Raiffeisen Bk In Unsp/Adr

Good afternoon, ladies and gentlemen. Welcome to the conference call of Raiffeisen 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, sir.

Thank you very much for this kind introduction. Good afternoon, ladies and gentlemen, or good morning when you are in another time zone. We're happy to talk to you again. I hope you are all healthy, sound safe in these days. I think that's important. Now let's talk about Q3. And you have received this morning the numbers. And I think what you see is the impact of COVID so far. And one might say to a large extent the way it was expected. In the consolidated year-to-date profit, you see, and if you compare it with last year, you see the increased provisioning and impairment charges. You see lower costs, which partly also had been caused by currency weaknesses in CE, and the lower costs absorbed some of the negative impacts. confirm our guidance for the full year 2020 and continue to expect the full year consolidated ROE to be in the mid single-digit area. Long growth was affected by currency movements. In local currency terms, we saw user-date growth in a number of markets like the Czech Republic, Hungary, Slovakia, Romania, Serbia, and Russia. We did, however, see some signs of slowdown in the demand for credit in the third quarter. And important to mention, net interest income has been impacted by rate cuts and by currency movements. And I will come to this shortly in detail, shortly. Fee income in the first nine months, probably as expected, was also down year on year. But the good thing is that we saw some recovery in Q3. You see the numbers close to 600 million. Consolidated profit year-on-year dropped by 32%. This year's CO2-1 ratio of 13.1. Long-term customers close to 92 billion. A small increase since year-end. Core revenues, net interest income, as I mentioned before, down 2% year-on-year, and as I mentioned before, the commissioning income is close to 1.3 billion, down 3% year-on-year. Provisioning ratio is in the range, and we will talk in detail about that soon. is in the range of what he what we expected with 72 basis points and the coverage ratio of stage 3 net non-performing exposure is good with 63.8 percent and with that i would like to move over to the next slide where we see the quarter results quarterly results and Let me start with the net interest income. As I said before, there was a drop of 55 million compared to the second quarter. This was triggered by the big countries, Russia and Czechia, but also by Ukraine, where we see not only a decrease in central bank rates, But also the effects development was Russia and Ukraine, Belarus, which is a smaller country, was negative for our business. I already mentioned that after the lockdown, the broader activities... In overall in many areas of the economy brought an increase quarter on quarter by 10% of the net fee and commission income. And trading income and fair value results was also contributing positively. So that overall the drop in the operating income is 1% quarter on quarter or 4% year over year. This was compensated, as I said before, by general administrative expenses here. One has to be aware when talking about staff expenses down by 9% that there is always a seasonality effect in Q3 as well, which is because of the holiday seasons. And I have to remember you that we had a special provision in the second quarter, which was a one-time event. When talking about... Other elements in the other results, we had one more adjustment in the valuation of participations and impairment losses on financial assets as explained. Yeah. And with that, we end with a consolidated profit of 230 million. which was a good improvement compared to the second quarter. I think on the next slide, slide six, there is two more details. The one I have mentioned already, the NII, if we now talk on the areas where it came from, when I'm not talking about the implications for the net interest margin, What you see is that the drop of 21 basis points, the biggest extent came from the drop in the NII to a smaller extent from the increase in balance sheet. You will see it on later slides that the inflow of deposits was still strong. We have high liquidity. So this drove the balance sheet, but this is not contributing really to the earnings. So we end with a 2% net interest margin in Q3. And in the lower right hand box I would like to draw your attention to some more details on the development of the fee income. Here you can see where the business activities improved and with that I would like to move to slide number seven. I think here again it's more the quarterly Details of the development and I think what you see is the drop in staff expenses and other administrative expenses. Depreciation is rather flattish. This is simply the outcome that we in the past and also now do invest in mainly digital developments. And, you know, as soon as this produced software goes into use, then depreciation starts. When asked where does this reduction in costs come from, so I already mentioned that FX was one contributor, but what we also see is that you might remember some time ago we introduced a review of our operating model at RBI head office and We saw a 40 million impact here already and a little bit more and another 10 million from the Austrian subsidiaries. You are aware that around 1 billion of the 3.1 billion of administrative expenses are allocated to Austria, to the RBI head office and the subsidiaries. We also saw some gains in the operational efficiency in the network banks as well. And there is more to come. Automation has still room, and this will bring down the costs also in the future. And you are aware that we have made some adjustments in the branch network last year already, which starts to pay off this year. And with the positive experience, which we made from the lockdown and the improved use of digital channels, there is also more potential in the future. When moving to the next slide, you see here the, I think, the regional segment where, how was the core revenue development? I think this is the one. One issue, the other is, and here you see that the various activities in the quarters, lockdown versus non-lockdown. So I think this is the big differentiator in the fee income between the various countries, how deep the lockdown has been, if you have this quarterly comparison. And the loan development to customers, I think you see here the development, which, of course, as these are Euro terms, as I reported before already, this has to be considered. And here you mainly see in the eastern part that this drop in effects also brought a big downwards adjustment in the loan portfolio. The rate cuts are visible in the net interest margin in all the countries. We had this strong reduction in central bank rates in Russia and Ukraine and given that I think the drop in the net interest margin is not that bad so far. I think in in the c segment you see the huge impact of this this big crop from the czech republic and moving to slide nine i i think the it includes here some valuation um some some information sorry uh on on specific uh positions in the balance sheet i would like to draw your attention to the lower left box which shows the customer demands for long-term loans. And I think what you see here is what we reported throughout the year, the different patterns between corporate and retail. And you see the improvements in demand in September. and in both I would say in September close to normal in the retail area and after a week development since May also improvements in in corporate when moving to the next slide and now we are on the report about regulatory capital requirements and ratios. Here we are at 13.1. The requirement is 10.42 for the C to 1 ratio. And you are aware that since the third quarter, we optimized our capital structure. so that we can make use of these improvements in the Pillar 2 requirements, where now the requirement with CT1 is 1.27, and the rest is met by 81 and by tier 2. And with that, I think I should move to slide 11. Slide 11 shows the development in the CDT1 ratio from Q2 to