Raiffeisen Bk In Unsp/Adr

Good afternoon, ladies and gentlemen, and 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. Johann Strobel, Chief Executive Officer. Please go ahead, sir.

Good afternoon, ladies and gentlemen, and thank you for taking the time to join the call. I'm pleased to be reporting on a strong second quarter today. which to some extent reflects an improved economic backdrop as well as a more favorable rate environment. Consolidated profit boasted a 66% year-on-year increase, driven primarily by lower risk costs. Net interest income for the first half was down 8% compared to 2020. However, it is important to note that it increased by 5% in the second quarter on the back of higher volumes and rate hikes. The second quarter was one of the strongest we have had for fee and commission income. We generated close to 500 million, which I will come to in a few minutes in more detail. Loans continue to grow steadily. We have now firmed up our outlook for 2021 and we are guiding for loan growth in the mid to high single-digit range. This guidance does not yet reflect the pending consolidation of Equipax. We have also revised our outlook for 2021 risk costs down to approximately 50 basis points, assuming that there are no renewed lockdowns. The integration process in Czechia is making very good progress, which I'll also address in more detail later on. We have been busy on the green bond side as well this quarter. Issue and activities included our first tier 2 green bond as well as green MREL issuances by our subsidiaries in Czechia, Slovakia, and Romania. And with this, I turn to the next page where we see the more detailed quota on quota comparison. I mentioned already the net interest income. I mentioned the very exciting development on the fee and commission income. We saw a slight increase in staff expenses by 3%. We saw a substantial more increase in other administrative expenses. These includes, one might say, regulatory costs, costs for the bank supervisor, which had been due in this quarter, to lower a couple of small additional amounts on advertising, In the staff expenses, we also had some rising incentive compensation components. As you have seen, we enjoy the good growth. And we're also continuing our investments in IT, cloud services, all this exciting stuff, but also in a couple of innovation ideas. and the other results I will also comment a little bit later. When talking about the core revenue trend, I'm happy that we now see what we have been talking quite a while, that around 770 net interest income should be the bottom, and we should now see the increase. In the 804, we have to make you aware that we also recognized 9 million of TLTRO bonus, which we did in the second quarter. As always, given this high liquidity and what we tried to achieve also with the takeover of the ING clients in Czechia, the net interest margin is inflated substantially and I think for a while this is not a strong key performing ratio. I talked about the net fee and commission income and if you look at the the lower box, the table on the right hand side, you see that actually the improvements have been almost everywhere in the second quarter. If we turn to the next page, we have a few more details on Raiffeisen Czechia. So as I said before, we closed the ECWA transaction on 1st of July. We are now in preparation of the legal merger, which will happen in the first quarter next year. And we are also working in very detail now on the operational merger. We want to have one brand and a consolidated system. It's about 480,000 customer relationships. It's about 2 billion customer loans where we We're especially proud of with this acquisition is that Equa has built a strong consumer lending engine. They have some distributional skills, what we did not develop in Ryfas and Czechia, and we are happy to add and use it in the then merged entity. And of course, to build something like this, you need quite a lot of talented people, and we are happy that they join us. We have ING. Here again, we are more than happy. We had this agreement with ING that we recontract the customers. They would recommend us as the preferred bank. And with having acquired now more than 150,000 customers with deposits of about 2 billion, we are very happy with this, much more achieved than we had hoped for. And, of course, in a rate environment where I see rising rates, this per se sounds very favorable. But I think our offer, what we have prepared for these customers, is also a very interesting one. We are proud of our cross-selling skills of our people there. And I think they will, by exploring the needs of the customers, they will find the right products, which makes the customer exciting. Bausparkasse, this is something which is important for the Czech Republic. You know this was an intergroup transaction, so it doesn't make a big change in the overall numbers, be it customers or deposits or allowance outstanding. But again here, the colleagues found ways for cost synergies. Here I can report that about two-thirds of these customers integration is already done and we will soon see some additional benefits. But again, here, also interesting, we hope for and plan for some cross-selling activities. Again, this is an interesting channel because, you know, Bosch Per Cousins or Building Society products are to a large extent driven by brokers and if you If you get it right with them, you can achieve much more. So happy about that. I will now turn to the next page. And so we have prepared two pages which somehow are perceived as a burden which keep quite a lot of management attention and attention of our people. I start with Belarus. You are aware of all these sanctions and the negative reports what we receive from the country. Just for those who are not so close to us. We have acquired the Priobank stake from EPRD already in 2003. This was the time when we all believed that the market will enter in a broad liberalization phase. Here we had for sure too high hopes and it did not materialize in the way we wanted. On the other hand, I'm I'm still proud that I think to whatever the improvements happened in this economy, the little changes, what we have seen, I think our bank could contribute to some extent to that. Overall, the impact of our, um, bank is not so big. So we have a market share of about 6%. Uh, in total, this means a 1.1 billion loans to customers, which is, uh, a little bit more than 1% of our group lending the equity. What we employ in the country is about 300 million euros, which is a little bit more than 2.5% of the group equity. If you want to look at the exposure of what we have, so this is now not only loans, but everything what you define as exposures of guarantees, committed lines, and, and, and. What you see here, it's an exposure of a little bit more than 2 billion euros. Are you aware of sanctions against the state-owned companies? We have given here a little breakdown. If you look at the structure, 14% of these exposures are to corporate state-owned entities. We have 5%, so around 100 million, to government, and we have about 10% 180 200 million to the um national bank and you're being close to banks for you it's clear that this is um this is an area where where banks have to be for their liquidity management uh yeah and we have uh from the targeted sanctions, we have to report that around 111 million of exposure is related to oil and gas, fertilizer, potash, and potato producing companies. The rest of the portfolio, so the bigger part is with private sector, corporates, but also households and SMEs, and of course, some foreign companies. When turning the page, then the second Big topic, what we have also, I have to say, not much development in the recent few weeks is our Swiss franc mortgage portfolio in Poland. It's about 1.1 billion euro terms outstanding. It's close to 29,000 loans. We have an amortization of about 100 million euros per year, so you see it's still a a long-term maturity portfolio. You are aware that the risk weight is different than what you usually have with a mortgage business with 118% risk weight. And, of course, what's the biggest issue is this litigation situation, which is increasing. The inflow is high, about 300 cases per month. In total, we have now about 5,500 cases. We have shared with you the model which we use for litigation provisions. And, of course, we have to adjust the parameters. So maybe to remind you, what we use is the inflow, the numbers at court, and what we observe, the decisions which first instances mainly and to a small extent or the second instances do in their rulings. These rulings have in the recent past been very much in favor of the consumers. The good thing, we will see what the Supreme Court will rule on, but the good thing is that the Supreme Court has invited five Polish authorities to give their opinion on this specific problem. You know that the Supreme Court, with all the members, will decide, will give a ruling on six questions which had been formulated by the President of the Supreme Court. Very important questions for the further developments. Probably not all of them touched, but we will see what maybe they would even go further to touch all the problems which are... part of this ruling with the various potential outcomes. What I found somehow confirming our view and what we talked about the last many years was a statement by KNF and the National Bank of Poland. The way I read it and I give you now my short brief summary is that overall the KNF came to the conclusion that at the time the loans were granted, the conditions under which the banks did it is deemed to be fair and not unfair. So this using this effects clause, the tableau, so the way it was communicated, the way the customers were informed were absolutely according to the standards of that period of time. I think the second, which is not important for us, but maybe important for the the public is that finally an authority, a neutral authority stated that some claims in the public that this is a a zero-sum game and that whatever the customers are losing, it's to the benefit of the bank. This was clearly proof that this is a totally wrong perception. So we'll see if this makes any impact on the public perception of this issue. Yeah. So 2nd of September, it was announced that the full civil Chamber of the Polish Supreme Court will meet again, and we'll discuss the six questions. I don't see enough to the provisions. OK, so maybe to the provisions, 195 million. To repeat that, we added 77 mainly based on the inflows and the decisions. To make that clear, we are now at a little bit above 10%, which I think is what I sense from the market is in line. Of course, there are two banks who are rather urging for a voluntary settlement with a different approach. Looking at slide number 10, I already mentioned that we have seen customer loans growing. about 2% quarter on quarter. The good thing here is that we now see also an increasing demand from the retail customers, especially in the unsecured part. You are aware that the mortgage business was doing quite nicely also the last couple of quarters, but now we see it also in the unsecured part. The areas where we still... before pre-pandemic had a little bit better outstanding developments in the credit card and in the overdrafts of the accounts by the private individuals. Here, given the high liquidity, this might take a little bit longer that these sources will be used also. If we then move to the next slide, so here we see... the 13.3% CET1 ratio and the other two. So I think it's a nice development what we have here and nicely covering the buffers. If we turn to the next page, here you see some explanation how it developed. We have driven mainly from the loan growth some 34 basis points or CT1 requirements in addition, and we had a change in the rating model for sovereigns, which is more granular now and which required additional 10 basis points. Retained earnings are up by 39 basis points. I am now at slide 13. I think in this time of over liquidity, there is little value in discussing liquidity ratios here. I just want to again sum up what I did at my introduction. We had a 500 million tier two subordinated green bonds on the first subordinated green bond. And we are also happy with the developments in the emerald area. Slovakia came with a 300 million green bond, Czech Republic with 350 green bond. And also in Romania, we had a green bond issue. This supports our emerald requirements. I think the countries where we didn't approach the markets, they're rather with small needs like Hungary, Croatia, and Bulgaria. With this, I come to slide 14, which is our outlook. And what we see here is that given this progress in vaccination, and I want to say the very skilled approach now in how to deal with increasing and reducing infection rates, I think overall brought very good fundamental for on the one hand for the government's dealing with infection rates on the other hand keeping the the economies of the countries in good shape and we see this in the gdp developments for 21 and 22 if you compare it with earlier forecasts from rifle and research then you see many improvements there and a couple of countries in our environment might already be at the level where we had been in 2019 with the GDP output. And those who do not fully reach it will be there in 2020. One might even say that in some countries, the positive trend could soon be reached. And so maybe after a few years, we will tell that we didn't lose too much on growth over the longer period. These positive developments and everything set under the assumption that because of the Delta version of the virus and other developments we don't see another sharp lockdown leads to a slightly revised outlook. We adjusted the loan growth where we say new lending accelerated in the second quarter and we now expect mid to high single digit percentage loan growth for 2021. And here, ECWA is not included in that number. Risk costs, Hannes will talk about it, is now expected to be around 50 basis points. Cost-income ratio is confirmed to 55 basis points. Here, we are eager for 2022, but there are some uncertainties still there. Profitability, we Stick to our midterm 11% target, CET1 ratio midterm 11%. And as some basic topics in our environment have not changed, we still have this broad range of payout ratio of 20% to 50%. Final remark before I hand over to Hannes. When talking about the 13.3% CET1 ratio, I did not mention that the one euro dividend, what we wanted to pay out in 2020 for 2019, this is still as a profit carried forward. And as soon as the ECB has dropped its strong recommendation not to pay our dividend. We approached them with our idea that we're going to pay dividend again, hopefully in the fourth quarter of this year. discussions with them and why discussions at all you might ask yourself so when reading their recommendation they made this reference to capital planning which is nothing more than an invitation to first talk about capital plans and then about dividends and this is what we plan to do our request for talks had been sent as I said on the day when and they lifted the pennant with this, I hand over to Hannes.

