Erste Group Bank AG
VSE:EBS
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Erste Group Bank AG
Earnings Call Analysis
Q3-2023 Analysis
Erste Group Bank AG
The earnings call of Erste Group kicked off without a hitch, as hosted by Thomas Sommerauer with the standard formalities observed, including reminders about the recorded nature of the event and the Q&A session slated for afterwards.
Erste Group's financial performance exhibits strong, consistent growth, particularly within Net Interest Income (NII), which marked its eighth consecutive quarter of increasing returns. Surpassing estimates with a 20.2% year-over-year rise and a 3.9% increase from the prior quarter, this growth trajectory supports a confident upward revision in full-year NII guidance, now expected to exceed 20% year-over-year. Consistent loan growth and advantageous Eurozone key interest rates, especially in Austria, buoyed this success, despite a slight rise in retail deposit pass-through rates.
Revenue is underscored by robust fee performance, achieving record highs due to payment services and asset management fees, prompting fee growth guidance for the year to be elevated to the upper single-digit range from about 5%. Meanwhile, cost management remains a focus, with full-year guidance holding steady despite high inflation and its substantial impact on wages. Efforts are underway to bolster efficiency and mitigate wage inflation to manage cost pressures in 2024.
Credit risk remains exceptionally managed as evidenced by minimal defaults and a stable Non-Performing Loan (NPL) ratio and coverage, which are expected to maintain close to record bests. Subdued risk costs are projected for the year, with guidance set below 10 basis points, and confidence extends into 2024 for sustaining these benign levels.
Erste Group's funding and capital positions are solid, as shown by stable wholesale funding, strategic debt securities increments paired with a well-executed EUR 500 million Additional Tier 1 capital issuance, and a pro forma CET1 ratio close to 15%. There is an intention to set a CET1 target at 15% by year-end 2023, reflecting a strong capitalization that will support future activities and distribution policies.
Looking forward, Erste Group is fine-tuning its guidance and projects a return on tangible equity (RoTE) of about 15% for both 2023 and 2024. The emphasis for revenue growth shifts towards fees with a moderated NII trajectory, owing to forecasted interest rate trends and deposit costs. Cost-income ratios are expected to increase slightly from historically favorable levels, while ongoing efficiency measures aim to contend with inflating operational costs. Risk costs are anticipated to remain moderate, supporting continued strong returns.
In terms of strategic growth, management displays a cautious stance towards mergers and acquisitions (M&A), focusing only on investments that align with their business model and significant strategic value. While monitoring opportunities in Poland, the current surplus capital would be directed towards organic growth and maintaining shareholder distributions within the 40-50% target range. The management also confirms that the definition of excess capital remains steadfast, indicating consistent capital distribution strategies moving forward.
Risk cost outlook for 2024 has slightly improved as per current developments, forecasting a dip below the previously anticipated 25 basis points. As Erste Group navigates the fiscal landscape, the expectation is to efficiently manage costs, buttressed by a confident approach to augmenting fees, to achieve the indicated financial targets.
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[Audio Gap] Conference Call of Erste Group. My name is Laura, and I will be your coordinator for today's event.Please note this call is being recorded and for the duration of the call, your lines will be on listen-only. However, you will have the opportunity to ask questions at the end of the call. [Operator Instructions]I will now hand you over to your host, Thomas Sommerauer, to begin today's conference. Thank you.
Today we follow our usual conference call procedure, which means that Willi Cernko, our Chief Executive Officer; Stefan Dorfler, our Chief Financial Officer; and Alexandra Habeler-Drabek, our Chief Risk Officer, will host this call. As usual, they will lead you through a brief presentation, highlighting the major achievements and developments of the quarter and also year-to-date, after which they are ready to take your questions.With this, let me also once again draw your attention to the forward-looking information disclaimer on page 2.And with having said this, I hand over to Willi Cernko for the presentation.
Thank you, Thomas. Ladies and gentlemen, good morning from my end as well, and welcome to our third quarter '23 conference call. Even at the risk of sounding repetitive, we once again present to you an exceptionally strong set of figures, both for the quarter and for the first nine months of '23, and I think it is then now fair to say that '23 shapes up to be an outstanding year in terms of P&L performance.Let me start the presentation on Page 4, with the development of our income statement. In short, most trends we saw in the first half of the year continued without any exception in the third quarter, sorry. And while the revenue momentum slowed somewhat, this was mainly due to the volatile elements of our P&L, most notably net trading and fair value result, while our core revenue lines, net interest income and fees continue to produce dynamic growth and actually again reach quarterly record levels. Operating expenses developed perfectly in line with our expectations and guidance. Risk costs saw somewhat of an increase, but this was due to parameter and overlay updates rather than due to any significant efforts. And most importantly, this doesn't change our strong credit risk outlook. All of this contributed to a strong bottom line performance in the first nine months of '23, which fully underpins our capital distribution plans already announced in the second quarter, consisting of a very healthy regular dividend of EUR 2.70 per share, that equates to a yield north of 8%, and the share buyback in the amount of EUR 300 million, which as we speak is underway.All of what I just said about our P&L dynamics is very well reflected in our P&L dashboard on Page 5. Net interest margin edged up again slightly, but a level of around 2.5% seems to be as good as it gets for the time being. This is not really surprising given that the slowing rate hike dynamics in the Eurozone and declining rates in certain CEE markets go hand in hand with slightly increasing deposit pass-through rates and smaller tailwinds from asset repricing. Our fees continue to perform strongly, driven by asset management and payment services. As already mentioned, net trading and fair value result was a drag this quarter, but only in relation to the exceptionally strong previous quarter. Our cost/income ratio is significantly ahead of guidance for the quarter as well as year-to-date. Hence, we are confident that we will deliver on our promise also for the full year. We can also comfortably confirm our outlook for risk costs for '23 as year-to-date we have booked only 8 basis points of risk cost. And if you add all this up, it's clear we will produce a return on tangible equity well above 15% in '23.When it comes to the development of the balance sheet, I'm on Page 6 already, trends were less pronounced than in P&L, but in light of an unfavorable macro backdrop when we talk about growth or when we talk about inflation, it is still positive. We saw an uptick in underlying quarterly loan growth. This is driven by Slovakia, Croatia and Erste Bank Oesterreich. Well, in Austria, this was mostly driven by corporate demand. Growth was well-balanced in Slovakia and Croatia. And even in the Czech Republic loan demand improved, but in euro terms was eaten up by currency depreciation this quarter. As for deposit volumes, they remained in the range we have seen throughout this year, and importantly, our core retail and SME deposits stayed, by and large, stable, while the more volatile corporate deposits already increased year-to-date. Overall volume trends are in line with our expectations, and even though we are tracking somewhat below our annual loan growth guidance, I'm confident we will get close enough, so we keep it unchanged at about plus 5%.Moving to our key balance sheet