Raiffeisen Bk In Unsp/Adr

Please stand by, we're about to begin. Good afternoon, ladies and gentlemen, and welcome to the Q2 2023 results 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.

Thank you very much. Ladies and gentlemen, welcome to our Q2 2023 update. Thank you for taking the time today. I'm pleased to report stable operating trends, stable deposit volumes, and stable capital ratios. Asset quality trends remain excellent, and Hannes will talk about all the details in a few minutes. As expected, loan growth continues to be very subdued, while the high level of provisions in Poland are the unusual and disappointing development in the quarter. We will go through each of these points in the following slides. But let me first address a few of the other topics which I'm sure you are interested in. Regarding our options in Russia, first of all, We continue to engage with the many regulatory authorities as we seek to either sell or spin off the Russian business and we are as committed as ever before to reaching a solution. In our last call we mentioned 30th September as the earliest possible date for the spin-off and as of today this appears unlikely. We will continue to work on this option now aiming for the end of December as a spin-off date. The sales process is equally still on the table, of course, and there is little more I can add today. Remaining in Russia, but on an unrelated note, the intra-group subordinated instruments which were issued by a Russian subsidiary and placed in Vienna were repaid in full. The Central Bank of Russia approved the early call and repayment of these instruments based on the very high CT1 ratio of our subsidiary there. Regarding the OFAC request for information, I can confirm that we have produced all the information requested and we have already started to answer some of the clarification requests based on what we have submitted and of course on the many reviews for our compliance setup in recent years, I am convinced that our systems are robust and we will fully satisfy the requests from OFAC. When looking at the results including Russia and Belarus, we have earned 1.2 billion in the first half of the year with a very high headline contribution for these two countries. I believe it is worth taking a closer look however. Due to the weakening of the ruble FX rate, Russia's total contribution to group equity is actually negative this year. The large negative FX move, which goes through OCI, more than offset the headline profit reported in Russia. Excluding Russia and Belarus, we can report a consolidated profit of about 500 million and a return on equity of 7.6%. This ROE is below our full year guidance of 10% and it includes the bulk of the governmental measures and contributions which are booked in Q1 as well as the much higher than expected provisions for litigations in Poland. The high provisions in Poland follow the negative European Court of Justice decision in June which has led to a surge in new cases in our model, both observed and expected. The capital ratio for the group excluding Russia improves to 13.9%, which I will discuss in a few minutes. Moving to my next slide, loans to customers are flat year-to-date, which will not come as a surprise, I guess. You recall that the loan growth in Q1 was largely driven by short-term business and repos, which was largely reversed in Q2. Core revenues, on the other hand, continue to be very resilient, and we have slightly increased our guidance for NII and fee income. OPEX are up in Q2, largely reflecting a combination of wage increases and vacation allowance booking. Moving to slide six and taking a closer look at NIIN fees. Excluding Russia and Belarus, NIIN improves 4% in the quarter with increases in group capital and markets in our key CE and SCE markets. Generally, what I can say is that we're still seeing some benefits from higher euro rates, not least in the countries outside the euro zone where we have very stable deposits. In the CE currencies, we do see some deposit repricing in Hungary and in Romania. And in Czechia, our net interest margin has stabilized. We can now guide for 2023 NII, excluding Russia and Belarus, of somewhere between 3.8 and 4 billion euros. Fees and commissioning come down slightly in the quarter. Again, looking at the ex-Russia-Belarus view, and this is largely driven by a drop in group corporates and markets. And here we see a reduction in Russia-related business, such as payments, clearing, and defects. And it's also having an impact on the head office. In extraordinary fee businesses, that we earned in Russia over the past five quarters or so was also somehow benefiting in Vienna here, and this is now reverting to the pre-war trend. While the business here in Vienna was down, we continue to see a decent NFCI growth in our key CE and SCE markets. In Russia, We continue to see a drop in fee income, which is both a reflection of our efforts to reduce specific activities there and a sharply lower Euro-Rubel rate. Full year guidance for NFCI, excluding Russia and Belarus, is slightly increased to 1.8 billion. Moving to the next slide, the balance sheet developments are now in slide seven. We look at loans and deposits, and as I mentioned before, loan growth very muted again, very much as expected. You will recall that Q1 loan growth was largely driven by short-term and repo business in head office, and this was reversed in Q2. Retail lending has slowed noticeably, in particular mortgages, and corporate volumes are pretty flat. On the deposit side, we've seen increase in CE and SE, whereas in head office, we saw further reductions in the very short term. Price-sensitive deposits. These deposits have no value to us from a liquidity perspective, and considering our very comfortable liquidity position, we prefer not to pay up for these, and this brings me to my next slide where we take a closer look at liquidity, which is slide eight. And here I'm very happy to report that liquidity is very good. Our coverage ratio and the NFCR are excellent as always. And each of our individual units are solid. Head