Thank you, Johan. Well, I'm very happy talking to you and either you already enjoyed your holidays or hopefully holidays are just ahead of you. Well, from my point of view, when talking about the way of the CEO main messages, I think we are observing and enjoying a very strong economic rebound with a strong GDP momentum. And this leads also, of course, to a strong increase in financial demand, meaning our credit exposure is increasing. Well, if I look at the second quarter, the sum up is easy. We have risk cost of 31 million euros. We have an MPE ratio of 1.7%. We have a very good coverage ratio, still best in class of 60.3%. And having said all this and giving this very strong economic environment we are enjoying, it was obvious that we had to adjust our risk-cost guidance to around 50 basis points. Let me now go into the details on page 17. If I look at the total exposure, which increased on a total sum by 1.5%, but please go with me into the details. So we have seen, as said by Johan Straubel, very good demand on the corporate and on the retail side, giving us an uplift of 4.4 billion euros. Given the strong still liquidity inflow and also merger with Equibank, we see an IG taking over the clients, a strong increase on the sovereign exposure of 4 billion euros, and it was partly offset by the financial institution exposure. Here we have changed our approach. In all days, we have shown on the derivative part the mark-to-market plus the add-on, Now it's the mark-to-market plus the potential future exposure on a net basis. Well, and if I lost you, I'm sure you will raise a question. So I move on to the next page on page 18. When talking about the provisioning, what you can see, and I would like to start the chart from the right-hand side, Q2 was showing we had 31 million euros of provisioning needs in total. 23 million euros coming out of stage three. And we also have allocated another 30 million euros for the Belarus sanction for the stage two. So having said this, the second quarter would be even zero risk cost if we would have not again used the IFRS environment to pre-provision, so to say, part of the Belarus sanctions. If you look at the first half year of the 110 million euros, you could also split up the 110 million euros into 30 million euros for sanction risk in Belarus, 21 million euros on post-model adjustment, and only 68 million euros are comprising real new defaults, a little bit more pronounced on the retail side, less so on the non-retail side. On the non-retail side, we even enjoy repayments also from default clients. not to lose on the minus 9 million euros on stage one and stage two. This comes because we see uplifting ratings and we also see early repayments. Well, I move on to the page 19, talking about foreborn exposure and moratorium exposure. Well, we thought in this quarter we would like to emphasize a little bit on the foreborn exposure because in the first part of the crisis, of course, we have provided liquidity were needed. We gave our industry assessment. And what we now see for the industries, where I would introduce a new letter of the alphabet, so not anymore V-E-L and U, it is this K shape. There are some clients who now need forbearance measures, which we're happy to provide because usually in the hodl sector, you have a very good collateral. What are the typical things? What is being requested? Is it a an extension or a covenant holiday. These are the things that are being asked for. And the other bigger part is still, you know, that demand when it comes to airports is not yet back on 2019 level. On the lower part of the chart, you can see still, you know, how the clients who made use of the moratoria, how they are performing. On the retail side, 93.3% completely resumed repayment They are in their repayment schedule. Some 1.9% have asked for further restructuring and 4.8% defaulted on the corporate side from the change from the last quarter. We see now that 94% are being back on the regular schedule. 4.2% and this is consistent with the increase in the foreborn exposure. 4.2% have asked for further restructurings and 1.3% out of those who have made use of of the moratorium defaulted. Let me move on to our RWA developments. Consistently, if you see good credit demand and increasing credit demand, of course, also RWAs are increasing. We have a slight effect also because of the migration effects. So 0.6 billion euros are being caused because of some lower ratings. And the other thing what I would like to make you aware of if you look at the bullet three is the market risk by another 0.5 billion euros. And this is given the environment also with the sanction language and in Belarus, we have slightly increased our rubble hedges leading to RWAs by the end of Q2 of 84.9 billion euros. This brings me already to the well-known and last page of my SWIFT presentation, To sum up, MP ratio 1.7, MP coverage 60.3%. Please be aware that we have a very good coverage if we would also include stage 1 and stage 2 of 89%, and this figure does not include any guarantees or collaterals. 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. You will pause for a brief moment in order to allow a queue to assemble. Okay, our first question comes from Jeremy Oman at Goldman Sachs. Please go ahead.

