Addiko Bank AG

VSE:ADKO

Earnings Call Transcript 2020-Q1

[Operator]

Dear ladies and gentlemen, welcome to the conference call with the management of Addiko Bank AG. At our customer's request, this conference will be recorded. [Operator Instructions]

May I now hand you over to the Addiko team, who will see you for this conference. Please go ahead.

[Razvan Munteanu;CEO, executive]

Good afternoon. This is Razvan Munteanu. I'm the CEO of Addiko Bank. I welcome all the participants to the earnings call for the quarter 1 2020.

Before we get into details, let me highlight a few important aspects. One, these are very difficult and uncertain times, impacting our customers, employees, shareholders and all other stakeholders of the bank. There is no history of a voluntary closure of the global economy. This creates uncertainty with regards to how fast the economy will recover and how differences between sectors and markets will play in. It comes on top of the uncertainty about the duration of the pandemic. Steps are taken to ease down lockdowns and restart the economic activity. It is still far from certain that contamination ratios will remain at the current contained levels in our region. Two, in this unique context, we decided to take significant precautions on the back of a strong operational result in Q1 and be thoroughly prepared to deal with the worst and not sugarcoat the current context. We are now well equipped to weather this crisis. Three, we're convinced that more than ever, expert consumer and SME lending will be in demand, supporting the continuation of our strategy. The crisis gives us the opportunity to accelerate the transformation by reducing costs and pushing digital. Four, the entire team works hard to ensure that our prior guidance, whether in terms of earnings, dividends or other key parameters will suffer in timing rather than in substance.

As usual, I am joined for today's call by Johannes Proksch, CFO; Markus Krause, CRO; and Edgar Flaggl, Head of Investors Relations.

Please turn straight to Page 4. We closed quarter 1 2020 with a negative EUR 8.4 million result. The good operating performance in Q1 allowed us to take a one-off extraordinary risk charge of EUR 13.6 million. It reflects our expectations for a deteriorating macroeconomic environment, and all this in accordance with IFRS 9 guidance. The results include as well a one-time DTA write-off of EUR 4.8 million. We are now in a good position to address the unfolding crisis. As I mentioned, in Q1 -- the Q1 result was supported by strong operational result before risk charges of EUR 13.2 million. This is more than 30% year-on-year improvement. It was achieved thanks to 4 important aspects: first, better-than-anticipated consumer lending in Q1 in spite of the consumer protection measures from the [ aid ] of 2019; second, strong performance in SME; third, successful cost containment; fourth, good risk performance of our operating business. This solid operating result comes in spite of a weak March on net commission income from lockdowns and crisis related-disruption.

The capital base of the bank remains strong at 16.9% transitional or 16.3% fully loaded. This includes the peak negative effect so far on OCI from the volatility and increased spreads in the fixed income market. This is where some of our excess liquidity is placed. The market circumstances in this area have improved since the end of quarter 1.

On risk, the second box on the page, NPE ratios improved to 3.4%, driven by the good performance of the risk team on the non-focused portfolio. The cost of risk associated with the operational performance of our focused portfolios was better than anticipated. This allowed us to pre-load the considerable reserve I mentioned related to the anticipated deterioration of the macroeconomic environment.

On digital, on the bottom of the page, this is the time to push digital transformation forward. Social distancing roles lend particular resonance to digital channels. Q1 provides us with a good starting base. Digital contribution to lending continues to go up and cross 10%. We also continued our growth in digital customers. We accelerate projects, giving customers better digital access to our products. It is also positive to observe moves in local legal and regulatory frameworks, facilitating digital interactions.

Also on the SME front, the automated lending activity increased to 37% in Serbia and Slovenia. On this, our expectation is to see the contribution slow down on the short term as we cautiously move more volumes to stricter underwriting until we see better the effects of the crisis on various industries and businesses.

If you please turn now to Page 5. On business continuity on the top of the page, our setup proved operational resilience to the crisis. We have delivered all our services without any discontinuity. Note that on top of everything, during the lockdown, we have been confronted with a major earthquake in Croatia on March 22. Over 80% of our employees have worked from home since the implementation of lockdowns without any disruption. We have recently started to return to working from office in line with local prescriptions from health care authorities. Branches continue to operate throughout this period. We had a maximum of 20 out of 170 branches closed. On the pages we present you, you still see 5 branches closed. However, as of this morning, only 1 was closed and 177 branches are operational. We were fortunate to register only 3 cases of contamination amongst our 2,800 employees. All 3 are fully recovered by now.

On the macroeconomic context, for modeling the crisis and the economic recovery, we are following the consensus of a V shape, recovery visible starting Q4 and in 2021. Our scenarios give higher weight to negative and worse assumptions. With this prudent approach, we ensure we can absorb the worst even as we work to limit the impact of the negative external context.

