Raiffeisen Bank International AG

VSE:RBI

Earnings Call Transcript 2023-Q1

[Operator]

Please stand by. We're about to begin. Good afternoon, ladies and gentlemen, and welcome to the Q1 2023 Results Conference call of Raiffeisen Bank International. Today's conference is being recorded.

At this time, I'd like to turn the conference over to Mr. Johann Strobl, Chief Executive Officer. Please go ahead.

[Johann Strobl, Chief Executive Officer]

Thank you very much. Ladies and gentlemen, welcome to our Q1 2023 update call. Thank you for joining us today. We can report another good quarter with decent operating trends and a very solid balance sheet. Consolidated profit for the first quarter was €657 million were return on equity close to 16%. More importantly, the core of the Group, excluding Russia and Belarus, earned €330 million and 10.4% ROE respectively. In the first quarter, we recognized the very large portion of the bank levies and other governmental measures and we have taken further €69 million of provision for litigation in Poland. Risk costs outside of Russia were very low with still very few insolvencies in our markets. Our CET1 ratio stands at 16%. You are by now familiar with our dual steering approach to the Group's capital ratio, excluding Russia, assuming a full loss of the Russian equity, our CET1 ratio is 13.7% and comfortably above current requirements.

On the occasion of our Annual General Meeting a few weeks back, we updated our shareholders and to market about our Russian business. We have spent the past year exploring a variety of options and our focus today is on two of these, namely a sale or a spinoff. In either case, the result would be a full deconsolidation of our Russian subsidiary from the Group. As we speak, we are working at full steam on both solutions. I cannot tell you today, which one will be favored as both require a complex series of approvals. In the meantime, we continue to reduce our business in Russia after shrinking the loan book and tightly managing RWAs in Russia last year. We've also taken additional steps to reduce our payments business. As a result, we expect the revenues and earnings contribution from Russia to decrease in 2023.

Another point I wish to update you today is the OFAC request for information. In February, we announced that the United States Office of Foreign Asset Control requested information relating to our payments business in light of U.S. sanctions on Russia. You're familiar with the statement we made at the time, but there are nevertheless a few points that bear reporting, repeating. We are operating fully with OFAC and have agreed to scope and timeline for the delivery of the requested information. We have agreed to deliver the requested information in three stretches. We are now finalizing the second delivery package and the third one will be completed in June. Second, the request for information on our sanction compliance program and exposures to Russia, this is what the OFAC seeks for. And finally, we are confident that our compliance systems are strong and we have frequently demonstrated this to our regulators and banking counterparts. We are confident that we will fully satisfy OFAC's request for information.

If we turn to the next slide, I can state that we are pleased with the operating results in the first quarter considering some of the headwinds we have shared with you during our last call. For the core of the group, excluding Russia and Belarus, NII is virtually flat. Fees in the core of the group were down 5% largely due to seasonal factors including the typical dropping volumes in Q1 versus Q4. Loan growth in the first quarter was muted in most of our markets and of course in Russia and Belarus we continue to reduce our business. Finally, and despite the strong inflation in our markets, the cost income ratio for the core of the group remains near 47%. In most markets we aim to keep our OpEx growth at or below inflation.

If we move to the next slide, there is – this offers a closer look to the first quarter. And if we start with the full group view, the decrease is largely attributable to Russia. As you know, 2022 was an unordinary year for our bank there and we have taken several measures to reduce business. This is already visible and we expect this trend to continue. More interesting for you, I assume, the core revenues, excluding Russia and Belarus, net interest income is pretty much flat, largely due to repricing of liabilities, which is happening slower than we anticipated. Nevertheless, we are seeing some competition in local currencies in the Czech Republic, Romania and Hungary, while Euro deposits continue to benefit from rate tax. We've slightly improved our NII guidance for 2023 to around €3.6 billion.

Fees were down in the quarter with the biggest drop in Russia due to lower volumes and margins, some of which is seasonal, but to a large extent some normalization after what was an unordinary last year. As I mentioned, we are introducing some restrictions and the Russian fee line will be lower as a consequence. In the core of the group, the drop is largely seasonal factors, which I have mentioned. Nevertheless, we have slightly increased our fee guidance for the core of the group as you will see in the outlook slide. And now we expect fees to be roughly flat versus last year.

Turing to the next page Slide 7, I have already mentioned the muted loan growth in the quarter. The main driver in our reported numbers comes from short-term business in head office such as repo and money markets business. Romania, so decent corporate lending growth also this was largely in the pipeline from Q4 and is not an indicator for the rest of the year. Going forward, we are cautious on new volumes for the rest of the year. On one hand, we continue to see low demand both in retail and in corporate where investments are slowing down. We are also selective on the underwriting. Our loan growth guidance for the year is now at around 2%.

