EBKOF - Erste Group Bank AG (EBKOF) Q4 2022 Earnings Call Transcript

Erste Group Bank AG (EBKOF)

Q4 2022 Earnings Conference Call

February 28, 2023 03:00 ET

Company Participants

Thomas Sommerauer - Investor Relations

Willi Cernko - Chief Executive Officer

Stefan Dörfler - Chief Financial Officer

Alexandra Habeler-Drabek - Chief Risk Officer

Conference Call Participants

Mehmet Sevim - JPMorgan

Gabor Kemeny - Autonomous Research

Mate Nemes - UBS

Johannes Thormann - HSBC

Riccardo Rovere - Mediobanca

Alan Webborn - Societe Generale

Tobias Lukesch - Kepler Cheuvreux

Jovan Sikimic - RBI

Robert Brzoza - PKO BP Securities

Simon Nellis - Citi

Andrea Vercellone - BNP Exane

Presentation

Operator

Hello and welcome to the Full Year Preliminary Results 2022 Conference Call for Erste Group. My name is Priscilla and I will be your coordinator for today’s event. Please note this call is being recorded. [Operator Instructions] I will now hand you over to your host, Mr. Thomas Sommerauer, to begin today’s conference. Please go ahead, sir.

Thomas Sommerauer

Thank you, Priscilla and good morning to everybody from sunny Vienna. Today’s conference call will be, as usual, hosted by Willi Cernko, Chief Executive Officer of Erste Group; Stefan Dörfler, CFO of Erste Group; and Alexandra Habeler-Drabek, Chief Risk Officer of Erste Group. They will lead you through a brief presentation highlighting the achievements of the past year and of the past quarter, in particular, after which they are ready to take your questions.

With this, I would like to highlight the disclaimer on Page 2, in relation forward-looking statements. And I hand over to Willi now.

Willi Cernko

Thank you, Thomas. Ladies and gentlemen, I also warmly welcome you to this conference call. In this call, I will present to you a set of financials that not many would have expected 1 year ago, including ourselves I have to admit. I’m also very pleased that we can fully confirm our robust financial outlook for ‘23 that we first published last November.

But before assessing the prospects for the ‘23 in more detail, let’s go to Slide 4 and have a quick the full year performance and Q4 in particular. ‘22 was all about revenue momentum, successful cost containment, operating jaws and low risk costs. And the good news is that Q4 was not different despite this quarter being affected as some significant negative onetime items. The key growth driver throughout the year was NII, rising almost 20% compared to ‘21, supported by rate normalization and higher-than-expected loan growth.

Despite the challenging environment, fees are also strong, growing more than 6%. One remark, 1 easily forgets this on top of the 17% fee growth that we achieved in ‘21, making the ‘22 performance even more impressive. All in all, a very favorable core revenue picture. Operating expenses were well under control and risk costs were primarily driven by portfolio provisions rather than actual defaults and hence remains well within our guidance. If you add all of this up, it makes for an excellent bottom line which exceeded €2 billion mark for the first time ever.

As a result of this strong performance, and I’ve already moved to Slide 5, we were able to deliver on all our promises we gave to you last quarter. Unsurprisingly, all financial indicators point in the right direction. Net interest margin is going on a rising trend, and we see no reason for this trend to change in 2023. At 53.4% for the full year, we have comfortably outperformed and upgraded ‘22 cost/income ratio target of 55%. And what’s more, we are confident that the trend of positive operating jaws will stay with us in the current year as well. The provisioning ratio of 15 basis points was stayed well within our guidance of 20 basis points and return on tangible equity of 13.8% for ‘22 was fully in line with our guidance despite a number of negative onetime items in Q4 as already mentioned.

The development of our balance sheet, as shown on Page 6, was equally impressive, impressive, because we enjoyed quality growth fundamentally driven by core customer business. On the asset side, we added almost €22 billion worth of customer loans. And while corporate volume growth was clearly in the lead for most of the year, the retail business exhibited even a steady growth throughout the year. The development on the liability side was pretty much mirroring the asset side. Customer deposits were the key growth driver and the fact that Q4 deposits dipped somewhat, that’s what worried me, had all for our core retail and SME deposits, which make up approximately 85% of our deposit base continued to show a market level of resilience and actually grew throughout the year.

Based on what I’ve just said about our balance sheet development, our strong balance sheet indicators as detailed on Slide 7, should come as no surprise. Our loan-to-deposit ratio was at a very healthy 90% at year-end. The increase of a couple of points in Q4 reflects some outflows in the volatile portion of our deposits. As already explained, and it takes nothing away from our superior deposit mix, that is a clear competitive advantage for us.

Loan growth comfortably beat our 10% target and as quarter remarkably strong. In fact, the NPL ratio again came in at 2%. This continues to be a post IPO best. Capital ratios were comfortably above our targets as were liquidity ratios and leverage ratio, the traditional strengths of our bank. I think is fair to say that the quality of our financials speak for itself. And this has led us to the conclusion that the quality upgrade is also due in respect of our capital return policy. For years, we have been a reliable dividend payer, and we will continue paying out 40% to 50% of net profit going forward. On top of that we now target buying back shares. The current plan is for an amount of up to €300 million in ‘23, subject to regulatory approval, of course. Stefan will give you more details like that in his presentation.

Let’s now move to my favorite part of the presentation, the business update, starting on Page 9. As you know, I am a longtime corporate banker and hence, I find it extremely valuable to both clients and observe retail customers. Before sharing some key micro insights with you, let’s have a look at what the economies tell us about the macro future. To cut the long story short, the predictions were fairly similar to when we reported the last time in November ‘22. That’s not bad news at all, because it means that our region is able to avoid recession. The expectation is for an economic slowdown, yes, but also for easing inflationary pressures and for very resilient labor markets. External balances are predicted to improve, primarily driven by lower energy prices and currency appreciation, while budget deficit should also shrink across the board. And last but not least, public debt is expected to remain at sustainable levels. You might remember that around I concluded by saying that we see the glass half full and half empty. And actually, this statement stands. If anything, the glass is maybe more than half full today, if you will.

With this, I move to Slide 10. If I had to summarize our retail performance, I’d say I’m pretty happy with it despite the many challenges that our customers are facing ranging from inflation to the economic slowdown, from rising interest rates to all of the stock markets. What makes the key difference here is that our customers all have jobs. And this explains why the consumer and housing loans have risen both year-on-year as well as quarter-on-quarter, even though new business volumes are unsurprisingly down.

Unsurprisingly because if we compare new business volumes with the second half of ‘21, we are talking about that still predates the euro rate, added to that, that it simply takes some time for customers to adjust to the new rates reality. And of course, the regulatory interventions should help either even though we see some relief coming through in Austria, as we speak. On the deposit side, we have started passing on higher rates to our retail customers by offering term and savings deposits. But customers are generally slow to shift their money around. And on the investment side, clients won’t again to opening new securities savings plan in Q4 after a couple of quarters of declining new sales. But here as well, we see a constant increase in the stock of savings brands.

