Raiffeisen Bank International AG

VSE:RBI

Earnings Call Transcript 2019-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 Mr. Johann Strobl, Chief Executive Officer. Please go ahead, sir.

[Johann Strobl, executive]

Good afternoon, ladies and gentlemen. A very warm welcome to our Q3 call. I can share with you a couple of good developments. I think the most important one is that the core revenues grew significantly. I have to add as a sort of disclaimer to all the comparison numbers that in -- bluntly speaking, if we just compare last year's figures with this year's figures, we are somehow not at the core of what we should look at because last year 10 months of Poland results had still be in, whereas this year they are not. So most of the time when I make comments on the development, I do this for adjusted numbers, so excluding the Polish core business. And based on that, I can say that we had a nice development in the loan growth. Loans to customers grew by 14% year-to-date. As we already mentioned last time, this number is slightly diluted by also short-term lending repo business, which is driven by the high liquidity in many markets, but even if we take these out, we have a very good growth in the loan portfolio.

We also have seen a good increase in the net interest income albeit this is at a lower rate than the loan growth. So we still see, in the year-on-year comparison, a pressure on the net interest margin, but more and more we get from the various markets now the impression that the margins are going to stabilize. And we also assume that the net interest margin total will stabilize.

Risk costs continue to be moderate. And you have to be aware that in this EUR 80 million what we have seen in the first 9 months, there is also the recognition of the new EBA default definition with an impact of EUR 36 million. But Hannes Mösenbacher will outline a little bit more in detail on that.

So on the first slide, you see the results. Operating results, EUR 1.5 billion; consolidated profit, EUR 874 million. I already have mentioned the loans to customers, and this leads to a good increased pro forma of CET1 ratio at 13.7%.

If we move to the next slide, I think I touched already the net interest margin, so let me focus on the cost/income ratio. The cost/income ratio is our clear focus and the area where we have to invest quite a lot of work to achieve our target of a cost/income ratio below 55%. The reasons for that are twofold, one is that we had a negative impact of interest rate swaps used for hedging, where the loan book is not at mark-to-market, of course, but the hedges had been marked-to-market, and with the low rate environment, we had a negative valuation impact on that. This was partly sourced by changing the hedging methodology, and Martin Grüll will probably talk about that a little bit more in detail.

So we found that the cost/income ratio would be better, substantially better, but even if we correct that number, it's still a long way to go to below 55%. With the already mentioned numbers from the hedging, negative impact from the hedging, as of now, we are in the consolidated return on equity with 10.4%, below our target of 11%.

If we move to the next slide, probably you have realized that our Russian bank has announced that they will reduce their branches -- the number of branches by 25% in the coming months and quarters. And the reason for that you see explained on that slide. It's the change in the customer behavior of Russia, which drives the development of our bank, but also which is the reason for this decision. So what we see that within 2 to 3 years, there was a substantial increase of use of digital channels, and on the other side, we have seen that the number of people visiting the branches for various banking activities services was reduced substantially.

So we see a drop of 30% in the branch traffic. And of course, this requires actions and the actions are that we improve our digital capacity, and we will reduce the branch network. And we already explained earlier that this change in customer behavior offers us also access to cities where we never or we haven't been present for a long period of time, and we believe that such a service model can -- we can have a reach to at least 100 cities without branches. And as you are aware, still you need from time to time contact with customers. This can be done by remote delivery teams to take care of the minimum logistics cost to core, anyhow of the services is delivered via digital.

If we move to the next slide, we see an update of our corporate customer activities. I think also in recent presentations, we started to make you aware that corporate business is core in all our markets for RBI, but we have a specific service model for our corporate customers, which we call the GAMS concept, which means there is a group account manager who is taking care to service customers which are active in more than 1 country, and this reduces the -- all this required minimum documentations and whatever you need from the bank supervisor's perspective in KYC, so this makes it much easier for those customers.

And what you can see in the numbers here is that this idea is still working, and we can add customers -- number of customers which take use of that. And this is a very important product. And I have to say I'm very proud that we also could deliver in the digital part a very beneficial service for customers. We call it in the onboarding and ease in electronic KYC, which makes life for our customer much easier. They do not have to visit us, which is important for international customers, but which is highly appreciated even in those -- from those customers who are even in Vienna, even they prefer to use this. And we are enhancing these services now in the export finance, which is a core product, which makes again for Austrian as well as international customers, it's much easier to get access to ECA finance guarantees and all those products, which are of importance to them.