Deposits from customers were roughly flat on the quarter. We saw reduction in head office we have very good liquidity position allows us to let low liquidity value deposits leave, and we can optimize our deposit base both for cost, but also for the liquidity value that they provide. In essence, we do not need to compete for a concentrated short rated and vary price sensitive deposits. We will take a closer look at head office, liquidity position on the next slide.

Slide 8. The liquidity position of the group, as you can see, the LCR was above 200% at the end of the first quarter and even at that higher as end of April. Equally important individual network units also maintain a very high LCR ratios typically between 200% and 300%. Our network banks are generally funded by a high share of granular retail deposits. NSFR for the group remains very high as well, reflecting very stable stock of term funding.

On the right hand side let’s briefly discuss the liquidity profiling head office. Despite no sizeable retail deposit base here, it is the most conservative liquidity position of any of our units. First, we have taken a number of measures to shore up liquidity since the start of the war last year. As of today, head office LCRs stands at around 160% versus 131% nine months ago. More importantly, we monitored on a daily basis the excess liquidity under the most extreme scenario. If we assume that all liability leave the bank at the contractual maturity, we will still have over €1 billion of excess liquidity after one year. I cannot think of a more cautious approach to managing liquidity and our team have done an excellent job building up this position. If you look beyond one year, the bank is equally robust. Long-term funding inclusive deposits above one year end bonds exceeds our loans to customer with a residual maturity above one year.

If we look at the next slide, you’ll see the development of the CET1 ratio, total group stable. We have earmarked a dividend of €0.80 per share, which would be 27 basis points in CET1. This is deducted from the regulatory capital, and what you also see is the benefit from transitional application of IFRS 9 of around 34 basis points in Q1.

If we turn to the next slide, you have an outlook to 2023 where you’ll see given the good earnings capacity the RWA increase, which I have already described before and some other impacts, I think one can say that we expect also the year end, a strong CET1 ratio.

Moving now to one of the most often asked question, which is what is potentially zero – price/book zero deconsolidation scenario in Russia. The landing point at the end of Q1 was 13.7%, so this is above our internal ratio what we have set at 13.5% for this scenario, numbers are pretty stable here. It’s a reduction on the one hand of the CET1, equity by €4.1 billion in case of deconsolidation and on the other hand we have a 13.4% – €13.4 billion, sorry RWA deconsolidation. Yes, I have to add two remarks. The one is that if we would also lose the intra-group subordinated instruments, we would have additional negative impact of 40 basis points. What you should also be made aware here is that the way operational risks of the RWA from operational risks are usually treated is a phased out approach. So if you would have an immediate facing out of the strong revenue pace, this would end another 45 basis points, 50 basis points.

Moving to the next slide, which is maybe more for documentation and information, is capital ratios and SREP, and what will happen till end of the year with some additional information on the MDA buffer and available distributable items. I think this is more for reading.

So I move to the next slide, which is the MREL and the funding plan, I think here again, with all the funding, what we successfully did already last year, but also at the beginning of this year, you see now a very good situation in the MREL numbers of the head office or the Austrian Resolution Group, I should say in a more precise way. So this is the one element. The other is that also in the network banks we have done, we made good progress and you also see what we need, might need in next year 2024. To our own funding plans here we might come with two to three additional benchmarks. One could be a covered bond issuance to strengthen our liquidity profile. Another could be non-preferred senior, maybe in the second half to maintain our loss absorbing capacity and to support our credit rating.

Slide 14, an update on Russia. You see in all ratios, the Russian bank and the local requirements is very, very strong, beat the liquidity position, beat the CET1 ratio. Also the loan deposit ratio is fantastically good. So very good numbers. You are also aware of the development. So we had another drop in loans around 3% quarter-on-quarter. We have reduced further our net cross border exposures, which is mainly RBI head office, €295 million. You might remember this was €600 million when the war started. And you’ll see the adjustments on the RWA. So this of course are moving elements and depending on mainly where the liquidity is placed, this might increase or reduce the RWAs from the Russian entity.

Coming to Slide 15, the macro outlook. Yes, small adjustments, what you see some countries slightly improved like our forecast for the Czech Republic. Others may be at zero, like Hungary, of course, the numbers are better in the Southeastern European area. And yes, Russia with minus two still in this shrinking environment. But reasonable number and given the big drop in Ukraine last year, we see a slight improvement in 2023. And of course in 2024, we assume in all the markets improved numbers of course inflation and high interest rates have an impact on household demands. And yes, we’ll see if the impact is might be even bigger.

Moving to Slide 16, this is also an update on our perception of inflation developments for this year and in addition to that also for next year. And then for some bigger markets where we are in some expectations of interest rate developments in some markets we already have this year a reduction in the key rates of the central banks. May of course here depends on the development of the inflation if it would come at that pace or if we would find. Maybe a little bit delay in the – well reduction of the key rates.

