Erste Group Bank AG
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Erste Group Bank AG
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Good day, and welcome to the Erste Group Bank AG Results for the Third Quarter of 2021 Conference Call. Today's conference is being recorded.
Now I would like to turn the conference over to Mr. Thomas Sommerauer. Please go ahead.
Thank you, operator, and good morning from Vienna to everybody who is listening in. Today's call will be, as usual, hosted by Bernhard Spalt, Chief Executive Officer of Erste Group; Stefan Dorfler, Chief Financial Officer of Erste Group; and Alexandra Habeler-Drabek, Chief Risk Officer of Erste Group. They will lead you through a brief presentation highlighting the achievement of the past quarter, after which they are ready to take your questions.
Before handing over to Bernhard Spalt, let me direct you to Page 2 of the presentation, which contains the disclaimer on forward-looking statements. And having done so, I hand over to Bernhard Spalt now.
Thank you very much, Thomas. Good morning, ladies and gentlemen. Welcome to our Q3 earnings call. Let me guide you through the pages and start with Page #4 with the key developments for this quarter, which basically is a reflection of what happened on the macro side in our region. And this is a story of recovery. This is a story of a strong recovery. When we last year have had philosophized around sort of would this be a V-shaped, an L-shaped, a U-shaped or a W-shaped recovery, looking backwards, I think it's very clear this has been a crystal clear V-shaped recovery so far with a lot of fragility and potential volatility ahead of us still.
So I think what I tried to say is that the CEE and also, of course, Austria recovery is very much on track. And the growth rates are being upgraded for 2021 by the hour or by the minute and are showing a full employment of full order books by the corporates and a very strong normalization of a lot of behavioral trends, which point to a precrisis level or even better than that.
If we sort of put that to our business model, then we see that the fee performance is really going from strength to strength, very much driven also by payment fees, which are reflecting now an opening up of the economy and opening up of the consumption of the investment behavior. So fee payment, but also, and we will get to that a little later, asset management-related fees and bancassurance-related fees are picking up significantly and are demonstrating the soundness and the solidity of our business model in the region.
What is very important to mention, this was hard to tell last year, is the risk development. We have, in a time of very limited visibility, built up very significant credit risk provisions, forward-looking type of credit risk provisions, not knowing at that time how moratoria and other sort of economic developments would impact repayment ability and repayment willingness of our customers. And we've seen that not only that the economies by themselves are very strong and resilient, but also the fiscal interventions have been very robust and effective. And we see that insolvency rates are still record low. Delinquencies are in the middle of absolutely nowhere. And again, we have almost 0 unemployment.
So this is a picture which we would not have anticipated. Of course, there will be some effects medium term now that the support measures are fading out -- are phasing out. But we do not expect any kind of cliff effects. We do not expect any kind of insolvency to [indiscernible] a couple of corrections. But overall, credit risk is in a very benign shape, I would say. And Alexandra will talk a lot more about that.
If we look at the outlook upgrades, then, of course, NII is center stage at a time where inflation is picking up in the entire region, all over Europe and in the countries which are not euro-denominated. We have already seen the central banks reacting to the inflationary pressures, which, of course, helps on our NII, a little bit this year but much more certainly next year.
So on the basis of a very good business model, very strong operating trends, a benign risk environment, net results are positive -- are very positive, I would even say, and we do return to a dividend policy precrisis. And we will have an extraordinary general assembly by November 25, where we will propose, as already discussed, an additional dividend of EUR 1 per share for the business year 2020. And for the business year 2021, in the business -- in the AGM 2022, we anticipate that a dividend of EUR 1.60 per share will be proposed and accepted by the shareholders. So overall, I think this shapes pretty much the situation which we're in.
Let me take you now to a couple of slides, starting with Slide #5, which are a sort of new kind of framework which I want to introduce because starting from beginning of next year, ESG will feature a regular and routine part of our presentation where we will report quantitative setup and targets and target achievements. So today, what I want to do is setting a little bit the scene, explaining how it fits to our business model, what is important to us and where we want to make a difference. And from next year on -- just a teaser, but from next year on, we want to make that a regular feature of our presentation and reporting to our shareholders.
So starting on Page #5, ESG is a key objective for our group. It fits incredibly well to our purpose. It fits incredibly well to our corporate DNA. We have been founded over 200 years ago with the mission of increasing prosperity in the region. And the sort of S part is -- the social part of the ESG equation is something where we have already, in the past, put a lot of emphasis on in terms of financial inclusion of nonbankable or financially excluded segments of the population. But also the E part and -- the environment part and the governance part is something where we now put on a lot of emphasis and build into our business model and business strategy and, of course, also our risk strategy going forward.
If we look at the 17 targets of the United Nations in terms of sustainable development goals, 17 sustainable development goals, we have chosen 7, which you find on Page #5, where we want to make a difference because they are relevant to our region, and we are relevant to them in terms of really making a difference. I won't go through all of them, but let me just touch a couple of them.
Climate action is very, very clear in the context of these EU next-generation funds. The whole economic growth for the next many years will be charged by the sort of investments into a different kind of technology, which we will support.
Clean water in our region. I just mentioned the Danube, which flows through almost all of our countries and which has significant pollution aspect, is something which is relevant to our region and where we can make a difference. Same as for recycling and waste, and waste management itself has 2 elements. One is sort of that it's important to create sustainability. Second, waste management in and of itself is a very, very high emission-characterized industry, which also needs to change.
Affordable housing in a situation is something which is a multiyear, I think, challenge for society and economy. At a time where interest rates are very, very low, at a time where, yes, salaries are rising but real estate prices -- in the absence of any kind of other sort of really attractive investment targets, real estate prices are moving up a lot faster than salaries, affordable housing for young people, for young families becomes a very, very structural problem, which we want to address together with also the stakeholders involved. And I don't go through the other ones which I mentioned here.
Page #6, and I won't touch upon that, is just showing how ESG fits to the organization and where it fits.
Let me take you to Page #7. And these are 2 very concrete commitments which Erste Group has undertaken amongst others. One is we will be member of the Net-Zero Banking Alliance. We are signing up to that, which I think is an incredibly important commitment to make. So we will be a part of that community. And starting from the sustainability report in 2022, we will commit to targets -- to interim targets until latest 2030 in terms of coming with a portfolio which is net zero with the ultimate goal to have 2050 a complete neutral portfolio on our credit book and investment book. So I think this is one. And secondly also, to have a regular reporting and also interaction with the peers in terms of how we can make progress here. So I think that is something which is the next logical step. And ourselves, we will reach in our operations climate neutrality already in 2023. So I think this is something which is an important statement to make.
If I just want to give some flavor on this Net-Zero Banking Alliance, if you look at our own portfolio, our own exposure to high-emission industries, like waste management, like cement production, like coal production and the likes, is around 1% in total of total loans. So we have got a relatively limited exposure. There is a good starting point. Nevertheless, it's a very serious challenge and something which we take seriously, how to help our clients transition from where they are to CO2 neutrality.