Concerning midterm and guidance on the lower boxes on the page. The various moratoria and fiscal measures implemented in the markets where we operate will dictate the restart of economic activity. Such measures from relaxation of lockdown, opening borders, supporting employment or implementing state guarantee schemes for companies are rolled out and adopted as we speak. Given their considerable effect on our performance in 2020, we suspend outlook indications for the year until we gain more clarity about the effects of the crisis and speed of recovery. We expect to achieve such increased clarity in August/September. We also expect that our midterm target will be affected rather in timing than in substance.

As you know, we postponed our AGM to the fourth quarter, allowing us to have the basis for reviewing our dividend recommendation for 2019 and guidance for 2020. It is important to note that the EUR 40 million we proposed for dividend distribution earlier this year for the 2019 result is still deducted from the capital ratios presented today.

For further insights on our business development, let's turn to Page 6. As I mentioned, the operational -- the operating result of the first quarter was strong, 30% up year-on-year before risk charges. The straightforward business model to specialize on consumer lending and SME banking is reflected by the transformation of our book. 62% now is in the focus segment of consumer and SME, from a starting point of 40% in '16 and 60% in '19. The efforts to defend pricing and margin were rewarded by an increase of 15 basis points for new business originating in consumer and 10 basis points in new business originated in SME. This demonstrates that our consistent value proposition, convenience and speed can protect the margins. We expect that as economic recovery will activate, the need for consumer lending and SME lending will remain very relevant, allowing us to continue building healthy margins through the relevance of our value proposition.

Please turn to Page 7. At the end of last year, the most frequent question we got was if we can manage the consumer lending restrictions implemented by regulators in Slovenia, Croatia, Serbia, Montenegro. Quarter 1 results confirm we can. As specialists, we adapt faster to external factors. The restrictions led to a reduction in new volumes compared to the same period in '19. However, the new originations were stronger than anticipated, and we gained 10 basis points market share on a weighted regional level. Notice well that in consumer lending, March was already down approximately 40% due to lockdowns and drop in consumption. Consumer NCI as well suffered from the lockdown in March in 4 ways: lower lending and the associated bancassurance business; reduced travel, impacting currency conversion income; one-off commission expense associated to new products; delays in the reactivation of our cards program, which we expect for the third or fourth quarter 2020.

On the SME front, the efforts to accelerate in 2019 paid off with a strong quarter 1 in new disbursements. The overall book is flat due to resegmentation of customers having grown their business into the non-focused segment of large corporates. Also, NCI performance in SME remained good with an increase of over 5% year-on-year even as the headwinds started in March.

A few points on the digital transformation on Page 8. In the context of the current crisis, digital transformation becomes even more relevant. Already prior to the lockdowns, our teams started pushing digital activation of customers through campaigns, temporary price rebates for digital transactions, simplified activation processes. The main digital KPI continued to develop positively in quarter 1. The number of digital users continued to go up, reaching 213,000 customers. Digital origination of customers' loans stands at 10.4% at the end of quarter. This is an improvement on the 9% at the end of '19. Together with growth in our Bank@Work distribution to 29%, we achieved out-of-branch lending of almost 40%. This way, we compensate for closing approximately 10% of our branches at the end of '19.

On the SME front, the ratio of automated lending continued to grow in Serbia and Slovenia, contributing to the strong quarter 1 and to the improved pricing of the new SME business.

Again, in the current context, digital transformation remains an absolute focus with multiple projects which are aimed at further accelerating digital acquisition and digital lending.

I would like now to hand over to Johannes, who will take us through the financial part, starting with Page 10. And then Markus will cover the risk topic.

[Johannes Leopold Proksch;CFO, executive]

Thank you, Razvan. Please let me explain you now on Page 10, how Q1 '20 is reflected in our financials released this morning by comparing them to Q1 '19. And please bear in mind that COVID-19 started to impact our revenues from mid-March onwards.

The higher rates on the focused business translated into further increase of our interest income from this portfolio. And as a consequence of further reduced deposit yields, the overall net interest margin increased slightly to 2.99%. Our net commission income, of which 90% are related to our focus business, decreased during Q1 '20. The development of fee income in our focus areas remained rather flat due to consumer protection measures introduced in 2019, given the strong link to loan disbursements, such as bancassurance and the COVID-19-impacted March. Operating expenses saw a drop of 9.9% to EUR 43.5 million. This is, as anticipated, a consequence of our successful execution of the cost restructuring measures introduced in 2019, ongoing cost efficiency programs, but also due to a one-off of EUR 0.9 million in first quarter '19 related to the IPO.

Overall, we are reporting a post-tax net loss of EUR 8.4 million. The result of the tax is determined by an operating result in Q1 above our expectations and successful cost containment, where we significantly increased risk provisioning, mostly associated with the IFRS 9 preloading of the anticipated macroeconomic effects for the current pandemic.

Now on Page 11 and 12, we provide you our usual breakdown to show a granular picture of the development of our interest income and expense composition and respective yield-related developments. While the increase in the non-focus income was overcompensated by the increase in interest income from our focus portfolio, the decrease in other interest income predominantly related to our bond portfolio and NPL unwinding, led to a slight overall decrease compared to first quarter '19. Please refer also to the appendix for a breakdown of our other interest income composition.