Continuing with the retail spec on Slide 11, you can see that our digital platform, George, is also doing well. We added 300,000 new users to George over the past quarter, taking the total value of almost €9 million. And don’t forget, this is a uniform platform across 6 different markets, enabling us to scale easily. Another trend that is an ongoing one is that clients forge ahead with doing their banking digitally. This is evidenced by the share of digital sales as of total product sales, which now stands solidly above 30% and will only rise from here. Having said this, we continue to be fully committed to our hybrid banking model that aims to merge the best of both worlds, providing physical contact points for those clients who prefer or need this, but at the same time, make it easier for clients to do an increasing part of their daily banking digitally.

Moving to the corporate business on Page 12, it is evident from the numbers that this segment shows growing 18% year-over-year. It was definitely the key volume growth driver throughout ‘22. This development was primarily driven by working capital financings and while the large corporate business has taken a breather in Q4, all other segments such as SME and real estate continued to show a healthy demand. The strong corporate performance is very much reflected by the feedback we get from our customers. That is all about expanding their operations, finding new employees and successfully tackling the challenges posed by the evolving geopolitical situation.

Let me also spend a minute or two on our markets business. The colleagues were very successful in helping clients raise necessary funds in a volatile market environment. In total, we talk about 191 transactions that were executed, including green owned issuances by our CEE subsidiaries, over the asset management business, assets under management that also recovered somewhat towards the end of the year, while green assets amounted to almost of a quarter of total assets under management by the end of ‘22. Overall, we’ll continue to view asset management as the key structural growth opportunity going forward across all our markets.

And with this, I hand over to Stefan for the operating trends. Stefan, please?

Stefan Dörfler

Thank you very much, Willi. Good morning everybody. As Willi already talked about loan growth patterns of our main business lines, retail and corporate, I will approach the topic of volume growth from a geographic angle and with that, we are on Page 14. Two statements this time from my end on loan growth. First of all, there was not a single country that has not enjoyed solid loan growth throughout the year. So growth was really well diversified and broad-based. And secondly, a consolidated growth rate north of 12% is truly exceptional and frankly, 1 has to go very far back in history to find anything comparable. Now taking into account the somewhat bright economic outlook, we are confident to deliver on our loan growth guidance of 5% also in the year 2023.

Let’s turn to Page 15 and deposit volumes. When we look at retail and SME deposits the impact of inflation as well as the fallout, the fade-out, I would say, of the pandemic are becoming more visible. In other words, while core deposits were still slightly up year-on-year, quarter-on-quarter, we actually saw a sideways movement, so core deposit inflows are definitely slowing. Total deposits being down a bit in Q4 ‘22, and Willi already mentioned. That is, however, entirely due to the usual volatility of public sector and financial institutions deposits towards year-end. When taking a step back and looking at our overall deposit mix, I think there are not many banks that are better positioned in the current rate cycle. Roughly 70% of our deposits are retail deposits. And of those, approximately 60% are side deposits. Just to put the last figure in context and to understand the speed of dynamics, 1 year ago, this figure stood at 62%.

And I’ll talk about deposit in the context of the big picture on NII and please follow me to Slide 16. Combined with the strong volume movement, the vigorous start to the Eurozone rate cycle last July as well as rate hikes in CEE and significantly higher sovereign yields drove the NII development of almost up 20% year-on-year. The growth rate in the final quarter of the year would have been even more significant, had the ECB not changed the terms and conditions of the TLTRO program, which led to a negative onetime effect of more than €120 million. This has primarily affected Austrian, Slovak and the other segments. And that explains the somewhat unusual looking moves in these segments on a quarter-to-quarter comparison. We are taking these hits immediately. We are now able to book all further TLTRO income for the remaining tranches until maturity at the effective interest rate of 67 basis points. And just to manage expectations here, almost €9 billion of our remaining position of €15 billion or so, €15.5 billion I think is exactly, will mature in Q2 and Q3 2023.

Returning to the topic of deposit bettors, it clearly makes little sense to talk about 1 number or just 1 trend here. Differences between retail and corporate, countries and currencies, interest rate levels and in particular, also curve shapes are very significant, especially at the moment. However, it’s fair to say that we are in a very comfortable position of assessing a superior deposit mix that is heavy on euro-based mean current accounting process. And here, you will see deposit betas, but low ones, simply because the float on the current accounts is almost a given. It does not mean that customers do not switch excess liquidity from current accounts to savings or term deposits. As we have just seen last year and continuing 2023 happening in the Czech Republic, but it’s slow process and there is limits to this. So whether eventual retail deposit betas will be 20%, 30%, 40%. And we are, to be fair here, nowhere close to these levels yet. I really can’t tell you right now. But that’s the ballpark that seems realistic. So if putting the full picture together, I can say that we are positive, very positive on NII for 2023 and hence, confident about our guidance of about 10% NII growth. However, 2023 NII growth will not be about Czech NII, but euro area driven as 60% of our NII is tied directly to euro rates.

Let’s move on to Page 17. And we have decided, as you can see from the slide, to show fee income in more detail, given it’s important – given its enormous strategic importance. Fees made a strong contribution to revenue growth in 2022, growing by 6.5%. This is all the more remarkable as it follows the strong performance of 2021 when fees grew by 17%. To talk about a couple of details, Payment Services and Lending business were the key growth drivers, supported by the better-than-expected economic performance and very strong loan growth. It is not really surprising that asset management and securities, the drivers in 2020 and 2021 were lagging in 2022 due to volatile and mostly bearish financial markets. Despite this, we managed to post a new quarterly fee record in Q4 of approximately €622 million, supported by the strong lending and insurance brokerage fees. One thing is for sure. We delivered our fee target of €2.4 billion originally set for 2024 two years early and we continue to see significant growth opportunities across the fee spectrum, primarily in asset management, given the significant wealth catch up across our region, combined with still low penetration rates in this business, plus insurance brokers building our exclusive partnership with Vienna Insurance Group is another such opportunity.

Having talked about our core revenue streams, let’s have a look at costs on Page 18. I think we did reasonably well here with costs growing 6.2% for the full year. Bearing in mind, we are operating in countries with tight labor markets and quite elevated inflation rates. Clearly, we could not escape the general inflationary trends, leading primarily to cost uplifts across the entire range of other administrative expenditures like IT office expenses in the broader sense, but also marketing and deposit insurance contribution have been remarkably rising.

In the final quarter of the year, we saw the usual quarter-on-quarter seasonality with other admin expenses, especially in the form of higher marketing spend, once again, being in the driving seat plus bonus accruals for our – on our personnel cost line. On a year-on-year basis, Q4 2022 looks pretty good, being up only 2.4%, but a kind of warning here, this was somewhat helped by a partial refund of deposit insurance contribution Hungary. So certainly, the inflationary trends are still very strong. And moving on through 2023, it remains to be seen when and how significant inflation will ultimately drop.

Delivering on operating jaws is our main goal, which brings me to Page 19, discussing cost/income ratios and operating jaws. If we put all operating items together, we get to a quarterly operating result of more than €1.1 billion. And that’s a new quarterly record. Quarter-on-quarter, this was primarily driven by a return of our trading and fair value result. You remember they were quite weak in the quarters before and we expect this run rate to be around the average again in 2023.