What I also want to say is that KPIs of key management positions, including myself and also our CRO, already feature ESG targets and will be expanded furthermore on the management going forward.
Page #8 is showing, and I don't want to read through that, that we are already a leader in the green bond issues, and we pay a particular emphasis also in being rated by external parties when it comes to our progress and stance on these key matters, and we are making progress on an already relatively good level.
Now after that kind of qualitative input, let me get back to figures. Page #9 shows our group income statement performance in terms of net profit development Q-on-Q and year-on-year. Usual kind of presentation. If you look at the Q-on-Q development, the only difference here is, of course, that Q3 did not feature this one-off effect of Q2 in terms of TLTRO. Everything else, I would say, is a positive development with a slight exception on the expense side, where I think we generally show a very, very good discipline. We had slightly higher expenses this quarter on marketing and IT development expenses. But overall, I think Q-on-Q development on the net profit side, very positive. Of course, also risk costs are showing the benign environment, which I already mentioned.
And this is even more prominent if you look at the year-on-year development, which is featured by 2 elements. One is operating trends, very good on the NII, on the fee income side; and a very, very positive risk cost development. And as our CFO, Stefan Dorfler, will say it, in terms of risk costs, one needs to look at the years 2020 and 2021 possibly together. This is showing possibly a picture which is more relevant to our business model. But overall, I would say the underlying trends in terms of net profit development both Q-on-Q as well as year-on-year have been very, very positive.
Very short reflection on Page #10, key income statement data. Net interest income and net interest margin. I do think we're always talking about when will be the trough in terms of net interest margin. The latest interest rate hikes certainly will help our business model. Loan growth will continue on the basis of a recovering economy, and interest rates sort of will be helped by the hikes, which have not come yet to an end.
Cost/income ratio, I think, is showing our commitment towards our target, which we have already mentioned in 2019 Capital Markets Day. And cost of risk, again, showing the picture which I mentioned. And we have returned to very solid double-digit return on tangible equity developments which we have sort of committed to over the last calls.
Let me guide it to Page #11, balance sheet performance. Also very simple, if you look at the left-hand chart, basically characterized by 2 developments. One is customer loans grow, which is very positive and in line with the economic recovery. And secondly also, there is still TLTRO plus a solid deposit inflow, boosting our balance sheet and boosting our liquidity position and, of course, increasing our cash position. So that's the asset side, and this is also reflected, of course, on the liability side.
Don't want to go too much into the balance -- key balance sheet data on Page #12. They are just a reflection of what I already said. NPL coverage ratio, just because we didn't mention it yet, is at very, very high levels. We do not expect in terms of ratios, both NPL ratios as well as coverage ratios, major different trends for the last quarter of the year. So we look at a rock solid balance sheet, I would say; and capital and liquidity ultra solid, I would say.
If I make -- take you to Page #14, macroeconomic update. We do see a much stronger recovery in 2021 than originally anticipated. You see growth rates which are very high. They will come down next year, and I will talk about that in a minute, but very high growth rates this year after the crisis here last year. And we also see a couple of other trends. And it's really a picture which is a very rich picture, I would say because, yes, high growth rates, but yes, you also see full employment. You see a scarcity of skilled labor force. You see supply chain fragility. You see industrial output somewhat hampered in Slovakia and the Czech Republic because factories have to reduce their capacity because of input factors not being available. So I think this is generally from a figure point of view a positive picture, but it's also to be understood for the further growth dynamics in terms of what will help and what will not help sustainable growth here.
So overall, strong growth trajectory, fragility on the delivery chain and on the labor market, and of course, in this context, with a strong dynamic on the supply-demand side, a strong inflationary pressure everywhere. And on this, the central banks have reacted, you've all seen that, and they will continue to react in terms of interest rate hikes.
Just a little reflection on next year, Page #15. 2022 will still show a growth path but at a sort of significantly slower pace, I would say. I would also anticipate and hope that inflationary pressures will ease off. That would be the main line of our understanding. There are mixed views on that, of course, and for good reasons, mixed views. But the base case is that inflationary pressures will ease next year, and we will get to a more normal kind of growth path and dynamics next year.
What is happening on the ground, Page #16. Retail, we still see a quite significant robust demand for housing loans. It has cooled off a little after we were spinning almost too fast last year because on these ultra-low interest rate environments, refinancing activity was high. This is now coming to an end now that the interest rates have been hiked. So we still see a robust demand in housing loans, a little bit lower than last year.
We see consumer loans still lower in terms of demand compared to precrisis levels. This might be already a little bit of a turning point that we get back to a business as usual in terms of mix between consumer loans and housing loans, but we're not there yet. So this is presently the dynamics on the product composition.
Securities development, especially on the monthly savings plans, have performed really well. In this context -- in this economic context, we've been rising the fee income quite significantly. And we've been raising the newly opened regular securities savings plans. So I think this kind of strategic setup works really well and will continue to work well over the next quarters and years, I hope.
Take you to the Page #17, retail, what is sort of happening in the branches. We're back to normal basically. Branch traffic is basically where it was precrisis. We are, of course, still very successful on the George side, with now 7.5 million customers being sort of -- are making use of George.
And on the product side, I would want to mention an example of the Czech Republic when it comes to green mortgages. Green mortgages are now developed everywhere. Just as an example for the Czech Republic, what is the sort of underlying product structure, is new buildings in ecologically better-rated categories. It's reconstructions where energy consumption is at least 30% lower. It's for electromobility equipment. It's for solar panels, et cetera. So here, a product setup is being developed and also subsidies are being sort of part of that offering and also advisory services, cheap or free advisory services to our customers, how to make use of the subsidies and the product features. And this will happen in all of our countries and will complement our product offering to the clients apart from investment products, which we already very successfully sell.
So think these sustainable elements in the lending business on the retail side will become more and more prominent. We are continuing to offer sustainable investment solutions and the George insurance hub on all product levels. Whether it's car and property, whether it's personal belongings, travel insurance or pension funds are being made available in George and are helping our fee income.
Corporate, again, a very strong show of recovery in all of the countries. SMEs, large corporates and real estate really show further growth. Investment loan demand is rising. We've been saying over the last couple of quarters that bridge loans, liquidity sort of support and working capital loans have been featuring the loan development. Now investment loans and also M&A loans are returning to the picture, which is showing a lot more confidence in the future economic development.
And what is also important that institutional money, institutional investors are going into the direction of commercial real estate in the region. Portfolios are for sale and are being sold. So income-producing real estate portfolios are being sold to institutional investors, which, again, is showing very much the search for yield and the search for cash flow, which sort of carries some yield. So I think this is something which is also picking up in dynamics and helping very much our business.
Capital markets business is performing incredibly well. We are sort of now in a total issuance volume of more than EUR 85 billion, which we have accompanied and sort of managed. And net fee and trading income also is reflecting that.
So I think this is basically what is happening on the ground. And on that, I would like to hand over to our Chief Financial Officer, Stefan, to guide you through the operating trends.