Moving to Slide 17, the guidance. So as I mentioned in introduction, it’s already here in the numbers as well. So core revenues €3.6 billion, the net interest income fee income at €1.7 billion, probably loan to customers plus 2%. On the group level, the numbers would be relatively similar, but of course bigger with €5.3 billion, €5.4 billion of NII and €3.2 billion to €3.4 billion in fee and commission income as we expect further reduction in the loan book in Russia. Then overall it might be – loan book might be flat. OpEx €3 billion which leads to a CIR, the cost income ratio slightly about 50%. We have a similar number in the total group at €3.8 billion. And cost income ratio somewhere between 41% and 43%.

You are aware of the risk costs overlay what we have built up in the past. So before we use this the current update is, as I mentioned before, good development, so around 60 basis points. The core group and on the total group at around 90 basis points profitability and consolidated return on equity around 10% and on total group level at 17%. And the ratios I have touched already above 13.5% and 16% respectively.

And with this I hand over to Hannes.

[Hannes Mösenbacher, Chief Risk Officer]

Thank you very much, Johann. Good afternoon ladies and gentlemen, and thank you for taking the time to join us this afternoon. Well, in what has been a busy quarter for the banking sector, I’m happy to report that the first quarter has been uneventful for RBI. First of all, credit risk is very muted year-to-date. Risk costs in the quarter are largely the result of further overlays being booked in Russia and benign risk costs elsewhere in the group.

Insolvencies are low, and we have seen very few early indicators of stress in our portfolio. We entered the year with excellent portfolio quality, and I’m satisfied that this remains very much the case to-date. Despite the sticky high inflation, both corporate and retail portfolios remain solid.

Let me talk about the retail side. On the retail side, our underwriting always included higher rates and consequently we have witnessed very little deterioration due to the current rates and inflation environment. We nevertheless simulate further rate hikes and double digit inflation rates going forward. And we still – we see limited pressure on debt servicing ability. Furthermore, labor markets and that’s very important are only expected to lose modestly, which of course is very much supportive.

Let me also talk about the corporate side. On the corporate side, commercial real estate appears to be on everyone’s mind nowadays. Our exposure is around €14 billion, less than 6% of the group’s total exposure. We’ll find a simple breakdown in the appendix on Slide 29. Please keep in mind that we have securitized over €1.5 billion of our real estate book, so our actual exposure is in fact lower.

Nevertheless, a few comments on our real estate exposure. We reviewed our portfolio towards the end of last year already stressing for prolonged higher interest rates. This is fully reflected in our internal ratings. We also assumed a pronounced drop on average of around 25% in prices and booked around €70 million of overlays. Our evaluations are conservative and either include haircuts to the market values, while alternative measures. In recent years, we did not revise the collateral values up every quarter as real estate prices appreciated.

We will be conducting another stress test in the second quarter where we will include further drop in property values and decreasing cash flows where necessary we may book additional overlays. And finally, the exposure is very well diversified across the sector and geographically focused in our region. And before you ask, and I may assume that you will ask no, we do not have any exposure to commercial real estate in U.S.

For the total group we keep and leave our risk cost guidance unchanged at 90 basis points. Let me also move away from credit risk. I’m sure you confirm that our liquidity position is exceptionally strong and as Johann mentioned, we have excellent liquidity in each of our markets and very stable granular retail deposits in head office. We have built the most resilient liquidity profile possible and however you stress liquidity outflows for the next 12 months, we will still have a surplus liquidity.

Another big topic nowadays everybody is talking about is interest rate risk. Interest rate risk is also very limited with asset and liability duration largely matched. We only recently started to build up fixed rate positions in currencies such as to Czech koruna and Romanian leu, and the interest rate gap remains small. Our largest exposure is in euros. And to give you a flavor where an immediate 200 basis points shock would have an impact of only 25 basis points in CET1 measures.

Let me now run you swiftly through the slides. I’m on Page 29 where you can see the overview where we have the 93 basis points are translating in €300 million of risk costs asset. The most important part and the biggest part is being allocated to overlays Stage 3 bookings are summing up to €62 million only, and you can see that we have now over €900 million of stock of risk overlays. The asset quality classifies and demonstrates by itself having an NPE ratio of 1.5% and a very solid coverage ratio of 58.2%.

I was talking about the low insolvencies. Maybe what is also still important, when looking at the right hand side of the box in Ukraine, we have seen the one other Stage 3 bookings, but at the same time, we have very robust overlays already being built up. And in Russia, we have further increased this overlays by €223 million.

Page 20 is showing the split in the different sub-components. As said, total risk costs are summing up to €301 million and €278 million are being allocated, the Russia and Belarus. But if you decompose the €301 million, you can see that the biggest part is coming with €176 million in the bill of overlays.

Let me move on to the next Page on 21. While I would not like to steal your time and going very deep to explain the difference of all €0.9 billion of risk of RWAs was in a quarter, there is one important information, which may have caught your attention. This is just €1.3 billion of inorganic effect, while this must be attributed to the Article 500 in the CRR where you have to risk weight public debt issued debt in a currency, which is different to the local currency.

