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 and 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 us today for our Q3 update. I'm pleased to be reporting on a strong third quarter today which reflects the continuation of the positive trends already highlighted last quarter. Consolidated profit is now 76% higher year-on-year, driven not only by lower risk costs, but also by strong recovery in lending volumes, interest rates and fee business. Net interest income for the first nine months is almost even compared to 2020, which we are very encouraged by considering that this year's first quarter was significantly lower than last year's. Higher volumes and rates are, of course, the driver here, and we expect this to continue into next year. We are also encouraged by another record quarter in fee and commission income, which are 538 million euros, mainly driven by excellent business trends and with no significant one-offs included here. Long growth accelerated in the quarter with almost 5% higher volumes before ECWA and 7% including ECWA. Our CT1 ratio is down 10 basis points in the quarter to 13.2%. ECWA is now fully reflected as is the additional proposed dividend, which we will have or talk about in a moment. couple of moments or I can do it now. You know, we have the extraordinary shareholder meeting on the 10th of November and there we propose this 75 cents per share. Good news is also that Moody's upgraded RBI's long-term ratings to A2 and Hannes will talk about the adjusted outlook where we first time speak about risk costs in 2022. I think what's also important is that we have an M&A update here today, which is Cartier Agricole Serbia is on track and we expect the closing in Q1 2022. Equa Bank, as I mentioned before, is consolidated for the first time. and Bosch PerCast integration and ing customer referrals are completed and one more where we are not working on it is the financial calendar for next year we we work to be much faster and we intend to to give you um Very deep insight to the total year already on the 2nd February in 2022. Moving to the next slide, which is slide 6. Here you have all the details about the third quarter, the income statement. And I think what we see here is a slight improvement in the net interest margin. Also, here I repeat that as long as the over liquidity is part of our business, I think this is a volatile KPI. Cost-income ratio is now at 53.3 for the first nine months, and it was 52.1 in Q3. But as you know, there is always some seasonality in invoicing and the way we then have ultimately our OPEX. So we target 55% for the full year 21. I will discuss a little bit more the... Revenues on the next slide. And on the costs, I would like to make a statement now, which is that for the first time, ECWA is also consolidated. And as you know, we started from the 1st of July. So it's the full quarter, which we do have now in the numbers. And one more element which I want to outline here as well, we come to that on a later slide also, is we took another 40 million provisions for litigation relating mainly to the Swiss franc portfolio in Poland. But there, as I said, we have a separate slide. Moving to the next slide, now talking a little bit about the core revenue trends. You see why we are happy with the current trend, what we have. And I think one important thing is that with the 875 million net interest income in Q3, we are almost at the levels what we have pre-pandemic in Q4 2019 and Q1 2020. Also, I have to mention here that ECWA contributed €16 million in Q3 on the revenue side. As we are aware that usually there is always a question also to the TLTRO impact on NII. In Q3, this was just over €2 million. And this means in total for 2021, €11 million. We're still not recognizing any bonus for the second special interest rate period as the observation date is the 31st of December 2021. And should we achieve the second bonus, both at head office and in Slovakia, it would be worth 43 million, which would be recognized over the coming years. Currently, we are confident that we can achieve this bonus as well. Net fiend commission income generation was again very strong in the third quarter. This is reflecting the continued pickup in activity that we saw in the overall business. The result was driven by a turnover in payment transactions and affects business across most markets. And We are also seeing sustained increase in retail investment products. Overall, the product lines are growing, and to a large extent, we believe that these levels are sustainable. Moving to the next slide, here it's about the loan growth, as this is one key driver for our revenues. you see here is the very good development which i have mentioned already throughout the various regions and this is an important impact also to the net interest income as i stated before i think what you should be aware that from the overall increase About 2 billion come from the Equa loan portfolio, which, as I said before, is first time consolidated. What we also share with you is the sensitivity of key rate hikes. And I have to stress this just to be very clear and well understood. What we show here, the numbers, these are sensitivity numbers which like usually in a simplified sensitivity analysis we assume that assets and liabilities are relative constant and that also the margins to a large extent do not have a structural change which means that in the sensitivity area what we give here, so 50 basis points in some of the markets or 100 basis points in some other markets, it's a reasonable assumption what you see here. Of course, if the rate would increase significantly more, then you do also have to expect some adjustments in the margins which are allocated mainly in the liability area where usually if you start from zero or very low, then the first one or two moves, you don't have to adjust the deposit rates, but at the later level, if a higher level, then of course this comes also with this And for your comfort, we have estimated the NII impact from these rate hikes, what we have seen so far, and this is about 33 million for the total year in 21. If we move to the next slide, number nine, then it's a short update on the developments in the Czech Republic. So the Raiffeisen, sorry, the developments of Raiffeisen Czech Republic. And here I think we can show a very good picture, the focus what we had over the last quarters in the, in our activities in the Czech Republic are now progressing substantially. What we see here is, and you are aware of it, we integrated the Bosch Parkasse in the Czech Republic, which was already within the group, but now it's fully integrated into Raiffeisen Czechia. I think this was an important move as this now improves our opportunities to offer additional products to our customers there and the customer base what we have here and what we speak about is more than 400,000. We also can report here that the referral project with ING was successful from our perspective and we have added 144,000 new customers successfully and I think again there we will provide a good offer for these customers also in the coming months and quarters and I think from the pure financial perspective one might have Is this at the point when we made the decision, is this the right point in time to add another 2 billion of deposits in an over liquidity situation? But I think we were somehow lucky with the timing that with raising rates, then also this gets more and more positive. And finally, Equa, This adds another more than 400, almost 250,000 new customers to the combined entities. And I have to say we are well on track with the integration. We assume that the legal merger can happen hopefully in January 21 and the IT technical merger in the third quarter. But the more important thing than this integration is that the business, the loan origination in ECWA is still strong and we like this very much. Having said all this, our teams have prepared one more slide which I understand that from time to time you want to see also more details to some of our segments. We have chosen this time markets and what we quite often explained also in the Q&As that our markets business is less one of capital markets trading, but it's to a large extent a customer-oriented business. This is what you can see on this slide. 92% of revenues which are attributed to capital markets come from customer business and I think what you see here as well is that the segmentation so the origination from the various segments institutional clients but also retail clients and corporates is well balanced and And what I have mentioned before is also that you see that the asset growth, like, of course, in the whole industry, the asset growth, be it in custody or in capital management in our RCM subsidiary, is developing very good. And we are also making progress with some of the products which are will support our position in the FX business, providing more comfortable services for our customers. Moving to the next slide, it's 11. You are aware that the pain points, what we still have in our portfolio, in our business, the bigger one is the Swiss franc mortgagor business in our Polish subsidiary, in our branch, I have to say now. And to give you a few ideas, the portfolio, so the Swiss franc part of the portfolio is at about 2 billion. It's close to 29,000 loans. Demortization is a long-term one, so 100 million per year. The number of litigation cases is increasing still with a high number of cases. On average, we recently had about 300 cases per month, and the total number is now more than 6,300. The provision I mentioned already, we added around $40 million, is now around 231 million euros. And yeah, the capital usage of this portfolio is high. If you add all the various elements, you know, the high RWAs, you know that of course also impairments go against capital and you know the high operational risk and the litigation provisions this adds up to more than 900 million euro and from the capital perspective someone might say it's already highly provisioned but it's the capital allocation it's not the P&L here I I refer to the litigation provision once again, about 230 million. So a few words to slide 12, which is an overview of the balance sheet and loan growth. I think I don't have to comment. Maybe as we are proud of, I mentioned the loans to customers, which first time are now about 100 billion. So we like this number very much. And I think what I should also elaborate a little bit is the numbers below in the lower left-hand box, where we speak about the origination of loans to customers. Here you see the good development, what we had in the third quarter. Well, I have to mention that in retail mortgages, we have more than a billion, so close to 1.1 billion. This is, of course, less than the 1.2 billion what we had in the second quarter. But be aware, the 1.1 billion is the second best quarter what we ever had. So it's... It's a very good development and of course we see the one or the other signs of reactions by regulators trying to put some brakes on the very strong development in some of the markets and also the margin pressure is felt here and there. So we are very happy with this development. Moving to the capital ratio, slide 13, it's 13.2. I think not much what I have to comment on slide 13, but we can turn to slide 14. and and here what you see is the development it's a 30 basis point aqua first consolidation we had um 23 basis points uh from the loan growth here of course you immediately will say this this is And I agree this is net because we have seen some improvements in the asset quality, which had a positive impact by 16 basis points. And the 23 is the net. We have some increases in market and operational risk, not that big. And the retained earnings plus those part of the dividend, which we will not... discussed on the 10th of November, so has an impact of nine basis points, which are included here in the retained earnings and support the CT1 ratio. Talking about 15 now, the coming quarters, our colleagues from Raiffeisen Research share with you, with us, their view on the loan demand in the region the way we see it. What I have reported already that the mortgage business is in a steady development and we also see a pickup in the consumer support for retail lending. What we also see is that now more and more corporate segment returns to long-term loans in the first few months of this year had been dominated by rather short-term working capital financing. What we can report is that overall I think the development of loan demand in the coming two years, 2022 and 2023, is still a very supportive one for our future development. Moving to slide 16, this is an overview of the macro outlook, what we see. for this year and the coming two years and I think we can be very happy with the development, what we have seen throughout our region and overall I think it's also a very, very good outlook for the coming two years. Having said all this, we slightly adjust our outlook and our targets and Yes, with this good development in the loan demand, we now expect loan growth of around 11% for 2021. This is excluding the aqua bank, aqua I have mentioned separately. And we'll talk about the risk costs in more detail later. So here I just want to mention that we expect now a provisioning ratio for 2022 around 40 basis points. Cost-income ratio, 55%. Also in the midterm, it's a commitment. You are aware that we will have next year some special elements coming from the integration costs of Equibank. I mentioned the technical integration as well as the credit recall subsidiary, what we also expect to happen to some extent already next year. Profitability, I confirmed the 11% for the midterm. And we also confirmed that our midterm CT1 ratio should be around 13% and given the various opportunities what we find in the market we still want to keep the broad range of payout ratio between 20 and 50% of the consolidated profit. And with this I hand over to Hannes. Hannes, please.

