Addiko Bank AG

VSE:ADKO

Earnings Call Transcript 2020-Q3

[Operator]

Welcome to the conference call of the management of Addiko Bank AG. Ladies and gentlemen, at our customers' request, this conference will be prerecorded -- recorded, I beg your pardon. [Operator Instructions] Now may I hand you over to the Addiko team, who will lead you through this conference. Please go ahead.

[Csongor Németh, executive]

Good afternoon, everyone. This is Csongor Németh, CEO of Addiko Group. I'm joined in today's third quarter presentation with -- by Marcus Krause, our CRO, CFO; by Ganesh Krishnamoorthi, CRBO, CIO; as well as Edgar Flagg, who is responsible for our Investor Relations. Without further ado, I kindly ask all to focus on Slide 3. And actually, I will give on Slide 3 and 4 the basic pillars of a similar structure as we had in the first half call, the basic pillars, 6 pillars, the update.

Firstly, earnings. Year-to-date of Addiko is EUR 6.4 million. This is compared to the EUR 12.2 million loss we had for the first half, which means that we have actually had a positive quarter in the third quarter this year with a result of EUR 5.8 million. Our provisioning is standing at 1% cost of risk, which is actually in numerical terms, EUR 37.8 million. This is circa EUR 8 million -- EUR 8.5 million increase compared to the EUR 29.2 million we had for the first half of the year.

Roughly EUR 15 million of this EUR 37 million is related to operational business-related risks and roughly EUR 22 million, EUR 23 million of it is related to IFRS 9 model adjustments and stage 2 developments.

The year-to-date operating results of the group has improved by EUR 14 million circa to over EUR 42 million, which is a 48% increase compared to the circa EUR 29 million we had in the third -- for the first 3 quarters of 2019. The return on tangible asset is 0.2%, slightly positive, but not yet at the rate where we would like it to be. With regards to asset quality and containment, the NPL volumes and our ratio remained stable at 3.6%. The overall exposure under moratoria has decreased by 34% from the slightly above EUR 1 billion to EUR 667 million. Markus will later on provide some color with regards to the exact details per country and per segment in the usual format like we did in the first half call.

And our NPE coverage remains also stable at 73.7%. I'm also very pleased to report to you that our funding situation remains still very solid. We still have over EUR 4.7 billion of customer deposits. And our LCR has improved further compared to the slightly above 200% to 210% when I compare it to the first half figures. And also, the capital ratio has strengthened even further now we are on a transitional CET1 ratio level at 19.2%. And even with IFRS 9 fully loaded CET ratio, we are standing at 18.5%.

Now if I currently ask you to turn to Page 4, the other 3 pillars or blocks with regards to the midterm targets. We are actually very close to completing our budgeting process for 2021, including as well the 5-year or the 10-year target, the midterm target. The only caveat, and I'm not backing down from the statement that management will be ready and we'll be aiming to provide an update in the fourth quarter 2020 on these to the market. But I need to make the caveat that with regards to the AGM that we have scheduled, the virtual AGM for the 27th of November, and with regards to both the Chairman and the Vice Chairman of our Supervisory Board stepping down with potentially new candidates being voted in, they would also reserve the right to give a decorate time or at least a few weeks or maybe a month for potentially the new candidates to get to know our business and our plans. So hence, it could well be that the public disclosure of the midterm targets will not actually take place in December, but only in January. We don't want to prolong it much longer. We are working, and we are on our side ready with it, but I hope you will appreciate the fact that we would like the new -- potentially new setup of the Supervisory Board to be fully acquainted with our targets and our midterm targets as well as provide adequate challenge to this.

With regards to the revised outlook, middle of the page, 2020, we have left 3 of the so far disclosed guidances, meaning the net banking income, the operating expenses as well as the CET1 ratio guidance unchanged, but we have revised with regards to 2 of the red indicated bullet points on the right-hand side of the page. Meaning gross performing loans, where previously, we have mentioned that we estimate the year end -- to have at year-end, EUR 3.5 billion. We feel -- based on the latest developments from the second half of August, September as well as the preliminary figures for the first few weeks of October, we feel that EUR 3.6 billion will be closer to reality.

With regards to the credit loss expenses, where we have given a guidance of having it between 1.1% and 2.2%. Now we feel more confident to actually guide that it will be maximum 1.5% when calculated on average net loans and advances to customers.

On Slide 5, there are 3 major messages or main messages I would like to deliver to you. Firstly, we have received the latest update from the Vienna Institute for International Economic Studies. And we have incorporated the latest forecast into the top right-hand side of the page. You see that both in terms of Slovenia, Croatia and Serbia, their expectations are improving compared to the latest forecast we had and worked with from -- for the first half call.