Q3. We had developments, one might say, as expected in the credit risk area where rating migration, yeah, you know, we have been expecting this, and the re-rating of the portfolio is to a large extent now done. RWA increase of 1.3 billion, which leads to 23 basis points. There have also been some new business and colleagues have been successful with remodeling some operational risks, which brought some improvements. I mentioned several times the negative effects development which is shown here with reporting point four. Also, we do have a part of the RUBER participation in Russia. It's not fully hatched, so there was some negative impact from this. as well but more important one has to say that also other currencies which are not easily being hatched contribute negatively like the few other currencies where we have this drop if i move then to slide 12 i come here to the yeah to the funding development, the liquidity situation. And what you can see here is this huge inflow of, on the one hand, deposits from customers. On the other hand, you are aware that we also participated in the TRO3, which also improved substantially the short-term liquidity. And we're now at the level of 170. And here, of course, it's our intention to bring this down. And with that, I think I should move to a few business updates so that you not only hear COVID numbers and impacts, or also I have to say, partly we see this year in these numbers as well. So I think what every company in these days can confirm is that with all the negative elements of the COVID, there are some positives. And one is that the digital transformation is strongly supported. When talking about our main targets for retail in this retail transformation, it's customer growth. And here we are happy to report that with these reduced activities in all the countries, we were able to grow our active customer numbers in Q3. And we are confident that if this development continues, we can reach our ambition for 21 with 12.5 million active customers. Mobile banking penetration improved, and this gives to 40%, and this gives us, again, confidence that the 55 are in reach in 21. Digital sales improved. Here we have to say that the lower sales in the physical channels supported this relative number of 34% digital sales. when the situation normalizes and visitor sales will increase, then probably this number will not be so high as it is now. But it clearly confirms again this ambition that 35% of all our sales should be done digitally. So when thinking about what could be the benefit of this further digital transformation, then I think the focus is on these five products, which we show here. In retail, three for classic retail BI and two for SME customers. These are the areas where we will put our focus. And, of course, they cover a big part of the operational and overhead costs And we believe that this should show the potential where we can save. And by the end of 2025, this is at least the potential of 114 million per annum. And yeah. I think if we get it right, it will not only contribute to a reduced cost base, but also to an improved revenue. And here estimates are that at least 110 million should come from these improvements. Moving to slide 14. Of course, I think the follow-up question then is what does this mean for branches? And I think there are and I have stated here these as well. It will show in two developments. The one is, of course, more digital sales gives room for optimization of the branch footprint. And probably here in our regions, we might take out 300 branches. And this is enabled by this improved remote sales and also by the digital development of our customers. And this comes from the way we will improve our branches. And the idea is that those people, the number of people who really are in a sales role in branches, so converted from a service function to a sales function, we should reach 70%. And this gives room for also cost reduction, of course. And it should also reduce the complexity. and these people will support also the transformation of the customers. We have been quite often asked, what is your approach? What is our approach on the digital development? Do we believe in one solution over all countries? We always said that For us, with what we know now, changing the total IT network in our branches seems for us expensive and maybe also risky. So the core banking systems, as of today, we do not intend to touch. We rather move in a direction which is based on APIs and microservices. decoupling and I think I have was speaking about this several times in the past and I think we make further progress on that so by introducing to a large extent APIs and microservices so that front end solutions customer facing solutions can more efficiently I would say in a more real-time way, communicate with the core banking systems. This is the way we are going to explore. We are already exploring. And this would lead to further IT cost savings. Here the estimates are 17 million per annum for this product. And of course, if not all the network banks have to invest in similar solutions, they should also reduce the capex, the investments. And if the reuse is successful, development time should also be reduced. Coming to slide 15, talking about the corporate banking area, I think here it's mainly about customer service and efficiency. So customers struggle with these huge requirements in KYC, account opening, and so on. So we believe that for The simple, the standardized product landing can be digital. Account opening can be easy, end-to-end. You see it here. And we made some progress also in the trade finance area where digital solutions are now available. And these functions will be rolled out over the coming quarters to the whole network bank. And this might also or will give some room in reducing the efforts in the process. Coming to the outlook, let me start with the macro outlook. We just arrived as a research just recently adjusted. The last one, which was from August, and to make it easier for you to compare and to read where the adjustments happen, what you can see is that in most of the countries, the development in the third quarter was better than expected, with two exemptions, Czech Republic and Hungary, and to some extent Croatia. So what you see is... few negative adjustments and you see the percentage points of the adjustment in the rows after the absolute numbers. And you see also the impact what our research people assume for 21. And 21 is rather unchanged, improved with again with small exemptions And I think the biggest impact came for the Czech Republic. We all have been surprised about the high number of infections and the required lockdown. Personally, I still hope that 21 is slightly better than what we see here, but the experts know anyhow better. But then there has been also a couple of countries where the negative impact of the COVID in 20 was less than one has expected even till August. So I think this is overall a rather positive statement. And with that, before I hand over to Hannes, I just confirmed the outlook which is modest loan growth in 2020, provisioning ratio to be around 75 basis points, cost income ratio. We keep the midterm target of 55%. It's still good till now, but by the end of the year, next year, with some seasonality in the course, we will be above this 55. and we will reassess this and with the Q4 numbers we will maybe adjust or for sure adjust also this guidance. Profitability for this year mid single digit and in the long run I think the potential is there for this 11%. The one ratio I confirmed the 13%. payout ratio between 20 and 50%. You are aware that we had the annual shareholder meeting. We have to adjust our dividend proposal as there is still this very strong recommendation by the ECB not to pay dividend this year. The approach we took is let's postpone this decision If the dividend ban is lifted by the end of this year or early next year, let's call for an extraordinary shareholder meeting and let's decide then. So here is the assumption that this approach gives us the most flexibility. And with this, I hand over to Hannes.