Thank you, Johann. Dear all, also hello from my side. Happy talking to you and sharing some insights on the risk report with you. Due to the risk cost of 151 million euros, you have seen the split across the different categories on the IFRS terms. Stage 3, 1 in 6 million euros. We have still allocated the 27 million euros, 30 million euros we have allocated for the increased sanction risk in Belarus. And we have reflected the BOST model adjustment in the first quarter of 14 million years. In addition, we have an MPE ratio of 1.6%, having a coverage ratio of 62.2%. And I'm sure that there comes the question, what is my risk-cost guidance for the year end? Well, I've been now on page 19, and as already indicated, I think The way when we look at the credit cycle, of course, as usual, as everybody else would do, we look at the macro outlook, and this remains quite supportive for the coming two years to see, 22, 23. Having this strong macroeconomic dynamic, we also see in many of our countries that employment rates are recovering back to the 2019 level. In some regions, we see really a super high employment rate. I think also on the third bullet, the pandemic, of course, is nasty, is demanding. At the same time, I think a broad part of the society got used to how to handle it. And we see, again, an adjusted way of consumer spending. And if in 22, latest 23, we are beyond the pandemic, I think we also see a sort of normalization when it comes to the saving rates. Order books are full. Everybody's talking about supply chain topics. Well, on the other hand side, supply chain is only being challenged if the demand is very high. So we see that the order books are quite full and capacity is also being built up. And there are another one, two factors, I think, which are very constructive is the next generation U-Fund. this strong political commitment on the ESG transition and sovereigns and banking sector, we see that the debt level is well to be managed. Since the Chief Risk Officer is talking to you, I have to add some wildcards. John is loving, you can't see him, but he said, well, Hannes, do you really need these wildcards? They are anyway obvious. But just let's also state the obvious, because the question anyway comes up. Everybody is talking about inflation. Everybody is talking about energy prices and supply chains. So the outlook is extremely constructive and the obvious needs to be managed. I'm now on page 20. There was so much talk about the growth RBI group was capable to demonstrate. Here you just see it again in the numbers. If you look at the CE region, bear in mind it's also including, of course, the AQUA exposure on the right-hand side, you can see the different products per segment. I would not run you through the details because we have demonstrated a very, very strong performance in Q3. I'm already moving on to page 21, the IFRS 9 provisioning in Q3. In total, we have 42 million euros, 38 million euros in this stage 3. With the integration of AQUA, and you can recall on this IFS method, it is a one-time impact of 14 million euros. So on stage one, you can see some net releases because of repayment and or of further improving portfolio composition. I was flagging the IFRS 9 impact from AQUA Bank, and the BOST model adjustment was also one Last time, this management overlay, we were capable to manage it on a quite stable basis. Total net release was 6 million euros only. Talking about RWA developments, you can see that we have increased our RWAs from 85 billion euros to 88 billion euros, mainly, of course, impacted by the credit risk and the strong asset growth. Partly, it's mitigated by the better performing and better rating. Therefore, we also have a certain mitigating effect by better ratings. Now, op risk is very much impacted by the provisions to be reflected for Poland, but also partly for Russia. Market risk, we have seen volatility coming down on ruble, and we also have slightly reduced hedging rates. In Rovold, therefore, we have lower RWAs on this one. So I think this is the most important thing. And on the right-hand side, reflect also some inorganic effect, which you would have to consider in your modeling for 2020. You know and you're aware of that there is a new regulation when it comes to the structural FX position. And this will cause for RBI group and RWA uplift of 0.7%. On the retail methodology, the headline would be this pandemic repair package. We see now a change from a point-in-time presentation of TPT through the cycle. This is causing an uplift of RWAs of 1.5 billion euros, at the same time having more stable RWAs going forward on the retail side. Corporate BD also changed in the due course of this repair package. What are the most important topics to talk about? This is this margin of conservatism and the way how you have to reflect the one or other adjustment. This is causing 1.1 billion euros uplift. At the same time, we would get the release on RWA on the market risk side by 0.7 billion euros. Coming to my last slide, which is easy one, MP ratio 1.6%, having a very decent coverage ratio of 62.2%. Yes, we have demonstrated a slight increase in the last quarter, but nothing extraordinary to share with you at this point in time. So, dear all, now we are more than eager 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 of your telephone is turned off or we will not receive your signal. Once again, if you wish to ask a question, you'll 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'll pause for a brief moment in order to allow a queue to assemble. Our first question today comes from Isabelle Dobreva from Morgan Stanley. Please go ahead, your line is open.