If I now come to the next slide, this is the macro outlook. We -- throughout the last couple of quarters, we adjusted our GDP forecasts, but if you look at the numbers now, it somehow confirms what we said that probably in '17, we have seen the peak, and in many countries, some in '18, and in '19 decline started, but still, I would say, the growth rates are good in all our countries where we are active in substantially better than in the Eurozone or in Germany or in Austria, and this will be also in 2020 and 2021. Of course, low interest rates remain a big topic for banks, and we have to expect that the low rate environment will also have some negative impact in terms of further rate decreases in the neighbor countries to Europe. And on the other hand, of course, we have seen rate reduction forcefully in countries with high interest rate levels like Russia and like Ukraine. On the other hand, it seems that the IMF will further support the activities in Ukraine and so we expect that the positive development in Ukraine will continue.

Moving to my next and last slide in this presentation. This is our outlook and our targets. And yes, we can confirm, given the macro outlook, but also what we have seen in terms of loan growth that we can confirm our target that we will be able to increase our loan portfolio in the mid-single-digit area. Risk costs, still optimistic, positive, and Hannes Mösenbacher will talk about that. I also expect that we will further reduce the NPE ratio as the environment for [ rate cut ] is still good and loan portfolio is also growing. I mentioned already that most concern for us currently is the cost/income ratio. But we confirm our target that we want to achieve a cost/income ratio of 55% in 2021. This, of course, should lead to an ROE of 11%, and we confirm our CET1 ratio with 13%. I also want to confirm the payout ratio in the broad range between 20% and 50% of the consolidated profit. You're aware that there are some consolidation opportunities in the markets we'll see, and as long as this opportunity seems reasonable for us, we want to keep some room and therefore have a broad payout ratio.

And with that, I hand over to Martin Grüll.

[Martin Grüll, executive]

Warm welcome also from my side. I am on Page 11 of our presentation, showing you the development on a quarterly basis. I would like to draw your attention to 2 numbers. In fact, one is the operating result improvement close to 10% quarter-on-quarter. And the second one I like pretty much is also the rapid or dynamic growth of the lending book, 4.6%. The growth is pretty much driven by group corporate and market, so the head office unit and also by Russia -- in Russia, also partly by the nice development of the ruble. Impairment is up compared to the second quarter, but that's primarily driven by the new EBA default definition, and Hannes would elaborate on that a bit more in detail.

Moving on to Slide 12, showing you the operating income and general administrative expense development. What is nice, and I would like to draw your attention also is the NIM, net interest margin across the group, 5 basis points better in the third quarter, so 2.46%. So there is a clear evidence that the net interest margin of RBI is stabilizing. So I expect approximately 2.4% for the full year, maybe a tick better, couple of basis point more.

Also the fee and commission income developed nicely. We had seen higher volumes of payment transactions, FX business, in particular, Russia and Ukraine and also Croatia, which is benefiting from the tourism season.

The net trading income and fair value result was better. Johann already mentioned that we further increased hedge accounting in the building society and also did some hedging -- economic hedging on the asymmetric situation of the Raiffeisen Centrobank certificates in the course of deconsolidation, accounting consolidation process. So that has been stopped.

The other net operating income is down EUR 39 million that is coming from more allocations to litigation provisions in Romania and also driven, to a certain extent, by provision releases we had in the Czech Republic in the second quarter.

Staff expenses improved. Two reasons: seasonality coming from release of vacation accruals in the third quarter for vacation which has not been consumed by the employees; and also you may remember that we booked a restructuring charge in the amount of EUR 10 million for the target operating model review, which is being undertaken in Vienna. For the full year across the group, so for the whole RBI group, I expect roughly EUR 3.1 billion operating expenses.

Page 13, we can skip. Let's move right away into the segments, starting with Central Europe. Loan growth 1% on a quarterly basis. We saw margin improvements in the Czech Republic; a slight deterioration in Slovakia. Risk costs in this segment reflect fewer provisioning releases in the Czech Republic and Hungary. Margin is, as I said, quite stable. I think we can move onto the Southeastern European segment, 4%. So very good loan growth, 4% quarter-on-quarter. NIM overall stable, but if we look particularly on the development in Romania, you see that we have improved by 16 basis points, and we are at the level of 4.63%. This is quite satisfactory.

