Erste Group Bank AG
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Erste Group Bank AG
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Hello and welcome to the First Half Year 2023 Results Conference Call of Erste Group. My name is Laura and I will be your coordinator for today's event. Please note, this call is being recorded. [Operator Instructions]
I will now hand you over to your host, Thomas Sommerauer to begin today's conference. Thank you.
Thank you so much, Laura, and welcome to everybody who is listening in also on behalf of Erste Group. We follow our usual conference call routine. Today's call will be hosted by Willi Cernko, Chief Executive Officer; Stefan Dörfler, Chief Financial Officer; and Alexandra Habeler-Drabek, Chief Risk Officer of Erste Group. They will lead you through a brief presentation highlighting the achievements of the past quarter and actually also for the first half of 2023, after which time, we are ready to take your questions.
Before handing over to Mr. Cernko, I would also like to draw your attention to the disclaimer relating to forward-looking statements on page two. And with this, I hand over to you, Willi.
Thank you, Thomas. Ladies and gentlemen, good morning from my end as well, and welcome to our quarterly conference call.
We can once again present to you a strong set of figures both for the quarter and for the first half year of '23. And as a result, upgrade our full year guidance for a second time this year. But before I talk about the future, let me start the presentation on Page 4 with the development of our income statement.
In short, we built on a strong start to the year by producing an even better performance in the second quarter. Strong revenue momentum continued with operating income up quarter-on-quarter, and of course, year-on-year. Costs developed in line with expectations, and effectively, there were no risk costs in the first half of the year despite not touching our performing provisions of €900 million.
All of this led to a strong bottom line performance in the first half of '23, which paves the way for increased capital distribution. Accordingly, our preliminary dividend guidance for '23 is for a payout of €2.70 per share, obviously, subject to AGM approval. And this will be complemented by a share buyback worth €300 million once we receive the supervisory go-ahead, hopefully within the next few weeks.
When you look at our key P&L metrics on Slide 5, we see that our net interest margin has started to move sideways, a clear indication that NII momentum is slowing. This does not come as a surprise but it's a reflection of slightly higher deposit pass-through rates, partially slow asset side repricing and slowing rate hike dynamics. But this notwithstanding, our fees continued to go strong, net trading and fair value results benefited from better valuations, and our costs developed as expected, all which support further upgrades on our cost-to-income ratio guidance from about 51% to below 50% for '23.
The continued strong credit risk performance warrants an upgrade of our risk costs guidance from maximum 25 basis points to maximum 10 basis points. And if you add all these up, we arrive at return on tangible equity target of higher than 15% instead of targeting the upper end of the 13% to 15% range.
When it comes to the development of the balance sheet, I'm on Page 6 already, we saw slightly brightening trends compared to the first quarter on the asset side, while customer deposits continued to perform strongly. And while customer loan growth was somewhat dragged down by the volatile portion of the loan book, our core retail and corporate business showed some further signs of life, despite the weak economic backdrop.
Clearly, the first-time consolidation of the Sberbank portfolio in the Czech Republic, which contributed a plus of €1.3 billion has helped. But overall, loan growth trends are in line with our expectations and accordingly, we see no reason to change our full year guidance for loan growth of about plus 5%.
As for customer deposits, there was exactly the other way around. Volatile inflows by financial institutions and corporates actually supported growth, while our core retail and SME deposits stayed broadly stable year-to-date and actually hedged up slightly quarter-on-quarter. The latter is quite remarkable, bearing in mind that our customers are still confronted, was elevated even in falling inflation, and have a multitude of investment alternatives available to them.
Moving to our key balance sheet indicators on Slide 7. All of them are in the green zone, if you will. Our loan-to-deposit ratio stayed stable at about 85%, asset quality remained exceptionally strong despite the more challenging macro backdrop. In fact, our NPL ratio improved again to historic best and the NPL coverage is also right up there with our best levels.
The CET1 ratio including interim profit and the pro-rata dividend deduction improved to just shy of 15%, which clearly broadens our options as regards capital distribution, while they remained - while the liquidity coverage improved and net stable funding ratio remained stable. The leverage ratio remained among the best in the country.
As we have announced at the start of the year, we are seeking to buy back shares in the amount of €300 million in '23 and hope to get the green light from the ECB shortly. And with profitability being strong and capital build above expectations, this buyback will probably not to be the last one.
And with this, let's now have a look at the operating environment. I'm on Slide 9 now. The economic forecast for '23 hardly changed in the second quarter. It's consensus that economic growth will be slower this year and that inflation was clearly peaked in all of our markets, but will moderate more slowly than expected earlier. And this in turn means that interest rates will probably also stay higher for longer.
Currency appreciation in countries like Hungary and the Czech Republic should support the improvement in external and fiscal balances. Labor markets are expected to stay tight, somewhat slowing the inflationary trends, but at the end of the day, they are key for maintaining consumer demand and keeping assets quality strong.
In summary, the economic picture in Central and Eastern Europe should remain robust during '23 and the outlook for '24 is definitely for a return of solid GDP growth. Against this low, but at least stable macro backdrop, the performance of our retail business has been encouraging. In terms of loan growth, we have seen further positive signs. New business volumes for our consumer loans reached the best level since Q2 '22, and overall demand for housing loans was increased in the second quarter for the first time in the year.
Year-on-year, new housing loans demand is, of course, still down 60%, but at least, we are now building a bottom and in some markets, we are actually moving up again. Most notably, in the Czech Republic where we have seen the highest demand for housing loans in the year. I would also like to highlight Croatia, where new housing loan demand has reached a record in Q2 following euro entry of the country.
On the liability side, our retail deposit base actually increased a little quarter-on-quarter at a time when customers are facing declining, but still significant inflationary pressures and increasingly have higher-yielding investment alternatives. As regards deposit pass-through and Stefan will be more detailed on this later.
Retail pass-through rates are rising, but still moderately so, and customers while gradually shifting some overnight deposits into term and savings accounts and to investments, of course, still maintain the largest portion of the deposits in current accounts. At the same time, we posted strong growth in the stock of securities savings plans, thereby confirming the positive trend that started in the second half of '22, so we are taking advantage of the growth opportunities that are available.
Moving to the corporates and markets business on Page 11. Volume trends have been mixed while the large corporate business line benefited from strong deposit inflows. SME deposits were broadly stable.
In terms of lending, both large corporates and the SMEs slowed - showed limited appetite for new loans resulting in a flat loan stock on an adjusted basis. In terms of product demand, we saw a slight uptick for investment loans while the stock of working capital loans declined somewhat. But it's a fair statement that currently, there is no definitive trend on the lending side.
