Addiko Bank AG (ADKO) Earnings Call Transcript & Summary

Dear ladies and gentlemen, welcome to the earnings call with the management of Addiko Bank AG. At our customer's request, this conference will be recorded. [Operator Instructions] May I now hand you over to the Addiko team, who will lead you through this conference. Please go ahead.

Good afternoon, and welcome, everyone, to Addiko's First Half 2020 Earnings Call. I'm Csongor Nemeth, I'm the CEO of the group. I'm joined here by Markus Krause, our CRO and CFO; as well as Edgar Flagg, who is our Head of Investor Relations. The aim of the presentation today is to provide as much transparency as possible with regards to the data set that we have for the first half of 2020. We also aim to give reassurance to all of you on the solid financial and operational standing of Addiko Bank. Thirdly, we also intend to provide guidance with regards to our current expectation to the full year 2020 results. And lastly, we also indicate priorities in our presentation of the activities that we intend to conduct in the next few months. At the end of the presentation, we will be, as always, ready to answer any of your questions you might have. With that, I would like to ask everyone to jump to Slide 3. Firstly, allow me to welcome Monika Wildner and Kurt Pribil to our Supervisory Board. At the extraordinary AGM that was held on the 10th of July, they were elected. So now the Supervisory Board of Addiko has 8 members, 2 of which are delegated by our Works Council. We also have a completed board setup. Markus Krause, who is with me on the call, he has assumed the role of CRO, CFO. I have taken over from the 1st of July, the role of the CEO and the team has been completed by Ganesh Krishnamoorthi joining us and who is being responsible for retail, IT and digital. I'm sure, and this is only a few weeks' experience, but I'm sure Ganesh with his energy and new ideas will -- and expertise in the field of retail and digital energy will help us move Addiko in terms of our core focus areas to a new level. Finally, I ask to turn to Slide 4. The new setup of the old members and the new member of the group management board is fully committed to accelerated execution of our established strategy. This is also in terms of being loyal to our geography and to our coverage of the focus segments, consumer finance and SME as well as to the continuous stringent cost management initiatives and introducing digital value-adding propositions to our customer base. We are doing this while we are also keeping a full commitment to prudency in risk management, sustainable business model, solid capitalization, maintaining strong funding and liquidity are core to our strategic proposition. In terms of the key topics that I would like to focus on, this is on Slide 5, that we have as the group management board on top of our agenda, this can be classified into 3 main areas. First and foremost, growth. We are doing and launching a numerous activities across our countries and our subsidiaries to accelerate the execution of our established focus strategy and introduce value-generating digital capabilities to our customers. We have managed to uphold our very robust asset quality with very tight management of risk and risk containment activities. We have also continued to run down our nonfocus book, and the disposal, we have considered disposal opportunities, but we decided to actually stop that project simply because we did not see an economically sound business case for that at the current market conditions. That was with regards to growth. The second one is with regards to cost. We have reduced and will continue to reduce our fixed and variable cost components in a sustainable manner, and we have to do this in order to compensate for some of the revenue gaps that we see as a consequence of the COVID-19 pandemic-related social and economic inactivity. We are committed to continue scaling up our migration to digital by harmonizing and automating our internal as well as customer-facing processes. And we are conducting a review of the rightsizing of the organization and our processes, and this will become more material in the fourth quarter as the initiatives have been set in place over the last few weeks. The third big bucket is capital. You will see later on in the slide, and Markus will shed also some details later on, that we have managed to maintain a very strong capital position. We have very stable and diversified funding and liquidity, and we are committing to keep these principles at the highest priority. We are ready and we are committing to the communicated dividend policy pending, of course, the recently introduced Europe-wide ban on paying out of dividends. And we continue proactive -- our proactive dialogue with the regulators on capital requirements Pillar 2 requirements and Pillar 2 guidance namely as well as MREL. Now to provide you the key highlights of the first half 2020 in terms of earnings, asset quality containment and funding and liquidity and capital. This is actually on Slide 7. Taking it step-by-step, earnings. The result after tax is EUR 12.2 million net loss for the first half of 2020. The second quarter 2020 result of EUR 3.8 million is actually an improvement compared to the EUR 8.4 million loss we have seen in the first quarter 2020. Our provisioning at 0.8% or 80 basis points cost of risk is actually EUR 9.2 million. This is predominantly reflecting quarterly IFRS 9 model adjustments, and this is EUR 23 million and stage 2 developments. Our operating result, and I think this is a very important and key indicator of the actual performance of the banking group, is up by 14.5% year-on-year and is EUR 27.6 million. This is supported by lower OpEx, operational expenses, despite the business impact, the full business impact from the COVID-19 in the second quarter this year. Our return on tangible equity calculated a 14.1% CET ratio is of minus 1%. In terms of the second bucket, asset quality containment on the same page. NPE volumes and ratio remained stable at 3.6% compared to the 3.9% at year-end 2019. This is clearly also affected by the moratoria that is preventing defaults for potentially affected exposures. But I have to highlight that in terms of the total exposure under moratoria in the whole of Addiko Group, only 15% of our portfolio is impacted. And over 90%, and Markus also will have a slide on this with regards to the focus and nonfocus segments and the breakdown later on in the presentation, over 90% of our loan portfolio has 0 overdues and are being current. Our NPE provision coverage is stable at 73.2%, and has remained stable since the beginning of the year. We are confident that we have all the risk mitigation at containment measures in place to assure that the quality of the portfolio will remain as it is currently. Funding situation is the fourth funding liquidity or the third bucket on this slide, our funding situation has remained solid at EUR 4.7 billion customer deposits, and our LCR is slightly below 200%. Our capital ratio has strengthened further to a transitional CET1 ratio of 19%. This is IFRS fully-loaded CET1 ratio of 18.2%. Please turn to Slide 8. I would like to give an updated flow that we are in the process of reviewing our midterm target, and this is an activity that we expect to be completed by the fourth quarter this year. Second bucket on this slide is the outlook for 2020, where we would like as the group management board and the group to provide you 5 key figures where we expect the group to end up in terms of the year-end financial figures. Firstly, gross performing loans. We are expecting to be at around EUR 3.5 billion. Secondly, our net banking income, we expect between 7% and 10% to be below the level of 2019, which was EUR 250 million. Thirdly, operating expenses, we are committed to deliver results in the OpEx category that is below EUR 175 million, and that is compared to the year-end 2019 figure of EUR 189.2 million. In terms of the fourth point, our credit loss expenses on financial