Johan, thank you. Dear all, great talking to you and good afternoon from my side. Well, if I would reflect on the first nine months of this challenging 2020, we can report that our MP ratio is at 1.9%. We show a very strong coverage ratio. This is coverage ratio one of 63.8%. If you look on our impairment losses of 497 million years, the biggest part goes to the stage one, stage two, and post-model adjustment. summing up to a risk cost of 72 basis points. We still see a low inflow in the Stage 3 bucket on the corporate side. For obvious reasons, we see the moratorials. We see also DEX deferrals. And having said all this, by this we are confirming it was just also repeated now. We are confirming our risk cost outlook somewhere around 75 basis points. Last time, we realized that you appreciated the deep insight we were providing on the non-retail side when it comes to our thinking on the industrial side. This time, we have thought we give you a little bit more insight on the retail dynamics. I'm now on page 19. I think that's a very well-known page to you. As outlined, of course, DFX dynamics have been heavily impacting the exposure, but if you look year-to-date, we see an increase on total exposure. For the many markets in the Eastern European part of our RBI group, we see that the development on stable FX rates would have been very strong. We could have demonstrated a growth of 2.8 billion euros at the same time because of strong deterioration on the ruble. On a net basis, we see a decrease of 1.1 billion euros And you also see on the right-hand side what is the split on retail, non-retail, and within retail. You see that we have in total some 41 billion euros of exposure at default, comprising 24 billion euros on the mortgage base and 17 on the consumer lending. The RWA developments have been deeply explained. Also not a big change. You see that we have finished during a half year With 80.5 billion euros, now we are at 80.1. We have the FX index. We see a little bit of growth. We see also the rating migration, and we were also talking about the op risk. H21 is just an update, and I realize that you have reflected on this also in your research notes. that we have seen now a drop of moratorium exposure outstanding from 7.2 to 6.2 billion euros. We see a stronger drop on retail part and then happy later on to give you some very first insights on the current behavior for those that are being back on the repayment. Do not expect too much on this one because we have just a historic experience now of one or two or three months of clients now being back in the amortization schedule. Bringing me to the page 22, where we have shown our retail exposure and we tried to explain it to you in more detail. What are the big messages of this slide? You see in the middle block the 38 billion euros for the BI clients and 3 billion euros coming with the SME clients. And you very well know our way of thinking when it comes to the industrial split, and we were also employing this industrial split to our BI clients, so where they are employed. And what you can see here, that only 6% of all our BI clients are acting and working in the industries which we leveled as very being challenged, these L-shaped industries. Some 23% are working in the industries which we call U-shaped, but we believe on a U-shaped recovery on the specific industry, and a big bunch, a big bunch of this. Over 70% is working in the area which we leveled green, meaning that they have a big impact but also seen a nice recovery. So that's the one way of looking at our BI portfolio. But even more important, if you look on the left-hand side, you can see that we have a very, very strong going-in position when it comes to the greater quality of our retail exposure. You see that we have 70% of declines. in the very, very good rating grades, some 23%, which we level here as good, sound, and acceptable, and so forth. So I don't have to do a guided reading for you. But this is my two most important conclusions on this upper bar here. So the industry split is also working on the PI client, and the client which we are banking with, only six of them are working in the red-level industries, out of the 6% comprising 2.2 billion euros some 0.3 billion euros have asked for a moratorium. On the S&E side, you can see that in total the portfolio, and that's very important to memorize, the total portfolio currently is just summing up to 3 billion euros. So we have been rather restrictive in the history on the S&E portfolio. And you can see here also the industry split. So hopefully it's insightful for you, and it helps you to make your assessment when it comes to the economic development of our group. Well, I would now move on to the next page where we have shown, and this is a very well-known slide to you, when it comes to the recovery assumption bear industry. That's very important. It's the recovery assumption bear industry. We are not talking about macro, what different letter in the alphabet you would like to use now. Sometimes I'm hearing it looks more like the trademark of a sports company, the current shape of the recovery. So what I'm talking about here is really focusing on the recovery shape, their industry. This is just for updating you what happens on the Q3. So I would not like to talk in details. I have introduced this slide already in Q2. So for me, no need to go into the details here just to clarify. that these are the recovery assumptions for our industry. Let me move on to page 25, and this is just again to see, because you always have two effects. The one is how is the industry moving, and also what is the financial strength of the individual counterpart? And here I can report that the numbers are more or less stable. So we have done our re-ratings. We have seen that some clients even have early repaid. So this is also just for your reference and for your records to give you an update that this bucket on the yellow and on the red industry for those clients which we call rather substandard and below when it comes to the customer rating. Last time I was talking about a mapped rating of somewhere around single B, double B. that here the portfolio is more or less stable. So I'm already now on page 26. In Q3, we have seen a total sum of risk cost of 185 million euros. We have shown here the different segments, and we have also shown here to the left-hand side where the 185 are coming, summing up. So you see some 55 coming from stage one and stage two. That's obvious we have to do and we're doing this, of course, constantly. We're doing these re-rating exercises. So you see that here there comes an updrift on the expected losses and on the shift on the stages. The second pillar we are showing here was 42 million euros. What did we have in mind when doing another post-model adjustment? Last time, we were talking quite intensively about our HODL portfolio. As I told you, on a net EAD basis, we're talking about some 1 billion euros exposure default after collateral. And we deemed it, given the still very subdued demand on offers from the HODLs acting within the cities, we deemed it justified to allocate here some post-mortem adjustments. State three, you see it on our coverage ratio that we have slightly increased our coverage ratio. And of course, goes without saying, we are being part of the economic cycle, and we see already some first defaults here and there. Let me come to my final slide, and this is also just updating anyway just repeating in a nice form what I was stating in my intro. We have an MP ratio of 1.9%. We have a coverage ratio of 63.8%. We see that the third bullet is maybe very interesting for you. If I would also add the coverage we have created in stage one and stage two and with all the post-model adjustments, we would now come to a coverage ratio of 95%. And everything is good for reading and where you can see what have been the dynamics in the different buckets. Well, having said all this, we are now 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 1 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 1. If for any reason you need to remove yourself from the queue, you can do so by pressing star 2. We will now pause for a brief moment in order to allow the queue to assemble. Our first question comes from Anna Marshall of Goldman Sachs. Please go ahead.