With regards to Bosnia, they maintained their outlook and their assessment. And with regards to Montenegro, the picture has slightly deteriorated. We have used and we based our assumptions mostly on a number of parameters, mostly on the base case with certain parameters also taking into account the pessimistic scenarios. That was message number one.

Message number two, with regards to new business volumes starting to pick up, for the first time, we have provided you in for detailed information with regards to the new business volumes broken down per month this year in terms of consumer and SME. And as you can see, after basically coming to a hold in the month of April for consumer, we have started to pick up volumes, new disbursement volumes significantly from that very low level, still very much below the new disbursements we have had in 2019. This is in the pink color.

In terms of the SME, you see that we have had not that dramatic drop as in consumer, but we are still lacking behind the volumes we have had in 2019. Mostly, this is because of the economic and social distancing and lack of activities related to the COVID pandemic. That was the second main message.

The third one is with regards to the unsecured consumer loan market stock. You see that, basically, with regards to the -- again, referring to the Vienna Institute of -- for International Economic Studies, we see that in 2021, they are predicting or forecasting a much improved scenario with regards to the percentage growth, and we trust that with our focus and the digital initiatives which Ganesh will also touch upon later on, we will be able to capture some of that macroeconomic and consumer loan market growth.

On Slide 6, we have priorly new information with regards to the focus and the non-focus development in the third quarter. You see that in the top left-hand side of the chart, both SME and consumer, so their focus book has remained stable with new disbursements, actually slightly improving, this is in the middle of the chart actually in the circle numbers from EUR 136 million quarter-to-date in the second quarter to EUR 172 million in our focus segment, with the overall new business reaching EUR 545 million until the end of September. The overall book remaining stable and also yields remaining stable.

With regards to the non-focus development, we have had continuous decrease of the non-focus segment this quarter by roughly EUR 40 million. This is on the bottom left-hand side of the page, from EUR 1.37 billion to EUR 1.336 billion, with no new business in mortgage and public and some very limited short-term financings in large corporate basically to utilize some of the excess liquidity and funding that we have.

With regards to Slide 7, the infamous focus areas for the Management Board and now basically for the whole organization, the GCC, growth, cost and capital, I would like to provide you, and I've listed the main bullet points on the right-hand side of the slide with regards to the progress during the third quarter. Number one, we have revised the risk parameters being closer to the pre-COVID-19 parameters with regards to our focus segment. We have ensured and we'll continue to ensure that our portfolio quality is maintaining its resilience.

Numbers three is, we have identified certain RWA reduction opportunities, which we could consider in the next 12 months if the case would be required. With regards to costs, we have spent an awful lot of time and resources internally resources to identify cost optimization program with regards to potential that we have listed here being slightly above EUR 15 million. This is compared to the guidance of the EUR 175 million or being below EUR 175 million for 2020 until 2022 to be executed. And we have -- with the help of Ganesh, and this is also something that he will touch on in a later slide.

We have revamped our digital strategy, and we have revisited the exact road map of loan distribution improvements that we will need to strengthen and execute on. Last but not least, capital. We continue to strengthen our capital -- continued to strengthen our capital base, and we are preparing ourselves for the AGM vision for conditional approval being supported by the Management Board and the Supervisory Board and to be submitted to the AGM. And we have had a very professional and very fruitful so far fruitful introductory meeting that we have had with the joint supervisory team of the ECB. This was at the beginning of this month.

And we will -- we have been told that the 2020 SREP ratio, which is valid for 2021, will not be done under the ECB and by them. It will actually be conducted still by the SMA because the takeover of Addiko actually took place on the 7th of October officially. And that is something that it will still be under the ECB's watchful eye but completed by the SMA. And we remain very, very hopeful that in all of the discussions and interactions with the ECB during the 2021 SREP cycle, we will managed to establish a much more level playing with regards to the pillar 2 guidance and the pillar 2 requirement that Addiko currently is governed by.

And with regards to the last update on this slide, we are continuing to expect the official and formal MREL decision from the SRB. And this is for the first quarter of 2021 is expected to be delivered to the bank.

Now without any further ado, I would like to hand over to Markus, who will give you an update on the financials and the risk side.

[Markus Krause, executive]

Thank you very much, Csongor. Starting on Slide 9 on the bottom -- on the top part with the P&L, I can report that this is showing a very strong year-on-year improvement of the operating result by 48% with respect to EUR 14 million. And also quarter-on-quarter, a slight tick up. The key driver of it is the continuous strong performance on the operating expenses, which improved year-on-year by EUR 17 million due to a tight and disciplined cost management, leveraging on end of 2019 taken restructuring measures, lower operating costs, especially also due to the second quarter lockdown situation and also no bonus accruals for the year 2020.