Hello, thank you very much for taking my questions. I have three. Firstly, I wanted to ask you about your cost outlook into next year. We have all seen the wage inflation numbers which are coming out of CEE, which are accelerating. And in the course of the costs were up 11%. And I know that some of this was the echo consolidation, of course, but how should we think about the cost growth into 2022? Could it be as high as 5% potentially? And also, would you expect that at group level, you can have positive operating jaws next year, given that already for the nine months so far, we're tracking close to the long-term goal of 55% cost-to-income ratio. Then my second question is on M&A. And we have seen you do a number of acquisitions recently. So could you update us on your latest M&A outlook? and also what type of targets would be interesting to you in terms of geographical or business mix. And then finally, I had a question on the Swiss bank mortgages. We have seen increasing industry discussions about potential voluntary settlements, and some other market participants look to be moving in that direction. So could you tell us what are your views on opening a voluntary settlement scheme, please?

Thank you, Isabel, for your questions. I highly appreciate it. Starting with your first one, which is the cost outlook for 2022. All these inflation discussions and all what we observe will of course have an impact on wages and therefore on on our cost base and currently I mean of course it's early to see to say how it develops but currently we would assume a five to six percent increase but this is not all as I have mentioned before we have the M&A transactions which I have been reporting and we have to be aware that there are integration costs substantially, and there are also, of course, the running costs from the targets. Cost synergies will come a little bit later, and of course you are aware that ECWA is only half the half year in, so the second half of the year. So you have, of course, increased that part for the full year next year. And Serbia, where the running costs are around 30 million, you should also include. Adding up these two numbers, one might say you have to add around 100 million from these M&A activities. What I want to make you also aware is that if you model the various segments or the countries, we are currently in a process to have a a mixed approach in developing new services for customers and software and it will happen that to some extent at RBI head office level costs will increase and in some of the network banks we are searching for reductions and the idea is that we centrally have to to build some of the applications and offers and it can then be broadly reused. Looking at the M&A, so the second question, the M&A targets, here I can confirm what we mentioned to you also in the past, so no change, which means the target countries for us are preferred czech republic romania but i also have to add slovakia and serbia i mean serbia is busy now we could have more slovakia i think with our dual brand tatra rafas and we have a good position If a target would fit, we would also like to add it to our bank there. And Hungary, I always have to say, it would be very good for our bank if we could find an improvement in the retail, mass retail. Here, I think the efficiency of our bank could be improved, but here I have to say, as of today, I don't see a target now, but yeah, you ask for what we would be interested in, and this is my answer. In terms of voluntarily Swiss franc settlements, I think what's currently at the table, so the total framework, we do not like that there are expectations that the full negative impact from the Swiss franc development is fully attributed to the banks. I think this should be. somehow split between all those who have benefited in the past substantially and, of course, giving the very good performance of the portfolio. There is also no, let's say, social need or no other from the perspective of can the customer afford any need. And the third element is we would need certainty from the agreement so that with whoever customer we agree on a settlement that it cannot be challenged in a couple of years claiming that not all the impacts from the legal environment had been understood. So in a summary, currently the framework is not ready for a voluntary settlement, at least from our perspective.

