Raiffeisen Bank International AG

VSE:RBI

Earnings Call Transcript 2022-Q4

[Operator]

Good afternoon, ladies and gentlemen, and welcome to the Preliminary Results 2022 Conference Call of Raiffeisen Bank International. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Johann Strobl, Chief Executive Officer. Please go ahead, sir.

[Johann Strobl, CEO]

Thank you very much for the kind introduction. Ladies and gentlemen, welcome to our call. It is about the preliminary 2022 results. Thank you for taking the time out from your busy schedule today. Results as you have seen are very good. These include of course an unusually high contribution from Russia. With many distortions caused by the war. I believe however, that down the line trends and the performance of the rest of the bank is also very good. The overall consolidated profit is around 3.6 billion and ROE of nearly 27%. The underlying profit if you adjust for Russia, Belarus and the one-time gain on the sale of Bulgaria is around €982 million and an ROE of 8.7%. Please keep in mind that this includes €448 million of provisions for litigation in Poland and 253 million of risk costs. This gives you an idea of the very good earning capacity of our core businesses. As we will discuss in a minute, our CET1 ratio improved to 16% consolidated and 14% if you assume a full ride off of our Russian business.

If we move to the next slide, then you see that our loan book has grown nicely in Central and South Eastern Europe while we had reduced significantly in local currency terms in Russia and Belarus. Core revenues have improved nicely as well, in particular for the business excluding Russia and Belarus. Our adjusted cost to income ratio of 50% is also very satisfactory.

Let me move to the next slide. Let's first discuss the dividend. On the one hand, they're very good results across the group in 2022 and the strength of our balance sheet mean that we are able to pay a dividend. The proposed $0.80 per share are roughly 26% of our normalized earnings. On the other hand, considering the uncertainty ahead, we need to be prudent and we'll wait for more visibility. We've made a lot of progress on the CET1 ratio and as we stabilize around the current levels, we will be in a better position to distribute. Until the decision to distribute is made, we will deduct the $0.80 per share from our capital ratio as this amount is earmarked for our shareholders.

As mentioned, our ability to propose a dividend is also a reflection of our very strong balance sheet. Net of the proposed $0.80 per share, we have strengthened our CET1 ratio to 16% and more importantly, improved our CET1 ratio, excluding Russia to 14%. At the same time, we have grown the loan book in our key markets, digested the RWA inflation from rating downgrades and other inorganic effects, and provisioned conservatively. We've also improved our MREL buffer over the course of the year.

I would like to take a minute to highlight the remarkable job our colleagues in Ukraine have done and the excellent performance of our bank there. First, by ensuring business continuity in the early days of the war and again when the country's energy infrastructure came under attack. There was extensive preparation done before the invasion, including for black out infrastructure such as generators, diesel power banks. Within weeks, all data and critics systems were successfully moved to the cloud. Most importantly, we experience no downtime of any consequence. Raiffeisen Bank Ukraine is a major contributor to the banking infrastructure in Ukraine and one of the best performers under these extreme circumstances. The feedback, from both customers and authorities alike, has been anonymous.

Second, Raiffeisen Bank Ukraine has strengthened its capital position while also taking a very conservative approach to risk costs. The revenue potential of the bank is also intact with a stable customer base and market shares. In fact, amongst the privately owned banks in Ukraine, we have seen the smallest loan book reduction and we have the highest share of customer assets relative to the balance sheet. In critical industries, we have maintained our lending exposures or even written some new business. Operating income benefited from the high interest rate environment as well as excellent feed business and trading results. This has allowed us to absorb their significant risk costs without showing a loss for the year. More importantly, Raiffeisen Bank Ukraine demonstrated very strict cost discipline, which largely offset the unexpected OPEX pressure caused by the war such as cloud migration and relocation costs, financial assistance and donations. All in all, I'm very proud of the job done by our management and colleagues at Raiffeisen Bank Ukraine.

Let's move to the next slide. As mentioned already on the second slide, we have seen very good growth in core revenues this year and you can see this on Slide 7. We have had seen both NII and fee income growth for eight consecutive quarters. In the most recent quarter, we have again seen excellent growth in the core group, excluding Russia and Belarus. We continue to see benefit of higher rates through resilient liability margins both in Euros and domestic currencies. In the Czech Republic, you will have noticed the 38 million dropped quarter-on-quarter. Now to a large extent this is coming from a line shift in revenue recognition on a fixed derivatives.

If you focus on the underlying business strengths, we see a small drop in the quarter around 8 million which is coming from the deposit mix. We have seen some of the current account volumes move to saving accounts and term deposits, which of course have a better yield. Fees and commission income is largely driven by Russia this quarter and elsewhere growth was slower. Looking at the core part of the group FX business saw lower volumes and of course the loan and guarantee line usually tracks the lending volumes, which were also muted in the quarter.

Let's move to the next slide. And what you see here is what I have mentioned earlier. In the business areas, excluding Russia and Belarus, you saw a nice loan growth by 6% year-on-year. And I think also their deposit growth is very good within the group. I'll leave you with this slide and move to the next one, which is the waterfall of the CET1 ratio development for Q4 and what you see is a significant improvement by more than 130 basis points to 16%. Coming from various areas, reduction in the loan book, some other credit risk reduced, and market and operational risks so overall it's important to have retain earnings to be considered negative. We have seen, of course the FX rate, which happened rather at the year end.

And of course I should mention here as it is stated, the earmark dividend is excluded from the 16% and you should be also aware that these are numbers from the traditional application of IFRS 9, where the benefit is about 44 basis points. If we now look at the outlook on capital for 2023, so you see our assumptions on organic impacts from retained earnings. And the RWA increase on the other hand mainly from loan growth, some FX elements and then some other regulatory elements, what you have also as part of this development, but it should be above 15%.