office, as you know, is wholesale funded and does not accept retail deposits. The ratios here are equally strong, and as I mentioned to you last time, we run a very conservation runoff scenario when we stress our liquidity. If you assume 100% outflow on all liabilities, including, of course, all deposits over the next 12 months, we will still be very liquid. Last quarter, we reported over $1 billion of excess liquidity after 12 months, in this extreme simulation and in this quarter the result has increased to around 2 billion. As I said last time, I don't think that you can have a more conservative approach to manage your liquidity position. Coming now to slide 9, what you see here is a stable C to 1 ratio. We had a couple of to some extent, effects-related negative impacts, and these were compensated by the retained earnings of 58 basis points. To remind you, on the lower part of this slide, the earmarked 80 cents per share, CET1, which are 27 basis points in CET1, are deducted, of course, from this regulatory capital And what I also have to mention is this is a transitional number. We benefit from the IFRS 9 by some basis points. Coming to the next slide, which is the outlook. So here we say on total group, we expect to be above 16%. And you see the drivers, which are retained earnings, which are On the negative side, some RWA increases. We expect a small loan growth, but also we expect higher market and operational risk-driven RWAs. We have a positive impact from the effects, which is based on our rate forecast. And then we have some inorganic effects, which should be positive. Since a while we share a very harsh simulation which is a price book zero deconsolidation of our Russian entity and we have set a target to be above 13.5, which actually is at the end of June. It would have been at 13.9. The basic assumptions are 4 billion of IFRS equity and 14.5 billion of RWAs, which for clarification are not only the RWAs in Russia, but also on head office levels. Some rwas for the market risk for the structural position what is not included in the 13.9 is a potential upside from the operational risk currently we have a 40 pips impact from the operational risk because of the good income situation in Russia and here in case of the consolidation it would be in the hand of the ECB if they would allow an immediate impact on that or the standard phase out approach. Yeah, I think the next slide 12 is more for your documentation, as you are all aware, of the various requirements, what we have, and the forecast of additional requirements until end of the year to be used by early next year. I would move to the next slide, 13, which is some information on the MREL requirements and the funding plan. In RBI-AG we currently have a solid 14.6 emerald ratio with all the details what you see here and all I can say is that this of course is a result of the fundings what we did earlier this year. We consider in the course of this year senior non-preferred issuance to maintain the loss absorbing capacity and to support credit ratings. When looking at other members of the group, what you see is that most of the countries, Czechoslovakia, Hungary and Croatia are above the requirements for this year and Romania still has a little while to go there. One update on Russia. Here I have to make you aware that, of course, as we throw out the report in euros, you see a further reduction in loans to customers year to date. But the large part of this minus 21% comes, of course, from the ruble devaluation against the euro. The net cross-border exposure was reduced further. You might remember we had, on 1st of March last year, 600. We are now down to 170. And what I explained from the loans to customers, what you see here as well, when we discussed the RWA impact in Russia under IFRS, here you see a bigger part comes from the FX impact, from the reductions. When looking at the bank in Russia, you see a very strong bank with a CDT-1 ratio of 13% pro forma and a significant buffer, which in absolute terms would be 3 billion above the minimum requirement, and also the liquidity ratio with an LCR close to 400% is very strong, which is not a surprise when you look at the loan-deposit ratio, which is down to 42%. We have seen, coming now to the outlook, we have seen a slowdown in Europe in the first half of the year with Hungary and Czechia entering into recession. Recovery will come in the second half of the year. We see mainly the manufacturing industries which suffer, especially those countries which have close relationships to the German partners, whereas in the southern part where tourism is significantly more important, we see a relatively positive development. Inflation and high interest rates have an impact on household demand. So we see a slowdown. But on the other hand, what we can also report and which is a very good information is that the unemployment numbers are still very low. And this is, I think, overall very good for consumption, but also for our risk costs. And in Russia, we see an L-shaped stagnation. scenario with a rebound in 23, driven by some fiscal measures. Yeah, on 16, you see our inflation report on these countries and also what we expect in the key rate developments. It's easy to say that with the exception of Serbia, we expect that we have seen the peak already And those countries which started earlier have very high key rates. We expect already this year a reduction, what you can see here. This brings me to slide 17, the guidance for this year. I have mentioned it in the introduction. Net interest income somewhere between 3.8 and 4 billion, fee and commission on 1.8 billion. This is the group excluding Russia and Belarus. On total group, this would be 5.3 to 5.4 and fee and commission income 3.2 to 3.4. Small loan growth in the non-Russian Belarus area, OPEX around 3.1 or 4 respectively. low risk costs uh profitability at around 10 percent uh on on the let's call it the core group and then the total group rather 17 percent and see the one ratio i have mentioned already above 13.5 and 16 respectively and with this i hand over to Hannes