assets. And you have to understand and appreciate that this is -- from all of the categories, this is the most difficult one to actually put a finger on simply because of the moratoria and the impact, the potential impact such cancellation of moratoria, as expected, could have on the portfolio, but we are committing to a range between 1.1% and 2.2% on average net loans and advances to customers. In terms of our CET1 ratio, we will maintain a position above 19% on a transitional basis, with the previously proposed 2019 performance-related and profit-related dividend already being fully deducted. The year-end 2019, just for the sake of reminder for everyone, was 17.7%. Lastly, on this slide, the AGM and the dividend guidance. We will hold whether it will be virtual or in person that is still to be seen, but we will hold our AGM for the business year 2019 in the fourth quarter 2020, most likely second half of November. With regards to the dividend guidance, the management is fully committed to the communicated dividend proposal, and the timing is dependent on the lifting of the recently introduced regulatory measures that applies to all banks across Europe. On Slide 9. We continue to rely and use the forecast from the Vienna Institute for International and Economic Studies that we have used over the last 18 months to ensure consistency. We have included both base and pessimistic scenarios that we have received from their side even through the presentation today. So you can also see, which are the numbers and the ranges that we are working with. Only time will tell, of course, which one of these ranges will materialize. But indifferently to the outcome, we are committed to focus on the 3 main boxes that are highlighted at the bottom of the page. Number one, with regards to customer business. Simply put, we'll continue to accelerate and we will continue to accelerate our digital value proposition. Number two, with regards to the operating platform, we will continue to stream line our costs. And number three, with regards to risk management, the main message is we will always remain prudent and show to through our principal of prudent risk management. On the next slide, I would like to share some details with regards to the continued repositioning of our focus areas, SME and consumer finance. On the left-hand side of the chart you see that we continue the increase of our -- the share of our focus segment. From the 40% that we had when we set out the strategy in 2016 to actually 63.4%, if I want to include the commas, the 63% that we have achieved in the first half of 2020. The second important matric on this slide, that the growth here pee segment have remained stable despite the very challenging macroeconomic environment. On the next slide, I would like to provide you a breakdown with regards to the focus and the nonfocus book development. On the top left-hand side of the chart, we have broken the consumer and SME segment down. And you see that if I would have to describe it in one word in terms of the development since the end of 2019 on sales, end of first half 2020, the focus segment have remained stable. On the bottom of the chart, you see that the nonfocus part of our portfolio, mortgages with the lighter gray and large for corporate and public with the darker gray color indicated, have continued the detraction -- the decrease of the portfolio according to the expected and planned contractual repayment schedules. Between 2018 and '19, the portfolio decreased by 11% in the first half of this year, we see a decrease of roughly 5% to 7% depending on the subsegment. One very, very important element that I would like to highlight on this -- still on this slide is the bubbles between the 2 charts. Here, we have indicated to you the year-to-date new business or new disbursements in our focus segments. In order to follow, I'll just read out the numbers. In 2018, we had a new disbursement of EUR 1.137 billion. In 2019, EUR 1.263 billion. In the first quarter of 2020, it was $238 million, and that has only increased to $373 million by the end of the first half. We have also included, and this is not a forward-looking statement, more of a calculation on an annualized basis, that we simply -- if we would have taken our assumptions where we would end up at year-end with new disbursements, we see that it was slightly below EUR 1 billion in the first quarter, while that assumption would need to decrease -- be decreased to EUR 750 million already on the performance in the second quarter that we have realized. Again, high level of uncertainty with regards to the COVID-19 social and financial impact is there to be considered. On the next slide, I would like to provide some key messages with regards to our continued digital transformation potential. This is on Slide 12. First main message is that since the beginning of the year, we have improved and increased by 13%, the number of mobile-banking users across Addiko. We have also improved by 8% the number of digital users that we have. In the bullet points you see that our Bank@Work initiative as well as our digital SME loans and the digital consumer loans have continued the trend of improving since 2019. I have to also highlight and with Ganesh being on board that we are constantly working, and we have initiated the work on the fine-tuning and the measurement and the reporting on some of our digital KPIs in order in the future to become more true to our value proposition of being a digital specialist player. We will, of course, keep you up-to-date in the subsequent earnings calls on some of the new KPIs that will be applied across the organization, including the group management board. On the next slide, I would like to provide you with some clarity with regards to our operating expenses and some of the next steps that we have ahead of us. Many times I heard, OpEx is the only part and the only KPI of the bank that is only and truly in our own making. Hence, I'm incredibly pleased to report to you that we have managed to decrease our OpEx to below EUR 40 million, EUR 39.8 million for the second quarter 2020. And in the bar chart, you see that, that decrease was actually true in all subcategories. Staff, administrative as well as depreciation and amortization. On the right-hand side of the chart, I would like to highlight a few key information for you. In the first quarter earnings call, we have reported that we have spent at Addiko, EUR 1.6 million on advertising. And as you can see in the first half that number, only increased by EUR 600,000 to EUR 2.2 million. This is also part of our very stringent cost management, not to spend money where we see it does not deliver immediate or short-term returns. Our HR costs have decreased, and I'm discussing -- go back to the bottom of the chart on the left-hand side, the red bit, that has decreased by EUR 0.5 million quarter-on-quarter. But what is more important to note is when we compare the staff cost from the second quarter 2019 of close to EUR 25 million, to the current EUR 20.7 million, that's actually a decrease of EUR 4.2 million. I also have to highlight that for the first half of 2020, the group management board has decided not to accrue any bonuses -- for any bonuses for this year. On the bottom right-hand side of the chart, with regards to the further cost reduction measures that are in the pipeline and in the making, I would like to and commit to that the group management board continues with the activities to launch further cost optimization measures. Number one is with regards to the review of our org structure, and the rightsizing of it. Number 2 is to review the distribution channels that we use. Number 3 is to descale and rationalize IT costs and expenditures. And last but not least, 4, is to accelerate the decrease of nonfocus-related costs. Hopefully, these 13 slides have been useful to you and have given you an overview. And with regards to now more details and deep dives, I would like to hand over to Markus, who will give an update on financials and risk parameters.