Moving to Slide 11, which is one element to inform you about our double steering approach, dual steering approach and what you see here is the impact of a deconsolidation scenario in Russia, of course with risk expectedly on the 31st of December, 2022. We would have landed at 14% and if we look forward we will see the group in a way that for sure we should be above 13.5% if this would happen. Now the core numbers are they're 4.2 billion of CET1 which would be deconsolidated without compensation in this calculation and then RWA deconsolidation of 15.8 billion. Be aware that the subordinated instruments which are held by the group are not deducted in these numbers. So if we wouldn't get any compensation for this as well, this number 14% would be lower by 30 basis points.

On the next Slide 12, you see an overview for your convenience for the core numbers on group level and the various MDA triggers, MDA buffer, and available distributable items. I think the numbers speak for themselves. You see the increases in some of the buffers on the right hand side of this slide.

Moving to the next you see -- a good improvement. So this 13, what you see is a good improvement over the year on our MREL and funding and you might have also seen that in addition to what we report to year end, we had another. MREL issuance at around 1 billion at the beginning, just recently in January. If we then move to the next, you see a few information on liquidity and MREL resolution groups. You know, we have this multiple entry point concept. The LCR very well improved, MSFR very good. So I think we have in all these aspects, very good numbers and for your information, you see also the upcoming funding needs to meet also in the other resolution groups, the respective requirements.

Moving to the next slide, this is the second part of the Russia update. What you have seen is, a huge decrease in RWAs of 6.3 billion. Half of it was the FX development and the other elements are reductions in the credit RWAs, but also in the liquidity. And the RWA is required for liquidity and, yeah. I think what one might also mention here, to give the total, the total view we have net, net cross border risk to Russia of slightly more than 200 million. In this we also reported, our trade finance guarantees to Raiffeisen Bank Russia, which are about 80 million. Of course, we see very good results, the Russian entity is more than well capitalized with CET1 ratio on local standards by more than 27%, which is an enormous buffer. And also, if you look at the liquidity ratios, the numbers are very strong.

Coming to the next slide, which is 16, an updated macro outlook from our own sources, Raiffeisen Research. The basic assumption is that the beginning of the year sees, of course is low down, maybe a seller recession, but then also some recovery in the course of the year. So that overall in Central Europe, we expect that the year brings a small growth of about 1%, slightly more as the structure is different, the industry structure is different in Southeastern Europe, on average around 2%. And, Austria 0.5 after the strong 5% growth in 2022. We see a stabilization in Ukraine after the huge drop because of the war by a third in 2022. And we see a further decline in Russia by around 4%.

Next slide gives our view on interest rate developments and also some flavor on where we expect inflation will be. It seems if you look here, that in some markets we already have seen the peak of this rate cycle, and in the second half of the year we already expect rate decreases, like in the Czech Republic and in Hungary, stable development in Romania, Serbia, and Europe of course, we see some further increases.

Coming to my last slide, before I hand over to Hannes, I think here it's, I would abstain from the reading exercise. This slide is full of numbers, the best what we can share with you what we expect within this year is probably might also answer most of your questions already, what you usually had, but with this to Hannes. Hannes, please.

[Hannes Mosenbacher, CRO]

Johann, thank you very much. Good afternoon ladies and gentlemen. I hope you have had a good start to the year and thank you for joining us for our first update of 2023. Before we discuss the coming year, however, I would like to spend a minute on where we stand after challenging year. Johann has mentioned a positive development of our balance sheet and there is but little for me to add. We finished the year with a non-performing exposure ratio of 1.6% stable on the year, and again, a very good Stage 3 coverage ratio of 59%. In most of our countries, we saw few interventions [ph] which allowed us to build up our overlays and BOS model adjustments. Please bear in mind, we have €729 million of overlays available to us for any risk cost beyond what is already budgeted for the next year.

There have been a number of RWA headwinds this year, and I believe we have managed them well. We have been proactive all year in reviewing our exposure in our internal ratings. Initially with the war in Eastern Europe, followed by inflation spikes and energy crisis, this has been definitely a very busy year for risk manager. I shared with you some of these portfolio analysis performed during the year, and I'm otherwise satisfied that our portfolio is fully reviewed and up to date. Not to forget the bank's liquidity situation, which is excellent, both on the group level in each of our individual countries. While there was some initial volatility march, this did not last, and we have seen consistent liquidity inflow since then. And of course you're aware of, since I'm not getting tired in repeating, our rating has been confirmed by Mood’s and S&P already in March.

Focusing on Eastern Europe, I would also like to highlight the very good performance of our -- of the Ukrainian colleagues. The cost of risk unfortunately reached our initial guidance here, and yet despite this, the capital situation of our bank in Ukraine sound. In local currency terms, we have maintained our loan book roughly flat with [indiscernible] attributable to the increase in provisions, rewrote new business during the year supporting the agriculture sector and related industries. In Russia, we have reduced the loan book by 30% in local occurrence terms. We will continue to selectively replace corporate exposure with retail exposure. Russia is an example of our active RWA management, and you will recall of course, the rating downgrades and the liquidity inflows, which led to substantial RWA inflation in the first and second quarter.

On the provisioning side we also came to the upper end of our initial guidance. Here, however, this is largely driven by Stage 1 and Stage 2 bookings. Again, the revenues have more than made up for the risk costs and the capital situation of the Russian bank is well above the regulatory requirements. Now, as we look ahead to 2023, we see some reliefs in otherwise challenging environment for corporate customers. Many of the post pandemic tailwinds are now over. The very positive momentum that we saw in 2021 and the first half of year 2022 is behind us. We were talking about deteriorating consumer confidence, and this usually of course comes after certain lagging with economic consequences, which is now any way the accepted new reality. But we have a complete new rate environment. What is also important for me to see is that on the other hand, the doomsday energy scenario have not materialized.