Thank you. Thank you very much. Thank you very much.

We'll now move on to our next question, which comes from Mehmet Seven from JP Morgan. Please go ahead.

Good afternoon. Thanks very much for taking my question and congratulations on the very strong results. Just a couple questions from me, please. First of all, on the fee income and the very strong performance, you mentioned that the momentum should be sustainable to a large extent. So for this year, do you think it could reach the 2 billion mark? And what will need to happen for that? And do you have a view on 2022 and beyond, at least in terms of the sustainability of the performance that we're seeing? And in terms of NII maybe, to what extent have you seen the positive impact of the rate hikes in Czech, Hungary, and Russia already? So you mentioned 33 million of positive impact for 2021, which is very helpful. So how much of that is already in the numbers in 3Q? Are you able to give us some more color? And finally, on the CHF mortgages again, and sorry for coming back to that topic, but it does look like that the pace of provisioning has decelerated this quarter, despite the still very high number of incoming cases. So could you please share with us what has brought the quarterly provisioning down? And if you can, what's your thinking for the quarters ahead? Thanks very much.

Thank you for your questions and your appreciation is also highly welcome. Indeed, the two billions seem possible. I think having had the 538 in the third quarter, it's reasonable to assume that let's phrase it differently. I think 500 500 per quarter is what we can assume fairly. And the drivers, like always, it's the business activities. So like Hannes said, we have to be aware that the vaccination rate in some of the countries are low where we are active. I think the positive element is that the government, the authorities have found a very good, flexible way how to deal with restrictions, with limitations to keep the infection numbers under control. But still, I cannot exclude that the one or the other month or so could be of lower activity. And finally, I have to say that I don't know if the capital markets will continue as good as they did. So also the overall performance was, of course, a strong element for our fee business. Can it continue for a while like this? I mean, you have better insights than I have. So here some volatility might come. When talking about your second question, the NII so far, I think a little bit more than 40 million we have seen year-to-date, and so the rest should come until year-end. And I think your third question was about the Swiss franc, probably the litigation provision, if I got it right, and the cases, what we expect, which might come. As I mentioned, we have... 300 cases now per month as inflow. We adjusted because of that higher inflow, we adjusted our model. The way our model works is we have segmented our overall portfolio and the current model assumes that the inflow will over the next couple of, maybe not now, but if I take a couple of quarters, then this inflow should reduce as those segments where we believe the inflow is higher, we have to a large extent seen these numbers. But still, I would not be surprised if... over the next couple of quarters another $2,000 or so would come in addition. And of course it to a large extent depends what we would see from the Supreme Court and maybe the one or the other or so second instance decisions Also, what we will see from those questions which have been addressed to the European Court of Justice, I think it always depends on the perception of how high the probability is that the customer will ultimately succeed. Bringing a case to the court does not come for free. There are some some costs involved as well. And I think the borrowers, they are very sensitive to the developments which comes from the court cases. So that's the current view what we have. Thank you for your question.

Great. Thanks very much.

Thank you for your questions, and we'll now move on to our next question, which comes from Olga Veselova from Bank of America. Please go ahead.

Hello. Thank you for taking my questions, and congratulations with the results. I have a couple of questions. One question is about the provisioning on Stage 3 loans. In the presentation, you mentioned that you add some provisions on Stage 3 loans, and mainly in retail, and mainly in Russia. Was this driven by the regulatory changes or not? And how do you think the regulation from the 1st of October will impact your provisioning in Russian retail going forward? So this is my first question. And my second question is about regions where you operate your macro big picture outlook. I think your team has increased GDP expectations for this year. Still, in which regions do low vaccination ratios can be a point of concern for you and can impact your results in the first quarter? And in Russia specifically, does the current lockdown impact your business plans in any way, or there is no visible impact given the lockdown is quite short? Thank you.