Thank you, Csongor. Please follow me on Slide 15, where I will start with the financial performance first half 2020. You see that in the first box, where the P&L is shown, we ended the first half 2020 with a loss of EUR 12.2 million, which is mainly impacted by 2 items. ETAs have been written off of EUR 8.7 million due to the COVID situation. And secondly, we were building losses based on IFRS 9 for the performing loan portfolio to reflect the macro changes with an impact of EUR 23 million, which is included in the book, EUR 29.2 million. If you will deduct these both items -- these 2 items from the EUR 12.2 million losses, you would come very close to the result of the first half 2019, which we finished with EUR 20.2 million profit. The operating result, as Csongor already mentioned, has been improved by roughly 15% compared to the first half 2019. Major driver of this were the operating expenses where we improved by 13% and brought it significantly down. I will go into the details on the next slide. This was used to overcompensate the reduction in the net banking income, which was mainly impacted by the COVID situation in the second quarter, but also in the first quarter partly. This leads me to the comparison in the second quarter, there you see that we actually improved by EUR 4.6 million compared to the first quarter, which is mainly caused by the DTA, which was mainly booked in the first quarter, and operating expenses were compensating for reduction in net banking income. The net banking income reduction compared to the first half 2019 is mainly caused by the loan book development, as you see it in the balance sheet. The performing loans have been reduced by roughly EUR 100 million, which is coming exclusively out of the nonfocus segment, which is according to plan. While on the focus segments, we managed to keep it stable in this difficult COVID situation. When you compare the deposits, we have with EUR 4.7 billion maintained it on a very good level, which gives you a funding surplus of EUR 1 billion, looking at the loans and receivables to customers of EUR 3.7 billion. The shareholder equity is reduced by EUR 20 million compared to the first half of 2019, which is caused by the EUR 12 million losses from the first half and some impacts coming out of fair value through other comprehensive income impact for debt and equity instruments. Going to the key ratios, you see that the NIM has been kept stable, same like loan-to-deposit ratio. On the risk side, you see that the nonperforming exposure ratio compared to the first half 2019 was improved by 100 basis points, slight increase in the second quarter compared to the first quarter by 20 basis points, which is in line with plan or even better than planned. The cost of risk are the 80 basis points, which Csongor mentioned already and where I would like to give you later on much more details on. The cost income ratio improved significantly due to these measures we have taken to 71%, down from 78%. The reduction in the loan book on the one hand side, has a negative impact on the net banking income, but it has a very significant positive impact on the capital ratio. You see that the CET1 ratio and also the total capital ratio on a transitional basis increased by 1.4%, up to 19% and on a fully loaded IFRS 9 basis from 17% to 18.2%. Also here, I will shed a bit more light in one of the following slides. If you turn to the next page on Slide 16, you see the main key performance indicators of the P&L. And I would like to give a bit of more background. The net interest income was reduced by roughly EUR 2.4 million, down to EUR 88.6 million in the first half of '20, which has several details. In the focus segment, we improved the interest income by 5.9% on a year-on-year basis, while on a quarter-on-quarter basis, in the second quarter, we unfortunately lost 1.3% due to the lockdown situation. We had some impacts in the bond portfolio due to interest rate changes and also the market situation we are currently having. In the nonfocus segment, we were exactly in line with plan. And in the interest expenses, we improved compared to the first half of 2019 by EUR 2.8 million, which was compensating the impact -- the negative impact of the interest income, which was EUR 5.2 million. Net fee and commission income was mainly impacted by the COVID situation and especially in the second quarter. Since loans, as Csongor mentioned already, were dispersed on a relatively low level and bancassurance as net fee and commission income component is closely linked to it. And on the credit cards, we also had less than we were originally planning. On the other hand, for account packages, we improved by 11% on a year-on-year basis. Overall, the focus segment is making 90% of the overall net commission income. Going on the left-hand bottom side to the operating expenses. This is the compensation of the net banking income reduction where we overcompensated it, and where our 2 components are the main drivers. Personnel expenses on the one hand side, which improved by 16%. We came down from EUR 50 million by EUR 8 million to EUR 42 million roughly. Main contributors were the restructuring measures taken in the second half of 2019, where we were closing also branches and reduced our stock of FTEs by -- to at roughly 250 and no bonus accruals have been built for 2020. The administrative expenses also went down significantly by 14%. This is a reduction from EUR 36.5 million, down by EUR 5 million, where there is the main contributors are marketing costs due to the situation of the COVID, we used significantly less than planned and advisory and legal costs, where we also didn't spend that much during these months and the branch costs have been reduced because we were closing last year, 17 branches. On the right-hand side, on the bottom, you see the credit loss expenses, which I will report on more in detail in some of the following slides. If you turn to Slide 17, I start with the risk management part and the asset quality, which is still very robust. You see the loan book development in the different segments. In the focus