Raiffeisen Bank International AG

VSE:RBI

Earnings Call Analysis

Company Sees Modest 2024 NII Decrease, Maintains Dividend

The company reported a solid financial position, with net interest income between EUR 4.2 and 4.3 billion, fee and commission income at EUR 1.8 billion, and loans to customers up by 2%. Operating expenses are approximately EUR 3.1 billion, resulting in a cost-income ratio of 50%. Risk costs are about 30 basis points, leading to a 10% return on equity and a CET1 ratio above 13.5%. There is a careful pivot towards a direct sale option in Russia, requiring multiple regulatory approvals. NII for 2024 is expected to remain flat or decrease slightly due to anticipated interest rate cuts in specific countries. Despite economic and geopolitical uncertainties and a cautious increase in risk costs to 55 basis points estimated for 2024, the company optimistically proceeds with dividend distributions.

Navigating Challenges and Optimizing Performance: A Tale of Resilience and Strategy

The company has charted a course through a complex environment, marked by regulatory changes and macroeconomic headwinds. As rising interest rates and inflation continue to shape the financial landscape, they present both difficulties and opportunities. The organization has showcased a strategic response by revising key financial metrics and adapting operations to maintain robust health, demonstrated by a cost-income ratio targeted around 50% and an assertive return on equity (ROE) of approximately 10%. Despite facing subdued loan growth projections, the tactical management of risk and expenses has bolstered their market position. Their adept maneuvering anticipates a stable net interest income (NII) between EUR 5.6 billion to EUR 5.7 billion, with fee and commission income up to EUR 3 billion. The consolidated ROE reflects this strength at a notable 16%, and an admirable CET1 ratio of over 13.5% emphasizes capital resilience.

Strategic Captains at the Helm: Executive Insight on Financial Outlook

Executive voices exude a note of caution amid the fiscal environment, highlighting a conservative stance on risk costs, anticipating a possible uptick to around 30-40 basis points, while stressing readiness for any commercial real estate downturns. Although overshadowed by challenges like geopolitical instability and the specter of economic stagnation, they remain vigilant, with an eye towards maintaining a prudent risk profile and a stable return on equity. On the dividend front, while it's early to chart the path forward, the executives express optimism that future dispersals will reflect the company's enduring commitment to shareholder value.

Precision in Planning: Capital and Revenue Dynamics

The organization’s financial blueprint for NII shows a dedication to precision, with specific country-level impacts detailed, including a projected EUR 10 million hit from European Central Bank reserve requirements. Balancing the macro with the micro, the leadership underscores a EUR 16 billion liquidity reserve at the European Central Bank, safeguarding against fluctuations. The discussion around risk costs underpins a conservative ethos, with 55 basis points penciled in for 2024, excluding potential overlay releases. Their strategic foresight is not just confined to the present but extends to future capital reallocations, evidenced by their preparedness for organic and inorganic opportunities across key markets.

Commercial Real Estate: The Calculated Approach Amidst Economic Tides

The company has taken a shrew interrogation of the commercial real estate (CRE) sector, dissecting key sub-sectors to gauge their resilience and risk levels. With their finger on the economic pulse, they see heterogeneous impact across warehouses, hotels, offices, and shopping malls, considering factors like location, industry recovery, consumer confidence, and policy interventions. Notably, the organization has implemented an adjusted underwriting criteria, aiming for a 7-8% debt yield, to navigate a landscape reshaped by valuation shifts and benefit from nearly a decade of low interest rates. This meticulous recalibration illustrates their forward-thinking approach, ensuring they stand ready to meet CRE challenges with strategic adjustments, including but not limited to a EUR 150 million provision for valuation risks.

Earnings Call Transcript 2023-Q3

[Operator]

Good afternoon, ladies and gentlemen, and welcome to the Third Quarter 2023 Results Conference Call of Raiffeisen Bank International. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Johann Strobl, Chief Executive Officer.

[Johann Strobl, executive]

