Erste Group Bank AG
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Erste Group Bank AG
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Welcome to the Third Quarter 2022 Results Call of Erste Group. My name is Caroline, and I will be your coordinator for today's event. Please note, this call is being recorded. [Operator Instructions].
I will now hand over the call to your host, Mr. Thomas Sommerauer to begin today's conference. Thank you.
Thank you very much, Caroline, and good morning to everybody who is listening in. In today's conference call, we follow our usual procedure, Willi Cernko, our CEO; Stefan Dorfler, our CFO; and Alexandra Habeler-Drabek, our CRO will lead you through a brief presentation highlighting achievements of the past quarter, after which we are ready to take your questions.
Before handing over to Mr. Cernko, let me also point you to Page 2 of the presentation, which contains the disclaimer on forward-looking statements.
With this, Willi, I hand over to you.
Thank you, Thomas. Hello, and good morning, everybody. Let's get started with Page 4 of our presentation with the key priorities. We are convinced that there is still plenty of organic growth potential in our region. So we don't see a need for a change with regards to our geographic footprint. Bolt-on acquisitions from existing resources are always an option. The other aspects of our business model are also strong, so will be maintained. But there will be a stronger focus on execution from now on by setting 2 key priorities. I'm talking about improved data analytics and significant expansion and enhancement of our digital offering with the core aim to capture a higher share of clients' wallets.
Let's go to Page 5. Based on the points made on Slide 4, we have updated our financial path to '24. First of all, we can confirm that we will deliver our 24th targets. I'm talking about fees of EUR 2.4 billion and a cost/income ratio of 55% early in '22. Hence, we are setting the bar higher throughout the period '22 to '24. Our key goal is operational excellence expressed by continued positive operating jaws. Accordingly, our cost/income ratio target is now 52% by 24% rather than the original 55%. In order to get there, NII is already and will remain a pillar of strength for us. For '22, we are going to expect 20% and for '23, we are considering 10% NII growth.
Fees, offer long-term and structural growth to us. Costs will be tightly managed and the increase will remain below wage inflation. Risk cost should remain low as we have significant buffers and solid underwriting standards. We are expecting that the labor market will remain strong and see that should also be supportive of low risk costs. We have a strong track record in sustainable profitability and 2022 and '23 will be no exception with the target ROTE for '22 of approximately 14% and for '23, 13% to 15%.
Having talked about the future, let's now have a brief look. Please follow me on Page 6. Having talked about the future, let's now have a brief look at what happened so far this year. The only point worthwhile mentioning on the left-hand chart, which shows the quarter-on-quarter comparison, meaning third quarter '22 versus second quarter '22, is that we build further general provisions in line with our risk cost guidance for '22 to be even better prepared for the upcoming macro slowdown. The comparison of the first 9 months '22 with the same period in the previous year is more impressive as it shows the key driver of profit improvement, and this is clearly revenues driven by NII and this comes from higher loan growth and higher rates and fees. And the picture would have looked even better if the trading and fair value lines would not have been impacted by interest rate related valuations. So all in all, a remarkable strong picture given the circumstances.
Coming to Page 7. Having already talked about our expectations and key P&L developments, let me just highlight on this page the improved margin situation, which we expect to continue in '23. And the fact that we achieved an ROE north of 13% and the ROTE north of 14% in the first 9 months of '22, I think it's not a bad performance bearing in mind that we already had to pay windfall taxes in Hungary and there is probably a similar measure to come our way in the Czech Republic. Both are painful to shareholders, but at least limited in time.
Coming to Page 8. Let's have a brief look at our balance sheet performance. There is one key development here and that is an exceptional growth in customer business volumes. Both net loans and customer deposits are up by more than 10% in the first 9 months of the year, and both have been growing faster than the overall balance sheet. This shows once again that we are strongly rooted in the real economy at an 85% loan-to-deposit ratio.
Page 9. If we look at the same key balance sheet metrics, now we can be very satisfied as well. Let me just highlight that we set another post IPO best for the NPL ratio. We're now at 2% with a very strong coverage. You will hear more about that from Alexandra later. And if we look at our capital ratios, there can be no complaints either. Our CET1 ratio is consistently above 14%, even taking into account that our business growth is exceptionally strong. Stefan will give you the capital details later. Our liquidity coverage and leverage ratios have been remained traditionally strong.
That is for an introduction. Let's now look at the latest economic trends and forecasts and what's happening on the ground in our retail and corporate business.
Slide 11. A key figure of '22 was clearly that economic growth so far turned out better than was expected following the start of the war in Ukraine. So if you will, the economic slowdown has been postponed to '23. I'm specifically saying slowdown because we currently do not project negative real GDP growth for any of our countries in '23. There will be many challenges for sure, but there are also buckets of strength. Among the challenges, we clearly have to mention the significant increase in energy prices and its effect on inflation. Nonetheless, we project that inflation should at least not get worse in '23. In some markets, even improved significantly. With this, we do not expect that interest rates will fall dramatically next year. So underpinning our NLI optimism.
A bucket of strength is clearly the labor market. You remember well that we were talking about labor shortages not long ago and actually still do. This will probably relax somewhat in the light of a weaker economy, but should remain strong enough to keep our retail costs down. While current account and budget balances are currently stretched in many countries due to high import prices of energy and fiscal support measures, this should get better next year as well. So all in all, I would say that glass is rather have full than half empty.
Moving to Slide 12, talking about the glass half full is also an adequate description for what's happening on the ground in the retail and in the corporate business. Yes, we do see declining new business volumes and mortgages in wake of higher interest rates and increased regulation. But also, yes, the stock of mortgages is still up both year-on-year as well as quarter-on-quarter. And yes, the number of newly opened securities savings account dropped in '22. But the positive news is that clients have not completely turned away from investments in the light of a dramatic market volatility. And this makes us optimistic as far as fee income outlook is concerned.