Interest rates started to stabilize in some key markets, and that should help on that income line. The full year performance was equally strong. We posted an operating result of almost €4 billion for all the reasons we have already talked about. And with this, we significantly outperformed even our upgraded cost income ratio. Willi mentioned that in his introductory remarks. And I want to indicate strongly that we are expecting and targeting operating jaws again in 2023, plus we are confirming our cost/income ratio target of 52% for 2024.

And with this, I hand over to Alexandra to update you on the excellent risk results.

Alexandra Habeler-Drabek

Thank you, Stefan and a very good morning, ladies and gentlemen. I can continue on Page 20. As has already been highlighted by Willi Cernko, the risk trends were also quite similar in Q4 compared to the earlier quarters of 2022. So what exactly did we do in terms of risk cost in Q4? Firstly, we ran another update of our forward-looking indicators, which led to additional allocation of about €100 million. Secondly, we also created some additional portfolio overlays, but this was partly offset by releasing our last remaining COVID provision.

Finally, we booked provisions for some minor default cases, especially in Austria, which explains the somewhat higher than usual charges in the other Bank, Austria and other Austria segments. But we don’t see any negative trend here, so no cause for concern. All in all, for the full year, we came in 15 basis points and 28 basis points for the quarter. And with this, with the 15 basis points for the full year, we remain comfortable with our guidance of maximum 20 basis points, which we consider now the better performance bearing in mind the challenging environment that we had to cope with also through 2022.

We are also looking ahead with confidence because the credit risk performance of our portfolio remains strong across the board, so no changes from what we are seeing on the ground. There is a high level of resilience, not just on the part of corporate but also in the retail business. And this is true for all geographies. Add to this, our continuous buildup of portfolio provisions, portfolio overlays and FLI provisions, they now account for more than €900 million. So you will not be surprised that we can fully confirm our risk cost guidance of maximum 35 basis points for 2023.

Let me guide you to Page 21, asset quality. As far as asset quality is concerned, it’s pretty much a mirror image for already said on risk costs. As a result, the NPL ratio was unchanged quarter-on-quarter at 2%. Year-on-year, we actually saw quite a healthy improvement of 40 basis points. Coverage levels remained more than adequate across segments. When you analyze IF9-stage migration trends, it is to bear in mind that the elevated Stage 2 level is a direct result of portfolio overlays in the FLI update and not connected to actual portfolio deterioration. So all in all, the credit risk situation is promising and we feel very well prepared for the challenges that 2023 has in store for us.

With this, I hand back to Stefan.

Stefan Dörfler

Thanks, Alexandra. A few words only from my end on the development of other results, and we are moving on to Page 22. It becomes pretty much evident from the left-hand chart that the main drivers in Q4 2022 were one-off items related to Romania. On 1 hand, we provided for an asset held for sale and on the other hand, we booked some additional provisions for legal risks related to the Romanian Building Society, in total, approximately €70 million. However, if you look at the – the full year, we also benefited from some legal provision releases of about €55 million in Romania in Q2 2022. So from this perspective, it’s almost a wash.

As this is all there is to say about the other results, we move on to Page 23 for a snapshot of bottom line performance. The story of our Q4 net profit is quickly told. Despite the one-offs just mentioned, we produced a respectable profit and digit return on tangible equity. The key drivers here were operating results on the positive and other results on the negative side. For the full year of 2022 net profit amounted to almost €2.2 billion. That’s a return on tangible equity of 13.8%. This excellent performance is direct results from our strong revenue tailwinds that brushed away cost inflation, slightly increased risk costs and the weaker other results.

With this, I move over to the funding and capital section starting on Page 25. The year-on-year balance sheet growth of €16.5 billion is mainly composed of the rise in customer deposits of €13.5 billion accompanied by the steady buildup of equity. Outstanding debt securities grew on the back of good market activities in CDs, while interbank deposits decreased year-on-year basis.

When turning to our wholesale funding activities on Page 26, it’s worth mentioning that with the higher rates, the end investor market demand for fixed rate instruments has picked up strongly. We have already placed two benchmark transactions in the year 2023, €1 billion mortgage covered bond and – €1 billion mortgage covered bond and €750 million green senior preferred bond. The year end 2022 TLTRO III volume, I mentioned it already, was at €15.5 billion and a significant share of approximately 60% of that volume will mature by mid-2023, i.e., in the quarters two and three.

Let me remind you that the 2027 maturity peak refers to MREL funding activities, which I explain in detail on Page 27, where I for today will be quite short, since everything is on track for the years 2022 execution and 2023 start. However, it’s worth mentioning that the next couple of months and quarters, we will see quite some MREL issuance on our strong balance sheet – on the back of our strong balance sheet growth. And to be fair, this is also connected to quite some costs.

The growth in risk-weighted assets of more than €14 billion on a year-on-year basis, now we are on Page 28 already, of course, mainly comes from the strong business growth. But please let me once more and finally and last time remind you of the Q1 2020 one-off step-up due to structural effects reflected in our market risk, RWAs.

Now, coming to a very important page to our year-on-year CET1 waterfall on Page 29, those effects of course perfectly visible and you are also aware all the other key drivers that we are displaying here. Therefore, let’s talk about our capital return policy. Ever since the COVID pressure started to subside and interest rates moved north, the topic of capital return was center stage in every investor meeting. And we always said that in addition to paying a regular dividend, returning additional capital by means of share buybacks is certainly something that is an option. In the meantime, many of you have even already incorporated various assumptions on share buybacks volumes into your financial models.

In our Q3 analyst call, we additionally told you that we will give further details on our plans either with the Q4 2022 or the Q1 2023 results in reality the timing only depending on the macro situation and the business outlook. Since the financial outlook is robust, Willi will summarize this in a minute, and the macro situation has certainly deteriorated since Q3 2022. We have sharpened our thinking on this topic towards targeting a share buyback in 2023 in the amount of up to €300 million. That’s an equivalent of approximately 2% of shares outstanding at the current market prices. The formal decision is still outstanding, and we need to apply to regulators for their okay, which we plan to do sometime in March. That’s where we stand at the moment.

Let me also be very clear once more about our unchanged capital allocation priorities. Funding the growth of the business will always be the first order of the day. And as a leading bank in the region, we will take part in market consolidation, as we have done in the Czech Republic and Hungary over the past 1 to 2 years, if the price is right and the deal makes sense. A regular dividend in the payout range of 40% to 50% is also something you can count on from us. In case everything runs smoothly, and our capital ratios are strong enough, share buybacks can be considered in addition.

And with this, I turn it over to Willi again for conclusions and outlook.

Willi Cernko

Thanks, Stefan. I’m concluding this presentation with our financial outlook for 2023 on Page 31. I think we have highlighted a lot of positives in our presentation, not just about the past year, but more importantly, also about ‘23, so I don’t want to be repetitive here. It’s enough to say that our ‘23 outlook ticks all the boxes, in my view, a strong revenue momentum will enable us to deliver positive operating jaws, risk costs are projected to be manageable, and we are set to earn a solid premium on our cost of capital.

Add to this a solid dividend yield complemented by a share buyback, I think we have a pretty compelling package from the. With all these positives, you may rightfully ask, what’s the risk, what’s the downside? An answer will be equally clear the risk, there is in the fields of politics and geopolitics, effectively risk, we can hardly influence. And hence, we will focus energy on those things we can influence in which we are good at, capturing the growth opportunities in the fastest-growing countries in Europe, in a sustainable and responsible way and offering our shareholders an attractive capital return.