indicators on Slide 7. All of them remain in excellent shape. Our loan to deposit ratio was right in the middle of its customary range of 85% to 90%. Asset quality continued to go strong with NPL ratio staying at 2% flat, while the NPL coverage excluding collateral was unchanged at 97%. The pro forma CET1 ratio, including profit and the pro rata dividend deduction, improved to just shy of 15%, while the liquidity coverage and net stable funding ratios remained almost stable. The leverage ratio at 6.6% remained among the best in the industry.And with this, let's now have a look at the operating environment. I'm on Slide 9 now. The economic forecast for '23 hardly changed since the second quarter. It's consensus that economic growth will be weak this year and that inflation has clearly peaked in all our markets, but is moderating more slowly than expected earlier. And this in turn means that interest rates stay higher for longer. Currency appreciation in countries like Hungary and Czech Republic support the improvement in external and fiscal balances. Labor markets are continuing to be tight, somewhat slowing the inflationary trend, but at the end of the day, they are key for maintaining consumer demand and keeping asset quality strong. Looking into '24, the economic picture in Central Eastern Europe should brighten, even though economies currently expect this to happen more moderately than they expected a couple of months ago. Inflation is expected to continue its downward trend, opening up the way for central banks to cut rates. And this together with better economic growth, should support a return of tangible volume growth.Talking about volume growth, and I'm on Page 10, in the meantime, let's have a look at the latest strengths in our retail business. As for housing loan demand, on a consolidated level, we are still bumping around the bottom with some bright spots in one of the other countries, such as the Czech Republic, where new business volumes are up for the third quarter in a row, or Romania, where new business volumes more than doubled quarter-on-quarter, but to talk about the sustainable and visible growth trend is still premature. The situation is different with consumer loans, where new business volumes remain healthy and are on an increasing trend, and that's more or less true for all geographies. On the liability side, our retail deposit base was broadly stable quarter-on-quarter but as well as year-to-date. As regards deposit pass-through, and Stefan will be more detailed on this later, retail pass-through rates are moving up but moderately and customers while continuing to shift some overnight deposits into term and savings accounts and to investments, of course, still maintain a largest portion of their deposits in current accounts. This, notwithstanding, we continue to see strong growth into stock of securities savings plans, confirming the positive trend that started in the second half of '22.Moving to the Corporates and Markets business on Page 11. Volume trends have been mixed, while all business lines in the Corporate segment manage to grow their loan books both year-on-year, as well as quarter-on-quarter. On the liability side, we saw diverging trends. Deposit volumes came down somewhat quarter-on-quarter. This is mainly driven by the usual volatility in the large corporate business, while year-on-year they were slightly up. So, all in all, given the circumstances, provide a good performance. The Markets business also performed well. We were mandated in 204 bond transactions year-to-date and generated healthy income growth in both retail securities and corporate treasury sales. Our asset management business recorded a slight decline in assets under management to EUR 73.9 billion, but this was mostly due to the market movements offsetting positive net sales, confirming that there is a growing fee opportunity in this business.And with this, I want to hand over to Stefan.
Good morning, everyone.Please follow me to Page 13, where I'll give you a couple of details in addition to the comments Willi already made on retail and corporate loan volumes. Overall loan growth would in euro terms in Q3 have been somewhat higher if the Czech crown, sorry, hadn't depreciated by 2.5%. That also fully explains the quarter-on-quarter decline in the Czech Republic. Slovakia and Croatia, despite being members of the Eurozone, continued to post healthy growth rates with growth being well balanced among the retail and corporate segments. Erste Bank Oesterreich enjoyed some uptick in corporate loan growth. The retail business still remains slow, impacted by regulatory measures as well as higher interest rates. Overall, we are very pleased that we can stick to our 2023 net loan growth guidance of roundabout 5%.As for deposits, and I'm already on Page 14, we effectively have not seen any significant changes in trends in the past quarter. Our core deposit base, which includes our retail, SME, and savings banks business lines, remained very stable. The same can be said about the overall year-on-year development. Obviously, large corporate deposits trend to be much more volatile, and for Q3, this is well visible in the Austria and the Czech segment. The retail deposit mix also remained very favorable. Unsurprisingly, we have seen a further drift towards term and savings accounts, still 56% of retail deposits are current accounts. Overall, our consolidated customer deposit base grew by 1.4% year-on-year, so that we continue to be confident about the NII contribution of our deposit base going forward.This brings me to Page 15, and the net interest income. We posted another strong quarter. In fact, Q3 2023 was the eighth consecutive quarter of sequential NII growth. Quarterly NII was up 20.2% from a year ago and up 3.9% compared to Q2 2023, respectively. The key NII drivers were pretty much unchanged. We saw strong tailwinds from higher Eurozone key interest rates, particularly in our Austrian businesses, Erste Bank Oesterreich and the Savings Banks. Higher than expected long-term interest rates pushed up our bond income, supporting our future income, given the duration of the investments. And last but not least, Willi mentioned it already, loan growth also starts to help again. On the flip side, retail deposit pass-through rates edged up a little bit. In our key markets, Austria and Czech Republic, we are now around or slightly above 20% mark. In Romania, closer to 25%. In most other markets, retail deposit pass-through rates were still significantly lower. All in all, NII performance was strong enough to raise full-year guidance once again. We now expect NII to grow in excess of 20% year-over-year.Page 16 is our slide describing fee income development. Fees continued to perform very well. That's the bottom line. They reached a new quarterly record, driven by higher income from payment services and better asset management fees. Accordingly, we increased our guidance for full year 2023 fee growth to greater than 5%, I would call it, upper single-digit from about 5%. Looking forward, we are confident that fees will remain a major contributor to our revenue growth in future years.Let's move to costs on Slide 17. All expected events till year-end are making us confident that we achieve our full year guidance of 9% cost inflation. The quarter-on-quarter lower personnel expenses are attributable to higher expenses for employee share program in the second quarter of this year and lower long-term employee provisions. These effects are summing up to something like EUR 24 million. And, obviously, the weaker Czech koruna helped on the cost line in Q3. Looking beyond year-end, we record substantially dropping inflation in most of our CEE countries, but certainly should slow down cost up-drift in 2024. However, please note that high 2023 inflation rates continue to have a significant impact on wage inflation via collective bargaining agreements and certain catch-up effects from a technical perspective.Moving to Page 18 now. We are delivering the fourth quarterly record operating result in a row, putting us on course for an excellent operating performance in 2023. Key drivers, as already discussed, are revenue-driven, primarily rate-related NII tailwinds, but also very strong fee performance and not to be forgotten, significant positive turnaround in trading and fair value contributions, as we always communicated as our assumption for 2023.And with this, over to Alexandra for all key infos on credit risk.