segment, the consumer stayed mainly stable with EUR 1.5 billion; the SME, stable with EUR 1.7 billion; and the focus -- nonfocus segment, as I mentioned already, was reduced by roughly EUR 100 million. The asset quality can be indicated very well in looking into the days past due counters, which we provided here in these different bar charts. You see that days past due more than 90 days, which is part of the nonperforming exposures has been maintained, mainly stable. In some segments, it's slightly lower even. And in one segment, the SME is slightly increased, while overall, it remained relatively stable. In the segment non overdues, we remained on a ratio basis, this portfolio very stable. In the segment from 1 to 90 days, you see a slight increase in the consumer segment, and in the nonfocus, while the SME went down by 20 basis points. All in all, this shows a very stable asset quality and confirms the sustainable approach we are applying here for the last years. Of course, also the moratoria have their implications that they are known -- not that many migrations into nonperforming. But since this is only 15% of the portfolio, the remaining 85% shows a very stable and solid asset quality. Our main task for the following weeks and months will be start balancing the lending policies, where we were very cautious during these last months to avoid a negative selection that we are also looking into getting the application potential properly migrated into approval rates, which are on the targeted level, which are currently significantly lower than we are originally planning. On the following Slide 18, I'll start with an update on the moratoria. The regulation has not really changed over the last couple of months. I just would like to point your attention on the right column, which is providing the changes and there is Serbia, the only country county where the moratoria have been extended by another 3 months based on the same rule that only clients voluntarily have to step back, otherwise, our clients get moratoria in Serbia. That's why the shares, they are very high, and I will come to that on one of the following slides. You see certain indications that in certain segments, in Montenegro and Bosnia, discussions have been started also to apply additional moratoria. As more moratoria will be introduced on top to what has been done in the second quarter 2020. This will mean that the NPE migrations will be rather coming in the years 2021. And I will give you later on also the potential implications on the cost of risk. If you turn to the next Slide 19, you see the moratoria portfolio, how it looks like in detail. Of our total EUR 6.9 billion portfolio, what you see in the circle on the left-hand side, in the earnings call in May for the first quarter, we reported in the retail segment, 14% of the portfolio impacted by moratoria and 16% of the non-retail portfolio. Now by the end of the second quarter, the moratoria, in that sense, are clearly defined, and we see a slight increase in the retail portfolio up to 17% and in non-retail with 23%, which is actually lower than we were expecting during the first quarter. This portfolio of moratoria is in total EUR 1 billion. And the EUR 1 billion is distributed over the different segments. What you see on the right-hand side on the upper chart, and the main impacted portfolio on a relative basis is the SME segment with 26%. We talk here about 52,000 clients impacted. And of course, the major part of that one is coming from the retail segment, consumer and mortgages, while on a country level due to the definition we opt out in Serbia. Serbia is the main impacted country with 55% on a relative exposure basis and 11% from the total stock. On the following slide, you -- I would like to go a bit deeper how we try to manage this moratoria portfolio. You see the EUR 1 billion on the left-hand side on Slide 20, which is split into EUR 600 million in the non-retail segment and EUR 400 million in the retail segment. The expiry dates are distributed over the following quarters. You see that in Q3, 85% of the moratoria are expiring, and the remaining 15% is expiring half-half in the fourth quarter 2020 and in 2021. From this 85%, which is expiring in the third quarter, we will learn more about the NPE migration in a post-moratorium status. So that's a very crucial quarter for us also to verify our model assumptions. How did we do the assessment of the portfolios? We went into detailed customer initiatives, where on the retail side, we had customer care cards, where we try to identify the individual situation of the client. Out of this EUR 400 million portfolio, we were able to contact roughly 87%, and we reached out of that 75%, and defined certain criteria based on employment shift, based on salary and any further information to classify them into highly impacted, medium and low. Highly and medium impacted is 18% of the total portfolio. On the nonretail side, we did a tailored assessment based on an individual base and not only the moratoria clients, here, we covered the total portfolio. We made a cash flow based analysis and looked also into the supplier chain to make sure that these interconnectedness is well understood and reflected in the risk judged on a qualitative basis. On the following Slide 21, you see the other approach, which is the IFRS 9, where the macro parameters have been incorporated into the model and this qualitative approach, what I was describing on the slide before was used to verify this. On the left-hand slide of that page, you see our portfolio distribution across the different stages. Stage 3 in the first half of 2020 has an amount of EUR 244 million nonperforming exposures. This is EUR 30 million better than by the end of 2019 and is on a similar or same level like by the end of the first quarter '20, which confirms once more the stability of the portfolio and that the inflows into nonperforming have been managed very well, especially considering that 85% of the portfolio is not under moratoria. Looking into the other performing loan stages, stage 1 and stage 2, this is explaining what has