Ladies and gentlemen, thank you for your attention. Now we are ready to take your questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] We will take our first question from Mehmet Sevim from JPMorgan. Please go ahead. Your line is open.

Mehmet Sevim

Good morning. Thank you very much for taking my questions. Could you please talk in more detail about the NII and margin trends in the Eurozone in particular? It seems the underlying momentum is stronger in the quarter than what would have the one initially thought, I assume. Could you explain why the margin expansion was so strong, particularly at Asset Bank, Austria and the savings banks and while it was more subdued at the other Euro segments? And given the effective interest rate in these numbers, I assume reflects the very early part of the cycle. How should we think about the quarterly developments in the Eurozone segments from here?

Stefan Dörfler

Good morning, Mehmet. Let me try to structure the answer on NII along your question. First of all, savings banks picking that up or Austria in general, I mentioned in my presentation already that we are leaning very much towards site deposits in certain areas. And what has to be added here that the asset side, especially on the savings banks is very much still a floating rate loan book compared to other fields where – compared to other countries, but also in, it’s more fixed rate. So that’s one thing why the savings banks are moving quicker in this upward trend, number one. Number two, you are right when you describe the Q4 in the light of TLTRO and other strong trends. So I would say, taking all, let’s say, quarterly specials out, it’s fair to say that you can add around about €100 million plus, a little bit above €100 million to the quarter, Q4. I mentioned the €120 million stemming from the TLTRO. There were a couple of other items which would take too much time to explain in detail now. So I think it’s fair to say €100 million higher would have been run rate in Q4.

Now the question, of course, is how will this develop further throughout the year 2023? We have, I would say, a couple of contradicting trends here, very positive still and with the, I would say, upgraded expectations on the terminal rate of the ECB key rate on euro we have stronger dynamics. This is absolutely clear. Therefore, on that probably our guidance is still a little bit on the conservative side. However, please don’t forget that in other parts of our region, and other currencies, the cycle has been moving on significantly further. And if you look at what Czech banks have been reporting on NII, we see a completely different development. So I think all in all, we feel confident with the 10% guidance on the back of our strong 2022 NII results. And we certainly will monitor very closely the situation when and if and how we need to upgrade or update this guidance.

Mehmet Sevim

Great. That’s very helpful. Thanks very much, Stefan. If I may ask on the Czech Republic also, I mean, if we take out the quarterly one-off that you mentioned, there seems to be quite a visible decline. And also, the deposit trends look quite challenged there. So is this – again, is this something that we should expect will continue for a while? And from a Group perspective, were it not for the ECB and Eurozone support, how concerned would you be about the Czech NII in 2023?

Stefan Dörfler

I’m not too concerned, to be honest, I think that we have – we have seen most of the adjustments, maybe not everything, but most of the adjustments in the market we have seen. Why? Let’s not forget that the rate hike cycle in Czech Republic started already in June 2021. And it’s actually finalized at least for time being, and listening to the Czech National Bank, it’s already finished in the summer 2022. So there was a lot of time already and for the adjustments in the Czech market and what I know from my colleagues is that most of the repricing that we expected has happened. Of course, we cannot firmly predict the future, but I personally think that the current levels of overall NII run rate are a good assumption to start with. What is, of course, a question mark, not only for NII, but general development in Czech Republic is how will the inflation development with that, the need of the Czech National Bank to do something on the rate side. I mean they committed to remain at the 7% level and then go down when the inflation drops. But so far, if you look at the reported numbers, inflation has not been dropping. So that’s a little bit of an uncertainty there. But overall, I’m, I would say, neutral to the Czech NII development for the rest of the year.

Mehmet Sevim

Great. That’s all very helpful. Thanks very much.

Operator

Thank you, Mehmet. We will now move on to our next participant Gabor Kemeny from Autonomous Research. Please go ahead. Your line is open.

Gabor Kemeny

Hi, thank you. My first question is on the buybacks. Can you just walk us through how you determine the size of the proposed up to €300 million of share buyback for this year in light of your capital distribution priorities? And then just a follow-up on NII, actually, this – the underlying very impressive and you mentioned that €100 million, €120 million of one-off if I just exclude those, I would get to, I think, on an annualized basis of 13%, 14% growth from the reported ‘22 level. So can you just elaborate a bit on the 10% growth guidance in light of that? And specifically, I think you mentioned, Stefan that you can’t really expect to think about the deposit betas, but some kind of indication would be useful on what is embedded in your NII growth guidance? Thank you.

Stefan Dörfler

Okay. I will try to answer your questions in the order – in the order of the way you brought it. So I think the first one is relatively easy, because we have always been saying that on top of our 13.5% target CET1 management, we regard any level sustainably above 14%, as how do we always say, Thomas, as excess capital. And that’s exactly how we got to the €300 million. Don’t forget that we have also to take into account additional cyclical buffers, which are kicking in by the end of 2022 and then by the end of 2023, again. All those things have not led to a change in our management target. Others changed it, because we feel very comfortable with our ADI and MDA levels. So I think nothing has changed on that back. And if you do your math, you will end up somewhere around a similar number as we did. On NII, on top of what I already said, in replying Mehmet’s question. Please, let’s maybe follow a little bit our thinking here for a minute.

First, we are really very early in the year, and we have given a very robust and as Willi explained it, I think, quite optimistic guidance at the beginning of November. And since then, we have seen a little bit of a change in expectation on euro rates, but things can change in either direction quite quickly. That’s my second argument. There are many, many moving parts on the NII that you are very much aware of product spreads, asset deposit pricing, as we just discussed, yields, volume development and so on and so forth. So I think it’s fair to say that there is room, and that’s my third point. There is room around the 10%, plus/minus 1 to 2 percentage points in terms of what the guidance means because we are guiding for approximately 10%. If you ask me today, would it be rather or less, I would say, yes, most likely, it’s going to be rather more. But if you remember our discussions in the – after the November presentation on the roadshow, I had, I think, 2/3 of my counterparts in the meetings were rather skeptical about it. So things are moving quickly. And I think it’s a fair and balanced guidance that we give today and as I replied already in the question of – to the question of Mehmet, should we see further evidence that we need to move and the debt higher, we will do so.

Gabor Kemeny

Thank you, Stefan. Can you just clarify what ECB rates are you hearing in your ‘23 NII guidance?

Stefan Dörfler

Yes, we are currently expecting 3.75%, maybe 4% terminal rate in the rate hike cycle. That’s our expectation. If you remember, when we talked last time on the call, it was rather in the 3%, 3.25% area. So this is the current expectation. But as you will agree upon, this is also a little bit of a moving target.

Gabor Kemeny

Indeed. That’s great. Thank you.

Operator

Thank you. We will move on to our next participant, Mate Nemes from UBS. Please go ahead. Your line is open.