Johan, thank you. Good afternoon, ladies and gentlemen. Thank you for joining us today, following this call, and maybe after a few other earning calls, I hope you enjoy your summer holidays. I will be briefed this afternoon with relatively straightforward developments in the second quarter. I'm sure you have seen it. Asset quality remains very good, and we are still not seeing any big up in insolvencies and defaults. Accordingly, the risk costs in the quarter are very low, For the core of the group, four basis points are 50 million euros driven by small incremental overlay bookings, while for the group including Russia and Belarus, we actually saw net releases. This is the result of overlays being released in Russia in line with exposure reduction in the country. Regarding overlays, we now have a level of 865 million euros. As mentioned, we released some in Russia and booked a small amount in the core of the group. You recall from our Q1 call, we conducted an internal stress test on our commercial real estate portfolio. This exercise confirmed that our provisions in Austria and group corporate markets are adequate, and we took a few extra provisions in Czech Republic and Hungary. Also in the first half of the year, we participated in the IBER stress test, for which the results are announced on Friday. This process is always a very demanding one, and I'm very proud of the way my colleagues have delivered all the calculation and data on short notice. A big thank you to my colleagues who have executed on this stress test. The outcome for RBI is very satisfactory. Our capital depletion in the adverse scenario is 316 basis points, below the average of the European banks, and more importantly, The outcome, if you exclude Russia, is broadly unchanged using similar assumptions. You also will have noticed that both Moody's and SMB affirmed our ratings this quarter. In fact, Moody's even upgraded our VI group. Putting together the stress test and the rating information can confirm that our business model and balance sheets are extremely strong. Finally, as just mentioned by Johan, We have updated parts of our guidance for 2023, and this includes some changes for the risk-cost expectations. For the group including Russia and Belarus, we can now guide for around 60 basis points, while for the core, including those two countries, we expect up to 45 basis points. Keep in mind that, of course, the core includes Ukraine, Focusing solely on group capital markets Central Europe and Southeastern Europe, we expect around 30 basis points of risk costs this year. As I promised, to be brief, I have tried my best. Let's now run through the slides and more interesting move on to the Q&A. I would now move on to the page 20 where you can see the details of changes in the due course of IFRS 9 provisions in the second quarter. So stage one, stage two increase mainly comes from Ukraine and Czech Republic, a little bit also from group corporates and markets. Then we have seen some small releases. You see in the section on overlays, as I have announced, that there was a strong reduction of 45 million euros. maybe as a background information, usually we try to deploy the concept of overlays in a manner that whenever we see exposure reduction, that we have to and that we can release on a pro-rata basis also the allocated provisions, which leads then finally to a release of provisions of 42 million euros in the second quarter. I'm on page 21, and if you look at the RWE development, we have finished year-end quarter end 31st of March with 98.6 billion euros and the first half year we have finished with 99.2 billion euros. What are the biggest changes? The one is the inorganic effect. We have updated our rating models on the FI side on specialized lending and at the same time we also have seen a pronounced FX impact of 1.7 billion euros leading then finally to to RWAs of 99.2 billion euros. I'm already on page 22, and I want to give you an update on the Poland Swiss franc situation. So we have currently cumulated stock of provisions when it comes to litigation provisions of almost 1.2 billion euros. So you can see that in the first half year we have increased this provision level by another 400 million euros. If you also consider what is our capital consumption from credit risk RWA's and impairments, we would have a current CAD1 equivalent coverage of 1.5 billion euros. This 1.2 billion euros of level of litigation provisions is around about 63% of the outstanding cross exposure. Well, page 23 would just highlight the MP ratios per segment and with the respective coverage. But as I said, I'm aiming for being very brief and being more curious about your questions.

Ladies and gentlemen, we will 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 your mute function on your telephone is turned off or we will not receive your signal. Once again, if you wish to ask a question, you will need to press star 1. If for any reason you need to remove yourself from the queue, you can do so by pressing star 2. We will pause for a moment in order to allow a queue to assemble. Our first question comes from Emmett Seven with JP Morgan. Your line is open. Please go ahead.