Let me move on to the next page please. What we understood from all your feedbacks that you would appreciate a little bit more color and splitting up our risk cost guidance to the different segments. While on group corporates and market CE and SCE, I think the headline would go stagnation or possible or slight recession in a combination with higher rates and persistent inflation. As I said, we have now already a stock of overlays of €729 million and so 2023 might more be focused on Stage 3 bookings. We believe that we could see up to €440 million in the segment mentioned.

You may consider this on the upper end, and I would dare to agree at the same time please bear in mind the sudden defaults what I'm also usually flagging, and this you would most properly find in this segment. The other two segments I picked out are more difficult when it comes to risk cost guidance. For Russia, Belarus, of course, it becomes now evident that the same sanctions are making their impact. Ongoing recession, especially if commodity prices drop global growth deceleration. So here we would believe that risk cost could sum up to some around between 250 to 270, and Ukraine it goes without saying that this is more than challenging to come up here with any well founded and sound numbers. So we again came up with this €200 million, €220 million, but please bear mind if you look at the risk costs from Ukraine that also here we have an overlay for extraordinary situations of round about €50 million.

Having said this, let me move on to the next page when talking about IFRS 9 provisions. As said in my summary, total €949 million and big part of it was anyway not in the Stage 3. So mainly in Stage 1 and Stage 2, you can see here all the details, the moves between Stage 1 and 2, adding a little bit on the microsite on the other hand side have any capacity to release the one hour overlay and the quarter four has been mainly driven by Stage 3 bookings.

Having said all this, I'm sure you also have recognized our strong drop on RWAs. If you look at this drop of €10.8 billion, I think you have three main buckets. The one is the credit risk RWAs, and here you have two effects, the one that short term exposure has been reduced. And on the other hand side also locally liquidity placements in Russia have been reduced. And on the other hand side, we have conducted in the quarter four some new securitizations and guarantees. The second big part, if you try to explain the €10.8 billion drop in RWAs comes of course from FX, which is summing up to €4.4 billion. OP risk, and I will talk about this in the page. We have switched back to the standardized approach and market risk RWAs also have been reduced because we have reduced our USD hatching.

Let me move on to one of our big blocks, what we also have allocated in our 2022 numbers, and this is about Poland. As you can see on the right hand side, we have now increased our stock of provisions for litigation to €803 million, and we have added another €262 million for new provisions for litigation in quarter four. What is important for me is, as I said beforehand, we handed back our advanced measurement approach on the op risk and therefore are being capable to report reduced volatility when it comes to op risk RWAs. I anyway, was talking about the MPN, the coverage ratio on my introduction and so I would stop here my presentation and we are eager to take your questions. Thank you.

[Operator]

Thank you. [Operator Instructions]. Our first question comes from Gabor Kemeny with Autonomous Research.

[Gabor Kemeny, Autonomous Research]

Oh, hi. Thank you for the presentation. I have a few questions, firstly on NII, and particularly your guidance, your 2023 guidance excluding Russia and Belarus. I think it implies a pretty significant drop from the Q4 level, from the Q4 annualized level around 15%, 20%. Would you be able to comment on the outlook here why you are so cautious or downbeat on NII going into 2023? And a related question to that, if you could elaborate on the check NII dynamics, please because it looks like the trend you have been flagging here, increasing share of savings, account term deposits, probably sounds like -- more like a trend rather than a one-off. So what are your thoughts about check NII into 2023? And my final question is going to be on Russia and the impact of the sanctions, not so much against Russia but I'm asking this on the back of the sanction, the recent sanction, which directly impacted Raiffeisen. So it would be useful to hear your thoughts about Raiffeisen’s ability to keep the Russian business in light of the likelihood of potential further sanctions? Thank you.

[Johann Strobl, CEO]

Thank you Gabor for your questions. I think in a nutshell, as I tried to explain, we in some countries, we already assume that the peak of the rate cycle is now, and in the second half of the year, we see a declining rate. So this will have some impact on the NII. The second is that we tried to explain that in some countries, so their trust meant -- so the relocation of funds on current accounts to time deposit -- term deposits and savings accounts is still ongoing. So this together explains why we are not so enthusiastic anymore of a further increase in NII. To your question on the check development and on this relocation to the trading result, yeah, in the FX derivative business I understand there is no one practice in the market. It can be allocated to the NII, so the interest component can be allocated to NII or to the trading risk, trading line. We have chosen the second one. So there was a relocation to that and as I said, in the speech so the net impact is around 8 million, which comes from this shift to other deposit from current account to the deposits. And so the basic assumption to support you is that at least for now, an NII income of around 50 million per month in the Czech Republic. So, I hope this covers that. And to your final, to your third question, the Russian sanctions on that, I -- let's look at it from two perspectives. So the one is the financial impact. I think here it's very, very simple. We have a leasing business in Russia, which is outstanding at year-end, 360 million. Around a bigger part of that is vehicle leasing. But nevertheless, we assume that our customers are not using these vehicles in the territory of Ukraine. And therefore I think the direct risk of repossessing or confiscation of these assets, I will assume is very small. And in the mid to long term -- additional consequences. These sanctions mean cause of course for the first time, an RBI entity is sanctioned and one has to observe and analyze what it could mean. Currently, I can only say we watch out, we will monitor, we will analyze. As of now, I could not add anything or give you any indication what this would mean. I don't expect that this would cause sanctions by the Western government into this whatsoever.

[Gabor Kemeny, Autonomous Research]

Okay, understood. Thank you.

[Operator]

Next question is by Mehmet Sevim with J.P. Morgan.