Mate Nemes

Yes, good morning and thanks for taking my questions. I have a couple of them. Firstly, I wanted to still talk a little bit about NII, specifically in Romania. It seems like in Q4, you had another big step up in the margin and the loan growth was also quite solid in the fourth quarter. I am just wondering if you could walk us through what is your expectation, specifically for Romanian margins in Romanian NII in 2023? Should we expect a continued strong growth in the country or you would assume some tailing off in the margin in the second the year? The second question is on risk costs, you reiterated the up to 35 basis point guidance. You have a very substantial stack of overlays. Perhaps for Alexandra, could you remind us what exactly is your assumption regarding the release or addition to overlays in 2023? And the final question is related to George, George Business that you started rolling out. Could you give us a sense of the cost implications of such a rollout? And to what extent does this play into the 7% to 8% OpEx growth in 2023? Thank you.

Stefan Dörfler

Okay. On Romanian NII, nothing really specific, I think what you have been spotting and I just discussed it with my colleague, I think what you have been spotting was in Q4, and we saw quite momentum on rate tax by Romanian National Bank, which played out short term there. Overall, I would see it stable. 2022 was, of course, additionally fueled by sharp loan growth. So I would say nothing really in particular on Romania on that end, stable, strong, but not skyrocketing. That would be my answer on that. And Alexandra takes the risk.

Alexandra Habeler-Drabek

On your question regarding risk costs, what amount of relief overlays or FLI included in the maximum 35 bps. It’s roughly 20% of our existing overlays and FLIs.

Willi Cernko

May I come back to your third question that is related to George Business. So as you have already said, we kicked off the process of rollout of George Business with Austria, other countries may follow in the upcoming years. So the initial investment is around about €30 million. This within our, let’s say, ordinary budget under rollout takes on an annual basis then €10 million to €15 million. So this is the investment that is related to George Business.

Mate Nemes

Thank you very much.

Operator

Thank you. We will move on to our next participant, Johannes Thormann from HSBC. Please go ahead. Your line is open.

Johannes Thormann

Good morning, everybody. Three questions from my side. First of all on the accelerated number of savings plans over the last quarters, is there any special sales campaign or what would you attribute this because in other regions, we see a lesser client interest? And secondly, again, more on the DACH region, also on your Austrian business, we saw weaker loan growth in other Austria, but still strong loan growth in Austrian savings banks. What would you attribute this to? And do you expect this to continue? And the last thing is where do you see the biggest upside risk to which line of your guidance, be it NII, fee income, cost or whatever or risk cost? Thank you.

Stefan Dörfler

Willi, do you want to start or should I? As you like.

Willi Cernko

You would.

Stefan Dörfler

Okay. I take first the last question if you allow, Johannes and I can be short here. Operating jaws, that’s what we and region by region, segment by segment. So I think it’s really not the time to say here, I see a percentage point higher, percentage point lower. I think it becomes obvious from the discussion that we had already today that on NII, should the trends, so to say, maintained throughout the year, there is some upside possibly. The same, however, it applies for other lines, like, for example, on the cost side, we expect the inflation to drop through over the year, like pretty much all economists expect. Should that for whatever reason not happen, then of course, our cost ambitions are quite tough, yes. So I think that’s the situation, but operating jaws, the cost-to-income ratio to improve further. I think that’s an overall target, which in any situation, at least in any, let’s say, acceptable situation, we are confident to deliver. On loan growth Austria, I can be very, very clear here. Other Austria segment, mainly dominated by large corporate, had an enormous boost throughout the year, however, in the fourth quarter, down a little bit by also the end of year balance sheet management by our clients there. That’s the one argument. The other one is a very important one, and that’s the perfect handover also to be Willi. Mortgage lending business has been slowing down, in particular, also in Austria in Q3, Q4 on the back of higher rates and a very – as we varied from our side, critically seen regulation. And we definitely saw a drop there. The difference between savings banks and other parts of Austria, I think it’s just due to a little bit different business mix, nothing specific there. With that, I hand over to Willi.

Willi Cernko

Yes, coming back to your question with regards to the savings investment plans. So we are currently talking about around about 900,000 plans. These are growing numbers. Yes, you are right this comes, first of all, from Austria. In Austria, we talk about on average on a monthly payment, around about €200 a month in CEE we talk about close to €100. So this is a growing business where we are benefiting over the years.

Johannes Thormann

Thank you.

Operator

Thank you, Johannes. We will move on to our next participant Riccardo Rovere from Mediobanca. Please go ahead. Your line is open.

Riccardo Rovere

Thanks a lot for taking my questions. Three, if I may. One, I think, is for Stefan. You mentioned before that one of the areas, the gray areas with regards to your NII guidance exclude the deposit retail. Now the rates have started going up quite a long time ago in Czech Republic, in Hungary. So what we see today in terms of passing higher rates to deposit costs? Can we assume this as the status quo given that rates have started going up. And more or less on the same tone, how long do you think if it takes to see the status quo in the euro area, Slovakia and Austria? Meaning if the current situation remains as it is still, I don’t know, just to put a date June 2023, do you think that at that point, we could assume nothing is going to change after that?

The second question I have is on the NPL ratio, this is, I think, for Alexandra. In the previous guidance you mentioned the kind of 3% NPL ratio. And I was looking at the presentation in Q3, I might be wrong, but I can’t see that anymore in the new forward-looking guidance. So I was wondering whether that still stands one way or the other? And if I remember correctly, that 3%, kind of 3% is undertaking couple of billions of additional NPLs, what happened to that? And the third question I have is on capital return. It seems to me that you consider excess capital anything that is above 14%. And excess capital is then devoted to the M&A bolt-on acquisitions or eventually share buybacks. And I was wondering in your thinking, is this – which of the two comes to us? Did you think, okay, we are at €100 million above 14%, so we can do a buyback, but we need to leave something for M&A or okay, there is any M&A opportunity, but first, we have to take care of the buyback or not buyback, just the way you are thinking? Thanks.

Alexandra Habeler-Drabek

I will start with your question on the NPL ratio. Yes, you recall correctly in the previous quarterly announcement, I indicated for ‘23 an increase in the NPL ratio, but for sure, not higher that 3%. So 3% was the absolute maximum. As we came in ‘22 with a very, very comfortable 2%, we still expect ‘23 an increase, but let’s say, rather around 2.5% than 2.3%, so still right, for sure, not higher than 3% from the tendency a little bit lower, around 2.5%.

Stefan Dörfler

Ricardo, on deposit status, to say the topic of today very unsurprisingly, I will give you two, which I found quite interesting info here. The one from Czech Republic, there, as we all know, the rate tax cycle happens between June ‘21 and June ‘22. And my info base tells me that by September ‘22, the current level of our most popular depositing and savings products. And I think this compares very well also to our friendly competitors there has been reached. We are talking about a 5-ish area. Yes. So it took about 2 to 3 months after the last rate hike until the market has been stabilizing at a certain level of deposit. Is this an indication for other countries? I would say partially. Why partially? On the one hand, I think we would all agree the expectation that we go that high in euro land is not there, so that the levels are different and definitely also the behavior and the competitive sets – competitor situation is different. So the second answer, I can give you that in Slovakia and Austria, we clearly still have quite some buffer. We expect higher migrations on term deposits to the current status quo, especially when the next two maybe three rate hikes in Euro land happen. In terms of timeframe, I’d expect in a market like Austria, but also Germany, do the adaption to happen a little bit quicker, yes. So I would say what it takes maybe 3, 4 months in Czech Republic, would happen within 1 or 2 months in those quite competitive and developed markets. That’s our current expectation, and that we are building our NII calculations on. Willi?