Good afternoon. Thanks very much for the presentation. I'll have three questions, please. Hopefully, they should all be easy. First one on Polish CHF provisions. The coverage has reached a significant level now, as you also mentioned during the presentation. So how would you see the provisions evolve from here over the coming quarters and years? Any color would be helpful. And secondly, just on your cost momentum, I'd like to, if possible, understand the quarterly moves better. So what's driving the 10% growth quarter and quarter at the group level? And if I look at the cost growth, excluding Russia and Belarus, it's 12.5%. But I can't seem to reconcile it from the individual subsidiaries. So any color would be helpful, maybe also with regards to your upgraded or higher cost guidance for the full year as well. And finally, just on the capital bridge on page 10, where you show the target for the full year, just for me to fully understand the retained earnings impact of 110 basis points, this is for the second half of the year or is this for the full year as it says on the slide because obviously the first half impact already. That would be helpful. Thank you very much.

Mehmet, thanks for your questions. When it comes to the Swiss strength provisions for a Polish branch, well, I think at this stage we would not expect material further provisions in 2023 to be expected. We have currently coverage of 63%. Well, of course, depending on the inflow, we may see here and there a slight higher And I think this is what is really important to observe. So if in Q3 we would see another pronounced inflow, of course, we would adjust accordingly. But basically, we believe that we have good coverage achieved up to now. As I said, maybe a bit higher still to be expected in Q3, Q4.

Thank you Hannes. I take the other two questions. I think what is most important if you look at comparison Q1 to Q2, what you have to be aware is that especially in head office there came additional So that the core wage increases, which came based on the inflation, what we had in the year before, came in in the beginning of the second quarter, which is impact there is a little bit above 30 million. And then what we have in the other administrative expenses, of course, there we also have seen partly some inflation adjustments on the services we buy, but then there are significant costs which are related on our activities around finding a solution for us. And when we look at the coming quarters, as I said, in some countries, these legs of the inflation in 2022, of the 2022 inflation will now materialize. And yeah, I do not exclude that here and there are some more. And it's difficult to say, depending on the development of our Russian activities, so not activities in Russia, but finding a solution for the Russian entity might add additional costs where I cannot give at this point in time a guidance. Yeah, for the year end, as we said, on group level, we expect 3.9 to 4 billion of costs. When talking about the capital bridge, some additional information, I think the one part is relatively clear, which is we add the profit. What we have in the outlook, we have this... payout ratio which we use as we have not set a specific dividend policy which is around 17% which of course is deducted already in half year and will be deducted also for the full year and then we have as I said a small loan growth assumed which is 2% or so which translate then in in a small amount of organic RWAs. What is more important is that some additional RWAs will come from the market and op-risk RWAs, which might be around 3 billion on group level and without Russia, 1 billion. And, of course, the OCI impact from especially the ruble exposure, the effects development. Here we have a forecast that we assume and now an appreciation compared to the low levels what we have, which should bring plus maybe 300 million something. And And then there are some further, let's call it, opportunities in the inorganic RWA. So the one is the famous Article 500, which is sovereign bonds in foreign currency, which had been during the pandemic weighted with zero, then reversed. And I understand that there are now discussions to reverse the reverse. And then we're working since long for increasing the scope for retail bonds. retail loans, especially here in Austria, Building Society, which we hope will get the approval in the second half of the year, which will also be positive. So these are under the other reported inorganic elements. Thank you for your question.

It's very helpful. Thank you for the details.

Our next question comes from Gabor Kemeny with Autonomous. Your line is open. Please go ahead.

Hi. A few questions from me, please. Firstly, on Russia, I assume that pushing out the possible timing of the divestment is related to the issues, complexities around the regulatory approvals. What is your level of confidence that you will be able to secure? these regulatory approvals by the end of this year? And to your mind, how do the sale and the spin-off compare from a perspective of operational complexity? That's the first issue. The second one would be if you could please remind us about your sensitivities to interest rate cuts in various markets. Yeah, I will leave it there. Thank you.

Yeah, very, very difficult question. And the phase where we are in is currently an informal exploration of a potential approval. I say we are more advanced in the sale than in the spin-off part. Also, when we now ask how confident I am, then I can say that this informal phase takes a little bit longer than I originally or at the beginning I would have expected. And usually this simply for me is a... I take this as an indication that it might be a little bit more difficult and complex than we would like to see without giving you, or I cannot, it would be pure speculation why... It can also be that Russian authorities... have so many other topics that it's still delayed. But of course, as the one who expects an information, I rather tend to that it's not a straightforward discussion. process anymore and I think still we would get more information in the course of the next couple of weeks at least this is what we expect and from that perspective I would say at this point in time it seems that the The spin-off, there are the one or the other additional question which makes it even more complex than the direct sale. Coming to your second question, which is the sensitivity of the NII to interest rate cuts. I think in Czech here that's a very low double-digit impact if you assume a 50 basis point. In Hungary, mid single-digit and in Romania maybe also. a higher single-digit impact than what we could expect from the 50 basis points sensitivity calculus.

Thank you.

Our next question comes from Benoit Pritchard with Kepler. Your line is open. Please go ahead.