The relatively stable development of our focus yield despite a negative market interest environment is proving again that we were able to defend our margins in a challenging environment via our proposition of convenience and speed. As mentioned by Razvan earlier, new business yields in consumer have actually increased by 15 basis points during first quarter and SME by 10 basis points, the latter being supported by the continuous increase of disbursements from our automated digital lending process for small tickets, also driven by lower maturities and better-rated clients.

And now on Page 12, we illustrate deposit repricing having also contributed in the first quarter '20 to decreased interest expenses on the back of reduced funding yields by roughly 12 basis points, meaning we pay today, on average, 46 basis points on our funding.

On Page 13, the net commission income, I would like to highlight that the flat development results from a commission expense increase of EUR 0.7 million in the first quarter '20, mainly related to the ramp-up expenses for new card products intended to be introduced in the second half of this year. As in previous quarters, 90% of income related to the consumer area being predominantly driven by accounting packages and transactions, while our SME clients increasingly use us for transactions, digitally solve guarantees and for trade finance business.

As mentioned earlier, COVID-19 impacted the second half of March, particularly the revenues from bancassurance and the usage of cards by consumers, and in the SME area, domestic transactions and FX. We expect these revenues to recover with consumption and economic activity ramping up.

Let's move now to operating expenses on Page 14. As mentioned earlier, first quarter '20 has shown operating expenses dropping by 9.9% to EUR 43.5 million. This is mainly due to the successful execution of the restructuring program in '19, suspended bonus accruals and ongoing cost efficiency programs, but also due to one-off, as also mentioned earlier, related to our IPO in the first quarter '19. In addition to that, we are proactively managing slightly increasing IT-related costs. We are about to introduce further cost measures in the upcoming months, among others, related to staff expenses and by continuing to encourage digital distribution origination over physical.

Let me now hand over to Markus, given the high importance of the risk-related topics, before I come back with an update on our capital situation.

[Markus Krause, executive]

Thank you very much, Johannes. On the following 3 slides, I would like to provide you with some details of the operational risk management result as well as first impacts of COVID-19.

Page 15's key message is that operational risk Q1 results are significantly better than expected, which was not only, again, caused by releases of EUR 3.8 million in the non-focus segments, but is also valid for both focus segments, consumer loans and SME, which is a result of a very solid and risk return underwriting over last years. For consumer loans, Q1 credit loss expenses of EUR 2.9 million were significantly lower than the amount booked for the same period in 2019, which was EUR 4.5 million, resulting in a credit with bearing exposure-based cost of risk, 19 basis points compared to 31 basis points in the same period in 2019. For SME, a credit risk-bearing exposure based cost of risk ratio of 5 basis points was booked in Q1, which is an increase compared to the same period last year, but significantly better than expected, considering the increased maturity of the portfolio.

Considering this, that we achieved across all business segments a very good operational cost of risk performance on a 0% level, it finally leads us to the main Q1 2021 one-off impact causing a total credit loss expense of EUR 14.4 million, which is an equivalent of 28 basis points on a credit risk-bearing exposure basis. The one-off impact is almost exclusively caused by a significant pre-load of EUR 13.6 million.

IFRS 9 post model macroeconomic parameter overlay to anticipate certain COVID-19-related and required refinement of IFRS 9 detailed models. Since the asset quality was further improving during Q1, where the nonperforming exposure ratio decreased by more than 50 basis points, down to 3.4% on a gross exposure basis, and in keeping the NPE coverage ratio stable at a 73% level, we are confident that the current stress situation caused by COVID-19 will enable us to back test the results of stress tests, which were used to derive the Pillar 2 guidance of 4% for Addiko. Since Q1 2020 asset quality doesn't reflect any impact of COVID-19 yet, I would like to provide on the following page more background on related moratoriums and the share in the retail and non-retail portfolio.

On Page 16, you see the structure of moratoria provided for each country, which is very similar, even the same for retail clients and legal entities. In Serbia, banks are obliged to provide moratorium if the client is not voluntarily stepping back from it, while in Montenegro, banks are obliged to provide moratorium based on client requests who doesn't have to state any reason. For Croatia, Slovenia and Bosnia, banks don't have to provide a moratorium if it is not clearly argued by the client how they are impacted by COVID-19. For Bosnia, Serbia and Montenegro, the duration of the moratorium is, in general, 90 days, which started mainly in April, which means that any asset quality impact can only be measured from Q3 2020 onward.

Being preventive, we keep close contact with the clients to understand their personal situation and to be prepared to decide on post-moratorium measures and also to ensure that the right IFRS 9 staging will be applied, which will cause the expected main impact on the cost of risk in 2020 in reflecting portfolio migrations from stage 1 to stage 2 with higher coverage ratios to be applied according to a stage 2 lifetime expected loss calculation. For Croatia, the duration of moratorium is, in general, 6 months but can be extended up to 12 months for clients in certain industries. While in Slovenia, 12 months are, in general, allowed by the regulation. To get clarity about the overall asset quality impact in a very early stage, we keep also here a very close contact with our clients to review their liquidity situation and to define appropriate measures.

