see even additional need for some square meters because people would also have maybe a small room allocated to home office activities. So flats could experience a demand for more square meters. Well, having said all this, meaning the securitization, I think as of today, the most challenged part of the portfolio is the hotel portfolio. And yes, here we will see further downgrades. But from estate rebookings, as I said, we have many of these exposures in really very, very good locations. Sorry for the long answer.

Thank you.

Thank you, Hannes. I think there is one question left for me, which is the TLTRO. So we have consumed $4 billion at RBI in head office and half a billion in Tatra Bank. And as you rightfully said, there are some conditions. The one is that if we show a decent growth of... 1.15% for the period April 19 to end of March 21, then there is a bonification of about 50 basis points. And if we keep it, but is it stable for the period of What is it? The period is the COVID is of March 20 to March 21. If we keep it stable there, then we get another 50 basis point, which is the so-called COVID-19 support.

And you're confident that you will reach that growth level, I guess, right? And put in at least 100 bps?

Yes, we are confident.

Thank you.

We can now take our next question from Simon Nellis from Citibank.

Oh, hi. Thanks very much. Just a really quick question from me. I think I may have missed it. Can you just tell me what the dividend accrual was out of the first half profit? It's not in the capital.

Eighty-two million.

Eighty-two million. Okay. Very, very clear. And if I understand correctly, your intention is to pay out the one euro per share dividend plus whatever you're accruing this year, if you're allowed, right?

If we are allowed, right.

Got it. And then just last on risk costs for next year. I mean, relative to, I don't know, in the first quarter, are you feeling more comfortable that risk costs could be lower than this year? Or is your thinking not changed? I think at one point you said that the outlook is still uncertain that next year could be another elevated year. It's not higher risk costs than this year.

Well, Simon, you know, as the question was raised in the beginning by Anna, where she asked you regarding the guidance, I was referring back when last time being in the city where I said through the cycle some around 60 basis points, 2020 for sure will be above this long-term average with around 75 basis points. And I think given the current development, I think defaults by itself shall peak or will peak somewhere around Q4, Q1. Hopefully not touching into the Q2, but still so. And therefore, as of today, our strong belief is that 2021 will still be above the the long-term average or through the cycle of the 60 basis points. And I also gave my arguments why I believe that 2022 could also be supported because some of the Stage 2 bookings we might then not need. We could see some re-ratings. and also the big amount of money could start to be employed. So I'm much more constructive on 2022 than on 2021 because, of course, all these projects need to kick off. And for this part of the industries where these packages are coming too late, this is where I believe that also till 2021 could be slightly above long-term average. As I said, this would be my best guess as of today. That's very helpful. And what we have seen, maybe last word on this one, Simon, is, for instance, when we look back on the SARS infection, it took almost four years that the room price and also the occupancies on hotels was back, four years. So it took four years that really the hotels have seen that the same amount of money earned per room and the good occupancies. And that's the reason why I believe that it may take maybe more than just this single year and also reaching into 2021. Thank you.

And I'll take our next question from Johannes Tormund from HSBC.

Good afternoon. Two questions left on my side. First of all, on page 24 with the cluster analysis, just to help me understand, where would you put your 75 BIPs risk-cost guidance in that chart? Where would you position that? And secondly, just as we've seen some volatility on the tax rate in the first two quarters, what is the full-year outlook and probably outlook also for the next year?

Thank you. Thanks for the question, Johannes. The 75 points, you know, as I once was sharing, and I come back then, of course, immediately to your question, so I'm not hiding away. So how did we do this 75 basis point? Starting point was through the cycle of the 60 basis points, 55 to 60 basis points. Then we have conducted in Q4 a stress test, leaving to some 100, 120 basis points. But this would be a pure passive approach, no government support, no nothing. So we believe that our risk cost shall be between the 60 and the 100. The other one is, you know, we looked at our rating. The other thing what we have done is we have conducted single ratings on the different corporates. Those who are being subject to the L-shaped recovery industry classification, we assume the complete fallout. of up to six monthly revenue numbers. And on the U-shaped, we believe that there is a fallout of three months of monthly revenues. And on the V-shaped, just one or two months. Having said all this, this is more or less always confirming the 75 basis points. And we must not forget the 75, around 75, comprising retail and non-retail. And last, what we also did on the non-retail side is that we have then included the way of looking at our industries. And now I'm coming back to the page 24, but this is also the reason why we have added page 25. Because if you look on the page 25, page 25 is summing up that this is substandard and below-rated customers. I gave you a feeling that this is somewhere around on a single B, single B plus level of the subcomponent or subportfolio. The implicit PD of this 1.7 billion euros is summing up to 10%. So now the calculation goes like this. We have 1.7 billion euros current PD on this one, having experienced already quite some downgrades. would be 10%, LGD 50%, you would come up 1.7 times 10%, 170 times 0.5. This is somewhere around 80, 85 million euros. Okay?