Moving onto Eastern Europe comprising Russia, Ukraine and Belarus. As in the second quarter, we see a stabilizing trend on the net interest margin in Russia. You may remember that we had a significant drop in the first quarter of this year. So there's a clear trend of stabilization. We gained in Russia 3 basis points. And as I indicated last time, I expect clearly above 5% for the full year in terms of net interest margin in Russia. In Ukraine, we see a decreasing trend, also driven by the National Bank key rate. Overall, loan growth was quite satisfactory with 5% plus quarter-on-quarter.

Next segment, and I'm now on Page 17, is group corporates and markets, a business we are doing out of Vienna. Here, quite a remarkable loan growth, 6% (sic) [ 7% ]. Net interest margin stable. The loan growth is driven by, to a certain extent, also project finance, but also ordinary corporate loans.

On Page 18, you see the development of our capital ratio. We were, at the end of September, at the level of 13.7% on the common equity Tier 1 ratio, also boosted by 11 basis points FX appreciations, in particular, in Russia. With regard to our requirements, I can confirm that ECB imposed unchanged requirements -- Pillar 2 requirement of 2.25% and Pillar 2 guidance of 100 basis points. So that's, I think, a comfortable situation that there is no change on the regulatory requirements.

My last slide shows funding and liquidity. Here also, you have a very stable development, both on the net stable funding ratio and also loan/deposit ratio. I think there is nothing really I have to elaborate in detail on that. Very stable everything.

So with that, I would like to hand over to Hannes.

[Hannes Mosenbacher, executive]

Martin, thank you. Also warm welcome from my side. Happy to talking to you. Well, if I would like to shed some highlights on the Q3 and the year-to-date, I think it's impressive having a risk cost of EUR 80 million. This is somewhere around 10 basis points year-to-date. Q3, as I also have indicated in our talks in London, was impacted by the new default definition summing up to EUR 68 million, but I think it's fair to say that we have a very benign economic environment and also low risk costs. NPE ratio now being at 2.3%, and I'm also happy that we have good coverage and even more so that we can report regarding good business growth.

I'm now on Page 21, and if you would like to look at the upper right-hand chart, you can see that RWAs have been increased by 7.1%. Market risk and op risk are coming down. Market risk, we have last time reported in the last year that we have to do these hedges in due course of our sales procedure. Of course, we have closed out these hedges and, therefore, less market risk RWA is needed. Retail RWAs and non-retail RWAs are increasing, which is consistent with our strategy that we would like to grow with our customer base, but also with our customer loans. Consistent with the RWA growth, you also can see that the exposure at default was increasing by some 6.8%.

I move onto the next page, 22. When talking about risk costs, they are summing up to EUR 68 million in the third quarter. Out of this EUR 68 million, EUR 36 million are coming from the new default definition. I don't know how you're deeply involved in all these formulations from the EBA and definitions. So we made a short sum up here what have been the main changes. The one is that we added some further definition when it comes to the unlikely to pay. This was added in the past-due counter and also, of course, you can see some cross default. So the past-due accounting in all days, if you have been 2 installments in arrear, you were honoring 1 installment and have left open the other installment, the default trigger was set back to the one which is still open. Let's say you had a monthly installment, so maybe you were 30 days in arrear.

Nowadays, all the open installments have been -- have to be honored by the clients. Otherwise, the day counter keeps on counting. The other one is on the gross defaults. So if you have a client, where one product makes some 20% of the total exposure, which is defaulting, it's also infecting the entire exposure with client. In old days in retail, it was just the product defaulting and not the client.

Summing up, you see across the regions that you have -- in total, you have very low risk costs summing up to EUR 68 million, and as said, EUR 36 million are coming from the new default definition.

Brings me to my last slide. NPE ratio is now down to 2.3%. NPE coverage ratio is at 60.2%. And I think I don't have to go country-by-country and region-by-region. The sum up would be that all across the regions, the NPE ratio came down like we have been capable to demonstrate across the group. So this would be my report to you, and now we are happy to take your questions.