Thank you very much for your kind introduction. Good afternoon, ladies and gentlemen. Thank you for joining us today in our last update call of 2023. We are happy to report a very stable set of results, driven by further revenue growth, still very few risk costs and more importantly, further strengthening of our capital position. I'm also happy to report that we have called for an extraordinary shareholder meeting on the 21st of November, at which we will propose the distribution of last year's dividend. You will recall that with the 2022 preliminary results, we announced a dividend of EUR 0.80 per share, and we are now in a position to make the distribution. I believe it is important that our shareholders participate in the excellent results achieved last year. Despite the strategic decisions that we are facing and the further provisions in Poland, RBI is in a very strong position and entirely capable of remunerating its shareholders. On the subject of our strategic decisions and while there is little I can share with you today, I am confident that we are making good progress. As you know, we are focused on achieving the deconsolidation of the Russian business by selling or by spinning off the business. On both of these options, we have made good progress. In previous calls, we shared with you a potential spin-off date at 31st of December, which today appears very unlikely. This is because we still see a clear, perhaps easier path to deconsolidation through a sale. Please understand that I will not go into any more detail. Unrelated to the Russian strategic consideration, but equally important to you is our dialogue with the U.S. Treasury and the request for information relating to our sanctioned compliance program. OFAC has confirmed to us that they have received all the requested information that they are working their way through it and that they are satisfied with our cooperation. And while I cannot comment on any potential time line, I am as confident as ever that we are fully compliant across the board. Let us now move to the third quarter results, which are in line with trends observed in Q1 and Q2. Excluding Russia and Belarus, we can now report a consolidated profit of a little bit more than EUR 1 billion after 9 months and the return on equity of near to 11%. Now please bear in mind that this reported 11% ROE includes over EUR 600 million of provisions in Poland, which brings our coverage of the portfolio above 70%. The CET1 ratio for the group, assuming a worst case in Russia improved to 14.4% or in fact, 14.8%. If you also assume relief on the Russian driven operations, RWA. Moving to my next slide, again, confirmation of the trends observed earlier this year. Core revenues continued to develop very nicely. Loan volumes are very muted and costs broadly reflect the inflationary enviro. Moving to the next slide, let's take a closer look at our core revenues. First of all, NII, which continues to develop very nicely despite the very little loan growth we have seen year-to-date. Euro rate hikes continue to feed through in Slovakia and Croatia, of course, where we have seen a little pressure on deposit pricing, but also in other CEE markets where we have a very sticky euro savings. In the Czech Republic and Romania, the pressure on the liability side appears to have stabilized. Heading into next year, we expect NII, excluding Russia and Belarus to be broadly stable, perhaps down a touch. [Indiscernible] Net fees and commission income are very stable, slightly positive for the core of the group, excluding Russia and Belarus and more noticeably down around 20% in Russia in the quarter, where we continue to shrink our payments business. And of course, this includes further weakness in the ruble observed in the quarter. Moving to the next slide, where you see the balance sheet. We focus on loans to customers on the one hand and deposit trends on the other hand. Once the customer roughly unchanged on the quarter, we see further reduction in Russia with an 11% drop in euro terms and 4% in ruble terms and generally a small increase in core Central Europe and SC markets in local currency terms. The EUR 1 billion increase in group capital markets is largely for repos and lending to our corporate customers' slope. To a large extent, this is in line with our expectations and the softer macro down across the region. Deposits are also very stable. Retail volumes are very stable, even slightly positive. As I have already mentioned, we believe that the competitive pressure in Czech Republic and Romania is behind us, and euro deposits are still very sticky and unsensitive corporate deposits, which, by their nature, are more volatile saw inflows in the quarter. Of course, these deposits are nice to have, but we do not plan our liquidity and funding needs around them. Moving to the next slide, speaking of liquidity. You can see the improvement in our liquidity ratios, both on the group level and at head office. At the local level across our network units, I mentioned the very stable retail base. In head office, clearly, the large inflows of corporate deposits have driven the LCR up to almost 200%. Again, these deposits are nice to have, but we do not plan our liquidity and funding needs around them. As you know well by now, we run a very conservative liquidity profile here at head office with very little duration mismatch between assets and liabilities. And furthermore, the securities portfolio is only used for the HQLA stock. And even here, securities only account for about half. The rest of our HQLA stock is in cash and other central bank placements.Moving to the next slide. I think this is more for documentation, the development of the CET1 ratio from half year to the end of Q3. The big movers have been the retained earnings and to some extent, a slightly negative impact by FX developments. The next slide is the outlook to 2023, the CET1 ratio, where we believe it will be stable the year-end. Moving to the next slide, which is to some of you quite of interest is the development in Russia and the impact of price book multiple 0, the consolidation scenario in Russia. So we have reached a 14.4% lending point if this would have happened at the end of September. Well, the main drivers are CET1 capital of EUR 4 billion and RWAs of EUR 13 billion, which are attributed to Russia. And I have mentioned already that in this number, the operational risk RWAs are not included, which amounts to 40 basis points. Moving to the next slide, capital ratio, development and SREP. I think, again, this is for documentation reasons and core information is the development what we expect in the Pillar 2 requirements and in the OCI buffer. Moving to the next slide, the MREL and funding plan. What you can see is that we have in head office a good buffer of nearly 600 basis points, which, of course, benefited from the senior nonpreferred issuance in September. And at the network unit level, we are also in a good position. Be aware that this presentation has a reporting date of 30th of September and on 12th of October, we successfully issued EUR 300 million by our Romanian subsidiary. And with that, they also meet their requirements. If we move further some more details on Russia, what you see is a further reduction of our activities. Main initiatives in this year has been the payments area, which followed last year significant shrinking of the loan book. I have already mentioned the revenue slide -- on the revenue slide by a drop of 20% in the fee income in Russia in Q3. And you have seen the balance sheet impacts as well. What is also worth highlighting -- And here, I did my [indiscernible] is the net cross-border exposure, which now stands at around EUR 40 million. You will recall that this was over EUR 600 million at the start of the war. What is even more impressive is that this reduction was achieved without taking any Stage 3 write-offs. RWA in Russia is further down in the quarter largely from ruble weakness, but also further lending reduction. Besides this, liquidity and capitalization of the Russian business remain very strongly with an enormous buffer to the local requirements and a very good liquidity cushion in the very low loan deposit ratio of 42%. Moving to my next slide, the macro outlook. Yes, we have seen a slowdown in the first half of the year. Second half stagnation or a mild recovery, the manufacturing sector, which is key for Central Europe, especially because its main trading partner, is Germany, keeps underperforming and this, of course, limits the GDP development in Central Europe. Southeast Europe benefits from the very strong tourism season and remittances, which is still flowing in strongly. And as a result, they are outperforming the euro area in Central Europe. Yes, recovery in Ukraine is making progress, but of course, it's limited by the ongoing war. And in Russia, we have an L-shaped scenario for the coming quarters. Moving to the next slide. This is the way we look at inflation and key rates for this year and also coming year 2024. Probably this is anyhow in line what you see. And now coming to my final slide, which is the guidance. And here, we have the core group, which excludes Russia, Belarus and we have the total group as well. So we have a net interest income of around EUR 4.2 billion, EUR 4.3 billion, net fee and commission income at EUR 1.8 billion maybe slight positive developments in loans to customers by 2%. So we will have OpEx at around EUR 3.1 billion, which will bring this cost-income ratio at around 50%. Risk costs will be before use of OLA, about 30 basis points. Sales will talk about this. This would bring a consolidated return on equity at around 10% and CET1 ratio, which will be above the 13.5%. But to that, I have talked already. And when looking at the full group net interest income, EUR 5.6 million to EUR 5.7 billion. Fee and commission income up to EUR 3 billion, slightly reduction in the loans. Cost income ratio with OpEx of EUR 4 billion will then be around EUR 43 million to EUR 45 million. Risk costs, 40 basis points. Consolidated return on equity around 16%. And as I have mentioned before, at year-end CET1 ratio of 16.5%. Hannes, I hand over to you.