Good afternoon, thank you for the presentation. Two questions for me please. Firstly on asset quality. You've mentioned your outlook for this year unchanged, but how about the outlook for the following two years, especially in light of your updated macro parameters? And also I would indeed like to take you up on your offer to comment on the moratorium exposures which have exited how the early performance looks like. And my second topic is capital. Could you please indicate how you see the trajectory into the remainder of the year? I see in your presentation you expect some positive regulatory impacts, but what else could be a moving part there? Thank you.

Well, Anna, thank you. If I may start with your question. If you look at the post-model adjustments and the way how we have thought about the different industries, so my way of looking at the current dynamics is, and you can maybe recall that for those which we have leveled in this V-shaped barcode, we were doing a stress simulated rating. assuming that there is a fallout of a monthly turnover. But those industries which we have leveled U-shaped, we were assuming a fallout of three months. And the one with L-shaped, we were assuming a fallout of monthly turnover of six monthly turnovers. On the V-shaped, I think we have been a little bit too conservative talking to the entrepreneurs, talking to the different companies. Many of them report numbers comparable to 2019. Not, of course, all of them, but the V-shaped. There are some industries, think about retail grocery and many others, where they do not feel such a huge slump. So this is my, on the V-shaped. The U-shaped, I was just lately reading a research from two very prominent rating agencies saying, well, in the most prominent industries, e.g. car industry, they assume a drop in annual sales of 25%. And we were doing this industry clustering beginning of March, April. So seemingly we have here really hit the nail. And then it comes to the red-level industries, and here I think we have been a little bit surprised by the deepness of impact. Now we see in some of the hotels that turnovers and revenues per room are going down by some 80 or 90%. So having said all this, the adjustment on the macro side, so this is the one way of thinking. The second way of thinking is that we have, and you can see it in this stage two BOST model adjustment, which we call macro overlay. We were already considering in our models, when we build models, we like models which are reacting quite fast and precise. At the same time, with the initial very strong recovery assumption by the researchers, our models would have forced us that we have already start releasing some of these stage two provisions, which of course we deemed extremely difficult to understand and to interpret. So meaning that we have added a lagging factor that part of this release would still start to be seen in 2021. So that's the reason why now if we now see a drop or an adjustment in Czechia and some other countries, we would not immediately see the need to adjust. And as I always said, we're talking about 75 basis, around 75 basis points. So please do not nail me down, Anna, in the end of the year. if we are on 71 or on 76 or 78 basis points. So this is around 75 basis points. The other questions you raised on the first insight, when we were talking about the retail portfolio and the moratorium, and in the peak it was somewhere around 4 billion euros, in our internal assessment, talking to the clients, asking them what will be your repayment, behavior, do you need a second restructuring? In the initial questions, many of them were saying, well, also some 20% of our clients when being asked via SMS or via calls have assumed that they would need a sort of restructuring. What we then have seen that only about 10% really make use of this restructuring need and this first very cautious glimpse I would now like to share with you is really very cautious because we see now some two, three months of first repayments and it's a neighboring country of ours. On the retail side, what we can see here that on the secured, so those who are in a secured lending, i.e. mortgages, that here the one coming into your area is below 1% currently on a secured basis. On the unsecured basis, we see that it's somewhere around between 2% and 3%, asking or coming into an area, meaning 30 plus, which means that we did not yet fully utilize also our collection and our restructuring, but these are the first numbers. On the corporate side, it would be too early to share with you any insight when it comes to the dynamics of those who are being back in the regular schedule. One more point before taking the second question by Johan. It's been taken by Johan. I think what for me is very important to underline and to emphasize, but it was already good to get our clients being back in normal schedules. So there was done a lot of effort that people, our clients allowed being back in their usual and normal amortization.

Thank you, Hannes. Talking about the RWA development to the year end, I think most important is that there is probably an organic growth of a little bit more than a billion, what one might expect. Maybe some further 400 million in rating migration, as I said, a big part of the re-ratings had happened already. And, yeah, then there are a couple of other elements which might neutralize each other. And, yeah, in terms of regulatory, what the regulator called quick fixes, so the software assets and the sovereign exposure That's not big for us, given what it's discussed now, but it could be around 15 to 20 basis points, which would be supportive in addition.

Thank you.

Thank you. Our next question is from Andrea Barcelona of . Please go ahead.

Good afternoon. Quite a few questions. The first one is on the TLTRO. I was just wondering at what rate you have accrued it. The second question is on procyclicality. If I'm not mistaken, it accounted for about 50 basis points of capital year-to-date. You just stated there's a little bit more to come in Q4. So the question is, how reactive will your models be? How often will some of this come back in future years? Then two questions on the corporate division. The first one is on provisions. If you can split out the 81 million in the quarter between stage three and other aspects. And the second, if you can make some commentary on the trends in NII for Q4, given the big drop that we have seen in Q3. And the final question is on macro in the Czech Republic. What is driving such cautious stance from your economics department for next year? Thank you.

Thank you for your questions. I'm not sure if I got all of them, but then if not, I'll kindly invite you to repeat one or the other. So till TRO, we do not accrue anything from the benefit which we might get. We will do it on a later stage when we come closer to harvesting. The other, the model, probably this was, I didn't fully get the question. So what I understood is, but please correct me if your question was heading in a different direction. You were referring to the point that how often we are re-rating our customers and what the impact that this would be. I don't know if this was the question or was it rather related to the to the modeling of provisions from the IFRS 9.

If it was the first... No, it's the first question. Up until now, you really haven't seen any material movement into stage 3, yet, already starting from Q1, RWAs have gone up, and then more in Q2, and then more in Q3, just because of rating migrations, adjustments you have made in your models, which are kind of managerially adjusted, I think, because you wouldn't have seen anything back then. So I'm just wondering whether you've now made the adjustments, so that's it, we shouldn't expect any material more into the future, and then once the crisis is gone, how fast the adjustments Some of them revert back.