happened based on the implications from the IFRS 9 macro model changes. On the bottom, you see the bubbles in the distribution of the stages. There is a 2% change from the second quarter -- from the first quarter to the second quarter from stage 1 into stage 2. This is caused by the increase PDs, the probability of defaults, which are the outcome of the macro parameter changes. The second impact, which we have from that modeling, is the coverage ratios in stage 1, which increased, you see it on the right-hand side, in the lower part, where the stage 1 is shown, where this increased from 50 basis points to 70 basis points, while the stage 2 coverages remained mainly stable. Combining these 2 impacts, so the portfolio shift of 2% from stage 1 into stage 2 and the higher coverage ratios in stage 1, this leads to a total increase of 50 basis points from 1.3% to 1.8% in the performing loan portfolio to anticipate potential losses over the following months and quarters and years under lifetime in stage 2. If you move to the following slide, Slide 22, I would like to explain the P&L impact, which I reported in the beginning of the credit loss expenses of EUR 14.8 million, which we had in the second quarter. This is a composition of 2 items. In the business segments, we booked EUR 30.7 million losses and allocations of provisions, while we released on the corporate center, EUR 15.9 million. This EUR 15.9 million contains, and this is shown also in the table below, in the first quarter '20 booked EUR 14.7 million, of which EUR 13.7 million is linked to that IFRS 9 post model overlay booking to reflect the macro changes on a higher level. This is shown in the pink cell in the first row. If you follow the arrow, you see that this has now been in the second quarter, done on a more granular level as part of the modeling and incorporated in the model on a client level, where we booked EUR 23 million coming from this IFRS 9 impact. Meaning that the business segment impact of the EUR 30.7 million what we have in the second quarter is major impacted by the model impact, this EUR 23 million and with EUR 7.7 million by operational cost, risk costs and migrations. This is better, the EUR 7.7 million, than we were actually expecting in our plan. Looking what that means in terms of cost of risk ratio, you see on the bottom that in -- on total level, on a credit risk-bearing base, we booked year-to-date first half, 57 basis points cost of risk. And on a net loan basis, 77 basis points. If you deduct the model impact, which is on a credit risk-bearing base, 45 basis points and on a net loan basis, 60 basis points, that gives you the operational impact of the cost of risk, which is 12 basis points on a credit risk-bearing base and 17 basis points on a net loan basis, which is significantly better than we were planning, partly, of course, impacted by the moratoria, but always taken into consideration that this is only 15% of the total portfolio. During the second half of 2020, we will continue reviewing these IFRS 9 model assumptions in considering additional update of the macro parameters and also reviewing the actual performance of the post-moratorium behaviors, which will start during the third quarter. This is leading also to our guidance that we are providing here a range of 1.1% to 2.2% on a net loan basis. Since this post-moratoria impact is still very hard to predict and needs to be observed very closely in the third and fourth quarter. While on the other hand, additional introduction of moratoria, like we see it now in Serbia, rather tends to -- that we are rather going into the lower half of that range in case more and more moratoria would be introduced. Coming to Slide 23. This provides the information on the capital situation, which is closely linked to the situation describing before also the losses. Here, you see a very positive development. Comparing the year-end 2019, where on a fully loaded basis, we had 17.1%, it is the red bar on the left-hand side, which went down to 16.3% in the first quarter due to many changes in bonds with OCI impacts and the losses we were booking also in the first quarter, the roughly EUR 8 million we booked there. While in the second quarter, the bond implications were reverted partly by roughly half, so a positive impact on the capital ratio of 44 basis points, and the losses relative to the first quarter were lower, so that the impact here were 8 basis points in the waterfall. The DTI had its impact of 8 basis points. And of course, what I mentioned, the positive impact of -- on the capital caused by the EUR 100 million reduction in the loan book is in positive impact by 50 basis points on the capital ratio. There is another significant component of 93 basis points as a positive one, which is caused by regulation. There is some favorable introduction of some risk weights for sovereigns, which is temporary until 2022, which is the majority of these 93 basis points and an SME supporting factor, which is of permanent use. Even if we would deduct this positive impact of 93 basis points from the 18.2, we would still end up with more than 17.3% on a fully loaded basis with a total capital ratio and CET1, which is compared to the end of 2019, an improvement of 20 basis points. Considering our minimum capital requirements of 14.6%, this gives a buffer on top of that of 2.7%. Considering that we are here under stress now, the capital conservation buffer, which is included in the 14.6%, which is 2.5% itself, can be consumed as well. If you now add up this 2.7%, which is above the minimum of 14.6% and use the 2.5% capital conservation buffer, this adds up to 5.2%, this is a lost absorption amount equivalent of more than EUR 200 million. So we have very high buffer here. And this is also questioning the Pillar 2 guidance discussion we were reporting on in the last quarters, where we guided 4% Pillar 2 guidance during the last SREP process, which we don't see as correctly applied because we had these significant loss absorption amount still being already in the crisis. With that one, I would like to hand over to Csongor to wrap up.