[Hannes Cizek, executive]

Good afternoon, ladies and gentlemen, and thank you for joining us this afternoon. I trust you have seen the figures, and I will be very brief on the Q3 developments. Virtually no risk cost in the core of the group, very low nonperforming exposure and, of course, a very good coverage ratio. At the same time, we continue to work on our overlays. We have increased our stock in the core of the group while releasing overlays in Russia. RWAs are lower on the quarter, largely driven by FX and supported by additional securitizations. Loan growth continues to be very muted, and we expect this continue into year-end. Furthermore, you will recall from our last call that we guided for EUR 2 billion of RWA relief until year-end 2023. And I'm happy to confirm that this was already achieved in October and will be reflected in the Q4 numbers. We are working on a few other changes. So there is potentially some more relief to come this year. Important finally, we have now reached a coverage of near 72%, and this could even increase a bit more into year-end. At the same time, we are now broadly rolling out our settlement offer after successful bile program. So now let me have a look a little bit broader on the environment, which has deteriorated since we last spoke. First of all, on the macro side, we clearly see some first cloud forming. GDP growth and surveys have weakened in our daily business; we are seeing more signs of fertility. Economic stagnation appears to be well entranced. Core inflation is expected to remain elevated for some time and energy and food prices also remain an area of risk. In commercial real estate, specifically, we are seeing the first signs of deterioration, and expect some risk costs here in Q4. Second, the geopolitical picture has become more unpredictable, and we are now facing a multidimensional scenario. As we look ahead, we maintain our guidance of around 40 basis points of risk cost for the full group in 2023 and around 30 basis points for the core, excluding Russia and Belarus. I realize that this implies a noticeable increase in Q4. And while I cannot say for sure when this will occur, the environment is sufficiently challenging to warrant caution. I mentioned some deterioration in the commercial real estate book, and of course, one or other unexpected default and the corporate book can quickly add some 5 or 10 basis points in risk costs. Allow me just a word on our commercial real estate exposure, where despite my words of caution, I believe that we're in a solid position, we are talking about 6% of the group's exposure with an average LTV in the range of 50% to 60%. We have conducted 2 stress test in the past 18 months. Our exposure backed the cash flows, which have been stressed. And in many cases, we benefit from fixed rate expenses. So while we may see some defaults in MP inflows in Q4, this is a natural part of our business, and we are ready. Looking ahead to next year, our risk cost guidance is a Dutch more cautious for all the reasons I have just highlighted. From 40 basis points in 2023 for the core of the group, my first estimate for 2024 is around 55 basis points. And as usual, this does not assume any release of overlays. While having said all this, thanks for listening, and we would be now eager to take your questions.

[Operator]

Ladies and gentlemen, we may now start the QA session. [Operator Instructions] Our first question from Mehmet Sevim with JPMorgan.

[Mehmet Sevim, analyst]

Congratulations on the strong results. I have 3 questions, please, maybe starting with Russia. It seems now you're pivoting towards a direct sale option. And I do appreciate you can't say much at this point, but maybe you can walk us through the regulatory approvals that are required at this stage. So what specific approvals would you require from which authorities, both in Russia and at home? And is there any clarity at all on the timing from here? And my second question would be on NII. Johann, you mentioned during your remarks that you expected 2024 NII to be flat or maybe a touchdown, could you please walk us through the underlying assumptions in different countries and particularly those where we are seeing or at least expecting rate cuts? And finally, on dividends. Clearly, this was a very pleasant development. And if I maybe can ask whether we should take that as a signal that the dividend trajectory from here is more normal that is you now stick to the current financial calendar that you also presented in the presentation.

[Johann Strobl, executive]

Yes. Thank you very much. I think starting with your first question. In Russia, what we have is, of course, the requirement of the Russian Central Bank, but you then also have within the administration at least 3 entities, which would give us or would need to give their blessing. And so it's not a straightforward approach, but we can believe that those interested parties have established a very strong relationship already or let's say strong -- maybe strong is a little bit too far going but have a relationship with these institutions. In Europe, we would need to, for sure, the approval of the European Central Bank as well as the Austrian F&A because it's a sale of a significant participation. I mean here, it's too early to say how long this will take. But as I said. We're still in a mood, which is rather optimistic. When talking about the rate NII development, then I think the more important point is that in some countries, we will see in '24. And I think I have mentioned it, it was Hungary, it is Czech Republic. We assume a key rate reduction. And yes, the good development what we had in NII came to some extent to by competition and liquidity available in the countries, which was better than I had ever expected. But on the way down, this will have an impact I think we shared with you that in Austria, as this is a large corporate business, it's a small margin business and little impact from the rate development, what we have. Yes, Czech Republic will also see a reduction in rates. So I think there are some areas which are because of no elasticity, we will see then yes, not any more support than before what I have said. This will bring -- what might bring the NII a little bit down. When talking about dividends, we're happy that we can distribute dividends till this year, and we will update you with the final results for this year than early next year.