Continuing with the retail topic on Slide 13, you can see that our digital business is also flying high with clients increasingly adopting digital banking. Currently, we have more than 8.6 million users onboarded to George across 6 markets. And this number is further going up every quarter. And this is not the end of it. As I mentioned in my introduction, the significant expansion of our digital offering by turning George from an interface into a platform is one of my -- is one of our key priorities.
Moving to the corporate business on Page 14. I think it would be a fair statement to say that this segment was the key growth driver throughout '22. Volumes are up dramatically, mostly as a result of higher demand for working capital facilities, and I'm convinced this will stay. At the same time, demand from the real estate sector could somewhat as interest rates started to rise. Our markets business, again, successfully helped clients in tapping markets. Well, Asset Under Management rank somewhat as market declined, but that was nothing unexpected. Overall, we continue to see asset management as a key structural growth opportunity going forward.
And with this, I hand over to Stefan for the operating trends. Stefan, please?
Thanks very much, Willi. Good morning, everyone. Please follow me to Page 16. Analyzing the operating trends in more detail, let's start with lending and deposit volumes. As already mentioned, the main driver of growth this year has been the Corporate business with not less than EUR 10 billion year-to-date volume growth. Overall, we are now guiding for a total loan growth of more than 10%, which is in real numbers around about EUR 20 billion, meaning from EUR 180 billion around about by the end of year 2021 to around EUR 200 billion by the end of the year 2022. Let's also mention that retail and savings banks has been holding up strong with around 8% year-on-year growth.
When it comes to the year-on-year geographical segment trends, the following points are worth mentioning. Large corporates have been a major driver of new loan generation since the war has been kicking in for reasons that we have been discussing in former calls and certainly will be part of the Q&A today again. And particular country developments, I would mention 2 on that page. On the one hand, in Czech Republic, while overall loan growth has been holding up well, we have seen a significant slowdown on the demand of mortgages, which is exactly what we have been expecting due to the peak of the rate hike cycle. And on Hungary, please consider the fact that all the numbers here are euro numbers, i.e., the respective decline is exclusively related to the Hungarian foreign devaluation.
Going to the deposit development on Page 17. Let me state that the overall loan-to-deposit ratio on group level is quite stable. We were reporting 84.9% loan-to-deposit ratio by the end of June, and we are reporting an 85.5% loan-to-deposit ratio by the end of September. Actually, both loans and deposits have been growing with the same number, but of course, slightly changing the ratio. However, and this is very important to understand the developments are very different from country to country. And that's also why we are managing liquidity and deposits pricing as well as volumes very individually country by country.
I just give you 2 kind of extreme examples of 2 neighboring countries. In Slovakia, both the whole market and Slovenská sporitelna are above 100 loan-to-deposit ratio as of today. While in Czech Republic, I think the whole market, but definitely Ceská sporitelna still has a loan-to-deposit ratio even below 70. So you see that there are very big differences and this needs to be taken into account when managing those respective businesses in the countries.
Coming to Page 18 and the enormously important topic around NII and NIM. As already mentioned, we have upgraded our NII increase for the year 2022 to 20%. That's of course, due to higher loan growth and higher interest rates, of course, in particular, driven by the latest developments in euro interest rates. Margins in business have started to adjust for and reflect the changed environment and financial market credit spreads extension. However, the situation, again, very much differs from country to country. And when going into the details on, for example, the Hungarian market or also the Austrian market, we will certainly discuss particular local developments. All in all, still the margins and the NIM is on an upward trend, first time, I would say, in many, many years, and we expect this to hold on for quite a while.
Coming to Page 19, let me start with net fee and commission income. The third quarter has delivered -- in the third quarter, we have been delivering a solid above EUR 600 million net fee and commission income result. And we do now expect to achieve the EUR 2.4 billion. Willi already mentioned it, formally targeted for the year 2024, already this year. And we guide for further 5% year annual net fee and commission income increased for the year 2023. So you can expect a triple-digit increase to be incorporated into our target guidance for the year 2023.
The composition of the trends, [ or as one ] would expect in the current environment, pointing to the fact that the payment services have been the main driver of growth in net fee and commission income.
Coming to trading in fair value results. Those results, all in all, in some of those 2 lines have been clearly negative in the third quarter, around about EUR 90 million. What have been the main drivers of the year-to-date total around about EUR 100 million negative result of trading in fair value. Number one worth mentioning, other fair value loans in Hungary. This is a temporary negative effect due to the fast rising interest rates, temporary in the meanwhile, for a couple of quarters in the meanwhile, of 1.5 years. Still, due to the duration and the maturity of those loans, we expect those valuations to recover in the upcoming periods.
The second effect, and this has been a comparable size. So we're talking in both cases, EUR 75 million to EUR 100 million year-to-date are coming from savings banks and the fair value fund holdings, those are obviously impacted by higher rates and should also normalize over the course of the upcoming periods. That's why we expect trading in fair value to return into the range of our usual guidance, EUR 200 million to EUR 300 million for the full year and EUR 50 million to EUR 75 million in average quarterly respectively, for the year 2023.
Let's talk about a couple of important points on operating expenses, showing numbers on Page 20. First of all, let me comment that on a quarterly -- on the total view, we have to take into consideration that the increase is or the jump between second and third quarter is exclusively attributable to the reversal of extraordinary deposit insurance contribution Sberbank. So the EUR 46.5 million reduction in costs in the second quarter was, of course, not repeating again in the third quarter. So that's just this technical comment for Q3 versus Q2.
Much more important is the fact that we are guiding and aiming for 6% year-on-year increasing costs. Although currently, for the first 9 months, we have an increase of 7.7%. Unfortunately, the reason is not that inflation has been coming down, but simply the fact that the fourth quarter 2021 has been impacted by a couple of extraordinary costs, which we do not expect to repeat in that dimension in 2022.
For the year 2023, we are, of course, challenged by a very inflationary environment. That's why we will not be able to keep the cost increases at the levels of this year. Still, and our CEO has already mentioned it, we are guiding for 7% to 8% cost increase 2023, over 2022 on the back of current inflation expectations.