Yes, good afternoon. Thanks for the presentation. Yeah, so the first question is on the exit scenario. Do you think this is also a scenario where nothing will happen? Do you see any body language or tone of voice indicating that the Russian counterpart wants to do nothing eventually? And I also wanted to check if there's any read-across from the Carlsberg-Dynon nationalization case. I guess no, but just wanted to check with you. Second question is on the net interest income. I think for the rest of the year, you indicate a bit of a softer trend, but I was trying to also understand kind of the trend for 2024. I guess it's a bit more complex to estimate, but I just wanted to have your view on that and also what you think about rate cut for 2024 on your forecast, how much impact that could have on net interest income. And the third question is actually more on the dividend side. When do you expect the approval for the 80 cents? And then also, it seems that you accrued 50 cents, which could suggest that you will go for a euro per share dividend on full year 2023, which will imply, roughly speaking, 30% payout ratio. So is this kind of level a good level to think about the future payout ratio for the core business? Thank you.

Yeah, thank you for your questions. I think I tried in my answer before to outline that currently it's in the hand of the many authorities where we need an approval and it's We're still in this informal phase and it's difficult to add here. What we said is that and we mentioned that we are in a readjustment of the business in Russia. So these adjustments are on the way and you have seen it already in the numbers and of course this will continue for a while. I have to say all the information I have on the two cases that you have mentioned is only what is available in public media. I don't have any additional insight. So it would be very much a guessing which would not add any contribution to the current situation and to your knowledge. I think when coming to your second question, the guidance on the net interest income, I think it's from the numbers, from the range what we gave. I think it's in combination with the half-year results, it's easy to see this softer trend, what we expect. Maybe I should say it, of course, it comes from the... The loan load demand is that we cannot add something significantly to the loan book which would support the NII. Second, what we see and the explanation simply is that in the current situation we see significantly reduced new business in corporates mainly in the mid long-term investment loans and in the retail sector, for many reasons, high rates, uncertainty, many other topics, why we see a significantly reduced demand in all the markets or in almost all the markets in the mortgage area. So these are the main two reasons on the liability side. It's the The restructuring, we see more and more customers moving money from their current account to higher rated products like saving accounts and term deposits. This is an ongoing trend. I think it's too early to see when this trend stops and when, from the perspective of the customer, the balance is reached on how they want to structure their assets. So maybe 4.24, it's a little bit too early to give further guidance. And to your third question, indeed, your assumptions are correct, what we have so far. But this is, as I said, the 2023 is not the dividend policy per se, but it's rather the methodology which we use, which is given by the European Central Bank. And here again, As you are aware, the current situation is for us still, let's say, with a couple of uncertainties. So technically, of course, we would need an extraordinary shareholder meeting for any dividend payment and we would take more weeks to come to a final decision on that. Thank you.

Our next question comes from Matei Nemes with UBS. Your line is open. Please go ahead.

Matei Nemes Yes, good afternoon, and thank you for the presentation. I had two questions, please. The first one is on risk or risk overlays, to be specific. I was wondering if you could talk about your approach to these risk overlays, the usage of these or reversal of them in the second half of the year and next year. I clearly noticed that ex-Russian Belarus, those overlays still went up in the second quarter, notwithstanding some of the releases in individual countries. So I'm just wondering, in light of the 45-bits cost-office guidance this year, how would you approach those overlays? And the second question is just going back to a potential exit or deconsolidation in Russia. I was wondering if you could give us a sense of your talks with the ECB and regulator, whether such a process would have any issues with regards to timing, i.e., the deconsolidation on the equity side and RWAs. Would this have to be wrapped up within the same quarter or fairly close to each other? or you sense that there could be some, let's say, leniency from the regulators' part? Thank you.

If I may start with the risk-cost questions, and Martin, thanks for raising this question. When we talk about risk overlays compared to some competitors, we really talk about overlays. So this is not macro, this is not anything else, this is really risk overlays. And just to remind ourselves, the total of 865 is decomposed of 364 million euros allocated to the core of the group. Then we have another 439 million euros when it comes to Russia and Belarus. And as I said in my introduction, of course, Ukraine belongs to the core. But just because the amount is a little bit bigger, Ukraine is separately shown here with 62 million euros. Well, when it comes to the usage, I think for Russia and Belarus, we would make use of them when out of the geopolitical situation there is the need that suddenly these loans would default. And what was always important, that's the way on how we have utilized this approach on the post-model adjustment and the specific risk factors is that whenever the exposure is being reduced, we would also automatically on a pro-rata basis decrease the BMA. That's the first thing. On the group, the 364 million euros They would mainly cover inflation as also last time I talked to you regarding interest rate sensitive industries like commercial real estate. So whenever we would see that a loan is being repaid, we would reduce provider. On the other hand side, you know, if the loan is being moved into a stage three, we would, of course, also make use of this post-model adjustment and release accordingly. So that's our way of thinking when it comes to the entire topic of BMAs. Thank you.

