Raiffeisen Bank International AG

VSE:RBI

Earnings Call Transcript 2018-Q3

[Operator]

Good afternoon, ladies and gentlemen, and welcome to the conference call of Raiffeisen Bank International. Today's conference is being recorded. At this time, I would like to turn the conference over to Mrs. Susanne Langer, Head of Group Investor Relations. Please go ahead, Madame.

[Susanne Langer, executive]

Thank you. Good afternoon to everybody from Vienna, and thank you for joining today's conference call. This morning, the presentation for the call was sent out, along with the additional insight slides. As usual, our 3 board members, Mr. Strobl, Mr. Grüll, Mr. Mösenbacher will go through the third quarter results, after which, we will open the line for your questions.

With that, I will hand over to Mr. Strobl. The floor is yours.

[Johann Strobl, executive]

Good afternoon, ladies and gentlemen. Thank you for joining this call. A very warm welcome. Today, we can present another very good quarter, and let me start with the summary, which you find on Slide 4 in the presentation.

In the first 9 months of this year, we have consolidated profit of EUR 1,173,000,000, which is up 29% year-on-year. And this number already includes EUR 121 million loss from the sale of our Polish core banking operations, which you might remember was already booked in the second quarter this year. What we like very much is that the operating income is up 5% year-on-year, also supported very much by net interest income.

We have again, a very positive development of risk costs, driven by high releases of loan loss provisions. What we also like is that our loans to customers, up 3% year-to-date, despite the sale of the Polish core banking operations, which is reported under the IFRS 5 reclassification.

The sale of the Polish core banking operations will give us an uplift of 85 basis points, which will be recognized at the end of the Q4 this year. The NPL ratio given this very good development also in the risk costs was decreased further and is now at 4.4%. A big part comes from organic reduction, but this is also supported by the sale of the Polish core banking operation. And the CET1 ratio on a fully loaded basis, but also included the year-to-date results, is 12.8%.

If I turn now to the numbers on the next slide, so this confirms what I highlighted in my summary. Net interest income, up 4.6%; net fee income, up 4.2%; so overall operating income, up 4.8%. General administrative expenses slightly increased by 0.7%. I mentioned already the very good performance of the risk costs. So we're over 9 months, still positive with EUR 56 million, which leads to profit before tax of almost EUR 1.6 billion, a profit after tax with almost EUR 1.3 billion and already, I have reported the consolidated profits. NPL ratio, I mentioned. The NPE ratio, the more important figure for the regulators, is now down to 3%.

If we turn to the next slide. Clearly, the ROE is very friendly in the development. Cost/income ratio on a good way. So over the year, it's I think now 55.7%. There might be some pressure -- or will be some pressure in the fourth quarter. So overall, this year, it will be a little bit higher than what we see now. Net interest margin is stable and provisioning ratio very, very favorable.

I, like usual, in these days, I would like to give you an update on Russia. Our activities there are performing very well. Again, we have the profit after tax in euro terms of EUR 368 million, which is up another 3%. And this despite of the ruble depreciation, which had been 9% year-to-date. And year-on-year average, it's down 11%. The net interest margin is stable on a solid high level; risk costs, very low; loan growth in euro terms, good at 8%; the NPL ratio, stable.

So what we can say is we confirm our strategy in Russia, which simply is expand the customer base in the retail area and in the SME area. We believe that the progress we are making in the digital development also will support our sales by our digital channels. In corporate, we're progressing in diversifying our large corporate segment, and we would like to get a little bit more numbers, but also volume, of mid-caps. And again, to confirm in the lower part of this slide, the loan book is diversified on total bank level as well as within the retail.

Poland, we are at the end of a challenging period. Probably, we will mention it once again in the year-end call because not all the details can be already shown in the numbers for the third quarter, but let me sum up. We finished the sale of the core banking operation on the 31st of October, which simply meant that we transferred EUR 7.8 billion (sic) [ EUR 7.9 billion ] of assets and EUR 8.3 billion of liabilities to the buyer. We disclosed these numbers in the September report on the held-for-sale. We confirmed the price, which we have given before. So the price/tangible book value multiple of 0.95, which is approximately EUR 760 million. The impact on CET1, 85 basis points, I have already mentioned in the summary. And in total, I can say that the assets, which had been transferred were EUR 9.3 billion and in terms of RWA, it had been EUR 4.9 billion.

What's left for RBI is a branch in Poland with EUR 3.3 billion of assets. This include a EUR 3 billion foreign currency mortgage book and EUR 300 million of corporate loans. As we very regularly stated, the average maturity of this portfolio is rather long term, so weighted average maturity is in the range of 10 to 15 years. This also depends on the currency. The branch will not originate new business. So this is a pure rundown branch. The NPL portfolio is currently on the level of EUR 373 million.

If we move to the next slide, I can confirm what we already showed on the last several calls. We have various growth strategies in the markets. Preferred markets from the current perspective are the Czech Republic, the Slovakian Republic, Romania and also Bulgaria. Also, I have to state that in total assets, Bulgarian operations is rather a small one, and we also see in some other markets a positive development.

If we then move to the next slide, here is an update of our macro outlook. As said several times, we believe that the peak in this cycle was in '17, but reduced growth rate is still on a considerably good level with 4.2%, for example, in Central Europe; 3.4% now in Southeast Europe; and on a stable level of 1.7% in Eastern European countries. And this will be reduced in the next 2 years also, but we believe still on a good level.