What does all of that mean for our total operating performance? In the summary you find -- summary you'll find on Page 21. The cost/income ratio for the first 9 months has been slightly below 54%. That's why we are now absolutely convinced that we will achieve the cost/income ratio target of less than 55% originally targeted for 2024 already in 2022. And the CEO has already clearly defined the way forward. I don't need to repeat that. But what I want to repeat and strongly reiterate is the fact that we are guiding for further operating jaws in 2023 on the back of good operating income growth and solid cost discipline in a very challenging environment.
And with that, I hand over to Alexandra for the risk part.
Thank you, Stefan. Good morning, ladies and gentlemen, and we continue on Page 22. As in Q2, also Q3 risk cost development shows a strong underlying performance of our loan portfolio, while we have continued building up our crisis-related overlays. The quarterly risk costs amount to EUR 184 million, thereof EUR 147 million from newly introduced overlays for those industries most exposed to the current situation around energy availability and volatile energy prices. Some EUR 30 million in Q3 come from an FLI update in Romania and only EUR 8 million net risk cost allocation come out of the ordinary course of business in Q3.
Year-to-date, this brings us to EUR 158.3 million, equaling 11 basis points. After this just mentioned additional overlays, we now have approximately EUR 618 million of crisis-related overlays and FLI available, and as already mentioned by Willi Cernko, we confirm our maximum 20 basis points guidance for the full year. For '23, we are guiding slightly elevated risk costs but still on a very comfortable level up to 35 basis points.
When we go to Page 23, also very extremely good figures. NPL volume, again, slightly went down and derives now at EUR 4 billion. And the NPL ratio further improved to a new historic low of 2% based on both continuous loan growth and sound recoveries. The NPL inflow in the third quarter was fully offset by recoveries and upgrades. The coverage further up, reaching almost 97%, so very close to 100% already.
Due to the new overlays built in Q3, our share of Stage 2, again, increased after decreased in Q2 to 18.5%. The S2 coverage is kept at 3.8%. Stage 3 is slightly down as a result of the fact that we don't see a significant increase in hard defaults yet. For the full year, we expect a stable share of Stage 2, so around the current level, a roughly stable or only very, very minor increase of the NPL ratios around 2% as we expect most of the inflows from defaults in '23 only.
Now to Page 24. On Page 24, you can see an overview of those industries, which were subject to the new management overlays in Q3. And the figures shown here are the total exposure that we have in these three industries or subindustries. So to sum it up, we expect times to be more difficult also in terms of credit risk and we are entering these times with the sound portfolio quality with still low number of defaults, a record low NPL ratio with a record high coverage and considerable buffer. So crisis-related performing ECLs of almost EUR 700 million as of Q3.
And with this, I hand back to Stefan Dorfler.
Thank you very much. Since the other results have been both quarter-on-quarter and year-on-year stable with a couple of minor effects canceling each other out, I invite you to follow me to Page 26. And here, we are showing the net profit declining on a quarter-on-quarter level, due to higher risk costs just described by Alexandra. However, the net profit year-to-date is about EUR 200 million or 13.5% higher than 2021 comparing EUR 1.647 billion to EUR 1.451 billion for the respective period in the year 2021.
We guide for around about 14% return on tangible equity for the year 2022 and the range -- the target range for 2023 has been set by management for 13% to 15% return on tangible equity.
For the update on wholesale funding and capital, let's please jump to Page 29. Erste Group has been fulfilling its original funding target for the year 2022 already by September, just finishing very successful, given the market circumstance one always has to add, covered bond transaction in September. However, we are, of course, like always, still monitoring the market for windows of opportunity and might consider pre-funding activities in the course of the fourth quarter. A couple of things are in the pipeline, let's see market conditions develop.
The overall syndicated funding in 2022 amounts to EUR 3.25 billion. And what is very important to mention given interest rates, so to say, overall coming back, especially in Europe area, retail funding in terms of private placements and placements to our retail investors has been picking up substantially and will be supporting our funding activities very much in the upcoming periods.
The 2023 funding volume will certainly be leaning towards the MREL eligible instruments since, and I will talk about it in a minute. Since there is a lot to do the overall growth that we are also planning again for the year 2023 and the fulfillment of all the regulatory targets in the context of MREL. Let me not miss to mention TLTRO III. You're all aware about the measures that have been taken by the ECB. And as a reaction of that, we will start with the repayments of the TLTRO volume, round about 20% to 30% of the total volume of EUR 21 billion will be repaid already in November. The final decision and the final volume will be set by November 16, 1 week ahead of the repayment date, 23rd of November.
Coming to the MREL analysis on Page 30, you see on the right lower bottom -- the right lower corner, a summary of our 2022 funding activities. And Page 30, we are obviously on the back of our strong loan growth combined with the current geopolitical crisis, it is posing some challenges both on cost and execution for us to fill -- fulfill our requirements in certain CEE resolution groups. Still, we were very successfully executing some countries at the beginning of the year, and some countries later on in second and third quarter, all the volumes that we were targeting for this year. And it's very important for us to achieve all these regulatory requirements, always well in time in order to allow for our business growth in all entities.
Coming to the CET1 ratio year-to-date waterfall on Page 31. We have adjusted the representation of numbers to be consistent throughout the year for every quarter. And in that moment, also thank you very much to some of you and some of our investors who have been critically remarking the way we have been reporting in Q1 and Q3. We have adjusted it now. And the pro forma CET1 ratio of 14.2% by the end of the third quarter is basically nothing else than the end of year 2021 number and minus the onetime effect of structural FX, which means that we have been absorbing even the OCI impact of the volatile markets and the full business growth and kept the level of the overall CET1 ratio stable, of course, fully incorporating the intended dividend of EUR 1.9 for the year 2022. And let me add that we are expecting subject to some FX volatility, a very similar level for the end of the year 2022.
On Page 32, you can then study the more detailed RWA, CET1, Tier 1 and total capital parameters and happy to answer any questions in the Q&A for details. However, I want to hand back to Willi Cernko for the key takeaways.