And to your second question, the regulatory approval process and the impact. Yeah, we are of course very concerned. We discussed that Any sale of the Russian entity at the given parameters would come with a significant loss and the deconsolidation of the RWAs only. So the loss comes with the signing, the deconsolidation of the RWAs with the closing. We had a discussion with regulators where they indicated, at least this is my reading, that it would be good if it would happen within the same quarter. And that's their thought behind. Of course, given the many signals what we hear, I would assume that European regulators would try to be as fast, as quick as possible. Otherwise, we would be disappointed. Is it doable? in in one quarter we hope so with a good preparation before but it's unclear on the other hand we now have um a good capital situation also so i i think what was uh Worrisome last year is at least we built up some buffer for that situation as well. So what you have seen in my part of the presentation.

Thank you.

We'll go next to Johann Sturman with HSBC. Your line is open. Please go ahead.

Good afternoon, everybody. I have two questions from my side. First of all, on the muted or difficult loan growth can you quantify how much is really a lack of demand and how much is self-inflicted pain or how you ever want to call it via the tightening of credit standards where you refrain from giving certain loans, as you mentioned as well? And regarding your NPEs, the drop to 1.5% is surely a strong achievement there. What is a realistic level in your view of MPs in the next years? I guess five years ago nobody expected that RBI could come that low. And what is a realistic level of through the cycle risk cost? Thank you.

Well, if I may start with the second question where you have built the bridge to the MP and that MPs are very low. Thanks for recognizing, yes, this was a lot of work, and I think we have managed well, not immediately selling as many have expected, but really also try to get a good recovery in the interest of our shareholders. Well, I would believe looking at the current forward-looking indicators, BMAs and so forth, and the still higher cost, higher interest rate that we could see interest rates, sorry, risk costs going up slightly. But at the same time, we must not forget that we have seen the last two or three years very benign risk costs at all. For me, this would be too early to give you a detailed arrival on risk costs for the next year. But as I said, we have seen the last two or three years very, very, very low risk costs and you have seen that we usually have also used this situation to build up some of this post-model adjustment to be well prepared if the cycle is turning. NP at 1.5 is maybe difficult to sustain over a very long period, but if it would now increase by some 50 basis points or 60 basis points, I would not mind So I think this is what comes into my mind when considering regarding the MP dynamic. And as you rightfully said, of course, we would try to avoid by all means that we go back to this MP level of 5% because it comes quite with a big regulatory effort. Johan?

Thank you. Talking about loan growth, I think, of course, it's a mixed situation. Let me start with the demand and, for example, with mortgage business, of course, what we see in addition to higher interest rates, what we see is that also the supply of new flats and whatever has slowed down in a number of markets and this is also one element which is the reason why demand is low. Of course you might say if we compare what we see today in new volumes what we have seen before the pandemic or at least eight quarters ago, then one has to say that in a couple of markets you also have refinancing. And refinancing happens if rates are low, but refinancing does not happen in a rising rate environment. It's for everyone more prudent to stay. So Difficult to answer. And if you talk about self-restraint, then I would assume you would compare our productivity or our activities to the overall development in the market. And we exclude, of course, Eastern Europe in this way of thinking. Then I would say... At least maybe the numbers are not so good. I can't see many markets where we have lost market share. So I think it's rather what we see also from market participants. And of course, in a rising rate environment, yeah, the asset margin on... on mortgages had been very, very small, very little. And so this adds, of course, to the self-restraint activity. If this improves because of adjustments, then maybe one might see more. But overall, this is the way I see the picture.

We'll go next to Ricardo Rivera with Mediobanca. Your line is open. Please go ahead.

Thanks for taking my question. Two or three, if I may. First of all, I just want a clarification on the spinoff. Johan, did you say before that at the moment the spinoff seems to be more complicated than a straight sale. I'm not sure I got it correctly. I just want to have a confirmation on this. The second question I have is, when I look at the slides where you show the Russian business at the back of your pack of slides, the loan book has basically halved in a year from 13 billions to kind of 7 billions. Certainly, there might eventually be some effects too. Is this speed, can this speed continue? And you have also reduced the book by roughly one billion and a quarter. Is this a speed that can be kept, meaning maybe one year down the road, one year and a half, two years down the road, if nothing happens on the spin-off, on the straight side, you can just wind down the operations without doing anything on top of that as an extraordinary actions. So the question is, how long would it take to basically bring everything to zero? is what we have seen so far reliable for the future. And the other question I have is on the check tax, I've seen you book to some 15 million, just a curiosity here. And that's all you need to book for the year. And is this going to stay for 2024 too, more or less of the, sorry, maybe you should know the answer, but just what I admitted, I lost a little bit of track on that. Thanks.