[Mehmet Sevim, analyst]

All right. That's very helpful.

[Operator]

Our next question is by Gabor Kemeny with Autonomous Research.

[Gabor Kemeny, analyst]

I have a couple of questions. Maybe firstly, sticking with NII. Yes, I've seen this guidance of stable to slightly down implies at least a EUR 200 million drop from the annualized Q3 rate. I guess you commented on the rate cut, but maybe you can also comment on the changes in the reserve requirement remuneration in the ECB and the Czech Central Bank. So what could be the impact of that? And what is your current liquidity surplus at the ECB that would be also interesting. And the other question I had was on the ROE guidance for ex Russia and Belarus were. I was a little surprised you kept it at 10% because I think if I add up the upgrades to your NII guidance and the better provision outlook, that means something like EUR 300 million, EUR 350 million at PBT. So quite substantial. Is it a kind of caution on Polish FX charges? Or why the unchanged 10% ROE outlook?

[Johann Strobl, executive]

Starting with your question on the impact of the minimum reserve requirements. So our guess is that on head office, the impact in '24 might be about EUR 10 million. We have then also in Slovakia and Croatia, which might add up to EUR 8 million, Hungary, EUR 16 million and in the Czech Republic, EUR 25 million. In Serbia, also some increased minimum reserves, so another EUR 6 million. So if I add this up, this is a significant amount for next year. When going to your other question, ROE, 10%. Also, we have a very strong result. Yes, depending on the development of litigations inflows, maybe there is a little bit more to do in Poland this year. So here, we have seen quite an active activity in -- by many of the customers. And then -- I mean, historically, we had some seasonality always at year-end, has indicated that a good risk result might not continue in Q4 and some seasonality in OpEx. We also have to be aware, ex Russia and Belarus, as you have said. And your third question...

[Gabor Kemeny, analyst]

The liquidity you keep with the ECB, if you have to.

[Johann Strobl, executive]

Liquidity surplus in site. So it's EUR 16 billion, if I got it correct.

[Gabor Kemeny, analyst]

Was that stable roughly in Q3 or changed in any way?

[Johann Strobl, executive]

Yes, it fluctuates. But of course, this is with -- as I said in the presentation, we have quite an active money market and repo business. And so this together then creates volatility in that amount. But as I said, for our steering of the liquidity, these high volatile elements of our deposit base is nice to have, but it's not important for our liquidity steering.

[Operator]

We go next to the line of Benoit Patrick with Kepler.

[Unknown Analyst]

It's Benoit Patrick from Kepler Cheuvreux. So 3 questions on my side. The first one will be on the exit from Russia. I was wondering are you plan to deal with capital controls restrictions on foreign currency transactions. So will you deal with that? That will be the question number one. Number two will be on NII. Could you update us on the sensitivity to rate cuts? So if I understand you've taken that into account in your guidance on NII. I'm just wondering to -- if you could provide the sensitivity on say, 100 bps per country. And the final one will be on cost development for 2024. Do you see inflation pressure getting a bit less for next year? And I think so in your previous comments, you mentioned some potentially one-offs, if I understand on OpEx, excluding Russia and Belaris. I was wondering what you referred to.

[Johann Strobl, executive]

I start with the most complex one. I mean we currently work under the assumption that an approval is a package which also gives a clear understanding how much capital over which period of time can be or will come to the head office and no capital and probably is also not the same. Here, I think we are -- what we see is that some international corporates could repatriate money. Recently, it got more complex. So this is one of the uncertainties what we have. When talking about your second question, the 100 basis points sensitivity of the NII. The numbers, what I have shared with you in the answer before when talking about what are our resumptions of rate cuts in some of the countries. So these cuts were already part of the, let's call it, cautious guidance what we gave on the NII development. So I think one can say this is included. When talking about the OpEx expectations for next year, here we -- of course, we have an environment which is still inflationary. We have done in a couple of countries there, we had a lag in wage increases. So we have been, for a while, very reluctant. We have to increase wages. What you can see, I think at least some 4%, 5% of OpEx increases for next years will occur. I think the uncertainty comes from some onetime spending around the Russian deconsolidating in this year, partly these have been compensated by nonrecurring costs from the integration of the acquisitions that we had. So this would be a first, first gas. And I mean, of course, we are talking in euros and then the question also is in local currencies, probably there is a little bit more than the 4% I have mentioned. Maybe 8% something.

[Operator]

Next, we go to the line of Johannes Thormann with HSBC.

[Johannes Thormann, analyst]

Johannes Thormann, HSBC, 3 questions, if I may. First of all, on your Polish business, 71% coverage ratio sounds nice, but do we need to go to 100%? Or what is your current worst-case assumption in terms of provisioning needs of coverage needs? Secondly, on your risk overlays, you said guidance is before usage of risk overlays. And then risk overlays cannot be maintained forever. Do you expect that you need to release some of the EUR 800 million next year? Or do you think you can keep them until, I'd say, 2025 or whatever, if we could get some more de-sale and last but not least, just at which point in time will you be able to give a midterm targets for ran only post the deconsolidation of the Russian business? Or could you say at some point, it's even possible with results and news on that.

