Raiffeisen Bank International AG

VSE:RBI

Earnings Call Transcript 2021-Q3

[Operator]

Good afternoon, ladies and gentlemen, and welcome to the conference call of Raiffeisen Bank International. Today's conference is being recorded.

And 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, and thank you for taking the time to join us today for our Q3 update. I'm pleased to be reporting on a strong third quarter today, which reflects the continuation of the positive trends already highlighted last quarter. Consolidated profit is now 76% higher year-on-year, driven not only by lower risk costs but also by strong recovery in lending volumes, interest rates and fee business.

Net interest income for the first 9 months is almost even compared to 2020, which we are very encouraged by considering that this year's first quarter was significantly lower than last year's. Higher volumes and rates are, of course, the driver here, and we expect this to continue into next year. We're also encouraged by another record quarter in fee and commission income, which are EUR 538 million mainly driven by excellent business trends and with no significant one-offs included here.

Loan growth accelerated in the quarter with almost 5% higher volumes before Equa and 7% including Equa. Our CET1 ratio is down 10 basis points in the quarter to 13.2%. Equa is now fully reflected as in the additional proposed -- as is the additional proposed dividend, which we will have -- talk about in a couple of moments or I can do it now. We have the extraordinary shareholder meeting on the 10th of November. And there, we propose this EUR 0.75 per share.

Good news is also that Moody's upgraded RBI's long-term ratings to A2. And Hannes will talk about the adjusted outlook where we first time speak about risk costs in 2022. I think what's also important is that we have an M&A update here today, which is Crédit Agricole Srbija is on track, and we expect the closing in Q1 2022.

Equa bank, as I mentioned before, is consolidated for the first time. And Bausparkasse integration and ING customer referrals are completed. And one more, we are not working on it is the financial calendar for next year. We work to be much faster, and we intend to give you a very deep insight to the total year already on the 2nd February in 2022.

Moving to the next slide, which is Slide 6. Here, you have all the details about the third quarter, the income statement. And I think what we see here is a slight improvement in the net interest margin. Also here, I repeat that as long as the over liquidity is part of our business, I think this is a volatile KPI.

Cost income ratio is now at 53.3% for the first 9 months, and it was 52.1% in Q3. But as you know, there is always some seasonality in invoicing and the way we then have ultimately our OpEx. So we target 55% for the full year '21. I will discuss a little bit more the revenues on the next slide.

And on the cost, I would like to make a statement now, which is that for the first time, Equa is also consolidated. And as you know, we started from the 1st of July. So it's the full quarter, which we do have now in the numbers.

And one more element, which I want to outline here as well, we come to that on a later slide also is we took another EUR 40 million provisions for litigations relating mainly to the Swiss franc portfolio in Poland. But there, as I said, we have a separate slide.

Moving to the next slide, now talking a little bit about the core revenue trends. And here, you see why we are happy with the current trend, what we have. And I think one important thing is that with the EUR 875 million net interest income in Q3, we are almost at the levels what we have prepandemic in Q4 '19 and Q1 '20. I also have to mention here that Equa contributed EUR 16 million in Q3 on the revenue side.

As we are aware that usually, there is always a question also to the TLTRO impact on NII. In Q3, this was just over EUR 2 million. And this means in total for '21 EUR 11 million. We're still not recognizing any bonus for the second special interest rate period as the observation date is the 31st of December '21. And should we achieve the second bonus, both at head office and in Slovakia, it would be worth EUR 43 million, which would be recognized over the coming years. So currently, we are confident that we can achieve this bonus as well.

Net fee and commission income generation was again very strong in the third quarter. This is reflecting the continued pickup in activity that we saw in the overall business. The result was driven by higher turnover in payment transactions and FX business across most markets. And we are also seeing sustained increase in retail investment products. Overall, the product lines are growing and to a large extent, we believe that these levels are sustainable.

Moving to the next slide. Here, it's about the loan growth as this is one key driver for our revenues. And what you see here is the very good development, which I have mentioned already throughout the various regions. And this is an important impact also to the net interest income, as I stated before. I think what you should be aware that from the overall increase, about EUR 2 billion come from the Equa loan portfolio, which, as I said before, is first time consolidated. What we also share with you is the sensitivity of key rate hikes, and I have to stress this just to be very clear and well understood what we show here the numbers.

These are sensitivity numbers, which like usually in a simplified sensitivity analysis, we assume that assets and liabilities are relative constant and that also the margins to a large extent do not have a structural change, which means that in the sensitivity area, what we give here, so 50 basis points in some of the markets or 100 basis points in some other markets. It's a reasonable assumption what you see here. Of course, if the rate would increase significantly more than you do also have to expect some adjustments in the margins, which are allocated mainly in the liability area where usually, if you start from 0 or very low, then the first 1 or 2 moves you've done, don't have to adjust the deposit rates, but at the later level at a higher level, then of course, this comes also with this. And for your comfort, we have estimated the NII impact from this rate tax what we have seen so far. And this is about EUR 33 million for the total year in '21.

If we move to the next slide, #9, then it's a short update on the developments in the Czech Republic, so the Raiffeisen -- sorry, the developments of Raiffeisen Czech Republic. And here, I think we can show a very good picture, the focus what we have over the last quarters in our activities in the Czech Republic are now progressing substantially. What we see here is, and you are aware of it, we integrated the Bausparkasse in the Czech Republic, which was already within the group, but now it's fully integrated into Raiffeisen Czech. I think this is -- was an important move as this now improves our opportunities to offer additional products to our customers there. And the customer base what we have here and what we speak about is more than 400,000.

We also can report here that the referral project with ING was successful from our perspective. And we have added 144,000 new customers successfully. And I think, again, there we will provide a good offer for these customers also in the coming months and quarters. And I think from the pure financial perspective, one might have challenged is this -- at the point when we made the decision, is this the right point in time to add another EUR 2 billion of deposits in an over liquidity situation? But I think we were somehow lucky with the timing that with raising rates, then also this gets more and more positive.