Well, Olga, I'm two times very happy. I always thought that today there will not be risk questions. So thanks for also flagging some risk questions. And, of course, we take your congratulations. That's very good for the team. State three provisions on Russia, there is not a big story behind. This is coming from retail. We have seen this is sort of a usual run rate. But, you know, since the numbers are already so small, we're flagging them explicitly today. that you also can see what are the main drivers even on these small numbers. So for me, there is nothing to worry about. It's the usual run rate on the retail side. You know that we are always taking the cases early on and doing a decent provisioning. The regulatory changes, at least the way I read it, on Russia is mainly a question when it comes to to the risk weighting because there is of course a quite strong growth dynamic but the growth dynamic here we're talking about beyond 20% on the retail side locally and the competent local authorities have increased the local risk weights and since we are subject to the Basel III environment and European regulation, these local increased risk weights do not have a direct impact to CAD1 on group level nor on any risk costs. So the State III provisioning, where we have been explicit that part of it also comes from Russia, this is more the run rate and the regulatory part is more on the risk weighting that here the risk weights have been increased. To your second question on the macro, well, I think the outlook what we have shared with you is constructive across the region. It's constructive across the region, and I think this shall be the main conclusion of today's discussion. When talking about the handling and managing the virus situation per country. I think what we have learned from many of our neighboring countries and in the region where we are serving our clients is that a very constructive approach was chosen. So the production facilities were kept more or less running. Where we have seen an impact was with the servicing. But on the servicing sector, for instance, if you talk about Russia, there was these holidays being provided by the companies in order to allow the different employees to conduct their daily work in a home office mode. So I believe that society now has learned also how to deal with the situation in the lockdown situation And we already have seen first 10 months running in a very favorable and benign environment. So yes, there could be for the one or other small industry, as we already reflect with the beginning of the pandemic, an impact mainly on the servicing sector. But on a broader scale, when it comes to production, production facility, we would not see an impact because of not a big impact based on potential lockdowns.

Thank you very much. Thank you.

And our next question comes from Gabor Kemeny from Autonomous Research. Please go ahead.

Hi. Three short questions from me, please. First one is on the NII outlook. a pretty impressive Q3 performance here, and you are showing the positive rate sensitivities. My question is, shall we assume further NII momentum on the back of the interest rate hikes, or do you see the upside being mitigated by the margin pressure you mentioned in some areas? The other question is on loan growth, where you flagged an 11% clean growth this year. How do you think about next year? It seems from your macro colleagues' forecasts that you are projecting quite a bit of a slowdown in some markets, especially in Russia. I see you are projecting a low teen growth, which is significantly slower than what we see now. So how do you think about the outlook in light of the regulatory effort to bring down long growth? And just finally on the provision outlook of 40 basis points, can you remind us, because this is below what you indicated as your normalized level previously, what does this 40 basis point assume in terms of macro overlay provision releases? and if you could give us an update on how much is left of the overlay provisions. Thank you.

Yeah, Gabor, thank you for your questions. I start with your NII, and indeed, I think we should assume that what we have seen so far is – is very positive for our development i have stated also to an earlier question that of course they already they already seen net interest central bank rate increases are supportive by another 30 million so i think it's it's good to assume or it's easy to assume that we might We might see an even stronger Q4 on NII. And if you add these numbers up and see that we see further positive impacts, well, what I hope is that we could be up to 3.5 billion of NII next year. When talking, and this I think is the second question what you had, is related to the first question somehow as well. Given the outlook what we have over our markets, I think one can assume a high single-digit loan growth number over the next one, two years. That would be my my guidance to these two questions. And the third, of course, is with Hannes.

Gabo, on the risk cost, the 40 basis points. Yes, you're right. We once indicated that through the cycle, we believe that we could see risk costs somewhere around 55 to 60 basis points. Given this macroeconomic environment, which we assume this is the starting point of our conclusions we believe that we shall be below this through the cycle 55 to 60 basis points and also shared with you on page 19 our thinking why we believe that we have a very constructive credit cycle outlook so this is the main reason for the 40 basis points and it also includes as I was asked last time I think for Ricardo on what must happen to see these 40 basis points. I think we see currently times with the one or other distortion or volatility, and usually I include in our risk cost forecast one mid-sized bigger corporate default. In these days where we see such big swings, I was assuming that we could see up to three unexpected corporate defaults. Last point, we did not assume any releases on the overlays, especially not on the non-retail side. On the retail side, it goes more with the macroeconomic adjustments, but here we have seen the release mainly already in 2021, so there could be the one or other million left, million be left on the retail side for 2022, but generally these 40 basis points is gross. Hope this answers your question.

Yes, thank you. Can you just repeat the retail overlay provision number and perhaps also if you have the corporate at hand?

In total, we have an overlay in total, and John or I, still in the call, will come back on the split of these two numbers. But in total, we have some 230 to 250 million euros in total as an overlay available. Understood. Thank you. On the split, we will come back to you.

Sure. Sure. Thanks. Thank you.

We'll now move on to our next question, which comes from Alan Webborn from Societe Generale. Please go ahead.

Oh, hi. Thanks for your time today. You expressed a little resistance about the net interest margin as a KPI. In saying that, are you suggesting to us that it could sort of come back down again? I hear what you say in terms of relatively high loan growth going forward, but what is your concern there? Because during the presentation you've talked about, certainly in the early stages of rate rises, most of the gain going through to the bank rather than to the client in terms of funding costs. So what's your concern about the trajectory of the NII? That would be one question. Secondly, I understand the 40 BIPs for 2022 in terms of risk costs. You sort of seem to have ignored 2021, and I do believe the sort of previous guidance on 2021 included three or four corporate problems. You've had 21 BIPs at nine months. So clearly you're saying to us, I guess, that you think that the fourth quarter is going to be, again, benign. That would be interesting on your shorter-term thoughts. Finally, in terms of the supply chain issues that your clients are experiencing across the region, are there positives or are there just negatives in terms of your own business? is there any negative impact in terms of your ability to lend? I'm thinking of, in fact, car leasing, for example. Or are there customers that are not investing because they can't get the necessary components and so on? Is there a negative? Or, in fact, is it actually accelerating the need for lending in order to improve production? I'd just be interested in your overall view on that.

Thank you. Thank you for your question.

It was not my intention to express any concerns or to irritate anyone. I would simply confirm from what I know today that we should have around 2% net interest margin throughout next year. It was rather compared to the past product comment, but no concerns about the next year.

Thank you.