Our non-retail portfolio consists of a very diversified structure across the industries where less than EUR 300 million gross exposure is in main impacted industries like tourism and transportation. For the retail portfolio, it is important to mention that we have a significant part of clients, more than 30%, which is employed in impacted industries -- in less impacted industries, especially in the public sector, which we expect to keep the asset quality under control. Further on, we don't have a significant concentration of customers employed in the most impacted industries like tourism and transportation.

We intend to use the continuously increasing level of data points to be able, over the next quarters,

to gradually refine the assumptions of the IFRS 9 model, to avoid, on the one hand, a pro-cyclical approach, but, on the other hand, to properly predict the expected cost of risk impact, which we expect to be above the through-the-cycle average.

Page 17 is providing you with some details related to the share of moratoria taken in retail and non-retail portfolios based on end of March, as booked in the system, and end of April 2020, as requested by client. For our non-retail portfolio, with EUR 2.7 billion gross exposure, moratoria requested by clients are approximately 28% by end of April 2020 where Serbia and Montenegro, according to the expense structure, are causing the highest share, while Croatia, Slovenia and Bosnia show a significantly lower share, which gives some comfort considering that these countries are covering more than 75% of the non-retail loan book. Almost 2/3 of all requested non-retail moratoria are coming from the industry's construction, manufacturing, wholesale and retail trade.

Our retail portfolio, with EUR 2.3 billion gross exposure, is impacted by moratoria requests with approximately 21% by end of April 2020, where, again, Serbia and Montenegro, due to the structure, are most impacted, while all other countries, again, show relatively low share while covering more than 80% of the retail loan. Following quarters will provide us with more insight into the payment behavior of our clients, but will also make it possible to gradually come back to business, applying our sustainable risk-return based approach through some further policy checks based on industrial view are considered.

Related to funding, moratoria will not have any material impact on liquidity ratios, like LCR, according to applied internally liquidity stress tests.

With that one, I would like to hand over to Johannes to continue with the capital situation.

[Johannes Leopold Proksch;CFO, executive]

Thank you, Markus. And now a brief update on our capital position on Page 18. We continue to have a very healthy total capital ratio, which, in our case, is equal to the CET1 of 16.9% on a transitional basis or 16.3% IFRS 9 fully loaded. The reduction of 84 basis points compared to the year-end '19 of 17.7% CET1 is mainly driven by a drop in other comprehensive income by EUR 32.9 million related to a plain vanilla bond portfolio. This has slightly improved since end of March, as some of you noted. There will be further volatility in this position, but as we do not anticipate any impairments, we will see a pull-to-par as markets stabilize and our portfolio duration is between 3 to 4 years.

Please bear in mind that our capital ratio as of first quarter '20 does not include the previously proposed 2019 dividend of EUR 40 million, which means the first quarter '20 capital ratio would be higher by 90 basis points if such dividend would not be distributed.

As mentioned earlier by Razvan, the dividend '19 proposal will be reviewed ahead of the postponed AGM in the fourth quarter. RWAs remained flat, reflecting ongoing review and implementation of optimization.

And by that, I hand back to Razvan.

[Razvan Munteanu;CEO, executive]

To wrap up before we go to the Q&A. First, a strong operating result in Q1 facilitated our significant risk charge related to the expectations for macroeconomic deterioration. This allows us to be well prepared to weather this crisis. Second, our model remains very relevant. In quarter 1, we demonstrated that we can continue our execution in a changing environment. Third, first quarter results demonstrate we can deliver the operational improvement required for our midterm target. Fourth, we'll have a better read on the crisis implications to our guidance after the moratoria in August/September. Fifth, we will accelerate digital transformation and cost programs to reduce the financial effects of the crisis, protecting the capital base and the dividend distribution capability.

With this, I hand back to the operator to coordinate the Q&A session.

[Operator]

[Operator Instructions] The first question is from Anna Marshall of Goldman Sachs.

[Anna Marshall, analyst]

Two questions from me, please. First thing on asset quality, could you please elaborate on your expected trajectory of cost of risk throughout the year? I think you've mentioned that you plan to refine your IFRS 9 assumptions. Could that happen already in Q2 or further down the road? And also, I appreciate these are still very early days, but any more precise indication of the full year 2020 in cost of risk apart from what you've mentioned, I think, that it's going to be above the cycle level. So that's my first group of questions.

And my second is on the new production. Could you please indicate the most recent [indiscernible] for new production in consumer and SME segment for Q2? What do you see so far? And also, how do you see demand versus your own kind of underwriting standard change in terms of the drivers of this [ amount ]?

[Razvan Munteanu;CEO, executive]

Okay. Thank you very much, Anna. I will ask Markus to answer the risk batch of questions, and I will address the new origination question.