[Hannes Mosenbacher, executive]

Well, if I may start, Johannes, with the first 2 questions on the Swiss franc matter regarding Poland. As we indicated, we are currently slightly above 70%, and we may add a little bit more dependent on the inflow to be observed in the quarter 4. You asked about what could be one of this worst-case scenario? And is it 100%? I think I know that people like talking about worst-case scenario, but we also must take into consideration that there are some clients where the remaining debt outstanding is maybe some EUR 20,000, EUR 30,000. And usually, if you go to legal way, it takes at least 3 or 4 years. So we will always have a certain cohort of people who are just saying, well, I recognize that that rebate the remaining EUR 20,000 to EUR 30,000. And I would not like to go for 3 or 4 years pedal in a legal situation. So that was the reason why we believe then with the 70-plus percentage of coverage that we will be well covered. But of course, if the inflow keeps on staying pronounced, we would add additional money. But you could think about the current portfolio. There was once a discussion we are not also compensation could be -- shall be considered, but there is a clear interpretation that with the announcement of the loan that no further compensation shall be considered. To your second question, when talking about '24 guidance is without overlays and when would we be forced to release some of these overlays. If we look at the total stock of overlays, I think we could easily divide them by 50-50. So EUR 400 million, around EUR 400 million go with RBI Group, Group corporate markets, CEE. And then we have a small part in Ukraine still as an overlay in a bigger part still in Russia. So I think as long as this situation stays. I think we will find good arguments with our auditors that we can keep this high level of provision in Russia, in Ukraine. The other one is what is the main source for our overlays, what we have for the remaining group. And as we call them, it's commercial real estate, is inflation. And as long as we stay in this elevated level of inflation and high interest rates, I would also feel confident that we could argue why so? Because as we realize and recognize that the very strong and pronounced increase of rates never seen beforehand in this comparable dynamic has a certain lagging effect, and the lagging effect is at least 12 to 18 months. And this would be exactly my argument and saying, "Well, guys, listen, this is what was intended by this strong and pronounced increase of rates. And as also officials from the ECB saying, well, let's now see how also the demand side causing the inflation is slowing down. So this would be my way of thinking. So the first 400 allocated to Russia and Ukraine as long as the war situation persists. I think we will have all the arguments on our side, unfortunately, to keep these overlays in place. And on the remaining EUR 400 million I would say we have a certain lagging effect from the interest rate increase. And if things start materializing for the topics where we have created the overlays, of course, we will also make use of them. Johann?

[Johann Strobl, executive]

Thank you, Hannes, when talking about midterm ROEs. I think we have 2 elements which in the past or till now have created some uncertainty, which ones was talking about the first one, which was the development in Poland, the rulings, the behavior of customers on the Swiss franc mortgages. Yes, I hope we soon come to an end of this negative development for us and at least in the P&L impact. And the other topic is, of course, Russia, where some additional uncertainty is also we have this tool steering approach is still with us. So I would not commit today that with the preliminary results, we are already there to give a midterm guidance for the business without Russia.

[Operator]

We go next to the line of Máté Nemes with UBS.

[Mate Nemes, analyst]

Good afternoon, and thank you for the presentation than on the results today. I have 3 questions, please. The first one is on still NII. Could you perhaps share your assumptions underpinning the NII guidance in terms of volume growth? What sort of volume growth do you bake in to your NII when you say stable to slightly down next year? That's the first one. The second question would be on RWAs. Hannes, you mentioned the $2 billion RWA relief achieved in October reflected in Q4 numbers. I'm just wondering, could you give us some visibility on any other organic inorganic RB moving parts when it comes to 2024? And lastly, literally, your CET1 ratio in PB Zero deconsolidation of Russia is now 14.4%, significantly stronger than a couple of quarters ago. And you were reportedly looking into perhaps some inorganic growth in some C countries. Could you give us your views on capital allocation from here onwards? Do you see opportunities via M&A, do you see opportunities perhaps to increase organic growth in certain areas? And if not, how should we think about perhaps excess capital going forward?

[Johann Strobl, executive]

When talking about the volume part of the NII assumptions and here mainly about loan growth, then I think on, given the GDP outlook, what we shared with you, one can expect 4% to 5% loan growth in 2024. And this leads then also to your question of RWA or no, I should rather say, capital allocation outside of Russia. I think here in terms of organic growth, the countries as a general assumption, but depending then also on the opportunities within the countries are still Czech, Romania, Slovakia, let's say, Serbia. One has to say that throughout this year, and we will see how good the margins are improving in the mortgage business. We have seen very, very low demand, but also very, very challenging margins. So the new volume was rather significantly down in some markets by 50% or more. So this explains why we still do not see significant increase, but the core markets, as I repeat it for you, are Romania, Slovakia, Czech, Serbia. Of course, the Austrian corporate business always gives room for something. And in retail, Kosovo has some opportunities. Hungary is an area where if the parameters are fine, then retail would be good to grow a little bit. When talking about nonorganic, of course, we will look at opportunities in the markets, which I have mentioned to you. But one has to be aware that other peers are also looking at that. So at the end, it might also be competitive approach. And yes, if it fits to the bank to the markets, then to some extent, we are interested in. And the RWA 2 billion relief in October, this was an answer for question to Hannes.