Thank you very much, Bernhard. Let's start with volumes on Page 20. Based on nearly 6% year-to-date net loan stock growth, we are raising our guidance for the end of year to mid- to high single digits. So something like a 7% before the [ comma ] is realistic at that point in time.
With regards to the mix of the growth, one can say that, overall, both year-on-year and quarter-on-quarter, we have seen slightly higher growth on the retail side than on the corporate side. However, one should differentiate from country to country as, for example, in Romania and Slovakia, corporate loan growth has been slightly stronger. So overall, it's a good mix. There is no bias to either side. But from country to country, the dynamics are a little bit different. And please bear in mind that especially for the Czech Republic, when looking at numbers in euro terms, there is some FX effect in still. Overall, the growth is very strong locally in Czech Republic.
On the Page 21, we can look at a very unspectacular development of customer deposits in Q3, with inflow dynamics somewhat slowing down, which is at these times quite a positive development. And for the first time, for some quarters, the loan-to-deposit ratio has been going slightly up from 83.4% to 84.8%, June and to September. Still -- we still observe a solid inflow, and we are not expecting a massive turnaround with regards to deposit inflow from customers. This will depend very much also, of course, over the next quarters on the further development of the economic environment.
On Page 22, we start looking at some details on NII and NIM. Now first of all, solid volume growth, and the first effects of the interest rate hikes are supporting the -- in absolute numbers. What is for sure very important not only for you but very much for us as well is looking at where the net interest margin is developing to. And if we adjust for the TLTRO effect of the second quarter, we have been seeing stabilization of net interest margin. So in concrete numbers, 1.98% has been the adjusted net interest margin in the third quarter as well as it had been in the second quarter. So one can expect a certain stabilization from the industry tax. However, I personally believe that as long as the liquidity environment remains as it is, we cannot expect a massive recovery in margins overall.
Please bear in mind again that there is a couple of million FX effect in the Czech numbers. So around about 1/3 of this fantastic growth that we have been seeing there stems from the translation from Czech koruna into euro. Still, I think it's fair to say that the development has been very, very positive.
Taking you to Page 23 and mentioning that the trading and fair value result in Q3 has been just normal in the sense of good, again, in 2021, I want to spend a couple of words on net fee and commission income. Bernhard Spalt already mentioned that we are going from strength to strength there and think this is really a justified comment since the year-on-year net fee and commission income has been up by 20%. And for the third quarter 2021 over 2020 -- the second quarter, still 6%.
What is interesting to observe is that the components which have been driving growth have been more biased year-on-year to securities business and asset management, whereas the third quarter in a quarterly comparison has been very much and very positively driven by payment services, which also points to the fact that the summer season in our tourist countries has been much, much better than originally expected.
Taking you to Page 24. A couple of words on operating expenses. Well, basically, for the third quarter as well as for the overall year-to-date development, I'd stick to the statement that nothing special to talk about, especially as PEREX have been, in particular, very much under control and costs overall still so. However, as one can see from year-on-year changes and especially latest macro developments, the dynamics are about to change, driven especially by the effects of the strong economic rebound and, as we all probably follow day by day, the latest inflation numbers. Therefore, let me use the opportunity to make 2 remarks that are appropriate at this point in time.
On the one hand, just as always indicated and expected, some cost items return to our cost line. So Bernhard Spalt already mentioned marketing IT costs also going hand-in-hand with very much future-oriented investments. But of course, also some kind of soft items on the cost side are returning. This is nothing unexpected and is reflected in some OpEx items.
The other thing is with the inflation picking up significantly, our proven and well-established way to look at costs in the context of income potential will be applied in the forthcoming quarters, and we will need to see how the inflation dynamics will actually develop in some of our markets. I'm sure we are going to touch upon this in the course of the Q&A.
All of that, bringing you to Page 25, results in an operating result in Q3 of EUR 906 million. And I think this reflects a strong development, making use of the recovery in the CEE region and very much focusing on the key pillars of our strategy.
With this, I hand over to Alexandra for the risk part.
Thank you, Stefan, and good morning, ladies and gentlemen. I continue on Page 26. As mentioned already by Bernhard Spalt, the risk environment continued to be benign also throughout the third quarter, which leads us to a guidance upgrade to a maximum of 15 basis points. One of the last moratoria in our region that has come to an end was the moratorium for tourism in Croatia. Also there, we have -- equally as in the other regions after the moratoria, we have not seen a deterioration in the portfolio since then. The extremely good summer season in Croatia for sure was very supportive. Now only Hungary remains where the moratorium has been extended. However, the number of clients opting in has further decreased significantly and is at a very, very low level.
What have we done in Q3 in terms of risk cost bookings? We show a net release in Q3 of around EUR 30 million, which is mainly resulting from updated macro overlays, FLI. This release is partially offset by parameter updates that we already performed.
Net allocations in Q3 on single cases have been largely offset by recoveries. What remains for Q4, some remaining FLI parameter updates will be performed as well as the update of our industry heat map, which will lead to partial releases of our stage 2 management overlays.
As we continue being cautious, given the still very fragile pandemic environment, we aim at keeping a considerable part of our reserves from the overlays and carry them forward to '22.
When we go now to Page 27, you can see the development of our stage 2 portfolio on the right-hand corner. So stage 2 share has come down a little bit compared to Q2 and will come down a little bit further by the end of the year, depending on the final industry heat map.
The improved NPL ratio of 2.4% is mirroring the very low default environment, Bernhard Spalt has already mentioned in the middle of nowhere. The coverage remained strong in Q3 and is expected to stay strong also for the year-end. Given the low default environment and the revised NPL inflow assumptions, we expect the NPL ratio to stay stable also in Q4 and also the continuous stable recoveries contribute to our improved NPL outlook of roughly 2.5% NPL ratio by the year-end.
With this, I'd hand back to Stefan.
Thank you very much, Alexandra. To complete the picture, let me guide you to Page 28 and say a few words about the other result since in the regional segment, other Austria and Hungary, there is a little bit of a lower number for this quarter, adding up to EUR 91 million in total.
Well, actually, 2 out of the 3 dominating effects here are economically positive. Why? Because as mentioned in the comments, one part in the other Austria is related to an early loan repayment, which actually makes a lot of sense and will return better on the NII. So that's around EUR 20 million, the effect. The other one is on the other booking, there are valuation effects in the holding, which simply represent strongly the upgrade of overall holdings, which here has another operating effect, which is slightly negative.
The only item which is clearly a loss in that sense is the booking of the estimated effect of the loan moratorium extension in Hungary. I'm sure you have been watching the developments there. This will be redistributed in the fourth quarter then in detail to risk and NII. However, to be clear here, the effect is relatively limited given what the moratoria had as an effect in the course of the overall pandemic.
All of that, leading you to Page 29, translates into a net profit for the third quarter of EUR 533 million. And it's worth to mention that the tax rate, given the positive outlook for the upcoming years, is currently standing at 19%. And the outlook for the end of the year is that it will be this -- at this level or even slightly lower depending on the deferred tax asset development. That's exactly the counter effect of what we saw in 2020 and has been discussed with you a couple of times in former calls. Bernhard Spalt already mentioned, all of that leads to a strong double-digit return on tangible equity, and this is also our expectation for the full year 2021.