Thank you, Markus. So as our closing remarks, I would like to highlight once again the growth, costs, capital or, in short, GCC in terms of our focus areas. Firstly, with regards to growth. We are committed to accelerate the execution of our strategy and specifically focusing on value-adding digital capabilities, also upholding the robust asset quality that Markus has described in detail. And we will continue to run down our nonfocus as planned. With regards to the costs, reduced fixed and variable costs and all the initiatives I have highlighted earlier, are of the highest priority. We will scale up the migration to digital of our customer base and our internal processes, and we will rightsize -- we will continue to rightsize our organization to the current market trends. With regards to the third C, the third abbreviated latter C, with regards to capital. As you have seen, we have a very strong capital position, and we are committed to maintain it. We also commit to the already communicated dividend policy, and we will continue our proactive dialogue with regulators. I thank you very much for bearing with us on these 24 slides, and we are open to answer any of your questions.

Operator, please open the floor for questions.

[Operator Instructions] And the first question is from Anna Marshall, Goldman Sachs.

Two questions for me, please. Firstly, on dividends. Could you please elaborate on how do you see the procedure from here to how your AGM and end year financials for Q4 if the dividend from 2019 earnings is not possible to be paid this year. And so the timing then shifts into 2021, but does the fact that or does the perception that, say, 2020 earnings may actually be with a negative sign? Does that play a role in the discussions with the regulators or the 2019 dividend is firmly attached to 2019 earnings, so to say? So that was my first topic. And my second topic for question was on costs. Could you please elevate on what share of savings achieved and to be achieved in 2020 are sustainable versus the share that is temporary, such as lack of bonus accruals, less marketing and so on? And generally, how do you see the trajectory of costs from 2021 onwards? There is a lot of moving parts here in terms of savings versus temporary factors falling out.

Thank you for the questions, Anna. I'll take the dividend, but Markus also feel free to jump in. With regards to the dividend, yes, your understanding is absolutely correct. So in terms of how exactly the wording would have to be formulated for the AGM, that highly depends on the regulatory ban that has been recently introduced. But yes, most likely from our current position that it would have to be done at the AGM taking place in 2021 for the business year 2020, also including the dividend decision for the profit of 2019 -- year 2019. The regulation -- obviously, this is fresh. So it was 3 weeks ago. So they are also adopting with regards to our internal decisions and assessment, and we will keep a close eye and we will always fulfill all regulatory requirements as we have done in the past. But the main message is that you see, that dividend is there, and the management board is committed to pay it, depending on the legal possibility to actually do so, that's to number one. With regards to number two, cost savings, I can only reiterate the management is fully committed to EUR 175 million being a target for this year. With regards to the 5-year and midterm guidance, including also the plan for 2021, this will be completed in the fourth quarter. But not to miss your question, in terms of the 2019-related bonus pool, the figure was between EUR 7 million and EUR 8 million. And that was something that we have considered for this year. The relevant pro rata part was not accrued in the first half of the year. I hope that gives you some sort of guidance with regards to the cost and which is one-off and which is actual reduction.

And the next question is from Simon Nellis, Citibank.

I guess my question would be on just the revenue outlook for the second half. I mean, from your guidance, it looks like you're looking for revenues to actually be a bit weaker in the second half versus the first half, if I'm not getting my math mistaken. Can you just run through why that's the case, where are you seeing pressure? I assume it's on margins. And on the fee income, I guess you'd be hoping that fees will revive now that activity is hopefully picking up, if you could provide -- elaborate a bit? And then my second question would be, can you also just give us a bit of a guide or an indication of what's happening with tax because you're paying quite a bit of tax, even though you're making losses, can you update us on what's happening there? That's all for me.

Simon, and thanks for the questions. I kindly ask Markus to take both of them.