I'm already on Slide 11. And there, I can confirm the outlook, which means that we expect in the coming years mid-single-digit loan growth. For this year, impairment losses on financial assets, the risk costs below the '17 level; NPL ratio to be further reduced, also in the midterm. Midterm, we want to achieve a cost/income ratio below 55% from our targets, so this is the most challenging one. In these days, we have a consolidated return on equity significantly above the 11%. But given the strength of our business, we believe that in the coming years, we can achieve this 11% ROE. We have targeted a CET1 ratio of 13% after dividends and still a broad range of payout ratio for the dividend of 20% to 50%. We also mentioned there in the past that the broad range comes also because of some uncertainty of additional RWA increases by Basel IV.

And with this, I hand over to Martin.

[Martin Grüll, executive]

Thank you very much, Johann. Also, from my side, welcome, and good afternoon. Let's make a deep dive in the quarter-on-quarter development. I am now on Slide #13. Net interest income, down in Q3, EUR 22 million -- sorry, net interest income, up EUR 22 million coming mainly from Russia. Here, we are benefiting from higher volumes and also good deals from central bank treasury builds. Romania, good margin development thanks to key interest hikes in this country, and also Czech Republic, where we also had quarter-on-quarter nice development of loan volumes.

Dividend income in this quarter was lower. As we reported in Q2, we had extraordinary payments. And since all these payments usually are received in Q2, obviously, dividend income in Q3 is lower. Net trading income and fair value results, down EUR 14 million, driven by valuation losses. General administrative expenses, down EUR 20 million. There were some one-offs in Q2, so I will elaborate in more detail later on.

Other result. As we reported in the second quarter, we booked the effect of the Polish core banking sale in full according to IFRS 5. This is the EUR 121 million impact. Impairment losses, we booked EUR 28 million, so this was a real cost. That should remind us that this is not a profit center. Hannes is already eagerly waiting to provide more flavor to you on the current development of our risk costs.

Next slide shows the distribution of profit. I will focus more on quarterly development of the various countries. Czech Republic visibly improved operating income. Hungry came in with EUR 33 million net profit but benefited strongly from an EUR 8 million positive risk result from the release of a workout case. Slovakia, a very good quarter, close to 0 risk cost, higher net interest margin and growing volumes, boosting the bottom line.

Albania, very stable profit development. Same in Bosnia. Bulgaria, lower because there were significant releases in Q2. Croatia, same trend as in Bulgaria, no benefit anymore from releases of risk cost. Romania, excellent performance, very strong bottom line driven by net interest margin improvement. We are at the level of 4.4%, so that's significantly above the level a year ago. And also the loan book is growing nicely in Romania. Serbia, we see a quite stable development. Belarus, also good development, EUR 4 million plus on the profit. Russia, fully on track; net interest margin, stable and again, low impairment losses, as was mentioned by Johann Strobl, and a very juicy growth of 5.6% quarter-on-quarter on the loan book. So in Ukraine, the operating result was stable, however, a lower profit compared to the second quarter since there were no releases booked in the third quarter.

Moving on to the top line development. I mentioned already EUR 22 million more on the top line. NIM, very slightly increased by 3 basis points. However, we expect across the group for the coming quarters a rather stable development. So I believe it will be around 2.5% in the coming quarters.

Dividend income, I explained already. Net fee income, commission income, down EUR 4 million. There was an exceptionally high second quarter net trading, I also mentioned already.

Let's move on to the cost side, which deserves a particular attention because we had now EUR 20 million lower cost. That was, as I mentioned earlier, driven by various factors. One factor is a booking of salary increases based on the agreement with the unions, so the collective agreement, which had to be paid retroactively beginning of the year. So that was a one-off. And in the third quarter, we released provisions for vacation allowances. So this has to be considered when you model the cost, the staff expenses going forward, which also needs to be considered to be reflected, and Johann mentioned it already, that we see across the board, quite a significant wage inflation. In some countries, the salaries go up by even 10%, so that you should clearly reflect in your -- not only Q4 2018, but also in the 2019 forecasts.

Let's move on the balance sheet overview on Page 17. 3% year-to-date growth of loan book despite the Polish core banking sale. That was achieved mainly in head office, Vienna, but also Czech Republic, Romania, Russia and I mentioned already, Slovakia. Some of this growth is driven by repo business, so short-term repo business, and cannot be considered as sustainable. This is why we stick to our outlook to grow our loan book by mid-single-digit number on average in the coming years.

Moving on to the regulatory capital, quarter -- I'm now on Page 18. Quarter-on-quarter, the CET1 capital ratio remained flat, including Q3 earnings. We had seen in line with the growth I mentioned earlier, nonretail credit risk growth of roughly EUR 2.6 billion; retail, roughly EUR 0.5 billion. And due to hedging operations in connection with the Polish sale, we had seen a more -- a bigger growth of our market risk, so bigger-than-usual EUR 939 million growth on the market risk. At the same time, operational risk came down by EUR 200 million.

Moving on to Page 19. The uplift from the Polish sale in the amount of 85 basis points on the CET1 is not yet reflected here. We do not expect any significant change of our Pillar 2 requirements for 2019. I remind you that beginning of '19, we have the combined buffer requirement of 4.5% on the CET1 lever. You know that we have fully covered our AT1. MDA restriction is at 9.83%, so very healthy. The buffer to MDA trigger, 2.5%. And also the ADI volume is very sufficient at the level of close to EUR 2 billion.