A strong performance improved compared to the second quarter also on the net commission income side, where we have an increase by 12.5%. This is caused by taking our business activities compared again to the second quarter, which was heavily impacted by the lockdown. Nevertheless, 2020 year-to-date net commission income is with 10.8% lower than 2019 as well as net interest income with 3.6%, both as a result of the COVID situation.

Both NCI and net interest income development are the result of a performing loan book reduction of roughly EUR 200 million on a year-on-year basis, caused by the development of the non-focus portfolio, as it has been planned, to reduce, while the focus portfolio could be kept stable but remains behind the pre-COVID expectations as we were originally planning.

The credit loss expenses in the third quarter were with EUR 8.6 million, significantly lower than the second quarter results, which itself was impacted by IFRS 9 modern macro parameter changes around EUR 22 million from the second end of first quarter. The Q3 credit loss expenses are in line or even better than we were expecting. But this is, of course, also positively impacted by the current moratoria, which also kept the nonperforming exposure ratio on gross exposure level stable at a low level of 3.6%.

The strong operating results, combined with improved risk costs, resulted in a profit after tax of EUR 5.8 million for the third quarter, while year-to-date, the loss was reduced to EUR 6.4 million, which was also significantly impacted by impairments on DTA in the first half of 2020.

Coming to the balance sheet. The year-on-year performing loan book decreased by, as I said already, EUR 200 million, as an impact of the lower business through the year, which is roughly around 50% to 60% on a year-on-year basis compared to 2019. This requires during the current preparation of our new 5-year business plan and also the related midterm guidance to consider all potential options and opportunities to scale up the loan book.

This is required to catch up with the original targeted net interest income and net commission income as we have projected and communicated during the IPO roadshows, especially. The balance sheet deduction is one item. While on the other hand, on the deposit side, we have continued to work on and to reduce the rates, while still we remain with significant excess liquidity. Shareholder equity further increased on a quarter-on-quarter basis by 1.6%, resulting together with stable risk-weighted assets in further strengthen CET 1 and total capital ratio by 0.2% to 19.2% on an IFRS transitional basis and 0.3% to 18.5% on an IFRS 9 fully loaded basis, not including the intended dividend payment for the business year 2019 of EUR 40 million.

Moving to Page 10. There is not that much to be added on top what I was saying on the first slide, only one remark on the net interest income that in the focus segment, we increased our interest income by 3.9% year-on-year. The net commission income heavily improved, as I said, by 12.5%, while we were suffering due to the crisis on a year-on-year basis with a 10.8% reduction compared to 2019.

The OpEx, I will give more details on the following slide and on the credit loss expenses as well on other side afterwards.

Moving to Slide 11. You see the operating expenses where you see on the staff expenses that we have reduced here also the cost significantly in 2020 compared to 2019. The restructuring measures on the one hand side initiated by the end of 2019 and secondly, the nonapproval of bonus for the year 2020.

The administrative expenses have even further increased decreased significantly, partly caused by the COVID situation, but also related to IT expenses we started to reduce the costs. We have planned to start with further initiatives during the year 2021 and 2022, where we see a potential of around EUR 15 million across all the areas.

Moving to Slide 12. I start with the credit risk part. First, the asset quality, I would like to give you the numbers on non-overdue accounts, you see that on the bottom of the page, where the red part is shown where we show on all the segments above 90% regular paying clients. While in the segment from 1 to 90 days past due, we see a slight tick up on the consumer side of 30 basis points and a more significant one on the small and medium enterprise side to 7.2%, but that has already been cured during October because this was caused by technical moratoria assignments.

What we also did in the third quarter is we started to review our policy framework, reflecting that the loan book development is according to expectations that we are going back to the pre-COVID policy rules, mainly considering certain industries where we are being more tighter, but this is the basis also where we see improvements already in September or have seen improvements in September, but even more now already in October.

On the following Slide 13, I just would like to give you an update on the moratoria. Where you see that in Slovenia, the moratoria client can still apply for until the end of November and that the period how long the moratoria availed are still up to 12 months. So out of the stock of that portfolio in Slovenia, you will see on one of the further slides has not changed that significantly.

In Croatia, the applying moratoria expired already by end of September, and they are only running out moratoria because of the tenor of 12 months of that moratoria. Serbia, by end of September, still a significant moratoria portfolio was here relevant. While in October, the complete moratoria expired. In Bosnia, Herzegovina, clients also can still apply for moratoria until the end of the year, while the base is very low and will also remain very low.

In Montenegro, just recently, new regulation has been launched, which is considered retail clients, which lost their job, or where a significant salary cut was done. But also here, we are not expecting a major impact of additional moratoria.