[Operator]

[Operator Instructions] We will now take our first question from Anna Marshall from Goldman Sachs.

[Anna Marshall, analyst]

Two questions for me, please. First one on capital. Could you please indicate what is the expected trajectory into the year-end and to 2020? Are there any potential headwinds on the way from the regulatory changes? And also in terms of capital utilization, obviously, I'm aware about your dividend range and potential consolidation opportunities. But just philosophically, how do you assess dividends versus buybacks? And would you consider the latter at some point further down the road? So that was the first question. And the second question is on Polish CHF mortgages. Could you please provide us with an update on the topic, specifically in terms of court case trends, line of rulings and likely provisioning approach?

[Martin Grüll, executive]

May I start with the capital? We had, at the end of December, 13.7%. With the growth momentum we are showing, it will be, I would say, slightly below, but we are pretty much in line with our plans. In terms of 2020 and beyond and regulatory challenges, there is a new regulation. The CRD V has been changed. The Article 14 was modified. We have in Austria -- and this affects the buffer regime in Austria. We have in Austria the systemic risk buffer and the other systemically important buffer. And until now, we have the higher of regulation, which means whatever is higher will be imposed. That was the case, is still the case, but there is evidence now that this might be cumulative, but we firmly believe that this would not lead to an extra capital buffer of another 200 basis points. We got indications from the regulators that the whole buffer concept will have to be recalibrated, and we would expect in the first or second quarter of next year clarity on that subject.

The question is on the -- and may I continue on the cases? The -- following the European Court of Justice verdict, the situation is still pretty unclear. We had in first instances a majority of cases lost, let's say roughly 2/3 lost, 1/3 won. In the second instance, it looks much better. And what we hear from the market, even overall in the entire market in the second instance, there's a majority of cases won. But we have to keep in mind that most of the cases, which are decided now, where we have statistics, are cases which were initiated prior to the European Court of Justice ruling. So all in all, the situation is still pretty uncertain. We have roughly about a monthly average of incoming cases of 50. So unfortunately, we can't give you more details on that one. Overall, we can say the situation is quite uncertain. We see a certain tendency that the zloty at LIBOR concept is not really followed anymore, though we have one or the other court decisions going in that direction. But more and more, we believe that courts start to follow the European Court of Justice, which means that the invalidity is a possible solution. But so far, no decisions were made with regards to the consequences of any possible invalidity. And it's clear that the European Court of Justice said whenever invalidity is discussed, the court must educate and inform properly the borrower about all the consequences. And with that regard, no decision has been made so far in Poland.

The dividend and M&A question, I mean yes, we are exploring opportunities which may come up in our territory. So far, we are not in a position to report on specific transactions. We have our dividend policy clearly in the outlook of 20% to 50% of the net -- of the consolidated profit, and we possibly could adjust. If there is an acquisition and if organic growth continues to be very strong, it might eventually lead to a change. But so far, no change in our dividend policy is planned.

[Operator]

We will now take our next question from Gabor Kemeny from Autonomous Research.

[Gabor Kemeny, analyst]

I'd like to follow up, firstly, on the FX mortgage question. Some of your Polish peers indicated that they would apply a portfolio-based approach to the provisioning for the FX mortgage lawsuits at the Q4 stage. Is this the approach you would be following? And if so, what do you think might be the drivers to determine what those provisions could be, what size of the provisions could be? And the other question is on NII. So in Czech and Romania, you expanded your margins and clearly did significantly better than some of your peers. What do you think sets you apart in terms of margin improvement here? And how do you think about the trajectory going into 2020? And finally, just on fee income, would you like -- would you be able to flag any one-offs in the results? Or do you think the Q3 performance is a reasonable indicator for the outlook from here?

[Martin Grüll, executive]

As far as your first question is concerned, we do not apply any portfolio approach so far because simply there is no real data where you could extrapolate and where you have a profound and solid basis for quantification of any results. Of course, we are very closely developing the situation and might, at the end of the day, not exclude that we would come to this, but so far, and this is also being discussed with the external auditor, we do not see any reason for any portfolio approach on the Swiss bank mortgages. In terms of net interest margin, yes, Romania and Czech Republic is doing nicely. Forward-looking, I would not expect any further improvement on that side because the pressure on the margin, honestly speaking, is still pretty high and, therefore, we believe that this level could be maintained, and I don't see any chances of further significant improvement. In terms of net fee and commission income, that was up EUR 31 million, quite nice, 7% quarter-on-quarter improvement, that's driven by, as I said before, higher volumes in payment transactions and also FX business, particularly in Russia, Ukraine and Croatia. But Croatia, as I said before, is seasonal that's driven by the good tourism season.