On the Slide 20, also you see a quite stable trend on funding and liquidity. We have a loan deposit ratio of 98%. Liquidity coverage ratio, 128%. Due to the dynamic growth, we will come to the market with senior unsecured transactions on a more regular basis.

Coming to my last slide, this is 21. As you know, we are aiming at a multiple point of entry strategy. It's still work-in-progress. Each network unit must form a separate resolution group. That means we have to negotiate with the Single Resolution Board in Brussels on the one side, and also with each resolution authority in the relevant countries. That needs time and, therefore, we, unfortunately, cannot yet share with you any specific targets, which will be given by the authorities. What we know is that for Austria and Slovakia, we would expect binding targets by the end of the second quarter 2019 and that then it should become effective and binding from the beginning of the third quarter, and the transition might go up to 4 years. But that, again, needs to be agreed with the relevant authorities.

That's all for my side, and I would like to pass on to Hannes.

[Hannes Mosenbacher, executive]

Well, thank you, Martin. Good and nice afternoon also from my side. Well, I think from the risk point of view, the summary is quite straightforward. The one thing is we have seen good growth in business. NPL reduced to 4.4%. If you prefer the NPE ratio, we're now at 3%. NPL coverage sums up to 75%.

We see good support by the economy. Why is this important? It gives us lower inflow into the troubled asset part and also, it gives good support for our workout efforts.

So let me jump into the details. I'm now on Page 23. Credit risk RWA is increased by roundabout EUR 3.6 billion. So where did the growth come from? It comes from nonretail side, mainly from Czech Republic, Romania and Slovakia. But also, good growth was executed on the Group Corporates & Markets segment. On the retail side, we have seen increasing RWAs of somewhere around EUR 678 million, and this growth was mainly weighted in Bulgaria, Czech Republic, Slovakia and, of course, not to forget Russia.

Martin already indicated the market risk increase in RWEs. This goes hand-in-hand with our Polish deals transactions, so we did some forward hedgings, and those hedgings have consumed some RWAs. But they, of course, after the successful execution of the transaction, will also fall back.

Yes. So I would move to the next page. When talking about the NPL and provisioning ratios on the portfolio level, we have seen good and strong improvement year-to-date when talking about risk costs. NPL ratio is now down anywhere on 4.4%. NPL coverage ratio, more or less the same like in Q2. We're on 75% now. Impairment losses on Q3 is EUR 28 million. This gives us the provisioning ratio of 14 basis points. So I think one could conclude that this looks quite decent.

Let me jump to my last page of the presentation, when talking about NPL distribution by the country. Last time, you have asked me what is my guidance when it comes to the NPL ratio. So we are aiming to somewhere around 3% to 5%. And then it's also easy to see on which markets there is some still way to go, well, obviously, in Poland, Albania and Croatia. In Ukraine, we are confident that we will meet somewhere around -- that we will finish the year-end somewhere around 10%.

Well, not keeping to you too long for your questions, so we would now open the floor for your questions. Please go ahead.

[Operator]

[Operator Instructions] Our first question comes from Anna Marshall from Goldman Sachs.

[Anna Marshall, analyst]

My first question is in capital, please. Firstly, could you please confirm if capital target is likely to remain unchanged at around 13% in the medium term? This is in light of stable Pillar 2 requirement but increasing countercyclical buffers in some countries. And a small part of that question probably is how much would be the risk-weighted asset relief after Poland sale related to market risk?

And the second question is on the related topic. Specifically, could you give an update on capital utilization plans, both in terms of growth and in terms of dividends and for dividends specifically from 2018 earnings?

[Hannes Mosenbacher, executive]

So we confirm that the capital target, as it was presented by Johann Strobl, is still unchanged at the level of 13% CET1. On the market risk, of course, I'm rather cautious in my guidance there because we have volatility. But if you would isolate the effect, we're talking an RWA relief of somewhere around EUR 800 million to EUR 1 billion.

[Martin Grüll, executive]

So capital utilization, may I start with -- I mean, again, in line with our outlook, dividends between 20% to 50% of the net profit and, of course, 5% risk-weighted asset growth roughly -- or mid-single digit in the coming years, around mid-single digit would certainty also consume a certain part of the capital.

[Operator]

Our next question is by Julia Miato (sic) [ Matoshchuk ] with Morgan Stanley.

[Julia Matoshchuk, analyst]

A couple of questions from me as well. So the first one is really on costs. Of course, you operate in geographies where wage inflation is quite high. So how should we think about the potential or the actions you can take to mitigate this wage inflation in 2019, 2020? And how should we think about the overall trajectory of the cost basis? It -- this is my first question. And perhaps, if you can give us some general color on the different regions, that will be great.

And then the second question, so the outlook for asset quality -- or at least in the quarter, asset quality was excellent. Again, we have seen this for a few quarters now. Do you see this continuing? Or do you see any pockets that are starting to worry you? Perhaps if you can give us any detail on the growth defaults that you are seeing, that will be interesting.

[Martin Grüll, executive]

Let me jump into the second question right away. Regions, we see -- or we would expect Austria, unfortunately, where actually today, roughly 1/3 of the total operating expenses is booked, quite a significant increase, to be followed by Czech Republic and Romania. Also Russia in local currency, but based on the most recent FX forecast, we would, in euro terms, not expect so much growth. But I have to mention that in local currency, it would be quite bold. It's coming, to a large extent, as mentioned, from the wage inflation but also from innovation investment. We mentioned that regulatory is still high. There's still a lot of depreciations coming in, but it seems that these costs are going to peak now, so we would not expect much more to come from the regulatory side. However, investments in digital and our innovations will certainly kick in. This is why we expect a quite bold and substantial increase in 2019. So coming to your question...