[Markus Krause, executive]

First of all, Anna, what I would like to report and what I mentioned in the first quarter, actually, we have not seen any implication of the COVID-19, which also doesn't give us any guidance how that might develop. The moratoriums, as I also mentioned, will last mainly until the end of the second quarter. And in some countries, as I also outlined, Slovenia and Croatia, it might take even longer. So that we see also asset quality-wise here, actually the first directions in the third quarter. Of course, we have built up certain scenarios internally, which simulate different assumptions of the behavior. So the V-shape is one of these assumptions we are looking at, but also, we have different sub scenarios here we are looking at. And the variance between the different scenarios is relatively large because we don't have that building base currently, which allows us to say the highest probability lies on that scenario. So that's why we are currently not disclosing any of these details because we would like to see the first directions, where it's moving to get more clarity which of these sub-scenarios will be the most probable one. And once we have that identified, we can, of course, give a certain guidance also to the market to be credible also in using available information.

[Razvan Munteanu;CEO, executive]

Thank you, Markus. If I take over on the new production topic. In April, the main effect affecting lending activity were lockdowns. So people were locked in their homes. Lower demand because of lack of consumption, and lack of communication for the obvious context of the crisis. We did not push campaigns, and that obviously affected the results. Not surprisingly, we operated in a range of 5% to 10% of our usual baseline, also with teams being busy implementing moratoria prescriptions. In the first part of May, so far, we have seen a faster-than-anticipated recovery. Even though we do not communicate yet, we started our first communication activity in Slovenia a few days ago. We see now the first weeks in May running at approximately 25% of our baseline. Our thinking process so far is that towards the end of the year, we'll reach somewhere in the range of 80% of baseline lending activity. Does it answer your questions, Anna?

[Anna Marshall, analyst]

Yes. That's very helpful.

[Operator]

The next question is from Simon Nellis of Citibank.

[Simon Nellis, analyst]

Maybe I could just push you a little bit on the cost of risk guidance. I mean most banks which have provided precautionary provisioning, kind of gave us steer on whether they think they've done a conservative job and that provisions will come down in future quarters or whether they think it's going to stay at this similar level. Can you kind of give us an indication of what happens for future quarterly risk costs to be either higher or lower or stable? That would be my first question, just so we can kind of get a better sense of what this cost number we should put it.

[Razvan Munteanu;CEO, executive]

Thank you, Simon. I'll pass on again to Markus.

[Markus Krause, executive]

You might remember the discussions we had during the IPO, where I always were stating that in our midterm guidance, we are having considered cost of risk ratio of 120 basis points, which is slightly below through the cycle. What we are expecting now, which is one of the scenarios we are looking at, that we are ending up slightly above this through the cycle. So it will not be -- because we have a very good asset quality, what you see also comparing the first quarter now this year 2020 to the first quarter 2019, you see that we were performing significantly better, which is not caused by any one-offs. This is caused by the real actual portfolio performance. So for that reason, these 120 basis points on the credit risk-bearing base, which is an equivalent of 160 basis points on a net loan basis, is a guidance we gave during the IPO, why you have to adhere something which gives you a direction. But as I said, the credibility comes first when you have some proof on some more data points. That's why I'm also very concerned reading proposals here and there, predictions here and there. We will see many corrections in the market in the next following quarters. I'm quite confident. So that's why let's get the first data points, and then we can make more guidance for the market.

[Simon Nellis, analyst]

Okay. So basically you're saying that 160 basis points on net loans is kind of a -- what you think is a normalized level. And that's sort of -- [ you kind of think ].

[Markus Krause, executive]

As I said, the 160 was below through the cycle, and I'm expecting it buffer through the cycle. We are in a crisis. So if you would expect now that this is honest through the cycle, I think I wouldn't give you any credible answer. So you have to add something here, which gives the direction.

[Simon Nellis, analyst]

Something more than 160 basis points [ throughout the next 12 months ]?

[Markus Krause, executive]

Yes. Yes.

[Razvan Munteanu;CEO, executive]

Yes.

[Simon Nellis, analyst]

Okay. For the full year. That's helpful. Can you just explain a bit more on the deferred tax charge? Should we expect further reversals of the...

[Razvan Munteanu;CEO, executive]

Yes.

[Simon Nellis, analyst]

Yes.

[Razvan Munteanu;CEO, executive]

Yes. Thank you, Simon. I'll pass on to Johannes to give you some color on that.

[Johannes Leopold Proksch;CFO, executive]

Yes. Maybe also a reminder to the background of the deferred tax assets. When we explained it, you know that we have basically only 2 countries. They are not expiring. So [ most of the tax loss ] carryforward. This is Slovenia and Austria, thus important only Slovenia. In other countries, they're expiring basically this and next year. So the EUR 4.8 million is a pre-loading, which means that we have, therefore, conservatively covered and reflected this year's performance. If in subsequent years, we -- which we have not visibility at the moment, still lower earnings are coming through, and which is, I would say, most probably for '21, you would only see a very minor impact, which we would obviously recognize as soon as we become aware of this. But as I said, very minor. In Slovenia, we can take this basically for longer. And we have very -- always use very conservative assumptions in capitalizing these tax loss carryforwards. I hope that answers your question.