Let me move on to Page 22, talking about the Poland, Swiss franc update. While we still have 27,000 loans outstanding, we have now 10,500 litigation cases, and we have added in the first quarter another €69 million for provisions in litigation, and we also had to adjust €17 million when it comes to net losses regarding annulment decisions.

Leading us now to a stock of provisions for litigation of over €853 million. What has changed on this slide? Well, we are also now talking about in public regarding settlements. We are now exploring a pilot program for settlement under – having this under consideration, and we would be very much willing to follow the terms proposed in the KNF solution, and converting the contract currency into slot. We know from the banking environment in Poland that this approach was tested and is successful.

Well, Page 23 is for your documentation that we are still having a prudent approach when it comes to NPE ratio and NPE coverage.

Do you all thank you for your patient and listening to us. We would now be ready to take your questions.

[Operator]

Thank you gentlemen. [Operator Instructions] We’ll take our first question comes from Mehmet Sevim with JPMorgan.

[Mehmet Sevim, JPMorgan]

Good afternoon. Thanks very much for the presentation. I’ll have a couple questions please. So firstly on Russia, I appreciate you can’t provide additional details on the exit option for now, as you mentioned earlier, but is there anything you can say at this point on the potential timing of it, whichever option it may be. And secondly on your NII guidance, which is €3.6 billion, €3.7 billion, excluding Russia and Belarus, given the first quarter run rate is still very strong. Do you attribute the repricing of these deposits and other liabilities, which you mentioned is going slower than you expected to non-sustainable reasons or what’s your thinking here? So do you expect an acceleration therefore going forward and things coming back to their previous momentum therefore?

And finally are you accruing any potential dividends out of 2023 earnings in your capital so far? And if so, at what level that will be? Thanks very much.

[Johann Strobl, Chief Executive Officer]

Thank you for your questions. So let me start with the timeline and I appreciate that you do not ask for a preference on the two solutions. As I mentioned before we need many approvals for both. If it works according to our plan, then where I believe the options where we have a little bit more in our hands is the spin-off and the current plan. What we are trying to achieve is that the spin-off could be finished maybe by, at earliest at end of Q3. So this would mean a quite a number of decisions and some approvals but main important, an extra ordinary shareholder meeting in still in August so that we can finalize it. And on the other hand, the so [indiscernible] of September, and on the other hand, I mean by a sale would mean that we would prefer to have a signing and closing within one quarter. But here one has to say this is a very strong assumption and again, depending on what you need as approvals.

To your second question, the NII guidance and the current run rate, which is as we stated around €1 billion, yes, we see signs of repricing. We see it in two ways. Another one is that within the product category we see an ongoing repricing, but we also see a shift from the lower price liabilities to higher once of consistent reduction on current account and shifts to saving accounts and term deposits, which of course are higher priced. And the dividend, what we have accrued, there is this 19% so you have this in as a percentage, 19% of the profit as this is the, the three year average what we have, and this is €128 million. And yes, as I said, this ratio is a regulatory requirement, which is based on the payout of the last three years where, so the intended $0.80 are part of this considerations. Thank you for your questions.

[Mehmet Sevim, JPMorgan]

That’s very helpful. Thank you. If I may just one very quick follow up on the Russia situation. So it sounds like the strategic decision has been reached from your site, but it largely depends on external approvals from here which option will ultimately be at and also at what time point. Is that fair to assume?

[Johann Strobl, Chief Executive Officer]

Not exactly. Not exactly. And the reason for that is that it’s also about economic considerations, what we have and, in both areas, there we might end up in a situation where the cost could be very high and then, then we would have to use a fallback solution. So even in the spinoff there might be extra costs, which I do not assume, but which can pop up at the last moment. So in that case, we could not even, or we would reconsider also the spinoff and, of course in the sale option at a little more, couple of more approvals than needed. And as we stated before, we could not sell at any price. So here we, there is a range, which is probably acceptable, but not at any price. Thank you.

[Mehmet Sevim, JPMorgan]

Very helpful. Thanks very much.

[Operator]

Next question is by Gabor Kemeny with Autonomous Research

[Gabor Kemeny, Autonomous Research]

Yes, hi, I would like to pick up on the last point, you made on the valuation. Can you just walk us through the potential sale potential range for the fair evaluation given the government regulations in place for foreign as itself? That would be the first question. And then to follow up on the NII. Could you be a little more specific on what deposit details are you observing now and what your guidance assumes what your NII guidance assumes for the core businesses. And my last question would be, I think you talked about some outflows of these short-term deposit, short term volatile price sensitive deposit from the head of this, what’s the outlook for deposit volumes from here? Are you expecting more outflows in the second quarter?