Thank you, Stefan, and once again good morning from Vienna. We are on Page 19 now. As Willi has already mentioned, credit risk continued to perform very well in the third quarter. The fact that we booked risk costs of 30 basis points is partially related to our regular FLI update, which led to some allocation since the macro outlook for the forecast period is slightly weaker, mainly for Austria. In addition, we ran parameter updates, which also led to some bookings across the segments. In terms of real defaults, we continue to see only a few. Year-to-date, this brings us to 8 basis points or EUR 128 million of risk costs. As a result of these developments, we confirm our risk cost guidance for 2023 of less than 10 basis points and we are also confident that risk costs will stay at benign levels in 2024 as well.Let's now have a look at asset quality on Page 20. As the risk costs we booked, as already mentioned, were to a large extent related to parameter updates and only minor NPL inflows, neither the NPL ratio nor the NPL coverage changed quarter-on-quarter. In fact, both ratios are still very close to all-time best levels. Looking towards year-end 2023, we believe that the NPL ratio and coverage will not differ materially from where we are now. If you look at this stage split, there were no major changes. And as a reminder, the elevated Stage 2 level is a direct result of portfolio overlays and FLI provisions, and not connected to asset quality issues. This slight increase in Stage 2 loans we actually saw quarter-on-quarter was mostly a result of the parameter updates already mentioned. So to cut a long story short, we continue to be in a very good shape when it comes to asset quality.And with this, I hand back to Stefan.
Thank you very much. When it comes to other operating results, and with this we are at Page 21, we register a strong result by historic standards with hardly any one-offs so far this year, and in particular in Q3. Quarter-on-quarter deterioration mostly attributable to partial reversal of resolution fund payments in Q2 2023. Maybe one forward looking remark here. Please expect somewhat more movements in this position in Q4 on the back of typical end-of-year revaluations, and of course then in Q1, 2024, when the recovery and resolution contribution, as well as bank levies will be booked.All the discussed components lead to net profit, earnings per share and return on tangible equity as displayed on Page 22. The slight drop in quarter-on-quarter net profit is due to higher risk cost bookings, as explained by Alexandra. We are very confident now to achieve the return on tangible equity target of greater than 15% for 2023, which represents an attractive premium on cost of capital.Let's now move to some information on wholesale funding and capital, starting on Page 24. Overall, wholesale funding was stable, as debt securities increased while interbank deposits declined. The increase in debt securities was mainly attributable to increased MREL issuance, I will talk about it in a minute, in the form of senior preferred and non-preferred instruments. The decline in interbank deposits was attributable to decline in TLTRO balance, fully in line with the communicated schedule. What is certainly worth mentioning and is documented on Page 25, is the issuance of the EUR 500 million AT1, which we were able to combine with a very successful tender for the outstanding AT1. Two-thirds of the issued volume was the participation in that tender. Other than that, let me mention, our benchmark issuances in 2023. We are tapping the market with two, each EUR 1 billion mortgage covered bonds, as well as with one EUR 750 million and one EUR 500 million senior preferred bonds. The private placement channel contributed strongly to the senior preferred segment and is expected to fill the remaining MREL needs in the second -- let's say, in the last quarter, there is very little hope, [indiscernible].I've talked about the local MREL activities in the Q2 call. On Page 26, you find the overview, which shows that we have complemented the portfolio of transactions in Q3 with a EUR 500 million non-preferred senior issuance by Ceska Sporitelna and a EUR 300 million green preferred senior issuance by Slovenska's Sporitelna. Let me mention that we are very happy about those transactions, transactions showing the strength of our local banks.When looking at the charts for capital and RWAs on Page 27, please note that CET1 capital does not include the interim Q3 profit on this chart. RWAs are primarily driven by corporate business growth, but retail also contributed on the account of Sberbank integration in Czech Republic and volume growth in selected markets, such as explained already by Willi on Slovakia and Croatia to be named primarily. Portfolio effects in the form of rating upgrades and improved collaterals mitigated the year-to-date RWA up-drifts. All-in-all I can say, RWA development is very much in line with our expectation.This fact, combined with the excellent results, allowed us to continuously build capital, as you can see from the CET1 year-to-date waterfall on page 28. Our pro forma CET1 ratio, which includes profit for the first nine months and a 75% of annual dividend deduction, has almost hit 15% and will likely grow from here. Setting the management target for CET1 officially to 15% as from year-end 2023 is a reaction to higher regulatory capital requirements, and in the same moment reflects our communication line of recent quarters. Please see Page 38 for many details on these regulatory requirements.Finally, a quick update on our current share buyback. As of last Friday, we have repurchased almost 6 million shares and at current market prices, there's probably another 3 million to go, in order to get close to the EUR 300 million total value of the announced share buyback.And with this I turn it over to Willi for the outlook and conclusions.