And finally, Equa. This adds another more than 400,000 almost 450,000 new customers to the combined entities. And I have to say we are well on track with the integration. We assume that the legal merger can happen, hopefully, in January '21. And IT technical merger in the third quarter. But more important thing than this integration is that the business, the loan origination in Equa is still strong, and we like this very much.

Having said all this, I have -- our teams have prepared one more slide, which I understand that from time to time, you want to see also -- more details to some of our segments. We have chosen this time, markets and what we quite often explained also in the Q&As that our markets business is less one-off capital markets trading, but it's more -- it's to a large extent, a customer-oriented business. This is what you can see on this slide, 92% of revenues, which are attributed to capital markets come from customer business.

And I think what you see here as well is that the segmentation, so the origination from the various segments, institutional clients but also retail clients and corporates is well balanced. And what I have mentioned before is also that you see that the asset growth, like, of course, in the whole industry, the asset growth, be it in custody or in capital management in our Austrian subsidiary is developing very good. And we are also making progress with some of the products, which will support our position in the FX business, providing more comfortable services for our customers.

Moving to the next slide, at 11. You are aware that the pain points, what we still have in our portfolio, in our business, the bigger one is the Swiss franc mortgage business in our Polish subsidiary in our branch, I have to say now. And to give you a few ideas, the portfolio -- so the Swiss franc part of the portfolio is at about EUR 2 billion. It's close to 29,000 loans. The amortization is a long-term one. So EUR 100 million per year.

The number of litigation cases is increasing still to a high -- with high number of cases. On average, we recently had about 300 cases per month, and the total number is now more than 6,300. The provision I mentioned it already. We added around EUR 40 million is now around EUR 231 million. And yes, the capital usage of this portfolio is high. If you add all the various elements, the high RWAs, you know that, of course, also impairments go against capital and the high operational risk and the litigation provisions. This adds up to more than EUR 900 million.

And from the capital perspective, someone might say it's already highly provisioned. But it's the capital allocation. It's not the P&L. Here, I refer to the litigation provision once again about EUR 230 million.

So a few words to Slide 12, which is an overview of the balance sheet and loan growth. I think I don't have to comment maybe as we are proud of. I mentioned the loans to customers, which first time are now about EUR 100 billion. So we like this number very much. And I think what I should also elaborate a little bit is that the numbers below in the lower left-hand box, where we speak about the origination of loans to customers. Here, you see the good development what we had in the third quarter.

What I have to mention that in retail mortgages, we have more than EUR 1 billion, close to EUR 1.1 billion. This is, of course, less than the EUR 1.2 billion what we had in the second quarter, but be aware, the EUR 1.1 billion is the second best quarter what we ever had. So it's a very good development. And of course, we see the one or the other signs of reactions by regulators trying to put some breaks on the very strong development in some of the markets and also the -- yes, margin pressure is felt here and there. So we are very happy with this development.

Moving to the capital ratios, Slide 13, it's 13.2. I think it's not much what I have to comment on Slide 13, but we can turn to Slide 14. And here, what you see is the development, it's a 30 basis point Equa first consolidation. We had 23 basis points from the loan growth. Here, of course, you immediately will say this is net, and I agree this is net because we have seen some improvements in the asset quality, which had a positive impact by 16 basis points and the 23% is the net.

We have some increases in market and operational risk, not that big. And the retained earnings last -- those part of the dividend, which we will not discuss on the 10th of November, so it has an impact of 9 basis points, which are included here in the retained earnings and support the CET1 ratio.

Talking about 15, now the coming quarters. Our colleagues from Raiffeisen Research, shared with you, with us their view on the loan demand in the region, the way we see it. What I have reported already that the mortgage business is in a steady development and we also see a pickup in the consumer support for retail lending. What we also see is that now more and more corporate segment returns to long term loans. And the first few months of this year had been dominated by rather short-term working capital financing. What we can report is that, overall, I think the development of loan demand in the coming 2 years, '22 and '23, is still a very supportive one for our future development.

Moving to Slide 16. This is an overview of the macro outlook, what we see for this year and the coming 2 years, and I think we can be very happy with the development, what we have seen throughout our region. And overall, I think it's also a very, very good outlook for the coming 2 years.

Having said all this, we slightly adjust our outlook and our targets. And yes, with this good development in the loan demand, we now expect loan growth of around 11% for 2021. This is excluding the Equa bank acquired I've mentioned separately.

Hannes will talk about risk costs in more detail. So here, I just want to mention that we expect our provisioning ratio for 2022 around 40 basis points. Cost income ratio 55%, also in the midterm. It's a commitment. You are aware that we will have next year, some special elements coming from the integration costs of Equa bank. I mentioned the technical integration as well as the Crédit Agricole subsidiary, what we also expect to happen to some extent already next year.

Profitability. I confirm the 11% for the midterm, and we also confirm that our midterm CET1 ratio should be around 13%. And given the various opportunities, what we find in the market, we still want to keep the broad range of payout ratio between 20% and 50% of the consolidated profit.

And with this, I hand over to Hannes. Hannes, please.

[Hannes Mosenbacher, executive]

Thank you, Johann. Also hello from my side, happy talking to you and sharing some insights on the risk report with you. Year-to-date risk costs, EUR 151 million. You have seen the split across the different categories on the IFRS terms, Stage 3, EUR 106 million. We have still allocated the EUR 27 million, EUR 30 million we have allocated for the increased sanction risk in Belarus, and we have reflected post-model adjustment in the first quarter of EUR 14 million.

In addition, we have an NPE ratio of 1.6%, having a coverage ratio of 62.2%. And I'm sure that there comes the question, what is my risk cost guidance for the year-end. Well, I've been now on Page 19. And as already indicated, I think the way when we look at the credit cycle, of course, as usual, as everybody else would do, we look at the macro outlook. And this remains quite supportive for the coming 2 years to see, '22, '23.