[Julia Matoshchuk, analyst]

Can you quantify, perhaps, what this means, in terms of 2%, 3%, higher than that?

[Martin Grüll, executive]

We will give you certainly a more granular outlook at the occasion of our full year presentation. We are in the midst of the planning process, but this is why I wanted to share with you the overall trend. So clearly, I can say the time of stable cost development is over. And we will come up with a more granular outlook on the cost side when we have the full year results available in the Investor Day in London.

[Hannes Mosenbacher, executive]

Well, on the asset quality, and maybe I give a broader flavor because I would assume that this question anyway comes sooner than later. Well, when talking about the Q3, what we have seen is that more or less, it's 2 or 3 markets being worth mentioning at this time. So we had a small increase in risk provisions in Czech Republic. This is more or less a real estate developer, a very small one and, yes, coming into the default bucket. The other one was -- 2 cases out of Poland. One is a rather famous one, which you could anyway see when you look up the Polish headlines. It was a company focused on collections of troubled debt. And the other one is a usual corporate but also small numbers, low -- I think, single digit. And lastly, in Russia, you have seen on the detailed presentation of our CEO that there was also an increase on NPL when talking about real estate. This goes back to one of our last and remaining loans granted in USD, and it's a storage capacity. And it was always around the trigger levels. And this time, it was hitting and was over the trigger levels, and so it moved to the default bucket.

Well, when looking ahead on Q4 and, at least, I sense that this could be part of your question, we have always seen in the Q4 some seasonal effects. So this is why we are not now saying, yes, we will finish year-end with a write-back, but that we are still tuned and excited about year-end. So Q4 seasonal effect, up to now I cannot report any major issues on this side.

The other one, what also makes the life of the CEO a little bit more demanding is this very political dimensions and dynamics, what we see. So this could also give a reason for risk costs. And finally, last but not least, now we have 3 quarters of experience with the IFRS 9, and we may fine-tune here and develop one other parameter. This is my guidance when talking about risk costs.

[Julia Matoshchuk, analyst]

And if I can quickly follow up. In terms of through-the-cycle cost of risk, what do you think RBI should see?

[Hannes Mosenbacher, executive]

Well, this is a revealing question, and I feel try not to answer it perfectly and correct. So I think what is fair to assume, as given with our outline, we see a deceleration of the economy in some of our regions, but not a sharp drop. Yes, so -- and on the other hand side, we may have some good recoveries and write-backs also the year after in 2019. So 2019, I think we could be slightly around last year's level, maybe a tick upwards, a tick downwards but -- so 2019 may look like 2017. So if we take 2017 and add a little bit our 2019, let's see. 2020, it's too early. But the long-term average is definitely higher than the 2017 level, and for sure, higher than what we have seen up to now in 2018.

[Operator]

Our next question is from Gabor Kemeny from Autonomous Research.

[Gabor Kemeny, analyst]

Broader question. You mentioned the cost/income ratio target of below 55% is the most challenging. And you have indeed spoken about wage inflation for some time. Still, we have seen a steady improvement in your cost/income ratio, that it is down 2 percentage points for the first 9 months. So going into 2019, how shall we think about the drivers? Do you think we would need a significantly higher rate environment to see further improvement from here?

And then secondly, on Russia, can you give us some color on the increase in the headcount? I think that Russian headcount went up by about 200 in the first quarter. Is there an intention to increase your lending business?

[Johann Strobl, executive]

So '19, you were referring. So we have this nice income growth, revenue growth in '18, which helped us. I think we still can do so in '19. But as Martin said, not so much favorable anymore because of the 2 reasons he had given. So on the one side, this wage pressure and on the other side also, additional investment.

And this also links to your second question. We have seen -- and I think we will see more people being added to the Russian operation. As I indicated, we will increase our customer base also in the coming years in Russia. This is our intention. And also, we had quite a lot of mobile banking, web-based services. We still have to do so. We have to add people into areas. The one is we hire, of course, IT people to support this development. In the past, in Russia, as well as in other countries, we did some in-sourcing. So if you just look at the number of headcounts, what you see is a combination of in-sourcing of services, which had been provided by external partners in the last few years. Reason for that is that we want to have some more know-how -- IT know-how inside. And different to the past, we don't see volatility there. But given the digitization, we see rather increasing that number. So I think we need less flexibility and more internal know-how. But in Russia, as I said again, in addition to the in-sourcing and in addition to the buildup to develop and improve our digital channels, we also have to add additional people into service, like call centers and whatever. Because this number has to grow, has to grow with the number of customers what we at.

[Gabor Kemeny, analyst]

And does this mean that you are seeking to increase the share of the Russian business? So would you be fine with Russia potentially becoming a bit bigger in terms of a group context? And just a small clarification, on the cost/income side, did you just mention that you see some potential slight room for improvement going into 2019?

[Johann Strobl, executive]

2019 might be -- as Martin said, we will outline this in the -- with the year-end numbers when we present that. I think the reason why we are not so clear now is we have not reviewed all the investment programs, what we see from our network banks, which might add cost. We have to see how the deposit rates in some of the countries, where we have seen rate increases, will develop. So I think again, with the year-end results, we will have a better view on that. But let -- and also, the negotiations on the union traders -- the trade unions, collective trade unions agreements are still ongoing, so we have no full view of how big the wage impact might be. So there are quite a lot of uncertainties. But let me remind you that we said in the past, it's difficult to achieve in '19, maybe also not in '20, the 55%, but we want to come closer to that number.

