Erste Group Bank AG
VSE:EBS
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Erste Group Bank AG
Earnings Call Analysis
Q1-2024 Analysis
Erste Group Bank AG
Erste Group started 2024 on a strong note. Operating profit and net profit both increased year-over-year as well as quarter-on-quarter, driven by net interest income consolidating near record levels and continued growth in fees and trading results. The return on tangible equity stood at an impressive 17.2%. Cost pressures were also less severe, notably due to significantly lower deposit insurance contributions .
The bank's performance in the profit and loss (P&L) statement was strong. The net interest margin stabilized around 2.5%, and the cost/income ratio aligned well with annual guidance. Risk costs remained within safe limits at 18 basis points, and the return on tangible equity was maintained in the double digits for Q1 2024 .
Volume trends in the balance sheet were somewhat muted in Q1, influenced by currency translations in Czech Republic and Hungary. Mortgage demand in Austria is expected to grow strongly in the latter half of '24, driven by recent government support for the construction industry. Customer deposit volumes saw a modest increase of 1.1% year-to-date, underscoring the bank's strong deposit base .
The loans are projected to grow by 5% for the full year of 2024, largely expected in the second half. The bank remains optimistic about loan growth despite low initial demand. Fee income hit a new record, growing 10.8% year-over-year. This growth was robust across payment services, securities, and insurance brokerage .
Operating expenses increased by a moderate 3.3% year-over-year, largely due to lower deposit insurance costs in Austria. For 2024, costs are expected to rise by about 5%, influenced by wage inflation. The bank aims to maintain its cost/income ratio around 50% for the full year .
Risk costs were kept low at 18 basis points for Q1 2024. Most bookings came from minority-owned savings banks, while Central and Eastern Europe's performance remained strong. The bank maintains a positive outlook for 2024 with expected risk costs below 25 basis points .
Erste Group's capital generation remained solid with a CET1 ratio of 15.5% on a pro forma basis. The bank plans to execute a EUR 500 million share buyback by the year-end, subject to ECB approval. Dividends of EUR 2.7 per share for 2023 were confirmed and are due for shareholder approval in May .
The bank confirmed its guidance for 2024. Net interest income is expected to decline by approximately 3%, reflecting anticipated eurozone interest rate cuts. Loan book growth is projected at around 5% for the year, largely in H2. The bank is confident in maintaining its cost/income ratio at 50% and achieving a return on tangible equity of about 15% .
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quarter 2024 results conference call of Erste Group. My name is Caroline, and I'll be your coordinator for today's event. Please note, this call is being recorded [Operator Instructions]
I will now hand over the call to your host, Thomas Sommerauer, to begin today's conference. Thank you.
Thank you very much, Caroline. And also a very warm welcome to everybody who is listening in on behalf of the Erste Group. We follow our usual conference call routine this time. So the call will be hosted by Willi Cernko, our Chief Executive Officer; Stefan Dörfler, our Chief Financial Officer; and Alexandra Habeler-Drabek, our Chief Risk Officer. They will lead you through a brief presentation highlighting the achievements of the first quarter 2024. And after that, they are ready to take your questions.
Before I hand over to Willi, my customary remark on forward-looking statements. As usual, in this call, management will make forward-looking statements, and accordingly, the disclaimer on Page 2 of the presentation fully applies to those statements.
And with this, I hand over to Willi.
Thank you, Thomas. Ladies and gentlemen, good morning, and once again, welcome to our first quarter '24 conference call. Last year, we have raised the bar as far as financial performance is concerned. And accordingly, I'm proud to report to you that in the first quarter '24, we continued where we have left off in '23.
I'm on Page 4 of the presentation. Both operating profit and net profit are up year-on-year as well as quarter-on-quarter. This was, in no small measure, due to NII consolidating close to record levels, fees continuing on their growth paths and the trading and fair value result benefiting from positive valuation effects. Cost inflation was also less pronounced as deposit insurance contributions were significantly lower than in '23. Risk costs remained moderate. Overall, we posted a return on tangible equity of 17.2%, I think, an excellent level for this time of the year, bearing in mind the upfront booking of various regulatory costs and banking taxes.
To sum it up, we made a strong start to '24. And accordingly, we are optimistic on delivering the financial goals we have set ourselves at the start of the year.
Our excellent P&L performance, and I am on Slide 5 in the meantime, is fully reflected in the P&L dashboard. Net interest margin continued to consolidate around the level of 2.5%, fully in line with our expectations. The cost/income ratio is already well in line with the guidance we provided for the full year. As the risk cost ratio is at 18 basis points, notably without any release of FLI provisions or overlays. And with all of this, we printed a return on tangible equity in the very healthy double digits in the first quarter of '24, as already mentioned.
When it comes to the development of the balance sheet, I'm on Page 6 already. Volume trends were muted in the first quarter in addition to being negatively affected by FX translation, especially in the Czech Republic and Hungary. A weak loan demand was not unexpected as we always assume that loan growth will be back-end loaded in '24, supported by lower [indiscernible]. And as far as Austria is concerned, also underpinned by a relaxation of macro prudential measures and the government support scheme for the construction industry that was passed by parliament just a week ago. Both should lead to higher mortgage demand in the rest of the year. Consequently, we stick to our full year growth target of 5%. Customer deposit volumes increased by 1.1% year-to-date, with our core Retail and SME deposits being broadly stable, once again, underscoring the strength of our deposit franchise.
Moving to our key balance sheet indicators on Slide 7. All readings remained in the optimal range. Our loan-to-deposit ratio declined slightly, reflecting muted loan development and healthy deposit growth, as already mentioned. Asset quality continued to be satisfactory, with the NPL ratio staying flat at 2.3%. In Austria, we saw a mild increase in defaults, primarily at the minority-owned savings banks, while CEE continued to perform very well. At the same time, NPL coverage, excluding collateral, remained almost flat at 84%.