[Gabor Kemeny, analyst]

Okay. And just a follow-up on the margin. So why do you think your margins increased so significantly in Czech and Romania? I mean I assume we had not too much impact from the rate rises in the third quarter. What were the drivers?

[Martin Grüll, executive]

It is driven by the sort of money market rates, which are not always fully linked to the key rate developments. And so it's more coming from the liability side, both in Romania and also Czech Republic. But as I said, you shouldn't expect any further improvements in those 2 countries.

[Operator]

We'll now take our next question from Tobias Lukesch from Kepler Cheuvreux.

[Tobias Lukesch, analyst]

Two questions from my side as well. Again, touching on the NIM development, you said that you are quite confident to have 2.4% for the full year. We touched now on your outlook and why you think that the Czech Republic was particularly strong. I was wondering looking to 2020, what is the argument actually for the stable rate based on the level where we are? You said it's liability-driven. How likely is it to see in NIM at the end of 2020 rather at 5 basis points lower at 2.35%, for example, then keeping it stable. If I heard you correctly or interpreted you correctly, I think you're not expecting that to rise from 2.4% level. And secondly, on the SoftwareONE IPO, there will be an effect probably for the bank in Q4. Could you give us just a rough indication maybe what kind of one-off we can expect to be booked in Q4?

[Martin Grüll, executive]

Yes. So to be more specific on the Czech Republic, we have a pretty large portion of current accounts, which are quite stable. So we had been in a position to reprice the assets side while rates on current accounts were quite sticky and that led to the improvement of the liability margin in retail and also, by the way, also financial institutions. So but as I said, don't be too optimistic in terms of further improvements in the Czech Republic.

Yes, SoftwareONE. Yes, there was -- the IPO of SoftwareONE took place beginning of October, and that will lead to a nice extraordinary gain in the fourth quarter, which will be in the -- which will be relatively high double-digit million euro amount.

[Operator]

We will now take our next question from Alan Webborn from Mediobanca.

[Riccardo Rovere, analyst]

It's not Alan here; it's Riccardo. I suppose it's my turn. Anyway, if it is my turn, I just have couple of questions, if I may. The first one, just a clarification on fee income. From the statements you made before, aside the good summer season in Croatia, the perception was -- my understanding is that the level of fee income we have seen in this quarter, especially in Russia should be considered as sustainable. Would you agree with that? Is that what you think? This is my first question.

The second question I have is sort of to get back to your payout range. With a fully loaded common equity, which is now 70 basis above the target, maybe you're going to make, hopefully, some profits, some internal capital generation in Q4. If you do not find any M&A opportunity from here till the day of the decision of the [ DPS ] in, let's say, first quarter 2020, is it reasonable to assume that the payout ratio could be in the upper part of the range that you have provided or would you prefer to keep a cash on a kind of buffer in case M&A opportunities materialized in -- later in 2020?

And then I have a third question, which relates to the risk cost guidance of less than 45 basis points. Now using 45 basis points of loans would bring the total amount of credit losses for the full year EUR 300 million above what you have reported in 9 months or something like that. Now I understand there is going to be some more impact from EBA default in Q4. But how should we -- but given that you have reported only EUR 35 million at the end of the day this quarter for one division, let's say, EUR 300 million on top seems to be a pretty cautious outlook. Or is there any reason why we should consider this guidance as reasonable?

[Martin Grüll, executive]

May I start with income -- the question on the fee income? Russia was very important. We saw quarter-on-quarter EUR 17 million. That is primarily related to payment services card-related -- credit card-related income, FX commission income. There was one-off of roughly EUR 5 million in August. So that's also another reason of this nice development. That's basically on Russia and Ukraine. We saw also a good fee generation from payment services partly due to a sort of repricing a new fee model for debit cards, higher volumes in clearing and settlement business. But this is, to a certain extent, considered as seasonal. Yes. So it's across the board. It's a very good momentum, except the one-off I mentioned in Russia of EUR 5 million.