To your first question, Ricardo, sorry if I was imprecise. What I wanted to express is that in this informal, I can't say application, informal exchange of ideas with authorities, I wanted to say my perception is that we're a little bit more advanced with the sale than with the spin-off. This is what I want to say and does not necessarily mean that it's indeed more complex, but it's more advanced in the one than in the other. So this is to your first question. To the second, I... The loan book, I think what we have to be aware is that the reduction this year came from the Ruver development. So what we reported now is minus 20%. The biggest part came from the FX development as it was reported in Euro. Recently, the reduction was relatively small. So I think the bigger part of this, so the short term, which simply ran off, happened already last year. Of course, we will have further runoffs and this will reduce the business. I think also the recently increased central bank rate will slow down a little bit the process because... refinancing at a higher rate is difficult and I have no idea how much incentives this would need. So I think your linearization or of course you use more complex models than linear models, but I would not do, but we will work on and find out what more we can achieve. as this is the fallback version and this is what I understand what many, many other international banks are doing not considering a sale or a spin-off but rather reducing the business and this is also one, let's say the third option what we explore currently. And your third question was about the tax. in the windfall tax in the czech republic yeah indeed we we there are a couple of developments which which we believe significantly reduces the tax base for the special tax and we have booked the already i think seven million uh so probably in the second half of the year there should not be a big impact as as yeah there had been many developments uh like also the the significantly increased uh risk uh sorry interest expenses uh which are which were had a negative impact uh on the development of the bank, but therefore also a positive impact on the, again, negative impact, potential negative impact of the mean for tax. Thank you, Ricardo.

Our next question comes from Christian J. Dubé with Barclays. Your line is open. Please go ahead.

Hi. Thanks for this next question. I have three. The first one is on the three. I look at slide number six, which is in which you... clearly lay out the top three businesses for your fee. From that, I just wanted to understand, if I look at the three components that you've given on the slide, I see a considerable slowdown in the run rate for the future, for the Group X, the Russia-Belarus fee business. Could you help us understand the drivers for your guidance of 1.8 billion? Second question is on the cost of risk. For the Group X Russia-Belarus, I see a 65 million of provisions till now. And on the slide, Hannes has guided to a 420 million, up to 420 million of risk guidance for the year, which is pretty similar to the last year. So are there any overlays, assumption built in for Ukraine? Or is there something that I'm missing on? And lastly, a simple question on the dividend, I guess. You are expecting the spin-off process to be ended by end of December. So should we expect the dividend that could have been supposed to be paid in this year could be delayed? Thank you.

No, Kancha. Starting with your first question, so at the beginning, the... I think the quality was not so good, but with the support of my colleagues, I assume now that your first question was about the slowdown in NFCI and your question what to expect in the second half of the year. The numbers were stated 1.8 billion for full year without Russia and Belarus and the reasons and the slowdown of course on the total group level. One element you are aware that if you look through the various components of the NFCI that landing always contributes and with this assumption that we have significantly reduced loan growth. This is negative for the NFCI. Of course, I think I have mentioned that with the adjustment of the foreign currency payments, sorry, the foreign trade payments reduced. This is a significant element we see coming with this also reduced FX business in Russia. And of course also that the securities business is significantly lower. So on the total group level, it's the reduced activities in Russia. I mean, on the other hand, one might expect that inflation supports fee volumes to some extent. This is the case. Probably not everywhere we can pass on this. And we should not forget that Croatia joined the Euro. And, of course, in this tourism season, significantly lower amounts simply come from that. concerning your third question which what I understood you linked the question to spin-off by the end of the year yes technically it's still possible I think finance definitely would prefer for reducing complexity to to have a spin-off rather at the end of November. So this means if you look at the full process, we have another two months to clarify all the requirements, what we have before we officially start and bring it to an end. Yeah, I think... Not from our numbers, from the overall perception our activities in Russia are perceived as risky and this is one one element of the of the limitations what we have with dividend payouts and of course the if there is anything positive when talking about the slightly delayed spin-off then this would be a good opportunity and here you are right to to not only decide on a spin-off but also on a dividend in the same extraordinary shareholder meeting thank you for your questions

If I may take the question on the risk cost guidance, yes, indeed, you're right. We have 65 million euros allocated to risk costs while giving a guidance of 420 million euros, including, of course, Ukraine. Well, on Ukraine, our current Our current reading of the situation would be that we would not plan additional overlays, but we might need here and there the one or other state three bookings. So that's the way when we share our thinking when it comes to the risk-cost dynamics in Ukraine. That's the one. And for the remaining means group capital markets, Southeastern Europe and Central Eastern Europe, we give a risk-cost guidance of around about 300 million euros Here you could see the one or other stage three bookings. And as usually when I do the arrival of risk-cost guidance, I always include one or two surprise cases when thinking about risk-cost guidance. And we still may need the one or other basis points for additional overlay bookings. Thank you for the questions.