Yes. Thank you, Stefan. Allow me just to focus on the outlook. When it comes to the GDP growth in '22, we still see a strong GDP growth, followed then by a significant slowdown in 23%. Loan growth should slow down coming from above 10% to approximately 5% in '23. NII growth in '22, approximately 20% should come down to 10%, but still a remarkable level. Fee growth should show up with 6% in '22 and 5% in '23. We are totally convinced that we can benefit from positive operating jaws.
Cost/income ratio, as already mentioned a few times, we already have achieved our '24 target in '22. So we have set a new target for '24 with 52% cost/income ratio. Dividend per share with EUR 1.9 is planned, and we are confident to deliver. And ROTE, return on tangible equity, in '22 with approximately 14% and for '23, it's planned in the range of 13% to 15%.
So I want to close with that. And now we open for your questions. Many thanks.
[Operator Instructions] We will take the first question from Johannes Thormann from HSBC.
What is the level of ECB interest rates and -- of the local Eastern European Central Bank which is baked in your new NII guidance for '23? And secondly, what part of the trading result losses have been valuation effects? And is there any sole part of the securities? Or are there just kept in the so-called [ depo ] or whatever, and they can come back? And last but not least, on your risk cost guidance if we look at 2022, the 20 bps were, I don't know, to 80%, 90% just management overlay. So underlying is probably less than 5 bps of risk cost. What needs to happen in '23, that risk costs jump from 5 to 35 bps, as you would have also to use overlays in case of an economic deterioration?
Yes. Johannes, I'll take the first 2 questions. ECB rates, basically you can build in the model that those are the forward rates by middle of September, yes. So this is basically, we took the market and pretty much we're taking the forward curve at that point in time, which basically is where they are trading roughly this question, it is the ultimate rate be somewhere between [ 2.75% or 3.25% ]. So that's for the LIBOR but more important, of course, is also the medium- to long-term curve 2, 3, 4, 5 years. That's number one.
And the other question on fair value valuation effects. I was pointing out the factors which are adding up even to more than the total loss. Of course, there are always a couple of other elements in there on the trading results and hedges and so on of dividend and income. But the major parts, even more than the current year-to-date result, are coming from the Hungarian [ Babylon ]. This is certainly coming back. This is a question of the next 1 to 3 years. We expect the lion's share to come back in '23, '24. Depends on how long the product, so to say, will be extended further, but the booked negative fair value for this year will certainly come back in the next 2 years.
And on the savings banks, fair value portfolio, it's a little bit a longer period since these are remaining portfolios, which not necessarily are coming in a pull-to-par effect that directly. So that would be my statement here. Most importantly, we expect coming back to the usual range of EUR 200 million to EUR 300 million for the full year '23. I think Alexandra, you will take the third question, yes?
Yes. So let me start, Johannes, by confirming your quick calculation that the underlying risk cost in '22, so far, roughly around 5 basis points. And the difference, yes, really is coming from overlays. What needs to happen next is to reach the 35 basis points. So we are expecting a strong increase in defaults. So new NPLs increased around EUR 2 billion, which then would lead us to be up to a number of hard defaults, then going up to 35 basis points. And let me also add, in this 35 basis points, we assume a partial usage to release of our reserves, but only to an extent of 25%.
We will take the next question from the line of Máté Nemes from UBS.
A few questions, please. The first one is on still the NII guidance. Just wondering specifically for 2023, what is your underlying assumption or expectation in terms of Czech and Hungarian rates? Do you expect a clear normalization of policy rates, i.e., lower there? That's the first question. The second question is on technical one on TLTRO repayments. Do you foresee -- do you expect any hedging-related losses or other impact as a result of this gradual repayments or this is naturally a big topic for you? And last question is just loan growth. I see you're around 5% guidance for loan growth next year. Could you elaborate a little bit where you would expect a more material slowdown presumably the countries where rates are higher already. And where are the countries or where are the areas where you would expect still decent growth. Is it Slovakia? Is it partly the corporate sector? Just curious to hear your views.
Thank you very much for the questions. I will take the first 2. Czech -- the expectations on the Czech market are pretty much -- that by the way, yesterday, the Czech National Bank went out with a quite explicit guidance. We expect rate hikes to have peaked there at the 7% level. I think that's the clear message of the Czech National Bank that they try to maintain this level until the inflation is coming down. That's also what we are building in into our expectations.
And in Hungary, honestly speaking, any kind of forecast of what happens there on the short-term rates is really a speculation at the moment since the National Bank is explicitly working on protecting the currency. You know that a lot of those measures have maybe to do with the funds coming from European Union or not coming from European Union. So on Hungary, it's really tricky. What is very important to mention is our overall profitability situation there is in so far mix that on the one hand, there is a big burden from the state measures on all the moratoria and of course, also the already mentioned windfall tax. But in the same moment, due to the deposits, not repricing in any form in the market, we are making very, very good money on so to say, daily income. So it's a very strange situation, to be very fair, here on Hungary.
The real driver, and that's the main point here, when we talk -- when we talk about overall NII, the main driver of our NII assumptions 2023 are, of course, euro rates. And here, we have a north of EUR 300 million assumption per 1% shift. And taking into account, of course, a significant deposit better. So it's the base case that we assume, could be a little bit better, could be a little bit worse. We are accounting that we are, let's say, rather on the slightly conservative side here in our assumptions. TLTRO repayments, very quickly and very simple. We have the reaction of the -- on the ECB measure. We have closed a couple of small hedges, but this is not material. We're talking about a couple of tens of millions. That's all done and dusted and completely in our numbers.
Can I have a follow-up?
Would you like to go ahead?
No, we have to address the loan growth still. Willi will take this question.
Yes. And I think Máté Nemes has a follow-up question from what I understand. But let's do the loan growth first Willi and then to the follow-up.
