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.