Raiffeisen Bk In Unsp/Adr

Good afternoon, ladies and gentlemen, and welcome to the Q1 2022 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. Jochen Strobel, Chief Executive Officer. Please go ahead, sir.

Thank you very much. Good afternoon, ladies and gentlemen. Thank you for taking the time to join us today. In what has been an eventful few months since we last reported, I'm happy to report a strong set of results for the first quarter of this year. But before I delve into the financials, we must recognize that the outbreak of war in our region has had a devastating impact on millions of lives. And our thoughts with all that are bereaved, displaced, and otherwise tragically affected. We are inspired by the tremendous support which Ukraine has received from across the world and I am particularly proud of the solidarity shown by many of our colleagues in the region. Hundreds of employees in Poland, Slovakia, Czech Republic, Hungary, Romania and Austria immediately volunteered with accommodation, transport, food and money and continue to do so today. As a company, we are also doing our part. We are supporting more than 1,100 colleagues from Ukraine and their families. In Vienna, we have assembled a team of over 200 helpers and volunteers, donated 10 million and raised 8 million from employees and customers. All of our network units in the region have also launched their own initiatives, including direct financial support and coordinating volunteer efforts. Moving to the financials, the consolidated profit of $442 million for the quarter reflects the very good first two months of the year, in line with the very good trends which we observed in the second half of last year. This is particularly the case for the NII, which comes in higher than Q4, where we had a large one-off from the Tilt-to-Row bonus. These include unusually high volumes, but are otherwise also very satisfactory. Loan growth was good in the first two months of the year, and in Central and Southeastern Europe, most of the countries grew at low to mid-single-digit rates. These strong results nevertheless include prudent provisioning with 97 basis points provisioning ratio. Hannes will walk you through this in full detail. Our CT1 ratio, including Q1 results, comes in at 12.3%. Just as we have been prudent on the provisioning, we have also upfronted as much of the RWA inflation as possible in the first quarter. This includes both the previously flagged inorganic effects as well as the rating downgrades in Eastern Europe. Accordingly, we expect to see the one ratio to revert back to our 13% target in the coming quarters. Moving to the next slide, let me talk a little bit of other activities away from Eastern Europe. And here I can report that our strategic initiatives are on track. Thank you. Sorry for this disruption. I assume you could hear me until I had covered the first slide, the overview, the executive summary. And I would now like to continue on slide five. And here I wanted to focus and report on our strategic initiatives where I say these are on track. So for the past few years, we have been focusing on our market position in Central and Eastern Europe and In Serbia, we made success with Kredija Krekol subsidiary acquisition. We closed it on the 1st of April, and we are also making good progress with the disposal of Raiffeisen Bank Bulgaria. And here I can report that both parties are committed, and we expect to close this probably at the end of the second quarter or the beginning of the third quarter. I think equally important for us was the technical integration of AquaPunk and the good onboarding of the R&G retail customers. With the uncertainty we're facing in Eastern Europe, in Central and Southeastern Europe, is more important than ever. And our capital planning... We will take, and within our capital planning, we will take the necessary steps to ensure that there we can grow continuously. We have built buffers in the first quarter as well. And if you look at the increased stock of risk overlays, which is now at $516 million, I think you have to put this into perspective, and this is around 50 basis points of our CET1 ratio. We have reduced our ruble hedge. We are currently fully immunized against euro-ruble volatility, and by this reduction, we have locked in 230 million of gains. And I have already mentioned it. I repeated that the RWA inflation, which is expected in Eastern Europe, so the downgrade of the sovereigns, has been booked to a large extent as we have reviewed individually more than 2,500 counterparts. And we also reduced our cross-border exposure which is now less than 400 million cross-border exposure to Russia. Finally, we also postponed the planned dividend for 2020 warrant to shore up our CT1 ratio. I think we have been very busy in the first quarter, but we are well prepared for what lies ahead of us. Moving to the next slide, the income statement and the KPIs. I think It's important to say that the annualized gross income at risk from customers which are sanctioned, and this probably is always a question for you, this is if we take the 21 as a proxy is around 60 million on group level. Here I have to say that the first quarter was comparatively normal, so that the impact will come from now on in the second quarter till the year end, and one might say parata. And if we look at the distribution of it, then we can say that around 75% is related to Raiffeisen Bank Russia and the rest to the head office. And also if you want to split it, between NII and NFCI, then it's a similar ratio. If we move to the next slide, then I mentioned the good development in the NII, which, and I mentioned that this development could fully compensate for the DLT row bonus, which we recognized in Q4. And given this strong trend, I think we can expect with all the uncertainties