Willi Cernko

Yes, I want to come back to your question the way we look at excess capital, there are three options, more or less to give it back to the shareholders. When it comes to bolt-on acquisitions and looking back last 2 years, I tend to say this is close to the ordinary business. When it comes to the transaction of relevant size, we would expect that at least mid-term, we will see further consolidation in the region as we are a strategic investor, relevant in all those countries. I would not exclude let’s say, to take an active role in that. Currently there is nothing on the table, but if this would happen, for sure, for such an operation, excess capital would be allocated.

Riccardo Rovere

Okay. Just to better understand from your wording, really, I understand the DNA of the bank is gross buybacks. Second, but I’m not sure I got it.

Willi Cernko

To give you the priorities as already Stefan seen outlined, the first is always – our top priority always gets your organic growth, we were able to outperform the market. Secondly, it’s about bolt-on acquisitions and also, let’s say, providing to our shareholders, let’s say, an attractive dividend. And for sure, we cannot and won’t exclude inorganic growth opportunities in region, if there are any.

Riccardo Rovere

Great. Thanks.

Operator

Thank you. We will move onto our next participant, Alan Webborn from Societe Generale. Please go ahead. Your line is open.

Alan Webborn

Hi, thanks the call today. Now you’ve reached a level of sort of 35% of digital sales. I mean, is that sort of a point where the end-to-end processing means that you’re gaining in terms of efficiency in the way that you’re selling, I guess, particularly the more simple retail products? Or is there still more room to and need to invest further in the sort of office to achieve that? Because I just wondered whether you are now seeing the benefits of the investment in digital selling and whether that is within the sort of cost growth guidance or is something that you think will be more benefit later on? So I’d just like to see where you are in terms of that. I mean, I appreciate the hybrid model. But clearly, it’s the processing that’s important in the processing that cost. That was the first question.

Secondly, in your overall loan growth guidance, I think before the call today, you’ve talked sort of mortgage growth sort of settling down at a lower level. Presumably, it’s going to be more difficult in the non-euro countries where rates are a lot higher. And I wondered within that sort of 5% loan growth there is, do you think the sort of mortgage lending is going to rise? Or is it going to sort of stabilize? And clearly, where do you think the real – the strongest driver of that 5% loan growth is and I wonder what the assumptions are there? Are you assuming that there is going to be more investment growth from corporates or just a continuation of working capital growth? Just to give us an idea of the trends within there would be useful.

And the last question was, I see that you’ve talked some quite interesting looking ESG targets for the loan portfolio decarbonization at the end of your presentation. And I wondered in the sort of four categories that you mentioned with some quite interesting interim targets for 2030. How much of the loan book does that actually include? And when do you think more of the loan book can be included? And will you be giving us annual updates in terms of your progress in those interims towards those interim targets? Thank you.

Willi Cernko

I want to start with your first question, digital sales. Last time, we were talking about every fourth product was sold digitally. Today, we are talking about every third product. So we show an increasing rate of products sold digitally and this is main digitally and not, let’s say, in any kind of hybrid sales process. Secondly, it’s all about efficiency, yes, but it’s also about improving our cross-selling activities because we are pretty sure that the more we are able to read our data, the more we have to be prepared to offer digital solutions for our customers. This is not in a contradiction to our hybrid business model. But when I try to sum it up, I would tend to say thinking of the future is digital within retail. So we see huge growth opportunities, especially when we are able to get access to the opportunities in a digital manner. So it’s on both ends. It’s about efficiency, yes. But it’s also about cross-selling. And I think with the ratio we are able to show right now, every third product is sold digitally, we are on the right track, and we are able to gain additional 300,000 George customers over the last quarter, meaning the fourth quarter ‘22. I would say we are right on track.

Coming back to your question related to the mortgage business, you’re right, based on many aspects. It starts from interest rates. It starts from EU regulation coming in as of first of August ‘22. This had significant impact on the new businesses, on the new flows. But looking at the stock, stock is still growing. Why stock is still growing? Because we don’t see any early repayments as we have seen in the past. So stock is further growing. New flows, let’s say, coming down. But let’s see, it is further developing. I would note we are stabilizing and I’m pretty sure will see further growth rates, positive growth rates, not to the extent we have seen in the last 2 years for sure. Yes.

Stefan Dörfler

I can fully confirm Willi’s explanation. And just adding to the other part of your question, which was about how do we put together in general, the 5% growth? Obviously, as you well know, making a forecast for a full year year-on-year volume loan growth is always a tricky challenge. But just what I heard already for the beginning of the year, we have quite some good dynamics in many fields. I know from the corporate business that the business has been picking up well at the beginning of the year again. So, certainly, a good confidence that we will see positive net loan development throughout the year, will it be around this mid-single-digit area? Finally, it’s our current best possible assumption. The arrows are pointing in that direction. But to be very honest, now at the end of February, making a real big guess on whether it will be rather four or six is hard to do. I think the growth will be coming throughout the cross over the business is a little bit more on the consumer lending side, maybe then on the mortgage lending side, for the start of the year. That’s what we see. The rest remains to be seen, and I hand over to Alexandra for the ESG question.

Alexandra Habeler-Drabek

Thank you. On your question regarding the industries displayed on Page 48 of the presentation, it represents roughly 50% of our loan book. For this year, so the year 2023, we plan to add four more industries, but which is smaller and which account for roughly 10% additional volume of the loan book and the rest will follow in the subsequent years.

Alan Webborn

And just you hope to update us annually in terms of the progress that you’re making towards 2030.

Alexandra Habeler-Drabek

Yes.

Alan Webborn

Thank you.

Operator

Thank you, Mr. Alan. We will move on to our next participant Tobias Lukesch from Kepler Cheuvreux. Please go ahead. Your line is open.

Tobias Lukesch

Yes. Good morning. Two questions from my side as well, please. First, I would like to touch on a potential M&A and share buyback again. If I understand you correctly, and you mentioned the increase in capital requirements, I think you’re moving towards the 12.5% rather coming from 11.5%, including P2G. And above 13.5% buffer, you say excess capital is above 14%. So that would give you only 150 basis points. And I was just wondering, given your vital – that you’re vital basically for the Austrian economy and definitely on the most important banking situation there, if this is really enough in your planning? And secondly, if I understand you correctly with the potential share buyback, to me, it doesn’t look like you’re really going for a bigger M&A opportunity in your planning and that you might be pushed a little bit by investors into this share buyback, but correct me if I’m wrong there. Secondly, on the cost bridge from ‘22 to ‘23, would be very helpful if you could maybe give a bit of a more detailed approach to the cost. And I’m very sorry I didn’t catch the kind of costs attached to the George rollout earlier. Thank you.