With that one, I would like to give you an overview on Slide 14 about the moratoria situation in terms of numbers. From the gross exposure base of EUR 6.8 billion, we see -- you see on the box below the share of moratoria in the retail portfolio, which decreased from the first half where it was -- of 2020, where it was 17%, down to 13% by the end of the third quarter.

In non-retail, it even decreased more significant from 23% by the end of the second quarter down to 14% by the end of the third quarter. That means that the moratoria exposure of roughly EUR 1 billion we were reporting by the end of the second quarter has been reduced now to EUR 667 million by the end of the third quarter, which is roughly 10% of the total loan book. Major impacted segments are still consumer and SME, and major impacted country is Serbia with roughly 42% by end of September. But as I said, in October, all this moratoria expired already.

This leads me to Slide 15, where you see the development quarter-on-quarter of the moratoria base. So starting with the third quarter, what I mentioned, the EUR 667 million, we expect in the fourth quarter that additional EUR 570 million will expire, of which already EUR 427 million expired in Serbia during October. So we will be left for the next year with around about EUR 100 million of moratoria.

On the right-hand side, you see the share of reduced moratoria in the portfolio, which is around 1/3 in all the different business segments. On a country level, most reduced ones are in Croatia and in Bosnia. We will continue also to monitor these clients in moratoria very closely and also will do the alignment with the IFRS 9 coverages, which you see on Slide 16, where the ratios remained almost completely stable.

You see a slight pickup on the right-hand side on the bottom with the performing loans by 10 basis points from 1.8% by the end of the second quarter to 1.9% by the end of the third quarter, which has caused by rating changes and minor migrations from Stage 1 into Stage 2.

On the cost of risk on Slide 17, you see the -- in the light to row on the upper part, the EUR 8.6 million cost of risk, which has been allocated half-half almost to consumer and SME. So there were no impacts in terms of any model changes. This resulted in a year-to-date cost of risk on a net loan basis of 1.03% on the total book. And due to the fact that we are expecting now from the expiring moratoria also migrations into nonperforming loan already partly in the fourth quarter. But also IFRS 9 model changes once more based on the macro parameters stronger reported about, we expect that the maximum cost of risk will be on a level of 1.5%.

Coming to the capital on Slide 18, you see that the risk-weighted assets remained stable comparing the second quarter and the third quarter with EUR 4.1 billion, while the equity base slightly improved due to the EUR 5 million profit we made in the third quarter and OCI changes, that leads to total capital ratio and CET 1 capital ratio on a transitional basis of 19.2%, while on a fully IFRS 9 loaded basis of 18.5%. These ratios doesn't contain EUR 40 million dividend, which is intended to be paid out on a conditional basis for the business year 2019 under the condition that the regulations, the ban will be lifted, and secondly, that the minimum capital requirements as required for the National Bank will be met.

This high capital ratio still leave further room for excess capital, especially considering the current SREP pillar 2 requirement and pillar 2 guidance ratios which are conservative from our point of view. And this is what we also have addressed as stronger said in the first meeting with the ECB, where we would see this as one of our high priority topics to be reviewed. With that, one, I would like to hand over to Ganesh.

[GaneshKumar Krishnamoorthi, executive]

Thanks, Markus. Good afternoon, everyone. I'm glad to share some insights around growth and digital. On Slide 20, we would like to highlight some key strategic business initiatives to drive incremental profitable growth in our focus areas, consumer and SME. Please refer to the left chart, which I will expand upon. In the context of digitalization trend also asserted by the crisis, we continue to optimize our physical distribution network by reducing our branch network from 179 in 2019 to less than 160 in 2021. We will also continue looking at resizing our branches and workforce to increase branch productivity and profitability.

Our key focus in this retail channel is to offer high-quality advisory services with redesigned and simplified processes to increase our share of wallet. I would like you to refer the second chart, which is in digital. We will continue our aspirated efforts in launching best-in-class paperless origination with omnichannel experience in all countries.

On the second point, we also plan to extend our target segments with high income consumers in consumer. In SME, we will sharpen our focus on small and micro businesses. With a unique value proposition. We believe our efforts, together with strong digital marketing, would double our digital business next year within our focus areas. Additionally, to the bottom of our chart, our existing digital loan engine will be improved and will act as a growth multiplier in driving B2B2C white label partnership, point of sales lending and will support our existing bank at work and remote advisory channels.

We believe these alternative channels will enable us to generate most cost-effective customer acquisitions and more than compensate our declining footprint. We remain convinced that these distribution strategies and initiatives will serve our customers in a better way would continue to transform our business model to drive profitable organic growth in the focus areas of the group.