[Mehmet Sevim, J.P. Morgan]

Thanks very much for the presentation. Maybe if I may follow up on Gabor's question on the sanctions risk, not necessarily on this one sanction that we saw, today, yesterday, the day before. It feels like it's becoming sort of a -- there's a momentum that we are seeing several risks and headlines coming, related to your operations in Russia and some of the liabilities that you have there and that you have to follow the rules in Russia, etcetera. Can I ask, is this becoming sort of a liability now and given the options are quite limited, seemingly, is the urgency of finding a solution increasing in your eyes, as we enter 2023, so I know it may be a difficult question to answer, but I would appreciate any color that you can give us here? And maybe my second question is on the dividends. When I look at the capital ratios now you're at 14% excluding Russia, 16% including it and you've recently increased your management target, seems like you're above all these requirements. So what kind of developments would you expect to see from here to make that decision or at least you know propose it to AGM [ph] at some point later or is it simply just to wait and see how the Russia situation pans out later? And maybe finally on the Polish provisions, you've reached quite a good coverage level now with the top up that you have done in the fourth quarter and how should we think about provisioning from here in Poland in 2023? Thank you.

[Johann Strobl, CEO]

Thank you for the questions. Indeed, I can only give a color based on what we observe and expect. So, indeed what we see is some changes. I think the Ukrainians and also the authorities said at the beginning of the war, been very vocal that the Western banks should leave Russia. And what we saw recently is that it seems that some of this they pick up again for whatever reason. I think it's political warrants. As I said before, it's not the financial impact as of now and I think, yeah, the concerns earlier had always been what if we just talk about the Ukrainian part of this overall development. And then of course the question is, will there be at some point in time also an impact on the Ukrainian entities or IFRS in Ukraine. Yeah, we have to see -- I think it's well understood and we try to share with you that the bank is also we know that there is a huge sector of state owned banks in Ukraine. I still believe that foreign banks are important for the development of the country. And of course we hope that this is considered and I shared with you the positive contributions that the bank delivered to the country. And I hope this is considered when talking about the whatever sanctions they might have in mind. But of course it's a change in the sense that that now an entity was sanctioned and not only threatened to be sanctioned.

I think in the other part, I think there are spillovers, so there is -- or so here up and down so, but there we carefully monitored the let's say the social media exchanges of use on our activities in Russia. And of course it -- some events make it -- bring it to a producer's attention. We have had this when the moratoriums for conscripted soldiers had been discussed in the public. I mean the very small amount in the portfolio. So also in absolute terms it's very little. But of course we understand that within Ukraine this is also a big emotional topic. From the Western parts, I think here the governments have a clear view that they want to define in which scope and in which frequency they add sanctions. So I think this is a clear political instrument and here we have I think a very good compliance framework and to be adhered to and the sun has set. Also we are proactively trying to understand what consequences could be and you see from the numbers that we to a large extent avoided that. So we have this of course this emotional political part and what Western governance need and want.

So I can only assure you that we are working on the assessment of the options what we have. And leaving Russia is one of the options by I'm sure you have carefully monitored the recent publications of what we call the protocol which states the requirements for a sale of a bank and also the -- but what for potential buyers might be of interest or is also potential dividends. And I mean the good thing is it's very clear now. The not so good thing is that of course the range is still wide, so the minimum discount what you have is 50% but it can be substantially higher as well. So it's -- and still you need this is just a frame for a decision but you also need an improvement. But I can assure you we are working with quite a lot of manpower and also external advice on that, but we permanently have to adjust.

When it comes to the dividend and you also made the link to Russia. Yeah, I think it's important to see the developments and as Hannes and I shared with you, we want to keep this high level of CET1 ratio and the good other ratios. I think there might be the -- there might be an option of leaving Russia, which would require for a short period of time more capital. So what I mean is between the period of IFRSD consolidation, when we would occur a loss. And the final regulatory deconsolidation of the RWA. So there might be a period where the impact might be even bigger than deconsolidation with zero rates so that at that point in the zero amount, so at that point one might be below this 14%. And so this would slightly help as well.

And to the dividends, then this simply means that there is a high probability or that you shouldn't expect that we have the annual shareholder meeting end of March. You should not expect that we would propose it. For that was depending also on some developments, but rather that we would have an extraordinary shareholder meeting in the course of the year. Nevertheless, we wanted to state with that we weren’t at the right point in time to distribute the dividend to the shareholders.

[Hannes Mosenbacher, CRO]

Yes, I can take the question on the Swiss Franc. You raised payment the 2023 guidance. We would think about that most properly we would need maybe another up to €200 million for the year to come. And I may anyway assume that you are closely following all the different league steps, [indiscernible] rolling to be expected in the end. But this is what we have currently considered in our numbers that €200 million are being added to the litigation provisions. Thanks for the question.

[Mehmet Sevim, J.P. Morgan]

All very clear. Thanks so much.

[Operator]

Next question is by Mate Nemes with UBS.

[Mate Nemes, UBS]

Yes, good afternoon and thank you for your presentation. I have a couple of questions please. First one is still on NII and I'm just wondering if you could confirm that you are indeed using a 4% ECB rate forecast for your group NII outlook for 2023 and I think that's what you show on your macro forecast slide? That's the first one. Second question is a Hungarian NII. I think in Q4 you recorded a very strong 22% growth. I saw that there has been healthy growth also on the loan side or the asset side about 7%. I'm just wondering, what's been driving this step change in NII, is there any one off here? And the last question is on your cost of risk forecast. I think Hannes you mentioned 50 basis point cost of risk outlook for GC&M, Central Europe and Southeastern Europe and do I understand correctly that that guidance is driven mainly by Stage 3 and does not assume any further overlays to be added on Stage 1 and Stage 2? Thank you.