Having the strong macroeconomic dynamic, we also see in many of our countries that employment rates are recovering back to the 2019 level. In some region, we see really a super high employment rate. I think also on the third bullet, the pandemia, of course, is nasty, is demanding. At the same time, I think broad part of the society got used how to handle it. And we see, again, an adjusted way of consumer spending. And if in '22, latest '23, we are beyond the pandemia, I think we also see a sort of normalization when it comes to the saving rates.

Order books are full. Everybody is talking about supply chain, topics, well, on the other hand side, supply chain is only being challenged if the demand is very high. So we see that the order books are quite full and capacity is also being built up. And there are other 1, 2 factors, I think, which are very constructive is the next generation EU fund. The strong political commitment on the ESG transition and sovereigns and banking sector, we see that the debt level is well to be managed.

Since the Chief Risk Officer is talking to you, I have to add some wild card here. Johann is laughing. You can't see him, but he said, "Well, Hannes, do you really need these wild cards there?" Anyway obvious. But just let's also state the obvious because the question will come. Everybody is talking about inflation. Everybody is talking about energy prices and supply chains. So the outlook is extremely constructive and the obvious needs to be managed.

I'm now on Page 20. There was so much talk about the growth RBI Group was capable to demonstrate. Here, you just see it again in the numbers. If you look at the CE region, bear in mind, it's also including, of course, the Equa exposure. On the right-hand side, you can see the different products for a segment. I would not run you through the details because we have demonstrated a very, very strong performance in Q3.

I'm already moving on to Page 21, the IFRS 9 provision in Q3. In total, we have EUR 42 million, EUR 38 million in this stage 3. With the integration of Equa and you can recall on this IFRS method, there is a onetime impact of EUR 14 million. So on Stage 1, you can see some net releases because of repayment and/or of further improving portfolio composition, I was flagging the IFRS 9 impact from Equa bank. And the post-model adjustment was also one question last time, this management overlay. We were capable to manage it on a quite stable basis. Total net release was EUR 6 million only.

Talking about RWA developments, you can see that we have increased our RWAs from EUR 85 billion to EUR 88 billion, mainly, of course, impacted by the credit risk and the strong asset growth. Partly, it's mitigated by the better performing and better rating. Therefore, we also have a certain mitigating effect by better ratings. Now op risk is very much impacted by the provisions to be reflected for Poland, but also partly for Russia. Market risk, we have seen volatility coming down on ruble, and we also have slightly reduced our hedging in ruble. Therefore, we have lower RWAs on this one. So I think this is the most important thing.

And on the right-hand side reflect also some inorganic effect, which you would have to consider in your modeling for 2020. You know and you're aware of that there is a new regulation when it comes to the structural FX position. And this will cause for RBI Group an RWA uplift of 0.7%. On the retail methodology, the headline would be this pandemia repair package, we see now a change from the point in time presentation of the PD through the cycle. This is causing an uplift of RWAs of EUR 1.5 billion. At the same time, having more stable RWAs going forward on the retail side. Corporate PD also changed in the due course of this repair package. What are the most important topics to talk about, this is this margin of conservatism and the way how you have to reflect the [indiscernible] adjustment. This is causing EUR 1.1 billion uplift. At the same time, we would get the release on RWAs on the market risk side by EUR 0.7 billion.

Coming to my last slide, which is easy one, NPE ratio of 1.6%, having a very decent coverage ratio of 62.2%. Yes, we have demonstrated a slight increase in the last quarter, but nothing extraordinary to share with you at this point in time.

So now we are more than eager to take your questions.

[Operator]

[Operator Instructions] Our first question today comes from Izabel Dobreva from Morgan Stanley.

[Izabel Dobreva, analyst]

I have 3. Firstly, I wanted to ask you about your cost outlook into next year. We have all seen the wage inflation numbers which are coming out as -- which are accelerating. And in the quarter, the costs were up 11%. And I know that some of this was the Equa consolidation, of course, but how should we think about the cost growth into 2022? Could it be as high as 5% potentially? And also, would you expect that at group level, you can have positive operating jaws next year given that already for the 9 months so far, we are tracking close to the long-term goal of 55% cost-to-income ratio?

And then my second question is on M&A. And we have seen you do a number of acquisitions recently. So could you update us on your latest M&A outlook? And also what type of targets would be interesting to you in terms of geographical or business mix?

And then finally, I had a question on the Swiss franc mortgages. We have seen increasing industry discussions about potential voluntary settlements and some other market participants look to be moving in that direction. So could you tell us what are your views on opening a voluntary settlement scheme, please?

[Johann Strobl, executive]

Yes. Thank you, Izabel, for your questions. Highly appreciate that. Starting with your first one which is the cost outlook for '22. And yes, all these inflation discussions and all what we observe will, of course, have an impact on wages and therefore, on our cost base. And currently -- I mean, of course, it's early to say how it develops, but currently, we would assume a 5% to 6% increase. But this is not all as I have mentioned before. We have the M&A transactions, which I have been reporting, and we have to be aware that there are integration costs substantially.

And there are also the -- of course, the running costs from the target. Cost synergies will come a little bit later. And you -- of course, you are aware that Equa is only half year, so the second half of the year. So you have, of course, increased that part for the full year next year. And Serbia, where the running costs are around EUR 30 million, you should also include.

So adding up these 2 numbers, one might say you have to add around EUR 100 million from these M&A activities. What I want to make you also aware is that if you model the various segments or the countries, we are currently in a process to have a mixed approach in developing new services for customers and software and it will happen that, to some extent, at RBI head office level, costs will increase. And in some of the network banks, we are searching for reductions. And the idea is that we centrally have to build some of the applications and offers and it can then be broadly reused.