[Johann Strobl, executive]

Let me add to what Martin said, concerning your question, dividend payout. You might be aware as it's public, we are in the process of an M&A target. And it's too early to say when it will be closed, and there might be one or the other opportunity. So I would say, we shouldn't expect an early adjustment of our dividend policy. So we would like to keep it for a couple of months, maybe even quarters, as there's quite a lot of things ongoing in our markets, not tremendously big targets, but big enough to have an impact on our capital ratio.

[Hannes Mosenbacher, executive]

Well, thanks for the question on the risk cost. That was the reason why we already -- after the first half year, we have adjusted our outlook from 45 basis points to below 45 basis points. And as indicated and flagged there in September, the new default definition shall sum up to a mid-double digit amount of euros, slightly above this amount, so then I think the calculus is easy. We already have done EUR 36 million, so you may still assume a small further amount to come up when talking about new default definition.

When it comes to the guidance for the full year, well, looking at the consensus, I think I'm very fine with the consensus, what is currently shown. What is the reason for the Q4? Well, I think the consensus is a very good one. There are 2 things: as said, the new default definition; and the other one is, we all know that you always have a sort of a seasonality pattern in Q4 when it comes to risk cost. This was the reason why I would not like to be talkative on the consensus and bring it down further.

[Operator]

[Operator Instructions] We will now take our next question from Alan Webborn from Societe Generale.

[Alan Webborn, analyst]

Clearly, you've done nearly 15% year-to-date loan growth and your target's mid-single digit. We appreciate that there's an FX element, and there's an issue about excess liquidity in growing your repo volumes and so on. But nevertheless, I guess outside the CEE region, you've done much better than you would have thought probably at the beginning of this year. And in terms of -- your targets are the same. So where is the slowdown really coming from? Is it because you've reached a level on your sort of corporate lending side that you now feel comfortable with? Are you expecting to see big slowdowns in areas like Russian retail and so on? Or are you just being extremely prudent because clearly depending on whether you buy something or not, you have the capital to keep growing and the areas that you've been growing in are quite profitable areas. But we've seen quarter-after-quarter some really quite sort of good levels of what seem to be underlying growth. Just give us an idea of what you feel the sort of the momentum is at the moment and why should we fear that it falls to quite the level that your midterm guidance would suggest. So that was the first question.

Now secondly, it would seem that potentially, the market conditions are changing somewhat in Ukraine. I mean are you now feeling more confident in your ability to grow the loan book there? Do you think that there's enough evidence to do that? Or does that very much depend on the IMF decision and relationship going forward? And when do you think you'll get a better view of that? That would be the next question.

And then sort of thirdly, I mean you talk a lot about costs. Do you think that you are sort of past the peak in terms of salary increases? Do you feel costs are becoming more manageable? Or do you think that you're still going to -- you're still more in the investment phase and therefore, we should think that costs are going to be -- getting to that 55% is going to be quite back-ended in terms of your midterm plan?

[Johann Strobl, executive]

Let me start with your more general question on the loan growth before then Hannes Mösenbacher will share his view on the Ukrainian market. What we see is, of course, we see a slowdown in the macro development. So this is the first thing what we should consider. Second, we see a reduction in some countries in the inflation rate. We see in some markets -- in the retail area, we see some measures by central banks to avoid an overheating. So you're aware they introduced LTVs, they introduced debt-to-income ratios, which makes it more difficult. I mean there is another issue, which also concerns us, which is the margins. We have been discussing also that in some areas, we have seen quite a margin pressure, which -- yes, probably, we -- in some areas, we might reach margin levels where we think it's not value-accretive anymore. So we will probably not take all opportunities what might be discussed in the markets. So it's a mixture of elements, which leads us to do an assumption that loan growth will be not at a speed what we have seen until this year, but will reduce a little bit.

I mean in the Western markets, there still had been good transactions in real estate and other areas, where probably this might also come to a peak. I don't know. We'll see. So the -- let's put it mildly, there are signs which makes us believe that the loan growth will decrease a little bit. And that's why we rather confirm the single-digit and not the double-digit expectations.