Thanks, Simon, for the question. I think the revenue outlook is closely linked to what change mentioned in terms of loan book development. So we are expecting potentially to go down to EUR 3.5 billion due to the COVID situation. So disbursements related, the loan book in the focus segment cannot be ramped up with the same speed as we are targeting for. So we rather kept it stable as we were reporting. And that is the main driver, which is also giving the guidance on the net banking income, the 7% to 10% range. Taxes, deferred tax assets are driving the tax result. So we have reviewed the COVID situation also in terms of how we can make use of it. Certain DTA in most of the countries have been expired this year. So they are timely limited. There is only Slovenia and Austria where this is unlimited. While in Austria, we don't have these profits. As you know, we are having an operational business. While in Slovenia, we were reviewing this as well. And the other countries, which are expiring now, we have written off, considering the situation. It might be that during the review and considering the second half how this will really develop that we might reconsider this a little bit, but this is a package of our midterm planning. So we go into our budgeting process now. And the remaining stock what we currently have are 6 million DTA.

So -- okay. So the tax -- you shouldn't -- you're unlikely to see material DTA write-downs in the second half, is that the message?

No. Exactly because it's mainly down. It's mainly down.

And then going into next year on a more normalized basis, what kind of tax rates should we kind of plan for, for the group roughly?

So the normalized one is 21%.

And the next question is from Hugo Cruz, KBW.

I just want to understand a bit more the core top line discussions with the regulated group had early. But clearly, if the P2G doesn't change, you still not -- you're still a bit more on the capital so do you expect the P2G to change from the discussions you've had so far? Or will you, for example, aim to deleverage faster to be able to have better knowledge to pay your dividend? That's all for me.

Yes. Thank you. I kindly ask Markus again.

Thank you for your question. On the Pillar 2 Guidance, there are -- of course, we are in very close exchange here with regulators on that topic as we were reporting also last time. We continued on that path. There is also, if you have followed the announcements from the ECB and EBA, there is some recommendation also to -- from the regulator side, ECB to the national competent authorities, this year, only in exceptional cases to change Pillar 2 Requirements and Pillar 2 Guidances. But we are addressing it very clearly that we are a very specific -- in a very, very specific situation, and we would like to accelerate that process. Because as I was reporting also in terms of these numbers, what we see under stress now, this is -- as I was saying this in the beginning, now being -- having first actual numbers, which is not completed in the sense of the period and horizon where we will see the full losses. But even if we run certain scenarios here, we will never use that loss absorption amount what I was describing, we still have, even without breaching here these minimum requirements. So the Pillar 2 Guidance definition of 4% is completely out of range. And we are working very hard on that one. But of course, it depends a lot on what the regulators will do this year. The focus is on their side, much more on the COVID situation than anything else. But the attention is, of course, very high on our side.

So just a follow-up. Do you have any plans to issue a Tier 1 or Tier 2 as well that could facilitate, create a bit more of a buffer on P2G?

Markus, please.

Yes. This is -- when you look into our capital ratio, currently, this is the one thing we could switch it, but currently, the market situation is also not that favorable, that's all clear. And secondly, it would currently just hurt us on the P&L side. So we have parked it for the time being, and we'll take it up once it makes really sense.

And there are currently no further questions from the conference call.

All right. Thank you very much. We have a few questions or actually one question in the webcast from [ Chiara Salghini ] at [ Stone Forest Capital ]. What do you expect in terms of ROE for 2020 and in the midterm?

I would like to take the answer. Ciara, many thanks for your question. We do not provide short-term ROE targets. And with regards to the midterm targets, so not 2020 year-end. And with regards to the midterm targets, as I have mentioned, we are conducting a review of our 5-year business plan and the midterm targets will be based on the outcome of that activity. And we hope to be completed with that in time for the fourth -- mid-fourth quarter, so for the AGM, actually. I cannot ask her whether she's satisfied with the answer or not, but hopefully, she will write another question if she is not. Any other questions on the webcast, Edgar?

There's no further questions on the webcast.

So we do have a follow-up question from Anna Marshall, Goldman Sachs.

Just a question on asset quality. So for moratoria, you've mentioned that the share portfolio that is under moratoria currently 15%. Can you please indicate what proportion of the portfolio was not eligible for moratoria in the first place due to kind of falling through the gap, so to say? And also out of the low or no impact retail customers that you assigned because there is quite a high percentage of them, do you have any kind of indication from discussion with them, is this kind of forward-looking take up on their part or opportunistic? And by forward looking, I mean, that they're, say, under furlough scheme and expect to potentially lose their job going forward or opportunistic means purely kind of precautionary?

I kindly ask Markus, please.