Looking at the M&A. So the second question, the M&A targets. Here, I can confirm what we mentioned to you also in the past. So no change, which means the target countries for us are preferred Czech Republic, Romania. But I also have to add Slovakia and Serbia. I mean, Serbia is busy now. We could have more. Slovakia, I think with our dual brand Tatra, Raiffeisen, we have a good position. If a target would fit, we would also like to add it to our bank there. And yes, Hungary, Hungary, always have to say, it would be very good for our bank if we could find an improvement in the retail, mass retail. Here, I think the efficiency of our bank could be improved. But here, I have to say as of today, I don't see a target now, but yes, you ask for what we would be interested, and this is my answer.

In terms of voluntary Swiss franc settlements, I think what's currently at the paper. So the total framework, we do not like that there are expectations that the full negative impact from the Swiss franc development is fully attributed to the banks. I think this should be somehow split between all those who have benefited in the past substantially and of course, giving the very good performance of the portfolio.

There is also no, let's say, social need or no other from the perspective of can the customer afford it, any need.

And the third element is we would need certainty from the agreement so that whoever customer we agree on a settlement that it cannot be challenged in couple of years claiming that not all the impacts from the legal environment has been understood. So in a summary, currently, it's not -- the framework is not ready for a voluntary settlement at least from our perspective.

[Operator]

We'll now move on to our next question, which comes from Mehmet Sevim from JPMorgan.

[Mehmet Sevim, analyst]

Congratulations on the very strong results. Just a couple of questions from me, please. First of all, on the fee income and the very strong performance, you mentioned that the momentum should be sustainable to a large extent. So for this year, do you think it could reach the EUR 2 billion mark? And what would need to happen for that? And do you have a view on 2022 and beyond, at least in terms of the sustainability of the performance that we're seeing?

And in terms of NII, maybe, to what extent have you seen the positive impact of the rate hikes in Czech, Hungary and Russia, already? So you mentioned EUR 33 million of positive impact for 2021, which is very helpful. So how much of that is already in the numbers in 3Q? Are you able to give us some more color?

And finally, on the CHF mortgages. Again, I'm sorry for coming back to that topic, but it does look like that the pace of provisioning has decelerated this quarter despite a still very high number of incoming cases. So could you please share with us what has brought the quarterly provisioning down? And if you can, what's your thinking for the quarters ahead?

[Johann Strobl, executive]

Yes. Thank you for your questions, and your appreciation is also highly welcomed. Yes, indeed, the EUR 2 billion seems possible. I think having had the EUR 538 million in the third quarter, it's reasonable to assume that -- let's phrase it differently. I think EUR 500 million per quarter is what we can assume fairly. And the drivers, like always, it's the business activities. So like Hannes said, we have to be aware that the vaccination rate in some of the countries are low where we are active.

I think the positive element is that the government, the authorities have found a very good flexible way how to deal with restrictions, with limitations to keep the infection numbers under control but still, I cannot exclude that the one or the other month or so could be of lower activity.

And finally, I have to say that I don't know if the capital markets will continue as good as they did. So also the overall performance was, of course, a strong element in our -- for our fee business. Can it continue for a while like this? I mean you have better insights than I have. So here's some volatility might come.

When talking about your second question, the NII so far, I think a little bit more than EUR 40 million we have seen year-to-date. And so the rest should come until year-end. And I think there was -- your third question was about the Swiss franc, the -- probably, the litigation provision, if I got it right, and the case is what we have -- what we expect, which might come.

As I mentioned, we have 300 cases now per month as inflow. We adjusted because of that higher inflow, we adjusted our model. The way our model works is we have segmented our overall portfolio and the current model assumes that the inflow will over the next couple of, maybe not now, but if I take a couple of quarters, then this inflow should reduce as those segments where we believe the inflow is higher, we have, to a large extent, seen these numbers.

But still, I would not be surprised if over the next couple of quarters, another 2,000 or so would come in addition. And of course, it to a large extent, depends what we would see from the Supreme Court and maybe the one or the other -- also second instance decisions.

Also, what we will see from those questions which have been addressed to the European Court of Justice. I think it always depends on the perception of how high the probability is that the customer will ultimately succeed because it's -- bringing a case to the court does not come for free. So there are some costs involved as well. And I think the borrowers, they are very sensitive to the developments, which comes from the court cases. So that's the current view of what we have.

[Operator]

And we'll now move on to our next question, which comes from Olga Veselova from Bank of America.

[Olga Veselova, analyst]

Congratulations with the results. I have a couple of questions. One question is about the provisioning on Stage 3 loans. In the presentation, you mentioned that you had some provisions from Stage 3 loans and mainly in retail and mainly in Russia. Was this driven by the regulatory changes on loans? And how do you think the regulation from the first of October will impact your provisioning in Russian retail going forward. So this is my first question.

And my second question is about regions where you operate your market a big picture outlook from. I think the team has increased GDP expectations for this year. Still in which regions do more work commission ratios can be a point of concern for you and can impact your results in the fourth quarter.

And in Russia, specifically, does the current lockdown impact your business plans in any way, or there is no visible impact, given the lockdown is by choice?

[Johann Strobl, executive]

Well, Olga, I'm two times very happy. I always thought that today, there will not be a risk question. So thanks for also flagging some risk questions. And of course, we take your congratulations. That's very good for the team.

Stage 3 provisions on Russia. There is not the big story behind. This is coming from retail. We have seen this is a sort of a usual run rate. But since the numbers are already so small, reflecting them explicitly that you also can see what are the main drivers, even on the small numbers. So for me, there is nothing to worry about. It's the usual run rate on the retail side.

You know that we are always taking the cases early on in doing a decent provisioning. The regulatory changes, at least the way I read it on Russia is mainly a question when it comes to the risk weighting because there is, of course, a quite strong growth dynamic, but the growth dynamic here, we're talking about beyond 20% on the retail side locally.

And the competent local authorities have increased the local risk weights . And since we are subject to the Basel III environment, and European regulation, this local interest risk weights do not have a direct impact to CET1 on group level nor on any risk costs.

So the Stage 3 provisioning, what we have been explicit that part of it also comes from Russia. This is more the run rate, and the regulatory part is more on the risk weighting that her the risk weight have been increased. So your certain second questions on the macro. Well, I think the outlook what we have shared with you is constructive across the region. It's constructive across the region.