Our capital generation also remained strong in the first quarter. On a pro forma basis, we posted a CET1 ratio of 15.5%. The slight quarter-on-quarter decline was driven by somewhat higher risk-weighted asset inflation. In terms of share buybacks, there are no changes to what we already said. We have already applied for a second share buyback in the amount of EUR 500 million to ECB and hope to complete it successfully by year-end '24.
And with this, let's now have a look at the operating environment. I'm on Slide 9 now. For '24, our economists are projecting a moderate economic recovery in our core markets. Importantly, all markets are expected to do better than in '23. Inflation should moderate further, providing room for central banks to cut interest rates. When exactly and how much is still a matter of debate, but our expectation certainly is that the downward rate cycle is fully underway in the Czech Republic and Hungary and will also start in eurozone in '24. Other economic metrics, such as unemployment, fiscal and external balances are expected to remain in good shape across our region in '24. And all of this should brighten volume growth perspectives as we progress through '24.
Talking about volume growth, and I'm on Page 10 in the meantime. Let's have a look at the latest trends in our Retail business. Housing loans stock remained broadly stable in currency-adjusted terms as the slow recovery in new business volumes continued with healthy increases in, particularly in the Czech Republic and Hungary. Demand in Austria, on the other hand, remained weak as many customers were holding back to take advantage of a government support package for the construction industry, which includes an abolition of the stamp duty for the first-time homebuyers until a value threshold of EUR 500,000. This package, in the meantime, has been implemented by the parliament. And consequently, we expect to have a positive volume effect in the rest of '24. On the other hand, consumer loan demand was satisfactory, with strong demand seen particularly in Romania in the past quarter.
On the liability side, our Retail deposit base was broadly stable year-to-date. As regards deposit pass-through, Retail passthrough rates continued moving up in Austria but still at a moderate speed. And customers, while continuing to shift some overnight deposits into term and savings accounts and to investments, of course, still maintain more than 50% of their deposits in current accounts. This notwithstanding, we continue to see strong growth in the stock of securities savings plans, confirming the positive trend that started in the second half of '22.
Moving to Corporates & Markets business on Page 11. Underlying corporate loan growth was actually somewhat better than reported figures imply on the upper right-hand chart. This was due to the FX depreciation, shaving off approximately EUR 400 million from the year-end total and the minor resegmentation from SME to the Retail segment in the amount of EUR 600 million. If we take this into account, we actually saw a reasonable start to the year. What is even more reassuring is that the deal pipeline started to build up, boding well for volume development in the remainder of the year.
Within the corporate deposit business, we saw some increased activity with public sector entities but, other than that, a pretty uneventful quarter with deposit volumes increasing somewhat year-to-date. The markets business continued its strong performance. We were involved in the issuance of EUR 52 billion worth of bonds and generated healthy income in securities business. Asset management also enjoyed a good start to the year, with assets under management growing by 4% to EUR 81 billion with good net sales in Czech Republic, Hungary and Austria. This supported our strong fee performance.
On the digital front, not to forget the corporate business also made good progress. In the meantime, we have, as you know, onboarded almost 40,000 customers to George Business in Austria and the first 600 in Romania.
And I hand over to Stefan for the presentation of the quarterly operating trends. Stefan, please.
Thank you very much. Good morning, everyone. Since Willi already made the most important comments on Retail and corporate loan volumes, I would just like to add a couple of points on country performance.
Croatia is maintaining the growth pattern that has started after the country joined the euro at the start of 2023, and we believe there is more good growth to come in this country. Other countries showed a mixed performance with some being impacted by FX movements, such as the Czech Republic and Hungary. In Austria, the demand backdrop remained fairly weak amid expectations of political support measures and the relaxation of regulatory rules related to the mortgage business, both of which were recently implemented. Actually, nothing special to say about Romania, Slovakia and Serbia for the first quarter. Overall, this resulted in a flat loan development in euro terms quarter-on-quarter.
For the full year of 2024, we remain optimistic on loan growth at lower rates. The expected moderate economic recovery and some tailwinds in Austria should help us achieve our target growth rate of about 5%.
As Willi already mentioned, there is very little to say about deposit volumes since our last reporting, end of February. You see the updated numbers on Page 14. Loan-to-deposit ratios remained in the high 80s, with end of Q1 number being 88.4% to be precise, and customer deposits have grown by 1.1% year-to-date.
Hence, let's turn to Page 15, and let's focus on NII. We are posting a strong first quarter with NII greater than EUR 1.85 billion. With this, and clean of all effects in Q4, we are trading -- we are trending sideways compared to second half of 2023, which is a very positive development, confirming our picture of a plateauing NII fully.
Q1 NII was a story of 2 tales, though: CEE on the one and Austria on the other hand. With the very strong CEE NII, I'm particularly happy with the performance of Czech Republic, which proves our resilience in the face of significant rate cuts and validates our balance sheet management strategy. The same is true for Hungary, where rate cuts have been even more pronounced. On the flip side, the Austrian segments performed weaker as deposit pass-through rates have increased for the seventh quarter in a row and have now reached approximately 31%, still very much in line with our expectations for 2024. And please do not forget that Austrian NII has been increasing by 69% for Erste Bank Oesterreich and 55% in savings banks in 2023, so that this consolidation now was clearly anticipated.
What can we expect for the further outlook? Short term, i.e., for Q2, I would expect a confirmation of current trends for most countries as the ECB will most likely take its first step in June with limited Q2 effect. And I'm more than happy to address all your questions specifically on certain countries later on in the Q&A.