The markets business also performed. We were mandated in a large number of bond transactions and we are among the lead banks in the largest CEE transaction in a long time. I'm talking about the IPO of Romanian hydropower house, Hidroelectrica.
Our asset management business saw stable inflows, both in retail as well as institutional segment, with assets under management rising to €74.5 billion, confirming that there are a growing fee opportunity in this business.
And with this, I will hand over to Stefan.
Good morning, everyone.
Please follow me to Page 13. In addition to Willi's comments on retail and corporate loan demand, I would like to highlight the following points when it comes to loan volume. The retail and corporate segments developed pretty much in line with our expectations in the first half of 2023 helped, of course, by M&A and FX developments, but still satisfactory given the somewhat softer economic environment.
In this context, I would like to mention Slovakia and Croatia, both nowadays euro countries, which have performed really well so far this year. What dragged us down on the other hand a little bit was the lower demand for short-term loans by public sector entities, which generally tends to be quite volatile.
Overall, as Willi already communicated, we confirm our growth target for - of approximately 5% for 2023 and we remain confident that we see a growth acceleration already in the early months of 2024.
As for deposits and I'm already on Page 14, we effectively have not seen any significant changes in trends in the past quarter. Our core deposit base, which includes our retail, SME and savings bank business lines actually increased slightly.
That's quite an achievement given the inflationary pressures our customers are still facing, and the fact that there are many attractive investment alternatives available to the clients nowadays. With this and some support from large corporate inflows, total deposit volume once again grew in second quarter of 2023. At the same time, the retail deposit mix remained very favorable.
Yes, we have seen a continued trend towards savings and term deposits just as expected but sight deposits maintained their share of close to 58% of the total retail deposit pie. So our statement from the previous quarter stands. We have a unique, highly granular and stable deposit mix, which puts us in strong position when it comes to generating net interest income, which brings us to Page 15.
The key message is that we are upgrading the NII guidance to 20% year-on-year. Given the importance of the income line NII, let me give you a couple of details to the quarter and in particular, to the segment developments. We posted another very strong quarter with net interest income being up 24% year-on-year and also in the quarter-on-quarter comparison, we are up 1.3%. And while we had a few positive and negative one-offs, they almost canceled each other out. So the quarterly reported figure of just below €1.8 billion is a very reasonable and fair representation of a clean NII for the quarter these days.
Now, let's go to the segments. The Austrian retail and SME segment continued to show strong NII momentum as rate hikes, loan repricing and rising but still moderate deposit pass-through, all helped. I can put together Slovakia, Croatia and Serbia because they all enjoyed year-on-year as well as quarter-on-quarter growth. While the Romanian NII consolidated due to increased interest expenses following the ramp-up of MREL issuance, very successful MREL issuance, but of course, at - for a certain cost.
Very importantly, the Czech Republic has been posting a healthy increase in NII on a quarter-on-quarter basis after the substantial drop. This was mainly due to the first-time consolidation of the Sberbank portfolio, which led to additional NII income of €18.5 million, half of which we expect to be recurring on a quarterly basis.
The other Austria segment also saw a strong rise in NII, however, this was strongly driven by a couple of one-time items, the biggest was a prepayment fee of almost €20 million following a successful restructuring. These positive one-offs were effectively offset by NII developments related to Hungary, where, to be honest, the local segment NII looks a little bit odd quarter-on-quarter at first glance.
There are two reasons for that. First, an entirely P&L neutral shift between net trading and NII in the amount of minus €108 million. As most of this was related to Intragroup transactions, the effect on consolidated level is limited to only €40 million, and of course, also, this is P&L and operating income neutral.
The other effect comes from extraordinary modification losses due to the extension of rate caps on various loan products. You know about the situation in Hungary, where still significant interventional, all kinds of activities and products in the banking area. This negative effect is reflected one to one on the Group level, too. However, all in all, Erste Group - Erste Hungary generated a better operating income as well as a better operating result in Q2 than in Q1. Actually resulting in the best quarterly profit since 2016.
Now, let's go back to the big picture on NII. All of the things we have communicated over the past couple of reporting periods still stand. Deposit pass-through rates in retail arising but only moderately so. In concrete terms, to add to Willi's information, we are slightly above 20% nowadays in Romania. We are hovering around 20% in Austria and Czech Republic. Of course, coming from different - so to say from different directions. And in all the other countries, we are still substantially below 20% pass-through rate in the retail deposits.
We further expect that we will continue to see tailwinds from the bond portfolio. Still, this year, I was indicating already numbers earlier - in earlier calls and also in the year 2024. And of course, while loan growth is not as great as last year or last years rather, it still contributes to our NII growth.
As a result, we upgrade our NII guidance from growth of about 15% to growth of about 20% year-on-year, which also implies that our picture of NII development on the consolidated Erste Group level for the forthcoming months is much better described with a plateau than a peak. Whether this will be slightly upward or downward-sloping, time will tell.
Having spent a little bit more time on NII, I can now be much quicker on fees. Page 16, please. Fees performed well in the second quarter. Still, we did not quite reach the record level of the first quarter. Hence, we are simply remaining in line with our guidance year-on-year. The quarter-on-quarter development was mainly driven by somewhat weaker securities fees in Austria. Please be reminded, the first quarter was exceptionally strong here, all other countries performed pretty much as expected.
In terms of fee categories, payment fees increased again, while securities fees took a little bit of a breather. All in all, there is no reason for us to change the fee guidance at this point in time. So we stick to around 5% year-on-year growth for the year 2023, fully keeping in our ambitious mid to long-term focus on fee income dynamics in mind.
Let's move to costs on Slide 17. Looking at all numbers, it's hard to deny the effect of inflation on our cost base across the region. Please bear in mind though that on a year-on-year change, it's - the year-on-year change for this quarter is exaggerated by the reversal of extraordinary deposit insurance contributions in Austria related to the Sberbank case in the amount of €46.5 million.
Leaving this aside, personnel expenses still rose significantly quarter-on-quarter as well as year-on-year, mainly due to the Austrian wage settlement becoming effective from April 1, 2023. The only good news in this context is coming with the fact that the negotiation season for wages has ended for the year 2023. Despite the challenging cost environment across the region, we stick to our guidance of limiting cost inflation to around about 9% for the year 2023.
Moving to Page 18 now. We can conclude that revenue dynamics have substantially outpaced cost increases, so much that an upgrade of our cost-income ratio guidance to below 50% for 2023 is just a logical consequence. This means that our 2023 operating performance will be right up there among the very best we have produced as a public company.