[Hannes Mosenbacher, executive]

Let me talk about the Ukrainia. I think what is important to note is if you look at the current GDP development in Ukrainia in the quarter 2, we have seen a year-on-year growth of 4.6%. Q3 was also still very dynamic with a growth of 3.3%, 3.5%. We see good consumer confidence, and that's exactly -- consumer sentiment and that's exactly the part of the portfolio where we are happy also to support growth. And of course, you were reflecting a very important issue. When it comes to the IMF mission, I think there's a lot of headlines going on, but I also have the feeling that the IMF is still very much committed. Just 1 or 2 days ago, there was an issuance done by the Ukrainian state entity. The take-up was very well perceived by the market. So and we are a strong bank in the local market. And we are also, of course, happy to support the local loan growth when it comes especially to retail.

[Johann Strobl, executive]

Costs, what you were asking, couple of explanations and expectations to that. The wage inflation was substantially in all our markets. What we had been able and you might remember in the years before that our wage increases were, on average, I would say, substantially lower than in the market, but this was not sustainable. So we saw the full base in most of the markets with wage increases by 10%. As I said before in my presentation, we invested in digital products in some countries. Still this means that depreciations also increased somehow on the one hand, and on the other hand, we do not see the full benefit neither on cost reductions by being end-to-end digitized nor by the change in the channel. So yes, it seems that it's -- we would see some effects already in 2020. But then also considering that we started some remodeling of our operating model, so this -- or so we started implementation. Usually takes 2 years till you see the full impact. So a little, let's say, what we expect, part of it will come in '20, but the bigger part will come in '21.

[Operator]

We will now take our next question from Mr. Simon Nellis from Citibank.

[Simon Nellis, analyst]

Just a question on your tax rate in the quarter. It seemed to be a bit elevated, if you could comment on that. And what's the outlook going forward for the group tax rate? And then my second question would just be on the trading losses and the hedge -- mark-to-market on the hedge. I mean what happens next year? I mean there's a pretty big delta in your revenue from that. Is that going to normalize next year? Or is there something -- should we continue to expect negative hedging result for a while?

[Martin Grüll, executive]

On the tax rate, we would expect for this year around 22%, going forward 21%, as one specific reason that we have to provision or eliminated the tax assets in Poland following the changed projections and earnings projections. But as I said, beyond 2019 should be 21% across the group. In terms of hedge, we had only sort of 2 cases. One was the implementation of the hedge accounting in the building society because of the change of the long-term interest rate. The valuation losses were rather high in the first quarter, but then we managed to accelerate the hedge accounting and that -- so going forward, we would not expect any major impact. I mean as you know, there's always an inefficient part of a hedge accounting, so that would result, of course, always in some sort of volatility. But due to the fact that we now implemented the hedge accounting and will further optimize it in the coming quarters, so the impact from this part should be mitigated, largely mitigated.

And the second issue, you may remember that we have this, what I would call, asymmetric situation, which appears only in the course of the group consolidation of our numbers. We have bond issuances in one unit, Raiffeisen Centrobank so-called certificates, which are booked there in the trading book. And on the asset side of the group, we used the money for our ordinary business. And therefore, you have -- there's no open position whatsoever, but when you consolidate all the units, you have this asymmetric situation, which on the group accounts triggered this valuation losses. Here, we have set up economic hedges, which means also from that side going forward you should not expect any major impact, which means there is a normalization of this valuation result in the next year.

[Simon Nellis, analyst]

Okay. Actually, if I can ask the question again in a more simplistic way. If I look back over the last 3 years at your revenue and I strip out net interest income and fee income, so core revenues, you still had a positive trading in other income, but it turned into a negative this year. I mean is that expected to go back into positive territory or not?

[Martin Grüll, executive]

Yes, really, because the trading in a narrow sense, which is done by our traders in the trading room, is very positive, despite the fact that we never have any significant positions, we don't take any significant positions. But the revenues coming out of the proprietary trading is positive, and you would expect this also to be positive in the coming years.

[Operator]

We will now take our next question from Riccardo Rovere from Mediobanca.

[Riccardo Rovere, analyst]

Just wanted to double-check I understood it correctly. Now with regard to the EBA default definition, if I understood it correctly, you stated that in Q4, we should expect an impact that should not be too far away from what we have seen in Q3. Did I get it correctly? Just to be sure.