Alan, on the 40 basis points for 2022 and cost of risk, things also for flagging 2021, yes, you're right. I was talking in the last quarterly call about this unexpected around three corporate defaults. Up to now, we did not see them, which I'm very happy about. And, you know, for the year end there of course if we would not see these uh defaults to come uh we would come in consequently lower please bear in mind two things the one is the the run rate uh on the retail side um which i think can be modeled pretty straightforward which is around 50 million euros per quarter and so the the unknown unexpected is on the corporate side but I think this could give you a good feeling where we shall finish on year end 2021. The second question on the supply chain. Yes, of course, we see that some of our clients are being impacted. You also asked for the finance and demand when it comes to production. Yes, indeed, we see a strong demand on the working capital facilities, meaning buying the imports, selling on, maybe also partly financing the exports, and the long-term adding capacity. Here, some of the corporates are still a little bit cautious, and let's see how sustainable this very soaring demand currently is. Yes, we see the first hints on also investment financing, meaning long-term financing, seven years, ten years, but it's not yet the biggest demand. The biggest demand is current on short-term to finance the working capital. And this would be my answer to your questions, and the team was very fast in getting the split on the Boston model adjustment back to the previous question. So the PMAs are being split for the non-retail with 250 million euros, which we tried to carry over to 2022. In the 40 basis points, none of the release of this 250 is consumed. And on retail, only little is left. It's in total some 50 million euros. What is still available?

Thank you. Thank you. Thank you.

We'll now move on to our next question, which comes from Meet Nemes from UBS. Please go ahead.

Yes, thank you very much, and well done on a strong set of results today. A couple of questions from me. Firstly, just coming back to corporate loan demand, I understand that you're perhaps seeing some green shoots of longer-term financing needs as well. I'm just wondering, what is your working assumptions on these longer-term, perhaps investment-related loan applications coming through? When do these get funded? Is it an 8-1 next year story, or this could accelerate already in the fourth quarter, obviously not extending any supply chain disruptions? Secondly, a quick clarification, perhaps, on fees, retail investment product fees up 34% year-on-year. I'm just wondering how sustainable is this? Are you seeing a paradigm shift in terms of retail demand for these products, or this could prove a bit more cyclical than currently expected? And the last one, just a technical question, I think in Q4 this year, you're expecting a corporate loan securitization to impact capital. What will be the impact on C81? Thank you.

Well, Matt, if I may start with the corporate loan demand. I think you have many ingredients, and I again would refer us back to the page 19. I believe, and I strongly believe, because of this next generation EU funding and ESG transition, that we will see this long-term financing need. But you also have seen that the projects have now been handed in. They have been assessed and approved or enhanced. And now the project needs to get started. So we will see the request and the demand for this longer-term financing. So I'm extremely confident that this will come latest by Q1 when all the bureaucratic stuff is being finished. So this would be my assumption. And on capacity utilization, I think this could be one shot if you adjust your production facility in an ESG-conform environment, you also may add here and there the capacity to adjust to the higher capacity need.

To your second question, the retail investment product, what we hope, what we assume is that this low-rate environment brought people closer to being also a long-term investor, even with smaller amounts, maybe even month by month. And I think We would love to assume that people keep this behavior. And so we hope that amid the long-term trend and to some extent it's the starting of a shift that customers and you know that to a large extent we are deposit based in all our markets we bring more and more customers also in that direction so we are overall confident and as I said before in total the 500 million fee income per quarter I hope it's on the lower end what is achievable quarter per quarter to your third question securitization in Q4 we mentioned it so It's more that you are aware that we are working on it and that we will create some room for loan growth also in Q4. But please understand that at this point in time, we do not want to communicate the full package of what we are working on.

Thank you. Thank you very much. Thank you. We'll now move on to our next question, which comes from Ricardo Rivera from Videobanca.

Please go ahead.

Good afternoon to everybody, and thanks for taking my couple of questions, if I may. I just wanted to get back one second and be sure I understood it correctly. A few minutes ago, Mr. Strobel, you mentioned 3.5 billion NII as a kind of indication for 2022. Now, If I understood it correctly, if I take the third quarter number you just reported in Q3 and multiply it by four, I would land exactly at 3.5. So if 3.5 billion is an indication for 2022, it would mean that the most recent rate hike, like the one in Czech Republic, most recent in Russia, will be passed completely to depositors, or maybe competitions will erode everything. And on top of that, you also mentioned you should have some loan growth. If I understood it correctly, you mentioned five single digits. That should bring NII on top of what we have seen so far. So did I get it right? 3.5 first. And second, if I get it right, is that a kind of floor? or is a formal indication for 2022, which would sound a bit cautious, let's put it this way. The second question I have is on the deposit side, the inflows remain strong. What do you do with these deposits? Do you expect to build up a little bit more the fixed income portfolios? investing in longer-term maturities. How should we think about the way to redeploy the deposits that you've seen so far? Thanks.

To your first question, with all your considerations and assumptions, I can only always say Yes, yes, yes. So you're right. It's conservative. I would also say it's rather the floor. We can here and there expect more. Also, I have to say that, yeah, we should not expect that the to-be-expected rate increases will fully materialize in the banks completely. Profit, I think, as I said before, as soon as the central bank rate is above 1% or so, then, of course, increases will happen. Maybe the corporate part is a little bit more sensitive than the retail part at this level, but you would find it then at some point in time also on that. Russia, you have mentioned as well. So here, I think, as we also have shown in our forecast, probably we soon will see or rather soon have seen the peak and and maybe also in Ukraine you would also already next year see some decreases after this fast and bold increase of central bank rates. You are aware that we work what we call model books where we invest and part of the inflow is invested also in mid-term products. Our modeling is not... especially long term you have seen this in the adjustments also in the past but yeah the recent rate increases as well as the steepening of the yield curve I mentioned this already in the Q2 call this was already supportive so yeah it it Therefore, not everything what we see as rate increase from the central bank goes then one-to-one in the P&L. Because of these model books, these investments, it reduces the volatility in both directions as well. And yeah, in some... Yeah, quarter by quarter, if we look at it, then you see rate increases usually in the retail asset area, reduces then for a quarter or so the margin, and then it usually comes back to the normal level. Because salespeople request, and especially if you use agents, you're aware of this, they request stable rates, what they offer to their customers, and they don't like if you if you adjust every second to new levels. But again, this is somehow flowing and levels out over some quarters. Thank you for your questions.