With that, I would be moving to Slide 21. This page builds upon last point on Page 20, how our enhanced digital loan solutions supported by strong risk engine, active business multiplier and an enabler of various new flood and play channels to drive incremental growth while remaining prudent with our risk appetite. Already today, customers love our unique end-to-end virtual branch experience in Croatia and one click M loans in mobile banking app in Serbia. We will not only extend these to the other countries, but also launch digitally initiated loan origination by 2021 in all our countries where regulatory restrictions, at least for the time being, do not allow end-to-end digital processing.

Furthermore, we are working on launching a new consumer point-of-sale product throughout our region with new partners next year should enable us to generate customer acquisition more cost-efficient and to provide upselling opportunities based on customer profile and their behavior. Last but not the least, our existing open API infrastructure capabilities will enable us to create white label loan solutions for partners and thereby enable them to offer our loans to the customers in the next years.

Moving to Slide #22. All of this distribution transformation is enabled by our modern IT infrastructure, which is captured on Slide 22. Our key technology focus areas are to optimize our system and processes, standardize our experience and scale our capabilities. The good thing is our key IT frustrate is already up and running, with most of the investment needed has already been done in the last years, which means now it's key to leverage on the existing platform and optimize.

So what it essentially means in the next 12 to 18 months in the core layer, we will focus on further optimizing our core banking systems across countries in the readily built core layer and we will continue to rescale and optimize our vendors and automate processes to generate an operational expense savings in amount of EUR 3 million already for the year 2021 and beyond.

The innovation layer is more of an open banking layer, enabling the core layer to interact with various compliance and risk engines and fintechs and customer experience platforms. As previously mentioned, within the next month, we plan to connect point-of-sale partners, lending platforms and other revenue regenerating services of our customers through this layer with a clear ambition to multiply our business opportunity. Last but not the least, we are also standardizing the experience and analytical layer, which will help us to launch e-banking and loan origination platforms in a more efficient way with one customer experience across all channels and countries and with one process value chain.

This, one for all approach enables us to drive down CapEx by EUR 6 million already in 2021. In parallel, we will continue to work on enhancing analytical capabilities to calibrate the optimal customer experience and identify revenue potential. To recap, the lion's share of investment in our IT infrastructure is already behind us. And our long-term IT strategy is built upon the following: one, simplification of processes; number two, harmonization and optimization of existing IT systems and vendors; number three, standardization of omnichannel experience across countries of operation; number four, enabling innovating solution with short time to market and growth multipliers. The goal is to make customers' life easier with simple products, convenient processes and thereby provide value, enabled by lean and effective technology.

So moving to Slide 23. We wanted to show you the key distribution, digital transformation and practice. In the context of current global crisis, we are seeing a change in the customer of the year with more and more customers moving towards digital channel. Our teams have already used the last months in pushing digital activation of customers to the campaign. As a consequence, the number of digital users continued to grow by 13% year-over-year on year-end '19 and now reaching to 233,000 digital users. While digital origination of consumer loans stand at 11% at the end of Q3 2020.

On the SME front, automated lending using simple loan digital platform, has been contributing in Serbia and Slovenia with 12% year-to-date. To summarize, digital transformation is more important than ever, especially in the times of locked down and economic uncertainties. And we are amplifying our efforts to improve our digital value proposition we believe this is key to provide a strong differentiation to other players that are active in our region. And now I would like to hand over to Csongor.

[Csongor Németh, executive]

Thank you, Ganesh. On Slide 24, I would like to just draw your attention to the key next steps that we as a Management Board and myself as CEO have in front of our eyes and our hands full. With regards to growth, we do our best, and we do everything possible to return to the growth path in our focus businesses, leveraging the digital capabilities that Ganesh just elaborated on. And we will -- and we are in the process, and we continuously do enhance our risk decision engine, while we have still the motto sustainability comes first and asset quality containment is of the highest importance.

With regards to cost, we will continue to implement the earmarked cost reduction programs, and we will also streamline our platform and digitalize both internal and external processes further. And as to the capital, we are committed to as a management team to obtain the conditional approval at the AGM, the AGM on the 27th of November for the 2019 dividend payment. We will do everything possible to achieve a level of playing field regarding the SREP ratios of Addiko by the ECB in the next 12 months.

And we will also -- we remain clearly committed and optimistic with regards to obtaining an updated MREL decision by the SRB no later than the end of the first quarter 2021. And that one will be based on what we have communicated to you and the market. So already not on a single point of entry, but a multiple point of entry with most likely single point from Asia. Without further ado, I would like to close the presentation and open the floor to questions.

[Operator]

And our first question comes in from Simon Nellis of Citi.

[Simon Nellis, analyst]

My first question would be just on the EUR 15 million of efficiency gains that you're targeting, I think, for the next 2 years, what kind of costs, will you have to incur upfront? Are you planning on taking any restructuring charges in the fourth quarter to achieve those gains? And what does that mean for cost growth going forward? I guess, what's the underlying cost growth, excluding those gains? That would be my first question. I can go one by one or give them all, it's up to you. Should we go one by one?