[Simon Nellis, analyst]

So I guess, you're saying that future impact -- well, you think you're pretty much done for this year, maybe next year another smaller minimal impact?

[Johannes Leopold Proksch;CFO, executive]

As soon as we become aware because you know that we do -- we update our plans towards the end of the year. We have -- and so it's basically accounting-wise, you need to do it as soon as you become aware. But we are, as you said, done for this year, pretty much done for this year.

[Simon Nellis, analyst]

And my other question would be on the recoveries you made in the legacy loan book. I mean they're pretty substantial, I think, EUR 3.8 million on a net basis. How much more recoveries do you think are possible? Or do you think in this environment, the actual recovery process kind of stalls a bit?

[Razvan Munteanu;CEO, executive]

So think of it. Thanks, Simon. I'll pass it on to Markus again.

[Markus Krause, executive]

Yes. Right. We have seen releases in the non-focus segment. That's in all 3 areas, so mortgages, large corporates and also in public finance, as you see it in the appendix on Page 33 of the presentation. Some of these releases is also caused by liquidating portfolios. So it's not only coming -- everything out of the nonperforming exposure, it's also due to the fact that we are reducing this and performing loan coverages of loan loss provision stock goes down. That's one element. And of course, we had some single cases in the SME. There, you just need to look at the nonperforming exposure stock, which, in mortgage, is EUR 85 million end of March, and which is in large corporate EUR 17 million, 1-7, and in public EUR 2 million. So there is not so much left anymore. But the main impact what we considered in our planning assumptions is that we are liquidating these portfolios gradually. And that is also causing certain releases. While the asset quality is very good, the coverage ratios are very good in these segments, you could argue on the large corporates, with the 55%. This is not high, but we know these tickets by heart. We know what we have as collaterals behind. So there, we feel very comfortable also with the coverage level.

[Simon Nellis, analyst]

So I guess the message is despite the environment, you might still see some recoveries?

[Markus Krause, executive]

So we are continuing with liquidating the portfolio. So moratorium is holding this now a little bit back. So it's slowing down the whole process a little bit. While on the other hand, we are continuing our costs, our strategy. And for that reason, we will see certain impact. While bigger ticket impacts, we are not expecting, to be honest.

[Operator]

The next question is from Hugo Cruz of KBW.

[Hugo Cruz, analyst]

A couple of questions. So going back to the cost of risk. I know it's hard to talk about the future, but can you tell us...

[Razvan Munteanu;CEO, executive]

Pardon? We lost the line. Can you repeat the question? We lost the line for a few seconds.

[Hugo Cruz, analyst]

Can you hear me now?

[Razvan Munteanu;CEO, executive]

Yes, we can hear you well now.

[Hugo Cruz, analyst]

Yes. Okay. So I'll start. So it's 2 questions, one on cost of risk. So I understand it's very hard to talk about the future. But if you could explain a bit the provisioning you took in Q1, if it's focused on -- based on a particular macro scenario or particular portfolios. Any color there will be very helpful. And second, if you could give guidance on the costs for this year. You say that your costs should continue to come down. But if you could give a few more numbers, it would be very helpful.

[Razvan Munteanu;CEO, executive]

Thank you, Hugo. I will ask Markus to take the risk, and then Johannes will cover the cost part.

[Markus Krause, executive]

So this one-off hit what we have taken with EUR 13.6 million is an IFRS 9 macro-related overlay of the current model. So the current model currently doesn't reflect this new macro outlook for that reason. But we are working on incorporating this into our model and refine our model to reflect that properly. This is also market practice. Many banks are doing this very similar because we were forced also already as we subsequently went to consider it in Q1. For that reason, we were using the current macro assumptions, which are still the one which were relevant last year by changing the ways of the different scenarios you have to consider under IFRS 9. So there's always an optimistic, evasive, pessimistic and [ it works ]. And we were changing these assumptions here significantly to also come with a balanced approach, on the one hand side, not to overshoot, to be pro-cyclical, and on the other hand also to be not too aggressive or too conservative also here in the sense or, let's say, aggressive in the sense of it's much too low.

We have not taken the full year impacts of such a simulation, especially to avoid the pro-cyclicality. We rather would like to use then the ongoing data points we will receive quarter-on-quarter to refine that IFRS 9 model. So as I said, first, we are embedding these parameters now into the model. Secondly, we will get data points of defaults, which will also be done gradually from the third quarter, considered and included in terms of default rates into the model. That means also we will redo the model on a quarterly basis. And especially by the end of the year in the last quarter, we will take the most important information, which is the Q3 portfolio behavior post-moratorium.

[Razvan Munteanu;CEO, executive]

Johannes, on the cost point.