[Hannes Mosenbacher, CRO]

Well, let me start with the cost of risk question. Yes, you understood me right. I think we really have now heavily increased our overlay bookings just to reference it. This is more than a full year of expected loss, the €700 million. I think this concept served us well in 2020 and also in 2022. Well, of course, if some special situations are coming up we still might be tempted to have another million Euro here to allocate to the overlay booking. So the 440 if they would materialize and I'm really cautious here on this 440, we would believe it's either out of migration but mainly out of the Stage 3. And do not forget the loan book what I'm talking here about is a quite substantial bond. So we're talking about the loan portfolio of round about €90 billion. And out of this €90 billion we are saying, well, we could see up to €440 million. And those like you might know me well that I'm usually also including one or two certain defaults when I do the risk cost guidance anyway. So this is yes, you're right it's Stage 3 and please bear in mind on this 440 which I have shared that one or two certain defaults are also included. Johann.

[Johann Strobl, CEO]

Yeah, thank you, Hannes. As far as to your NII, so if I start with the Hungarian one which is very precise as you were asking for Q4. I think the special phenomenon in Hungary is what you see is that the central bank rates are high. But the allocation from the current account to other deposits is slow, so it's not that huge what you might expect. And as the margin is always much better on this current accounts, this was supported very much. And of course if you keep then this liquidity in the central bank at the deposit rate there then this supports your margin very well.

I think what maybe if you can compare to other banks what might also strike you is when talking about the NII that there is a cap on some loan rates which probably in other banks is because of the structure what they offered compared to what we offered. So fixed versus variable rates. Loans, indexed loans this is also different and so in a nutshell this was also supportive as the let's say the negative part of this government measures was relatively less painful for us than for other banks because of the structure of the loan book.

When talking about your question do the Euro, do the CP rate, where we yes, we at this point in time we assume that it will move in the course of this year to 4%. And this still comes in steps if you look where we are. So it takes some time to feed through. You shouldn't expect too much positive impact on the what we have in the head office. This is to a large extent here so that it is within RBI. It's mainly a large corporate customers where you always are around the market rate. So the margin is razor sharp and you gain very little from it, but we have in some network banks a share of euro deposits and here we could get something. So maybe I guess could be that it might have a positive impact of 40 million to 60 million in the course of 2023.

[Mate Nemes, UBS]

Very helpful. Thank you very much.

[Operator]

Next question comes from Alan Webborn with Societe Generale.

[Alan Webborn, Societe Generale]

Oh, hi, thanks for the call and your answers so far. Just a couple of questions if I may. Firstly, Hannes talked about potentially sort of 200 million plus more provisions on Poland. Now they're taken in other in command. Are they in your forecast for provisions or are they outside of that because you did seem to say that they were taken into account. So could you clarify what you mean by no further legal provisions for Poland in relation to what you said about provisioning? That was the first one.

Then secondly on Russia, I think there was a pretty -- 30% odd depreciation in Q4 and yet you're -- when we see that and what happened to the loan book and what happened to obviously risk weighted assets as well and yet the reduction in NII was relatively limited and your fee income again was record. Could you just give us a little bit more detail as to what was going on, what was the levers if you like in the Russian business in Q4 and presumably that is not something that's sustainable. I mean I understand that we've had a number of quarters of very strong numbers that you're forecasting, a recession in Russia and apparently there's not that much hedging. So could you put a little bit of color on what's actually been going on there? So that was another question.

On Ukraine in terms of provisioning you're talking about sort of again a few 100 million more provisions they put into the pot for 2023 and yet you took almost no provisions in Q4 against quite a high operating income. And I wonder what's -- again what's going on there, why if you need to take so many more provisions for Ukraine next year, didn't you use Q4 as an opportunity to bump them up a little bit? That would also be interesting. Then does the dividend that you're proposing needs to be agreed with the regulator, has it been agreed in principle or does that happen after you properly propose it, would be also interesting? And finally, do you think that the margins, the net interest margin of the group excluding Russia and Belarus will actually be up in 2023? Thank you.

[Johann Strobl, CEO]

Yeah, I'm not the IFRS guy but the provisions for Poland is in the other, not in the risk provision of Hannes, but in the other. So when talking about the Ruble depreciation and you compare it to the NII of 2022. So if I remember correctly we had this steep drop in the FX rate only in December. So the -- in the income you have the reporting on the -- I'm looking to my colleagues on the average of the month and the compensation for this you have then in the OCI. So the impact on the OCI was huge and partly of course this is the income. So looking forward of course we start from a different level and therefore NII and also fee income cannot compare to what we had so far.

When talking about not so much the FX impact, but the development on its own, the fee income so you see some seasonality, some also driven by the various developments around the war and the impact on Russian population. And here this is one driver of fee income as well. But of course it will have an impact also by the -- from the FX and one should not be as -- you should not consider the very good development of Russia that this will continue from any perspective. So neither from the volume, from the amounts what we have, nor from the very positive FX impact. So this is a different year what we have ahead of us. I mean still the underlying business as of today looks good still but at a different rate level.

[Hannes Mosenbacher, CRO]

Well, Alan you gave us a lot of question and also about Ukraine, what is our way of thinking when looking at the Q4 just in Q4 we had in total €73 million of Stage 3, but if you look at the full year how we have dealt with the war situation in the country. We took the impairment losses early on. As usual, this is our approach, but this is just to reconfirm that we took the impairment to -- losses early on. And as I said when talking about the risk cost guidance in Ukraine and when talking about these €200 million which I've flagged, I clearly say well this is the most challenging part on the assessment. Bear in mind that we have €50 million of Stage 2 overlay provisions also allocated for a potential blackout scenario. So you see the things what we're discussing here, blackout, non-blackout, I don't know, but the €50 million for the blackout would already be here.