Good afternoon, gentlemen. I have two questions, actually. So the first one is on... Thanks for the presentation, obviously. The first one is on page eight. So when you talk about the Belarus exposure, I was just wondering, when it comes to the exposure of Raiffeisen, i.e., the parent, to the Belarus subsidiary, is the exposure limited to... to the 0.3 billion of equity you have there, or are there also intra-group loans from Vienna into your Belarus entity? So that's kind of question number one. Question number two, so I've now listened to more bank conference calls over the course of this week than I can keep count of, and we are three and a half hours away from the European Banks Authority stress test results being announced. Not one bank has mentioned the stress test as being relevant to them, or was it a discussion point? And I was just wondering, from your perspective, two questions, I guess. Number one, is the stress test result a relevant factor for you when you think about your capital planning? And number two, you mentioned before that you've already requested to start discussions with the SSM on the capital return policy. Do you expect it to feature in that discussion? Thank you very much.

Yeah, I think you have in two questions put a very broad content when talking about the stress test. I think the reason why why banks do not mention the stress test results at all is a simple one. And this relates to the methodology. So the methodology says that you deliver in a couple of rounds, according to their scenarios, the results which come from their models. But then they come with adjustments which are not compliant to your model at all, and you have to run it. So if you ask yourself, is there additional insight coming from the final outcome on your policy, then I say no. There is no... Because it's a sort of black box. We haven't... heard any any concerns with our results from the the authorities till now so there was no heads up no nothing so uh three and a half hours ahead of this i assume it's also not a big thing on the other hand I think the way it was designed that knowing when most of the banks will publish their results, knowing what to communicate before and after they drop, so there is some impact. Maybe, we don't know. I don't expect. I personally still think that the 13% what we have a C to 1 ratio is good. I think that, of course, the stress scenarios this time are even more severe if you look at the overall development, what we had over the last years, two years now. So it's very severe. I think the outcome, we are not allowed to talk about the outcome. I understood before the evening. but the outcome is in the range everyone expects. I don't know if they will make, when we talk about the dividend, a reference to the stress test results. We'll see. It's just the sequence of events why we are a little bit more careful. I mean, any details would then be given by Hannes. I don't know if he's allowed to say something today already or you can call him after midnight. I don't know.