[Operator]

Our next question comes from Alastair Ryan from Bank of America.

[Alastair Ryan, analyst]

So corporates and market's part of the growth in the quarter. Could you just give us a little bit more color whether that's sort of in the footprint or elsewhere? And then secondly, related to that, the mid-single-digit growth outlook target, it feels like you could easily do more than that next year. Is it just that you don't want to change the number at this point in the year? Or will there be parts of the business where -- that you'll be slowing down so that the bits that are doing better still average you out to mid-single digit?

[Johann Strobl, executive]

Yes. The mid-single digit, this is what we believe also midterm, given the development in the macro areas, is what we can achieve. Why this might look a bit lower than what the current run rate is, there are 1 or 2 reasons for what that in addition. One is that in the fast-growing markets, like the Czech Republic or Romania, we have seen some interventions by the central banks, the bank supervisors where we believe that finding new restrictions on the loan criteria, like limiting the debt-to-income or limiting the loan-to-value for private individuals, we think this might have an impact reducing the new volume growth by 20% to 30% in the retail markets. So only by that, the growth rate naturally will come down a little bit.

[Martin Grüll, executive]

Maybe the question of the footprint in corporate and market, so this is within the existing footprint. So don't worry, we are not going to re-expand in Asia or in the States. It's the existing -- mostly with existing customers, also project finance and this kind of thing. But we have not changed our footprint, if that was your question.

[Operator]

[Operator Instructions] We'll now take our next questions from Benjamin Goy from Deutsche Bank.

[Benjamin Goy, analyst]

Two question from my side, please. First on the loan losses, it feels like Poland has been a major driver in the last 2 quarters. You alluded to 2 corporate cases, but I was just wondering how the split was of loan losses in Q3, Q2 between the core bank and the operations you are retaining.

And then secondly, it was a strong performance in 2018. Are there any considerations to prepay the Austrian banking tax for 2019, 2020 this year as some of your competitors have done?

[Martin Grüll, executive]

Well, let me start on Poland there and at least perform the split regarding retail and nonretail. The retail, and what you can see is that in total, we were capable for the remaining part of the Polish banking entity to increase our coverage ratio, I would say quite nicely by some 5 percentage points above 60%. So this was mainly on the retail side where we capable to increase coverage ratio and the -- as I indicated already with my first contribution, the nonretail cases were normal workout cases. And if you look at the run rate back to last year, so there's nothing that you would say it's a big difference and a big change compared to the last year. So this time, in Q3, we have allocated there some further coverage on the retail part and the 2 nonretail defaults I have indicated.

On the bank tax, as you know, there are still 2 installments to go, and we will not change the payment schedule.

[Benjamin Goy, analyst]

Okay. Sorry, maybe to follow up, or to ask differently. On your FX mortgage portfolio in Poland, what you will retain, is there a significant contribution in the loan losses in the last quarters?

[Martin Grüll, executive]

Well, as I said, if you do the calculus, you could see that we have added some EUR 20 million on provisions to have our -- the coverage ratio beyond 60%. I was also indicating one of the entities in the country there being focused on troubled assets and working them out. They have defaulted. So we see now a slight decrease for sales prices when it comes to troubled assets, and that was the reason for us increasing the coverage.

[Operator]

We'll now take our next question from Andrea Vercellone from Exane.

[Andrea Vercellone, analyst]

Just 2 clarification and then 1 question. On the IPS scheme, the EUR 49 million contribution for this year, has this already been accrued in the capital ratios or not?

On Poland, did I understand correctly that the recycling of negative effects reserve was already booked in Q3? Or does it still have to come in Q4?

And then on Russia, have you already decided on the ruble-euro, ruble-dollar hedging policy for next year? Or you haven't supplied that yet?

[Johann Strobl, executive]

Sorry, it was not switched on. Yes, it was -- it's fully reflected already, the IPS contribution. The recycling -- the second question relating to the recycling of the FX loss, which is actually capital neutral, but must be shown in the P&L. Unfortunately, there was a typing error. Instead of Q3, it should read Q4, and it will be then visible in the fourth quarter.

And the Russian euro-ruble is not decided yet. We continue to hedge a certain amount within the given framework we have been using for a couple of years. But there is no final decision. Actually, these decisions are made by a hedging committee, which is implemented here in Vienna on the central level. And of course, this will be reviewed, our policy and the tactics will be reviewed on an ongoing basis.

[Operator]

Our next question comes from Riccardo Rovere from Mediobanca.

[Riccardo Rovere, analyst]

A couple of questions, if I may. The first one is on stock of securities issued. I noticed it has gone up a little bit in the quarter. So I was wondering whether you have -- you prefer to, let's say, to do some pre-funding now, waiting maybe for a rate increase in the coming like months or quarters.

The second question I have is on -- to get back a little bit on the cost/income ratio of 55% of cost, in general. I understand all you say, the investments in digitalization, the wage inflation and so on. But at the end of the day, the only thing we don't see is that the FDs keep going up. And you have explained maybe why, but that cannot go on forever, I would imagine. The amount of branches never goes down. So I was wondering whether the, let's say, the drive toward digitalization at some point, we should also start seeing FDs going down and branches -- and rightsizing of the branch network.