For the full year 2024, we keep our guidance unchanged based on our assumptions for interest rate developments, volumes, both on loan and deposit side, and regulatory environment. Certainly, we'll revisit this forecast based on all facts available when we report half year 1 figures on August 2.
Let's come to fee and commission income on Page 16. Fees continued the strong performance, hitting a new quarterly record in Q1 2024. Year-on-year, we posted growth of 10.8%, and this was attributable to our 3 core growth drivers: payment services, securities business and insurance brokerage. Clearly, we had some tailwind from inflation-driven repricing, but we also had a healthy contribution from increasing volumes. Quarter-on-quarter, fees were up 1.5%. And here, it was mostly securities business that drove growth. Consequently, this performance is mostly visible in the other Austria segment.
What is remarkable, and I really want to mention that from a strategic standpoint, is the growth of asset management volumes in Retail in Czech Republic and Hungary. Hence, with this excellent start to 2024, it makes us optimistic that we will comfortably deliver our guidance for the year of mid-single-digit fee growth. If anything, we believe that this P&L item has, again, good potential for outperformance in 2024.
Turning to operating expenses on Slide 17. Now we can report that the first quarter costs grew by a moderate 3.3% year-on-year. This was mainly due to significantly lower deposit insurance contributions, especially in Austria. Quarter-on-quarter, we saw an absolute decline of costs, which was attributable to the seasonally higher spend that we usually observe in the fourth quarter.
As far as our outlook for 2024 is concerned, we still expect an increase of cost of about 5%, mainly due to the continued inflation-related wage drift in all of our markets. We've been talking about the Austrian effect starting from Q2 a couple of times while the lower deposit insurance cost should help also for the full year cost development.
Summing it all up for the operating performance, what were the key operating result drivers in Q1? Page 18. Revenue momentum reaccelerated, with NII consolidating near record highs, fees setting another quarterly record and trading and fair value result also making exceptionally strong positive contribution. Expenses, as just mentioned, were seasonally lower quarter-on-quarter on decreased personnel and other administrative expenses. This combination leads us to reiterate our cost/income ratio expectation around about 50% for the full year 2024 and an overall very solid operating performance for the year.
And with this, over to Alexandra for details on credit risk.
Thank you, Stefan, and good morning once again from Vienna. I'm continuing now on Page 19. As Willi has already mentioned, risk costs came in at 18 basis points for the quarter without any releases of FLI provisions or industry overlays. With this, we remain comfortably within our guidance.
On the left-hand chart, it is clearly visible that the minority-owned savings banks, as in Q4, accounted for the majority of the bookings. But even with this, the savings banks maintained a historically strong level of profitability. Overall, the trend of slight increases in new defaults continued at a slower pace in the first quarter of 2024, pretty much in line with what we expected and also communicated a quarter ago.
Looking at Central and Eastern Europe, the risk performance there continues to be excellent. In Croatia, we again posted net releases, thanks to rating upgrades and improved collections. In terms of overlays and FLI provisions, as shown on this slide and also mentioned, we still have approximately EUR 750 million on the books. And hence, we are fully confirming our 2024 guidance of lower than 25 basis points of risk costs.
Let's now turn to asset quality on Page 20. The NPL ratio and the NPL coverage ratio stayed at comfortable levels. While we continue to see some further NPL inflows, especially, again, as mentioned at the minority-owned savings banks in Austria but also the Erste Bank Oesterreich, the situation in Central and Eastern Europe remained exceptionally strong, with NPL ratios even improving year-to-date in several countries, such as Croatia, Romania or Hungary. This is really very reassuring. NPL coverage was broadly stable year-to-date. Going forward, given the high collateral of the new NPL inflows, we expect coverage to remain around current levels for 2024.
And with this, I hand already back to Stefan.
Thank you very much. We're turning to Page 21 and spend a couple of comments on the other result, which came in significantly improved both year-on-year and quarter-on-quarter in both cases, around about EUR 150 million better. The main year-on-year drivers, or as already highlighted in the Q4 call, where the EUR 110 million round about lower resolution fund contributions due to no payments in 2024 in the eurozone countries, Austria, Slovakia and Croatia. In addition to that, the banking tax burden affecting other result was also lower as extra profit tax in Hungary was cut in half. And this positive development was partly offset by the first-time booking of such tax in Romania in the amount of around EUR 9 million to EUR 10 million for the quarter.
Please be aware that the quarterly banking tax in Slovakia of about EUR 21 million is actually reflected in the tax line, not in other result. For the quarter-on-quarter comparison, the main differentiator are the Q4 bond sales and some other effects that have, of course, not reoccurred in Q1.
Summing it up for the P&L on Page 2022 (sic) [ Page 22 ] for Q1. The strong quarter-on-quarter and year-on-year operating performance driven by top line growth, continued moderate risk costs and a strongly improved year-on-year and quarter-on-quarter other result results in a net profit after minorities of EUR 783 million. Given all components of our outlook, we confirm our return on tangible equity target for the year 2024 of about 15%.
With this, let's spend a few minutes on wholesale funding and capital, turning to Page 24. Wholesale funding volumes went up in the first quarter on the usual start of the year insurance activity, in our case, mostly driven by covered bond issuance. And in addition, we were more active in the CD market in euro and U.S. dollars as pricing was advantageous, and this is the reason behind the increase in debt securities. The rise was partly offset by lower volume of interbank deposits on account of the continued reduction of the TLTRO balance. Overall, of course, our strong funding profile was still primarily built on Retail deposits as described earlier.