And looking at the total portfolio of still €1.6 billion, as I said, we were supporting also the planting season in the Agri business. We still have €1.6 billion of performing loan portfolio available and therefore we thought it's prudent and conservative to have another guidance of €200 million on risk costs. And believe me every Euro we have to spend less in risk costs is a good Euro for me as well. Johann.

[Johann Strobl, CEO]

Thank you, Hannes. To your question of the dividend, of course when we talk about the dividend, we go there, but as you see it, we left it open when it will happen and therefore it then when we come to a decision it would need again a discussion also or an information of the regulator.

[Alan Webborn, Societe Generale]

Okay, that’s great. Just one or two small follow-up. On the overlays in Russia presumably are staying in Russia, so they're not available to do anything else with? That was one. And also on the -- I notice in Russia that you appear to be sort of growing the business. There seem to be about 5% more staff there in Q4 against Q3. I mean, I guess it's being run independently, but I just wondered why you'd be doing that in the current environment? Thank you.

[Hannes Mosenbacher, CRO]

Well, I will take the first question when it comes to the Russian overlays, yes, these overlays are being created, booked and built in Russia and they will and shall stay in Russia if they are needed. But at the same time, I think we have been extremely transparent also showing how much of overlays Alan have been booked on the remaining RBI Group. And please bear in mind that besides the overlays, we also have heavily increased our Stage 2 bookings when it comes to the macroeconomic adjustment. This was a main driver in the fourth quarter and of course these macroeconomic bookings are available for the entire RBI Group. But yes, you're right, the overlays of the above 300 has been booked and created in Russia and therefore will be available for Russia in the case of need. Johann.

[Johann Strobl, CEO]

To your question of FTE increase, this is not an increase business growth, it's related to IT. So what you see is that in addition to the sanctions, there are many IT companies are finishing their services to Russian banks. And our bank has to redevelop or develop new systems quite quickly and so this is why we add the additional IT people to well to be fast enough and to be resilient and independent from Western suppliers.

[Alan Webborn, Societe Generale]

Superb. Thank you.

[Operator]

We'll take our next question from Juliana Golub [ph] with Goldman Sachs.

[Unidentified Analyst, Goldman Sachs]

Appreciate the comments. One question on the insurance please. Just regarding your plans for a benchmark Tier 2, is that purely based on the anticipated RWA inflation that you see in 2023, just given that you did a benchmark deal in the fourth quarter near Tier 2 curves, so I was just wondering? Thank you.

[Johann Strobl, CEO]

Yeah. So we had a pre funding for -- in October, which for one which is running out now. So, I think this should serve us well. I hope I got your question right. But this would answer to the question I understood. Thank you.

[Unidentified Analyst, Goldman Sachs]

The pre funding in the fourth quarter, so in October, but then you indicate another deal for this year if I understood correctly from the presentation?

[Johann Strobl, CEO]

So it might be that in the later of the year we will consider one, but not quickly.

[Unidentified Analyst, Goldman Sachs]

Understood. Thank you very much.

[Operator]

We'll take our next -- we'll go next to Andrea Vercellone with BNP Exane.

[Andrea Vercellone, BNP Exane]

Good afternoon. Two questions and two clarified -- one clarification. The first question is on the 7% return on tangible equity target for our guidance for 2023. I understood that that includes 200 million of extra provisions for Swiss farm mortgages in Poland. If it is or not, can you confirm? And also at the denominator…

[Johann Strobl, CEO]

Yes, Andrea, confirmed.

[Andrea Vercellone, BNP Exane]

Okay, at the denominator, what have you used in terms of equity, the current equity of the bank or you have taken out Russia and Belarus given the scenario is without Russia and Belarus? Then can you give us some color on volume growth, the 3% to 5% in 2023, which countries would do better or which geographies would do better? And the clarification is just on the Czech Republic NII, the 30 million, does that refer to the whole of 2022 or just the quarter, I shall -- is that the new base or the new base is higher because you have taken down 22 million which was for prior quarters? Thank you.

[Johann Strobl, CEO]

Yeah, sorry I interrupted you. The 7% ROE target, the 200 million as Hannes explained are included in that. So, the denominator is without Russia and Belarus, it's of course it's always the average of the capital what you have. And then the volume...

[Andrea Vercellone, BNP Exane]

Sorry, being the average, you have taken it out at both ends, right?

[Johann Strobl, CEO]

Yes, on both ends.

[Andrea Vercellone, BNP Exane]

Okay, at both ends. Okay.

[Johann Strobl, CEO]

Yes. Yeah, an in Czech I understand that this is a great confusion, this reallocation. So that's why we say our base assumption is we start from January with monthly NII in the Czech Republic by 50 million per month. So I hope this clarifies. And the loan development, probably some further shrinking in Eastern Europe. Of course not at the speed what we had so far because now we are coming more to the longer maturities and then we have in the bigger segment Central Europe, maybe 3% loan growth, something like this 3% to 4%. And in the Southeast Europe slightly more. So, higher single digit.

[Andrea Vercellone, BNP Exane]

Thank you.

[Operator]

Next question is by Riccardo Rovere with Mediobanca.