Looking at the second quarter in isolation, operating result hit another quarterly record of almost €1.5 billion for all the reasons we already talked about. Strong NII, solid fees and the continued recovery in trading and fair value result just as expected. You remember I talked about that a couple of times already last year, plus the expense growth in line with expectations. And that's pretty much all to say about operating result.
Therefore, I hand over to Alexandra to talk about credit risk.
Thank you, Stefan, and a very good morning also from my end.
We are on Page 19 now, and as Willi has already mentioned, credit risk continued to perform very well in the second quarter. We did not see a big number of defaults, rather a few cases in one or the other country, but this was fully offset by positive developments such as recoveries again and rating upgrades.
Consequently, we booked a net release of 2 basis points. And let me reiterate in doing so, we have not resorted to releasing any existing portfolio FLI provisions. So our provisions for portfolio and macro deterioration is still fully intact at €900 million, which equals more than 40 basis points. As a result of these developments, we once again improved our risk cost guidance for '23 to lower than 10 basis points rather than 25 basis points.
This move should be seen as a sign of continued confidence in the resilience of our entire credit portfolio, and once again, I expressly include our real estate exposure in this statement where due to our discipline sticking to risk-mitigating lending standards, we do not see any issues.
Please follow me now on Page 20, where we have a look at asset quality. Not very surprising, this page and the data on this page fully mirrors my comments on risk costs. In fact, we have reached a new all-time best level for the NPL ratio of below 2%, to be very precise, 1.97%. Provision coverage on the other hand is very, very high, close to 100% on consolidated level and very strong across the Board. Looking towards the year-end of '23, we believe that the NPL ratio will remain around the current levels, so around 2% and coverage will also be at strong levels also at year-end.
If you look at this stage split, there were no major changes compared to Q1. And as I say, in every call, let me also remind you today, the elevated Stage 2 level is a direct result of portfolio overlays and FLI provisions, and not connected to actual portfolio deterioration.
As we have neither performed the new FLI update nor changed any management overlays in this quarter, the share of Stage 2 loans as well as the stage coverage was unchanged compared to Q1. So all in all, as far as credit risk is concerned, we are in a very good shape and we approach the second half of '23 with a very healthy level of confidence.
And with this, I hand back to Stefan.
Very much, Alexandra.
Let's move to Page 21. When it comes to other operating result, you certainly all remember all the moving parts in Q1. This quarter was very quiet on that end, with actually only the partial reversal of full year resolution fund contribution and selling gain in the other Austria and other to be mentioned individually.
On Page 22, we show the quarterly net result of almost €900 million broken down by segments. The combination of strong operating performance and the risk situation as just described by Alexandra allows us to upgrade the return on tangible equity guidance for the business year 2023 to greater than 15%.
Now let's have a look on the wholesale funding situation. And I would like to start with the Group level on Pages 24 and 25. MREL compliance and long-term liquidity needs drive the increase in issued debt securities volumes. That statement that you can take just as this. That's what is driving our activities and that's what we have been targeting with all our activities there on the bond market.
We have publicly issued in the first half of this year two mortgage-covered bonds in the total amount of €2 billion and two senior preferred issuance in the total amount of €1.25 billion. However, private placements contributed very strongly to the senior preferred segment and are expected to fill the remaining MREL needs in the half - second half of this year completely.
Finally, the decline in interbank deposits was naturally driven by TLTRO redemptions bringing the outstanding amount down to €10 billion by the end of the second quarter just as scheduled.
Flipping to Page 26, we can report that all the MPE resolution groups are at or ahead of their issuance plans. In total, already more than €3.4 billion MREL-related CEE issuances have been placed in domestic and euro markets in the years 2022, 2023. I think this is quite remarkable given in the quite limited liquidity that you see in the less developed markets. So we are very proud of these achievements. That's why I'm saying, all in all, our message with regards to MREL stays the same. We fulfill all requirements in time, volume and quality.
Regarding RWAs and we are already on Page 27, nothing spectacular to say about the second quarter. Year-to-date, credit RWA drivers have been business effects, of course, the inclusion of the Sberbank portfolio now in the second quarter and FX developments, which have most generally speaking been driving up the euro RWAs on the consolidated Group level. And on market risk RWAs, please keep in mind that these are down year-to-date by €1.1 billion based on internal model effects. I think we have been talking about that already in the first quarter.
With this, let's turn to the CET1 waterfall and capital ratios on Page 28. It's fair to say that some volatile parts have been supportive recently, namely FX translation and fair value changes to debt instruments to OCI, as well as a good contribution, let's mention this, of savings banks via the minority pillar. The big picture and as I believe very positive trend of generating core capital on the back of good earnings is, however, hardly influenced by those short-term effects. This allows us to further finance growth and distribute capital to our shareholders on an attractive level.
As regards dividend, we have factored in €1.35 per share for the first half and with this, we target a dividend per share of €2.7 for the full year, fully in line with our target dividend payout ratio range of 40% to 50%. As regards to share buybacks, already Willi mentioned that we will precede with those - proceed with those immediately as soon as we get the green light from the ECB.
And with this, I hand over to Willi for the conclusions and financial outlook.
Thank you, Stefan.
Now, I'm concluding the presentation with our upgraded financial outlook for '23 on Page 30. I think it was evident from the presentation that Erste Group is in a good shape both from an operating as well as risk perspective. As a result of this, we have reviewed our guidance that was already a very robust one and again upgraded some key line items.
We now see net interest income rising by about 20% rather than 15%. As already mentioned this is very much driven by rate hikes in the eurozone, combined with rising but still moderate deposit pass-through rates. This also triggers an upgrade of our cost-income ratio target to below 50% in '23 and of course, risk costs are also due for an upgrade from less than 25 to less than 10 basis points, following the strong performance in the first half of the year.
The cumulative effect of all the above is an improved expectation for return on tangible equity of above 15% and this of course puts us in a position to pay a very healthy dividend of €2.7 per share for '23 and it also increases our flexibility as regards for the capital returns.
Ladies and gentlemen, thanks for your attention. We are now ready to take your questions.
[Operator Instructions] We will now take our first question from Mehmet at JPMorgan. Your line is open. Please go ahead.
Good morning, congratulations and thank you very much for the presentation. I have three questions, please. First of all, on your loan growth guidance. You mentioned during the presentation that you are seeing some signs of recovery, but still, your guidance implies some pretty visible recovery need in the second half of the year. So, can I please ask where you expect this recovery to come from and how do you see the early trends going into 2024, if you can comment on this?