[Martin Grüll, executive]

Well, when talking about purely in isolated regarding the new default definition, it will be even lower what you have seen now in the Q3. But what I said in London is, the total amount is slightly above double-digit million euros, and we have now seen EUR 36 million. So the impact on the Q4 out of the new default definition, for sure, is lower.

[Riccardo Rovere, analyst]

Okay. Perfect. Now this is just to be sure. This is -- let's say, this EUR 35 million in Q3 plus a little less in Q4 is applying the definition of the EBA default to the current stock of nonperforming exposures, right?

[Martin Grüll, executive]

No, this is not right. So I was just encouraged by my fellow colleagues that I should give you more clearance when it comes to the number. So it's half the impact what you have seen in the Q3 when we're talking about the new default definition. So hopefully, this is more than sufficient. Then coming back to the methodology, as I tried to explain, it is working on the entire portfolio, also on the living portfolio because in all situations, each year when it comes to the day past-due accounting, you had some exposures maybe which have been 30 days past-due for a longer period because the client was just late for 1 or 2 installments. But of course, when making use of this new way of accounting, this is way beyond the 90 days default. So therefore, maybe in all times, the client was showing performing, but now it was turning into nonperforming, first thing. The other one is when it comes to 20% ratio, yes, we had clients, especially if you look at the impact there in Bosnia and Herzegovina, where they had been in arrears in a certain product, but also then infecting the other products. So it's really going more with the stock of the living portfolio than with the non-defaulted portfolio.

[Riccardo Rovere, analyst]

Okay. To make it more simple, are you basically saying that from now on, every single quarter, the amount of credit losses will be, just to put a number, okay, kind of EUR 30 million higher just because of the implementation of the new definition or is an impact of Q3 and Q4 and then it's going to disappear?

[Martin Grüll, executive]

It is the second one. It will disappear. It was just introducing the new methods and now we are with this new method. And I consider this a one-time impact, Q3, Q4, and this is it because we, of course, will adjust the way how we do our collection strategy.

[Riccardo Rovere, analyst]

Perfect. Perfect. Now the third part of the question. When I look at the consensus that the IR department put together and you're publishing on your website, for some reasons, consensus sees credit losses going to EUR 400 million, actually above, and then -- in 2020 and then above EUR 500 million in 2021. This is what is published on your website. Now I'm not going to ask you if you think that is right or wrong. But what I want to -- would like to hear from you is, if there is any reason to your knowledge at the moment, what you can see at the moment, why the asset quality, in the regions where you are operating at the moment, any reason why your asset quality should deteriorate dramatically from what you see right now?

[Martin Grüll, executive]

Well, I think there are a couple of things. The first one, when referring to the consensus or the median of the consensus, I was referring to the full year of 2019. So this is what I say, yes, I think the full year consensus for 2009 is an appropriate one. And then as usual, 5 basis points up and down is EUR 40 million up and down. So you easily can have this as one bigger default, and they always can come by surprise.

While not thinking too much front-loading when it comes to the outlook of the coming years, but I think we must not forget that really in '17 and in '18, but also in 2019, we got very good support also from the recovery we have achieved. And we are late cycle industry in the banking and, therefore, I think we would go back sooner than later to a normalized cost of risk. And this is what I also tried to convey in the London meeting in March when saying what is our normalized level of risk. And since the volume, of course, is going up continuously with the growth rate we have shown, of course, risk costs on longer term, somewhere around 10 or 20 basis points, I think is also maybe a very harsh assumption and not sustainable in the communication, but also in the modeling.

[Operator]

[Operator Instructions] As there are no further questions, I would now like to hand the microphone back over to Mr. Martin Grüll. Please go ahead, sir.

[Martin Grüll, executive]

Many thanks for your interest and for dialing in today. As this is the last RBI result call in which I will participate as CFO, I would also like to take the opportunity to say a personal thank you for the many interesting questions also today and all the discussions over the last 15 years. It's been a pleasure to work with you. The next earnings call is scheduled for the 18th of March 2020. And if you have any questions in the meantime, as always, please don't hesitate to contact us. Thanks, again, goodbye, and have a good time.

[Operator]

You may now disconnect.