Well, you have stated or you have posted two questions when talking about the stress tester. And I think some of you anyway run their own models based on our numbers. We are very transparent. You know our API very well. So we see three years extended period of recessionary environment. Interest rates in the stylus scenario even have been slumped down further. And what is very special is that you're in a three years wait and see modus. You just see the crisis making its way over your balance sheet and you're observing a standstill modus. The second part you're asking, capital planning, yes, indeed. We also use in our budgeting process, in our way of conducting our regular business, we use scenarios which we deem sufficiently severe, but also giving them at least a likelihood of some 5% or 10%. And it would look differently, our internal stress test, compared to the one which was designed by the IBER. But of course, we don't have to design a stress test scenario, stylus scenarios for 100 plus banks. So I think at this point in time, even if I would be tempted, I would not like to give more details on the IBER stress test. Let's wait for 6 p.m. and let's enjoy the output. On the Belarus intergroup loans, this is very, very minor. we have another 33 million euros of intergroup loan provided to Belarus. Hopefully this answers your question.

Yeah, thank you very much.

Thank you. Our next question is by Mehmet Sevim at JP Morgan. Please go ahead.

Good afternoon, gentlemen. Thanks very much for the presentation. I'll have just one question on the CHF mortgages and the provisions that you're taking there. I totally understand the approach you're following, but at the same time, it's very visible that the trend is worsening there, given the cases are going up. And I guess this is in line with the expectations, of course. But there are also concerns that the date of 2nd September would potentially not bring much clarity and that the issue would carry on for the foreseeable future. So can I ask here, are you concerned that this drip feeding of provisions could potentially impact, let's say, your dividend payments in a given year? Or could you see any other resolution to this problem? I mean, let's say, for example, it reaches 100 million a quarter. It's going to be 400 million of P&L taken out. What is your view here? And is there an alternative solution that you may consider. And maybe just one more question on NII. Here, can I ask what your expectation is in the second half of the year? And how would you see the lending environment, given that now we're in a hiking cycle in many of the countries? Do you think that this may affect consumer demand for mortgages or personal loans negatively? Thanks very much.

Yeah, talking about the development in the Swiss francs, as of today, I still would think that we keep our methodology, which is depending on the inflow of cases. and there's also a forward-looking component in it. But the number of cases which are coming in is important. Here this is clear. I think for me the most important question would be, and let's look now what is the, given the inflow, the speed what we have, I won't say that we see any or we face any negative impact on the dividend payment capability. We have built in our midterm planning an increasing number of cases. We assume that the speed of the inflow is similar to what we have. It's digestible. So this is the first part of the question. I think the most important question for me is in addition to what the six questions which are addressed to the court, which is if there is an annulment, what is the impact on that? Because what we already have, I think one important decision by the Supreme Court with seven judges, which is binding to my understanding, is that they said the time of limitation, so the question if there is an annulment, they said there is two conviction theories. So the two then... parts of the loan are separated and everyone has to go on its own for it and there is no automatic compensation on each other. As bankers, we would say what is the cost of funds which you can then charge both sides. What I understand, the terminology shall not be used, because here it's not about cost of funds, but on something else. This something else there, to my knowledge, was not decided by judges and for sure not by the Supreme Court. You might be aware that following the advice of our lawyers, we in one case, which got famous anyhow, as it was at the European Court of Justice, We followed what we think are the requirements under Polish law. And yeah, we need a judgment on that. So with all what I see, I don't think that... that it would go much faster, also from the customer perspective. The only negative thing I have realized so far is that there are now judges who rule that as long as it's not decided at the court, customers do not have to make any repayments. This is a new incentive to customers to act faster with their, in, in all the other cases, I think it, uh, if you would have asked me, I would rather advise the customer to wait now because currently the perception is that they have an option and, uh, and they, why would you really use your option? So I think this is the question for the, the customers and, uh, In our forecast, we have a couple of more court cases already built in. We'll see how big the acceleration will be, but there should be enough room, I would say, and no risk for the dividends. Would we go for a voluntary settlement as it is proposed by BQO and ING? I haven't found any reason why to do so. It does not solve the problems and it seems that also not so many customers from these banks are running after that. When talking about the NII for the second half of the year, I think it's reasonable to assume that maybe 1.6 billion or so could be possible. And yeah, the loan growth, we assume maybe half between 5 and 10, something like this.

Okay. Great. Thanks very much, Johan. Just maybe one follow-up on the first question. So if you were to offer a voluntary settlement scheme and you would convert a CHF loan into a PLN loan, would there be a change in the risk weighting of that loan, just technically speaking? Or would it still be at 118% on average because it's still a foreign currency loan from a group perspective?

No, if you convert it into Polish Swati, then it's domestic currency and then it should be maximum 35% risk weight or so. And I understand that you say this might be one additional buffer what you could use when thinking about the overall cost. And yes, we do. And in another occasion, I said, yeah, there have been countries which came with a solution which... I think it's not possible in Poland because of EU law, but with some conversion, I don't know. But it must be something strong. So if we solve it and change from Swiss franc to SWAT, then we really need certainty. And then we want to close this chapter. Yeah. But it would be reduced. The RWA, our assumption is 35% risk-weight.

Okay, that's very clear and very helpful. Thanks very much for your comments.

Thank you. We will now take our next question from Isabel Dobriva at Morgan Stanley. Please go ahead.

Hello, thank you very much for the presentation. I had three questions. The first one is on the dividend and the one euro, which is the crucial capital at the moment. A few of your peers have been giving a quite upbeat message on dividend, basically saying that if the dividend is already accrued through capital, then the discussion with DCB is more or less a probability. And from listening to you, it sounds like the discussion here might be a little bit more nuanced. Is that a fair understanding of your message, or are you fairly confident? that the dividend will be paid this year. And, you know, how does the stress test link you to that? And then my other two questions are more straightforward. So one is on NIMA. Could you just remind us of the sensitivity to rate hikes in Russia and how much of a benefit you expect to see already this year from the rate hikes we have seen so far? And then my third question is on the new cost of risk guidance. Could you share with us what are your assumptions within that regarding the macro overlays and also demigration of Stage 2 lines? Thank you.