Secondly on trading. I understand this is more or less a reversal of the negative trend we saw last year when CEE rates were increasing and valuations were coming down. So can I first of all confirm that this is the case? And secondly, how would you expect this line to evolve in the coming quarters as rates come down further and maybe hopefully valuations go up?
And finally on Mr. Cernko's comment earlier on the buyback and the fact that or the potential that this would not be the last one, can you please guide us on your thoughts here given you're arguably quite new to the buyback scene in terms of order of preference when it comes to capital allocation potential, CET1 thresholds and timings? That'll be all very helpful. Thank you.
Okay. I'm going to start with your first question regarding the loan growth. Let's start with consumer finance activities, we see here first positive signals already at the second quarter. So we see here further growth opportunities. The same when it comes to the mortgage business, there, we are still let's say struggling with some regulatory aspects, but we see here positive signals on the horizon.
When it comes to investment loans, we are very much convinced that the European funds that are available for transformation of the economy is also something that could be seen and can be seen as a booster for the corporate loan business. So we are still quite positive that we can meet our 5% loan growth targets for '23 and have a positive outlook for '24.
Yes. Hello, Mehmet. Let me address the trading and fair value question. So, first of all, your general assumption is completely right. It's very much a reversal of last year's developments. In particular, when it comes and I'm sure you remember that we have been commenting on the Hungarian baby loan quite a lot. This is now substantially returning to our P&L.
We had a significant fall after really brutal hike of rates in Hungary at the beginning of this year and end of 2022. We were falling down further especially in the long end of the curve - belly of the curve, that helped a lot. And also, the fair value positions in the savings banks, which have on the one end, a pull to par effect. And secondly, they have also benefited from the somewhat lower rates in the second quarter on the long range. So that's generally speaking, a reversal of last year's development.
In the second quarter in particular and I mentioned it in my presentation that there was this effect in - on the Hungarian side, which was much, much limited on the Group level, which has been contributing a couple of 10s of millions to the trading and fair value line. This is not going to repeat and going forward, I think you remember, we've always been guiding to our general expectation to €200 million to €300 million on annual or €50 million to €75 million on a quarterly basis. I think that's still a very good exemption - assumption for the run rate on trading and fair value. However, as we all know, this remains to be a volatile part of our operating income.
Share buybacks, if I may Willi, then I will briefly comment. So, first of all, we really expect and on the back of our conversations with the regulator, we don't see any reasons for too much longer waiting period. Let's see what happens in the next days and weeks, and then we will simply execute the announced share buyback and will do so according to market standards. Going forward, I think any further share buyback decisions are subject to our end-of-year capital position.
I think we've made a clear statement with our dividend announcement that we are sticking exactly to what we've always been saying, supporting the growth in our region, supporting the activities of our clients, distributing on a very attractive level dividend to our shareholders. And then on top, whatever we regard this excess capital and this remains exactly as always 14% plus CET1, we will consider for further capital return. This communication stands, and you can count on it.
That's all very helpful. Thank you.
Thank you. We'll now move on to our next question from Mate Nemes at UBS. Your line is open. Please go ahead.
Yes. Thank you very much for the presentation and for taking my questions. Three of them, please. Firstly, I was wondering if you could update us on the expected benefits of the securities portfolio resetting to higher yields in 2021. So that's on the NII side. Second is still sticking to NII. I was wondering if you could provide some color on the expected downside rate sensitivity, particularly in Czech Republic and in Romania. And in the context of still elevated euro yields and better performance in the securities portfolio, if you could share your thoughts on the NII trajectory that you would expect next year?
Finally, last question is on capital. Obviously, we've seen quite a substantial increase in your CET1 ratio despite still healthy growth in your books. I was just wondering if you would expect any, let's say, regulatory effects or any, let's say, unusual moving parts in your capital bridge in the second half of the year apart from capital consumption for RWAs and retained earnings. Thank you.
Yes. Mate, let me quickly start with the last one. The answer is no. We don't expect any further measures there. We have incorporated all the changes on countercyclically and so on into our assumptions. So at this point in time, we don't expect any further measures on that end.
Securities portfolio, we have communicated that for the year 2023, €1.3 billion is a good assumption. I think you were mixing up the year somewhere in your question, but I think that's what you were asking about. We do not know yet exactly depending on the quite volatile fixed-income market, what should be expected for 2024. But what I can tell you for sure, it should be higher.
And that's for the simple reason that the expiring and maturing bonds, and we have an average duration of 4.6 years on our investment book are simply low-interest rate bearing - low interest-bearing securities and they are substituted even in rather adverse scenario by significantly higher interest rates. We will give for sure by Q3 first better indication or a range for the investment book. But I can tell you it will certainly grow for at least one more, maybe also two more years from the level of €1.3 billion in 2023.
And then you were asking about the NII downside on Czech Republic and Romania. Let's distinguish here between - because I think developments between - in these two countries, although they are both now at 7% key rate have been quite different. On the one hand, the speed of the rate hike cycle was completely different in Czech Republic, really Czech National Bank was rushing within 12 months from 1% to 7%, whereas the same, so to say, distance took the Romanian National Bank, just about 2 times the time. That of course had an impact on the repricing on the deposit side as well as the liquidity situation is different in the two countries.
However, to be fair, we have clearly an assumption that a quick rate cut cycle in those countries would not substantially help banks and also not Erste. We do not have yet a detailed analysis because it depends also very much as I always say on the shape of the curve. But I think around about say on 100 basis point cut across the two countries, we certainly have to account for, yes, €200 million, €300 million of impact if it goes that way.
Frankly, I do not expect rate cuts anytime too soon in Czech Republic because the inflationary environment is still quite challenging. So for this year, rather not maybe towards the end of the year, Romania even less so, but certainly, it would have a short-term negative impact. That's clear.
Thank you.
We'll take our next question now from Benoit Petrarque from Kepler. Your line is open. Please go ahead.
Yes. Good morning. It's Benoit Petrarque from Kepler Cheuvreux. So yes, three questions on my side. The first one, just to clarify the one-offs on the NII. So I come to minus €10 million, minus €8 million or minus €10 million roughly at consolidated level. Will it be kind of fair level for the second quarter?
The second question is on the NII trend. So I think you get towards the peak level, but you talk about a plateau for 2023 in the coming quarters. So I wanted to come back on this plateau effect, what kind of assumptions are embedded in this plateau? I'm referring especially to the mix of deposits that you see 7% in sight currently, which is still quite high. So are you expecting a drop of the sight deposits in the coming quarters? And also do you think your NII could still plateau in 2024? So that will be the second question.
And then the third one, sorry to come back on your capital, but 14.9%. I think on the pro forma is 14.7%, including the buyback. We still have six months to go. So it's going to be a pretty high CET1 ratio towards year-end.