Okay. Let me answer your third question with regards to the loan growth. Let's distinguish between SME and the large corporates. Yes, there is a slowdown, especially with the SME -- within the SME segment and not that much with large corporates. And as I already outlined, working capital facility, the demand will stay at the level as we have seen it in '22. But what is worth to get mentioned is the following: Based on the higher rates, we will see less refinancing activities, firstly. And secondly, on top of that, this would have a positive impact on the stock. And on top of that, in new flows, the new businesses, even if we have to consider less new businesses. So all in all, we see a positive trend, and we calculate with 5% growth.
Do you have a follow-up question?
Yes. Just wanted to pick up on Stefan's comments regarding conservative deposit betas? Could you just give us a sense what sort of levels are we talking about here? Presumably, at the current stage, we are still not quite to the typical 40% deposit betas that we reduce for the cumulative rate hikes. Is that a fair assumption?
I think that's a separate session needed for all term deposit analysis and so on. To be very honest, I will not give you an explicit percentage number. We are assuming a slower repricing than in the year -- in the early years, 2000s for the simple reason that we have a completely different liquidity environment. In the same moment, we are expecting a significantly faster repricing in euro area than compared to the CEE countries since there is a much bigger competition expected. We see some first signs in Germany, for example. I'm sure you're following that of certain offerings out there. At the moment, we feel very little pressure anywhere in the retail field. We see, of course, financial institutions, insurance companies, professionals coming up and we're dealing that case-by-case basis. We are -- as I said, we are expecting significant deposit repricing on the -- due to the fast increases on the ECB side, and we are building it into the model as we go.
We will take the next question from line Gabor Kemeny from Autonomous Research.
Firstly, on your NII guidance for next year, in the 10% growth guidance, do you assume that -- it looks like it's mostly driven by euro and rates going up from here. Do you assume that roughly 1/3 of this would accrue to the savings banks? Would that be a fair assumption? And if so, shall we assume that about 2/3 of the growth would drop to your bottom line, this is what is included in the guidance? That's the first question.
Secondly, on costs, the 7%, 8% growth guidance for next year is remarkably close to what you forecast for this year. And I wondered what wage inflation have you factored into this guidance, please, in Austria? And in CEE -- and my final question is on capital requirement because some of your listed peers have guided for increasing capital requirements next year and particularly [indiscernible] countercyclical buffer or FII, you have kept your target at 13.5% for this year. I wondered how you think about the target going into next year in light of the capital requirement changes?
So Gabor, first thing, it's a very good estimate, 1/3, 2/3. Of course, the details depend on how the market situation in the respective regions are. Some savings banks are stronger on liquidity, with some weaker. The clear overall question is, yes, it's a fair assumption, 1/3 savings banks, 2/3 the other euro entities. Just don't forget one element, which is coming in our favor when it comes to bottom line. As of 1st of January 2023, Croatia is now a fully euro country. So that means the share of overall -- as related euro volume is increasing was relative to savings banks, just to add that, answering your question comprehensively.
Yes, you are right. We were, so to say, courageous enough to go out with a relatively tight range on inflation. You remember our discussion that we had when we were guiding 5% to 9% for this year. You were criticizing us why we have such a broad range and Willi and Thomas were tightening in to 6% to 8%. Now we are at 6%. Is there a guarantee that we will end up between 7% and 8%? No. Is it our absolute best estimate as we speak? Definitely, yes. And you're answering your question what we are basing the assumption on that they can very clearly answer.
It's exactly the assumptions that Willi has been explaining on the macroeconomic environment, I think it's on Page 11. Those are the assumptions which are behind. Just to give you one more detail since you were asking about Austria. In Austria, we have, so to say, a good and a bad news on our cost 2023. Let's start with the bad news. Obviously, the wage inflation will kick in. We will have negotiations with the unions for our collective agreements starting quite soon. And the basis is the average inflation of 2022. So what helped us in former years, might be a burden here for the next year.
The good news still is all of those increases will only kick in with the second quarter. So you do not have to -- or we don't have to account for it full year, but only, only, so to say, for 75% of the year. So those are effects that while we expect inflation in Austria to come down to 5% to 6% in the year 2023 as average. You have to account for a higher wage inflation of existing personnel due to the mentioned reasons.
And then I can be very short on the capital question. Yes, we have an increase of the minimum requirements. By the way, I'll give you the details. We have, as of today, end of Q3 2022, 11.26% total CET1 minimum requirement. This will increase in a mix of countercyclical and OCI buffer to about 12.2% by the beginning of the year 2024 in 3, 4 steps altogether. And we have discussed about whether this requires an adjustment of our management target. And since we, as you know, are actually living this 13.5% to 14% area due to the certain volatility in capital as a management target, we decided not to see any necessity given the business model and given our overall stability that we have been bringing forward recently. So that's the answer. Minimum requirements are increasing, no change of management target.
That's very helpful. So when we think about share buybacks and the scope for share buybacks, shall we look at the 14% of an indicative threshold?
We'll come back to that, as already said last time, February, late April next year. It is still on the agenda. We want to discuss then in spring.
We will take the next question from line Mehmet Sevim from JPMorgan.
Just 1 remaining question on my side, and that's again on NII and specifically on the Czech Republic. Leaving the rate outlook aside, we've started seeing some of your larger competitors in the country also bumping up their deposit costs most recently, and they also have quite low loan-to-deposit ratio. So can I please ask how do you see the margin progression there? And where should NIMs go in the next few quarters in Czech, which also started stalling this quarter already? That would be very helpful.
Yes, Mehmet, you're absolutely spot on. We have already -- I think we made a comment on Page 18 on the quarter-on-quarter results, saying exactly minor decline in NII driven by higher interest rate expenses. That's a fact. It took a while until the deposit repricing kicked in. It happened now. I think it's now adjusting for a level which as the Czech National Bank is guiding remains around that level. This is our current expectations. Some further repricing will happen. But that's all built into our expectations, and we do not expect any kind of margin compression on the back of it.
Let's not forget that the risk environment also has to be considered on the asset side. But it's definitely the case that we are not expecting any boost or tailwind at this point in time from a rate environment and deposit situation in Czech Republic. So I would say neutral to slightly deteriorating situation in this market in a moment. That's absolutely correct observation. All of that built in into the forecast that we give today.