We'll move next to Hugo Cruz with KBW. Your line is open. Please go ahead.

Hi, thank you for the time. Just wanted to ask again about the solution for Russia. Do you have the sales solution? Do you have a potential buyer lined up or you're still just talking about potential transaction scenarios with the authorities? And then when you're looking at the sale versus spin-off option, and you're looking at what you want to do, do you want to have a solution that provides you with full deconsolidation and no future exposure to Russia? Or are you looking at a solution that keeps you with some exposure to potentially capture some future potential optionality from a potential end of the war? What would you like to do? cut off all ties with Russia forever, or are you looking to keep some future optionality? Thank you.

Indeed, it's not that we are only working here. Indeed, there is interest out of Russia on acquiring the bank. So this I can confirm. Second, Yeah, deconsolidation is the main route what we're going. This is why we look at sale and spin-off. And within that, and what I understood is you also ask, is there, might there be something in between? At least this is the way I understood your question where you say, Could it be that you will not end up with a full sale, but being, let's say, forced to keep a minority share? This can also be the case. I don't know. We'll see. And the point is, which I want to stress again, we are working with all our efforts, but the outcome is not in our hands because of the many approvals in this geopolitically difficult situation.

So we do not, we cannot choose.

Thank you for your question. Pardon me, sir. Just a reminder, 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.

Yeah, maybe, operator, there, what I learned from my colleagues, there was a question in the chat, which was an update on the OFAC... request for information and I can confirm that we have produced, so we had an agreement which type of information are requested. We had an understanding, we have produced, we have submitted that. We are in a process of clarification of some of the information we provide. and we feel we are confident what we always have said that also after this these questions that our systems are robust and that I assume that OFAC will be satisfied with what we have delivered so far but I can't give you Any timeline on... I mean, it's an intensive process and quite a lot of questions. So I have no idea when this exercise might come to an end.

And our next question comes from Juliana Gola with Goldman Sachs. Your line is open. Please go ahead.

Good afternoon. Thank you for the presentation and for the opportunity. I have two questions, please. First, could I ask about the ruble hedge? Given the value of the hedge has reduced materially, you effectively now have the Russian equity unhedged, apart from the $175 million of notional left at the level of the subsidiary, if I'm not mistaken. So can I just ask, or could you please help us understand, what will the impact on the group equity be from the unhedged position in the Russian equity, assuming delay in the consolidation of the subsidiary? And my second question would be, on the Swiss franc loans outstanding. What proportion of those are expected to be subject to litigation? And could you please talk a little bit about the developments that you have seen since the negative ECJ ruling in June? Thank you.

Well, I would maybe start you, Liana, because, you know, your questions come in always extremely indicated when talking about this risk-shrink loan, many clients also being motivated and inspired by marketing campaigns by local legal firms that they would like to sue us. Currently, you know, we have, usually we have an inflow of around about 200, 250 new cases per month. And in June, we have seen a more pronounced inflow of clients litigating us. This was around about 450. And that was the reason why I said, well, there was a peak and there was a spike in But we would assume that in Q3 we would also have a slowdown. So the main impact of the European Court of Justice ruling was that we have seen a more pronounced inflow of new legal cases. And I also gave you the numbers. when it comes to this one. At the same time, I believe this information is now being well digested and consumed in the market, and this is the basis for my assumption that you would now see a reduction from this elevated level to a more through-the-cycle level. Johan.

Thank you, Johannes. To the first question, Ruble Euro Hatch, The market is what it is, so it's impossible from the head office perspective to build up patches so that I can confirm the number, but this is within the Russian entity and not here. The second part of your question, the sensitivity of FX developments or I mean, I take a simple one and I hope you accept if I say a 5% devaluation, which is given what we have seen this year, a very modest one, but it's a sensitivity, of course, would have a CET1 impact by 12 basis points. So we lose... Of course, easy if we have 4 billion of IFRS equity, we lose 200. On the other hand, the RWA reduction would be some 500. So this is these 12 basis points. The hedge is so small that it would take off just one basis point. So net, then you would have 11. Thank you for your question.

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 to all of you. As Hannes said, we wish you hopefully soon a start of a very good holiday season after the earnings season, and we hope that you are soon back for further news. Thank you. Thank you. Bye.

Ladies and gentlemen, you may now disconnect.