Thanks, Stefan. I'm concluding this presentation with our fine-tuned guidance for '23 on Page 30, and I'm also happy to offer IFRS schemes and how we see '24. I think, there can be no doubt that we are in good shape. Otherwise, we would not have the upgraded key items of our '23 guidance. We now expect NII growth to exceed 20% in '23 and fee growth to be higher than 5%. But obviously being great now is not enough, one also has to be confident about the future, and I firmly believe that with a projection for return on tangible equity of about 15% for '24, we do not fall short in this respect.Looking into '24, we see continued revenue growth, although attributable to growing fees rather than growing NII. And on the latter, we also remain constructive, mainly on account of continued loan growth and tailwinds from our bond portfolio, but we also acknowledge that interest rates will rather go down than up from here and deposit funding costs are also skewed to the upside. Cost inflation should moderate compared to elevated '23 levels. And for this to happen, we will put in every effort to mitigate the wage inflation as much as we can through efficiency measures. All-in-all, we expect the cost/income ratio to deteriorate somewhat. But to put this into context, from a '23 level, that will likely be a historic best by a long shot. And risk cost should also remain moderate for longer. And with this we should again produce a return on tangible equity of about 15% in '24, as already mentioned.Ladies and gentlemen, thanks for your attention. Now, we are ready to take your questions.
[Operator Instructions] We'll now take our first question from Mehmet Sevim at JPMorgan.
I have 3 questions, please. So first of all, on loan growth into the year-end. Your guidance of 5% growth still looks quite ambitious, taking into account the nine-month delivery, I think which is just 2%. So for the fourth quarter alone this would imply some 3% growth. And my question is, therefore, are you seeing a stronger pipeline specifically for the fourth quarter, or is that the underlying improvement in trends that you also mentioned during the presentation, maybe that would also extend into 2024?My second question is on the higher capital requirement. Previously you were already a communicating 14% threshold for capital that will be excess in your eyes and eligible for distribution despite the 13.5% capital target. So, can I ask, is this now remaining the same, so 14% is in line with the 14% new management target, or would that also go up with the new management target of 14%?And finally on M&A, if I may. How has your appetite in Poland changed now that the politics, basically, it looks to be moving back to orthodoxy and now the big impediment to get involved looks like is going away.
Okay, Mehmet. I may start with the first question. You were referring to the loan growth. Yes, 5% is pretty ambitious, but we see significant drawings during the course of the fourth quarter. So my expectation is to come close to 5% year-end. And I would say it's also the level we see for '24. Adding to that, the third question you raised, when it comes to M&A, Poland, you know, we have a clear set of priorities when it comes to surplus capital. It starts always with organic growth, then to stick to our payout ratio 40% to 50%. And then, whenever there is an opportunity in our core markets to look for M&A, but also share buybacks, we would not exclude for the upcoming years. Poland, as you know, we are always looking at Poland investment opportunities, but there are a couple of prerequisites I want to address. The first one is, we are just interested in a strategic investment. We are not looking for a financial investment. Secondly, it has to be a significant M&A transaction and it has to fit to our business model. So in case there is something on the market, we will have a closer look on that, but there is nothing that is currently underway.
And I am complementing your question -- portfolio management with the question on capital. Thanks very much for raising it, also that concretely, and my answer can be very short, no. That means the definition of excess capital remains unchanged. There's nothing more to it.
We'll now take our next question from Benoit Petrarque at Kepler.
Yeah, 3 questions on my side. So the first one will be on the return on tangible target of 15% for 2024. I think this is an implicit of roughly EUR 2.6 billion net profit. You know, you talked about the cost of risk last quarter at around 20 bps, 25 bps for '24. I was wondering if that's changed. And also looking maybe on the revenue side, so EUR 2.6 billion level will imply probably roughly stable NII, probably, you know, higher fees for 2024. Is that something you have in mind? So could you maybe, you know, without providing too much details on individual P&L lines, maybe could you just update us on the main revenue and also maybe cost items?On the capital side, so 14% excess capital threshold reconfirmed. I assume you will end the share buyback at around Christmas. Are you in a position to put another round of share buyback, say, close to year-end or early next year? Do you have already a kind of ECB approval for that?And then the last question will be on the NII. So you continue to see a shift from current accounts into savings and term deposits. Clearly, the mix is still very positive with a fair amount of current accounts still, or do you see that moving in the coming quarters and also 2024? Do you expect a more significant shift out of current accounts?
I take the liberty, Benoit, to take your very first question. Well, I think you described it qualitatively very well. These are about the components we need to get to what we are indicating for 2024. Maybe let me just, on behalf of Alexandra, I'm looking over and I'm happy for her to comment a little bit more in detail. The outlook for risk costs for 2024 are a little bit better these days, looking at all the developments. Then these 25 basis points that you were talking about, nothing more concrete that we would say at this point in time, but it will probably, in our assumptions, in our budgeting, will be slightly lower.On the other components, you're perfectly right. NII will not be this dramatic positive driver anymore. We have been talking about this plateauing couple of times. As you know, we are very positive on this still that we can, so to say, substitute step by step the tailwind from interest rates by good loan growth again. Willi has been answering the loan growth question just before. And yes, we are very confident on fees and then we need to manage costs in a way that we can land where you are indicating. So that's pretty much a good description of what it requires to get to a 15%, roundabout, return on tangible equity in 2024. So nothing to add on that on that end.And maybe, Willi, if I may, I'd also take the current account to term deposit shifts. Look, we are experiencing these weeks and this month a stronger move, a stronger shift in euro area in particular in Austria. This is something which is exactly as expected, since people start realizing, on the one hand, there are better rates offered when they go for 1 or 2 year savings book or savings account. But what we see, and this is the way that we manage for our business model. While the mix is maybe slightly deteriorating on the interest rate front in Austria, in the same moment it's a step by step improving now, for example, in another very important market, Czech Republic, where we had the hard times in end of 2022 and up until summer 2023. Here, we see improvements and I expect clearly an improvement also throughout the year 2024.So I think it's all about the total mix and all the components, which I am, in the interest of your time, not going through all of them, for example, investment book is going to be supported. I'm sure that loan growth, with slightly rates coming down in Czech Republic, will be stronger, and all these things together will lead to a total NII expectation that is still very supportive for our total returns. And I think share the buyback equation, Willi will take care.
Yeah. In respect of additional share buybacks, our approach is to take one step after another. So our focus is for us to complete the current share buyback, and then decide about a possible second round in '24. If we look, and I mentioned it already, at capital allocation in more general terms, then our priority order is still unchanged, that means funding of organic growth, paying a regular dividend within our target payout range of 40% to 50%, looking at acquisition opportunities and finally, considering share buybacks. This is the way we look at it, and I think let's wait, what is coming up in '24.
We'll now move on to our next question from Mate Nemes at UBS.