Yep.

Currently, we already have booked some 76 million euros as stage two risk costs. But stage two risk costs you only can consume for those who have defaulted. And even you would now stress me and say, well... and if you're way too shy on stressing this portfolio, well, then double the numbers. Double the numbers and go with a BD of 20%. Go with a BD of 20% of this portfolio. This would lead us to some 340 million euros. So what we do is we really try to look at the portfolio, is it retail, is it non-retail, but look from different ways of challenging the portfolio This is another way of challenging the portfolio. And now coming back to the page 24 on the classification, what we have leveled here with a 1. Well, you know, if you have fraud, you always could be caught wrong-footed. But in this big area, what we have covered with 1, I would not expect as of today any default coming from. So it's really the 3A, 3B, 3C area where we believe that this is the clusters where it is most likely that we see some need for stage 3 bookings. Hopefully this helped.

Yes, thank you. Thank you.

To your other question about the tax rate guidance, We assume 24% for this year and mid-term 22%.

Thank you very much. Thank you very much.

We can now take our next question from from UBS.

Yes, good afternoon. Thank you for the presentation. I have two quick follow-up questions. The first one is on cost. You mentioned that we should expect the cost-income ratio to deteriorate in the second half. Could you give us a sense actually how sustainable these lower admin costs are? In which areas shall we expect perhaps some inflation in the second half? And the second question is on the OPRISC charge related to the Swiss franc mortgage litigation in Poland. Could you give us some color? What are the underlying assumptions of this charge? What is it based on, perhaps, in terms of the current exposure or outstanding amounts or VIN ratio of cases? Any color on that would be very helpful. Thank you.

Well, let me start with the second question on the OBRISQR. You might have in mind that we are having a current outstanding in Poland with our Swiss franc exposure summing up to some 2.3 billion euros. Colleagues will confirm. No, I have already now the confirmation with me. So it's 2.2 million euros what is currently in Swiss franc outstanding when we talk about Poland. First thing. Second thing is that the KNF at this time was introducing for mortgage secured lending an extremely elevated risk weight, meaning that we have a risk weight for this portfolio of 150%. And in their argumentation, what they have used, they also included as a reasoning for this elevated risk weight is that they have assumed that there might be the one other legal case. This amendment to the CRR or the interpretation and the reference being made goes with the credit risk waiting. Our belief up to this moment before we had to include it is, well, this elevated risk cost, as also stated by the KNF, is partly also covering that would be assumed litigation cases are out of the contact risk. ECB has forced us to say, no, these are pure op risk cases. These are contact risk cases. And as you're aware of, that we also have to provide some legal provisions for this portfolio. Currently, we have some 60 million euros of legal provisions being added to this portfolio. And as our CEO said, also including our modeling and our assumed further inflow, this is then in the end of the day, you know, turning itself into an operating need of capital of 800 million euros. That's the RWA, sorry. That's the background of these dynamics.

When coming to your cost-income ratio question, the pressure which I was referring The second half of the year mainly comes from the revenues. We assume, and now this is a broader view, we assume that the OPEX should be stable this year, next year. I think here, as I mentioned before, the wage pressure is to a large extent gone. If there are areas where we have to increase wages, then probably the overall efficiency gains what we can expect from and there are several areas. The one is, of course, the less... what we need, home office is coming well ahead and all this stuff. And midterm, it's also the impact from digitization where we can reduce our operations, cost for operations. And of course, we execute further what we labeled as the target operating model project in head office here. It's according to the plan with just a few months of delay during the shutdown. The measures are designed and executed. There will be, of course, some fluctuation quarter by quarter. This is effects driven here and there. There might be marketing spend more than what we had in the second quarter. But if you look on a year-on-year comparison, OPEX should stay flat for a while.

Thank you. Thank you for your questions. If you have any more, please remember to press star 1 on your telephone keypad to place your question. The mute function on your telephone needs to be turned off so we can get your signal. We can now take a question. from Thomas Unger from Earth Group. Please go ahead.

Yeah, thank you very much for also taking my question out at the very end. I'd like to come back to the answer you gave to the very first question, Q&A, on the dividends, and where you said that you're growing more and more pessimistic about the approval. Are you talking about the approval of the dividend as such for 2019 and 2020? Or is it just a matter of timing and then when it might be paid out? Thank you.

I was talking about the 19 dividends to be paid out in 2020. This is where I think the opportunity is diminishing day by day, at least what we see in our talks with the ECB. On the other hand, it's the final responsibility of the annual shareholder meeting, which will happen in our case on the 20th of October. I think next year is still open. I hope at least.

Thank you.

Thank you very much for all your questions and your participation. Have a good day. Stay healthy.

Bye.