[Johann Strobl, Chief Executive Officer]

Yes, I would only, so Gabor as you are usually one of the best informed persons maybe I don’t, I cannot add anything new to the valuation mechanics, but, so let me rather share my way of thinking. So well, there are always rumors in the market that the mechanics will be changed. I still work on the base of what they all said earlier calls reported. So the 50% discount from the value plus the 10% and on the sales price for the exit tax yes, rumors are there that this could be changed. The tricky part is that the valuation will come from the buyer. So there, the buyer is like always the one who selects the evaluator out of this list and whatever. So we usually work from a very simple approach, which is put capital maybe with a few adjustments.

This is the way, we are more or less thinking when talking about EBITDA, it’s not a number which I like, we rather talk internally about the pass through on deposits. And here one has to say that especially when we talk about euro than in Austria, this is yes, and this is linked also to your third question. Its yes deposits come from institutional clients and from large corporate. So these are, they are money market deposit. So what remains is and which means that they follow the Central Bank, I should rather say the money market and only what is on the account. So the lower amount, lower volumes, which per customer, which are on the accounts on a daily basis, they give us some room. So here, if one might assume that 70% might be passed through in the Slovakia and in other units where we have Euros here, I guess it’s significantly lower, maybe around 30%. So these are our exemptions with which we work.

And, of course, there is always the uncertainty about the competition. This exactly leads to your third question, short-term corporate outflows. Bigger volumes with overnight are very, very short maturity, so it's good to have them. It's good to know where the money is, but there is no need to have them all the time. So this is money, which is quickly moving, and our people have a good understanding where the sensitivity is. So this is what one can manage. And yes, it – in head office it also depends on the timing of funding activities in capital markets and some others. But it's not here. It's not about expectation. It's rather than the market situation. And in terms of the – I should repeat, the quality in terms of, yes, modeling, so for – we did in our internal systems, the NFSR, of course, not in LCR. It's not really of high value. So it's rather short term activities. Thank you for your questions, Gabor.

[Gabor Kemeny, Autonomous Research]

Okay, thank you, Johann. Just a quick follow up on the Russia's fair. Do we have clarity that the basis for the fair valuation would be the current or latest reported equity? I'm asking this in the context of your Russian equity more than doubling since the start of the war.

[Johann Strobl, Chief Executive Officer]

No, yes. My assumption is that we take the – here again, I'm relying on the potential buyer, but my starting point is it's in ruble terms. It's the latest available equity what we have there. And, yes, when talking about – in euro terms, there is some adjustments and then, Gabor, as you know, it depends on designing if you use the Q1 or Q2 or so. So here we have some questions, which still needs to be discussed. And yes – and some others – what Hannes has mentioned, you might point to overlays and whatsoever. So this creates an area which are, of course, would needs to be discussed also with the buyer. So it's – I want to say there are some additional elements which comes on top of the book equity, which are – will be addressed when talking to the buyer. Thank you.

[Gabor Kemeny, Autonomous Research]

Yes, that's fair. Thank you, Johann.

[Operator]

Thank you for all your questions. [Operator Instructions] Next question is by Johannes Thormann with HSBC. Caller, your line is open.

[Johannes Thormann, HSBC]

Sorry, sorry, I was on mute. Johannes Thormann, HSBC. Two questions from my side, please. First of all on your commercial real estate exposure, as you said, you have nothing in the U.S. If you look at your existing country of risk and the different asset classes, which feels you most comfortable and which are still the largest concern for you in this respect. And if you look at the fee income, just a simple question, which are the most surprising dynamics for you and what has been like the biggest disappointment this quarter? Thank you.

[Hannes Mösenbacher, Chief Risk Officer]

Well, Johannes, if I may start with the commercial real estate, just to remind ourselves and I was addressing you in my introductory words to Page 29, actually, it's 28, and where you can split – see a split of the different sub-factors when talking about some real estate. And let me start with the segment and then maybe talking also about the countries, so not to bypass your question. Well, if you look at the different sub segments, I think, it's fair to say I don't know how you experience if you're in business travel more or less the hotel market is back. There we see two things. The one is the level of occupancies, but also what we like to look at we call it RevPAR. It means also the revenues per room and they are way above, way above for 2019 – if we take 2019 as a reference point.

The other one is, I know that there is nowadays a lot of talk regarding office, but at the same time I also strongly believe that – that the office market, if you're being compliant with ESG and building state-of-the-art fees, you still would have a good demand. Well, I think, part of the market was really – what we think was the warehouse. We have seen I think also motivated by the supply chains that there was these – it is heavy, it is very, very heavy reliance on these warehouses. And we have seen yields, which have been exceptionally low when talking about warehouses. We have seen warehouses priced with yields of 4%, 5%, which is at least for me head scratching. So this is the point when talking about different industries.

So office ESG, I think, will still be solid. There will be a good demand. Hotels have nicely recovered. Industry, well, depends on the slowdown in industry. Residential, well, also here, guys listen we have seen very pronounced valuation over the last two, three years, so why not having also a little bit of a slowdown and taking steam out of the entire heat when talking about this portfolio. So what I would flag at this point in time is maybe the warehouses where I believe that they have seen a very strong valuation. And so, this is the thing where I would think, well, let's see how things do develop. Also, of course, warehousing is very much dependent on the economic momentum. When talking about the countries, the biggest part of our real estate portfolio is, I think, it's easy to talk about. The biggest part is here with – in Austria. And the next biggest one is Czech Republic and Slovakia and a little bit Romania and all the country – other countries are much lesser exposed.