I have 3 questions, please. The first one is on corporate loans or corporate lending. Could you give us a sense of the type of lending that you're doing these days? Are these primarily kind of shorter-term loans or you're seeing perhaps somewhat longer duration investment type of loans as well? And also, I'm just wondering what is your expectation, you know, going into 2024, given some concerns, perhaps around the macro environment in Germany and in the region.The second question would be on the potential introduction of retail government bonds. I was just wondering if you could give us some of your thoughts regarding potential impact on deposit flows and maybe deposit pass-through rates. How would that impact your business in Austria. And the last question would be on NII. I wanted to zoom in a little bit on the 2024 NII outlook.And I was wondering if you could give us some sense of the tailwinds you're expecting from your bond portfolio in 2024. That would be the third question.
So let me start with corporate lending. There are two, let's say, sources. The first one is, yes, we are happy to say investment loans. This has a lot to do with transformation of the economy and everything that is related to Green Deal-related activities. And secondly, it's more working capital needed, simply, it is slightly picking up. So that is much more positive than sometimes we follow the media. So there are some really positive signals and we are quite confident that this keeps running as expected.
On your question regarding retail government bonds, and I would assume and you correct me if I'm totally wrong on that, that you are referring little bit to the Dutch example and the Belgium example, sorry, which was quite interesting to watch. Look, we have a little bit of experience with this in Hungary and in Croatia and also in Austria there were a couple of, so to say, activities from the issue. Nothing spectacular on our end. We are in very good contact also with the issuers and the respective financing agencies, and this is nothing that we expect to have a major impact on deposits overall, and in particular not on Erste and Erste quality.The other question, NII outlook, and here especially the investment book that you were referring to. Maybe let me first mention that the tailwinds, and I was referring myself to bonds before, of course, also helps on the repricing of fixed loans. Let me just give you the example of Slovakia where the typical average duration of the repricing of mortgage bonds is somewhere between three and five years, which means that step by step, we see a good repricing on the fixed asset. I'm sure you have been observing that we didn't have this wild increase of NII in Slovakia, on the one hand, these days or this year. On the other hand, we see a very positive outlook there on the repricing going forward.So that's in terms of qualitative description. In concrete numbers, we see about EUR 20 billion of total assets repricing every year, which would result in a very nice, let's say, EUR 400-plus million positive impact, of course, at current levels, which are not going to be the same throughout the years 2024, 2025. Against this, of course, is the repricing of the deposit base. And all of that builds into our total assumptions of NII.
We'll now take our next question from Riccardo Rovere at Mediobanca.
3 if I may. The first one is on the 15% indication of our return on tangible equity for '24. Does this rely on recalibrating the common equity tier 1 ratio close to 14%, or is it assumed to remain, say, like it is today, somehow 100 basis point above that level?The second question I have is on the deposit betas in Austria. In Czech Republic, since the rates have started to hovering around 7%, at least the data from the National Bank in Czech Republic showed no material deterioration for the deposit beta. It's like the rate stop going up. Is this something that you think might eventually happen in Austria and Slovakia and Croatia, eventually too?And then the third question I have is on the digital euro. The ECB has decided to go ahead with the project. Do you see challenges, opportunities, or do you plan any particular investment on the back of these over the next few years?
Riccardo, thanks very much, and I mean it for the very first question. And the answer is very simple. We always talk about the actual real tangible equity, not something which is in a perspective or which something might be a target. I understand that some others have been adapting their communication there. No, the answer is not about the 14%, whatever, it's always the real tangible equity that we also use for all the other calculations that we are referring to when we talk about the return. Very simple, very clear.
Stefan, sorry to interrupt you. Today, the equity base of the Bank is compatible with a buffer of roughly, okay, 100 basis point above 14%. The question here was, this buffer of 100 basis points, is it supposed to go away, so to say, common equity Tier-1 ratio in 2024 being closer to 14% rather than 15%. You know, you see what I mean? So the equity base will basically go down, let's put it that way.
I hear what you mean. This is a completely different discussion, whether it will be at whatever point in time, in '24, '25 at 14.2% or 15.2%, or whatsoever, that's a separate discussion. Your question was about whether or not we are calculating our assumed return on tangible equity on the real tangible equity or any kind of, so to say, management target. There was my answer that we are always referring to the actual and on the balance sheet registered tangible equity and not some fantasy number, or whatsoever. That's the one thing. The other question is a separate question. And I think Willi has been referring to that in terms of the use of the capital already and it can be one quarter a little bit higher, one quarter a little bit lower, but it's always the same reference we take in the sense of calculation methodology.I can be sure then the deposit betas. Look, it's difficult to predict to be honest. Yeah. We expect a bit more in Austria as the CEE deposits are more granular. That's one very important factor that, of course, the average deposit in, let's say, I don't know what, Romania holds much, much less actual money on his account than an Austrian would have. That's a certain indication that the pass-through at the end of the cycle might be a little bit higher, but honestly speaking, it's relatively difficult to predict, because you will agree that this mix of, let me say, very much ample liquidity in the system, on the one hand, sharply rising interest rates in a generation where, let's say, half of the population hasn't seen interest rates ever during themselves holding some money on the accounts. It's relatively difficult to predict and we learn month by month. And honestly speaking, my assumption would be Austria a little bit more than in other countries, but nothing that would go way beyond what we saw in Czech Republic. That's my personal assumption on this one.
Just briefly on digital euro. There are no particular investments planned for the time being. I think we are all aware, now we enter into a phase of a political debate. Let's see what are the potential outcomes, but for the time being, there are no investments planned.
And we will now take our next question from Johannes Thormann at HSBC.
3 questions from my side as well. Johannes Thormann, HSBC. First of all, on your savings plans and this increase every quarter, which is probably different to patterns we see in other markets, what is driving this, say, success and how much does it boost your AUM inflows? Can you provide some more color on it?Secondly on the banking taxes, how do you see this progressing in Austria? Could you expect that politics go back to higher levels like we've seen some in 2015? And then also about Slovakia and Czech Republic, what is the state there?And last but not least on your cost of risk in '23 and '24, less about the basis points but the overall risk picture. We have still a EUR 900 million risk buffer on your balance sheet and Alexandra said before 20% maybe used this year and 80% taking into the next years. Is still this a fair assumption or should we expect EUR 180 million to be booked in, in Q4 because you can't take everything into '24? What is this changing now that you can take every booking in '24, or is there something coming in '24?