Yeah, coming back to your first question, I think over the years we sent a clear message to our shareholders but also to the ECB and all the others when we said we just one euro per share what we what we promised in at the beginning of 2020 for the year 2019 we never added to the CETV1 so you can see that what our intention is and I know the reason why we we are not stronger than what we had been in the, in the past is that, um, I want to see, we want to see how is the, the language of the ACP tonight around the stress testing. And, and then after that, we can, uh, we can talk about it when talking about the sensitivity, uh, of the, rate hikes what we have seen overall in uh in 2021 uh for russia i would assume till year end this should bring additional 30 million around 30 million half from the rate tax uh uh what we have seen earlier, a little bit more came earlier, so in March and in June, and a little bit less than half from what we have seen now in July. So about 30 million compared to the 2020 number. And the sensitivity, With the numbers I shared with you already, it's Russia. It's... You said the, sorry, I have to get your full question. The sensitivity was 100 basis points is about 10 million to 15 million. So we're a little bit more sensitive now to rate reductions than to increases. So 100 basis point ups might be another 10 million. And as I said, let me confirm all the rate tags, what we have seen. till now would add 30 million on the Russian NII. And then there was one more question I understood. Cost of risk guidance, Hannes.

Well, thank you very much for this question. So, you know, all through the cycle, risk costs are somewhere around this 55, 60 basis points, which we have shared with the market. and states do provisions I would deem very stable over the next months to come. The only coffee there, but this is just, you know, you could say the disclaimer. Let's see if there are any further lockdown leaders. But the way how we look and what is our base case scenario, you know, that vaccination speed keeps the pace and Yes, we could see a higher rate of infection, but no further lockdowns. Having said this, we believe that the stage two provision should be fairly stable because where would the stage two come from? For further migration? Well, I'm not scared about too much about further migration on the rating scale because, you know, we have re-rated all our clients more or less already two times. So here we should be clear. not pretending that they could not be the one or other client, but in looking at the total portfolio. So this would be one potential inflow. Another sanctioned topic, well, this anyway we would flag explicitly. And the other one is further post-model adjustments. I would not deem it necessary, given that we have done a very robust and decent job when it comes to this post-model adjustment. Hopefully this guidance helps, Isabel.

Thank you.

Our next question is from Gabor Kemeny at Autonomous Research. Please go ahead.

Hi, a few short questions from me. Would you flag any one of non-recurring items in your fee income in the second quarter? Perhaps a quick comment on the second half would be useful. The second one, did you accrue any dividends with the H1 capital ratio and what you're thinking around the dividend payment from 2021 results. And just finally, if you can give us a sense about how you came to this $30 million Belarus sanction provision. I understand you have about $130 million exposure to the sanctioned entities and maybe 600 million overall to the sovereigns. So, would you be able to give us a sense of what's the likelihood of recurrence of these provisions in the next few quarters? Thank you.

Yeah. Talking about the fee and commission income, Gabor, so there are no one-offs in this quarter. We made, if you compare it to the last years, two small changes in the way we present and the crew. The one was that in the past we had, in terms of credit card payments and so on, a rather big booking in the Q4. We adjusted this a little bit. And just for the, let's say, bonifications or whatever, we would show in the fourth quarter. So it's more like an accrual base. So if you think about modeling the fourth quarter, there is less seasonality than what was in the past. And also not at one time, but... let's say, a switch between the lines was that in the banknotes business, which in the old, before, up to last year, everything was reported in the trading. Now there is one element, which is really rather a fee income, is reported here. But you've seen this already in the first and in the second quarter, and it will remain like that. So there is no... Then you ask for the dividend which had been accrued for the half-year CET1. What we do in our capital planning, which is relevant for what we report, we use the lower end of the range, which means 119 million, which is the 20% payout, which was required. I mean, this is more for planning and reporting, and the final number will then be decided for the fourth quarter in the January-February meeting by the board and the supervisory board. And the Belarus question goes to Hannes.

Gabor. It's in the end of the day, it's not super rocket science, but at the same time, also, of course, I think it's robust to open the mind and to think, you know, how could you approach this topic? So the method we deployed is we have looked at those companies who are being subject to the sanction and sanction risk. We went into the single transactions. And this gives you a total sum which is slightly below the 14% out of the 2.079 billion euros. And then we have employed an assumed loss given default of some around 40-50%. So meaning if I look at these four affected names, and if I look at the loss potential per name with the method described here, then it gives me a number somewhere between 25 to 30 million years. That was the reason why we came up with the 30 million years at this point in time. Whenever there comes further insight, further developments, new sanctions to be announced, blah, blah, blah, we would have to adjust anyway. But this is the basic approach what we have done. So looking at those who are being subject to the sanctions, We looked one step deeper, one to the single transaction, coming to the average, employing a loss given default of 40%. This leads us to the 25 to 30 million euros. That's the way how we have done it. Hopefully, it helps cover.

Yeah, thank you all. This is very helpful.

Thank you. Our next question is by Johannes Forman at HSBC. Please go ahead.

Good afternoon. Two questions, please. First of all, on your LLP guidance of around 50 bps, which is probably double the level we've seen in H1, so would imply that we see more than double the level in H2. What needs to happen to get there in terms of changes to default and so on? And probably also to get a sensitivity or understanding what would be needed to maintain the current levels of 1213 BIPs risk costs in the second half of the year? And secondly, could you elaborate a bit if the new Austrian Raiffeisen Bank IPS has any impact on your regulatory costs? Thank you.

Well, Johannes, if this is fine for you, I would start with the 50 basis point cost of risk guidance. Okay. it would be fairly split equally between retail and non-retail. And retail is maybe even a little bit easier to do an appropriate forecast because here you have certain run rates. So you could take the 50 basis points and maybe a little below the 25, 2025, what could come by retail because here you have a certain run rate, what we know from our historical models, could be on the lower end, but this is the way how we have thought about. So 2025 coming from retail. And the other one, we kept another 25 for the non-retail for the second half of the year. Well, a couple of thoughts on this one. Also, of course, you know, if you use the typical methods with this BD, LGD, and then we have done a bottom-up and top-down. So it was done very thoroughly. And What I also included is you could have one or two mid-sized companies which would just come as a surprise because we have seen in the history that some of the companies had a decent good rating and suddenly you have seen them on the screen announcing that they have financial problems. So this is what we have comprised in the second 25 basis points for the non-retail part, having said this, for the corporate part. That's our way of thinking. Does it resonate to you? Yes, thank you.