What I have underlined in my introductory notice that when we have conducted the underwriting, we have not conducted the underwriting based on a pure LTV perception. I know that there have been some market participants just say, well, it has an LTV of 60, 70, 80, so you can go ahead. We have been very much looked on the cash flows and on the repayment capability. And some of the interest targets have been so well flagged that of course we have considered them in the repayment schedule. What they also must not forget is that some of these companies also have interest hedges in place if they either have done a fixed rate loan or if they would have been on a floating basis, some of them also do have interest hedges in place.

So in Czech Republic, we have seen the strong increase. We have seen this very strong increase in rates, and I can share with you that we usually do an underwriting on five to seven year fixed rate loan. So whatever happens to them, they will be further capable to rebuild their loan. Yes, if I have structured in a project finance structure, I may be required to adjust my rating and this is what I also outlined that we have done. So well then talking about Austria, which is the second or the biggest part of the portfolio with about €3.4 billion, here we go usually with high quality exposure in Austria, also the same underwriting, so not pure LTV based, but also cash flow based. This would be the way of looking at it, Johannes. Thanks for your questions.

[Johannes Thormann, HSBC]

Thank you…

[Johann Strobl, Chief Executive Officer]

I take over – yes, shall I?

[Johannes Thormann, HSBC]

Yes, please.

[Johann Strobl, Chief Executive Officer]

Maybe I take your second question.

[Johannes Thormann, HSBC]

Go ahead.

[Johann Strobl, Chief Executive Officer]

Fine. So if you look at the Group level, then the drop is compared to the last quarter, €230 million. The biggest part comes from Russia. So here it's neither a surprise nor a disappointment. We announced that we are going to reduce our business in Russia, not only in the loan business, but also in the services. And yes, if you then look at some of the details than only €23 million out of this €230 million is then a reduction in the rest of the group.

And there it comes mainly from the payment services business where we, as I try to indicate where we usually have in Q4 quite a seasonality in the way the fees are paid and calculated, but also in the Christmas business and whatever you have. So, and it’s fairly spread. So Czech Republic down by €6 million, and in Romania for example, also down €5 million because of lower activities, again seasonality, I mean Ukraine down €4 million here. I think it’s not a surprise that that there as well, some activities are less.

So overall, I think it’s a very expected development outside of Russia and with Russia as well. Yes, the, I mean, what you see is that the loan and guarantees business usually generates also fees here question is with the reduced loan volume to what extent this will with slightly decrease everything else, I think pretty fined. So the big changes came in Russia from the payment services, from the securities, brokerage businesses, there is little, and of course from the foreign exchange business. Thank you for your question.

[Johannes Thormann, HSBC]

Thank you. If I may add a follow up just on the Russian payments, did we see the full effect of the termination of the correspondent banks in the fee income and other income sources? Or should we expect more to come?

[Johann Strobl, Chief Executive Officer]

They are – we have – we had these adjustments not overnight, at the beginning of the quarter. So there had been every week reducing business. So if you take the full quarter, then you should expect also a further drop in the coming quarters.

[Johannes Thormann, HSBC]

Okay. Thank you very much.

[Operator]

Next question is by Hai Thanh Le Phuong with Concorde.

[Hai Thanh Le Phuong, Concorde]

Hi, thanks for your presentation. I just have two topics or discussion. The first one would be on your provisioning guidance. So just that I have the read across correctly. So, if I’m adding up the numbers and you expect like up to 90 bps for risk cost and from this 50 bps [ph] is for the core, then I would say that you don’t expect material provisioning in Russia moving forward to the year. Is that correct? And also, it would be nice to have your assumptions, like if there is any particular segments or segments at the core, if you assume a substantial asset quality deterioration because you expect a clear rise on the risk cost at the core for the rest of the year.

And my second topic would be, it’s quite specific on – it’s on Hungary, because the national bank has changed interest paid on the reserve requirements. And I was wondering if you could share with us the net interest income impact from that step. Thank you.

[Hannes Mösenbacher, Chief Risk Officer]

Well, I take the first question regarding the risk cost guidance, and you’re completely – you’re completely right. I don’t see any further need in Russia for the rest of the year. We have built up a big bunch of BMAs already last year. We added one in the first quarter. I indicated when giving the outlook how much I do believe, and that is the reason why we immediately covered it on the first quarter to not to stay with any risk costs, ups and downs when it comes to Russia. So this goes to your first question.