I will start, maybe immediately with the third question. So cost of risk, you mentioned the EUR 900 million. When we take into account what we booked in Q3 with a small increase on FLI and also overlays, we would even now -- right at EUR 940 million. Out of this EUR 940 million -- and you all know in this macro and geopolitical environment, especially FLI is very hard to tell. However, we plan or expect for this year that we will release roughly EUR 100 million of this crisis-related ECLs in '23. So out of EUR 940 million roughly EUR 100 million. And next year, we expect another partial release of overlays and also a partial release of the FLI provisions in the amount of EUR 250 million. Yes, so this is our current expectation.
Okay. Let me come back to the first question, savings plans. We have now more than EUR 1.1 million savings plans issued. This is a regular savings on a monthly basis. On average, when we look at Austria, we are talking about EUR 200 per month. When we look at CEE countries, then we talk about EUR 100 per month. So this is something that is a sustainable, very steady, growing business. We are benefiting more and more from that initiative we have launched a couple of years ago. When it comes to the bank levy-related question, Austria for the time being nothing to be expected. But you never know what's going in your neighborhood. There is always a lot of learnings around. No, for the time being, in Austria nothing to be expected.
Sorry, if I follow-up. First of all, what is driving the continued uplift in savings plans now, whereas in other countries people tend to cut on saving and then rather keep the money for other things and they are less committed to enter -- because the number is increasing every quarter.
It's a question of penetration at the end of the day. And I think in Austria, at least it is well known and well-established, regular savings on a monthly basis is long-term perspective, and we should never forget, on average, let's keep aside now the pandemic, but in Austria, normally the savings rates, let's say, the savings ratio of Austrian households is always around 8%. And during pandemic, we went up to 14%. So there is, let's say, there is the necessary prerequisite given for such an initiative. And this is now also implemented and rolled out in the CEE countries and it works.
We'll now take our next question from Gabor Kemeny at Autonomous Research.
Hi, a few short follow-up questions from me, please. Firstly on the increase in the capital hurdle, 2% to 14%, I guess what drove this? I mean, we knew the OSII buffer increase and the countercyclical buffer increase, at least until the year-end, at the Q2 stage saw -- has it increased countercyclical buffer requirement expectations for next year or something else?Secondly on the buybacks, I think, current consensus expectation is around EUR 700 million, EUR 800 million for next year. Can you perhaps comment if this is a reasonable expectation?And then thirdly, the NII sensitivity to falling interest rates, if you could comment on that, please? I think it would be really useful if you could split out the CEE rate sensitivity and then including the Eurozone rates.
First, the increase, I think I described. It's quite substantial overall increase over the last four quarters and going into 2024 that we simply reflect in our official target. That's it. Nothing more or less or behind it. On the NII sensitivities, let me distinguish here, because as you very well know, we have been reacting and also positioning ourselves to the extent of course we could sense the market moves in the different currencies through the different directions. And we have now a positioning that would -- where the Bank would benefit in CEE, in parts of CEE, where we expect in the year 2024 rate cuts, we would benefit from those. In particular, this is true for the Czech Republic. There, well, it's everyone's guess when the first rate cut will happen. You know that the Polish Central Bank was the first mover there and there was speculations about Czech National Bank to move in November, December or January. Frankly speaking, for the full year 2024, that's not so important as the magnitude of those cuts will be. And we are positioned for lower rates in Czech Republic, that I mentioned I cannot specify you in very much detail, because we don't know how the shape of the curve will develop, but it's, of course, given the size of the Bank it's quite significant.On the other hand, in Euroland, we are still definitely positioned for rates remaining at this level or even slightly increasing further for, let's say, the next 2 to 3 quarters. Our opinion is that ECB is either finished or will do another step, but the long end of the curve has shown that we see quite a stickiness in the higher rates. That's why we don't believe that the euro rates will fall sharply in the next, let's say, 2 quarters and that's also our position. So all in all, we are positioned neutrally to slightly for lower rates in CEE, and we are positioned for remaining or still slightly higher rates in Euroland and that's the bottom line, it's fully reflected in our assumptions for the budgeting and our targets that we have communicated today.
Gabor, when it comes to share buyback, to be honest, I can just refer to my statement I already made. That means we want to first complete the current share buyback and then decide about the possible second round in '24. If you look at capital allocation in more general terms, then our priority order is unchanged. Funding organic growth, paying a regular dividend within our target payout range of 40% to 50%, looking at acquisition opportunities, and finally, considering share buybacks. That's the way we look at it.
Just a small follow-up on the rate sensitivity please, Stefan. Is the EUR 200 million, EUR 300 million sensitivity to 100 basis points, you mentioned on the previous call, is still valid?
That's still pretty okay for Euroland, but we will certainly start to adjust to, let me say, lower sensitivity when we feel the cycle of ECB rate hiking is coming to an end. So at the moment, yes, there is still a very, very good assumption for the range, but I will definitely give you a little bit of a different message than going further in the year, assuming that the current assumption of the ECB, so to say, cycle that the market has materializes.
We will now take our next question from Hugo Cruz at KBW.
Just a couple of follow-up questions. One on loan growth for next year. Do you expect to see more growth on the retail or the corporate side and in which countries you expect to see more loan growth? And then on the OpEx growth for next year as well, can you be a bit more firm on what kind of growth you expect there?
When it comes to the loan growth in '24, the way we look at it, we see in both segments a positive loan growth. When it comes to retail, business with housing loans is picking up. We see first positive results in a couple of countries, in more or less all countries we see a very promising growth in consumer loans. When it comes to corporates, I already mentioned it, it has a lot to do with Green Deal, with transformation of the economy, especially we're more exposed to all those items. They are forced to start investing in new technology, new production procedures, and also working capital facilities are more than ever used. So we see a positive environment for a positive loan growth in both key segments, in all countries.