That's very helpful, Stefan. So if I'm not wrong, then your current deposit rates are at 3%, 3.5% in Czech. Is that correct? And basically, do I understand it correctly that this will likely be the level also in the next few quarters, assuming no change in the interest rate outlook? That's for new deposits, say, savings accounts in the country.
We will take the next question from Alan Webborn from Societe.
I think I was muted.
Yes. I think, operator, just, the last question, we answer again.
Yes, because I was muted for this moment. So getting back to Mehmet's second question. On an average level, you -- I don't know exactly where you got this 3.5% from, but I've already mentioned a couple of times in the last call even that there are term deposit offers out not only from us, of course, but also from competitors, which are in the area of 5% given that the 7% have been around for a while. Of course, only on term deposits, not on current accounts. So it's -- the average is certainly still what you have been mentioning. That's the current situation. And we're closely following the developments in the market.
We can go to Alan Webborn now.
[Operator Instructions].
Can you hear me?
We can hear you.
Okay. Great. Could you just explain a little bit as to what happened in the net interest margin in Hungary in Q3? I mean it's pretty high and the [indiscernible]. And also with relation to Hungary, with the cap extended on retail mortgages and also on SME lending to sort of June, July of next year, do you expect that to have a cost? And when will you take that, will you take it more likely in Q4? So that was a couple of questions on Hungary.
And then -- on the -- you see you talked a lot about execution and digitalization being a real priority and data analysis and so on. That seems to have been a real sort of focus since the change of regime. And I wondered now after a certain period where you think this is actually making a difference? Are you actually seeing other than greater levels of digital onboarding? Are you seeing more revenues being generated? Are you seeing more cross-selling? Is that a fundamental part of what effectively is quite an upbeat view of 2023. I'd just be interested to know where you are and what sort of progress you think you've made over the last 6 months.
Okay. I try to tick off all the boxes. I think certainly, Willi will then take the digital execution question. I think the first one, if I got everything right, acoustically was on Hungary and NIM and probably you're referring to Page 18 and this huge jump from 2.70% to 4% this year. Look, that's on the back of what I mentioned already previously. The stabilization by the Hungarian National Bank of the whole short-term liquidity is, of course, leading to, let me say, very interesting developments. Don't forget that even this is already adjusted for the FX effect, otherwise, it would be even higher on those spreads.
That's, of course, for the price of -- actually now answering your second question of significant burdens on the Hungarian profitability from state intervention on other fields. So I would say, to be fair, comparing the current net interest margins in Hungary to an ordinary course of business would not be appropriate. As I said before, we are paying zero on deposits there in the same moment, the key rate has been raised now to 18%. So I think you can imagine that there are a lot of swings in our balance sheet there.
Now on the interest rate caps, we have to distinguish here between the SME loans and the mortgage interest rate caps. On the SME loans, this is a relatively minor effect. We will be booking in Q4 around about EUR 8 million equivalent to represent the current effectively communicated interest rate stop, which is until the June of 2023. Obviously, you know that even for accounting reasons, we cannot anticipate any prolongation. It's officially out for end of June 2023. We will account for it with EUR 8 million by the end of this year, and it's already in our guidance.
Much bigger is the effect of the mortgage interest rate cap. Here, we have a prolongation also until the June of 2023. And there is no decision yet whether there will be a prolongation up until the year 2023. Here, we will book around EUR 16 million in the Q4 2022 for the first half year. And we are incorporating into our budget, but not into our accounting and assumption around for the second half of the year. That's for accounting reasons, the case. And that means we will account for around about EUR 24 million, EUR 25 million out of those 2 interest rate caps in the fourth quarter for Erste Bank Hungary. Willi, please.
Yes. I want to come back to your third question with regards to digital. As already mentioned at the very beginning, this is one of our -- one of my key priorities, improving data analytics capability and expand and enhance our digital offering. Everything we do in '22 and '23 is already embedded in the budgets. So we invest a significant number in this initiatives. Just to highlight one initiative, we have -- we are going to launch during the course of the fourth quarter and predominantly starting with the first quarter '23 as George business. So up until now, we are offering George, let's call it, for privates, in 6 of our 7 core countries. Serbia is not still not yet onboarded.
We will do this in 1.5 years from now because we are replacing the core banking system over there. But when it comes to George business, so we are going to launch George business in the fourth quarter with the Friends and Family approach. And with the first quarter '23 rollout is planned. And then we have, let's say, George present in Austria, George business present in Austria, followed by Romania, Czech Republic and the other countries, then we later on follow. I think you shared with me that each and every customer that is with us in Dutch -- in a digital manner, cross-selling is simply higher because we are much more interactive, and this leads to much higher cross-selling ratios as we have seen it in physical banking up until now.
We will take the next question from line Andrea from BNP.
Andrea Vercellone, BNP Exane. First question is on bolt-on acquisitions. In the Czech Republic, we read you're in exclusive negotiations to purchase the Sberbank portfolio. I'm just wondering what the rationale for carry on with this transaction is in light of the forthcoming bank tax, if you can comment on that? Second question is on the EUR 676 million precautionary provisions, let's say, can you split them between what is FLI, so model-driven and what is pure overlays, so managerial adjustments?
Third question on Croatia. You mentioned before a commentary that joining the euro, so increases your sensitivity. But don't you see a risk that actually the NIM goes the other way, i.e., the Czech rates converge to euro rates, which are much lower than what you're currently booking? And also, if you can give us an estimate of what fees you will lose in Croatia next year because of the euro adoption?
May I start with...
bolt-ons.
Yes. Let me start with bolt-on acquisitions. And referring explicitly to Czech Republic and Sberbank portfolio. Yes, let's phrase it in that way. Starting with 2008, we learned to live with a risk category. It's called political risk. And we shouldn't get worried whenever some of these events may pop Up. It's nasty, it's challenging. But let's say, from a longer time perspective, it was always manageable. We have taken a long-term perspective on the region and Czech Republic is a core region. And for us, it's an opportunity the portfolio fits perfectly to the existing one. It's predominantly a mortgage and then SME-related portfolio and we are totally convinced that terms and conditions that are going to be negotiated over the next couple of days will be very beneficial to us. And from a strategic point of view, it fits, we take a long-term perspective.