And what would be needed if everything goes well?

If everything goes well, we don't see these two or three defaults that I have announced which could come as a surprise. And I think the reason why we have included them is such strong economic impacts usually also may cause some companies that suddenly you see them, as I said, on the screen. So if they will not come, then we are even lower. And if retail clients are performing even better, given loan increases, high employment rates are and then also the retail run rate may come in a little bit lower. This is my way of thinking when talking about the risk-cause guidance. Thank you.

When answering your question on the IPS, maybe for those who are not so close, we always have an IPS, so an institutional protection scheme with our core shareholder, the Landesbanks. It happened that... Raiffeisen has decided not so long ago when the deposit guarantee scheme was changed that Raiffeisen moves to the general one. After reconsidering with some negative experience by a bigger fraud defaulter, Raiffeisen now went back and make use from the possibility to have its own Reifeisen deposit guarantee scheme. And as a consequence of this, there is now a little bit broader protection, institutional protection scheme, where also the other members of the Reifeisen deposit guarantee scheme are involved. Therefore, the volume increases. Therefore, also the funds for the IPS increase it. But this does not change the contribution of RBI. So the additional funds come from the others. One might say the new members. You know, the costs are depending on the Yeah, or let's say the floor for such costs are given by the regulator, which currently is 0.5% of the RWAs of the consolidated IPS. So for us, in a nutshell, no change.

Okay, thank you very much.

Thank you. Our next question is from Ricardo Rivera of Mediobanker. Please go ahead.

Yes, good afternoon to everybody. Thanks for taking my question. If I may, I wanted to get back one second to one of the previous questions from a colleague of mine with regard to the 50 basis point risk-cost guidance. It's still not clear, not 100% clear to me whether in this 50 basis point you assume to release, to use some of the post-modal adjustments that he charged in 2020. Sorry for that, but if you can clarify. And if that is the case, if I remember well, the post-modal adjustments in 2020 amounted to, roughly speaking, 300 million and if that is the number we could eventually use to think about that. The second question I have is on risk-weighted assets. How do you see the progression in risk assets over the course of 2021? Do you think you have already included most of the headwinds like trim, EBA guidelines, I would imagine rating migration at this point, or is there any other ambush maybe from regulators that we should take into consideration? Thanks.

Riccardo, I appreciate very much the question. It gives me the opportunity to even walk here. Well, as I said, the 50 basis points, let's split the 50 basis points equal into retail and non-retail, 25, 25 each. Well, on the 25 retail, I was arguing about their run rate. The second thing, what you mentioned is the BMA and the booking in 2020. At this time, you can recall, you know, V-shaped, U-shaped, L-shaped way of thinking. And if I would be forced to introduce a new letter from the alphabet, I would introduce this K-shaped because within the industry, we see now the differentiation that some of the clients within the specific industry are performing very nicely. That's the upright part of the key. But also at the same time, we still see some who are suffering. So who is still in the recovery phase, so to speak, it is the hotel portfolio because we mainly have financed hotels being exposed to the prime locations within a city center. What we know, Ricardo, and we took guidance from the 2002-2003 SARS environment, that the full recovery on the hotel sector in the city hotels may take up to two, three, maybe even four years. Having said this, and you know that a big part of our BMA was mainly allocated to two things, or three industries. The one was everything that comes in with airports, airlines, and so on and so forth. The second one was to the LPO portfolio, and the third one was this accommodation hotel portfolio. And when going back to the first quarter, We have not believed that the lockdown will be so much extended. And that's the reason why, if possible, I would like to carry over part of this BMA. And you have been right with around 300. I would be eager to carry over at least part of it to 2022. Why so? Because as you have seen in our foreborn exposure, so things fit together very nicely. we have seen an increase of our foreborn exposure in the quarter two of 184 million euros. And then let's see, you know, if the foreborn measures, what we have conducted, are sufficient. And if they are not sufficient, of course, you know, I have to provision them. And then I would have already the BMA available to allocate the BMA, which is currently abstract, to a dedicated case. So that's the way of thinking. So for the guidance I gave on the 50 basis points, besides we would see defaults, especially in this area I have announced, I would try at least to, or we as an RBI group, would try to carry over a substantial part into 2022, because as said, this industry may still be challenged. RWE progression in 2021 is the most headwinds included. As I said, we have done two times re-rating cycle. Of course, you always could say, well, is there another big thing to come or is this the full story? Yes, slightly. There might be the one or other small non-organic impact what you could expect. But the biggest but hopefully comes because of strong business growth.

Okay. Thanks, Hannes. Just to be clear, to get back on the first question, my understanding from your wording is that you expect to keep carrying the 300 million or most of it in 2022. And then eventually a decision to be taken

in 2022 right yes sir yes yeah okay yes that's our way of thinking part of it i have to i have to release and that's the reason you know the way how we have built it out of the retail so i cannot carry over the full 300 so it would be reduced by about 100 But part of it, of this 200, we intend, given my arguments on the affected industry, airline, airports, and hotels, we deem justified to carry them over. If the foreborn exposure is then turning into a defaulted exposure, because then the BMA is exactly serving the purpose that we have done this post-model adjustment for future potential defaults.

Yeah, okay. Fine, fine. Thanks. Thanks a lot.

Thank you. Our next question is by Krishninja Bude at Barclays. Please go ahead.

Hi, this is Krishninja from Barclays. I have three quick questions, actually. So the first one is regarding the recent Czech Republic transaction, how much do you expect to benefit from those in terms of your NIM profile in the country? How would that help you to change it? Secondly, just to align with that, what is the incremental NIIN PBT impact? And also, is there any upfront restructuring cost that could be allocated to this? And just to add on to this, I think any synergies that you expect from this deal? And second question is given your strong Q2 results. What's your expectation for the ROT for 2021? And third one, which is a broad and a strategy kind of a question, I think it's just regarding what's your thinking about the, what's your thinking in terms of growth between inorganic and organic growth in the businesses? And in terms of capital return, what's your view, given where the stock trades, what's your view on the buyback program? Thank you. Thank you very much. Hello.