what we have from FX rates and all the other elements. And NI is somewhere between 3.7 to 3.9 billion in 2022. And this assumption is based on the continued loaf growth in the core regions, Czechia, Slovakia, Hungary, Romania. But we also have a positive impact from the rate hikes, which we had in 21 and in the early 22. And, of course, the land book was filled nicely until the end of last year, so the asset base is good. And with all these developments, we expect that – that interest margin will be around 2.1%, 2.2% in 2022. And, of course, also we still have quite a lot of surplus liquidity in this improved rate environment. This is now positive. When talking about the NFCI, again, there we can expect a mid-single-digit growth growth and in absolute terms this might be 2.1 billion. Of course, this is also supported by the goods development in effects commissions what we had in the first quarter. When turning to the next slide, eight, overall we expect a flat development in loan volumes in 2022, as we have to assume some further weaknesses in currencies. But as I said before, focus will be on loan growth in the core countries, Czechia, Slovakia, Hungary, Romania and Serbia. And of course, one has to expect that not only because of the weakening of the currencies, but also with the recession ahead of us that banks in Eastern Europe are reducing their loan book to be prepared for this difficult period which lies ahead of us. And moving to the next slide, which is number nine here, you can see that we have Very solid liquidity ratios. We had experienced a deposit outflow with the beginning of the war in some countries somehow impacted by the way of the closure of spare Europe. But we have recovered very nicely and you see this also in the good LCR ratios in all the countries. When moving to the next slide, the CET1 ratio, of course, here I have to say that the downgrading of the sovereign and the direct and indirect impact on the risk weight brought our CET1 ratio down to 12.3%, and on the slide you see the The various elements we included, the retained earnings, we included the dividend in this number, so these are performer numbers. In addition to the RWA increases and deflect inorganic effects, I also have to stress that because of the continuous inflow of Swiss franc litigations in Poland, we had another increase in RWA's also in the operational risk driven by that. If we then move ahead, One might ask with my statement how to, when starting with 12.3, how might we come to close to the 13% at the year end? So here we have to consider that the net impact of the M&A activities, so the sale of Bulgaria and the consolidation of the participation in Serbia, will bring in total a 74 basis point improvement. Then, of course, you also expect over the next three quarters additional retained earnings in a region of 25 to 40 basis points. And then we have to a much lower extent also some more downgrades, some long growth. And if we add this up together, And with the inorganic effects, what we have lacked, which will be compensated by countermeasures like securitization, we would end up close to 13% at year end. When moving to the next slide, having a look at the capital ratios in total, and as I have mentioned already the CET1 let me focus on the total capital ratio here you have to consider that because of the regulatory amortization of issued instruments so it had an impact of around 70 million or a total capital impact of 7 basis points because of the downgrades in the IRB portfolios this led to a an increase of the regulatory expected loss and this reduced, on the other hand, the IRB surplus, which is part of the total capital. In total, this impact was around 170 million or 16 basis points on the total capital ratio. If we move to the next slide, MREL, always of interest for you. So we We have a surplus of around 400 million, and in the course of the next, so the current and the next two quarters, we have some ideas of issuing which will be supportive for the M-religible securities, and this can be or will be a Tier 2 issuance probably, and also a senior preferred one. and of course also as we have this multi-point of entry approach, we also outlined here the requirements of some of our important network banks. Moving to the next slide, a few more information on Russia network bank and the cross-border exposure. You are aware that we have announced that we are looking at different options for our Russian business. And I think it's important to state that as of today, we did not make any decision so far in which direction we are going. For us, most important for day-to-day is that the bank remains very well capitalized, very liquid, and that it maintains its excellent operations. On the capital side, we have suspended new lending and will generally look to offset the rating downgrades and other inorganic effects by reducing our exposure. Our approach here is not to pursue new clients and new lending and only selectively rolling existing exposures. This also benefits to the liquidity, but we also can report a strong deposit inflow. And we have been very clear that we are under no obligation to provide any fresh capital or funding to our bureau. And we do not expect that our bureau to require it anyways. We are exploring all our options. One is to sell. But we may also consider other possibilities, such as giving up control and deconsolidating Russia from the group while still retaining a financial interest. We still see value in our Russian franchise, and the question is then how to best deliver value for our shareholders. A lot of the work we are doing today is to evaluate the options, the various scenarios under which we can make then the decision. This might also include a new business model for IFAZ in Russia, which requires significantly less capital and