And I think this shall be the main conclusion of today's discussion. When talking about the handling and managing the virus situation per country, I think what we have learned from many of our neighboring countries in the region where we are serving our clients that a very constructive approach was chosen.

So the production facilities were kept more or less running where we have seen an impact was with the servicing sector. But on the servicing sector, for instance, if you talk about Russia, there was this holiday being provided by the companies in order to allow the different employees to conduct their daily working in home office motors.

So I believe that society now has learned also how to deal with the situation in the lockdown situation. And we already have seen first 10 months running in a very favorable and benign environment. So yes, there could be for the Warner other small industry, as we already flagged with the beginning of the continuing an impact mainly on the servicing sector. But on a broader scale, when it comes to production, production facility, we would not see an impact because of not a big impact based on potential lockdowns.

[Operator]

And our next question comes from Gabor Kemeny from Autonomous Research.

[Gabor Kemeny, analyst]

Three short questions from me, please. First one is on the NII outlook, a pretty impressive Q3 performance here, and you are showing the positive rate sensitivities . My question is, shall we assume further NII momentum on the back of the interest rate hikes, or do you see the upside being mitigated by the margin pressure you mentioned in some areas?

The other question is on loan growth where you flagged an 11% clean growth this year. How do you think about next year? It seems from your macro colleagues forecast that you are projecting quite a bit of a slowdown in some markets, especially in Russia, I see you are projecting a low teen growth, which is significantly slower than what we see now. So how do you think about the outlook in light of the regulatory efforts to bring down on growth?

And just finally, on the provision, provision outlook of 40 basis points. Can you remind us because this is below the -- what you indicated as your normalized level previously? What does this 40 basis point assume in terms of macro overlay provision releases. And if you could give us an update on how much is left of the overlay provisions?

[Johann Strobl, executive]

Yes. Gabor, thank you for your questions. I start with your NII and Indeed, I think we should assume that what we have seen so far is very positive for our development. I have stated also to an earlier question that, of course, they already -- You've already seen net interest central bank rate increases are supportive by another EUR 30 million.

So I think it's good to assume or it's easy to assume that we might see an even stronger Q4 on NII. And if you add these numbers up and see that we see further positive impact, well, what I hope is that we could be up to EUR 3.5 billion of NII next year.

When taking and this, I think, is the second question what you had is related to the first question somehow as well. So given the outlook, what we have over our markets I think one can assume a high single-digit loan growth number over the next 1, 2 years that would be my guidance to these 2 questions. And the third, of course, is for Hannes.

[Hannes Cizek, executive]

Gavin, on the risk cost, the 40 basis points. Yes, you're right. We once indicated that through the cycle, we believe that we could see risk costs somewhere around 55 to 60 basis points. Given this macroeconomic environment, which we assume, this is the starting point of our conclusions, we believe that we shall be below through the 55 to 60 basis points.

And also shared with you on Page 19, our thinking why we believe that we have a very constructive credit cycle outlook. So this is the main reason, 40, 40 basis points. And it also includes, as I was asked last time, I think the [indiscernible] on the -- on what must happen to see these 40 basis points, I think, we see currently times with the other distortion or volatility.

And usually, I include in our risk cost forecast one midsized, bigger corporate default in these days where we see such big swings, I was assuming that we could see up to 3 unexpected corporate defaults. Last point, we did not assume any releases on the overlays, especially not on the non-retail side. On the retail side, it goes more with the with the macroeconomic adjustments. But here, we have seen the release mainly already in 2021.

So that could be the EUR 100 million left -- be left on the retail side for 2022. But generally, these 40 basis points is gross. I hope this answers your question.

[Gabor Kemeny, analyst]

Yes. Can you just repeat the retail overlay provision number? And perhaps also if you have the corporate at hand?

[Hannes Cizek, executive]

In total, we have an overlay in total in [indiscernible] still in the call, will come back on the split of these 2 numbers. But in total, we have some EUR 230 million to EUR 250 million in total as an overly available.

[Gabor Kemeny, analyst]

Understood.

[Hannes Cizek, executive]

On the street, we will come back to you.

[Operator]

We'll now move on to our next question, which comes from Alan Webborn from Societe Generale.

[Alan Webborn, analyst]

Thanks for your time today. You expect a little reticence about the net interest margin as a KPI. In saying that, are you suggesting to us that it could sort of come back down again. I hear what you say in terms of relatively high loan growth going forward. But what is your concern there? Because during the presentation, you've talked about certainly in the early stages of rate rises most of the gain going through to the bank rather than to the client in terms of funding costs. So what's your concern about the trajectory of the NII, that would be one question.

Secondly, I understand the 40 bps for 2022 in terms of risk costs. You sort of seem to have ignored 2021. And I do believe the sort of previous guidance on 2021 included 3 or 4 corporate problems. You've had 21 bps at 9 months. So clearly, you're saying to us, I guess, that you think that the fourth quarter is going to be, again, benign. That would be interesting on your shorter-term thoughts.

And I guess, finally, in terms of the supply chain issues that your clients are experiencing across the region. I mean, do you see -- are there positives or are there just negatives in terms of your own business? Is there any negative impact in terms of your ability to lend? I'm thinking of the unified car leasing, for example, or are there customers that are not investing because they can't get the necessary components and so on? Is there a negative, or in fact, is it actually accelerating the need for lending in order to improve production? I'd just be interested in your overall view on that.

[Johann Strobl, executive]

It was not my intention to express any concerns or to irritate anyone. I would simply confirm from what I know today, that we should have around 2% net interest margin throughout next year. And it was rather compared to the past broader comment, but no concerns about the next year.

[Hannes Cizek, executive]

On the 40 basis points for 2022 and cost of risk things also for flagging '21, yes, you're right. I was talking in the last quarterly call about this unexpected around 3 corporate defaults. Up to now, we did not see them, which I'm very happy about.