Andrea, if I may try to give it a trial to explain what we are doing and what we have done. You're right that currently, year-to-date, we see about an inflow to the state three, which is some 30%, 40% below a three-year or five-year average. But what are our credit analysts and our underwriters have to do? You know, I cannot proceed in believing that there is no crisis out there. So what all my fellow colleagues have done in my area of competence, we were looking at the financials, we were looking at the interim reports, and we have adjusted and our rating consists basically of two or three components. The one, of course, is the hard facts here, right? Here we have to wait for the annual reports and results, but we are using interim results. So therefore, you're already on the hard fact side. You could see some impact. And still in the internal rating, hard facts are accounting for some two-thirds and soft facts for another third when doing and exercising the ratings. So the rating analysts also have looked, of course, and here they can include very much the forward-looking dynamics, and they have also done so. But that's the reason why you see this re-rating, and we deem it necessary. for us internally but also in our external communication that we show the fair reflection on the probability of default when it comes to our credit portfolio. So this is a usual job what you anyway in a going concern would do. but even more so and even more important when you are acting in such a strong crisis as we have, what we are now facing. So this is the usual process, what we are doing. And normally we have at least once a year to re-rate the customer. Given the dynamics, what we are seeing, we are also not trying back to have a second or third look on the credit profile of a specific client. So that's the reason why you see this strong RWA dynamics. And yes, you're right, we are moving here quite swiftly. But this is what I also would have expected that we see some RWA impact on the credit risk side.

When talking about your question on the NII expectations till year end, so, yeah, you're aware it's a, three elements which drive this. First, all these three elements are based on my expectation that there is no further drop on the, or not a remarkable one compared to what we had in the first quarter. So then the drivers are mainly the three which I am mentioning now. The one is, which had... element in the negative development of the NII. These are maturing hatches and runoffs in model books. This might add another 15 million for Q4 in a drop. And then the question is to what extent can this be compensated by some loan growth as expected and probably important is the question at which margin this over the cost of funds this new loans can be acquired. I mean we have been have seen some positive developments when in the pickup of the loan demand in September. This is what you also have seen in our numbers. And the broad question is to what extent is higher loan volume, higher margin loans like unsecured lending can be acquired. So this is the, I think the structure of the loan demand is the bigger driver. We saw a slight improvement in the overall margin in loans in the third quarter compared to the second, so some repricing adjustments. But on the other hand, I have to report also that all the banks are highly liquid for some customer segments there is also a fierce competition. But overall I think it's this development and of course what is very difficult to forecast is the impact of FX. As you have seen we have maybe in quarter on quarter about 20 million of drop driven simply by the effects in some countries. And here, again, I would assume stabilization or slight improvement in some of the currencies.

Well, I will take then the next question, Andrea. Hopefully, we got you right on the risk costs that you would like to have a little bit more of an insight what is going on with the Stage 3. because I reported in the intro that the inflow on the Stage 3 currently still is rather low. So, you know, in total, you see a Stage 3 booking in Q3 of 87 million euros. Can I stop you a second?

I'm only talking about the Austrian corporate divisions.

That's easy. That's the two things what I was mentioning, the post-model adjustments, the post-model adjustments on the HODL portfolio and the leveraged loan portfolio. So there we have done two post-model adjustments. That's everything. And increasing here and there our coverage.

So most of the provisions booked in Q3 are not Stage 3?

Yes, sir. when when commenting on your question what is negative on on the check microsoft i mean negative it's uh it's not as good as i had hoped for well what we have seen in in august so this uh dropped in 2021, which is a year-on-year number. So the increase of just 1% compared to the 4.1% what we had a few weeks ago. And I think the explanation is that the lockdown is in the service sector and in some areas rather big. And probably because of the high numbers, the expectations is that it takes a little bit longer to recover from that. I mean, some industries, my understanding in the Czech Republic is that they are still doing well. And some support is also quite good from the state. So that's, as I said, a mixed picture. To a large extent, these are assumptions now, how long indeed this lockdown will last.

Thank you.

We'll take our next question from Alan Webburn of Society General. Please go ahead.

Hi, thanks for your time today. Could you talk a little bit about the operating performance in the group corporates and markets division in Q3? It seems to be sort of perhaps seasonal weakness, but could you just run us through the trends in NII and fees and the other operating lines for the corporates and markets? That would be the first question. I know you said that Secondly, on the margin that 20 million comes from the FX level. But I do remember you, correct me if I'm wrong, but at the second quarter stage, you felt that the margin could be flat going forward. And clearly, it isn't. And I wonder, outside of the FX, what are the elements that you're seeing that are maybe more difficult perhaps than you saw at the second quarter level? Is it the mix? Is it the level of competition? Is it the liquidity? If you can give us a little bit more idea of that, that would be helpful. And obviously, do you think the margin overall is going to fall further from the Q3 stage or do you think from where we are, there's an opportunity to keep it a little bit more stable? That was the second question. And I think sort of finally, in terms of the Eastern European side, I mean, what's your view about the growth, I mean, the recovery coming through in Russia that we're seeing from some of the tiers there? How do you feel about the growth opportunity there? this decided lockdown. Thank you.