balance sheet. And this does not preclude a sale in part or in whole. I will not make any statement today on the timeline. I can only reassure you that we are working hard on it, and as soon as we have clarity, we will share this information with you. But let me reassure that we will take as much time as necessary to achieve the best outcome for our shareholders. I have mentioned already the reduction of the ruble exposure and also the net cross-border exposure as well as the reduction of the ruble hedges. Let me now move to the next slide, which is 15. What you see here is that, of course, we had to adjust the sector loan growth outlook inflation. We start feeling corporate loan growth might be below nominal GDP trends, with some exceptions in smaller countries on the Western Balkan. And the higher interest rates leads to a cool-off of the housing loan market in several countries. Moving to the next slide, 16. Of course, the inflation, the war in Ukraine, and also Some other disturbances, what we see, lead to a reduction in our GDP growth assumption. Of course, the very negative impact comes in Ukraine being at war, but also the sanctions will bite deeply into the Russian GDP development and also in Belarus. Coming to the next slide, we have... suspended for the time being the medium term outlook and we want in this uncertain times mainly give a guidance on the 22 development and here I can sum up what I presented during my speech now. We expect an increase behind single digit percent on the net interest income and the mid single-digit percent increase in fee and commission income. We expect a stable loan volume with mid single-digit growth in our core markets in Central and South Eastern Europe. We expect high single-digit percent OPEX growth plus an additional 100 million integration costs for the acquisitions of Equibank and Krediagrikol in Serbia. Nevertheless, we expect that the cost-income ratio will be around 55%. The provisioning ratio is expected to be up to 100 basis points, and this will lead to a consolidated return on equity in the range of 8% to 10%. And I see the one ratio at year end should be close to our 13% target. And with this, I hand over to Hannes.

Thank you, Johann. Good afternoon, ladies and gentlemen, and thank you very much for taking time to join us today. The war and devastation that we are witnessing daily in Ukraine is beyond words, and millions of lives have been tragically affected. Before we discuss the impact on RBI, I would like to first recognize the remarkable effort by our colleagues in Ukraine who have kept the bank up and running throughout the war. Many of our colleagues have been displaced and yet are still working from Western Ukraine or neighboring countries. Throughout the war, all normal banking operations were maintained, most branches remained open, and even cash in transit and ATM restocking was sustained. We are grateful for the effort and inspired by their sense of duty. RDI is entering these unprecedented times in a very good shape. We have reflected nearly all the expected impact on RCD1 throughout RWA inflation, a sustainable stock of risk provisions, plus additional overlays. Our portfolio quality is very good. Our non-performing exposure at record lows, and we have minimal exposure to sanctioned entities. In Russia and Ukraine in particular, MP ratios are below 1.5% with a state three coverage ratio of 65 and 96% respectively. While the recent events may have been difficult to anticipate, I'm confident that we have done everything in our power to be as prepared as we can be. Risk management is about managing the future and in the past years we have implemented a number of processes and controls which serves us well today. The strict monitoring of the overall exposure to Eastern Europe was designed to ensure the group's resilience in even the most extreme scenarios. This approach has been the cornerstone of our capital allocation policy to Russia and Ukraine in recent years. We also have been operating with very strict concentration limits on Russian entities, precisely for times like these. In 2018, we implemented a watch list of counterparts who could possibly become subject to Western sanctions. And it is no accident that after six rounds of sanctions, only 3% of our Russian and Belarus exposure is under asset-free sanctions. You are by now very familiar with our approach to currency hedging. We learned our lesson in 2014 and 2015. We have since then substantially reduced the sensitivity of our CT1 ratio to large ruble moves. And of course, since the war started, we have been very busy. First of all, to ensure our clients' liquidity needs, we fully restocked our ATMs and branch networks in Ukraine in anticipation of our customers' withdrawals. We immediately downgraded Russia and Belarus to one notch above default and Ukraine to one notch above that. This led to a number of automatic downgrades, and we have performed over 2,500 further rating reviews, focusing on sanctioned entities and customers who are directly exposed. This means that we have taken most of the RWA inflation in the first quarter and only small amounts may materialize in the following quarters to come. As mentioned in our outlook, we expect the CAT1 ratio to recover to about 13% from here. We have built up substantial provisions in the quarter in a variety of ways by updating the market assumption in our FS9 model, by reviewing the credit ratings of impacted customers and by shifting the exposure to stage two, and finally, by building up more overlays in expectation of risk costs to come. As of today, we have 560 million euros of risk overlays available to us. Since we spoke the last time on the 1st of March, we have been actively reducing our cross-border exposure to Russia, which is now less than 400 million, and will come