So again, to the question on your preference, yes, how do you see the payout ratio of 40%, 50% because clearly at accruing roughly 45% payout ratio, your CET1 ratio will keep on going up at the current profitability level, so will you consider maybe paying probably a higher payout ratio or maybe high end of the range versus buyback? So just wanted to clarify on that. Thank you.
Yes. Let me start right away with the capital question. So first of all, your - so to say, your assumption indication is perfectly right. The effect of the share buyback is around about €100 million, equaling 10 basis points. So that's around about a good assumption. So, not taking into consideration, of course, retained earnings and so on, the direct impact of the €300 million share buyback is around about 25, 30 basis points. That's correct.
Second remark. Look, we don't trade dividend against share buybacks. So we simply don't do that. We have a very clear rank of capital utilization. And we don't say, let's pay a little bit more here, and then do a little bit more or less share buyback. That's not the way we would like to look at it. And frankly speaking, we have also received a lot of feedbacks from investors and that they would not want us to see, so to say, playing around this way.
So having said this, we are operating within the range. And frankly, it's very, very hard to make any predictions now for any particular - any potential 2024 dividend. However, the way you are thinking about it saying, okay, if maybe the net results are slightly lower, and then in order to keep an attractive dividend, we might go slightly further up on the range. Well, I wouldn't disagree as a matter of principle.
And on share buybacks, I just want to repeat what I said before, and what I said so often. If we see at a point in time where the decision is possible and the decision is, so to say, new and we are substantially above what we consider our comfort level on 14% and consider we have excess capital available. Then we would enter into a discussion around share buybacks. So that's the order of the sequence of events.
Now coming back to your very easy question about whether 2024 will still be a plateau. To be honest, I would love to know myself. I can't make any forecast on that end. I think my assumption is based on everything we talked about today in terms of 2023 and maybe going into the beginning of 2024, growth assumptions as well as interest rate developments, investment book on the positive end, higher funding costs both on the deposits as well on a wholesale on the other hand.
So honestly speaking, this is based on assumptions for the next couple of months. That's why I also said in my presentation, it's about the forthcoming months, not necessarily yet for the forthcoming quarters, that to be honest would be crystal ball interpretation. And on the NII one-offs, I simply say yes, you are pretty much there. It's adding up to a small negative number all in all.
Yes. Thank you very much.
Thank you.
We'll now take our next question from Johannes Thormann at HSBC. Your line is open. Please go ahead.
Good morning, everybody. Three questions from my side, please. First of all, on the risk provisions, your €900 million risk overlays, how long do you think you can keep those overlays if the macroeconomic situation does not massively deteriorate? Will we see some releases already this year to support your 10 basis points guidance? Or will it more be a topic for next year? Or do you really think you can keep those €900 million overlays for several years?
Secondly, on the 2024 dividend, what triggers would be needed to cut the dividend from the '23 level of - '23 proposal level? And last but not least on banking taxes, probably a bit more in general, we've seen probably surprisingly less burdens than we had expected initially or the market had expected last year and this year, what is your outlook from - impact from banking taxes? Thank you.
Yes. Let me start with your question on the €900 million. So our current expectation is that we would see some releases but minor releases already this year and that we could carry forward - or we target to carry forward roughly 80% of the €900 million. Yes. So, maybe more, it all depends, of course, on the development of the macro situation, and of course, also on accounting principles. We do not expect that we can keep the provision for several years. FLI, there is always a certain amount, which stays in the stock, but we would expect for the upcoming year '24 that we would see more releases of this €900 million very rough range of maybe up to one-third of the amount.
Thank you.
And you were asking about what could trigger a cut into the intended dividend. Now, since I don't know exactly whether you meant '23 dividend to be decided in the AGM '24 or a '24 dividend, I answered both. Obviously, a dividend is only fixed once the AGM is really approving it and it's paid out.
Of course, you know this. I think the year 2020 has very painfully shown that there is always a possibility of events that can change course on things like dividend. Everything else, so to say, I would say is rather not to say very unlikely to change our intended dividend, at least when it comes to the proposal of the Management Board.
On 2024, I think I discussed in answering the question of the colleague before what our intention is. Our intention is to have a very attractive capital return offering to our investors and that also implies that we will certainly stick to the range that we have been given and obviously, if profits are maybe stable or in somewhat lower in one of the forthcoming years, it doesn't have to be the lower end of the range necessarily. It can be somewhere in the middle or even in the upper end of the range. It's very hard to predict, but that's about my answer. I hope you - I could address your question as exactly as possible.
Yes. When I want to come back to your third question regarding the banking taxes, I want to start with a statement, you can never exclude it. We learn to live with such surprises from today's perspective.
When we look at Austria, when we look at the Czech Republic, when we look at the other countries, nothing short-term to be expected. I want to exclude one country, it is Slovakia. We are expecting elections in September. There might be then some likelihood given for the upcoming years. But this is very much dependent on the outcome of the elections. But from today's perspective '23, we don't see a significant risk of that.
Yes.
We'll move on to our next question from Gabor Kemeny at Autonomous Research. Your line is open. Please go ahead.
Hi. A couple of questions from me. One follow-up on the share buybacks. Just - so come year-end, you see your CET1 ratio, you see your capital position. Would you seek to buy back shares with a view to going down to 14% CET1 ratio or would you seek to preserve some capital for organic growth or bolt-on acquisitions? That's the first one.
Second question is on cost. I think your clean cost growth was around 13% in Q2, obviously, driven by the wage indexations, et cetera. Would you - where do you see a slowdown in cost, whether you expect to execute efficiency measures, so that your FY '23 cost growth would converge to the 9%?
And then the last question I have is to Mr. Cernko. I think you mentioned in an interview the other day that you would not seek to expand your mandate to be on the end of next year. Can you just talk a bit about your [technical difficulty] and your thoughts on the CEO succession, please. Thank you.
Hi, Gabor. Let me take the share buyback question first. Look, let me maybe make one technical comment that we have not been discussing ever in any of the calls, but it's important. We also have to look or not necessarily only us but also the share buyback manager, we also have to look at the liquidity of our shares and there is a certain limitation of what realistically can be executed within a certain period of time. I just invite you to have a look at that. That's just as a kind of limiting factor at the upper end of expectations that some market participants, respectively analysts have. So that's just one remark.
But on the other hand, yes, I think it's a fair assumption that in principle, since we regard 14% at a very, very healthy level that we would - if we are somewhere around 14.6%, 14.7%, maybe we would look at the capital return or of course, very attractive M&A opportunities and would not intend to have 15%, 16% or whatever, yes. So that's definitely something you can rightfully assume.