[Johannes Leopold Proksch;CFO, executive]

Yes, on the cost. Thanks, Hugo. So basically, as I mentioned, there will be step-related reductions and they are predominantly in areas where we can basically reflect also the current work-from-home and so on. So reducing unused holidays is, for example, one which can contribute certain elements. Sales incentives in Q2, this you don't -- haven't seen in Q1 because we still had a very good quarter. We'll reduce, but we will also, and we always highlighted this, repeat basically what we have done last year on different scale, and we are very selective and aware of not harming our revenue capabilities. But as I mentioned earlier, branches versus digital is basically here the keyword. And basically, you have seen it last year. And you have seen in the first quarter the impact, which that resulted into.

[Operator]

At the moment, there are no further questions via the telephone line.

[Edgar Flaggl, executive]

Thank you, operator. We have a few questions that came in via the webcast. First from [ Florian Novo ] of DDM Group. 3 questions. One, could you please provide some more detail where the tax expense came from? Two, how it is split in the OCI losses between FX and the bond portfolio? Three, could you provide some color on the structure of the bond portfolio, i.e., issues, maturities, currencies

[Razvan Munteanu;CEO, executive]

Thank you very much for the question. Johannes, will you please take this topic.

[Johannes Leopold Proksch;CFO, executive]

Yes. So the first on tax expense, I think this was covered. This was an earlier question. OCI, I think it's in the earnings release quite explicit. Basically, you can see the reduction in capital by roughly EUR 50 million -- just above EUR 50 million. EUR 32 million of these are coming from bonds. And the number is in there, but I think something just below EUR 10 million FX, and then, obviously, the quarter loss of EUR 8.4 million.

[Razvan Munteanu;CEO, executive]

Third question, bonds portfolio.

[Edgar Flaggl, executive]

The structure of the bonds portfolio.

[Johannes Leopold Proksch;CFO, executive]

Structure of bond portfolio. So we obviously -- we always highlighted this as a very conservative asset allocation already during the IPO. Not much has changed. Quite the opposite, 85% investment grade, including Croatia, which in the meantime, obviously, became investment grade. New government's financials average ratio between 3 and 4 years. But these are basically the highlights of this bond portfolio.

[Edgar Flaggl, executive]

All right. The next question we have in the webcast is from Mr. [ Patera ]. 4 questions -- 5 questions, apologies. One, is the sale of NPEs currently ongoing? Two, are higher discounts needed and/or has the sold volume decreased? Three, what percentage of NPE do you expect to sell? Four, what is planned for NPE that cannot be sold? And five, do you expect devaluations of collateral? And if so, to what extent?

[Razvan Munteanu;CEO, executive]

Thank you for the question. I'd like to ask Markus to cover these points.

[Markus Krause, executive]

So I gave already the comment on the non-focus segments, where the nonperforming exposures are mainly in the mortgage segment. So we are -- we were doing certain one-off portfolio sales in the past, which we currently doesn't consider because that's exactly what you are asking here for. There is an implication on the current pricing we get in the market. That's very clear. So we are rather continuing working them currently down ourselves. That's related to mortgages. On this EUR 17 million left for the large corporates, as I said, individual tickets, we manage them ourselves. We find the sweet spot where needed and I'm not concerned at all about here.

Related to the focus segments, consumer and SME. Our consumer segment, we have a forward flow agreement here in 3 of our countries. Currently, in Croatia, the forward flow agreement is on hold exactly because of the situation. Our partner here is [ Stotis ]. So we are currently managing that portfolio internally. But we are very confident that once we are entering next year, we can agree on a new forward flow agreement with them to make sure that our strategy also works according to having clarity once a client exceeds 180 days to give it to the experts while getting a fixed price. The pricing discussions might be a topic at that stage.

[Razvan Munteanu;CEO, executive]

Right.

[Markus Krause, executive]

On the small-medium enterprises. Here, again, we are not forced to do any sales. We do it case-by-case. We are reviewing them, and then we are finding the right restructuring approaches, all the sweet spots in the market where we see an opportunity.

The collaterals, as such, is the same here. Of course, the situation is impacting that a little bit. But it's currently -- we are anyways going into these portfolios on a case-by-case level. We are evaluating this also. But we are not -- because this is our key focus when we are doing lending, the collaterals are only the secondary source. So we focus on cash flows and not on collaterals as our main part of doing recoveries in collections.

[Edgar Flaggl, executive]

One new question on the webcast. Any potential updates from the regulator regarding capital requirements? Also anything on Q2 issuance and situation on the current market? The question is from [indiscernible].

[Razvan Munteanu;CEO, executive]

I would -- thank you for the question. I would share with you the fact that we're closely interacting with the regulator, but explicitly on crisis management circumstances. At this stage, we do not have any news on this particular topic. And also the Tier 2 is not a matter of focus right now.

[Markus Krause, executive]

And maybe just to add, we always -- we were very clear. And this hasn't changed. We basically update you on the discussions with the regulator during our year-end call. And the Tier 2 topic will only materialize in the last quarter, together with the AGM. And therefore, we will await the developments until then.