Yeah, when talking about the GCM segment, I think, sorry, I think one has to be aware that here as this is mainly a Euro on to some extent, US dollar-based business. If I compare Q1 with Q4, for example, in the corporate area, it was more or less flat performance. So we had 81 million compared to 84. Yeah, the second quarter was better. And here there are some I mean, this is also driven by some large long-term loans which might be repaid early from time to time if customers feel strong or there is a new request what we had by the end of Q3, which you can't see in these numbers. But in general, I would say this is... within the normal range of fluctuation what we have seen so far. But we have to say that the demand for long-term loans, this was, yeah, one might say expected, but this was lower than what we had throughout the years. The second is the institutional clients. I think here in this business, there had been quite a lot of repo business, which given the difficult situation, had nice margins. And here this business was rather back to normal. And in capital markets, we had... There is always this switch how much some of the positions are hatched and you see the result in the NII or is it in the trading income. So here partly this is a change also between the lines. So if I add up this 19 million drop in NII in this segment in Q3, then five to corporates as explained, five to institutional corporates, clients mainly as I said from repo and the 8 million in capital markets trading activities. When talking about the margin expectations, And Russia was your broader question then as well. Yeah, in the guidance, I have to say, which I gave the drop in this, the effects, the effects impact on this margin drop was, I did not consider this, I have to say, and And to some extent also this increase in balance sheet when going through the presentations, this had a life basis point impact on the NIM. This I also did not consider when talking about the NIM development. So these two have to be considered in addition. When talking about the other drivers, Then, yeah, of course, the sluggish demand in unsecured loans, I think there compared to the normal year, we lost about one billion of new business because of this COVID. And this, of course, has a negative impact because then the margin there is, of course, much better than what we have in the secured part. And yeah, as I said before, this five basis point comes from the over liquidity. This in the future might be reduced a little bit. because, yeah, of course, some of this over liquidity will be returned to the customers or what we would prefer, bring them to other products, which brings it off the balance sheet, but could create also some, generate some fee business. I have to look if I have forgotten anything. Yeah, Russia. I mean, Russia did, quite well, despite the high number of COVID infections. And I think there, in local currency terms, the numbers that the loan business is not that bad, one might say, and the potential is also there. So this might be one answer if there is some some switch between foreign currency and local currency that there is also some room for improvement. Also, I also want to make you aware that some of the hedges for the falling rate which has been entered in recent years will also mature some of them in the course of next year. Correct. That's super.

Could I just have a quick follow-up in terms of what was your appetite like for unsecured lending? Because, I mean, clearly there are some markets in your region where unsecured lending has been growing actually quite fast in the third quarter. I mean, would you describe yourselves as quite prudent as far as that goes, or did you feel that it was just demand that wasn't there initially? to give us an idea of, you know, there was a significant recovery in economic activity in the third quarter, and you don't see that much of it in your numbers.

Yeah. I think, as I said before, in retail, we came back to, and we compared it to, the new volume in February, which was the full last month before the lockdown came mid of, or before we felt it. And in Russia, of course, it came later. Overall, I can say that we had this drop in the unsecured landing, which was 70% less in April than what we have had in February. And we found a slight improvement in May. Since then, yeah, and as I said, it recovered to up to 90%. I think maybe it was the case that in the first two months, maybe we were more differentiated and And you said a nice word, prudent with our risk policies. And when having seen the development, we start to ease it substantially, not at the level what we had before COVID, but many obstacles have been removed. We also returned back to some of the sales activities you know, pre-approved limits and all this stuff which supports lending. So, to a large extent, we are back to the behavior we had, but not fully. That's very helpful.

Thank you.

And we'll now take our next question from Olga Vaslova of Bank of America. Please go ahead.

Good day. Thank you for the presentation today. Can I ask if I understood correctly that there was zero impact on the net interest margin from CO3 in the third quarter? This is my first question. My second question is what would be your cost growth outlook for the group for 2021 if that is possible to guide at this point? My third question is on Poland. I think Polish banks are saying that they very much expect the decision, the ruling of local Supreme Court, do you think that for your business this suggests an upside or downside risk to the taste of provisioning you have in Poland right now? And my last question is the sensitivity of your financial to the exchange rate in countries where you operate. It may be difficult to generalize really, but maybe you could generalize for us what would every let's say 10% of depreciation of the basket of currencies in your countries versus the euro, mean for your net interest margin and for your CT1 ratio? Thank you very much.

So I'm not sure if I fully got the first question. So was it that the question was what is the impact of the CLTRO on the net interest margin?

On margin.

On margin, yes. We did not accrue any of the potential goodies of this. So there is no positive on that. And yeah, the total volume is around 4 billion what we have under TLTRO. Sorry, I'm I'm not anymore as good as I was in my younger days to figure it out in my head immediately what the impact is on that. But it's 4 billion in addition with no additional income. This is the way I would phrase it. And in Poland, the question was the rulings, what we expect. I mean, in... For me, it's very difficult to say where we really end. But maybe Hannes would add to that.

Well, I think what we have seen is... that in the due course of the lockdown, the number of legal claims was reduced as an inflow. There were still some questions outstanding to the European Court of Justice from one regional court we see now more and more of the second instances coming and I know also from some other market participants but you're anyway closing extremely you're anyway falling extremely closely that the one or other also has rights to find the settlement with their clients I think there is a Some of them, they are still waiting what is the feedback from the second request from the Gdansk region to the ESG, how this should be interpreted.

Was there a third question? Sorry to make such a mistake.

Yes, there was a question on cost. Do you have any early, possibly early outlook for 2021 on cost growth?

Yeah, 2021 should be on the level of 20. There shouldn't be that much wage inflation and the investments what we take should be on the same level and there where we have to increase, it should be compensated out of the running costs. So I would assume on the same level. Of course, it also depends on some of the regulatory developments. There are few uncertainties. One was that the And this is now more in the regulatory area that the contributions of our banks to the various funds, being it resolution funds or being it deposit insurance in many countries, is rather high. Russia benefited this year from a reduction this might be changed next year. We had the good development in Slovakia that after the substantial increase, it was stopped for the second half. And what I understand, there are good signs that it will not be continued next year. So it's... I would say on operational costs we should be where we had been this year and of course there is again an FX component which could work in both directions and then there is this other element. But my assumption is flat.

Thank you. My last question was about the sensitivity of your net interest margins and Did you want ratio to weaker currencies? If that was the last slide.

Yeah, here I would have to look up in my material or maybe the quicker way for all of you is that I ask John Carlson and his colleagues to have a nice table for you on these sensitivities. If this would be also fine. You will get it rather soon. Thank you.

Thank you so much.

Thank you. Our next question comes from Ricardo Rover of Mediobanca. Please go ahead.