And the third question I have is on NIM. You clearly stated that you expect over the next quarter, at least, the NIM to remain stable. Does it mean that the rate increase that you have seen in Romania, Czech Republic and partially, Russia, too, the rate had been fully incorporated in the third -- or let's say, in the 9-month results?

[Martin Grüll, executive]

If I understood the first question, was it on funding or pre-funding of our wholesale funding needs? If that was the question, I can confirm that we're already in the process of pre-funding our wholesale funding requirement for next year.

[Riccardo Rovere, analyst]

Sorry to interrupt you. Does it mean that the NII this quarter was somehow burdened by this pre-funding and this should not happen over the next few quarters?

[Martin Grüll, executive]

No, no, no. It was not so huge that you would see this already in the third quarter.

[Johann Strobl, executive]

Regarding your question to the cost/income ratio and hence, the cost drivers. As of now, when we talk to our customers, and we do quite a lot of research, so we go in 2 directions. The one is that we are optimizing our branch network. And you are right, quarter-on-quarter, you might not always see reduction in the number of branches. But if you took a long and historic perspective, then you have seen that we have reduced in some markets substantially. On the other hand, we have to say that in some markets where we, maybe couple of years ago, we have already reduced the branches substantially, we, at the moment, we don't think that we will reduce further. So think of it as small market. Hungary, I think some -- when we had 130, we have reduced it to slightly above 70. It might take a big change in our strategy and in the customer behavior to substantially reduce this further. And also, if I take Russia, for a customer base of 2.5 billion, 2.6 billion, I don't think that given the customer behavior, that this branch network is rather big.

What we see in some Balkan countries that with the change in the way we supply with cash and some other ways, this gives us, in the future, opportunities to further reduce the number of branches, but also the layout of branches. So if we take out then the cash supply from the branches itself, this will reduce the number of cashiers what we have to have in the branches.

So you are right, it's -- if you look at the numbers quarter-by-quarter, you might be disappointed, if I really understand what you say. If you look at the mid- to long term, then I definitely think that the number of adding people will some -- will come to an end, not now because this in-sourcing is not closed, because we still grow the number of customers and the customer behavior is changing slowly here. But when we in-source people, this does not mean that this increases the cost. It rather reduces cost. Cost buying -- buying services from outside is more expensive than having the people inside. So yes, I think this were the questions. And the NIM is answered by Martin.

[Martin Grüll, executive]

On the NIM, while we like the trends in Czech and -- or the Romania, please keep in mind we are talking in total of about EUR 16 billion out of EUR 80 billion total loan book in the group. So it's only 20%, which is currently benefiting from improving rates in the markets. So on the other side, in particular, in the Czech Republic, we see quite strong pressure on pricing of asset products, for instance, mortgages and also corporate loans. So while we are benefiting on higher margins on the liability side, we are losing -- so this is neutralized by quite competitive pricing on the asset side. And as I said before, the volumes, which might be potentially effect, is only 20% of the total loan book.

[Riccardo Rovere, analyst]

Okay. Very clear. If I may, just as a quick follow up. The NII in the corporate division looks to be a bit volatile quarter-after-quarter. The loan book has kept growing maybe because of repos or short-term loans. What we've seeing, it is, let's say, an average of the past 3 quarters in that division, a decent, let's say, proxy of the underlying NII in the corporate and market division?

[Martin Grüll, executive]

Yes. So the underlying NII is clearly below the EUR 290 million, which we had seen. I'm talking about operating income, not NII. But let's talk about total operating income. That's roughly EUR 250 million to EUR 260 million, roughly. And Q2, when we mentioned this last time, is higher because we had these dividends from non-consolidated affiliated company, close to EUR 20 million. So this is why this segment in the second quarter was unusually high.

[Operator]

Our next question comes from Johannes Thormann from HSBC.

[Johannes Thormann, analyst]

Three questions from my side. So first of all, a clarification. If you say you will provide more clarity on strategy and then -- and other things with full year results, you mean 13th of March or already with the prelim result on 6th of February?

Secondly, just to get a feeling, if we look at the range of your NPL ratios, how far do you think the NPL ratio on group level can go down? Or even if you don't want to specify on group level, then some markets at least to get a better feeling and understanding. Or if you think you've reached your low point in some markets?

And last but not least, usual question on tax rate. Again and again, you come in lower than guided. Should we keep a 20% tax rate as a run rate for the next years? Or what do you really think is realistic? Because 25% to 30% seems always too high for you guys.

[Johann Strobl, executive]

Yes, let's assume we have the 13th of March as the more room for communication.

[Hannes Mosenbacher, executive]

Your question on the NPL ratio, maybe I was short. On a group level, we aim to get an NPL ratio of 3% to 5%. This is what we try to achieve, and that's the reason why kept our outlook constant when talking about NPL development towards the midterm. So we are still pushing very hard that we bring it down, even from the current status of 4.4%. I also earmarked and indicated those markets where we think we still have quite some work ahead of ourselves. It's Albania, it's Poland, it's Croatia, and it's Ukraine. But also in Ukraine, already this year, you will see a further decrease on the NPL ratio.

Why we stay at the 3% to 5%, we have some countries where you have a tax regime, which is penalizing you if you do early write-off. So you get taxed if you do early write-off, and that's the reason why we would never go for below 3%. So 3% to 5% on a group level, some markets I have mentioned, this will be the current guidance.