[Csongor Németh, executive]

Absolutely -- no, as you wish. Hi, Simon, you can. we were making notes. So you can ask all the questions, and let me take that notes.

[Simon Nellis, analyst]

Yes. my next one would be just on loan growth. Can you just give us an idea of what you think loan growth might be next year, given that you're seeing kind of improving production? You mentioned the risk-weighted asset reduction plans, but there seem to be a bit of a contingency. Can you just elaborate on that? And then a question on provisioning. It sounds like you're going to be changing your macro forecasts on the positive side. So I'm surprised that you still have 150 basis points maximum risk cost guidance. Should it be substantially lower if your macro forecasts are actually improving and you haven't reflected that yet? That would suggest that you'll have an improvement, reduction of our IFRS overlay your macro forecast. And then on top of that underlying cost of risk seems to be pretty good. I'll leave it there.

[Csongor Németh, executive]

Okay. Thank you. I'll take the first one and Markus to jump in with the others. With regards to the EUR 15 million, so it's basically -- this is compared to the EUR 175 million, below slightly of EUR 175 million number that we are confident of reaching for 2020. So -- and we also have to take into account that the bonus pool that it was roughly in the past few years between the EUR 600 million and EUR 800 million range has not been accrued for this year.

So with regards to the aim of the Board and myself is to make sure that we identify at least EUR 50 million, and we have identified at least EUR 15 million to be executed by end of -- including 2022, with the aim of at least half of which should serve as a room for establishing a bonus pool that in any sustainable organization and a sales-driven organization, we believe there must be there.

[Markus Krause, executive]

Simon, I would take the second question on the loan growth. We are, as I said, currently in the budgeting process from which we again derived and also the midterm guidance. So we will inform the markets relatively soon. So plan is in December, latest in January, coming with the adjusted midterm guidance, which will then also contain the loan growth development. And also reflecting then the risk-weighted asset development according to our fine-tuning of our strategy in a sense how fast we will accelerate this in the different sub-business lines like consumer, SME and also reduction of the non-focus.

Then you had a question on the provisioning. Why we still then budget for this 1 or -- what you give that outlook of 1.5%? The main impact, why this is comparable high. So still 1/3, so we have now 1% roughly, and 1/3 would that mean is coming in the fourth quarter only. That's caused by the moratoria situation since moratoria expired now during October. And from individual client assessments also what we see where it might be harder for certain clients, we'll see then if they will migrate still during this year into nonperforming. And on the other hand, the macro parameters is rather a positive effect, as you rightly said.

So we do a prudent approach here with the 1.5%, as I said, at a maximum. So of course, we hope to be better. But that means also then whatever happens now will not come next year and vice versa. So this is actually a balancing impact for the years '20 and '21.

[Csongor Németh, executive]

I think I forgot to answer your question, Simon, with regards to the fourth quarter, any restructuring cost bookings, that is currently being reviewed. We are committing ourselves and are fully committed to the guidance that we have provided with regards to the financials for year-end 2020. And if required a needed, then the adequate provisioning of such restructuring programs will be done already -- or some of it will be done in the fourth quarter.

[Simon Nellis, analyst]

Okay. And just on the lending, I mean, I realized that you're still budgeting for next year, but do you think you would return to growth in your focus segments? And I guess, given that the macro is looking reasonably okay, is that your general assumption? I don't need a number, just whether you think you'll actually grow the loan book or not?

[Csongor Németh, executive]

I think you might appreciate the number. We're not providing a number, and we do believe that we should return to growth in our focus segments, yes.

[Simon Nellis, analyst]

Great. And then maybe just one last question for your new member, Ganesh, we haven't met, hi. I'd just be interested in knowing, you obviously have a lot of experience at Easybank. What do you think, having, I guess, recently joined, you think are easy wins in terms of the digital strategy that you can kind of effect reasonably quickly? And how might that impact the financials over the next year or 2?

[GaneshKumar Krishnamoorthi, executive]

Yes, thank you, Simon. This is Ganesh. Yes, I believe -- when I looked at the market is still a greenfield in the digital space, and I believe we have significant opportunities, as I mentioned, we've already the digital infrastructure in place. So all we need is to make sure that we have the right right end-to-end digital origination in all the markets. And that's exactly what we are actuating and I mentioned in our presentation, that would really help us to double the digital growth. And so that's just a first win.

And as I mentioned on the IT sessions, obviously, on the way how we organize ourselves and and the way how we execute on the digital strategy would be a complete difference to what we did before and would save us a CapEx of EUR 6 million there.