Thanks. If I may, a brief follow-up. When I look at slide 8, where you provide the table with the NII sensitivity for each country, the numbers the numbers you show in the last column, do they take into account some kind of pass rate to depositors or not? So then your cost is all of it?

No, this is the rather stable assumption where you say what is the way we model what is the positioning. And this was my statement when I say this might work for 50 basis point increases if the level is not too high. But if you take the example of the first line check market with currently at 125 basis points, So if it would happen that by somewhere end 22, we would be at 3%, then you should not multiply the 50 basis point sensitivity by the factor. But then you should assume that we will see impact on the margins as well on the liability side. So it's for small amount, it works. because then you also don't have the direct impact on the margin, but for bigger movements, it's indicated here for some markets, it already has an impact on, and some of it is passed on to the customers. That's for sure. Thank you.

So for me to understand, when I look at this table, the more rates go higher, the lower the sensitivity to each, I don't know, 25 basis points. So 25 would be some sensitivity and 75 is less.

Let's take a simple example. So what we say here, Czech Republic, a rate hike by 50 basis points should improve our net NII by 24 million. If by the end of the year 22, you might assume it's 325, so 200. So to make it simple for me in calculation, four times the 50, I would not expect that it's improving by 100 million. So here you should assume it's lower.

Thank you. I got it. Thank you. Thank you.

We'll now move on to our next question, which comes from Krishnendra Dubey from Barclays. Please go ahead. Your line is open.

Hi. Thanks for taking my questions. I have two very quick questions. First one on the fee income. The payments FX business and the retail products have done well, but I was just wondering AM results were a bit weaker. Is there any specific reason for it? Secondly, what's your tax rate guidance for this year?

Thank you.

I'm not sure if I fully understood your questions. But what I sense from you, I would say it's relatively... easy to assume that in terms of FX business, it's strongly correlated with the business activities. And this is also the case for the payments. So one can say that because of the good developments what we had in the recent quarters, the payments and account services are already back on the level what we had pre-COVID. So if you average 18 and 19. And this also gives you an idea about the sensitivity. I think FX, to some extent, of course, and this is for you as a professional also, Nona, what we would say in German, also a very easy, simple one. It's a combination of the business activities I should have said, but also the volatility. Because as I indicated, it's to a large extent customer-driven and the activities of the customers are different. Asset management, I have to figure out. Yeah, here you should not be so much looking at the details of the quarter. There was a reclassification between the various lines in Romania and in Bosnia to some extent. So the The detailed numbers are a little bit distorted in Q3, but I confirm the overall positive development. And the tax rate, the guidance here as of now is 23.5% for this year.

Thank you for your questions. Thank you.

Thank you, and we'll now move on to our next question, which comes from Johannes Tormann from HSBC. Please go ahead.

Hello, everybody. Two questions left from me. First of all, a follow-up on the tax rate. If I take your current guidance of 23.5, this would imply a strong jump and doubling of tax rate in Q4. What are the reasons behind it? And secondly, on your dividends, payout ratio guidance. If I take the combined dividend payments this year, we are above the 50% guidance. Should we assume that you also will be serious at the up end or as you only have a smaller buffer, could you also opt for going down to the low end of the dividend payout range? Thank you.

You're starting with the second one, you're

The payout for this year, I mean this is the payout essentially for two years. We had these limitations and you know that in 19 we set aside one euro per share and this was never considered as part of the CD1 equity. But having seen the very good loan demand in the recent quarters and, of course, also the somehow cautiousness, what we had been made aware, this is the reason why we then reduced it to only 75 cents per share. And you're right, if you add that the two payments, the two dividends for this year, then we are above. As I said before, the range is that we see as long as we see such a good loan demand and of course probably this cycle will also come to an end as we already have seen here and there some some measures by regulators and discussing to limit the development in some of the retail areas. It's better to have some power now and then adjust later. So this is a very simple question and this is why we keep it so broad. I have to say I did not fully get your first question on that X-ray jump assumption, but here John Carlson and his team might do a follow-up in more detail with you if this is fine for you.

Thank you. Yes, thank you. Thank you.

We'll now move on to our next question, which comes from Tobias Lukas from Kepler Chevrolet. Please go ahead. Your line is open.

Yes, good afternoon. There's one question left. Thank you for providing the overview of the markets business. So I was wondering, especially looking into the institutional clients and the corporate clients, how do you think will the demand develop? And could you maybe give a bit of an insight, like how much of product demand there was over the past, let's say, six to eight quarters? And where could this go going forward? Is there more demand potentially on forex hedging? Is there more demand on interest rates, derivatives? And also the RFlex platform that you pointed to, maybe you could give a bit of a flavor how much this is contributing profit-wise and where this might go. Thank you.