Thanks. Anna, related to your question of the moratoria itself, the first one was related -- the second was related to retail. The situation on the retail side is that in these customer care calls, what we did we really -- and we don't do this only one. So we are trying to -- especially when on Serbia, if business is extended, we will take it up again. We also remind the clients properly. And the situation as we see it, from the salary development, which is one of the key items as well as the employment shift is giving us sufficient qualitative verification of the coverages, what you have seen in the model changes. You have seen also on that slide, I didn't mention it, but it's shown there that for the moratoria clients, the coverage ratios are twice that high then on the non-moratoria portfolio. So we have 3% on the moratoria and 1.5% on the non-moratoria coverage ratios in the performing loan portfolio, which is also a very good confirmation that the qualitative assessment and also the quantitative one fits quite nicely. So we have there, I would not say a cushioning, but we have their proper approach in reflecting the potential higher risk we will see -- we are seeing in the moratoria portfolio due to the fact that in some countries, it's 3 months, and some in 6 months, we have even a 12-month period in some countries, which as long as it is, it's harder to predict. That's all clear. But overall, I think the coverage is what we have there are quite reliable. But as I said also, the real back test, we'll follow now starting with the third quarter. And then we will adjust if needed the model during the fourth quarter. And the first one -- sorry, I forgot what was the first one. Can you please repeat the first one? Sorry, Anna. Yes, I got it.

What share was not eligible for moratoria in the first place?

Yes. This is a question, which is very hard to answer because we did it case by case. So where there except Serbia, where this opt out approach is where rather the client would have to step back themselves. In all the other countries, it's done in the branches where they looked into the clients individually where they assessed it, the situation. And of course, we have our data, but I don't know it now by heart. But of course, we also pushed several clients back, which were using this momentum of getting, let's say, time of not paying any installments, where there was no indication. We were always testing what also the root cause is. Is the root cause really cover driven? Yes or no? If not, of course, we have rejected those. And the eligibility actually is really caused -- has to be caused by COVID and for that reason, we checked also was there a salary reduction in that period of time. So they came with payment slips. And also the employer situation was checked according based on confirmation. That's how we did it.

And the next question is from Mladen Dodig, Erste Group.

I would just kindly ask you to just to revert a little bit to the regulator's request on the capital ratio. So can you just remind me and probably somebody else. If -- what are -- are there any key dates or whether you have some expectations on revisions? Or how it will be -- how the regulator might be stringent on the total capital ratio, if it's not met or something like this?

It might come as a great surprise, but I kindly ask Markus to take that one.

Thanks for your question. I give you a bit of more background from the past also. So there's a regular yearly process, the SREP process. In that SREP process, usually in spring, it's usually April, May you get now question from the regulator where you have to provide the latest status from the last year-end. It was this year a bit different due to the COVID situation. So we had time or they were requesting rather the data based on June 2020 that they can take already into consideration the first 2 quarters of the COVID situation. So they would like to see how much the banks are impacted by the moratoria. Then there is a process that they are reviewing this on their side and make their assessment according to EBA guidelines, which are clearly describing the regulators what to look at. The governance, you apply, the asset quality, liquidity. So all these items, they review. And then they come with a draft usually in autumn, late autumn, which they provide to the bank for providing feedback. In last year's SREP process, so the former letter, which is documenting then what you have to apply, you receive then actually in spring, the following year. So this spring in 2020, we received the assessment, which was based on 2018 data, and which was done during 2019. And there, we received a Pillar 2 Requirement of 4.1%. And for the first time that was introduced a Pillar 2 Guidance of 4%. The Pillar 2 Guidance is for stress testing purposes, while the Pillar 2 Requirement is for judging the bank in what is not reflected under Pillar 1. And these are more the ICAP based items like additional information on asset quality. How you govern? How you do the internal audit? So many, many items they look into and derive out of that what charge on top to the 8% minimum under Pillar 1, you receive as a bank. We are objecting actually both because we see that this bank has developed significantly over the last years. We really changed everything and turned around every stone here. While it has not been really reflected significantly in the Pillar 2 Requirement. And on the Pillar 2 Guidance, this is for stress testing. Here, we are criticizing heavily the way how it has been calculated. Since our actual situation of performance of losses has not been considered properly, certain projections were used, which we consider as not adequate. Secondly, the probability of defaults, which have been applied are completely out of range and compared to when we are seeing us also comparing with the benchmarks. It's also different when you look into how ECB banks under ECB supervision are treated. And how currently here with financial market authority, Austrian National Bank is the Pillar 2 Guidance averages for ECB supervised banks is significantly lower than what you see -- what we received. We are one of the -- or we are the only, I would say, less significant institution currently in Austria, which is operating in that region where we are in, while not under ECB supervision. So there might be some change because Croatia joined the SSM. And Slovenia is the second country being in the SSM and Austria. So with 3 countries being in the SSM, we qualify from the formality criteria to being under ECB supervision. So there might be a change coming.

Fair enough. That's exactly what I thought whether there will be some kind of, let's say, different moves by the regulators regarding the complete situation, which is definitely unprecedented. So they might considering this as you said at one point of time in more accelerated way. But yes -- and just maybe one question considering the fact that Bank of Slovenia has extended the dividend moratoria to April 2021. Does that affects your Slovenia subsidiary in moving dividend back to Austria or in any other way now?

It depends on if they would extend it another time, but usually, we are closing the year during March, April. And that means this is expiring end of April. As long as they would do profits, and they would -- or the year 2019, the profit from the year 2019 could be reconsidered same like we do for the group year on a holding level.

No further questions on conference call.

There is no further questions on the webcast. With that, I hand over to Csongor for closing remarks.

Thank you. Thank you very much for taking your time, and thank you for all your questions, to listening to us. I wish everyone to stay healthy, stay positive. And thanks for your attention and your questions. Bye.

Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.