Yeah, I'm here with you. Sorry. So the Equibank is not a big one, as I said, with a 2 billion loan portfolio. I think we expect some 40 million or so gross income for the second half of the year. yeah, let's say the 40 million on the NII, because there is almost only NII. I mean, the The rest of the acquisitions, what we have done, will not have any significant impact when we talk about net interest margin. As I said, these are mainly liabilities, what were added from the ING transaction. So here, you shouldn't expect too much. When talking about... The NII, I wasn't sure, this was referring to the ECWA transaction. Is this correct?

Yeah, this is regarding the ECWA transaction, the incremental NII.

So this is, as I mentioned, as there is little fee income, it's almost everything of the 40 million for the second half goes into the net interest income. then the OPEX is, I mean, the OPEX is maybe about 26 million, which might be added to the OPEX from that perspective. And then, of course, if we talk at the overall, then for the next 18 months, there will be some additional integration costs on OPEX. on the then on the compliant entity mainly on on the on the check uh on the yeah in the second half on first half of next year um i did not fully get your second question i think it was somehow about roe or so but but would you be so kind and repeat your question please

Sure, sure. No worries. I was just saying, given the strong Q2 and the free chat that you guys are suggesting, what is your ROTE expectation for 2021?

The ROTE expectation for 2021? Yeah. You have seen the first half of the year. There is some seasonality in the first quarter. On the other hand, There is some seasonality from the cost perspective. You know that the seasonality in the first quarter usually is that a bigger part of the regulatory costs come in the first quarter. And in the second quarter, we have a little usually more OPEX and maybe also more risk costs. So... Yeah, you probably won't double it. You won't double it, no. That's what you usually not do.

Sure, I was just, maybe I was looking at my brain, because I was looking at 6.5% to 7.5% ROD expression.

Yes. I mean, to be less precise, I would say it should be better than last year. This is clear. Is it already double-digit? Let's talk a little bit later. Not yet. Then your question was organic growth. I mentioned already that what we add is the aqua from Anorganic, which is the $2 billion of loan portfolio. I think you are aware that the one or the other smaller consolidation targets are in the market all of them what we are looking at currently not that huge but something inorganic might come as well and then I understood you also have a question on the buyback program of course from time to time we look at this as well we understand that the broader part of the shareholders are rather in favor of a cash dividend than of a buyback. But, I mean, if you ask me, would you have a program in the drawer in case it's an exceptional time, then... I say we have brilliant finance people. They have something in the drawer, but I wouldn't expect that we use it this year.

Thanks a lot. Thanks a lot, Johan. Thank you.

Thank you. Our next question is by Alan Webber, Associate General. Please go ahead.

Hi. Thanks for your answers on the questions today. I just wondered, in terms of the improvement in your your loan growth guidance for the year. Clearly, you had one or two geographies that have shown quite strong performance in the second quarter, maybe helped a little bit by currency. I'm not sure. But what for you was the main driver for that improvement in growth? I mean, is it particular geographies you're really a lot more confident of? Is it that you feel that you can put a little bit more capital to work because there's always demand in a number of these countries? Could you just give me a flavor of how you feel and why you are confident to push the loan growth target up? That was the first question. And the second question, again, sorry to ask it again, but your provisioning on the Swiss franc mortgages in Poland is is clearly lower than a number of the domestic banks. And as you rightly said earlier, a number of them seem to be a lot more keen to go for a voluntary settlement. But that voluntary settlement seems to demand that the majority of operators in Poland accept it and go for it. Do you feel that you will be able to, if the majority go for a settlement, for example, if it's done on the KNF terms, can you still ignore it and go through the courts yourself? Because clearly, if your clients are getting a less good deal than the others, isn't that going to be rather difficult? So at the end of the day, will you not really just be forced to follow what the majority go for, or do you think you can not do that and go through the pain of another three years or so of court cases? I just wondered what you feel about doing something different, as I guess you've tried to do earlier. So that was the second question. Thank you.

Well, Ellen, if I can start with the second question when it comes to the Swiss franc provisioning. As our CEO clearly said, PICO was using a different path when it comes to their provision. We also know their shareholder structure and their good intention to find a settlement at the same time. There was only a little day curve. And if I look at the other banks who already have announced their The quarterly results, we feel very well with our coverage of above 10%. If I look to Commerzbank with some 11%, if I look to someone there with 14%, we have get in for obvious reason with 3% only. BNB also being on 10%. BPH 10.46. So we feel very well hosted in the environment what we have created. And of course, each and every bank has a different loan dynamic and dynamic when it comes to the court ruling. So that's the reason why we have thought that the current coverage of this around 10.2% is very well done. The other one is, you know, when you were talking about the judgment, when the ruling comes from the Supreme Court, it is a very strong guidance, not to say even binding to the local regional courts. But needless to say, different if there would be a new law introduced, each and every individual client would have to go and to sue the bank to get here a legally confirmed agreement with the bank. That is the reason why we take this approach. And we must also not forget, and that's another thought, Currently, there is one industry in Poland which makes a very good earning out of the whole situation. These are the lawyers and the different core lawyer communities. Because if you go the route towards the court, you know, it costs you some 10,000 euros plus. So that is the reason why we believe that there will not be a one-serve time announcement. but rather if there is this ruling by the Senate of seven or the clear guidance in answering clearly these six questions that we could see either a slowdown of new cases coming in. And as I said, our current provisioning is already assuming a further increase of new cases coming in. That's our thinking on the second part of your question when it comes to to the provisioning and to the coverage on the Swiss francs provisioning. Well, the loan growth goes across all the regions. I think we already have confirmed these loan growths in the first quarter. You can recall that Johansson was already very constructive and positive in the first half year. Well, if you go across the different regions, well, I think we see very good growth in Central and Eastern Europe. Is it Hungary, where it could be double-digit? Also, Czechia is constructive, maybe not as pronounced as Hungary. Slovakia is somewhere in between Hungary and Czechia. This is the way I see it when it comes to the C region. When looking at the SE region, Is there one country to take out where we can see very pronounced growth? Maybe in Serbia to take out one of them. Current research has it that we believe that we could see even a double-digit growth in Serbia, but also Albania and Bulgaria are showing a very nice growth dynamic. Very favorable. Also still, when it comes to the Eastern European market, we have seen that in Ukraine we have been capable to catch some of the market share as well. Here we would be slightly below double digit in Ukraine. But if we look, for instance, in Russia, at least market capacity would show a clear market growth beyond double digit. Well, and last but not least, just to finish our regional footprint, I think Belarus is not the market currently. to heavily expand our footprint when it comes to financing. Okay, good. All right, thank you.