Yeah, starting with the last one, the RFlex. This is at the very beginning, and this is something which is now introduced for mid-small customers, and I think it has some potential for retail customers as well. Currently, it's launched in Romania and Croatia, so it's at the very beginning. I hope that within this quarter still we can launch it in the Czech Republic and Hungary. And of course, then probably it's also broader over the next couple of quarters launched in other countries. So at the beginning, let's say, over the next couple of quarters, it's overall beginning to develop... I think in the segment where it's launched, it's positive. So one might say if we do it right, it can be 20% up, but it's not for the large customers, so the institutionals and the others. When talking about institutional clients, I think here what helps is – and we have it on slide 10 as well – Our services in custody are, of course, benefiting from the overall positive development of the various market segments. So this is the one. Of course, with this comes some additional services. The overall need for hedges, to a large extent, as I said in an answer to a former question, comes from the volatility in the markets. I mean, one has to state that overall, the bigger part of the corporate business comes from the FX. This I can say, but what we have seen in debt capital markets compared to the past is substantial positive development. We are perceived as a good know-how provider for green bonds and short China and whatever. Of course, we are aware that this market segment is running very, very well. But of course... There are others who are closing the gap, other competitors. So we will not fully get the market positive development. Thank you for your question.

Thank you.

And our next question now comes from Simon Nellis from Citi. Please go ahead.

Oh, hi. Thank you for the call. I just have one last quick question, and that would be, could you just remind us how much dividend accrual from the 21 earnings has been deducted from the capital, if any? I think it was around 20% of the first half earnings, if I remember correctly. And actually, my second question would be on the tax rate and minorities in the CE division. Can you give us an indication of what the tax rate should be going forward? in the CE division now that the structure has changed a bit with the recent M&A?

Yeah, the first I can answer in a very simple way. It's the 20%. So we for capital planning and also in discussions with the ECB and others, the regulators, we do throughout the years the 20%, so the lower end of the range, so it's 207 million so far, and only at the end of the year we start then discussing the final element, what we want to do.

The

The second question is, again, the text what you said, the 23-24.

I was actually specifically asking... And I can only confirm and also ask you to accept the follow-up. So I don't have the details now in front of me and it would... If I now rush through my papers, it will take me longer than I can ask you to accept.

So John will do a follow-up with his team. Thank you. Thank you. Thank you. Give us a little bit more time.

And as I interrupted Hannes, I start with one, which is M&A activities in Russia. Fine. Here the question was, what is our strategy there? Would you seek to boost market share in some of core products there like mortgages? Maybe a little bit more in credit card business. Here we would consider... if everything fits also an M&A transaction, an improvement in our private banking activities as well. I think mortgage production, we are strong on our own itself. So here it must be a very rare occasion that we would consider it as well. And then... I would hand over to Hannes. There is a question on which I read and he will answer. Energy prices and supply chain. Can you quantify size of your portfolio that is directly at risk from rising energy prices and supply chain troubles?

Thank you for the question. I will focus on the energy price issue. And you know that we... I usually like to go with an industry approach on looking at our portfolio. And of course, when talking about who will be impacted by the energy prices, you could distinguish between a first level and direct impact and a second medium impact, a second round impact. Needless to say that, of course, it depends on how much of the prices you could pass on to your off-takers. So which are the industries which are heavily dependent on on energy prices. Industry which are heavily dependent directly on energy prices is e.g. agriculture, steel production, aluminum production, paper packaging, and some others. In the second round effect, you could have many other companies as well. So what we did, assuming that this question may come, is we looked at those companies which are subject to this energy price increase, as I flagged them, and looking at the weaker ratings. And so for those where we believe that they have a direct and a higher impact, it's something up to some 360, 400 million euros exposure. At default, if I conclude, you know, because there's also a lot of guaranteed business, it reduces down to 233 million euros. And if I look at the industries with a medium-sized impact, it would reduce on the net exposure level to 867 million euros. But as said, this is not the total portfolio. This is the portfolio with a slightly weaker portfolio. rating uh and and uh as said you know distinct in where where we would see a direct uh high impact and the medium impact always assuming and that's very important as long as you can pass on the prices of the high energy prices uh many of these producers will also be fine uh so this is my my first question on the energy prices the supply chain The reason why I flag the supply chain as one of the wildcards or seems to be watched out is because it reminds me back to our question in January 2020. Sometimes it could be a little gadget, a little semiconductor on a big machine which you're missing while you cannot finish the final production of this machine. So the supply chain impact is much more difficult and demanding to grasp than the energy price impact. So this would be my answer to the energy and supply is something where you really have to work with work line to learn and to see what the one-hour impact is causing. At the same time, we see that's very important. If you look, for instance, in the car industry, car industry is still capable of to demonstrate, even with lower volumes, a much better EBITDA margin. So this would be my very broad answer to your very specific question. Thank you.

Thank you, Hannes. And moderator, I understand there is a final one from the chat, which probably I already have answered. But a quick summary of what I have said. we see inflation we see wage pressure it might be that that this might increase our cost base by five to six percent in addition to that i made you aware that we have first time consolidation effects by We're talking about the full year with ECWA, which is in 2021, only for a half year, and the Kretiag Recall subsidiary from Serbia, which is not at all included. And we have one-time integration costs from IT and other elements as well, of course. And this will come... uh to some extent in 22 and and maybe it's not everything might be finished also in 2023 i gave the indication that if we add the additional running costs and the the one-time integration costs you might add 100 million to the going concern what we had so far and And the cost synergies, what you also expect from any M&A transaction, will come over time, not so much already next year. Thank you for all your questions. Moderator, it seems that we are close to the meeting and as I haven't any indication for further questions, I want to thank all of you for being with us. Stay healthy. Be with us also in the already announced full year result, which is on the 2nd of February 2022.

I love this date. Thank you. Have a good afternoon.

Bye-bye.

Thank you very much to our speakers today. Ladies and gentlemen, this does conclude today's call. Thank you very much for your participation. You may now disconnect.