And last but not the least, there's huge opportunity in harmonizing some of the IT vendors. And that would give us an OpEx savings of EUR 3 million. So these are just quick wins, which will help us to and to answer the question on the growth side, which you asked before, also, we believe that we will go back to the growth on the key segments.

[Operator]

Next on the line, we have Jovan Sikimic of RCB.

[Jovan Sikimic, analyst]

Hello, guys, can you hear me?

[Csongor Németh, executive]

Yes, sir.

[Jovan Sikimic, analyst]

I have 2, 3 questions. First of all, were there any nonrecurring elements in fee commission in the third quarter? Then -- exactly, I mean, given the fact that you now have clear, let's say, view on 2021 macro outlook, which has been upgraded as far as I realized. Can you also provide your indication within the cost of risk for next year? And the last one, if you can just -- I mean, tell us a little bit who's taking new loans, particularly in your focus segment, let's take, I don't know, Croatia, Serbia, Slovenia is the main market? And how is the competition doing in that segment, let's say, this week, this month?

[Markus Krause, executive]

Okay. Starting with the net commission income, Markus speaking, there are no nonrecurring elements. So everything is regular business. So the improvement was actually just caused by that business came back after the -- by lockdown heavily impacted second quarter. The second question is on the cost of risk and the macro thing I tried to explain, cost of risk will be part of the midterm guidance for next year. So you will anyways learn that very soon.

[Csongor Németh, executive]

And the last one is competition. I think with regards to the consumer and SME, it is not the competition that we worry about is basically what we're worried about in the third quarter is basically trying to ensure that we maintain our prudent risk approach while selecting those customers where we believe the support of new financing should be given. I hope I answered your question?

[Jovan Sikimic, analyst]

Yes, yes, yes, more, just to have a bit of kind of color, what -- how is this situation. So you are having back with these new loans, let's say, majority of them are new clients, right, or not for SMEs and consumer?

[Csongor Németh, executive]

There is a mix. There is new lending to existing customers as well as new to Addiko customers.

[Jovan Sikimic, analyst]

Okay, okay, okay. And maybe the last one was on the cost of risk. I mean what's your view? What's the normalized cost of risk for SME and consumer loan without any, call it, just, let's say, normalized over the cycle?

[Csongor Németh, executive]

So let's imagine a without a COVID.

[Markus Krause, executive]

I think the -- one of the first guidances we gave you is exactly what is 1.5% was on a net loan basis, original midterm guidance before the COVID situation started, this is actually also what -- I think we would be better now a little bit. We are very hard to say actually what is now the contribution of the moratoria, 100%. You cannot make that 100% judge on an individual case. Is that now just because of 100% the COVID situation or not, there can be also the regular impairments. So I would say this year, it would be a little bit lower than the 1.5%. But in general, the midterm guidance we have given there is a quite reliable one. It's a normalized.

[Jovan Sikimic, analyst]

It is across the bank, right? Across all portfolios?

[Markus Krause, executive]

Yes, across the bank, of course. Yes, yes. Focus, non-focus everything together.

[Jovan Sikimic, analyst]

And for focus segment, you don't give any kind of indications or guidance or whatever, what -- what's your view on the normalized cost increase?

[Markus Krause, executive]

The focus segment takes the biggest share of this cost of risk around 80% to 85% is roughly the share of the cost of risk coming out of the focus segment. So roughly, take this as a guidance. If you wait them with exposure, you can come up to a certain number.

[Operator]

The next the line is Mladen Dodig of Erste Group.

[Mladen Dodig, analyst]

I think I may congratulate you on the results and also to be an institute for taking more reasonable forecast, if you allow me. Just wanted -- just to confirm that I understood correctly. So for cost reduction of EUR 15 million for the next 2 years, this is on -- compared to this amount that is expected in 2020, EUR 175 million, right?

[Csongor Németh, executive]

Yes. But before I answer that question once again, I would like to just say that we appreciate your opening remarks of the performance. And also, we are fully happy to receive an update from the Vietnam Institute. Of course, I have to make the caveat that with every single forecast that 1 has with the situation, it can change up and down. And we are living and dealing with in an agile environment with all the facts and figures. But whatever is thrown at us, we seem to be dealing with it to the best of our ability.

And the answer to your question is, yes, it is compared to the EUR 175 million.

[Mladen Dodig, analyst]

Okay. And regarding the guidance of maximum 1.5% from the risk cost. So that should be with the renewed guidance of EUR 3.6 billion for the gross performing that should translate in a risk cost of, say, 50 to 50 something million euros, am I right?

[Markus Krause, executive]

Very good calculation.

[Csongor Németh, executive]

We like the calculation.