[Martin Grüll, executive]

On the tax rate, we would expect around 20% for full year 2018; and midterm, slightly above, so let's say 21%, 22%.

[Operator]

[Operator Instructions] Our next question comes from Alan Webborn from Societe Generale.

[Alan Webborn, analyst]

Clearly, in Q3, you had a number of very strong volume numbers in, say, Russia, Czech Republic, Romania, Hungary, Bulgaria, I think in principle sort of between 3.8% and 5.6%. Was there a conscious decision to sort of to grow faster in the third quarter? Are there elements, for example, short-term lending that I think we saw at the beginning of the year that boosted those lending numbers? But could you just give us a little bit of a feeling as to what's getting on? Because clearly, they are quite strong numbers. I think you alluded earlier to your wish to do more mid-corporate business in Russia. Is that now starting to come through? Because clearly, those numbers were particularly strong. So if you can give a little bit more color on that, that would be helpful.

Secondly, when you closed the sale of Poland at the end of October, I believe. Therefore, when we look at what's left, will it be making a loss? I know you say it won't be material, but will it be costing you a little something to keep running that business as you run it down? Or -- and how do you think that's going to progress now that you know what the structure is going to look like?

And then the last question was, you talked in terms of the Russian margin being helped by the bond revenues and so on in the third quarter. Does that suggest that the NIM you achieved, which I think is almost a record in the third quarter, is perhaps a little bit high to be sustainable? And given, presumably, you've had a rate rise in Russia, presumably that will crimp slightly the margin. I just wondered what your views were on that as well.

[Johann Strobl, executive]

Yes, we're happy that we are back on a growth rate. I think you're following quite long Raiffeisen. It was for our relationship managers, a difficult period when they were restricted in growth. So in these days, we found that timing-wise, this is -- given the cycle where we are and the way we see the development, it's a good period to grow. I am not sure if we can keep that pace because there are restrictions coming in the Czech Republic, in Romania, in Slovakia as well. And so I think there will be a natural reduction of the loan potential. This might also come somehow from the reduced macro growth potential in the countries. And in Russia, it's also -- depending on the opportunities. I think we always said there might be a pricing level where we rather do not want to grow stronger, and then there are times when we like to do so. So the Russian sales team is a very flexible one, which can increase substantially if we want. So in some areas, it was rather to bring the organization back to growth. In others, it's rather depending on the circumstances. So we do not say that we keep this pace for many, many periods, given the reasons I gave you, but it was important that we all see that we are still able to do so.

[Martin Grüll, executive]

On the earnings from the new branch in Poland, we said that it will not be significantly contributing to the bottom line. As you probably know, the market margin is around 150 basis points for the Swiss franc and euro loans. Risk costs going forward should be rather modest, as Hannes also explained to you. Unfortunately, there are still the bank taxes. This is a bit more than 40 basis points, which will be the tactic, and we employ roughly 150 people. So all in all, bottom line in '19, we still have sort of some cost in sort of -- we set it up fully so the initial costs are absorbed by the year-end, maybe we can optimize the operating model in the next year. But all in all, it's neither a huge loss or nor a huge profit, so it's more or less neutral.

[Alan Webborn, analyst]

And on the Russian NIM?

[Martin Grüll, executive]

Russian NIM is -- I mean, there was a rate hike, as you clearly realized, I think 2 weeks ago. We see, as I already mentioned on the other side, in particular, on the mortgage product, quite significant pricing pressure. So my assumption would be to remain flat for the next 1 or 2 quarters.

[Operator]

Our next question comes from Tobias Lukesch from Kepler Cheuvreux.

[Tobias Lukesch, analyst]

Three question, if I may. Firstly, on Russia. You mentioned the U.S. midterm elections as a key event regarding the development of the sanctions on Russia. I would be interested of your current view on that.

Secondly, the recent oil price change, is there any concern? Or does it have any impact, the rise in the first half, now the slump we have witnessed?

And thirdly, is there any message that you would like to rephrase based on what you have provided with your latest event in London 2 months ago?

[Johann Strobl, executive]

Yes, referring to your first question, the -- or referring to your first question, the sanctions. Unfortunately, we don't sense any signals from anywhere that the number of sanctions will be reduced. We rather feel that the framework is even expanded to add here and there. I think the main point is -- and then I have to ask you were especially referring to the midterm elections, we -- I have not heard, neither systematically or anecdotally, so far of any intervention by the Russians on the midterm elections. Maybe I don't know everything. But of course, this negative development will remain for a long period of time. It depends how the sanctions are structured. Let's put it that way: The way we build our business, as we said, it's -- usually, we can expect that the direct impact on us should be limited. Of course, it creates quite a lot of operational efforts to deal with all these sanctions. But as we have seen with the Rusal case, we never can rule out that something comes, which also can have a direct strong impact on one of our big corporate customers. So we don't see any ease in the sanction games, unfortunately.

[Martin Grüll, executive]

Well, on the oil price development, the reactions, what you can see is with the first half year results, we received from our customers acting in this industry in Russia, they look very favorable, it goes without saying. With these oil prices, it's straightforward that the balance sheet looks quite healthy and also, of course, profit contribution.

The other thing is what we always must keep in mind is that even the current price, but also the price we have seen in the first half year, if my memory serves me right, is, of course, quite well above the budget assumption by the Russian government. So companies and the government enjoyed this current very favorable oil price.