On Page 25, I guess, yes, Page 25, we are showing the latest update of our MREL issuance execution. As you can see from the list of the transactions in Q1 2024, we have done another Ceská at EUR 500 million nonpreferred senior and a EUR 400 million Erste Croatia preferred senior issuance. Let me use the opportunity to mention that the various capital markets activities of my colleagues across the different resolution groups, which very -- are very much supporting the excellent progress in delivering on the group-wide MREL funding plan.
Looking at the Erste Group debt maturity profile on Page 26. We registered total issuance of 2.5 -- a little bit above EUR 2.5 billion in the first quarter. In January '24, we issued a EUR 1 billion covered bond benchmark, 7 years maturity at mid-swaps plus 50; and another EUR 1 billion later on then in March, just short of 10 years at the levels of mid-swap plus 55. With this, we have mostly done -- we are mostly done for this asset class with our funding plan, and also for the other bond types, we are well advanced already early in the year. TLTRO redemptions have been scheduled, and let me remind you that the maturity profit does not include AT1 instruments as we do not implicitly guide for future calls.
Reported own funds, and we are already on Page 27, came down slightly quarter-on-quarter. As for CET1, quarterly profits are not yet included, and we called an AT1 tranche in Q1. Risk-weighted assets were up year-to-date, in equal measure, driven by business growth, most of which corporate off-balance sheet business and, worth mentioning, increased operational risk on the back of the regular annual severity recalibration. This updrift in operational risk is a nonrecurring effect, of course.
Finally, for my part, let's look at the CET1 waterfall on Page 28. As a result of the capital and risk-weighted asset developments I just presented, our reported fully loaded CET1 ratio came in at 15.2%. On a pro forma basis, we stand at 15.5%, i.e., just slightly down from year-end due to the FX translation to OCI and before-mentioned RWA effect.
In terms of capital return, there are no changes to our plans. Subject to approval by the Annual General Meeting in May, we will pay a regular annual dividend of EUR 2.7 for the business year 2023. With the half year 2024 numbers, already together with the new CEO, Peter Bosek, we will inform you about the intended dividend for the business year 2024. And as we have already communicated 2 months ago, we are targeting a buyback in the amount of EUR 500 million. To this end, we have already filed an application with the ECB and still hope to conclude the transaction by year-end 2024.
With this, I hand back to Willi for the outlook.
Thank you, Stefan. I'm concluding this presentation with our detailed guidance for '24 on Page 30 or, I should rather say, the full confirmation of what we have said a quarter ago. If anything, we are more optimistic today to fully achieve our targets we have set ourselves 2 months ago, and consequently, I would not be surprised if the guidance will be reviewed at half year.
But for now, if we look at the net interest income, numbers are pretty much developing as we expected. For the time being, we see consolidation at the top and expect a minor decline when interest rates are cut in the eurozone. Hence, we maintain our guidance of approximately 3% decline in '24. We also believe that the loan book will grow by about 5% this year, but that is growth will mostly happen in the second half of the year.
We are confident that the cost/income ratio will remain at the strong level of about 50%. We again expect risk costs to be moderate at less than 25 basis points in '24 and benefiting from further releases and impacted only by a small deterioration in asset quality. And of course, we are confident that we will achieve a return on tangible equity of about 15%.
In terms of capital returns, Stefan has already said everything that is to say about the dividends or planned share buyback. Combined with our long-term growth profile, we believe that this represents an attractive proposition to investors.
And this, ladies and gentlemen, concludes our presentation remarks. Thanks for your attention. We are now ready to take your questions.
[Operator Instructions] We will take the first question from line Benoit Petrarque from Kepler.
It's Benoit Petrarque from Kepler Cheuvreux. So yes, the first one will be on the pass-through rate in Austria. So you mentioned 31%. I think it's up 5 percentage points quarter-on-quarter. So what do you expect going forward? And I think you mentioned that this is still well embedded into your '24 guidance, but just wanted to check where you think we might end up in the current interest rate cycle.
Actually, linked to that question, the number two will be on this new federal savings product, the Bundesschatz. So what is your expectation in terms of customer flow? I know it's a bit early days, but do you have already seen any customer reaction? And obviously, how do you expect your pricing strategy to potentially move with that new product, a new competitor?
And then the last question is on the very strong NII in CEE. What are moving parts playing in the Q1? I think loan growth was limited, so I guess it's mainly deposit margin. But what do you expect in the coming quarters in Southwestern Europe on NII and strong performance sustainable?
Right. Thanks very much, Benoit. I will take the first and the third question and then leave it to Willi, who is very deeply into this Austrian topic for commenting on that other question.
Yes, the deposit pass-throughs have been accelerating upwards. And if you look at the ECB statistics, you will find Austria together, I think if I read it correctly, Portugal or so, among those countries, which had an acceleration of deposit beta [indiscernible].
I don't expect it to go much, much further from here, but it's very hard to predict. We think that in the Q2, we will have a reconfirmation of the trends, but then it should be stabilizing, especially once the rates come down and the absolute interest expenses will start to go lower. But I can only confirm your assumption in the question that this is all still exactly in line with what we have been including in our overall guidance.
NII in CEE, yes, I definitely think it's sustainable, especially when loan volumes would kick in as expected. I would even expect further towards the end of the year and going into 2025 that we should see some support from the volume side. Obviously, there are always some specific events here and there on one or the other country development which can change that. For example, Hungary, I'm not so extremely optimistic for the second quarter, to be honest, because we have had a substantial rate cut, and obviously, this will eat a little bit into our overliquidity returns.
But all in all, yes, CEE NII stable, strong. And definitely also for the outlook, a very, very good path forward.