down further in the coming months. We closed out half of the ruble capital hedges near the whites and thereby locked in 200 million, 230 million euros of profit. Equally important, our CD1 ratio is still fully monetized from any volatility on euro-ruble. Let me now focus on a couple of slides. And on the first slide, now focusing on page 19, you can see that we have booked 319 million euros of Risk costs, 97 basis points. Risk cost overlay is 516 million euros, MPI ratio 1.6%, and 61.8% of coverage. In the middle of the slides, I have added some of our core beliefs, and all of them, of course, very much impacted by the war. Of course, we will see that there is a sort of a slowdown, but not yet a recession in Europe. Inflation will come in higher. Higher interest rates to be expected. Supply chain disruption and increased geopolitical risk goes without saying, causing also some second-round effects. And the sanction regime on Russia and Belarus, we assume, will be long-lasting. Finally, the Green Deal and the energy independency got a new boost. All these leads lead us forward. that we guide now for risk costs of up to 100 basis points. What is very important for me here is this is a cross number. This is a cross number and not assuming that we use any overlays by these 100 basis points. But, of course, if some of the events which we have presumed in our overlay allocation would materialize, of course, we would make use of it. Let me move on to the next page. When talking about second ground effects, we were opening up our mind and asking ourselves who again might be heavily impacted by these second ground effects. Is it energy or is it any issues on the supply chain when it comes to semiconductors? The obvious one would be the car industries, also airlines and chemical manufacturers. leisure and hotel industry would still also suffer. But again, you can see here that our exposure towards these companies is rather limited. Again, to emphasize that we have really done a very comprehensive work, 2,500 case-by-case customer reviews have been conducted, and therefore reflecting the current risk assessment we have downgraded the sovereign foreign currency rating for Russia, Belarus, and Ukraine, just about the default rating and leading to more automatic corporate downgrades. On the next page, you can see after six rounds of sanctions, and the date we are using here, the cutoff date is the end of April, you can see that we came down from 705 million euros down to 613 million euros by heavily reducing this exposure to the sanctioned corporate and financial customers. Just to remind ourselves, this equals 2.5% of the total exposure outstanding to Russia and Belarus. What can you expect how we are moving on? And you can see this on the right-hand side. What are the maturities of the exposure towards the sanctioned entities and how these run down? could look like over the time. I move on to the next page on 2022, and there is so much talk about this RWA development. So let me give you some of the insights. In total, credit risk increased by 11.8 billion euros, and as a quality effect was, of course, driven by the downgrades in Russia, Belarus, and Ukraine, mainly corporate sovereign and FI portfolio. The first two months have been characterized by good business demand, and therefore we also see an uplift in new businesses. Op risk, there was the explanation given. This is in the context with the Swiss-rank mortgages. Market risk has a minor impact, and then you can also see because of the FX devaluation that there is also a little bit less of RWAs because of FX. What do we believe that you would have to assume over the next coming months on RWA effects? Yes, unfortunately, the litigation in Poland will pursue and therefore also causing the one or other RWA increase out of op risk. I was talking about the one or other spillover effect, but this we think is very much contained, and we would currently assume just another 1.5 billion euros of RWA's. You can remember that there was this EBA guideline on the so-called repair package. And finally, please do not forget that there is a RWA relief as well from the Bulgarian deconciliation. Let me move on to the provisioning and the compositioning of the provisions in the Q1 2022. So what you can see that in the Stage 1 and Stage 2, Because of all these rating reviews, we see an uplift, an increase of €160 million. The macro update converging to €150 million of uplift. We allocated some €46 million when it comes to geopolitical risk and some €59 million when it comes to sanctioned risk in Russia. Part of the BMA we have released. And what you also can see that Stage 3 bookings have been extremely low. So meaning when we talk about our risk-cost guidance, that most of these 100 basis points are being allocated to the Eastern European region. What is also important for me when talking about the 319 million years, and I can recall when we have presented our 2021 numbers and our 2018 numbers, When we have been asked, hey, guys, listen, why are you allocating some provisions to sanction risk or geopolitical risk? So you could also add another 150 million euros what we have collectively booked over this period of time to what's been 319 million euros. I move on to page 24, and I would be fast forward because there is little change, and I don't want to steal your time. And this brings me to my last page on the MP ratio and MP coverage ratio. 1.6 MP ratio good coverage with around about 62%. That's just one thing which I would like to guide you through is if you look on the line regarding Eastern Europe, you can see that over the years, over one year, we have brought down the defaulted exposure from 2.2% to 1.4%. And at the same time, we have increased coverage. Having said all this, we are now more than happy to take your questions.