And for the year-end, of course, if we would not see this default to come, we would come in consequently lower please bear in mind 2 things. The one is the run rate on the retail side, which I think can be modeled pretty straightforward, which is EUR 50 per quarter.

And so the unknown, unexpected is on the corporate side -- But I think this could give you a good feeling where we shall finish on year-end 2021.

The second question on the supply chain. Yes, of course, we see that some of our clients are being impact, and you also asked for the financing demand and when it comes to production. Yes, indeed, we see a strong demand on the working capital facilities, meaning buying the imports, selling on maybe also partly financing the exports and an end. The long-term adding capacity. Here, some of the corporates are still a little bit cautious and let's see how sustainable this very soaring demand currently.

So yes, we see the first hints on also investment financing, meaning longer-term financing, 7 years, 10 years, but it's not yet the biggest demand. Biggest demand is current on short term to finance the working capital. And this would be my answer to your questions, and the team was very fast in getting the split on the BOSS model adjustment back to the previous question.

So the PMAs are being split for the non-retail with EUR 215 million, which we try to carry over to 2022 and the 40 basis points, one of the release of this EUR 215 million is assumed. And on retail, on little as left, it's in total some EUR 50 million what is still available.

[Operator]

We'll now move on to our next question, which comes from Máté Nemes from UBS.

[Mate Nemes, analyst]

Yes. Well done on a strong set of results today. A couple of questions from me. Firstly, just coming back to corporate loan demand. I understand that you're perhaps seeing some green shoots of longer-term financing needs as well. I'm just wondering what is your working assumptions on these longer-term perhaps investment-related loan applications coming through? When do these get funded? Is it an H1 next year story or this could accelerate already in the fourth quarter?

Obviously, I'm notwithstanding any supply change disruptions. Secondly, a quick clarification perhaps on fees. Retail investment product fees, up 34% year-on-year. And I'm just wondering how sustainable is this? Are you seeing a paradigm shift in terms of retail demand for these products, or this could prove a bit more cyclical than currently expected? And last one, just a technical question. I think in Q4 this year, you're expecting a corporate loan securitization to impact capital. What will be the impact on CET1?

[Johann Strobl, executive]

Well, Matt, if I may, we start with the corporate loan demand. I think you have many ingredients and I again would refer us back to the page I believe, and I strongly believe, because of this next-generation EU funding in ESG transition that we will see this long-term financing need. But you also have seen that the projects have now been handed in.

They have been assessed and approved or enhanced and now the project needs to get started. So we will see the request and the demand for this longer-term financing. So I'm extremely confident that this will come latest by Q1 when all the practical stuff is being finished. So this would be my assumption. In -- and on capacity utilization, I think this could be one shot, if you adjust your production facility in an ESG conform environment, you also may add here and there the capacity to adjust to the higher capacity need.

[Hannes Cizek, executive]

To your second question, the retail investment product, what we hope, what we assume is that this low rate environment brought people closer to being also a long-term investor, even with smaller amounts, maybe even month by month.

And I -- we would love to assume that people keep this behavior. And so we hope that's a mid- to long-term trend. And to some extent, it's starting of a shift that customers and you know that, to a large extent, we are deposit based in all our markets. We bring more and more customers also in that direction. So we are overall confident.

And as I said before, in total -- yes the EUR 500 million fee income per quarter, I hope it's on the lower end, what is achievable quarter-by-quarter. To your third question, securitization in Q4, yes, we mentioned it. So it's more that you are aware that we are working on it and that we will create some room for loan growth also in Q4.

But please understand that we -- as of this point in time, we do not want to communicate that full package what we are working on.

[Operator]

We'll now move on to our next question, which comes from Riccardo Rovere from Mediobanca.

[Riccardo Rovere, analyst]

I just wanted to get back one second and be sure I understood it correctly. A few minutes ago, Mr. Strobl, you mentioned EUR 3.5 billion NII as a kind of indication for 2022. Now if I understood it correctly, if I take the third quarter number you just reported in Q3 and multiply it by 4, I would land exactly at EUR 3.5 billion.

So if EUR 3.5 billion is an indication for 2022, if it means that the most recent rate hike, like the one in Czech Republic, most recent in Russia will be passed completely to depositors or maybe competition will erode everything. And on top of that, you also mentioned you should have some loan growth. If I understood it correctly, you mentioned high single digit, that should bring NII on top of what we have seen so far. So did I get it right, EUR 3.5 billion first? And second, if I get it right, is that a kind of floor or is a formal indication for 2022, which would sound a bit cautious, let's put it this way?

The second question I have is on the deposit side. The inflows remains strong. What do you do with these deposits? Do you expect to build up a little bit more the fixed income portfolios, investing in longer-term maturities? How should we think about the way to redeploy the deposits that you've seen so far?

[Johann Strobl, executive]

Yes. To your first question with all your considerations and assumptions, I can only always say, yes, yes, yes. So you're right, it's conservative. It's -- I would also say it's rather the floor. We can here and there expect more. Also, I have to say that, yes, we should not expect that the to be expected rate increases will fully materialize in the bank's profit, I think, in some as I said before, as soon as the central bank rate is above 1% or so, then, of course, increases will happen maybe the corporate part is a little bit more sensitive than the retail part at this level, but you would find then at some point in time also on that.

Russia, you have mentioned as well. So here, I think as we also have shown in our forecast probably we soon will see or rather soon have seen the peak and maybe also in Ukraine, you would also already next year see some decreases after this faster and bold increase of central bank rates. And yes, it's -- you're aware that we work, what we call model books where we invest and part of the inflow is invested also in midterm products our modeling is not especially long-term, you have seen this in the adjustments also in the past.

But yes, the recent rate increases as well as the steeping of the yield curve I mentioned this already in the Q2 call. This was already supportive. So yes, it's -- therefore, not everything what we see as rate increase from the Central bank goes then 1:1 in the P&L cost because of these model books, these investments, it reduces the volatility in both directions as well.