I want to spend a few minutes on wholesale funding and capital. And on Page 31, you see the debt securities issued overall. And I want to say a few words about the composition since there were some changes throughout the year. Due to the MREL issuance activities, we have issued more of senior unsecured bonds than in recent years, and we have -- due to TLTRO issued significantly less mortgage covered bonds. So that's a direct effect of the developments that we have been talking about quite often. And you see this different mix in the pillar on the right-hand side in the left picture. My colleagues in group markets made use of market opportunities by temporarily increasing via certificates of deposits their volume. And I can tell you that this has been adding positively to the excellent markets result also in Q3.
With regards to liquidity and funding in general, let me mention that we'll very closely monitor the further developments around the TLTRO and what ECB will actually then decide on this exercise. And then we will conclude whether and how much of the volume we might redeem earlier than the actual maturity of the instrument definitely, and this is important for you, we have all the flexibility to do so.
Nothing special on our maturity profile. Therefore, we can jump over to Page 33 and a more detailed MREL update. As you can see from the chart and bullet points on the right-hand side, we have been progressing very well with our issuance plan and placed MREL-eligible products in almost all our countries. Hungary, with a fairly low target volume, is still open, but everything is technically prepared, and I'm sure that we will also execute the first transaction soon in Hungary.
So please simply take with you that Erste is fully on track and compliant with the expectations of the regulator and equally important, so our own goal settings with regards to the execution of the NPE strategy.
The waterfall of the year-to-date common equity Tier 1 development on Page 34 is pointing to the strong increase of overall EUR 1.2 billion in CET1. Detailed mix and breakdown you find on Page 35. What is worth mentioning for the third quarter is that the inclusion of the prudent amortization of software assets has finally been done exactly as we always indicated, and the effect on CET1 is 21 basis points improvement, so just around the level that we always have been indicating earlier on. Therefore, the CET1 position overall stays stable in the quarter, although the third quarter profit is not included, and you see the pro forma number with 13.5% also mentioned on that page.
Since there is nothing else worth mentioning, the dividend information we have already been sharing with you at the half year call, I hand back to Bernhard Spalt for the conclusions and key takeaways.
Thanks, Stefan. Page #37, key takeaways and outlook. I will not relate to the key takeaways because I think we've gone into them already reasonably comprehensively. Let me just take you to the right-hand part of the slide, which is a 2021 outlook.
We've said that the outlook on the GDP will outperform the original expectations quite significantly all over our markets. We will see a mid- to high single-digit loan growth development, which is upgrading our guidance. And I do think that the outlook beyond 2021 will carry, yes, growth features and growth dynamics, still very positive environment, but it will carry also a lot of fragilities, which we need to watch and manage.
On the business performance side, we see a double-digit -- for 2021, double-digit operating growth result -- operating result growth. And the fees are still performing, I would say, in a very, very formidable way. So we expect here low double-digit growth for the entire year.
Credit risk, as Alexandra said, maximum 15 basis points for the full year. The narrower or the lower this figure gets, the harder is to really sort of be very accurate, talking about a couple of basis points right now, but it is reflecting this environment which we are benefiting from. And also, if I may say so, a very long development over the last many years, a long development of very, very good credit growth in terms of picking up opportunities which make sense in terms of risk/reward profile. So I think this is not only a reflection of now a positive environment, it's very much a reflection of the last, I would say, 10 years' very, very good sort of credit growth.
On the capital position, as we said, we anticipate to get the approval of the EGM in November of an additional EUR 1 for the year 2020. And we envisage a EUR 1.60 dividend per share for the business year 2021.
Profitability, net profitability will be significantly higher clearly than in 2020. And as Stefan said, double-digit return on tangible equity -- very solid double-digit return on tangible equity expected for 2021.
So this concludes our presentation, and we are very much looking forward to taking your questions.
[Operator Instructions] We will take the first question from Izabel Dobreva from Morgan Stanley.
I have 2 questions. The first one is on net interest income. I was hoping you can help us understand the impact of the rate hikes on your business. And especially, I'm interested in how much of the rate hiking benefits in Czech, Hungary and Romania you are retaining so far and when we think about factors such as the deposit fee income. And also keeping in mind the very strong deposit growth we have seen, has your rate sensitivity changed at all?
And then my second question is on costs into next year. You mentioned the scarcity of good labor. And also, it looks like the wage growth is, of course, accelerating. So how should we think about the level of cost growth into next year? Could it be as high as 4% potentially? And also what mitigating actions could you take to fight this wage inflation pressure?
And then my final question is very short. Capital is now at 14.5%. So I am curious, what is your latest thinking on starting a buyback, please?
Let me be straightforward on the NII. I think the translation that we have been indicating to you for a while still works. So that means 25 basis points interest rate hike in Czech Republic translate to EUR 25 million plus in our group P&L. This holds up well. And the effect of the Hungarian rate hikes is single digit but also positive, of course. So that's all going in the right direction.
Obviously, since you were mentioning deposits, there is to be observed how, in general, the pricing in the respective markets develops. It's true for the deposit side but equally so on the asset side. So we saw, of course, adjustments already in recent weeks. On the mortgage pricing in the Czech market, this remains to be seen how it will really develop. Some players are acting this, some players are acting that way. I think the translation into P&L is definitely holding up. We will watch it very closely. Should there be any changes, we will certainly inform our investors with regards to the effects.
Then costs. Now if we again would like to have a brief look at Page 24. And if you dare have a look on the year-on-year changes and look at the Czech, the Hungarian and the Serbian change, and I would like to add the Romanian because we were going down there in costs, however, there has been an exclusion of a former subsidiary. So actually, on a net basis, they are doing very well on costs, but it's also starting to increase slightly. So in those countries, we are enjoying the benefits of the rate hikes. That's nice, but in the same moment, cost pressure is, of course, there. You see the numbers on inflation in these local markets. This is something which will definitely be a topic on the table in negotiations with unions in the next couple of months.
So if you ask me today, what level of cost increases one should incorporate for the year 2022, I'm not able to give you a concrete percentage number. But definitely, one should expect those numbers to grow. In the same moment, our top line is massively benefiting from this development. So that's why I was mentioning that from country to country, from market to market, we will need to manage the overall efficiency and the overall return dynamics, i.e., also reflected in the cost/income ratio in very much detail.
So for Austria, for example, just to give you one number on the euro land, we are talking much lower numbers. Yes, there will be a stronger wage increase than in the last 2 years. That's easy to say because the last 2 years, we had 1.6%. But will it be 2.9%? Will it be 3.2%? I don't know. We will need to watch it. I think the dynamics are very strong, and we will certainly keep track month by month.
I think, Bernhard, do you want to take the capital question, please?