On costs, I think the point you made was that on an annualized basis, we have been trending rather 12%, 13% than 9%. That's absolutely correct. And obviously, the impact of the wage increases in Austria only, so to say being incorporated for nine months, implying that in PareX in general are between 12% and 13% even already now year-on-year. We will definitely have a certain reduction of upward trends, not only that but also a calming down of inflation, especially wage inflation in CEE already this year.
We were moving very quickly there. I talked about that in Czech Republic, Romania, Hungary. We were adjusting to the new reality very quickly. And this is now already slowing down, whereas in Austria, we will see still an impact in 2024 because the average of 2023 inflation is the basis for the negotiations with the unions in 2024.
So I would say it's a mixed situation. It will not be so that we will see cost pressures coming down very quickly. However, we stick to our guidance for this year and certainly will give by Q3, a first idea of what we think 2024 developments will look like.
Okay. Now, coming back to my mandate. I think as you know, my mandate is going to expire end of '24, meaning end of December '24. The Supervisory Board meanwhile kicked off a succession process. It's well on track. It is expected that we can announce a successor during the course of the fourth quarter.
With that, we are able to meet our target. This means the successor should be nominated at minimum 12 months in advance. And with that, I think we're well prepared for any kind of the handover process. So I'm quite confident this can get managed too quite smoothly to the benefit of all stakeholders.
That's very clear. Thank you, everyone. Just a small follow-up on Stefan's point on the share buyback. Can you elaborate on this - on the liquidity point as a possible constraint for the buyback? Is it like a limit - we have like a limit in mind like 20% or 30% of daily liquidity? How would this work?
We don't have a limit, Gabor, it's not us setting any limit. It's simply the market, so to say, the market practices are setting a certain limit and there is usually certain volume limits on share buybacks and then the agreements are of a kind that you can buy back a certain percentage of the daily volume is usually excluding closing auctions, please don't forget that closing auctions, which are quite reaching volume are excluded from share buybacks in, I would say, all the cases I'm aware of.
So I think it's fair to say that definitely way, way above the €300 million that we have been indicating for this first share buyback can be executed in the calendar year, but definitely not something in the billions, yes.
So I think I can't give you a number today. It depends on market liquidity, which is obviously not always the same but you can't expect that a share like Erste can be traded on a share buyback basis, it's €1.52 billion, that's definitely much too high. But the €300 million is definitely not any limitation by any means, okay?
Okay. That makes sense. Thank you.
Thank you. We'll take our next question from Riccardo Rovere at Citi. Your line is open. Please go ahead.
Thank you. Thank you very much. Thanks for taking my question. Three or four if I may. The first one is again on NII. Stefan, before you stated about this concept of plateau, but I was wondering how can this be possible considering the ECB start as hike rates are fairly substantially over the past in May, June, in July, and this is - clearly has affected your balance sheet, assets and liabilities only partially and considering you were talking about deposit beta retailing, the - if I remember correctly, 20% area, and this is not going to go to 100% overnight. So I was wondering how should we read this concept of plateau considering also you're saying that right in Czech Republic, we expect not to go down.
Second question I have is on the FLIs, so this is for Alexandra and Stefan, too. How do you think about FLIs when it comes to setting the dividend of the buyback? Because FLIs are 5% of the market cap, it's 3 times your requested buyback, is a considerable amount of money.
The third question I have is, I know you will - probably you will not answer to that or maybe just partially. You have acted again the ROCE targets for '23 to above 15%? Now if we keep this plateau concept of NII in considering Alexandra stated that you expect to bring to carry over 80% of the FLIs in 2024, which is €700-or-so million. And this would be 35 basis points of risk cost in '24, which is - was the original guidance of six or nine months ago, I don't exactly remember. So is it - I have to say that maybe the 15% kind area might eventually be kept also for 2024 considering NII, that's majority of your revenues?
And final question if I may, if we had - if you can help us in trying to understand what is the underlying NII in Hungary, is that maybe the level we saw in Q4, just to help us? Thanks.
Right. All right. Riccardo, a nice portfolio of easy questions. I'm looking at Alexandra. We will try to take them together. And let me start again by reiterating, I have been talking about plateau indication in the view of a couple of months, yes. I think we all remember that when we were talking around year end, and then again after Q1, a lot of people were expecting Q1 to be the peak NII, then people were expecting to be the Q2 of peak NII. And I'm talking about Erste, in particular, but also more generally in the market.
Now, it shows that a couple of other banks and equally, so we are able to keep or even increase NII levels and that's something, which I guess is on the back of, on the one hand, the ECB path for sure, I completely agree with you. But on the other hand also of the changes in the business models and the changes in the way we - business is being done across maybe euro land to say the least.
Now, let me just say two additional things about what would support and what would maybe harm about - beyond the obvious, our assumption. The one is EURIBOR levels to roughly remain at the current levels, that's an assumption we would have and that would, of course, support a longer-term good return on in euro countries, based on the growth assumptions Willie has been talking about and based on our ability to translate the market situation into good returns. That's I think a fair assumption. Obviously, a sharp repricing of deposits like we saw it in Czech Republic on the other hand would be detrimental to our assumptions for the forthcoming months. A couple of words on FLIs maybe?
Yes. Not so easy to answer as it was more a statement from your side than a question. But let - so first, let me clarify the €900 million is not only FLI, it's FLI and stage overlay in total. And of course, FLI, not the full €900 million have been newly built in the course of the crisis, but there was also some stock of FLI, you always have in the books here, but still you are completely right, this is a considerable amount. And let me repeat what I told also or what I said after Johannes' question.
We do not expect that we can carry forward the amounts longer than '24. So in '24, current expectation today is that we will see a considerable release of these FLI overlays, of course, depending on the further development of the macro environment, yes, which is very hard to say. We will do the next FLI update in the second half of this year. We would not expect huge releases for the time being, but also this is a little bit too early to say, but this is the current expectation. But all in all, yes, you're right, it's a considerable amount, which makes us confident that risk costs should remain low also in the upcoming periods.
And then getting back to your other two questions, the return on tangible equity, obviously, depends on many parameters. You know this at least as good as I do. Let me make a statement regarding what we are aiming for. We are aiming for beating consistently sustainably the cost of equity, which does not necessarily apply that we have to be above 15% that would also be covered then on a 12.5% level, just to say something.