Then I would continue. I can be very quick on the split of the EUR 670 million roughly. This is -- so buffer split EUR 350 million come from FLI, EUR 300 million from the new management overlays that we built in Q2 and Q3 and EUR 30 million are still remaining so-called old overlays from COVID-19. So EUR 350 million, EUR 300 million and EUR 30 million.
I'm very happy because this is -- I think the first time, at least that I've been on the call, we have a question on Croatia other than the negative discussion around tourism during the pandemic. So I'm actually very thankful for the question. I want to answer in very brief 4 parts. First, I think it's obvious that Croatia, which has been suffering very badly in the pandemic has had a fantastic tourism year 2022. To all my knowledge, the numbers, not the guess, but the numbers have been better, the overall turnover already in 2022 than in the record year 2019. So that's number one on Croatia, and you know what the weighting of this industry in Croatia is.
On your question regarding fees, yes, we will have a reduction, especially and only on FX fees round about EUR 20 million compared to what we made in '21 and '22. That's, of course, full in our total guidance included. There is no concern at all regarding the current levels, which you have already, as you see on Page 18, a little bit reduced on net interest margins. We, to the opposite, overall, expect a positive development on NII on the back of significantly better liquidity environment because the minimum reserve in Croatia has been reduced in the context of the euro accession from 5% to 3% already and will go down to 1% by the beginning of 2023.
So overall, Croatia from kind of travel [indiscernible] during the pandemic is definitely a very positive market for us at the moment. Obviously, now the weighting in the overall group. It's an important market for us, but it's not a huge market, but we are quite optimistic for the next couple of quarters and years in Croatia.
We will take the next question from line Riccardo Rovere from Mediobanca.
Just a kind of follow-up and clarification. First of all, thanks for providing us with the outlook for 2023, which is not exactly common. Just on that, I just want to be 100% sure I understand it correctly. In all your guidance and outlook '23, you're assuming no recession. You think there will be no recession in any of the countries where you operate. Just want to be 100% sure about that. Then you assume rates in the euro area, I think, Stefan, you mentioned your IBOR between[ 2.75% and 3.25% ], if I got it correctly, which I was just wondering what your IBOR were referring to 6 months, 12 months, 3 months.
And then you are assuming that rates in Czech Republic and in Eastern European countries, in general, will stay more or less where they are because you think given there will be no recession, inflation will remain -- will continue to remain fairly elevated and so rates will stay where they are, which is not exactly the common belief, the mainstream forward rates assume rate to go down in Eastern Europe in general?
And then maybe a question on for Alexandra. If I remember correctly, you mentioned again in the report, in the press release that you're still experiencing write backs on loans that were weakened off or with very, very, very high coverage when you sell it. Does this have a role in your risk guidance 2023 in the 35 basis points?
I want to start with your first question with regards to do we exclude any recession. Let's raise it this way. As I already said, and this is also shown on Page 11. Yes, we currently do not project negative real GDP growth. Not project negative real GDP growth, I want to repeat this. But this could also mean that we will see for 1 or 2 quarters a technical recession. This is not excluded. But considering 4 quarters, this is what we have as an underlying assumption.
And I also want to refer to the positive criteria. We want to mention if it is the labor market, if it is -- especially when it comes to corporates, they came out from the COVID crisis to a large extent even stronger because they were able to preserve their capital and liquidity positions and so on and so forth. So there are many good arguments to go for this assumption.
Very clear answer to the point, which IBOR we talk about, the 3 months IBOR? That's the relevant one for most of our -- the lion's share of our loan book. And yes, you're right, [ 2.75% to 3.25% ] is our terminal rate assumption. We are basically very much with the consensus regarding the next 2 steps of the ECB, meaning expecting another 2 rate hikes, most likely 50 bps and then, so to say, evaluating the situation just as the ECB has been communicating. Let's see what happens. Then it very much will depend on the inflation development, I'm sure.
Thanks very much for getting back to my remark on CEE currencies because I was not precise enough before. We have -- following also the Czech National Bank guidance, we have the assumption that the Czech rates have, so to say, reached their peak. And there, I think you asked when we think they might come down again. The assumption has been shifted towards rather the second half, if not only the fourth quarter of 2023 for first rate cuts. By the way, we had this assumption built into our calculations for today's call before the Czech National Bank basically want to confirm this view. So that's the current assumption for Czech rates.
We have still some rate hikes to be expected most likely in Romania. There is not such a very clear guidance since the Romanian National Bank is looking primarily on the currency, but we expect some further steps there. And honestly speaking, Hungary, you know what happened there the last 2, 3 months. To predict whether they will shift from 18% elsewhere, it's something which I'm really not dare to make any prediction. Alexandra, please.
Hello. So yes, the written-off stock has come down to EUR 1 billion as of Q3, thanks to the regular recoveries that we are achieving on this written-off stock. They showed very, very stable also throughout the difficult quarters of being around 8% to 9% per year. So we are talking about EUR 80 million to EUR 90 million every year of recoveries on the written-off stock. And as this is stable, we also expect this to continue in '23. So we neither reduced it nor increased it, but we factored it in, as we know it. But overall, this is not a huge driver for the risk cost development in '23.
A follow-up on this, if I may. If I got it correctly, you before mentioned you expect the NPL ratio to go up to kind of 3%, and that should entail a couple of billions of higher NPLs, if I got it correctly. Now you cover your NPL at an astonishing 97%, if I remember correctly, on the slide. Now if I brutally multiply the 97% times to billion, that number would be well ahead of 35 basis points. What am I -- I must have got something wrong, but I don't understand what.