Thanks, Stefan. On the capital question, our management target, our internal target for capital levels when it comes to common equity Tier 1 is unchanged at 13.5%. So whatever is above this, you can consider and we will make it more explicit next time in our presentation as a buffer for either M&A or potentially share buybacks. I think give us a little bit of time, have some patience on the M&A side. There's nothing we can report today. But sort of on the next call, we will be more specific on how we look at the utilization of that buffer.
We'll now take the next question from Mehmet Sevim from JPMorgan.
I have just 2 questions, please. So firstly, on the fee income and the very strong trend that we're seeing there. Obviously, you've been highlighting this that this is also sustainable going forward. But if you look in the medium term, you were targeting that 4% CAGR to 2024. It's maybe early days, but given the very strong momentum that we're seeing, do you think that there could be an upside to this target? So basically, if you look at 2022, 2023, 2024, should we expect around 4% growth per year? Or could there be some upside?
And maybe on that also, in the short term, how would you expect the performance of fees in the fourth quarter taking into account any seasonalities? But also, are there any one-offs that you would expect similar to the last quarter of last year that -- which came from payments, for example?
And my second question, obviously, on cost of risk, the 15 basis points new target that you have, I'm sure this is still on the conservative side, but what would we need to get to that number specifically? Obviously, looking at the 9-month performance, we're very close to a flat cost of risk for this year. So do you expect any specific defaults in the last quarter? Or is that simply a conservative assumption that you have for now?
Yes. Thanks, Mehmet, for the question. And I would like to take it first in numbers on the fee income. And Bernhard, since you have been talking very much to all our colleagues in the countries recently about exactly this matter, I would kindly ask you to add some medium-term, longer-term qualitative comments on that.
Now fourth quarter first, it will be good. Fourth quarter typically is a strong quarter since there are some premium bookings and so on from partners, which, given the results in 2021, should all be arriving. Still, of course, there's always the risk of a drop in the capital markets, which will reduce, for example, the income on the asset management side. Overall, I think fourth quarter should be good and there is nothing in the -- so to say, in the business going on which would lead us to any concerns as such short term.
That we cannot repeat those growth numbers now quarter-by-quarter and year-by-year is a natural effect. That we should be expecting to reach some of our absolute goals earlier, that's very much a fair assumption and the EUR 2.4 billion that we originally indicated to be achievable in 2024. And frankly speaking, in 2020, we were rather thinking of might we have to postpone it by 1 year, now could very much in reach a year earlier maybe. Yes, that's definitely a fair conclusion.
And Bernhard, with regard to the detailed dynamics, you know more.
Yes. Maybe just on the same note, the underlying business trends will support minimum what we have announced in 2019 in terms of growth potential and CAGR potential. I even think that we can sort of significantly be better than that. However, there's always a constellation of the consumer protection side where fees are under permanent pressure. This is something which one also needs to take into account. But payment fees and securities fees and insurance fees will be doing well over the next years, and the demand is not sort of flattening out. It's rather rising specifically on the securities side.
Now on the question -- to the question on risk costs. I wouldn't call it a conservative assumption, but for sure, it's a cautious assumption. And I think given the still -- as mentioned, still very fragile environment, it's good to be cautious. What needs to happen that we -- that this 15 basis points come in reality.
So this 15 basis points for sure have some room for the parameter updates that we are performing in Q4. It requires that we can keep this considerable part of our reserves that we are planning to keep, which is roughly 60% maybe more of the reserves that we have been booking so that we can keep them and we do not have to release them. And third point, of course, is 15 basis points also leave some room for defaults. And I want to repeat what Bernhard Spalt has already said, the lower you get with the basis points, of course, the challenge, to be very precise, gets higher, especially in this pandemic environment.
The next question comes from Hai Le Phuong from Concorde Securities.
Congrats on good results. Just a couple of questions from me. Touching on your cost topic again so just that I understood it correctly. So you expect costs to be pressured, but also income benefiting from inflation. So does it mean that you still expect cost-to-income ratio to improve further from this kind of nice level? Or have you seen the bottom of the cost-to-income ratio for the next couple of years?
And my second topic would be on Romania where the COVID situation is quite bad and also the political situation is rather noisy these days. So have you seen a worsening operating environment there? Or what is your outlook in general here? So is it still sound in terms of operating environment?
Very clear on your cost-income ratio question. Our ambition to deliver positive jaws also going forward is completely unchanged. Of course, given the very likely excellent operating result in the year 2021, it will be a challenge to beat it and to improve further 2022 and to improve further 2023. But it's the clear ambition, i.e., the income will need to outperform the cost line, which in some countries means that we will drive it very much from the top line in those countries where inflation might be rather modest. Definitely, the cost reduction and the cost adjustment will remain a top priority. So that's the answer. So a clear commitment to positive jaws also going forward.
Let me take your second question on Romania, and if I understood it well, a sort of combination of how is COVID -- our COVID figures developing and how our politically circumstances developing and does this change our operating environment.
I think you touched upon an important point when it comes to COVID figures. This is a point of concern for all of us still. Vaccination rates, yes, are going up, and they are going up very sort of in a very different way from country to country. And Romania is sitting here the low in terms of still hovering around 30% vaccination rate, which is not in itself a strong pillar of, how should I say, confidence.
Overall, still, our economic activity is very, very dynamic and positive in Romania. The environment is dominated by a strong demand overhang and full order books on the corporate side. So economic activity, good political fragility has been featuring Romania for as long as we know Romania. So that is not much different. But now the vaccination rate is not something which leaves us unconcerned. And we hope that this is being worked upon. Just compare it to Austria, headquarters levels in Austria, vaccination rate in excess of 90%, which gives you an entirely different kind of level of confidence.
We'll now take the next question from Benjamin Goy from Deutsche Bank.
Two questions, please. First, even though you're a third party, would be interested in your view on the CaixaBank announcement on the placing of the stake in Erste Group and what's potentially needed. Because it sounds like they are in discussions with Erste Group Foundation, but what's holding up kind of a solution here? Do you think the dividend payment could speed up the process?
And then secondly, just talk about M&A. Typically, it's about consolidation of banking assets. I was wondering whether you also specifically look, so to say, add product factories like the small deal in Hungary you did with retail brokerage? Is there other stuff to come and you think that would -- might even fit better than just adding a subscale player to your existing franchise?
Okay. I will be very short on the Caixa announcement because this is happening in the owner's sphere and not on the company's sphere, very little I can add to that. Caixa has already, in late 2020 when they announced their acquisition and intended merger with Bankia, said that they will review all of their minority shareholdings. And as much as I know, they have gotten rid of all of them with the exception of the position in Erste Group. And now Erste Group is sort of the last piece in this puzzle. So it's consistent with what they announced. I've got nothing more to add to that. So for the bank, this is not our sort of, how should I say, sphere of control. And the foundation will continue to sort of control a syndicate of 20% plus. And there's nothing more I can sort of add in terms of flavor to that kind of picture.
In terms of consolidation, again, there will be opportunities, whether it's portfolios, whether it's businesses, whether it's smaller banks, in the region, in all of our markets, and we will look at all of them still in the same kind of context which we mentioned last time. If they fit to our strategy, if they're earnings accretive and capital accretive and if they're inside our capital abilities without tapping the capital markets, we will have a look at them.