Good afternoon to everybody, and thanks for taking the question. The first one is on the funding mix. Deposits are going up quite nicely. This is fairly common in Europe, but I also noticed that your medium to long-term funding has been expanding over the course of the first nine months, which is a bit more surprising. I was wondering whether you have the opportunity for some pre-funding, maybe? And with regard to deposit, do you see any possibilities of redeploying this amount of money somewhere else to reach a little bit better remuneration? The second question I have is, again, sorry, on TLTRO. What has prevented you to book the gain? You know, the loan book is growing. the benchmark is not exactly challenging to beat. So I was wondering why you decided not to book anything and eventually when you should book the benefit on the four billions, which could have at least, let's say, smoothed the difference between the NII that you have reported and what consensus is going for. The third question I have is again on NII, Taking out FX, taking out the KLTRO contribution, do you see the 770 million that you have reported this quarter more or less as the run rate going forward? And then I have another question on RWA, you have already clearly specified, clarified that a lot of the weighting migration should have already been somehow captured in your risk-weighted assets. I was wondering about if there could be any impact from the definition of default, if that has already been taken, EBA guidelines, these kind of things going forward. And last question I have, sorry for that, is if I remember correctly, in the past, you mentioned the possibility of bulk on acquisitions in some of your core markets. I was wondering whether this statement still remains, if you can change your mind, if you can share your most recent thoughts on the topic. Thanks.

Okay, thank you for your questions. I mean, when talking about the long-term funding, there had been various occasions throughout the year, and you know that part of the long-term funding also came from the on the optimization of our capital structure. So this 81 and the sub-ordinated. So this was a driver and the other had been in the early days, sometimes when we also tested the market there. So I think this is, yeah, it... I think the next year will rather be driven by the MREL requirements than by other funding needs. And maybe a little bit later then there is another need to keep the efficient capital structure by some... The two elements which lose the full recognition of the supervisors. This would be my first answer to the general question. The second part of it is to the TIL TRO. I don't know. I recognize that some other banks consume this already. we have decided that we would rather do it at the end of this exercise. So maybe we are a little bit cautious in this element. When talking about the NRI, the 770 as a run rate, of course, we hope that we still can improve it. It's not that easy that we are all aware of, as I said, some hatches or model books running off. On the other hand, if we assume a loan growth of, I don't know, say 4%, maybe even more after the positive news with vaccination, and if this is a nice product split between unsecured and others, then it where I said it should be on the level of what we expect for this year. And it should be a little bit higher than 770 times four. So I hope for a little bit more, of course.

If I may take the question on the RWA impact when it comes to the new definition of default. I think you can recall that already in 2019 we have introduced the new default definition of default and have also reflected what is the impact when it comes to the risk costs in the quarter four of 2019. Now it depends on how you read the guideline. The one is on the non-retail side, we anyway use through-the-cycle BDs. So we would not assume as of today any impact out of this new default definition on the non-retail side. And on the retail side, it still needs to be seen if we would employ through-the-cycle, you would experience a slight updrift on the retail BDs.

And on your, I think it was the last question that you raised, the M&A, we are here. I think every rationale what we used to explain is still valid. These days of very low rate or negative rate environments is an invitation for consolidation and the markets which we mentioned Czech Republic, maybe Slovakia, maybe not so pronounced. Then Romania, Serbia. This holds still.

All right. Thanks. Thanks a lot. Thank you very much.

Thank you. Our next question comes from Robert Brazoza of PKO BP Securities. Please go ahead.

Hello, everyone. Thank you for the presentation. I have one more question on the entire development in the group corporate segment. Has there been also any negative impact of lower average loan rate for the multinationals lending? Because We've seen that there is a downward pressure on the corporate lending prices across the region. Second, in Belarus, there was quite weak NII results, also taking aside the question of the currency. Should we expect more or less this level of the NII going forward? What was the major driver? Was it also hedging related? Because the drop was quite sudden. And finally, could you comment on the stage two developments? One, in mortgages, there was an increase of 1.1 billion euro over the quarter, quarter to quarter. And in the corporate sector, there was a decrease of 1.3 billion euro, third to second quarter 2020. Could you comment what was the reason for these changes and which sectors in the corporate Stage 2 book were most positively affected? Thank you.

Yeah, when talking about the net interest income in this segment with large and multinational customers, so what we can say is two elements which somehow are contradicting. So as I explained, we had a situation that we even had, if we compare Q2 with Q3, those which we booked, we even had a marginal improvement on the new volumes. But one has to say that for a while we also have been rather selective and so we observe and this is the second part of the question we observe and confirm that there is large customers and in some countries even more so for quasi sovereign so corporates which are held and which are close to the sovereign local sovereign which by some banks are probably treated like the sovereign itself. And therefore, there is some additional pressure on that. And in our case, it was also the structure. There have been in the third quarter, there was a reduction in long-term loans by Yeah, one might say repayments by some customers on the one hand and less new generation, as I explained before, and what you have seen also in the charts. When talking about Belarus, yeah, there are several impacts. You know, the one is that, yeah, the central bank is – is defending to some extent the currency as well. So this means that liquidity is limited. The central bank is very carefully in managing the liquidity in the system, which creates pressure on lending in local currency to private individuals. So this is very difficult now. Yeah, NTFX impact I also mentioned. So it's two or three impacts and I would say it's as they only have 1.1% of assets in the total group, the impact is on group level not so huge overall. But yeah, when looking at the NRI also, we have a negative contribution from the country. And I think that it might be complex for the next couple of months in the country. Even this uncertainty is what we have mainly in the political area.

Well, thanks for your question on the stage two dynamics. I go back again a little bit in history. Already in Q2, we were using the way on how we have looked at the whole story that we have employed on an industry level, the shift of the full industry into the stage two. But of course, this you cannot run towards the end of the year. And going also back to a question of Andrea, we have then looked into the details of the individual customers who was in this industry bucket. And whenever we have performed the re-rating, it was taking out of this comprehensive way of leveling the full industry into stage two. So that's the reason why you see partly now a reducing dynamics when it comes to the stage two. Secondly, what we also have seen, and my colleagues have just provided me with the single counterparty names, some of them just rebate. They have been stage one because of this leveling. It was stage two. But also, of course, as we have discussed beforehand, we have seen also some repayment of these clients. On the retail side, it goes back to some mortgages where we have based on the currency and or on the moratorium, we have shifted them to the stage two. So that's the basic and the background of the dynamics on the Stage 2 bookings.

Thank you very much.

We'll take our next question from Simon Nellis of Citibank. Please go ahead.