Of course, it's our ambition to keep it at very, very favorable levels. Good operating performance, which will also require good cost control to be very clear because we cannot expect topline to increase sharply further as we saw in the last couple of quarters. And of course, let's be clear, a benign risk environment is required to achieve a return on tangible equity on debt levels. And then the underlying run rate, I think it was around Hungary.
Let me make two statements here. I think it's a good guess to say take the average of Q1 and Q2, and you will be, let me say, well guided for the local level. Still, I've been saying that so often and I think the last couple of quarters really proved it. In Hungary, we have simply a situation where both the government and the regulator are substantially intervening into the market. They are intervening on products, they're intervening on the interest rate side, they're intervening on government bonds. You all know about this.
And at the end of the day, this has always been okay for us on a net-to-net basis. However, when it comes to the different lines of other operating result of the different toplines and also including risk, frankly speaking, it's very hard to say on which lines - I forgot the tax line, of course, on which line what will show up. At the end, it's important that we have generated very good return on equity from Hungary in the last couple of years and we have full confidence that this will be the case also going forward. If you ask me today, what will show up in which line, honestly speaking, I don't dare to predict.
That's very clear. Thanks.
Thank you. We'll now take our next question from Hugo Cruz at KBW. Your line is open. Please go ahead.
Hi. Thank you. I have quite a few questions. So first, I'll start on NII for the - your guidance of plateau for the Group for the coming months. What does that actually mean for the Austrian business, especially EBOe and on the savings banks? If you could give guidance at least for 3Q would be very helpful.
Second, on the loan growth, perhaps I misunderstood, but I thought you said you could see some acceleration of loan growth in the beginning of 2024. Historically, I think you showed a loan growth of around 5% before COVID. Now, even if we have some rate cuts, I think we'll stay at a higher rate environment than historically, which could be a problem to generate loan growth. So you think 5% is something you can still do next year or not?
And then two more questions. One on OpEx. Why is the OpEx for this year has been so high? I understand your guidance of plus 9%, we have banks where even with low - a bit lower inflation that you're guiding for kind of flat year-on-year. So is that there are more salary pressures in CEE or is it that you have a bunch of investments that are going through the P&L right now and perhaps at some point, they could disappear in the future? If you could decompose these effects would be very helpful.
And finally, on the cost of risk, you will be low because you have the overlays but what do you think could be a normalized cost of risk in the future, again, considering perhaps a bit higher interest rate environment than historically or why - I think historically, you've talked about potentially normalized cost of risk around 40 basis points, why are we not seeing that? Why the cost of risk has been so low and should we continue even after you use the overlays? That's it. Thank you.
Maybe I start with the third question on cost of risk. Also just to clarify, they are not. So this year, they are very low, but not given our overlays because we did not touch our overlays and FLIs. So it's low because really recoveries are strong, upgrades are strong. We see quite a normal NPL inflow, but as well a very, very good recovery and upgrade situation. So first on this.
Second, yes, when it comes to normalized - or let me divide into two parts. For '24, it's quite early to give a risk cost guidance for '24, but however, still I would like to give an indication as I've already mentioned that we expect releases from this €900 million next year, next, this risk cost should be - should remain also very low. So if not at the level of this year only really slightly up. So very, very low risk costs expected for '24.
For a normalized risk cost, you rightly said historic through-the-cycle risk costs of 30 basis points to 50 basis points, when you recall in some previous calls, I already indicated that I expect normalized risk costs going forward being at the lower end of this range. So around the 30 and when you asked me about my, let's say, a mix of expectation and ambition level, I would see normalized risk costs going forward rather below the 30. So between - something between 20 and 30, which then again fits quite well to the current level of risk costs.
I want to come back to your question with regards to the loan growth '23 and '24. For '23, as already said, we confirm our outlook, our guidance. For '24, it's our internal ambition, it's our internal guidance that they want to see a loan growth of 5% to 10%. This is not just, let's say, to be in line with market performance. It's our ambition to outperform the market. So we are talking about the low end of our, let's say, mid, long-term guidance we have set ourselves.
Coming back to savings banks question, thanks for that because it allows me to point out that really the last - well, actually in the meanwhile, two years have been very satisfying on that end. I would say in principle, you can assume the same dynamics on the savings banks front as you can for the Austrian segment EBOe.
Maybe with one remark due to their lending mix, which is a little bit more biased to floating components than fixed components, I would say, in both directions, it would be a little bit of a stronger effect. Yes. So that's simply for the reason that the floating rate interest binded products are around about 10 percentage points higher in the average for savings banks than it is for the Austrian EURIBOR part.
And then you were talking about OpEx, and you have been hitting the nail exactly right. It has been, in the first place, the inflationary environment. It has been a substantial increase in salaries all across our countries, and I think for good reasons. I mean let's not forget that a couple of months ago, we were still talking about massive burden for households in all countries, actually, on the back of the energy crisis. And we were ready and able to help our employees, and they have been paying back with fantastic performance and excellent results. However, this has come at a price. That's the component that you see in our wage inflation in our PareX.
The other component is that we have been taking the opportunity and have been taking very good skills on board, which help us to drive the digital transformation, especially in countries like Austria, Czech Republic and Romania. You see that also in terms of the staff development in our report. We have been adding people after cutting back, especially in Austria substantially in the years 2019 to 2022. We have been increasing firepower there from very skilled labor. And that has been adding to the whole equation over time.
Of course, we will keep control of this. And I've already been talking both to the Czech and the Romanian management how they are going to deal with this. And it will all result into proper and of course, very ambitious revenue assumptions on the one hand, and cost control on the other hand. So in other words, exactly the way you're assuming around OpEx, that's the situation. And I think at the moment, it turns out into very good overall figures.
Okay. Thank you.
Thank you. We'll now take our next question from Krishnendra Dubey at Barclays. Your line is open. Please go ahead.
Hi, thanks for taking my questions. I have a couple of questions. I think sorry to get back on the cost. But I guess I'm just wondering, I guess, you point out there are some efficiency measures that you have been put in place which will help you. So the question is, I guess, if those aren't in place, what would your cost inflation would have been? I guess that is very relevant for next year, given if the revenue environment stands benign, you - the revenue growth doesn't come in, how would you contain cost?
Second point is on the dividend. I guess, just to go back on dividend. I guess so this year dividend, you're saying that it will be €2.7. So just going back to the next year 2024, would that - would you consider a progressive dividend for the 2024? Or you could - or your payout would be based on your 42% payout ratio? Thank you.
Okay. I think the second one is very easy. It's all according to the dividend policy and anything else at this point in time would be pure speculation. So that's simple answer to the dividend question. On costs, I think what we should not forget, we have been sailing on a flat cost basis for quite a while. We have been very restrictive on the one hand in the Austrian perimeter. And anyway, our colleagues in CEE have been very disciplined for all the time and going into the pandemic and so on.