We'll now take the next question from Gabor Kemeny from Autonomous Research.
A couple of follow-up questions from me, please. First one on the macro overlay provisions. Can you just confirm how much is left and just in euro terms? And what is your thinking around keeping more of the overlay provisions? I think on the second quarter call, you indicated that half of the reserves could be carried over. And now the macro picture looks more supportive. You talked about GDP growth upgrade, et cetera, and you are indicating that more of the overlay provisions could be carried over. So that's the first one.
And the second one, you talked about momentum in new lending with some potential fragilities. Could you talk about where you see any particular risk of overheating in your markets in the context of inflation picking up? And specifically coming back to Romania, would you be able to comment on how possible currency devaluation could impact your capital ratios and earnings?
I would start with the question on overlay. So overall, in terms of euro million, we have built overlays from macro FLI and from stage overlays in 2020 of roughly EUR 600 million, EUR 650 million. From this EUR 650 million, we intend to carry forward 60% plus. What has changed to the previous assumption of 50% plus from the environment, you're right, not much. But what we see is that we would like to keep not only the typically COVID-hit industries like tourism and international transportation on our heat map, but we are also taking a closer look on those industries which are now partially suffering or could potentially suffer from the higher energy prices and also from the delivery chain topics, so like automotive and metals. So this is the reason why we think we would have a good reason to carry forward more than this 50%. But of course, this all needs to be very well documented, very well analyzed and also aligned with the auditors because we can only carry forward what is accounting-wise justifiable.
Okay. On this fragility/inflation, lending outlook and potential risk implications, let me sort of frame it like this. What we see in this context of huge growth rates in 2021, for 2022 is a situation where the search for qualified labor staff, the sort of fragility of delivery chains and supply, sort of in general in terms of commodities, will be a sort of, how should I say, potentially capped for underlying growth momentum. So what I'm trying to say is that growth might not have the dynamics one would expect because of these limitations or because of this imbalance between supply and demand. I do not think that this will translate specifically into a risk cost, but it might be sort of slowing down loan growth as we go. So I think this is what we wanted to say at that stage.
With regards to your question -- Gabor, with regards to your question on capital and potential impact of currency change or currency moves, first, a general answer. So if you consider theoretically a 5% depreciation of major CEE currencies, you would have, on the one hand, a negative impact on the regulatory capital of, say, something in the area of 30 to 40 basis points. On the other hand, of course, with a positive impact on RWAs translated into euros, this would reduce to something in the area of 20, 25 to 30 basis points because, of course, RWAs would be reducing. So that's just as a general guidance if you consider a CEE currency depreciation. Obviously, the major effect would come from the Czech currency.
And with regards to Romania, we do not particularly foresee any weakness at the moment in our economies on the currency there. But for the sake of numbers and facts, we are holding EUR 2.1 billion in equity in Romania. So whatever kind of scenarios you want to run, this would need to be the basis.
Very helpful. As more follow-up perhaps to Alexandra, would you be able to quantify your direct exposures to the industries which might be directly impacted by the gas prices?
The gas prices. Well, the -- maybe overall what we are currently analyzing, so roughly to give you a number, this is roughly EUR 500 million exposure directly impacted. But what we are, of course, also analyzing is potential indirect impacts. So this is nothing which is worrying us for the moment, but just, I think, we are well advised. So we are convinced that we are well advised to have here a close look and to keep stage 2 overlays for those where we deem it meaningful.
We will now take the next question from Johannes Thormann from HSBC.
Johannes Thormann, HSBC. Three questions, if I may. First of all, coming back to the countries, which countries surprised you so far the most in 2021 positively and negatively probably? And which one has the best outlook for 2022, in your view?
Secondly, coming back to NII, could you elaborate a bit more on the impact of rate hikes on the deposit business, in your view? How much will it stop inflows? Or will this burden from this business just go away?
And last but not least, at the beginning, you talked about the ESG mortgages. How much is this business potentially cannibalizing your own business? What are the incentives to do this business for you as well as for the customers and probably also the pricing differential compared to normal mortgages?
Maybe I'll start with the first, and I'll take the third question. The first question, which countries surprise us the most and which countries having the best prospect for 2022. I think with the exception of the speed of the interest rate hikes, which were clearly a positive, let's call them surprise, the countries all have demonstrated a very, very positive and solid business performance, and we expect them to sort of continue to do so in the next year.
What we don't mention enough, I would say, is Austria in the context where the savings banks -- of course, a lot of that is going out through minorities. But we're always talking in a sort of -- how should I say, in a sort of downtalking way about the savings banks. They've been doing really well over the last 9 months, and they will continue to do well. So I think one shouldn't underestimate them in terms of what kind of business sense they make. But overall, I would say we are really happy with all of the countries development, I would say, and expect them to continue to do a good job also for 2022. So no, I wouldn't take out one of them.
On the ESG mortgage cannibalization, I don't see that. Yes, there will be some cannibalization for outright new business, but there will be a lot of add-on opportunities when it comes to changing the energy efficiency of existing real estate. If you look at the quality of flats, and this is not only true for Hungary, Romania and the likes, it's also true in Austria, there's so much to be done when it comes to energy efficiency and exchanging your heating systems and exchanging other kind of components so as to also make use of subsidies but also, of course, make use of financing. And this is on top and not instead. So I do think that there is a huge opportunity which will grow over the next many, many years because the difference you can make when it comes to energy-efficient systems in a house are making, cash flow-wise, a huge difference for the borrowers. So I think that is not a cannibalization game. This is an on-top game. And when it comes to pricing, I do think this will be, broadly again, a positive game because the subsidies coming in.
Johannes, back to the question on deposit repricing, the effect of rate hikes on deposits and so on. As you know, we have always been more cautious on the impact also adjusted for size in Romania and Hungary, translating into good income -- net income. And the reason for that being that we expect in Romania and Hungary a more explicit repricing of both retail and corporate term deposits then we do that in Czech Republic.
Now this is an assumption. It doesn't have to be materializing that form, but both the market environment, the competitive environment and also experience from the past are pointing in that direction so that we might see a relatively swift and fast repricing of deposits in Romania and Hungary, whereas in Czech Republic that might come slower and might depend on the different business segments.
Overall, and therefore, you have, of course, a clear point here. The client deposit repricing will be very much key not only for us with regards to the impact on P&L but also for the central banks, which, at the end of the day, are trying to steer their local economies in the reaction to local inflation.
The next question comes from Riccardo Rovere from Mediobanca.
Three, if I may. First of all, when I look at Page 15, when you provide the macro update, in the first chart and in the last chart of the top of the page, you have real GDP growth more or less 4%, maybe 4% to 5% in 2022 in the various countries in which you operate. And then you have consumer price inflation, 2%, 3% roughly. Is that possible -- is it possible that the loan growth that have been seen so this year in 2021, so let's say, high single digit, to continue the same way in 2022 if those numbers had to prove correct over the course of 2022? This is my first question.