Any segments, portfolios where you expect more in the next three quarters? I assume that you have this question for all the portfolio. As I also indicated in my introductory statement, while I believe that nevertheless we have a solid portfolio that commercial real estate might be good for the one other surprise, and that’s also the reason why we might be tempted to book the one other overlay still in the second quarter when it comes to commercial real estate. So this would be my guidance when it comes to risk cost. Johann?

[Johann Strobl, Chief Executive Officer]

This was a very specific question, which I can answer with one number. We currently expect €17 million impact from this minimum reserve issue, and this is included in the guidance, what we gave. Thank you.

[Hai Thanh Le Phuong, Concorde]

Thank you.

[Operator]

Next question is by Riccardo Rovere with Mediobanca.

[Riccardo Rovere, Mediobanca]

Thanks. Good afternoon everybody. Thanks for taking my question. Couple, if I may. The first one is, again on risk guidance, risk cost guidance for the core operations, the number, the 60 basis points that you are alluding to for the whole 2023. It seems to me that is exactly the same number before the kind of 75 basis points. Just with the difference that one quarter has strong and you charge the zero or very close to zero. So it would mean more or less 20 basis per quarter as it was before. So the question is, while of a sudden in just three months, something should go from zero to say a couple of €100 million in the core operations. Considering that, in your market forecast, you have one of the slides in a GDP is assumed to remain positive one way or the other.

The second question I have is, it’s not clear to me, and sorry if you have already explained that I missed the very start of the beginning of the call. It’s not clear to me why on NII the guidance has been raised for core operations in such a way, can see in the wait scenario, okay, it’s a bit different, maybe in Hungary in year-over-year [ph], but it’s not shockingly different than it was three months ago. So just wanted to have a better understanding of side of these questions that will been answered.

[Hannes Mösenbacher, Chief Risk Officer]

Riccardo, if I may start of course, you are right at the same time, we are still early in the year and in the 60 basis point please allow me to make two remarks, what must be considered. The one is within the 60 basis point; we also of course have Ukraine being considered. And on the other one is the indicated overlays for real estate. So that’s the reason why we have the 60 basis points at this point in time where we say, well, you have right, of course, why do we have another 20 basis points per quarter? But these have been the consideration, so that within the 60 basis points, we have to cover Raiffeisen Bank Ukraine’s portfolio performance, which currently looks extremely solid. And at the same time also this potential overlays for the real estate.

This is the point and what is the background? Of course, unfortunately we believe that the geopolitical situation stays tense that the economic outlook is slowing down. Johann were sharing the GDP outlook. So this has been the consideration why we kept the 60 basis points up at this period in time. Thanks for the question.

[Johann Strobl, Chief Executive Officer]

Yes. I mean, to your cautious question €1 billion we had, and I take now Russia, not so much into consideration as here, the development of the volumes and a couple of other questions are relevant. And I think you anyhow ask for the core group. So this almost €1 billion what we had in Q4. Indeed, this is a drop in, if we say €3.6 billion, €3.7 billion on the other hand, yes, funding costs which you need for the mid MREL requirement and whatever are not to be underestimated. So, I think this is one element, which over the year has to be considered.

And the second of course is that as I tried to explain that the structural repricing. So the change in the structure is an element. So that we see a continued development that from the accounts customers move to deposit to term deposits and saving accounts. It’s yes, we will see if the – which speed this trend is ongoing and also what we see from the competition. So this is our – the way of our reasoning why we – from your point of view, we are cautious or if I would say it in my terms, the – we lower the run rate. Thank you.

[Riccardo Rovere, Mediobanca]

Thanks. Just a quick follow-up on the risk cost if I may. Hannes, when you refer to the possible provisions related to real estate, you already have – Raiffeisen [ph] already has post-model adjustments, can those be used? How should we think – how should we be thinking about those, the ones that are already existing? Should they – can’t they be used for that for the purpose? And are you assuming in the 60 basis points, the use of the post-model adjustments already have been charged over the past couple of years or so for COVID and energy crisis, whatever?

[Hannes Mösenbacher, Chief Risk Officer]

Well, Riccardo when referring to Page 19, you can see the detail split, and the €547 million are really allocated to Russia and Belarus. And there is, it’s very much about event driven. I don’t know which company will be next on the sanction list. And that was the reason why we have created this high level of BMAs. What we also usually do Riccardo is that we try to build these overlays in a way that they are self-consuming. What do I mean by this, for instance, on the cross border exposure, we also have allocated at the certain stage of time BMAs. And as soon as they’re being rebate, I can release these BMAs. So I think the two blocks when talking about Russia and Belarus, but also when talking about Ukraine, they’re very much allocated to event – to single events. And then we would have the capacity to make use of these BMAs.

The other one, the €319 million taking care about inflation. I think energy, we currently all feel yes, that the energy storage across Europe is on a very prudent and high level. But I have no clue how things would develop in the fourth quarter when we, again, talking about fallen in winter time. So that’s the reason why we kept also the €319 million. This is the way of thinking, but usually we try to structure them and allocate them in a way that they’re self-consuming. So means as soon as the potential portfolio where this BMA might be needed is reduced, then we can also release this BMAs. But as said, out of the €917 million, €547 million plus €52 million I allocated to this event-driven topics allocated to Ukraine, but also to Russia and sanction risk. Hopefully it is helped in the interpretation.