Stefan Dörfler

Yes, looking at Tobias, at the mix of your questions, we can do that together, Willi. And I take the first part on the technical side on capital. So are almost right with your assumption regarding our expected requirements. They are moving up by total of 60, give me a second 63, 64 basis points from year-end 2022 to January 2024. So from the low to mid 11%, 11.4% to something like 12.28% by beginning of 2024. So a little bit lower than you assumed, but yes, you’re right. They are increasing. However, the management buffer of without is always to be looked at this without Pillar two guidance. We’re still at 150 basis points, and we feel very comfortable with this. And this is on the management target, not on the definition of excess liquidity or sorry, excess capital. So I think it’s smaller since the cycle buffers have been increasing. But overall, we are feeling comfortable with that and also feel ready for driving the business forward and having a proper capital distribution. And for the M&A question, I hand over to Willi, please.

Willi Cernko

Yes. I can just repeat what I already said. Because you said it seems there is in corporate a significant M&A transaction. There is nothing on the table right now as already said. We cannot exclude, in other words, we would expect at least midterm, further consolidation in the region for sure. In that case, we couldn’t be seen as potentially as an interested party, coming back to George Business.

Tobias Lukesch

Sorry, Willi, please, if I may. And I was just thinking the other way around, I mean, to me, it seemed like you were not creating a capital buffer to really go for a midsized or large size M&A transaction there. So for me, it looks like you’re more incorporating kind of bolt-on acquisitions, but nothing more basically on your current capital plan.

Willi Cernko

You are right. You’re right. You’re right.

Tobias Lukesch

Okay.

Willi Cernko

When it comes to George Business, as I said, there was an initial investment of around about €30 million. And the rollout takes €10 million to €15 million annual. This is the investment incorporated in the ordinary budget.

Stefan Dörfler

Thanks, Willi. That’s perfectly bridging to your question about the cost bridge. And so first of all, I want to point out that when we look at our cost base, not only that it’s always in the context of operating jaws, it’s also very much in the light of the investments that Willi has already been talking about and the investments into our digital and overall business future are very, very important to us. Now how do we get to the numbers? It’s basically a mix of expectations around overall inflation and the results of collective bargaining in Austria and the Paris and with that, the salary increases in the countries we operate. In that sense, in terms of our costs related to that, there is good and bad news. Let’s start with the bad news. Inflation has not been coming down yet. I think it’s fair to say that we are operating in countries, which among the ones with the highest inflation in Europe. And also, Austria has been showing compared to, I would say, peers an elevated level of inflation, which of course, makes negotiations with the unions a little bit harder. That’s one – that’s the one part. The other part is and you probably well know that, that a lot of those increases are only kicking in, in the course of the year. So typically, the current collective bargaining that is currently running is only valid and materializing with April 1 in the respective costs. So it’s actually 75% to be allocated. That’s just as a technical explanation. How do we get to our numbers? It’s pretty much around what we have also shown our outlook. We want to and we do mitigate the significant inflationary pressure by efficiency measures. So if you look at the second of the last 2, 3 years, it’s always about one-third that we can, so to say, to deduct from the run rate of inflation. That’s definitely at least the ambition as we are going forward. However, the absolute numbers are not in our hand, as you will certainly understand.

Tobias Lukesch

Thank you very much.

Operator

Thank you. We will move onto our next participant, Jovan Sikimic from RBI. Please go ahead. Your line is open.

Jovan Sikimic

Yes. Good morning. Thanks a lot for the call. I have one question on Czech windfall tax, because in the last presentation, I think you gave a guidance of around €100 million per year. Can you maybe give us an update on that? And on Croatia also, I mean, they should have a windfall tax. Maybe you also have some assumptions how it should look like 2023. And also in the respect of Croatian business, you still stick to this around €20 million negative effect from euro entry on FX, right? Thank you.

Willi Cernko

Okay. To answer the two questions related to windfall tax. I will to start with the Czech Republic. There is nothing new. So to stick to the formula and mentioned last time, we talked about – around about €100 million. When it comes to Croatia, there is an extra for the ‘22 and nothing for ‘23. They have increased the income tax to 25% across all industry up a certain threshold. So we are affected by around about €50 million for ‘22.

Jovan Sikimic

And that’s why you booked is already in the other half results, right, explains this maybe?

Stefan Dörfler

Absolutely. The Croatian Corporate tax will be very precise, this is not a windfall or even banking tax, this is – was explicitly also by the government named increased corporate tax one-off too, so to say, a little bit to reduce the impact of the 2022 inflation in the country. That was a one-off booked in the year 2022, like also all the other banks we presented it as far as I understand.

Jovan Sikimic

Okay. Okay, thank you very much. This impact from Euro on fixed fees, €20 million, right?

Stefan Dörfler

Croatia, you mean? Yes, yes. I think – thanks for the question on Croatia. Let me spend one or two sentences on it. First, I think it’s – we can really be proud how our colleagues have been executing the euro introduction very successfully, very smooth with very good customer feedback. I think it’s worth mentioning that. So thanks – a big thank you to the Croatian colleagues for executing this project very successfully. That’s number one. On the business side, I think, to be very honest, I believe it might be even a little bit less in the course of the year, let’s see. That’s our best estimate. But we see already for the start of the year that actually colleagues are able to make up for it a little bit better. So I would say maximum of a drop there on revenues from that area is €20 million, maybe a little bit less.

Jovan Sikimic

Okay, thank you very much.

Operator

Thank you. We will now move on to our next participant, Robert Brzoza from PKO BP Securities. Please go ahead. Your line is open.

Robert Brzoza

Good morning, everyone. I have a few quick questions. The first one on Hungary. There was about €20 million in provisioning the one of the highest over the recent quarter. My question is, was it related to overlays or does it represent some worsening of the underlying portfolio with some implications for ‘23? Second, also on Hungary, in the quarterly terms, the NII went down a bit from a high level. How does the competition from deposits is shaping up in Hungary? And what’s the outlook for the NII given the very high interbank rate in Hungary? Personally, I would be expecting customers increasingly moving savings products to higher-yielding offerings. And lastly, on Czech Republic, there was indeed a very low tax rate of 7.5%, only, which I believe contributed to the 15% tax rate on the consolidated level. My question is, what was – I mean, is it sustainable going forward? Or should we expect the tax rate across the group to normalize to the statutory level for ‘23? Thank you.

Alexandra Habeler-Drabek

Let me start with your question on Hungarian risk costs. So, the charges that you see very mixture mainly of three topics: the one that you mentioned overlays. The second, there is also a part – a risk cost-related part given – due to the moratorium, which is – has been introduced and the interest rate cap. And the third topic is the integration of Commerzbank, which also resulted in some provisioning that we did. So, all in all, no deterioration of the underlying portfolio quality in Hungary.

Stefan Dörfler

And Robert, Alexandra already answered half of your question on Hungarian NII because this was the reallocation of moratorium related positions. More importantly, looking forward into 2023. So first, the most important thing for you, we expect around about a stable NII from Hungary in the year 2023. In terms of deposit behavior, let me say, Hungary is very special. I think no one would disagree on this one. And you have not only have a situation where by all the measures of the local government with regard to prices and also in the financial market, there is such a very special behavior in the market that there is no move by any of the banks also not by the leading one, and you know who it is, on the deposit front. However, of course, the customer requests on, so to say, turning some yields to the deposit holders, so to say, satisfied by other products. And those are the government bonds, which are offered to the retail. So you don’t – you cannot look at deposits in Hungary, the way you look at deposits in all the other markets because it’s such a especially, let me say, driven market by the respective players on the National Bank and government bonds. So if there are moves from the deposits to other products, it is going into those very special government bonds, but most importantly for you and us, NII 2023 in Hungary, we currently expect it to be quite stable year-on-year. And I think you had a question on the Czech tax rate. To be very honest, I don’t have any detailed info on that for you. I can look into then we can get back to you later on. Nothing specific that has been catching my eyes there.