The second question I have is just a clarification on the 15 basis points, and this is probably a question for Alexandra. If I understand it correctly, the 15 basis points does not take into account any release of the, let's say, if I understood it correctly, 40% of the EUR 600 million, EUR 650 million overlay in Q4, if I understand it correctly.
And last question I have is when it comes to Caixa, could there be any legal impediment for you to eventually buy [indiscernible] shares from Caixa directly? I don't think there should be given they did it with [indiscernible] a week ago or so, but I just wanted to check with you.
Riccardo, very briefly on your first question regarding macro and translation into loan growth. I think you definitely understood that the guidance is for 2021, and we did not extrapolate it necessarily into 2022. So it's clear that a slowdown in the GDP growth will have an impact on the loan growth naturally. So we will watch macro numbers very closely.
It's very hard to predict into what extent an immediate impact on the loan production will take place. We are quite optimistic given the situation also on the labor market and so on. But naturally, should we come in, let's say, 3%, 4% lower in GDP growth in 2022 in average compared to 2021, it's a natural effect that then loan growth would also somewhat slow down. It's too early to say. We will certainly be in more detail then going into the new year and update you on that. But obviously, that this is a macro effect on loan growth as well is absolutely correct. That's clear.
Maybe on the last question on Caixa and the share buyback. When I was talking about a potential share buyback or a share buyback buffer in the context of our excess capital, I was not insinuating any kind of bilateral or preferential deal but an ordinary share buyback towards the general market.
And finally, on clarification on the use of reserves. So in our current 15 bps forecast, we do not foresee a release higher than maximum 40% of the reserves. So this is what we are planning part of the releases we have seen in Q3 from FLI updates, partially offset by parameter updates. And additional releases from FLI updates but even more from stage 2 overlays coming from the industry heat map update, we will see or we are planning expecting for Q4.
We'll take the next question from Alan Webborn from Societe Generale.
First question, are you seeing any impact of the supply chain issues in terms of your ability to lend, for example, auto leasing, anything else like that? Are you seeing any direct impact on your business in the regions from that?
Alternatively, are you actually getting more demand in terms of some of your customers seeking to replace production that's not coming from elsewhere? Could you give us an idea of how that's impacting the dynamics of your business currently? I understand what you say about future risk issues and so on, but now that would be interesting.
Secondly, you talked about the potential for sort of mortgage growth related to sort of ESG transformation, climate change and so on. Do you think that the overall sort of packages that you've been talking about in terms of the regional development are directly impacting your loan portfolio as an addition now? Or do you think that's something that we're going to see more in next year and the year after? And is what you said about mortgages being an addition rather than cannibalization, do you also see that for the whole of the sort of climate change issues that you're seeing in the region? That was the second question.
And the final question was do you get to a point where the very sharp increases in interest rates, what you're seeing or likely to see in the Czech Republic in particular, do you feel that really has a bit of a shock on demand sort of mid next year? Or do you think it's something that the country can deal with?
Let me take question number two upfront. ESG mortgages and ESG-related financing opportunities, when will they come. This will be a feature of 2022 going forward for a variety of reasons. Many of these subsidies schemes, which will be part of the offering, are now being developed. And the same is true for all of these national programs in the context of these EU next-generation funds. These are now schemes which are being developed by the local governments, being input in the local legislation and which will then form a part of our offering and part of our advisory services. I would not expect that to change at all the picture for the next 1 quarter, 2 quarters or so. This will go well into 2022 when this will change the new business mix both on the corporate as well as on the retail side.
Then I would take your question on the impacts from delivery chain, supply chain topics on potential working capital financing. So on a very general base, those companies in our portfolio affected by high energy, freight and commodity prices, they are mostly reporting high demand and full order books. So, so far, no negative impact on our portfolio. What we do not yet see is resulting higher working capital demand, but this is the current situation not yet, and we would not exclude that this will come maybe also on the short term.
Yes. And regarding the potential, I use your words, impact of sharp increases in the sense of shock of demand. Obviously, the goal of the acting central banks, and I think, in particular, Czech National Bank, is to limit the inflationary tendencies in a very, very early stage and by swiftly and much more radically reacting than other comparable central banks like the Polish one and others. They definitely have the goal to avoid both an overheating of some of the developments in the economy as well as in connection with that, shock of actual economic activity, and with that, of course, also demand on the loan production. So I think we will learn more later this week when the Czech National Bank holds its next meeting and will very likely set the next step. And I'm sure they will also comment with regards to their intentions.
Now for our business, I think it's going to be very important how the shape of the curve develops. If you look at the shape of the Czech interest rate curve, then it very much points to a scenario which is, I would say, indicating some inflationary tendencies later into 2022 but then rather coming down, and actually, the Czech National Bank reaching their goal. And in such a scenario, I would definitely not be afraid of any kind of shock of demand. I would rather expect a very appropriate and probably also for our business, helpful scenario. It's very difficult, of course, to forecast in detail, and we will watch the scene together and see what happens into 2022.
We will now take the next question from Hugo Cruz from KBW.
Just 2 quick questions for me. First, I know you give more clarity on M&A in Q4. But I'd just like to understand, when you think about M&A, is there a certain war chest to the same euro million amount that you have in mind that you always want to keep? Or is it more just always assess it on a deal-by-deal basis?
And second, we have seen some news on Basel IV from European Commission recently. Do you -- can you give any guidance on what could be the impact for Erste?
Let me take the first question on the M&A part, is there a specific war chest or are we considering everything deal by deal. It's certainly deal by deal in the frame of what I've mentioned before. So it's not a specific amount of money we want to spend. It's a sort of deal-by-deal analysis. Does it fit? Does it pay off? Does it sort of play on the capital side? So I think that would be the answer to it.
Can you repeat the second question because I don't think...
This is mine. I take it. This is Basel IV. This I take. So nothing has changed from our expectations. So the Basel IV [ CR3 ] regulation is expected to have no negative effects on our portfolio.
We will now take the next question from Krishnendra Dubey from Barclays.
I have 3 questions. The first one on NII. Could you please remind us of your TLTRO balance? And is there any follow-up or catch-up that is expected in Q4?
Secondly, on cost, given the inflation print that we are seeing across various geographies, the staff expense is going to increase next year. So what are the flex that are available for you in terms of cost in the non-staff expenses that you could utilize to maybe achieve your target or remain at 55% given some of the costs -- COVID-related costs, which might not have happened in 2020 and 2021 could come back in 2022?
And lastly, could you please update us on the tax rate guidance for this year?
Sure. I try to be crisp on those 3 because I think they can all be explicitly answered in -- with numbers or quick statements. So first of all, no further catch-up booking, subject to any changes, the ECB might apply to the overall TLTRO system. So should that happen at any point in time, then we have to update you anyway on the effects. We currently are holding EUR 21 billion in total across several legal entities and overall expect for the year 2021 or actually know that the effect will be just a little bit north of EUR 100 million. Most of that has been booked in the second quarter, as you know.