[Riccardo Rovere, Mediobanca]

Yes. And sorry to continue this. The €319 million is, this assumes to be used when you provide the guidance of roughly 60 basis points, meaning that the 60 basis points on a gross level would actually be more than that, because you are…

[Hannes Mösenbacher, Chief Risk Officer]

It is not Riccardo. The €319 million would be another – would be, as we said, the 60 basis points are always communicated in a level of not using overlays. Of course, you’re right, if it goes beyond the 60 basis points, I could also make use of the €319 million stated here. That’s the way how we have built up our three [ph] BMAs.

[Riccardo Rovere, Mediobanca]

Okay. Okay. Okay. Now that’s clear. Thank you very much. Thanks.

[Johann Strobl, Chief Executive Officer]

Thank you very much for your question. I appreciate it.

[Operator]

Next question is by Iuliana Golub with Goldman Sachs.

[Iuliana Golub, Goldman Sachs]

Good afternoon. Thank you very much for the presentation and for taking my questions. I appreciate that you provided details with respect to the RWA dynamics. I’m just interested in what happened to Hungary as there is a quite sizable increase quarter-on-quarter, whereas the loan books saw quite modest quarter-on-quarter growth. So I was just wondering, is this related to the inorganic effects you mentioned on weighings of public debt in the foreign currency, or is there anything related to the actual credit risk in that country that changed?

And the second question would be around the investment portfolios. You mentioned that you started recently building in the Czech Republic and Romania. Would you be able to specify, please, if this isn’t available for sale portfolio? And are they just government bonds or anything else? And the third question, and I’m sorry to go back to CRE, but would you be able to please provide the average LTVs for your portfolios in Austria and Czech Republic? Thank you.

[Hannes Mösenbacher, Chief Risk Officer]

Well, Iuliana. You’re fast in formulating your question. So Johann is not even capable to write down your question. So it’s a little bit possible to I talk, that he can phrase the question slow down a little bit process. So the way I understood your first question is about the very strong and pronounced RWA agrees in Hungary. Yes, indeed, you spot this perfectly, right, but this goes back to this article 500 what I have mentioned. As soon as you have public debt issued in occurrence other which is different to the local currency. So that’s the regulation that if you have an issuance related to public debt, which is not in the local currency, you have to risk with it. That’s the main reason and you could find the one or other euro bond issued in Hungary and therefore you have to risk with them. So that’s the first point.

When talking about model books in Czechia, in Romania, we have built up this receiver position mainly in bonds. But if this is not available, we would also be willing to use swaps, which is maybe dependent on the depth of the capital market here and there, a little bit more challenging. And the other thing is team is working great. Johann, if not have laid down the questions regarding the LTV distribution, well, can you repeat, Iuliana, the questions regarding the LTV distribution? I’m happy to answer them, but give me a flavor on the exact question on the LTV not to steal your time.

[Iuliana Golub, Goldman Sachs]

Yes, absolutely. Apologies for having been so fast. I’m just conscious of time. Yes, the last one was – and thank you for the answers. The last one was regarding the LTVs for your portfolios in Austria and Czech Republic, where you have the biggest CRE exposure if I understood correctly?

[Johann Strobl, Chief Executive Officer]

So the LTVs are for Austria, and the other group is that round about 70%, 80% on an LTV basis, which is below 70%. And if we would go above 70%, the rental or the loan structure must be a very special one. But in Austria, if you sum up it would be 70% in the range of below 60% LTV. So that’s the – when talking about Austria and everything, which is above you need to have very special reasons why we would have been willing to go above.

I mean, talking about Czech Republic, the answer is even easier. Only 6% would have an LTV above 70%. Hopefully this helps in your assessment, and please bear in mind when you convert these numbers, is that revaluation has already done – been done in Czechia for all the real estate. And in Austria, we always have also been very prudent when considering the value of the project. Hopefully, this helps and answers your questions.

[Iuliana Golub, Goldman Sachs]

Understood. That’s very helpful. Thank you very much.

[Johann Strobl, Chief Executive Officer]

The last questions you gave me is, regarding how our investment book is being built up or and we have it’s either hold to collect and not so much available for sale. Thank you.

[Iuliana Golub, Goldman Sachs]

Very clear. Thank you.

[Operator]

Thank you for all your questions. [Operator Instructions] As there are no further questions at this time, we will now conclude today’s conference call. Thank you for your participation.

[Johann Strobl, Chief Executive Officer]

Thank you very much for your participation. I wish you a very good weekend. Many thanks for your interest for all your detailed questions. See you again soon. Thank you and bye-bye.

[Operator]

You may now disconnect.