To your second question, first of all, and I think this is broadly shared within the banking industry in Austria, this is very well perceived. We see this as a positive contribution to competition.
And secondly, what is more important is it creates awareness for the securities business. But it's still too early to say to what extent this is really going to impact the deposit business with Retail customers. But definitely, we are not worried about that.
We will take the next question from line Máté Nemes from UBS.
I have 3 questions, please. The first one would be on the loan growth outlook. It sounds like the loan growth assumption of 5% increase year-on-year is, to a large extent, dependent on the pickup in growth in Austria. I was just wondering if you could provide any further color on that beyond perhaps the Retail segment. And also, I'm wondering what -- to what extent are you confident hitting the minus 3% NII growth expectation should the loan growth disappoint materially? That's number one.
The second question would be on [ RDV ] inflation. The op risk severity recalibration seems quite material in terms of the increase. Could you provide any further color on this, anything that we should be aware of?
And the third question would be on risk cost and risk cost outlook. I was wondering what led you to change the overlay release assumption for the guidance. I think it used to be 1/3 release of the FLI and sector overlays, and it's EUR 200 million. Any color on that would be appreciated.
Let me start with the first question you raised when it comes to loan growth guidance of 5%. Two remarks to that. The first one, when we look at corporate business, we see a, well, let's say, developing pipeline. So there is confidence that we can meet our targets. And secondly, when it comes to Retail mortgages, again, please bear in mind, we have established a very well and broad established support package for private households. So there is the expectation that beginning with the third quarter, this business is going to pick up. So we are pretty confident.
Yes. Let me just add to this question, especially the part on NII. The volume growth is, of course, a factor, but it's definitely more forward-looking factor ranging into '25 and forth following. I don't think that whether we will have 3.5% or 5.2% loan growth at the end of the year will change the game so dramatically for 2024. And let's not forget that for CEE NII, we have also the fixed-rate asset maturities and repricing. We have been talking about the duration a couple of times. So it's not only the loan side but also the securities portfolio.
So hence, yes, volumes play a role. We will need good volume development in the long term. Short term for 2024, it's not so much depending on 1 percentage point up or down.
Then I will takeover on RWA op risk. As you rightly recall, this was a recalibration. So first of all, which is very important to state, this is not showing a deterioration of the loss profile. So this does not mean that recently the losses from op risk have increased.
What happened, and you might know from a methodology, there is this 10-year rolling window in op risk in the calculation. And in this 10-year rolling window, some smaller tail losses drop from the calculation, while larger ones from the past including when you recall, it's quite some years ago, the FX conversion that within Hungary with EUR 300 million and EUR 50 million Erste Bank Croatia, they are still in. And by the fact that smaller events dropped, these remaining bigger events gained more weight, and this led to this updrift. But this does not mean that loss rates have increased.
Second, on risk cost outlook, there hasn't been a change, to be very open. We always accounted for EUR 200 million, EUR 250 million of FLI and overlay releases, and this assessment has not changed. So current expectation is EUR 200 million. It can also be, yes, what we said, between EUR 200 million and EUR 250 million, so no material change in any assumption.
We will take the next question from line Johannes Thormann from HSBC.
Also 3 questions, please. First of all, on the savings plan, it seems that the growth is accelerating as if the numbers of the new savings plan is actually increasing. So any marketing push behind it? Or what is driving this growth? And what are the average investment?
Secondly, on the risk costs follow-up on the FLI. The EUR 500 million to EUR 550 million remaining FLI after this year, will this be a base you always need to have? Or is there still some amount which could be released in 2025? And what kind of sectors are you going? Any changes to those industries or still the old typical names?
And last, but not least, just a simple one on the tax rate for '24, any changes due to the shift of the Slovakian banking tax into the tax rate?
I will take the savings banks cost question. If I got it right, Johannes, you have to help me because the line was a little bit weak, I think it was savings banks costs, right, OpEx?
No, the tax rate.
No, tax rate was the third question. This is easy. Tax rate, I can -- but the very first question you had.
The savings plans.
Savings plans, okay.
Okay. Johannes, I want to take this. Sorry. Okay. This is a well-established initiative. We kicked it off already in '22. Meanwhile, we have 1,235,000 so-called securities savings plans sold. And the good thing is this is well established in all core countries, leaded by Czech Republic who's more than 500,000 and so on and so forth. And also, we are talking about 110,000 plans.
The average amount on a monthly basis, in Austria, we are talking about EUR 150; in CEE, on average, EUR 90. No special combined. It's well established in the network.
And by the way, the tax question very quickly before I hand over to Alexandra. Yes, it is in the tax line. Yes, it has, of course, a certain updrift effect. We are applying a 20% net tax rate for the first quarter, and we will, of course, update you as we go throughout the year where we will land for the full year.
On FLI, Johannes, the remaining -- or the planned remaining EUR 550 million by year end '24, we do not expect that this is the stock. Of course, FLI moves with macro, but we would expect also for '25 that we could release some EUR 150 million to EUR 200 million. And the remaining part, we then would consider an FLI stock.
On the typical suspects in terms of industries, we still have some energy overlays left, not so much. Those we expect we will fully release over this year. Cyclicals, we also regularly review and chemistry and metals. We currently would not see a big change. And of course, we are, as we started many quarters ago, regularly monitoring all the industries. But as of today, we do not see any other industry which would qualify, let me call it like this, for additional overlays.
We will take the next question from line Krishnendra [ Dubey ] from Barclays.
I have 3 questions actually. First on the NII. Actually, could you talk about the others NII, which is at -- which has increased quarter-on-quarter? And what are the drivers? And what could we typically see going forward and for the year? And also in the past, you have been kind enough to provide the guidance for the 100-basis-point movements on the rates for different geographies, if you could update us on that.