[Johann Strobl, executive]

And to your third question. I'm not sure if I fully understood your question. I think, in a nutshell, what I tried to say about Russia is that there wasn't any big change since we were in London. Sanctions are there as they are. Yes, no relief on that. But maybe you could repeat your question so that -- if I was not clear with my answer.

[Tobias Lukesch, analyst]

No, totally clear.

[Operator]

Our next question comes from [ Daniel Koch ] from [ Deka Investments ].

[Unknown Analyst]

My question is basically around an update on the funding plan. So you already said on the call that you plan to come to the market more frequently with senior bonds to fund your growth. Can you probably give us a little bit more details? Also, you gave a graph of your upcoming maturities, and I'm aware that you also have Tier 2 securities coming due next year, at least for the -- for a call. And I know that your Tier 2 buffer is really big, at least much bigger than the 2% that is regulatorily probably the optimal level. So would be the idea to probably refinance those upcoming Tier 2 maturities with new, non-preferred senior or also with other preferred senior? Can you give us some more details there?

[Martin Grüll, executive]

On the senior unsecured, please understand, this is work in progress and also a question of windows and timings. So please understand that I cannot share any specific timetable on this one. On the MREL, we said that the leave framework that's in place. We are preparing. That is also something, which we may come up, not in the very near future, but in the coming quarters, it's going to be quite likely.

And on the question of the old Tier 2 instruments, please understand that this is not something which I can comment because this is a sensitive information. But as of today, there is nothing decided and, of course, once we decide to do anything on like a liability exercise or call, we would certainly inform the market in time.

[Operator]

Our next question comes from Gilles de Bourrousse from OCTO Finances.

[Gilles de Bourrousse, analyst]

I have a couple of questions, please. The first one is on liquidity. We can see that you have increased your buffer in terms of its HQLA. So I know they represent mainly 90% of the buffer. I was wondering if it was a new paradigm for RBI. And if you are comfortable with it considering that, if I'm not mistaken, these are high-quality liquid assets that are fair valued in the -- obviously, their value can move from one day to another and impact the LCR. My second question...

[Johann Strobl, executive]

Yes. Sorry, to interrupt. Thanks very much for the question. Unfortunately, I have to make a correction. This is on Page 20. In the meanwhile, it should also be on the homepage and actually, if you look on the revised version, it shows that structurally, there has been no change. But thank you for the question. That's for the clarification for all the readers.

[Gilles de Bourrousse, analyst]

Okay, okay. I also have a question on the -- on Russia. Because in the NPL ratio for real estate, it stated that you have a coverage of 8% for the exposure, which is quite low. And I was wondering if you are comfortable with it. And I also had a question also on Russia. If you could update us on your sensitivity to a decrease of the ruble versus the euro on your capital ratios. And finally, just to bounce back on the MREL question. Can you give us some kind of a solvency capital composition target? Meaning, obviously, now you have a bigger buffer of Tier 2, which is about 3%, would you feel more comfortable with around 2%, which is the regulatory buffer?

[Martin Grüll, executive]

Well, let me answer your question on Russia on this current coverage of some 8% to 10% when it comes to the sub subsegment on real estate. In this segment, we have a very interesting situation because many of the clients still honoring their obligation. So purely economically, you will say, well, there's no reason for defaulting them. But at the same time -- and the reason why not there would be no economic reason for defaulting them on the one hand side, they have good rental income and honoring their obligation. And if they would fall short on rental income, there's also good experience on shareholder support. But at the same time, and I have shared this with you when talking about Russia, the Russian inflow was one of the remaining old cases, which we have financed in USD. And this specific storage building was always on the brink of all the trigger levels. Is it discounted cash flow? Is it yield? Whatever you call it. And in this quarter, we decided to put it in the default bucket. But funny enough, part of this presented bucket on what we call default bucket is still honoring their obligations. So no reason for increasing the coverage ratio.

Okay, so on the sensitivity, it's still the relation one. Ruble 1% -- 1 basis points on our CET1 capital, so that's unchanged. And with regard to the question on Tier 2 and buffer, as I said before, there is no -- as of today, I have to say, any specific liability exercise or call plan. And rest assured that we will always make our decision based on what we consider to be in the best economic interest of the company. And we will certainly inform the market in time.

[Gilles de Bourrousse, analyst]

Okay. Just a follow-up question, very quick on capital. Do you expect further effect of TRIM on your capital ratio or any?

[Martin Grüll, executive]

Well, thanks for this question. You know this target review of internal models is a very intensive work. Out of many models we are employing, 3 very important models have been already been subject to this TRIM exercise. It's the nonretail corporate part, it's the market risk part, and it's the retail part. And out of those 3 TRIM exercises, in none of the 3 TRIM exercises there was any need to adjust our RWA calculation.

[Operator]

[Operator Instructions] As there are no further questions at this time, I would like to hand the call back to your host, Mrs. Langer, for any additional or closing remarks. Thank you.

[Susanne Langer, executive]

Thank you for all of your question. If you have any additional ones, please don't hesitate to contact me or my team. We will publish our full year preliminary results on the 6th of February. The next scheduled conference call will take place on the 13th of March when we publish our full year results for 2018. On the 14th of March, we will host our annual investor presentation in London. Thank you once again for your participation, and goodbye from Vienna.

[Johann Strobl, executive]

Thank you, and goodbye.

[Martin Grüll, executive]

Bye-bye.

[Operator]

Ladies and gentlemen, this will conclude today's conference call. Thank you for your participation. You may now disconnect.