[Jovan Sikimic, analyst]

No, I just wanted to be sure the time I'm taking the proper numbers into the view. And yes, if you might say just something on the yields. I saw on the presentation that the consumer yields are slightly better, but just if you can maybe give us some more color on that one also.

[Csongor Németh, executive]

This is actually in the presentation we provided on Slide 34 on the right-hand side, the usual quarterly update that we have had in the previous quarters as well. And you can see that in terms of new business, in consumer, it has improved compared to last year's 7.4% to 7.5% and basically has remained stable for SME.

[Markus Krause, executive]

And onwards, how do you see the developments?

[Csongor Németh, executive]

With regards to our continued focus on smaller tickets in SME. And basically, the small, small businesses, we hope to achieve better margins, maybe at lower volumes overall because of the smaller ticket sizes, but better margins. And with regards to consumer, Ganesh, if you want to add anything?

[GaneshKumar Krishnamoorthi, executive]

Yes. On consumer, we would like to keep it constant as much we can. We are really going after, as I mentioned, also more high income customer base. So we will have a risk-based value proposition overall in the market, but ideally like to keep it constant.

[Operator]

At this point, there are no further questions from the conference call. And so I will turn the floor to the Addiko team for potentially questions from the webcast.

[Csongor Németh, executive]

We have received because Ana Marshal from Goldman, couldn't reach -- couldn't join us today in the call, but she has sent us the questions, which I would like to propose that. I read out the question or Markus should read out the question, which we have split amongst us. So her first question was a clarification regarding the 2019 dividend payout. Does the statement of ours in the presentation constitute the actual proposal for the AGM unchanged versus the original proposed EUR 40 million? Or is that to be formalized? Would there be any other conditions attached apart from the removal of regulatory restrictions?

Here, the answer would be, no. We are sticking to our original guidance for 2019 profit-related dividends of EUR 40 million. The actual conditions that can be is the ban being lifted or the recommendation band -- recommendation/band being lifted by the ECB as well as Addiko fulfilling all of its capital requirements for year-end 2020 as well, which we are very confident we will do.

[Markus Krause, executive]

Second question is from her related to the asset quality. What are the drivers behind the narrowed cost of risk outlook for 2020? Are these improved macro projections or anything else? Other implications for the potential dynamics for the cost of risk next year? And what are assumptions regarding the second wave's impact and/or moratoria extensions

I think mainly these questions came already. Just to summarize very briefly, there are these 2 components. On one hand side, post moratoria migrations to be expected still in the fourth quarter. On the other hand, the improved macro parameters from the Vienna Institute compared to what we implemented by mid of the year have a compensating impact.

And with the midterm guidance and the update of our 5-year plan, we will, of course, then consider the development until the last minute what will happen in 2020 and what is the implication on year 2021? And the second wave impact is actually exactly something, which is then also will be reflected and also in next year, which we will communicate then in the -- with the midterm guidance, the updated one.

Third questions on the core revenues in 2020. She likes to have a clarification regarding the higher gross loan expectations, but an unchanged net banking income guidance. These are the differences in lending mix versus the previous guidance or more pronounced spread pressures?

Here, the situation is that this EUR 100 million higher loan book compared to the previous midterm guidance still leaves the range of 7% to 10% we were seeing of net banking income lower than previously. So it's within that range. The improved disbursements also, as it has been mentioned also by Ganesh and Csongor, which we are seeing now in the fourth quarter, also due to the adjustment of our policies. That is actually all in that 7% to 10%. It will have rather more positive impact than on the following year 2021.

Then the last question from Ana is on the costs, how is the EUR 50 million cost savings going to be spread through 2021 and 2022? Are there any further related charges to be booked this year?

Simon was asking already a similar question. For that reason, I think there is no need to repeat it once more.

These were the questions. So if there are any further questions, please let us know.

[Csongor Németh, executive]

Well, operator, we have no questions on the webcast. So we would hand back over to you. If there is any further questions

[Operator]

We do have one -- yes, sir, we do have one question and again from Mr. Simon Nellis once again from Citi.

[Simon Nellis, analyst]

Just one other follow-up question. I see that the funding cost has come down nicely, pretty steadily. Do you expect further reduction going forward? Or have you kind of reached limit in terms of funding cost decline?

[Csongor Németh, executive]

There might be still, but very, very small adjustments downwards. This is what we are expecting, but not -- nothing unfortunately or fortunately, nothing major.

[Operator]

And there are now currently no further questions in the conference call portion.

[Csongor Németh, executive]

Well, then from our side. I would just like to say a big thank you for taking interest in our third quarter earnings. I think we have laid out a very strong third quarter and have given you guidance with regards to everything that we have on our agenda for the next months and hopefully, years. And I just wish you all to stay well and stay positive. Thank you very much.