For '23 -- so the 3% first, you need to say well below 3%. So our current expectation is, let's say, somewhere between 2.5% and 3%. So really well below the 3%. And we are not expecting that we will keep with the increased NPL ratio, a coverage of almost 100%. As you know, coverage for new NPLs is usually lower and is building up over the time, and there's collateral, et cetera, et cetera. So we expect for '23 still very good NPL coverage but not at the level that we see currently.
Okay. Okay. And just to be a general analysis. And then I'll finish, I promise. In the 35 basis points, you assume only a partial use of the overlays, right, only 25, if I remember correctly?
Yes. One quarter. Yes.
One quarter. Okay, okay.
We will take the next question from line Shane Mathews from WhiteOak Capital.
Congrats on the results. I just want to understand how the mortgage demand has held up in the other regions other than Czech. So Czech you specifically mentioned, there's been a slowdown. So should give us a sense of how it has really been in the other regions and what do you see in the future? And related to that as well for the Sberbank portfolio as well would be largely mortgage. So what would be your view on the Czech market in the future?
So the question that is related to the mortgages. Yes, there are 2 factors that have to be mentioned. The first one is, yes, it is interest rates. And the second one is, it is the regulatory environment. So it is something that is not really borrowing, I have to say. It is a bridge to, I would call it, to the new normal. So we have calculated in this, let's say, slowdown. On a year-on-year comparison, I'm pretty sure we will see at least a positive development, meaning mid single-digit growth rate. This may compare with significantly above 10% growth rates in the recent past, yes, but still in a positive territory.
Got it. And I just want to get a better understanding of the provision release in the second quarter and EUR 184 million provisioning in this quarter. So I just want to get a breakup and how exactly that came about? Because I didn't really understand that part.
Which question? I understood the provision increase in the second quarter, you said? In Q2 or Q3?
Yes. So in the second quarter, there was -- so in the second quarter, there would have been a net release of provisions. And in this quarter, there was a EUR 184 million provision added. So I just want to understand the breakup of what exactly made this increase in the Q3.
Yes. Let me briefly recap also what we did in the second quarter. In the second quarter, we did an FLI update, which resulted in an FLI, in a release of EUR 125 million, when I recall correctly, roughly. Yes. So -- and we also released the stage over listed we had from COVID, when you recall. We kept some, so especially the city tourism. This were the EUR 30 million that we still have that was mentioning. And so this overall led to a decrease also given that the underlying risk cost allocation is extremely low. Now in Q3, there are no methodological releases. We have an increase from the FLI update for Romania of EUR 30 million. And we have increased given the new stage overlays, an increase of roughly EUR 150 million.
All right. Got that. And just one final question on the Czech banking tax. So I just want to understand how much of an impact would we see in Erste. And could we see that in the next quarter?
We have considered EUR 100 million with regards to the Czech banking tax. But final outcome to be seen because discussions are ongoing.
We will take the next question from line Olga Veselova from Bank of America.
My question is about Hungary. So what do you want to do there? So what's your strategy now? Do you want to grow in line with the market and stick to previous aspirations in the region? Or looking through 2023, you would think if the Hungarian share in total earnings should actually be gradually going down? So what's your kind of big picture strategy in Hungary? How do you feel about being there for the next several years?
And quick one. Second question on the Czech windfall tax. I appreciate it's difficult to say now exactly what the payment will be given that the discussions are ongoing. But what do you hear that, how would you assess the risk, that the formula can be revised? Or you hear that the discussions are actually moving in the direction to approve the current formula?
Let me start with Hungary. I want to take a very pragmatic approach in answering your first question. Let's put things into perspective. We're talking about, in total, when it comes to Erste Group of about EUR 200 billion loan book. And when it comes to Hungary, we talk about EUR 5 billion out of EUR 200 billion. We are present in Hungary now for at least more than 2 decades. And we got used to all the ups and downs. At the end of the day, it was a decision, a positive decision. And we are pretty sure the country is going to overcome these challenging times.
And finally, let's have a look at foreign direct investments in Hungary, especially in the recent days, new huge foreign direct investments were communicated. So there is still a belief in this European country, and this is the way we look at it. We have taken a long-term perspective despite all ups and downs.
When it comes to the Czech Republic and the windfall tax, I think you're aware that discussions are ongoing. The key question is simply, do we talk about the formula or do we talk about the number they want to get collected at the end of the day. From today's perspective, the news we have, we can consider that the formula is, let's say, the relevant, let's say, angle of the story. And it is for a limited period of time. But it's a decision that is going to be taken in the upcoming days. And as far as I'm informed also during the course of today, there are discussions ongoing. So for us, we have included let's say, the formula that is relevant for us, and we talk about roughly EUR 100 million.
We will take the next question from line Jovan Sikimic from RBI.
Many thanks for the presentation. I mean, many of my questions were already answered. Just the one I would have in the last time you presented a nice, let's say, risk case scenario from Russian gas, gas prices and gas imports. So -- and now I haven't found any update on that. Maybe can you shortly elaborate on how do you see eventually the risks to your cost of risk guidance in case still we have kind of risk case scenario?
So we have presented it as you for surely recall, not as a stress scenario in case that the gas flow is really severely interrupted or fully stops across our region. We have calculated the impact and you know for 90 bps and 85 bps for '22 and '23, respectively. '22, we are now in the fourth quarter, gas storages are full. So this is no longer a scenario for '22. For '23, as gas storages are full, we were not -- we didn't consider it meaningful to make an update out of this scenario. It is calculated as it is, and our 35 bps, as I already said, it's not overly optimistic, it's not overly cautious, but still prudent, and it only considers 1/4 of our buffers to be released. So we think with the 35 basis points, we are well equipped also in these uncertainties in the gas area. In case situation would change dramatically, of course, we would update the scenario again.
There's no further questions at this time.
Okay. Thank you very much, Caroline. I hand over to Willi Cernko for concluding remarks.
Yes. Before saying thank you again, I want to bring to your mind full year preliminary results '22 are going to be presented end of February, concretely 28th of February '23, we're going to present the full year preliminary results in '22. So with that, many thanks for being present for all your questions, and happy to see you and happy to hear you next time.
Thank you for joining today's call. You may now disconnect.