And therefore, I think the - what I was talking about in answering the last colleague's questions was mainly referring to how we deal with it going forward. And so far in 2023, obviously, in this environment, we used the opportunity to invest into our digital future, which I think will pay us well - will pay back well in the future with revenues, too. So cost measures to be discussed certainly when we go into planning for 2024, but nothing spectacular to mention at this point in time.
Thanks a lot.
Thank you. [Operator Instructions] We'll now move on to our next question from Michal Konarski at mBank. Your line is open. Please go ahead.
Hi, thank you so much. I just wanted to ask you for an update on M&A front. Some local person client was speculating that you are interested in takeover of Hello Bank!, and then to Poland. Could you give us a comment on that? Or not only maybe specifically on Poland, but also other markets in terms of M&A? Thank you.
Just one remark to your question. As announced today in the morning, we have signed, our colleagues in Czechia have signed an agreement to take over the consumer financing portfolio of Hello Bank!. This is a portfolio in the amount of €365 million. We're talking about roughly 200,000 customers. On Hello Bank, I don't want to comment because we don't do that.
Okay. Thank you so much.
Thank you. We'll now move on to our next question from Andrea at BNP Paribas Exane. Your line is open. Please go ahead.
Good morning. I've got three. Two are just numbers. The easy one, €900 million of overlay plus FLI, can you please split the two between what is FLI, what is overlays? Then on - well, indirectly net interest income. Can you give us the minimum reserve requirement at the ECB between all of the countries? You can just give us the total. But can you split out the portion which is savings banks?
And then finally, on distributions. With regards to possible additional distributions on top of your ordinary dividend, based on your discussions with your investors, do you believe they would have a preference for a share buyback or just a special dividend of X amount if there was to be any? Thank you.
I'll start with the easy one. So the total FLI effect out of the €900 million is €583 million as of June '23.
On the minimum reserve, I can tell you that the total is around about €1.5 billion with ECB and just about half of it comes from savings banks, Andrea.
With regards to your third question, based on the discussions I and we had - have had with our investors, there's a clear preference for buybacks.
Thank you.
Thank you. We'll now take our next question Simon Nellis at Citibank. Your line is open. Please go ahead.
Hi, thanks for the opportunity. Just two quick ones from me. If I could follow up on the M&A question, I saw that you're not interested in buying OTP Bank Romania, if you could talk on why that's the case. And secondly, just on risk-weighted assets. I think in your slides, you show a €2 billion decline from portfolio improvement. I guess that's asset quality improvement. If you could just unpack that and if you see further reduction in RWA from that effect going forward. Thank you.
With regards to your first question, OTP Romania, we showed our interest, but we didn't manage to achieve the second round.
On RWA, yes, you have seen rightly. So we have seen RWA decrease from portfolio quality. For the second half of '23, we would see the - overall, the total RWA remain rather flat, which also then should mirror a mix of business growth-induced increases and some also quality-related decreases. So overall flat, nothing major to expect.
And just going forward into, say, next year, would you expect further kind of improvements from the asset quality side if the continued benign trends continue?
Well, it's - so for '24, to be honest, we would not expect a huge portfolio improvement, yes, as currently, we continue to see quarter-to-quarter portfolio improvements. And for the current planning in '24, we would rather see at least no other further improvement in the portfolio quality.
Going forward beyond '24, this is a different story and one also needs to take into account then the start of the implementation of Basel 4, which, as I've already said in previous calls, we would not expect any negative impact. So going forward, portfolio quality, yes, should pick up again, but for '24, it's not in the current planning.
Clear. Thank you.
Thank you. And we'll take our last question from Juliana at Goldman Sachs. Your line is open. Please go ahead.
Good morning. Thank you for the opportunities. Apologies for the first two questions will be on funding. Just on MREL, I know you're in a comfortable position there and now guiding for any further issuance to be executed via private placements. So I was just wondering if, as part of your 2023 issuance plan, we shouldn't expect you to be back in the public market. And maybe it's a little bit premature, but your AT1 coming up to a call in April 2024, I was just wondering how do you look at the economics of refinancing that bond, also given that it is currently trading in the money?
And maybe just the last question on asset quality. Data this quarter and your upgraded cost of risk guidance point to a very strong asset quality picture. I was just wondering, in light of a slowdown in the CRE market and neighbor in Germany, could you please comment on trends you're seeing in Austria and the Czech Republic? And how do you feel about the collaterals on your NPLs given those are mainly made up of real estate? Thank you very much.
Yes. Thanks, Juliana, for actually giving me the opportunity to address wholesale funding once more briefly. What I said was that we are able and easily can cover all our MREL requirements on the Austrian resolution group with private placements going forward. However, we never rule out going to the market, also with the benchmark transactions, if there is a good window of opportunity out there and it either fits into our liquidity structure, or could also be certain prefunding for the year 2024, depending on the market environment. So that's what I tried to bring across.
AT1, very important and very good question. We are looking at all options at this point in time. Obviously, any kind of capital-related transaction is always subject to approval of the ECB. But you can be sure that we are discussing, both internally as well as with the market, all options regarding the refinancing of our April 2024 AT1 call at this point in time. And I think the other question was on asset quality, Alexandra, I guess.
Yes. Thanks for the question. Let me start by reiterating that overall in our very strong asset quality, we explicitly include commercial real estate. You mentioned the high collateralization levels, which are true not only for our current - when you look at the total carriage, when you - also let me outline, when we look at the coverage of Stage 3 only, when you add the collaterals, we would be above 100% also on isolated Stage 3 level. Collateralization levels is very high also in real estate. So it averages around 80% across the total real estate on balance portfolio.
And let me also point out the topic of yields because you mentioned Germany, yes. In Germany, we are not very active also not for real estate. When you look at our regions, the rental yields are significantly higher already now than in Western Europe. So the devaluation risk in our view is significantly lower in our region. So in CEE, to be very precise, rental yields range around 6% to 8%, so valuation discounts are likely to remain in the high single digits, which is then offset by rent increases, what we are also seeing now.
Very clear and helpful. Thank you very much for your comments.
Thank you. There are no further questions in queue. I'll now hand it back to Thomas for closing remarks. Thank you.
Thank you, Laura, and I hand it back to Willi for concluding remarks.
Yes. Thank you, Thomas. I have to say thank you for you participating in this conference call and I should not forget to mention our next - our Q3 conference call takes place on the 30th of October '23. And with that, thank you very much for participating and wish you a nice day.