And yes, in some quarter-by-quarter, if you look at it, then you see rate increases usually in the retail asset area reduces then for a quarter or so the margin, and then it usually comes back to the normal level because salespeople request and especially if you use agents, you're aware of this. They request a stable rate, so what they offer to their customers and they don't like if you if you adjust every second to new levels. So this is -- but again, this is somehow flowing and levels out over some quarters. Thank you for your questions.

[Riccardo Rovere, analyst]

If I may, a brief follow-up. When I look at Slide 8, where you provide the table with the NII sensitivity for each country, the numbers you showed in the last column, did they take into account some kind of pass rates to depositors or not, so then your cost [indiscernible] all of it?

[Johann Strobl, executive]

No, this is the rather stable assumption where you say, what is the way we model, what is the positioning. And this was my statement when I say this might work for 50 basis point increases if the level is not too high. But if you take the example of the first-line check market with currently at 125 basis points. So if it would happen that by somewhere end '22, we would be at and you should not multiply the 50 basis point sensitivity by the factor.

But then you should assume that we will see impact on the margins as well on the liability side. So it's -- for a small amount, it works because then you also don't have the direct impact on the margin. But for bigger movements, it's indicated here for some markets, it already has then an impact on. And some of it is passed on to the customers. That's for sure.

[Riccardo Rovere, analyst]

Yes. So for me to understand, when I look at this table, the more rates go higher, the lower the sensitivity to each, I don't know, 25 basis points. So 25 would be some sensitive and 35 is less.

[Johann Strobl, executive]

Yes. Let's take a simple example. So what we say here, Czech Republic, a rate hike by 50 basis points should improve our net by EUR 24 million. If by the end of the year '22, you might assume it's EUR 325 million. So EUR 200 million, so to make it simple for me in calculation. Four times [ EUR 350 million ], I would not expect that it's improving by EUR 100 million. So here, you should assume it's -- actually, it's lower.

[Operator]

We'll now move on to our next question, which comes from Krishnendra Dubey from Barclays.

[Krishnendra Dubey, analyst]

I have two very quick questions. First one on the fee income. The payments FX business and the retail products have done well, but I was just wondering, AM results were a bit weaker. Is there any specific reason for it? Secondly, what's your tax rate guidance for this year?

[Johann Strobl, executive]

I'm not sure if I fully understood your questions. But I -- what I sense from you, yes, the -- I would say the -- it's relatively easy to assume that in terms of FX business, it's strongly correlated with the business activities. And this is also the case for the payments. So one can say that because of the good developments, what we had in the recent quarters, the payments and the account services are already back on the level what we had pre-COVID.

So if you average 2018 and '19. And this also gives you an idea about the sensitivity. I think FX, to some extent, of course, and this is for you as a professional also known what we would say in Germany also. So a very, very easy, simple one. It's a combination of the business activities, I should have said, but also the volatility because, as I indicated, it's to a large extent, customer driven and the other activities of the customers are different.

Asset management, I have to figure out -- yes, here, you should not be so much looking at the details of the quarter. There was a reclassification between the various lines in Romania and in Boston to some extent. So the detailed numbers are a little bit distorted in Q3. But I confirm the overall positive development. And the tax rate, the guidance here as of now is 23.5% for this year.

[Operator]

We now move on to our next question, which comes from Johannes Thormann from HSBC.

[Johannes Thormann, analyst]

Two questions left from me. First of all, a follow-up on the tax rate. If I take your current guidance of 22.5%, this would imply a strong jump and doubling of tax rate in Q4. What are the reasons behind it? And secondly, on your dividend payout ratio guidance, if I take the combined dividend payment this year, we are above the 50% guidance. Should we assume that you also will be fire at the other end, or as you only have a smaller buffer could you also up or going down to the low end of the dividend payout range?

[Johann Strobl, executive]

Yes, starting with the second one, your payout for this year, I mean, this is the payout essentially for 2 years. We had these limitations. And you know that in '19, we set aside -- EUR 1 per share, and this was never considered as part of the CET1 equity.

But having seen the very good loan demand in the recent quarters and of course, also the somehow cautiousness what we had been made aware, this is the reason why we then reduced it to only EUR 0.75 per share.

And you're right, if you add that -- the two payments, the two dividends for this year, then we are above. As I said before, the range the range is that we see as long as we see such a good loan demand. And of course, this -- probably this cycle will also come to an end as we already have seen here and there some measures by regulators and discussing to limit the development in some of the retail areas it's better to have some power now and then just later. So this is a very simple question, and this is why we keep it so broad.

I have to say, I did not fully get your first question on the tax rate jump assumption. But here, John Carlson and his team might do a follow-up in more detail with you if this is fine for you.

[Operator]

We'll now move on to our next question, which comes from Tobias Lukesch from Kepler Cheuvreux.

[Tobias Lukesch, analyst]

There's one question left. Thank you for providing the overview of the markets -- business. So I was wondering, especially looking into the institutional clients and the corporate clients, how do you think will the demand develop? And could you maybe give a bit of an insight like how much of product demand there was over the past, let's say, 6 to 8 quarters? And where could this go going forward?

Is there more demand potentially on Forex hedging? Is there more demand on interest rate derivatives? And also the R-Flex platform that you pointed to, maybe you could gives a bit of a flavor, how much this is contributing profit-wise and where this might go?

[Johann Strobl, executive]

Yes, starting with the last one, the R-Flex. This is at the very beginning, and this is something which is now introduced for mid-small customers. And it -- I think it has some potential for retail customers as well. It's -- currently, it's launched in Romania and Croatia. So it's at the very beginning. I hope that within this quarter, still we can launch it in the Czech Republic and Hungary. And of course, then probably it's also broader over the next couple of quarters launched in other countries. So at the beginning, let's say, over the next couple of quarters, it's overall, beginning to develop in I think in the segment where it's launched, it's positive.