[Riccardo Rovere, Mediobanca]

Hi, good afternoon everybody. Couple of -- two to three questions if I may. The first one is on Slide 10 where you mentioned 80 basis points of regulatory and inorganic effect on capital. I suppose this is in 2023. Would you mind elaborating a little bit what this refers to? The other question I have is with regard to the overlays, your guidance is -- before the use of overlay in 2023 is there -- how should we think about the use of overlays, is it possible to use it in 2023 or is sometime given the outlook is something that is eventually postponed for sure to 2024, just to have an idea when you talk to your own -- with your own personnel what kind of discussions you have on this topic? The other question I have is on fee income, looking at what you have reported in Q4, it is a bit difficult to reconcile fee income at around 2.5 billion next year. Do you expect all the business related to FX to basically evaporate and if that is the case why should it be given that that stream of revenues has been there now for three quarters in a row kind of situation, not exactly changes unfortunately? And the other question I have is on the general on the leverage and the risk weighted assets reduction. Is that something that we can consider as somehow completed or how should we think about you -- you seem to be here and that especially Russia?

[Johann Strobl, CEO]

Yes, to your question with the to Slide number -- page number 10 with the other impacts. So, a couple of elements which we have to mention. So, one is an impact from the transitional benefits. Well, we had so far. So, this is phasing out. Others are that there is a phase out of the temporary positive treatment of sovereigns. So, they had a risk weight of zero, this has increased to 20%. So, this was public debt issues in currency of other member states and here we took out the maximum what one can assume. Then there is this EBA repair program where if you have more need for detail question which then has an impact on Romania and Slovakia. Hannes might have additional questions. And yes, some in the financial institutions rating model, there are also some adjustments. So, couple of topics which come from that.

[Hannes Mosenbacher, CRO]

Well, Ricardo talking about the overlays and the use of overlays, I know that you anywhere of how add ons can be released, but just for the big audience. On the one hand side, we could of course, immediately release them if the underlying risk which is currently not being captured in the different models would no longer exist and therefore, we anyway would be obliged to release. The other one is if the risk factor which we have flagged is being captured within the model and/or if the client has migrated into a Stage 3. Maybe one more thoughts to be added what we also tried to, the way how we have created some of the small adjustments and overlays that they are self-consuming. And I will give you an example, I was always talking about our cross border exposure. And in the due course, whenever we are able to further reduce we will also release a certain amount of cost model adjustment because we have allocated a certain by booking to this poster, to this cross border exposure. And whenever we are capable to reduce we are also able to reduce part of this post model adjustment. Ricardo, thanks for the question.

[Johann Strobl, CEO]

And to the fee income question Ricardo. I mean, if you look on total group level, we explained several times that this specific currency management by the Central Bank of course, will not repeat. So, this was a strong contributor to the FX income. But even if you take aside this component, then you do remember that there was also in the Western part of the world for a period of time substantial FX business related to Ruble. I think we also had a share in these activities and this will not come back again. And then the usual words I expect on total fee income, some assumptions like in the Eastern part, we will see further devaluation in the currency. And if you compare it to 2022, then this also has in Euro amounts a negative impact.

And, of course, what I should also not forget is that Croatia now is in the Euro area and of course, the FX business which is still needed for tourism and other activities is substantially smaller. So, this on its own might cost us 20 million or so. Thank you. And did I miss something Ricardo.

[Riccardo Rovere, Mediobanca]

Maybe on the -- under the leverage and how should we think about the balance, the size of the balance sheet especially in the Russian interactions?

[Johann Strobl, CEO]

I'm not sure if I got your question right. Do you see the balance sheet size in Russia, how this this might change? I mean, here this is mainly a question of the deposit inflow and the currency development, I would say. So here it's -- this is not driven by the loan book but it comes from these other elements and here it is difficult to say, some large corporates, they can place their deposits here and there. And then maybe also when it's about foreign currency deposits, then it's it might be also in pricing issue. So these are price sensitives deposits as well, which are the driver for the balance sheet. Thank you.

[Riccardo Rovere, Mediobanca]

Okay, thanks. Thank you.

[Operator]

Next question comes from Hugo Cruz with KBW.

[Hugo Cruz, KBW]

Hi, thank you for the time. Hugo Cruz from KBW here and I have a few questions. In no particular order. First of all, you're accruing dividends or you will accrue dividends for 2023. What will be the accrual mechanism that you're assuming their payout, is it just ex Russia and Belarus or the whole team? Second, a question on the Polish, I thought before these results, you didn't have to increase coverage anymore, because you had so much capital allocated against the Polish and Swiss Franc issue. So what made you change your mind about it to decide to increase provisions again and you gave the guidance of 200 million, does that mean -- that’s on the provisions but should we expect any change to the RWA's or allocated against Poland, will that change in 2023? And then final question. We have the EBA stress test coming up. I don't know if you have any comments about the assumptions that the EBA is using or what kind of impact you expect that for --? That’s it, thank you.

[Johann Strobl, CEO]

Yeah, indeed, there is also a dividend accrued for 2023 and it's around maybe a little bit more than what we what we have this year, for this year so for 2022 and yeah, that's the maximum I can say as of today. And I think from this figure it easily can be assumed that one does not expect an input, if I may say so, our contribution from Russia or Belarus at this point in time.

[Hannes Mosenbacher, CRO]

Well, thank you for your questions Hugo on the Polish slot. The minor change of the approach are from the armor to the standardized approach. I think this is pretty straightforward and we have shared with you how dynamic and how strong the dynamic of the op risk RWA has been, because of each and every league. In provisional bookings, we had to add more and more op risk related RWAs. And the armor was not capable to serve this and to cover this topic appropriately.

The second one the way I understood your question on their increase of provisions, but at the same time having a lower capital RWA coverage. Please bear in mind a couple of thoughts on this one, whenever we add more of the legal provisions, this of course, is also increasing our coverage when it comes to the deleted lane of our counterpart. And the locally deployed risk weight of this 150% when it comes to Swiss Franc financing, of course, keeps on existing. But the op risk RWAs what we have seen out of the armor have been many -- most of the time are mainly being motivated by this very, very strong dynamic we have seen out of these legal provisions. And because now we have moved back to the standardized approach, the allocation of op risk RWAs towards the specific segment goes across along the cross income allocation. So this is the main reason why you now would see a lower RWA coverage when talking about Poland.