Thank you. Our next question is by Robert Broza at PTO BP Securities. Please go ahead.

Good afternoon, everyone. I have two quick questions. First, follow up on the cost of risk. I've noticed that in Bulgaria and Romania, annualized cost of risk currently at around 80 bps is actually higher than in Russia, where it is below 60 bps annualized. So my question is, are there any country-specific drivers in Bulgaria and particularly in Romania that are sustainably driving the provisioning charges upward? And on the other hand, do you consider this level of cost of risk in Russia to be sustainable over the mid-term? So that's my first question. And second question is on the fee and commission income in Romania. It registered a 20% quarterly increase. So my question is, I can't imagine it was purely due to reopening of the economy because it has been fairly robust even during the pandemic. What has been behind this increase? Was it a one-off or did you change your fee schedule or simply it was related to the customer activity? Thank you.

Well, thank you for working through the presentation so deeply. I appreciate it very much. On Romania, of course, this is not the run rate I have to clearly admit, but I don't know if you followed the latest constitutional court ruling in Romania when it also comes to the mortgages. And one could say we once have discussed in this esteemed room of participants when it comes to handing in the keys. And, you know, we thought that especially on our strength portfolio in Romania, we also deemed it necessary to do another post model adjustment when it comes to Romania. which is summing up in total to 8.5 million euros for this specific subject matter. So this would be my answer for Romania. You're right. It's elevated, but it's a quarterly number. So please do not scale it to the full year. The second one is Russia. I can recall this question, I think, multiple of quarters. The 60 basis point, you know, what we guide for Russia is derived from our models, you could say, based on ratings, based on LGD experience. At the same time, what we have enjoyed very much is that the local national champions have been capable either to adjust the business model if they have been challenged or they have been just rock solid. Yes, you're right. It's very, very low. If we really can sustain this for the next endless quarters, I don't know. But Russia was always able to surprise us positively when it comes to the risk costs. Model would indicate slightly higher than what we can see currently. But colleagues continuously demonstrated. And what we also see that's very positive, that also on the retail side, The forward-looking indicators, is it the 30 days plus, or the 90 days plus, and three over three months, all of them look quite favorable.

Referring to your other question, which is the fee income in Romania, quarter on quarter, it's a combination. No specific one-offs. What we have seen is, or what I would say is, I wouldn't expect, and I try to be cautious, I wouldn't expect that it's so easy to repeat the 500 quarter-and-quarter, which also means Romania. But if you look at the fee income in Romania, it was also last year around a little bit above the 40 million. So the 45 is, I would say, exceptionally given also the new launch business in the unsecured lending area. which is a very good one, and some other activities as well. So no one-offs to mention in Romania. Very good quarter, and currently we are very positive to say. I mean, there is some seasonality. Maybe from the Visa MasterCard. So if you take off two to three million from this as a special seasonality, then you are anyhow back at 41, 42 what we had in the last years as well. So I think it's a very good development, but not such a big surprise.

Thank you. Thank you. Our next question is by Ricardo Rovere at Mediobanca. Please go ahead.

Yes, thanks for taking this follow-up. Just on TLTRO, I noticed that you got 9 million bonus in the quarter. Can you remind us where you stand in terms of accounting of the benefit of TLTRO? It's getting a bit complicated to track all the differences among the various banks.

I fully agree with you that the accounting is very difficult. And it took my colleague quite a while until they got the impression that I have understood it the way how we did it. So what we did is first we said, let's wait until we have the confirmation. Don't book anything earlier. So we waited until we had the final confirmation, and then we booked everything, what was accrued for the first time. We are in a sort of accrual mode, if I may start with this. And what comes on top of this accrual mode is that we didn't book anything for last year. So this came on top. Our volume is not so big, but we would now accrue every month. We would accrue monthly. And of course, it's for the rest of the drawing. And it might be around, what is it then, in a half year, maybe five to seven million, something like this. Because the nine million, this is already with what we also allocated from last year. But we accrue it over the life of the drawing on a monthly basis.

So this is just to be sure, the 9 million we have seen in this quarter will more or less stay every single quarter in the foreseeable future.

No, no, no, no, no, no, no, no, no, no. Sorry, sorry, sorry. This would be misleading. So what we have is we had in May we booked for the first time and in May we in May we We then had to book everything what was in accrual terms since this period started, where part of it goes back also already in 20. And now it's a little bit difficult to do it because this is a group report, what we do. And so you might say that we will have, let me think, we will have For the first half year, we had a little bit less than 4 million, what we take in RPI, AT, and another 4 million will come in the second quarter, something like this, almost 4. And we had a catch up of last year as well. And we have a smaller amount from Tatra Bank. So I don't know if I was not precise enough. I'm looking around also in the round here. People say I'm rather too optimistic. Maybe I should say just 5 million in the second half from the TLTRO. And 4 million was a catch up. So if you take the 9, 4 million catch-up of last year, 5 million for the first half of the year, and another 5 million in the second half of the year. You see, also for me, it's rather difficult.

Thank you. Okay. Okay. Thanks. Thanks.

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. So again, that is star one. Okay, 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 your participation. If I may join the thanks, I want to wish you all the best not only for the weekend ahead, also probably it might be a late start given the ECP with the announcement of the details of the stress test. But nevertheless, all of whom who have not enjoyed the nice summer, I wish you all the best. Enjoy it. The banks that you cover, I have seen all report good numbers. So it will be a good holiday for you and I think also for us. Thank you. Bye-bye. Thank you.