[Hannes Mosenbacher, executive]

Well, Máté, your question, the way I understood it is that you were curious about -- also about 2024. So the October EUR 2 billion are summing out that we have introduced an IRB approach for our mortgage business with the building society here in Austria, where we have usually over the cycle, very low risk costs. And therefore, we benefited from this very good risk performance also with lower risk weights when switching to the IRB. And secondly, as I mentioned, also the revert of the sovereign model to a standardized approach with another EUR 1 billion. Looking ahead to the -- or sneaking into the 2024, what nonorganic effects, you could expect is around about EUR 1.5 billion, EUR 1.6 billion of relief. What would be the main argument? The one is this, again, change of the article 50, where we have seen in the beginning of the year, the updrift, -- you could -- we are switching also to an IRB model in our creation unit, and we will have to have an update on our corporate rating model. So this would be the reason how to argue a relief on the nonorganic side of around about EUR 1.5 billion, EUR 1.6 billion.

[Johann Strobl, executive]

There was -- there are also questions in the Czech and the one was any news on the OFAC broke. Here, I can confirm what I used in my introduction. The feedback from OFAC is that you delivered all the requested information. You were very cooperative and it will take some time to analyze this information what we received. So the positive cooperation and the completeness was confirmed. The rest, I can only add from our perspective, which I tried to express as well, of course, experts, external experts, not only our experts were looking at the number at the data, the transactions, what we have to deliver, and they will have been fine with that. The problem is, of course, that in such a process, one cannot give a time line for them in best case to close it. And then there was a second question. If the extraordinary shareholder meeting on the 21st of November will be also used to vote on the spinoff of Russia if the sale does not materialize. So this is not on the agenda this topic, and we will not ask for a shareholder decision at this point in time.

[Operator]

We go next to Krishnendra Dubey with Barclays.

[Krishnendra Dubey, analyst]

This is Krishnendra from Barclays. I have 3 questions. I guess you've been very helpful on the NII guide and the cost guide. It would be really helpful if you could talk about the moving parts for the fee income for fourth quarter as well as for the next year. Second question is on the RWA increase, I guess, on Slide 10, you highlight a 95 basis point impact from the RWA increase. So it has 3 components, I guess, loan growth market and the operational RWAs. So if you could talk about what is -- what part of this is operation band what is causing this increase? And the last question is on Poland, I guess. You built up a decent provision. I guess you sold off a business to BNP and the noncompete has probably ended last year, I believe. So is there a chance of you entering the Polish market again and doing the core banking operations in the country? And aligned with that, I believe there was a pilot project for settlement. So how is that progressing? And can you update us with the details on that.

[Johann Strobl, executive]

When talking about the fee business. What I tried to express is that we have one part of the fee income, of course, is related to the loan business. And here, I explained what one can expect until year-end and also for next year. So here we see a limited positive impact. Then of course, with the reduction of the Russian business. So in parts of it, the head office has also been supportive to international customers and having some FX transactions, which will also reduce. Yes, there might be some support on fee volumes by the inflation. One should not expect too much on additional pricing because of the inflation because here we see, of course, a significant price sensitivity meanwhile, in all the markets. And of course, if you have a longer historic time horizon, then you would reconsider also that in Croatia, we have the euro adoption, which, of course, costs EUR 20 million of euros if you compare historic numbers this year and also the future. When talking about Poland, I think on the settlement, Hannes gave to an earlier question, answers, which if I may shortly summarize and repeat here that we believe as of today, what we see based on our model, so that the inflow of what we have seen so far and the modeled inflow over the next couple of quarters, we believe we are well provisioned as in this provisioning model, the enormant part is a very, very strong component -- of course, as Hannes said, you have in this model also settlement period to come to an end of 3 to 4 years, which then for provisioning requires also a discounting, which then is one of the reason why the current 70% over time, then will be different. So this provisioning is fine unless we see in the coming quarters another wave of litigation inflows, which would need to then do a further provisioning. Let's have a look at that. To your question, reentering the Polish market, one can say we cautiously and to a very small extent, have reentered the Polish market. We have built from scratch a digital bank, which operates on the Austrian license. So can act throughout Europe. We have decided to start in Poland because we believe in our region, this is the most advanced digital market, most competitive one. We started with unsecured lending. We are in the process to adding daily banking, so an account and some other features. But this is more a European exercise than Poland one. I don't see a full reentering in Poland. And Hannes will take some other questions from you.

[Hannes Mosenbacher, executive]

Outer one update on settlements in Poland. As I was talking about, we have the one order, we have over 300 test cases, demonstrating that our procedures are well working. And now we would do the whole story at scale in the Q4. And then we will see how well also on a broader scale, our settlement offers will be perceived. And then talking about the split up on these 95 basis points of RWA growth, you could assume some 55 basis points motivated by organic credit risk RWA growth, and the remaining 40 basis points due to a sum of op risk and market risk. Why so? Because in op risk, we standardized approach and you have a 3 years average. And of course, you know that in the last 2 years, we have earned very well, and therefore, a year with a little bit less gross income is leaving the time series and a new one with higher income is added.

[Operator]

Next, we go to the line of Riccardo Rovere with Medio Bank.

[Riccardo Rovere, analyst]

A couple, if I may. The first one, I'm looking at Slide 52, where you show the size of the Russian business in Europe. And I noticed that the loan book goes in area from EUR 13 billion to EUR 6 billion, deposits go from EUR 25 billion to EUR 15 billion. Certainly, there is the ruble effect here. But still in Europe size of the operations is going down fast, really fast. So I don't know -- let's assume for a second that the spinoff order part is -- takes time. It's already taking maybe more time than you were expecting some time ago. At what level in euros, the Russian business would be small enough at that point, the spinoff and though that part won't become kind of relevant or redone. You just let it go just another everything to the Russians, if that is possible. This is the first question. And the second question I have is on the digital euro. Is there -- do you see threats risks, opportunities from that? Or do you plan any particular investment on that given the ECB has decided to move ahead in this project?