So one might say it's -- If we do it right, it can be 20% up, but it's not for the large customers, so the institutions and the others. When talking about institutional clients, I think here, what helps is , and we have it on Slide 10 as well that our services in custody are, of course, benefiting from the overall positive development of the various market segments.

So this is the one. Of course, with this comes some additional services, the overall need for hedges to a large extent, as I said in an answer to a former question, comes from the volatility in the markets. I mean, one has to state that overall, the bigger part of the corporate business comes from the this I can say, but what we have seen in that capital markets compared to the past, the substantial positive development.

Yes, we are perceived as one -- as a good know-how provider for green bonds and should China and whatever. Of course, we are aware that this market segment is running very, very well. But of course, there are others who are closing the gap other competitors. So we will not fully get the market positive development.

[Operator]

And our next question now comes from Simon Nellis from Citi.

[Simon Nellis, analyst]

I just have one last quick question, and that would be, could you just remind us how much dividend accrual from the '21 earnings has been deducted from the capital, if any? I think it was around 20% of the first half earnings, if I remember correctly. And actually, my second question would be on the tax rate and minorities in the C division. Can you give us an indication of what the tax rate should be going forward in the CEE division now that the structure has changed a bit with the recent M&A.

[Johann Strobl, executive]

Yes. The first, I can answer very in a very simple way. It's the 20%. So we -- for capital planning and in -- also in discussions with the ECP and others, the regulators, we do throughout the years, the 20%, so the lower end of the range. So it's EUR 207 million so far. And only at the end of the year, we start then discussing the final element, what we want to do. There's -- the second question is, again, the tax, what you said, the '23, '24 . I was actually specifically asking SP02 And I can only confirm and also ask you to accept a follow-up. So I don't have the details now in front of me, and it would if I now rush through my papers, it will take me longer than I can ask you to accept.

So John will do a follow-up with his team.

[Operator]

[Operator Instructions]

[Johann Strobl, executive]

Wait, wait. Hold on, hold on, hold on.

[Hannes Cizek, executive]

Moderator, sorry to interrupt. There are some questions also in the chat, and we would be willing to take the questions from the chat.

[Johann Strobl, executive]

Thank you. Give us a little bit more time. And I -- as I interrupted, Hannes, I start with one, which is M&A activities in Russia. In here, the question was what is our strategy there? Would we -- would you seek to boost market share in some of core products there, like mortgages. Maybe a little bit more in credit card business? Here, we would consider if everything fits also an M&A transaction and improvement in our private banking activities as well. I think mortgage production, we are strong on or around itself.

So here, it must be -- yes, a very rare occasion that we would consider it as well. And then I would hand over to Hannes. There is a question on which I read and he will answer. Energy prices and supply chain, can you quantify size of your portfolio that is directly at risk from rising energy prices and supply chain troubles.

[Hannes Cizek, executive]

Thank you for the question. I will focus on the energy price issue. And you know that we usually like to go with an industry approach on looking at our portfolio. And of course, when talking about who will be impacted by the energy prices, you could think between the first level and direct impact in the second -- medium impact, the second round impact.

Needless to say that, of course, it depends on how much of the prices you could pass on to your off takers, which are the industries which are heavily dependent on energy prices. Industry which are heavily depend directly on energy prices is EG agriculture steel production is aluminum production is paper packaging and some others.

And in the second ground effect, you could have many other companies as well. So what we did assuming that this question may come is we looked at those companies with -- which are subject to this energy price increase as I flagged them and looking at the weaker ratings. And so for those where we believe that they have a direct and a higher impact, it's summing up to some EUR 360 million, EUR 400 million exposure at default, if I conclude, because there's also a lot of guaranteed business. It reduces down to EUR 233 million.

And if I look at the industries with a medium-sized impact, it will reduce on the net exposure level to EUR 867 million. But as I said, this is not the total portfolio. This is the portfolio with a slightly weaker rating and, as said, distinct in where we would see a direct high impact and a medium impact, always assuming that that's very important as long as you can pass on the prices of the higher energy prices, many of these producers would also be fined.

So this is my first question on the energy prices. The supply chain, the reason why I flag the supply chain is one of the wildcards or seems to be watched out these because it reminds me back to our question in January 2020. Sometimes it's -- it could be a little a little gadget, a little semiconductor on a big machine, which you are missing, why you cannot finish the final production of these machines.

So the supply chain impact is much more difficult and demanding to rest than the energy price impact. So this would remain a answer to the energy and supply is something where you really have to work with Berlin, Belarus an sea port to learn and to see what the and impact is causing. At the same time, we see, and that's very important. If you look, for instance, in the car industry, car industry is still capable to demonstrate even with lower volumes and much better EBITDA margin. So this would be my very broad answer to very specific questions.

[Johann Strobl, executive]

Thank you, Ernest. And moderator, I understand there is a final one in the -- from the chat, which probably already have answered, but a quick summary of what I have said. We see inflation, we see wage pressure. It might be that this might increase our cost base by 5% to 6%.

In addition to that, I made you aware that we have first time consolidation effects by when talking about the full year with Equa, which is in 2021, only for half year and the Crédit Agricole subsidiary from Serbia, which is not at all included.

And we have onetime integration cost from IT and other elements as well, of course. And this will come to some extent, in '22 and maybe as not everything might be finished also in 2023. I gave the indication that if we add the additional running costs and the onetime integration costs, you might add EUR 100 million to the going concern what we had so far and the cost synergies, what you also expect from any M&A transaction will come over time, not so much already next year.

Thank you for all your questions. Moderator, it seems that we are close to the meeting. And as I haven't any indication for further questions, I want to thank all of you for being with us. Stay healthy. Be with us also in the already announced full year result, which is on the second of February 2022, I love this date. Thank you. Have a good afternoon. Bye-bye.

[Hannes Cizek, executive]

Bye-Bye.

[Operator]

Thank you very much to our speakers today. Ladies and gentlemen, this does conclude today's call. Thank you very much for your participation. You may now disconnect.