Robert Brzoza

Sure. Thank you very much.

Operator

Thank you. We will move on to our next participant Riccardo Rovere from Mediobanca again. Please go ahead your line is open.

Riccardo Rovere

Thanks for taking my follow-up questions. So two, if I may. The first one is RWA. Now given the outlook of the peak for GDP and unemployment and you mentioned to the NPL ratio made by Alexandra earlier. Is it fair to say that RWA growth should never or less credit volumes growth in ‘23 or should we expect anything on top of that models over [indiscernible] the SSM and stuff like that? And the other question I have, on the FLI in ‘23. Alexandra before mentioned around we expect to around 20% of the €900 million you have. I was wondering why 20%, why not all of those or 50% of that is just because some sectors are particularly – doing particularly well relative things and those will not be just why 20%? Thanks.

Alexandra Habeler-Drabek

Good. Let me start with RWA development, what we expect for ‘23. So the total full year loaded RWA is expected to increase in ‘23 by low single digits, so roughly 3%, mainly, growth of credit risk-weighted assets and mutually offsetting expectations on op risk. There, we expect a very, very small increase in market risk where we expect a small decrease. So already rightly mentioned, in line with our loan growth, no specific OpEx from the modeling area. Also for the years to come for the later years, we expect for credit risk RWA that they grow around 4% to 5%, mainly reflecting portfolio growth expectations. On the FLI, why 20% release? These are the assumptions that we based on our forecast and our guidance. And of course, the macro is decisive on the ‘23 risk cost development. I don’t want to be – I mean, it’s very, very early in the year and too early to review the risk cost guidance, which we will do together with Q1. But what I can say is this 20% release assumption depending on the macro environment, could give some room for higher releases, but it’s really much too early to say.

Riccardo Rovere

Very clear, thanks.

Operator

Thank you. We will move on to our next participant, Simon Nellis from Citi. Please go ahead. Your line is open.

Simon Nellis

Hi, thanks very much for the opportunity. Just two quick ones from me. Firstly, on your capital requirements, do you have line of sight beyond ‘23, where do you think they peak? And another one and I might have missed this because I joined the call a bit late. You had a big increase in the levies in Austria in the fourth quarter. Could you explain what’s behind that? Thank you.

Stefan Dörfler

Sure. First of all, for more color on the details of our capital requirements, I kindly refer you to Page 39, where we are lining up all the details and if there are further questions, please turn to our IR any time, and we can go into those details. So we don’t expect just to say that explicitly and also the regulator has been indicating that we don’t expect any further significant adjustments there for the foreseeable future. So I think the levels are set up until ‘24, ‘25. But of course, no one knows exactly what will happen on the regulatory front in the longer run. That’s on the one. And the other one, thanks very much for that question because that gives me the opportunity to say that this was actually not a booking related to any 2022 initiate takes or whatsoever. It simply is an old case based on our so-called [indiscernible] Agaba in Austria, where we had a long-lasting tax discussion with Austrian tax authority and where we just ended up for this additional payment mostly just as important for you also, mostly in the savings bank sector. So it’s half of that roundabout is going out again on minorities, but that was booking on the first quarter. I also may say that we are still in the case in sales, so it might be that years, but it can really take years. Some parts of that might come back. We are not accepting their interpretation, but it’s nothing in the new sense of any kind of new taxation or related to current business. It’s a case from the mid-2010s.

Simon Nellis

A clear one-off?

Stefan Dörfler

Absolutely. Absolutely.

Simon Nellis

Yes. Okay, thanks so much.

Stefan Dörfler

You too, thanks Simon.

Operator

Thank you. We will move on to our next participant, Andrea Vercellone from BNP Exane. Please go ahead. Your line is open.

Andrea Vercellone

Good morning. Two left. The first one is on Czech Republic. The other one is on personnel costs. On Czech Republic, can you give us some indication of the capital impact, positive or negative, I think it’s positive, but you may tell us something related to the acquisition of the Sberbank portfolio? And also, if you can give us a guidance on the NII contribution related to this. Also, I struggle to reconcile the guidance of €100 million of levy, special levy in Czech Republic. I get a lot less than that. So I was wondering whether this guidance includes anything related to this portfolio or not. In personnel costs, it’s a qualitative question, specifically on all of the CEE countries. When you agree the new salary levels bank by bank, do you backdate it to first of January or it starts when it starts and then it continues for 12 months? Thank you.

Stefan Dörfler

I can take – Hi, Andrea, I can take the second question right away. Since there are no structural rules we have it in Austria, Germany, anywhere existing. You see it exactly as you assume, it’s negotiated, it’s implemented, it becomes, so to say, live, it goes live. And we have had significant salary increases, as you will understand, especially in those countries with very elevated inflation, namely Hungary, Romania, Czech Republic. In the course of the year 2022, you see most of that numbers. And as long as the inflation and the cost of living of our employees is that much elevated, we will also certainly readjust according to the market that’s the situation is it is completely different situation in Austria, where all of that is very much regulated and I’ve been pointing to the currently performed collective bargaining already. And Willi, do you take the Czech Republic? Okay, so on the first capital, Czech Republic, very simple, no whatsoever effect of those two transactions that we see. So the Hungarian one and the Czech one on any capital levels in the group. That’s number one. And on the NII, I’m just looking around, there will be, of course, a positive effect from the portfolio. Can we get back to you with a specification because I don’t have it at hand now?

Andrea Vercellone

Yes. And on the – is there any implication of the acquisition on the tax, on the bank levy?

Stefan Dörfler

That’s a good – thanks for that. Thanks for specifying this one. No, because this was part of the negotiations in the first place that don’t ask me exactly how it technically is represented. But my understanding is that there was a prerequisite in the course of the acquisition was that at least for the year 2023, it’s not going to be considered. And by the way, you asked about whether it could be turning out much lower. Willi already the clear information that we have not changed our assumptions so far since the political decision process is, let me say, choppy. And we don’t know what the final outcome is. You’re right. According to the formula, as you and some of your colleagues have been calculating according to the pure formula, given the numbers, it even could be significantly lower, but we are rather on the cautious side, and I’m sure you understand that.

Andrea Vercellone

Thank you.

Operator

Thank you. It appears, there are no further questions at this time. I’d like to turn the conference back to Mr. Willi Cernko for any additional or closing remarks. Thank you.

Willi Cernko

Yes. Thank you very much. Thank you to all of you for your participation, your questions. And I should not forget to invite you to our next presentation on the 28th of April, we are going to present our results for the first quarter ‘23. Happy to see you again, all the best and have a nice day. Bye. See you next time.

Operator

Thank you for joining today’s call. You may now disconnect.

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Erste Group Bank AG (EBKOF) Q4 2022 Earnings Call Transcript