The second or the third question, you raised is EBA stress test and our comments on the assumptions what we do have on this one? Yes, we had next to all the many discussions we had in the last couple of days. We deeply looked at the scenarios provided. Well, I think within our guidance and way of thinking and talking to you, an idea to claim that on the avec [ph] scenarios and on the energy prices, we would say that they are milder converted what we have considered when talking about our integrated stress test and when sharing our way of thinking with you. But at the same time when looking at the GDP unemployment rate this looks a little bit more pronounced than what we had in top of our mind. And as you're well aware that last time what is the motivation or the narrative has been argued is well, let's assume the virus would be back and then we would see two years of slump in GDP and only the third year would maybe then see a certain recovery. But having said this, this is important. Hugo, at the same time, we have the €729 million of risk overlays is interesting. And not yet having conducted yet the calculation, but I would at least assume that the impact is comparable or higher than with our last test with our last EBA stress test is exercised. This would be out of my first talk with my colleagues when looking at the macro economic assumptions. For me, it was interesting to see how certain countries have been considered when it comes to valuation drops in terms of real estate. So this is interesting how the country’s brief is looking like. So this would be my first assessment and not to spoil conference call, I would stop here. Thank you Hugo for your question.

[Operator]

We'll go next to Robert Xhosa [ph] with PKO BP Securities.

[Unidentified Analyst, Goldman Sachs]

Hello, can you hear me?

[Johann Strobl, CEO]

Yes.

[Unidentified Analyst, Goldman Sachs]

Good, great. Thank you for taking up my question. I know I mean, it's getting quite late. So quickly looking at the changes of the equity and regulatory capital quarter to quarter, has there been anything else except for the FX impact behind? And second, there has been already a couple of questions on the fee line development going forward, like lesser demand for hedging, etc. But looking at Russia, specifically, are you aware perhaps of any coming legislation that could affect profitability of the sector in general there, I'm referring here to the for example, budgetary situation, funding for war in Ukraine, which might require some spatial sort of war economy with negative impacts spilling over, for example, on to the banking sector to your knowledge, has any such potential plans or drafts been already taken or thought about on the ground there? Thank you.

[Johann Strobl, CEO]

Let's start with the second one, with a short answer, which is no, I'm not aware of any developments till now. I'm not the real insight in Russia. But given the history, what they have, I would not expect that they go for such things. And the first question was the FX impact on the -- in Q4 I think here we have -- I think the answer should be on Page 9, I guess it's 78 basis points, which was negative. So the last of these elements in the waterfall of Page 9, 78 basis points. Thank you.

[Unidentified Analyst, Goldman Sachs]

Thank you very much.

[Operator]

Next question is by Tobias Lukesch with Kepler Cheuvreux.

[Tobias Lukesch, Kepler Cheuvreux]

Yes, thanks for taking my questions as well. I would like to touch back on the NII. With regards to the deposit beta could you maybe share with us what you're currently seeing in the individual countries and also what your forecast is, your expectation for a deposit beta, we know, it's all often kind of 20% to 30%, with many European banks? And secondly, again, touching on the question and the first question actually from Gabor with regards to the 15% to 20% decline of NII if we kind of extrapolate the Q4 result. Could you maybe give an indication that makes you explain well with the Czech Republic and so on, but how much of that potential 600 million to 800 million decline could be transferred actually to the trading line, is it 100 million to 200 million you see basically on the other line? And I think that's it. Thank you.

[Hannes Mosenbacher, CRO]

Beta is a difficult one. I spent spend some time with my people and at the end of the day, they told me please tell me what is the beta and I was somehow struggling. So, we rather that the intention is to give you and we tried here and there to give you some sensitivity on the driven by the key rate developments. And yeah, as I said before, there may be Czech flats of -- flat development, maybe slightly negative with the minus 8 million. What you have seen in Q4 is some indicator of what might go on when you have the structural shift in the liabilities. In the NII, if the Czech is irritating you that's why we try to say simply take the 50 million as a starting point, the 38 million, this was only a Czech issue and the third million built up in the first three quarters. And we changed it in the fourth quarter. So it's not the quarterly jump or whatsoever. So it's reallocation of that. And I would need to figure out a little bit more on your annualized Q4 that there are some factors in so maybe the team could come back after the call and give you a break up on what we have. If this is okay for you Tobias.

[Tobias Lukesch, Kepler Cheuvreux]

It would be great. Thank you very much.

[Operator]

Next question is by Ellie Dann with Morgan Stanley.

[Ellie Dann, Morgan Stanley]

Hi, there. Thanks for taking my question. Sorry, if I've missed this already, but I haven't heard any plans for -- issuance [Question Inaudible]?

[Johann Strobl, CEO]

Yeah, indeed Ellie. We might come -- no, I'm sorry, I was still caught you. I was a little bit distracted by your question. If it wasn't already answered, the question before was the Tier 2 where I said we will come in later of the year. But you were talking about the 81. So sorry for creating this confusion. I think what you shall say here is you know that the rate has been adjusted in the -- the coupon has been adjusted. So, what we can say is, we cannot comment on upcoming COVID decisions at this point in time, but you should be aware that we are committed to replacing the non-COVID bond with a new bond subject to the economics and spreads of the refinancing and here, this was my reset. Yeah. We have seen some coupon adjustments which you only have here. Thank you for your question.

[Operator]

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

[Johann Strobl, CEO]

Thank you for participating. Wish you a good afternoon. Bye-bye.

[Hannes Mosenbacher, CRO]

Goodbye, colleagues. Bye.

[Operator]

You may now disconnect.