Oh, hi. Thanks for the call. Just curious how you're thinking about risk costs for next year. I know it's a difficult question. But just given what you know now, you've improved your macro outlook a little bit in some markets, and your feeling on risk costs for next year would be helpful. And then just two quick technical questions. Can you just remind me how much of a dividend was deducted as accrued for this year? Sorry if I missed that. And also I see in your – reported results that the fully loaded courtier one was 12 and a half excluding earnings. And you're saying it's 13.1 with earnings, but earnings were just 30 basis points of risk weighted assets. I'm just wondering where the other 30 basis points came from. Thank you.

Well, the first question goes to me, and since our CEO was quite heavily challenged today with many questions, the 2021, Simon, you know, I think it is really very demanding, and to the best of our knowledge, and you have many effects. You have the movements from the stage one, stage two, stage three. You have the rating migrations. you have then the inflow on the state three, which of course next year shall be more pronounced if you do not have these tax holidays and the moratoria. So having said all this, even though I could also make it less dramatic, but I think we would be around the same level as we have seen today, of course, with a bigger margin of error. So to say it's again, this around 75, And, of course, we will reach out to you if we need to adjust, but this is to the best of our knowledge. And I give you a glimpse where the different dynamics are coming from. I know that some other market participants have been even more constructive when it comes to the risk-cost, but I think we have two effects that we must not forget, which partly compensate. The one is on the macro models. given this outlook, you should get sort of a relief. On the other hand side, you will still see the one-order migration because, as I have said also beforehand, then you get the hard numbers and you get the balance sheet figures and you could expect the one-order rating downgrades still to come. So that's the thinking, that's the number on how we come to this around 75%.

And to the dividend question, we had proposed this one euro per share, which is close to 329 million or 41 basis points. And then during the year, we take the lower end of the range, so the 20% of the profit, which in that case is 128 million euros. or 16 basis points so in these two would add up to 57 basis points which we do not recognize as of today in the CT1 ratio and the explanation why the 12.5 and the 13.1 in the gap is so big is this is to my understanding if you do not If you do not have a full audited report, you do not only, you are not allowed to recognize the profit, but in addition to that, you have to reduce some of the provisions. And if you add these two elements, then this explains the, so not only that you don't show the profit, but it's written like as you were negative in that report. because of the provisions. So this is the way we understand the regulations, and that's why the difference is so big.

And that's what it is. Thank you.

And we'll take our next question from Johannes Thorman of HSBC. Please go ahead.

Good afternoon, everybody. Johannes Thorman, HSBC. Two questions from my side. First of all, it's fair to say that you have 1% of your exposure in hotels. Would you still consider this the biggest risk industry or the biggest industry risk in your portfolio? And if you could put back more details, like if it's in Austria, Croatia, the usual tourism, city or rural hotels or holiday resorts, what's behind it? And secondly, just more general question, you are talking to regulators as well. What are you hearing regarding dividends? You hear them saying about a differentiated approach, or do you want to – will they go again for a more blanket approach, one size fits all for all banks, and then – although Mr. Humpel is just German Buffett head. But he hit the tapes today saying he wants a conservative approach. What are you hearing from your Austrian regulators? Thank you.

Well, thank you very much for the question on the hurdles. I tried to explain already our way of thinking in the last quarter. There are a couple of things. And if you look at our portfolio, and this is the thing what I would like to focus on, we have financed the one or other hotel within the city centers. So all the hotels, what are used for traveling, what are used for any conferences, with a very good, being very well reflected within the city, this is what you would find in our portfolio. So no sleepover anywhere on the outskirts. So like two or three stars. So we are talking about a different category. This is the one thing what I can tell you regarding the hotel portfolio. So you would also not find just pure leisure hotels in our portfolio. Is it in Croatia or is it somewhere else? Yes, there could be some five or ten million euro here and there. But the one billion is comprising mostly of the one what I was saying, hotels in very good locations within the cities. focused on citadurism and some conferences. This is the way we are looking at the story. You know, big part is coming from within Austria, with very good locations, a little bit of Czech Republic. Within you, you would also find Devonara, and this is almost it, and the Croatian portfolio is already much, much, much smaller. So what is our thinking? on the hotels. The one is we are in regular context with all these hotels to see how they take care of their rates and also on their utilization, what we can see. And we also look at the same time always at China, Because in China, you can see now in some of the city hotels that the occupation is already being back to between 50% to 70% from the peak what we have seen in 2019. Why is this important for us? Because it could be sort of a front-running indicator to us. The hotels we are financing, we are currently on a utilization of some, let's say, 15% to 25%. At the same, so that's the one how it's being utilized. The other one is how it's being structured when it comes to the underwriting. And I already made a very important point, you know, they have really best locations. They have the best locations and usually you finance it that there is a reserve cash account and suddenly you have then your regular amortization and then you have a sort of a balloon payment. But this balloon payment is very nicely covered multiple times by the by the value of the entire hotel you're financing. So this is what I could talk about. Yes, you're right. And this is also the reason why we have allocated some of the BOST model adjustment to this distinct portfolio, because I think this will be a very small fraction of our total portfolio, which keeps us also quite busy in the workout units and restructuring units in the coming quarters to come.

Yeah, when talking about the regulators, the Austrians always follow very, very fast the ECB EBA recommendations. So they do not develop their own view. When talking about dividends in the public sector, We immediately get the call where they question us again why we are so positive on the dividends. But this is the current policy, I would say. I hope that there is a change in their policy. But the signals, what we hear from the ECP and the EBA, I would say are rather mixed. It comes like, I don't know, cold, warm, hot, sour, something like this. When one person is a little bit more positive, another one steps in and is less positive. And there are so many of them. It's difficult to understand it.

Okay, thank you.

Thank you for all 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. As there are no further questions at this time, we will now conclude today's conference call. Thank you for your participation.

Thank you very much for all your questions, for your participation, for your time. Stay healthy. I hope we hear each other soon. I think I'm looking to John later if we don't have any other meetings early February with the preliminary results. Thank you. Stay healthy. Bye bye.

Thank you. You may now disconnect.