[Edgar Flaggl, executive]

Good. A few more questions on the webcast from Jovan Sikimic at RCB. Jovan seems to have trouble on the voice line. 5 questions to start with. How do you see DTA adjustments that led to higher tax charge going forward into '20? I believe this has been answered already. Two, can we expect some reversals from bonds and regulation in the coming quarters? Three, the amount of one-offs on the fee line? And what is the outlook for 2020 on fees? Four, how long can high IT costs be compensated in other or buyout areas? Five, outlook for consumer loan growth in the region.

[Johannes Leopold Proksch;CFO, executive]

So the first one, DTA was answered, the second one as well, I would assume.

[Razvan Munteanu;CEO, executive]

Answered, yes.

[Johannes Leopold Proksch;CFO, executive]

Yes. There was a reversal until mid-May, I can even be precise, of roughly EUR 4 million from the EUR 32 million. But I also was clear that there's a volatility in the market. And therefore, it's very hard to predict what the year would bring us, but we are confident that this is a prudent asset allocation, no impairments expected, therefore pull to par at some point in time, hopefully, when the situation stabilizes.

Then the amount of one-offs in the fee line. Of course, as I mentioned before, we have this big project in basically migrating to an outsourced card provider. And that has brought some one-offs in the first quarter. To some extent, this will continue. But I think the main topic here is, as I mentioned earlier, that, obviously, very strong links to the origination of consumer loans. Bancassurance is obviously impacted and will recover as consumption increases and therefore, consumer lending throughout the year. Razvan was giving some indication what we expect so the fee income will obviously only recover throughout the year.

IT as the fourth question. We are carefully managing IT. That doesn't mean that we are not spending on IT, but I think everybody understands that this is a topic where you need to very carefully also negotiate with the providers to not overspend and spend carefully. So we basically continue, and as we gave out the guidance, to look for net decreasing costs over the years and not on increase in costs. So the compensation of increased IT spending will come out of other areas for the years to come.

And I think Razvan already provided an answer outlook on consumer loan growth in the region.

[Razvan Munteanu;CEO, executive]

Yes. We're anticipating that. Towards the end of the year, we'll see probably 80% of our baseline production. However, keep in mind, these are anticipation, which are not based on indications from the market. As also Markus explained, this crisis is very unique in its way of unfolding. So this is a working scenario rather than a prediction.

[Edgar Flaggl, executive]

Thank you, Razvan. 2 more questions from Jovan at RCB. One, how do you see DTA -- sorry. One, how do you explain the significant decrease of the consumer loan cost of risk from 130 basis points in 2019 to roughly 80 basis points in the first quarter '20? Two, do you provide also industry breakdown, e.g. tourism, trade, transportation?

[Razvan Munteanu;CEO, executive]

Markus, if you would like.

[Markus Krause, executive]

So the first question relates to the cost of risk. I mentioned already that it is purely operationally, driven the improvement comparing the first quarter '20 to '19. In -- of course, we had also, in the starting point, certain legacy portfolio also in the consumer. This is now mainly out and there are certain impacts we had...

[Operator]

We cannot hear you at the moment. Dear ladies and gentlemen, we need to pause at this moment.

Dear ladies and gentlemen, we will continue now.

[Edgar Flaggl, executive]

We apologize, we lost the line. So we're going back to Markus.

[Markus Krause, executive]

The last question was the first one related to the cost of risk improvement first quarter 2020 to first quarter 2019, from 130 to 80 basis points. And I outlined once more that these are both operationally driven numbers, so no one-offs in there, and that Q1 2019 still had some legacy consumer loans which were not underwritten by our policy here. So this gets also approved that the asset quality is very good, which will help us also knowing this crisis, to overcome it, most probably a bit better.

And the second question is related to industries, if we are also going more in detail there. Of course. During the whole situation now, we are splitting the country -- the portfolios into industries. We start from the corporate side, look into the industries, and define also criteria how we are reviewing the companies, first of all. And secondly for new business, define the criteria according to industries. And also on the retail, private individuals, we are looking at the employment status, where the clients are. So we are keeping very close contact with the clients, first of all, to review their employment status also and to find out because it could have been changed since they got the loan. And we are checking their employment industries, which are more impacted or less, and considering this also in our assumptions for doing restructurings once moratoriums expire and also for new business lending. As also Razvan pointed out that our policies, we'll consider now certain more checks which we then we'll fine tune over the time to come back also in terms of speed to that level as we headed before the crisis started.

[Razvan Munteanu;CEO, executive]

The industry breakdown of our portfolio is available on page 34 in this deck if you want to refer to it.

[Edgar Flaggl, executive]

There is no more questions on the webcast. Operator, back to you.

[Operator]

So there are no further questions via the telephone line as well. So we can conclude at this point.

[Razvan Munteanu;CEO, executive]

Ladies and gentlemen, then on this day I thank you for the participation, and wish you an excellent continuation of this week. Thank you very much.

[Operator]

Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.