Third question -- second question is on the fee side. I think you talked about you could have better performance in the fees and you could do better than the 5% guidance. Are you putting it up? Or you're just talking at about Y-o-Y performance about it?
And third is on the risk cost primarily. This is for Alexandra. So if you could just break down the FLIs by geographies or by divisions, that would be helpful.
Okay. Krishna, I'll take the 2 operating performance questions. So really nothing special on other Austria NII, a little bit of an effect in Q4 there. So there's definitely nothing special to mention in terms of overall developments, everything just business as normal.
And no, we are not upgrading the CEE overall growth. I think it's 5% -- sorry. I think the question was about volumes in CEE, right, Krishna?
No, fees and commission.
Fees and commission income. Yes, we see [indiscernible] sorry. Thanks very much, Thomas, for helping me. No, we definitely have a very optimistic outlook there. Obviously, we need to see -- get a little bit more evidence in the second quarter where some of the trends are reconfirmed because obviously, at the beginning of the year, there are some sales activities, some campaigns which could maybe dilute a little bit the longer-term trend. But if we get a reconfirmation of the trends in the second quarter, we definitely will consider an upgrade of the guidance in this income line. Definitely, right.
On your question, let me repeat, if I understood correctly. So you're asking this EUR 200 million to EUR 250 million release on FLI that we are -- and release of stage overlays that we are planning where we would see it. Let me start. So FLI, out of this EUR 750 million, EUR 500 million is FLI, and the [ as is ] status is that roughly EUR 220 million are booked for Austria and EUR 285 million for CEE.
And as mentioned and as you know, the FLI moves with macro. So where we would see the release will strongly depend on the macro development. But as we see that CEE is really doing very well, I would expect, as of today, a little bit more in the FLI of CEE than in Austria, but we will do the FLI update in second quarter, and then we will know more.
Yes. And I think just the 100-basis-point rate movement, what do you think of the -- on the NII sensitivity actually?
I think there is not a big change to this, and just give me the opportunity to emphasize that we always should look at currency sensitivities, not so much country sensitivities, reminding you of a significant share of euro balance sheet in countries, the like of Czech Republic and Romania. So I just can reconfirm around about EUR 300 million NII sensitivity but, for the full year, of a 1% move in ECB in euro rates. Let's not forget that around about 40% of this would be showing up in the savings banks.
And I think the Q1 already has been showing that our sensitivity indications on the Czech currency, quite accurate and that we are benefiting from the rate cut cycle that the Czech National Bank has been kicking off.
[Operator Instructions] We will take the next question from line Mehmet Sevim from JPMorgan.
I have just 2 questions, please. Firstly, on NII, and I know, Stefan, you actually implied this during your comments, but the full year guidance does seem to imply that NII will go down a lot in the second half of the year if you take into account the first quarter run rate and also what you said on the second quarter. So can I ask, what's your feeling about the second half NII at this point in the cycle, maybe without even thinking guidance? But in terms of rate expectations, growth, et cetera, what do you think NII will look like in the second half of the year?
And maybe one follow-up on Czech Republic, actually. Could you talk about what's driving the resilience in Czech NII in this declining interest rate environment? I know you said euro rates are still supportive, but in terms of the deposit cost, for example, there, after the 125 basis points cut, have you started repricing your deposits down? And if yes, what kind of reaction have you seen from your core customers? And how do you expect that to continue? Maybe any color on that would be helpful.
And finally, on CRE and the savings banks' risk costs, it seems like you've done quite a visible allocation this quarter to CRE there, as you had signaled before. But could you give us more color on the state of business in this segment and what is driving it? And how do you expect the next few quarters to look like?
Yes. First, Mehmet, let me remind you what is our current expectation when it comes to ECB key rates. We assume -- which probably is very much the market opinion at the moment, we assume a 25 basis points cut in June. And then one can read from the statements of the ECB council member that -- members that their -- I think their idea is to cut 3 more times than in September, October and December. I think that's on their minds.
However, there is a certain risk to this assumption for 2 reasons. First, U.S. dollar rates. It seems very much that the Fed is definitely open for what happens in '24. I mean you read the market comments as much as I do. So there is definitely a factor which they cannot completely ignore on the ECB side.
And the second thing is, obviously, what will happen to core inflation but also the energy component later on in the year in Q3 and so on. So I think while the June is more or less a done deal, at least we read it that way, the further path is very much depending on developments in summer or with, let's say, Q2, Q3 figures.
Having said this, everything you hear from us in terms of NII outlook is currently built on the base case of these 4 cuts. And this would mean that we would see a deterioration in terms of NII -- displayed NII in Austria, on the back of that, a little bit of pressure on the other euro countries but much less so, leading to a Q3, Q4 on the Austrian activities, which is substantially lower than Q2 and Q1. That's on that front. Of course, should this change or should the deposit pass-throughs slow down or stuff like that, it can only -- it should only get better from here.
NII in Czech Republic, maybe 2 things. First, Q4 was relatively weak. Q1 was relatively good. But we are overall on the path of this rate cut cycle on the right end. And discussing the deposits, the repricing has been starting. And we don't see any changes there in terms of, so to say, pressure from the market. We are very well positioned. Our liquidity position gives us the comfort to be market followers. And we are benefiting actually from some of the, let me say, signs of, I wouldn't call it stress in any form, but some signs of pressure on P&L in other houses. So I'm very optimistic with the combination of good volume development and overall right balance sheet management position to deliver a very good NII in Czech Republic in '24.
Then I will take over on your question on commercial real estate. Let me start that commercial real estate in the classical sense, so meaning shopping centers, office, logistics and hotels, is all doing very, very well across the board, also in Austria.