Costs and influence on inflation. I mean, naturally, and I've said that a couple of times in calls that short term, always, the cost-to-income ratio is being driven by the income line and the cost then can -- the cost management and disciplined cost management over a longer period then positively influences the development. So in other words, should you have a very quick and very aggressive peak in inflation and the top line might not go hand-in-hand, then you will have a short-term, let me say, deterioration on cost/income ratio. I do not expect that. We see a lot of very good signs to improve further our top lines and outperforming with our top lines the cost development.
So as I said already earlier on, our ambition to deliver positive jaws year-by-year is there. Will it be necessary always possibly every single year? That, of course, remains to be seen.
And the third thing, tax, 19% is the current overall tax rate being applied. We expect this not to go any higher. Will it go lower? It depends on the final budgeting and the final details of all the tax outcomes but certainly will not go higher for the full year 2021.
Sure. Just a small follow-up on the cost. By the flex available, I meant was more in terms of do you have any like the real estate expense or any other thing which probably could be -- as an example, which could be optimized in the near term to offset some of the cost pressures. So I was talking more in terms of what are the flex that you see as available for you in medium term.
There's always room to improve, always room to increase efficiency here and there. Definitely, we will not take any actionistic action there. It is -- we are so broad in all the markets where we operate. So we will need to face the challenge and we will need to deal with it in a proper way. You will not see any actionistic selling of this or that in the context of the inflationary developments. This will not happen.
The next question comes from Andrea Vercellone from Exane BNP Paribas.
Quite a few questions from me. Some on NII, one on trading and one on risk-weighted assets. On net interest income, talking about the sensitivity to rising rates in the Czech Republic, how much of it comes from simply your investment portfolio, your liquidity portfolio and how much of it comes from the actual sensitivity of the rates on the loan book? And attached to that, more general for all the countries, if you can qualitatively tell us what you see in terms of margin developments, competition, et cetera.
On the TLTRO, I understood the answer to the previous question. I wonder whether the same also applies in 2022, i.e., if you do meet the benchmark and you do not repay the TLTRO ahead of time, do you also not expect any one-off?
On trading, can you remind us of more or less what is your quarterly guidance going forward? And do you see any negative implications in light of the rising interest rate environment in some of the countries?
On risk-weighted assets, for Alexandra, if you can remind us of the add-ons that you still have given that you have had a number of model changes in the past. So some of them would have gone. And if you expect a positive impact or not from the removal of whatever residual you have. So far, that's simply gone, but they have been offset by other negative aspects.
I hardly was able to follow every single part of your question, but I try best and you just get back, please, quickly. So the easy one is the TLTRO because here, we are -- if you want, given the volumes that we hold in some, we are passengers of further ECB decisions. So we will benefit again in 2022, but subject to the ECB changing their rules with regards to beneficial levels, there will not be any kind of catch-up level -- catch-up booking at the level that you saw it in 2021. However, as I mentioned before, should they -- and there are, of course, scenarios which could lead to this. Should the ECB extend the favorable minus 1% and should we, and we are quite confident on that, again, achieve all the volume targets, then automatically adjusting for the way we account for it, there would be a churn. But that's a theoretical discussion at this point in time. Current rules of the, so to say, TLTRO game would not lead to any catch-up booking in any comparable size as we discussed in this year.
The other question was with regards to investment book versus other effects. Of course, the investment book is a very important part of the Czech operation and since we have been investing our over liquidity and very successfully so in the last couple of years into the investment book. I cannot give you a precise percentage of what part of the effect would be in the investment book. We can follow up on that. But I would say the major part comes from the loan book, the major part comes from the overall ordinary business.
And then I think you were also asking about...
Trading.
What was that? Trading, yes, trading. Trading, very simple, EUR 50 million to EUR 75 million per quarter as a guidance. And if you look at this -- the quarters this year, it was perfectly fitting in, the trading, and including fair value. And just to make a qualitative statement, this is not an investment book. This is a trading book. Therefore, it's relatively independent of short-term ups and downs in interest rates.
Now to your question, RWA, specifically on the add-ons on credit risk. So as of Q3 '21, we are carrying add-ons of EUR 6.6 billion. The biggest one -- or the 2 biggest ones, one is the very well known from [indiscernible] IRB of EUR 2 billion and EUR 2.4 billion on the new LGD methodology. We are working on removing these add-ons and by closing of findings and of remediation actions to get rid of those add-ons over the periods to come or at least to lower it substantially.
On credit risk RWA. So no negative method effects are expected for the next periods. So as I said, to repeat, rather a relief and overall credit risk RWA growth in line with business growth. Let me make one remark on -- as you were asking on RWA. On market risk RWA, there will be a method effect next year is the EBA guidelines how to treat FX-induced -- so the FX-induced credit risk in Pillar 1. So this will be an impact on market risk Pillar 1 starting in '22.
I didn't understand, out of the EUR 6.6 billion RWA add-ons, you plan to resolve all the critical points and update your models, release those RWA add-ons or a part of it. But does it mean we should just take them out or they will simply be replaced by higher model-driven RWAs?
No, they will be reduced. So we will partially remove them, so they will really be reduced, not entirely but to a considerable extent. This will take some time as the remediation -- yes. So this will not happen -- not in Q4 but over the periods to come.
And then I had a final question, more on the -- if you could make some general statements on the competitive environment in the various markets vis-a-vis NIM.
Let me just sort of take that question for all of the markets. The situation is completely unchanged. So the pressure is on. Competition is high. All of the banks are sort of liquidity long. All of them have sufficient capital to lend. All of them have an overhang -- or most of them have an overhang in deposits. So yes, margins are under pressure and will continue to be under pressure. And luckily, that's the same statement which I made the last time. The competition is happening on the margin side and not on the underwriting standards side.
Let me do a brief correction. I've mentioned the EBA guidelines. This was on structural FX risk, not on FX in those credit risk, just to be precise.
Okay. Thank you, Alexandra. Operator, we are taking our final question now from Simon Nellis.
We'll take our final question from Simon Nellis from Citibank.
I just have one quick one, and it's more of a clarification. You seem to be performing better than you expected and you have a very strong outlook for the fourth quarter. So I'm just -- the question is on the dividend of EUR 1.6 that you are planning to propose. Is that a hard target? Or could that be revised upwards if you have another strong quarter? And that's it for me.
Well, this is a target as we see today. I think you need to also see it in the context of a potential share buyback, which we have mentioned earlier on in the context of excess capital, which we're continuing to build.
But the EUR 1.6 is fully confirmed, 1:1. It's also what we have been aligning with the GSD/ECB. And that's all on the dividend. And share buyback has just been commented by the CEO. So that's the situation on capital distribution as we stand.
So thank you very much, ladies and gentlemen, for your interest in our call. Thanks for your attention. Let me sort of announce the next 2 events which are, I think, relevant down the line. One is the AGM on November 25 with one agenda point, and this is the additional EUR 1 dividend per share for the business year 2020. And we will reconvene for an earnings call on February 28 next year for the full year preliminary results 2021.
With that, we conclude the call, and thank you very much. Bye-bye.