With regards to our expectations on costs, let me first repeat what I've said on a couple of calls already, and this is very important also for, so to say, building into your models on 2024 expectations. The Austrian logic, very much comparable to the German one, is based on collective bargaining and collective agreements, which are always following an average of a preceding period, which means that even if inflation rate CPI falls to, let's say, I'll give you a number, 4% until April or whatsoever, the reference rate that they are referring to is the average of 2023, which we expect to be somewhere slightly north of 7%. This was helping us in the years '22 or so where still the basis for negotiation was a lower inflation rate and while already the blended inflation rate was higher. So that's going against us.On the flip side, of course, we see the different reaction in CEE, where we had significant wage inflation in 2022 already and again in '23. Here, the wage inflation pressure is significantly easing now. Labor market is still strong, but we are expecting much less there. That's the [indiscernible] story and I'll give you a rough estimate in a minute. Second effect is that we are investing into our future. We have been really beefing up and I think Willi was describing what's going on, on the retail front but also corporate front, all these activities, especially into our digital footprint, are coming along with significant IT investments. We have been talking about that. We are absolutely committed to, also in the future, undertake these investments because they are paying back substantially in our top line.Having said this, all-in-all, I don't give you an exact number, but we are making up for about one-third of, say, the blended inflation by efficiency measures, but definitely we expect something like 5%-plus also in the year 2024 for total OpEx, everything else is unrealistic as from today's perspective. And that's of course built in, in our total operating, so to say, performance assumptions. I hope this was helpful.
We'll have a follow-up question again from Riccardo Rovere at Mediobanca.
The first one is on the risk-weighted assets. The 2024 and maybe should we expect anything particular that should make RWA growth deviating from whatever will be the loan growth in the Bank? And can you please remind us what is, if any, the expected impact of Basel IV, especially at the beginning of the phase-in period, so 2025?The second question I have is for Alexandra. I'm not sure I understood you correctly. I got that you expect to use EUR 250 million of FLI in 2024, which would mean that those FLIs will be kept at least partially also going into 2025. I'm not sure I understood it correctly.And the last question I have is, maybe on NII run rate. It's been rather volatile. I was just wondering what could be the run rate, if what we have seen in this quarter could be a decent run rate for the future.
I would start with your second question. Yes, you understood correctly. So after a small partial release until year-end and another partial release of the 250 that you have rightly mentioned, we expect to take forward another part in '25. I think developments, also the geopolitical ones of the recent weeks, have proven us right to keep this very, very prudent level of crisis-related overlays. And pleased to also note -- not forget, there's always some base on FLI. Yeah. So you will always have some stock of FLI overlays. But overall, yes, you're right, you understood right what you have repeated.The second on RWA in 2024. So let's start with '23. So in Q4 '23, we expect total RWA to remain headline stable. We expect credit risk RWA to be driven by slow business. So still by business growth and somehow offset by our regular currency measures that we are applying. Portfolio quality, we also expect to remain relatively stable for this year. In '24, the expected RWA development is not very spectacular. So nothing special to mention. It will be driven by some portfolio deterioration, partially offset also by modeling parameter effects and, of course, also business growth. Basel IV, I can confidently repeat that we expect an overall neutral to even slightly positive impact out of Basel IV. So nothing has changed on this assessment.
In Hungary, if you allow me to make the disclaimer then in Hungary, always something spectacular can happen as we saw in the last couple of years, always with the add-on that we have been managing to a total, both operating and net result to this, which was very favorable. We expect a pretty much stable NII, and 2024 is expected to be comparable to 2023. So, we are talking about EUR 350 million to EUR 380 million in euro terms that you have an absolute amount as well.
We will now take our next question from Simon Nellis at Citibank.
I might have missed it, but you said that you're not expecting any special taxes in Austria, at least at present, but what about Slovakia? I think they were talking about that, if you could give us an update there. And also what level of windfall profit tax do you expect to pay next year in Hungary?And then my last question would be, maybe if you could just provide also some color on the Other division NII because it's also been quite volatile. And if there is any sensitivity, you know, what should we be looking forward to kind of forecast for Other division NII?
I want to start with the bank taxes. Austria, as already mentioned, nothing to be expected for the time being. Slovakia, still unknown. Yes, there was a statement made by the new Prime Minister that he intends to introduce a bank levy. At what level, still unknown. Let's see what is expected. And Hungary, it is still unchanged also for '24.
So no change. So I think you can purchase securities, right, to reduce the impact?
Yeah. Everything is unchanged in Hungary for the time being.
Yeah, that would have been also my -- I'm just checking. We don't expect or we have no signs in the moment of any changes on bank levies in Hungary. Maybe let me mention to complete the picture one other country where we have already kind of a good indication what is the, so to say, tax environment for next year, this is Romania. There we don't talk about an explicit bank levy or windfall tax or whatsoever. There has an adjustment in the overall corporate taxation, that's my understanding. And it's relatively minor. On a Group level, we talk about short of EUR 35 million to EUR 40 million impact for the full year 2024. Confirmation is yet due in the political decision-making process. But that's, so to say, rounding up the picture. And I think Willi, you have commented already on the other countries that are, so to say, in the focus in the moment. Czech Republic, just to complete this picture as well, nothing to be expected for this year, and no signs for '24 at this point in time either. The other question was on Other division's NII. Can you specify, please once more, do you talk about the Austrian Other or what do you mean?
No, I guess the other division. So the corporate center, the NII is quite volatile as well. If you could just give us some -- or unpack what's driving that.
Now I got you. Sorry for my lack of understanding in the first place. Yeah, the corporate center, no, whatsoever major trends. It's a residual allocation from other segments. Logically, when rates are very quickly moving and the fund transfer pricing for the operating business segments like retail markets, and corporate are of course adjusted to the markets' conditions, there is always a bigger residual allocation to corporate center, but no trends whatsoever. I personally expect it to come down from this year's levels, obviously, because the residual booking on the back of the sharp moves was relatively high and elevated this year. But again, no trends that I would be able to name here.
We will now take our next question from Shane Mathews at WhiteOak Capital.
2 questions from my end. 1 on the Stage 2 loans. It's inched up really to 20%. I understand that large part of it is due to FLI updates, macro assumptions et cetera. But can you give us a better sense of how much would be performing, how much would be substandard NPL, just to have a more clear picture of the Stage 2 mix?And second question on Czech margins. Czech margins have been seeing some improvement in the past two quarters. How do you expect this to continue and what could you see being the major drivers; a higher loan growth, more repricing on the loan front?