What we are seeing in Austria is residential real estate, and this mainly residential real estate developments in Vienna undertaken by smaller- and medium-sized developers. These are developers where the Erste Bank Oesterreich did not do so much business with, some Sparkassen did, and we see exactly the same pattern that we have seen in Q4 '23.
We have seen the NPL inflow has a little bit slowed down in Q1. I would not rule out that it will now stop immediately, but I'm quite confident that in the second half of this year, those weaker market participants, yes, we have seen them all, to be very blunt. But this is really focused on the small segment, residential real estate in Vienna, of course, not the nonprofit housing associations. They're doing excellently and are also a big share in our portfolio, as you know, and I would expect a slowdown in the second half.
And yes, you are right, we have booked risk costs. But when you look at the absolute amount of EUR 90 million and take into account that we have not yet released any of this EUR 200 million, EUR 250 million, the overall picture is not so dark.
We will take the next question from line Gabor Kemeny from Autonomous Research.
Just 2 quick questions for me, please. On Hungary NII firstly, you seem to be indicating that we should expect a gradual decline with falling rates. Any color you can give us on the Hungary NII evolution, please?
And the other one is on what Alexandra just discussed on some of the savings bank being exposed to real estate developers, the problematic real estate developer. Are any of them exposed to the extent that they might require support from the cross-guarantee system in your view? What is the likelihood of that?
I can start with this one with a clear no, yes? So really high collateral levels throughout all these financings. So absolutely no reason of concern in that respect that you indicated.
Yes. And on the Hungarian question, Gabor, well, we are expecting, like probably the whole market, further rate cuts, and hence, the income from placement of excess liquidity will be lower, as mentioned before. In addition, I think you're aware that the rate cut for corporate deposits has ended with the end of Q1. And therefore, in my short-term outlook, I was mentioning Hungary to be a little bit of a risk on the NII performance. We had a positive effect in the first quarter of around about EUR 9 million in euro terms of that factor. So let's see how this further develops. So we are not negative on Hungarian NII by any means, but this excellent performance we saw in the first quarter might not repeat in the same way.
We will take the next question from line Riccardo Rovere from Mediobanca Group.
2 or 3, if I may. The first one is a sort of curiosity on how you think about FLIs when it comes to decide your capital distribution plans because you are now at 15.5%, including the profit for the period, which is 150 basis points above the -- your very high internal target at 14%, and you have not used a single penny of the EUR 750 million. So technically, the cap -- one could claim that the capital is at 16%. So [ not ] just asking any update on the guidance, nothing like that. Just curious to know if you can see that EUR 750 million as part of your capital or not?
The second question I have is on -- again on NII, if I may. When you look at the past experience, so 2009 -- '08, '09, maybe a bit of 2010, because of the deposits in Austria when the rate plateaued, it kept going up for a while, which is what is happening now. And then when the rates started falling, the cost of deposits in 2009 started falling almost immediately. I was wondering whether the lesson from the past, you think, can be an indication also for the future.
And somehow related to that, when you look at CEE, it looks like that given the rates are so high or were so high in Czech Republic, in Romania, in Hungary, it was easy, at least at the beginning to transfer on the cost of the deposits at the rate cuts because we were starting from 7% or well above 7% in Hungary. To what extent -- to what level of a rating you think you can keep doing this in Eastern Europe? So if I, in Czech Republic, do go to 3%, would you still be able to pass most of the rate cuts on the cost of the deposit?
Let me very generally, Riccardo, take the last question because listening to you, I was going through all the impressions I've had from my business colleagues from the countries and so on. So it very much obviously depends on the business mix that you have in the deposits. And here, I can definitely confirm to you that we have very fast adjusting portfolio there.
We have been providing to our customers quite attractive deposit rates, as you know, from the years 2022 and especially also 2023. We were also suffering in terms of NII in Czech Republic, but we are now also able to reprice very quickly downwards. The market is doing that. Therefore, both in terms of competitive situation as well as product mix, we are able to reprice quite quickly.
How this will exactly play out in the Austrian scenario, I can't tell you yet, obviously, because we might only be starting in June with the rate cut cycle. But given the maturity profile of our -- so to say, of the term deposits, especially on the Retail front, I would be quite optimistic that the delay from central bank and key rate cuts to actually really also having a relief on our interest expenses will be relatively short. So that would be my comments on that.
And well, I don't know, Alexandra, do you want to talk about the FLI as part of capital? Should I? Should Willi?
Maybe let me start only by recalling. You said we did not use yet. So FLI and stage overlay was higher even in the past year. We had EUR 900 million plus. We use part of it to counterbalance real default inflows already in '23. For this year, we planned the release of the already mentioned EUR 200 million, EUR 250 million, which also means that we are using what we provisioned for in previous periods for a deteriorating environment.
Some basis, as also already mentioned today, will remain. Yes, so there will be a base of FLI. But other than that, I would pass it on to Stefan for the capital distribution.
Look, very as a general comment not any kind of risk technicalities on my end. Let's not forget that there are very, very, very different expectations between, so to say, the regulatory view on those discussion points and the investors' view on the discussion points. And we have to sail and we have to manage, so to say, between those very different expectations, of course, also always fully complying with all the audit and accounting rules.
So I would simply say, to be very fair here, Riccardo, we have in any case, plenty of excess capital. That's absolutely clear. Even if we do not account a substantial part of FLIs to it, we have substantial excess capital. We are very much talking about this. You know that this level of 15.5%, plus/minus, is a new level to us. We know and we have already -- Willi has already discussed this also with his successor very openly that this will be a point for discussion with you latest then also in summer.