[Johann Strobl, executive]

I think it's indeed, we have seen a significant reduction on the Russian loan book. One can say that also with the changes in the international transaction payments business, I think we have achieved quite a lot. Nevertheless, in the Western perspective, we have to be aware, the size of the bank is still significantly larger than the 2 or 3 other international banks in Russia. I think the issue what we face and one can see it also in the structure of the balance sheet comes from the still high deposit base. We have not decided on a level where one could use your wording and say now Russia is irrelevant within RBI Group, and we can't keep the bank. Of course, as you see from our activities, we, in addition to a sale and spin off, we are working on the reduction of the business so that the overall impact on RBI is not so important anymore. But no numbers, no numbers so far decide and as I said, focus.

[Riccardo Rovere, analyst]

And Johann, if I may interrupt you just one second. Excluding the devaluation of the ruble, are you happy with the downsizing of the business, the speed and the downsizing of the business. So when are you expecting it to go faster. Any color on that would be nice.

[Johann Strobl, executive]

Yes. I think we have achieved quite a lot, if you say, where we started from. I think that if you look into more details, then, of course, you have the -- when looking at the loan book, you have quite a lot of volatility from the FX developments. I think we did quite a lot in the short-term corporate book and on the retail as well, the mortgage business, of course, in an area where you have a volatile interest rate environment, one cannot expect that the refinancing happens by other banks or whatsoever. So here, I think customers are cautious, and this is why you have this development. Yes, I mean everything is different from a Western perspective than usually. So usually, you would enjoy this nice deposit base. Here, it's a challenge to reach a size where we, let's say, the international pressure also is going to be reduced. And as we still feel that we act as I described. When talking about the digital euro, I could now talk an hour or so and echo what other European banks are saying. Yes, we don't see a use case and anything more. But of course, as soon as it comes, we then will act. But we're not on the forefront of developing that. I think we are capable enough when it comes that we will be ready in time to offer what's required to our customers. But it's -- when we talk about where do we now invest then it's not the base for the digital euro. But in the area of digital offerings, we have quite a lot, as I have said, everything what you would need and the rest has to be specified by the Europeans, and then we will invest.

[Operator]

We go next to the line of Iuliana Golub with Goldman Sachs.

[Iuliana Golub, analyst]

Congratulations on my side as well. Three questions, if I may, please. The first one would be on the Russian RWAs. So in the second quarter, you were guiding for EUR 14.5 billion of net RWAs to be deconsolidated compared to EUR 14.3 million of accounting RWAs. And now the RWAs to be deconsolidated stand at EUR 13 billion versus, I think, EUR 13.7 million accounting. So I'm just trying to reconcile how a 4% reduction in accounting RWAs translates into a 10% reduction in effective RWAs, if you can help me, please. The second question is on asset quality. I think you saw some credit exposure downgrades from Grade 3 to grade 4 during this quarter. And I think mostly in Germany and Hungary, I appreciate that you have already commented on credit risk, but could you please elaborate a bit on trends you are seeing in those geographies in Austria and especially on the CRE front, please? And the third question is on Ukraine. Your GDP growth assumption looks quite promising there for the next years. Do you see any opportunities perhaps for loan growth on the back of the reconstruction in the western and central part of the country that is to come?

[Johann Strobl, executive]

I try to answer your question. I think we have -- and you allow that I just talked about the end of September and the RWA impact in Russia. So we have a credit risk RWA of about EUR 9 billion in Russia, and we have a market risk of EUR 4 billion because of Russia, which is, of course, our own participation in the Russian entity. And of course, this EUR 4 billion of RWAs are mostly in head office as this is where the participation in the Russian entity is booked. And so this probably it's the reason why it's difficult to run through a few information and then come to a reconciliation of the numbers. So here, I tried my best at this point in time. But I mean, more technically also the team would be happy. I think we have on Slide 11, maybe this is helpful where we have the idea how the RWAs are reported in Russia. I think let me -- I would need to open this up on my side as well. But this is the EUR 13 billion in total and what you might use then. And when -- maybe this is good enough for an answer at this point in time. When talking about the Ukraine GDP outlook. Indeed, we are positive. I think the country has well-adjusted to the developments. They were impact. This is, of course, the basic assumption of all our forecasts. They were impact to a biggest extent is limited to the areas of war of fighting and the damage in other parts of the country is very limited. This is a basic assumption. And the second part of it comes, of course, from the good support from the international Western parts from Europe and the U.S., so both of these are helpful. I think when we talk about reconstruction, I think it's fair to say that the reconstruction comes in different phases. And what you currently have is that Ukrainian companies are suffering also to exporting goods without international guarantees and to importing here and there goods, which they would mean to replenish the production environment, what they have. So here, one can say it's still a challenge. I think then the second part would be infrastructure is very important. So this is a European exercise mainly. When talking to the international institutions, EBRD, EIP and others, there is an increasing will to support this reconstruction and so one can be positive for that. Yes, we are not planning in the plants, of course, we have not that big expectations built in. But of course, for the well-being of the country, we hope that this comes in the phases, as I have described the more the better. And Hannes will talk about your other question.