I'll just start with the Stage 2. So overall, the full Stage 2 of course is performing. So the non-performing part you have in Stage 3, so Stage 2 is performing. And as you rightly also indicated, really a very, very large extent of this Stage 2 share -- and the reason for the high Stage 2 share is due to, or related to our stage 2 overlays that we have been applying now for quite some time since -- in fact, since the COVID crisis. Maybe also to add, to give some flavor on the outlook. For year-end, we would expect a decreasing trend in Stage 2, so being around 17%. And a similar trend of a slight decrease we expect for '24. So the current number of 19.6% we would consider as a peak.
Yeah. And let me take your question on Czech margins. Now, if you look at the net interest margin development and the quarterly change, pretty much everything in this small deterioration is due to FX move in this quarter. And I personally expect the net interest margins in Czech Republic to stabilize at least at these levels now, since we certainly have seen a very sharp drop here. And at the end of the day, it depends on the rate environment. It's a little bit hard to predict quarter-by-quarter, but overall, I'm very constructive on the Czech market and the combination of volume, development and stabilizing net interest margin should give us a good medium-term outlook on NII in Czech Republic.
We'll now take our next question from Alan Webborn at Societe Generale.
In terms of the breakup of fee income in Q3, I mean, clearly, you know, you highlighted payment services and securities have been both doing very well. Is there much seasonality in those two areas, or, you know, do you think the sort of run rate that you saw in the third quarter is something that you can run with going ahead because clearly, they are both very good numbers? So, I wonder what you felt about that. And in general, in the payment services is it sort of the retail customers not that active. So what's actually generating the activity there? That would be helpful.And the second question was on the debate on minimum reserve requirements. I think there have been couple of changes happened there in the Czech Republic and they are expected to. What's your view on that? And how important is that for you, in particular, should the ECB change what they are doing at the moment?
Fee income, I think there is, especially for this quarter, not too much of seasonality. There is always around the year-end. If there are premiums of achieved volumes and so on, there is a little bit more of booking in that direction, but not so much in Q3. What certainly has been driving our dynamics there is, so to say, the flip side of the costs. So there are a couple of services which are indexed. There are a certain payment services which are indexed. I think you should see that also in the industry, but it's much better in the translation to real P&L in our case, since we are combining it with good volume developments, especially in CEE.Going forward, we were counting on the full diversity of our fee income structure, and Willi has already been describing that we are counting on a, I would say, constructive macro outlook. Not fantastic, but I would say, reasonably positive and definitely a better performance of our countries compared to Euroland which should give you, so to say, this edge that we can outperform, let's say, peers or those where only acting in Western European countries on fee income. Q4, Q1, you will see one or the other seasonal fee booking, which I will then describe. So thanks for the question on that end. Minimum reserve requirements, yeah, very interesting discussion that we see here across all jurisdictions in the ECB, as well as in other central banks. I'll give you the hard numbers first and then one sentence of my opinion. The hard numbers are that in the year 2023, the impact will only be in Q4. Obviously, on the Czech side it will be EUR 18 million on NII, and on the Euroland side EUR 16 million, so adding up to a total of EUR 34 million, which is simply the adjustment of the minimum reserve, so to say, technicalities in Q4. Assuming that all the rates remain the same, which we don't assume for next year, that would add up to some like EUR 120 million, EUR 130 million in 2024. I don't expect this to be the case, simply because Czech rates will probably in average be lower.On Euroland it's your call, what do you think about it. Here we are definitely expecting a negative impact from minimum reserve, so to say, regime that has been introduced. Do we see measures of comparable, so to say, kind in the other currencies, not really. Hungary has been a completely different regime in the past. The other countries are part of the Eurozone, with the exception of Romania, and Romania I'm not aware of any kind of such discussion. And if you allow me, I will not comment politically on the thinking of the central bankers in that respect. There are others to comment.
We'll now take our next question from Olga Veselova at Bank of America.
I have 2 questions today. First question is what part of your corporate loans have fixed versus floating interest rates? And then if you could give it separately for Austria and Czech Republic that would be great.And my second question is about Hungary. Hungary recommended banks to introduce a cap on interest rates of new mortgages. Do you follow this recommendation if it's not mandatory, or correct me if it is? And what do you think about the old cap? Do you think it will be increased or it will be extended in its current form?
I'm not exactly sure looking also at Alexandra and Willi, do you mean the overall mix of fixed and floating, or any particular one?
Corporate loans, do you have fixed versus floating?
Corporate loans?
Yeah, corporate.
Corporate loans are 80%-plus floating. Yeah. And the second one was do we follow, so to say, the rules of the game in Hungary? Well yes, we do because otherwise we wouldn't do business there. So I don't know whether this was exactly the question. So can you also repeat this Hungarian question once more?
Yeah. So I guess the interest rate cap on new mortgages was a recommendation. It wasn't a legislation. If it was the case, so correct me if I'm wrong, do you follow this recommendation or maybe it's mandatory? And also on the old cap which was introduced quite a while ago, do you think it will remain intact, it will be extended or the level of cap will be increased?
Yes. So on your question whether we follow, a very short answer, yes, we follow it.
We'll now take our last question from Jovan Sikimic at RBI.
I think you have stated somewhere in the presentation about healthy demand in commercial real estate business. Can you maybe just add a bit of details or insights, which really loan types are here standing out and which markets are, let's say, more robust than the others? And also maybe if you spend a word on residential real estate current situation on CEE and Austria.
So I will take this question, also start by confirming that overall our commercial real estate portfolio is really very sound, and as you rightly said, also a source of loan growth. What we are observing is that it's currently more the usage of already committed lines, also some refinancings of fully rented and really very high-quality assets. It's currently less on development of new projects. This is a situation which I think we are all very much aware and we expect that this should improve and accelerate again in the upcoming periods.To your question on regions, so it's quite across the board in our region. We have commercial real estate business, also new business in Austria, in Romania, but also Hungary, and Czech Republic. Rather little in Slovakia. Slovakia, the share of commercial real estate is very low. And we stick to our core region. Residential real estate, we have an extremely high share of the non-profit housing associations, as you are aware. So, overall, the mix, the resilience of the portfolio, the high collateralization, and low LTVs, nothing has changed from previous quarters.
Thank you. There are no further questions in queue. I will now hand it back to Willi Cernko for closing remarks. Thank you.
Thank you very much for joining our conference call. And I should not forget to mention to invite you to our full year preliminary results '23 on the 29th of February 2024. Thank you for joining. Have a nice day.