We have a clear path forward for distributing via the share buyback, and in particular, our regular dividend, what we always have been communicating should that leave us still with substantial excess capital, communication about how to deploy this excess capital will definitely have to follow. That's my general comment independent from EUR 100 million up or down on FLIs here and there.
Right. And maybe a quick follow-up on op risk RWA. This is an update that happened right at the beginning of the year. So [ technically ] the operation should stay more or less at this level for the rest of '24, right?
Yes.
We will take the next question from line Robert Brzoza from PKO BP Securities.
I have 3 quick questions, partially covered in the discussion -- in the earlier discussion. First of all, on the residential exposure, as I understand, mostly concentrated in Vienna. Could you share how much of the provisioning has been targeted to cover that exposure? And then from previous calls, I recall we're always referring to the residential exposure is relatively well collateralized. So I'm just wondering what happened that it didn't work out as originally planned and whether that could have any negative implications on the timing of the overlay releases in the coming quarters. So that's first question.
And the second question is more generic. How do you see the competition in digital banking? I'm here referring to George and Revolut. As we can see Revolut is having a major marketing push across the region. How does it impact the fee schedule? Do you plan to offer like flat fee plans for customers? Or do you plan any changes? How do you see the state of the competition across? The reason -- it's not just Revolut, but a new, for example, digital bank from Transylvania in Romania, new mid-sized banks being set up in the Czech Republic. What's the impact on your core business there?
Yes, let me start. So we do not expect from the fact that the one or the other small- and medium-sized developer being active in Vienna [ is trying ] any impact on the timing of the release of overlays, yes. So no. We are a clear no on this.
A clear yes on your statement on the high level of collateral. Yes, this is true. And when you look at the EUR 95 million overall, which is not only coming from Vienna residential real estate. So it's run business as usual in Retail. We did not have any bigger counter effects in this first quarter. But basically, this EUR 95 million is not so huge. And when you dedicate, let's say, very roughly half of it to some residential real estate projects, you can see that the collateral level is really high because EUR 45 million, let's say, for 10 real estate projects is not so huge.
Okay. Let me take the Retail question. I think you are fully aware that it is our intention when it comes to Retail as well as to corporate, we want to be among the top 3 in all our core countries. And this is not just achieved. We're heading to be the top -- on top of the competition in each of our core countries.
With George -- and this is one of the key arguments, George, and with George being present in all our core countries, this gives us access to scalability, firstly.
Secondly, it is meanwhile used by more than 10 million customers. And we should not forget that today, more than every second Retail product is bought digitally. So this is a tremendous development we have seen over the last few years, and this is an ongoing process, seen also by further alignment across the board. We should not forget besides that, we have a well-established brand in all our core countries. This supports a lot. This helps a lot to get access to new customers, to attract new, especially young customers.
And thirdly, not to forget, we have a well-established branch network, a franchise with well-trained and motivated people. And we're seeing this throughout the crisis when we talk about COVID. When competitors who were just present digitally were unable, let's say, to meet customers' expectations, we were able to do that.
So all in all, I have to say I think we are well established. We are leading the pack when it comes to digital solutions. We have a network that is well established. We have motivated people, and we have a brand that is seen as young, innovative and prepared for the future. So I'm very optimistic when I look ahead.
[Operator Instructions] We will take the next question from Benoit Petrarque from Kepler.
It's Benoit from Kepler Cheuvreux. Just 2 follow-up questions quickly. Now just thinking about rate cuts potentially, so could you remind us how do you hedge your variable loan book in Austria? It seems that your balance sheet management has been very strong in CEE, looking at the Q1 results. But just wanted to know a bit more on your hedge on the variable loan book. U.K. banks are doing the structural hedge. I was wondering if you try to anticipate also a bit of a rate cut potentially impacting the yield on the loan book.
And the second one is, obviously, we have this wage inflation coming in, in Austria. I was just wondering here what plans do you have to address the wage inflation. AI, is that something you consider as well to optimize also the cost base going forward and maybe reduce FTEs?
I try to address, Benoit, the points as accurately as I can. So firstly, we are -- as I mentioned before in a detailed answer, we are actually exactly basing our assumptions currently along the expectations on ECB rate path forward. And this has, at least, short term, 2024, a certain impact on NII. This was the one part.
In terms of overall repricing, I think I gave you already a couple of insights what we expect on the Austrian side.
When it comes to cost, well, it's very clear that we will have an updrift starting from the second quarter. We have mentioned that very often in the light of the collective bargaining, which was resulting in this round about 8% increase as you can read from the overall coverage, also communication and press. We are definitely expecting overall operative -- sorry, operational improvements and efficiency measures.
And your question on AI, we have a lot of activities mainly targeted, to be honest, on the customer front but also on process optimization, which are kicking off to be fair. We are users. We believe that we can benefit from the new technology very much. We are -- have a lot of young people, especially taking care of pushing us ahead there. Willi just mentioned that also in the context of the customer services. That's the plan going forward. Short term, to be honest, I would not dare to say it will have an effect on managing the cost in 2024. I would not dare to say that, Benoit, to be honest.
It appears no further questions at this time. I'll hand it back over to your host, Mr. Willi Cernko, for closing remarks. Thank you.
Ladies and gentlemen, as there is no further question at this time, and this is my last quarterly presentation to you, the half year presentation on the 2nd of August '24 will already be hosted by my successor, Peter Bosek. I would like to thank you for the many insightful conversations we had over the past 2 years and your continued commitment towards Erste Group. It was a pleasure to work with you over the past 2 years. Thank you very much and bye-bye.
Thank you for joining today's call. You may now disconnect.