[Hannes Mosenbacher, executive]

When talking about commercial real estate, I think we have to prefer in talking about the 4 main contributors to commercial real estate. This is warehouse, this is huddles. This is office, and this is shopping malls, basically. On warehouses, I think, of course, with a slight reduction on the economic momentum, we may see a little bit less use of the warehouse, but nevertheless, they are usually built close to highways on critical turning points. So therefore, I would not believe that we would see too many of defaults and provision needs when it comes to warehouse. The hotel sector also nicely recovered out of the intima, we see that in many of our countries, is it Croatia, is it Albania, but also here in Austria, we could see that the hotel the tourist season was outstanding. So on the hotel part, I think, of course, always depending on how the financing is being done. But nevertheless, we would also believe that not too many problems would materialize. Remaining to -- but this is office and shopping malls. Office here, we have a structural shift. I think also on the demand side, those who are working in the city know that the occupancy rate on the office is still low and not fully utilizing the capacity available. And the other one is shopping malls, looking at leading indicators when talking about consumer confidence, we also may assume that people are less eager to use their savings for extra shopping. This is the 4 markets. The other one is what are the driving factors. And we still believe that given that inflation is a little bit higher for longer, we would also believe that interest rates are staying higher for longer. And of course, then you get to effect the one is the valuation effect and the other one is a cost of refinancing. Many of the projects are anyway financed on a fixed rate basis. And other factors which could impact and I would not go specifically to Austria because what I'm mentioning was also to for Germany, for Czech Republic in quarters, but staying now with the euro 1 euro financed exposures, we also must not forget political measures. So as soon as you introduce a certain cap on the rental income or call it a break on the rental income. This is a little bit artificial because on the one hand side, you have the inflation, you have higher interest rate costs also to bear and on the incoming side, you put politically a cap on weaker consumer demand might be a challenge. And let's see if the inflation stays as it is and also maybe this cloud side was indicating on the geopolitical part, what this does do on the consumer demand. What did we do? We have adjusted our underwriting criteria. Now we would rather underwrite on a debt yield of some 7% -- 8%. And as I said, of course, given this new interest rate environment, also valuation curves will be adjusted, and we will see that many of the companies who have benefited from an 8-year long of non-existing interest rates in Europe. We'll also see in 2023, some valuation adjustments. This is what I would expect for sure. And yes, could there be the one other liquidity issue. I also would assume. So that is the reason why I elected it. And that's also the reason why we have created in total BOSS model adjustments for the commercial real estate of EUR 150 million. I hope this was a very comprehensive answer, Julia. Otherwise, if you wouldn't need further details, churn and colleagues are more than confident to follow up.

[Operator]

We go next to the line of Simon Nellis with Citibank.

[Simon Nellis, analyst]

Just 3 quick ones from me. Firstly, on Ukraine, I see that you're back to growing the loan book and the assets. Is that the intention to continue doing that? Or is there something else behind that maybe currency? And on the risk cost, actually, you've released provisions in Ukraine, if you could talk about the outlook for risk cost in Ukraine a little bit? That would be helpful. Second question is on the dividend. Do you think you can maintain the EUR 0.80 0.80 dividend going forward? It might be too early to talk about that, though. And then last, just on OpEx, I think your EUR 4 billion OpEx guidance would suggest a very large increase in the fourth quarter. So are you just being conservative? Or are you -- is there going to be exceptional seasonality this year?

[Hannes Mosenbacher, executive]

Simon, if I may take the first question, thanks for participating. On Ukrainian, thanks for noticing that we were capable to grow our loan book in Ukrainia. We also have done this last year, we have provided last year over EUR 400 over EUR 400 million of new financing made available for agriculture. And of course, for the very strong companies in Ukrainia, we have preapproved limits in place, and they are being utilized, and we are happy to provide the necessary needed financing risk cost outlook in Ukrainia. As you have seen, we already have booked some round about. Let me just look up the exact number. my memory serves, we write about EUR 80 million of risk costs in the EUR 74 million in the first 3 quarters. We also have some overlays. Yes, maybe we would need another EUR 20 million, EUR 25 million for year-end. But please bear in mind, Simon, that this, of course, is exactly the reason why we are so broad in our guidance because the dynamic could change. And in my current thinking could be proven wrong already tomorrow. So that's the -- in our base assumption, we would add another EUR 20 million, EUR 30 million per year when it comes to risk cost in Ukrainia. Johann?

[Johann Strobl, executive]

Thank you. As you're right for it, it's too early to make any statement on the future dividends. But as I promised, we will come with something when we have the preliminary results, which anyhow is early February. To your other question, OpEx in Q4, I think it's a good question for a reason. If you look back in history, I think you would find years where we have EUR 100 million difference between Q3 and Q4. This was not so much the case last year where we had higher costs in -- because of the many reasons I have stated around Russia. So when we talk at overall group -- so I think if we then look at Russia, the bigger part of the cost increase from the many areas to deconsolidate IT and whatever was consumed and one could see this already in Q3. On the other hand, Q3 is always a smaller one because people consume their holidays and then build up new things. So yes, there is some seasonality always if you take out the extraordinary that the special the one-offs, and we have also, if you compare with Q3, then I have to remind you that in Q2, we booked quite a lot of extra cost here in head office for Russia as well. So this volatility will continue in various areas for a while. And I hope that -- hopefully, already last next year, we would be back to normal. So be aware when you compare quarters that you have the special impacts, which are specific to the Russian development when talking about Q4 last year -- this year in Russia and head office.

[Operator]

We'll now turn the conference back over to Johann Strobl for any additional or closing remarks.

[Johann Strobl, executive]

Yes. Thank you very much, Mrs. Operator, for your kind moderating of this call. Thank you to all participants who showed interest on Friday afternoon. Thank you for your questions and your nice comments. Looking forward to hear you again. Yes, maybe at the preliminary results or whenever it's you, Hannes.

[Operator]

This concludes today's teleconference. We thank you for your participation. You may now disconnect your lines.