Banca Transilvania S.A. (TLV) Earnings Call Transcript & Summary

Dear, ladies and gentlemen, welcome to the conference call of Banca Transilvania. At our customers' request, this conference will be recorded. [Operator Instructions] May I now hand you over to Ömer Tetik, CEO; Mihaela Nadasan, Deputy CEO, IR and FI, who will lead you through the conference. Please go ahead.

Hello. Good afternoon. This is Ömer Tetik, Banca Transilvania. And I hope you're all okay, you're safe and healthy. And definitely, these are interesting times, and we are trying to adapt ourselves. So as you have seen, we have also tended general shareholders' meeting call location, with the announcement with a budget estimate that we would say that it's on the, I'll say, on a best effort basis as much as we can guesstimate some of the data from the market. But also, we have been approached by many of you during the last couple of weeks, with several questions regarding Romania, Romanian banking system and BT itself. We will try to answer the questions as much as we can and then try to leave more time for the Q&A session. So that's, if anything, we skip maybe -- we will try to answer directly or at least, we'll move down and come back to you with an answer later on. So although in Romania it seems to be at the beginning of the curve of the COVID-19 situation, our first priority starting 3 weeks ago had been the safety, health -- health care and safety of our personnel and also of our customers. Through this, we want to also ensure the trust among all levels. That's why the initial letters were addressing several measures taken by the management, while we were keeping our network fully functional, both our ATM and branches were fully functional. We have also increased the capacity and the performance of our online channel. We have started new online channels and increased also the capacity of call centers so that customers will definitely reach us 24/7 for whatever they need. Taking some physical security, let's say, health, security measures as well, putting plexiglass windows in all our cashiers after we have changed actually all the service points with very open and fancy design. Now we are putting back some plexiglass for the security. We have put disinfectants, masks, gloves for our personnel. We are limiting the number of clients within the units of BT. Customers have been informed by our website and network and this is about the rules. And they respected because it's the -- social distancing is the general rule, and they had been hearing -- they have been exposed to it at different levels. So that I think so far, including today, when it's a salary payment day in Romania and as a big salary payer banks, we have a huge volume of transactions. Everything is going on smoothly. We have taken care excessively in addressing the needs of customers from cash withdrawals to restructuring request and we were also, I guess, if I'm not wrong, we were the first financial institution announcing some great periods of automotive restructuring. The first grace period we offered on the credit card side was addressing actually the need for traffic. It was -- I'll say, to decrease the traffic of customers visiting our branches in case they don't do transactions through online channels. And we postponed credit card installments, which is corresponding to 5% of the outstanding debt to May 2020 for 2 months. And then we have announced also several options for individual customers and the SME customers between -- up to 3 months, also looking to obtain more information from the government side because we knew that they were about to come with measures, which so far I would say that because they are dealing mainly with the health care situation. They have been lagging behind taking important measures on the economic side. And the reaction from the private sector mainly, not from the banking sector, they started coming on a daily basis, its new -- I think it's on news, but it is not yet a full and complete picture. Hopefully, we will be able to get more support from the central administration. Nation Bank of Romania as they were -- they were always also during 2008, 2009, even in the previous challenge of Romanian market, they have been very punctual and very hands on. They have announced decrease of the interest rate, tightening the corridor of the rate and also supplying liquidity to the market just to show a bit of muscle but also their desire to support full and easy function of the market and economy whenever and however necessary. Although we still think that from now on more governmental and fiscal measures to be taken for the markets, hopefully, to come back to this reshape, recovery, because we are also following different scenarios about Romania and about Europe, about world economy. It seems that nobody wants to -- and is able to come with a single scenario. Everybody has 3 versions of a good scenario, the standard scenario and the worst-case scenario. We tried to be as pragmatic and as rational as possible, discussing also with customers and personnel with our network that we are building our budget. That's why the numbers that we have presented, that are reasonable under current circumstances, but it depends on also Romania's recovery part, European markets recovery part. It depends how much the medical situation will continue, but it seems that Romania are also on the -- on this side, the Romanian government took severe measures in terms of current -- putting several cities under quarantine and forcing out to isolation, closing several shopping malls and nonessential businesses. On the other hand, keeping production on the agriculture, food production and the canned food production further. I think Romania definitely cannot -- I don't think any country can go as a winner out of this current situation. But still, there are some benefits we can generate. First, we may see and hopefully, we'll see more public sector investments so that the government increasing the budget deficit most probably towards 5% to 6% or even more of the GDP. If you look at the neighboring countries, not only to Germany or France, but if you look at Poland, Hungary, Bulgaria, so we are also expecting Romanian government to push more investments and more money in the market. This can -- in the medium term, Romania's balance of payments may approve and current account deficits may decrease and that already ongoing investments in agricultural, food production, IT, as everybody is now more focused on this transition, can bring further value to Romanian economy. And we see also some of the pressures as regard to the labor market inflation to be decreasing. So it's very difficult for us now to commit certain, very sure of confident numbers about macroeconomic figures. But we think that's -- I would say, Romania will -- depending on, again, the health care situation, Romania will struggle, not having to -- not to have a negative GDP growth or GDP decrease this year. But if the recovery will be quick, Romania might be also surprising on the positive side with a very low GDP growth this year. And we think that the overall lending activity in the financial sector will be mostly focusing on the restructuring, the reschedulings and keeping the ongoing exposures. I don't think we can see big investments or big lending activity, it will be decreased appetite from the customers and also from the bank's side as well. We are also following what European Banking Federation and European Banking Authority are announcing. So we see some, let's say, relaxing results. Definitely these are about reporting. It doesn't necessarily solve the real problems, but it gives us all of the bank more breathing space in terms of diluting problems in a longer time spent. On the other hand, as we were always criticized maybe by the investors by keeping an inefficient capital position and high liquidity. Although we were not foreseeing this, we think that this is the moment that our liquidity position, customers trust and also high capitalization will help us to go through this unprecedented crisis in a relatively better shape. We have also tried to -- try to -- as the management, we think that the bank still can offer a cash dividend to its shareholders. However, we will be very compliant definitely to the recommendations of European and local banking authorities. And we don't want to risk anything for the medium or risk long term, with a short-term decision. On the other hand, while making this proposal to our Board of Directors and thus to the general shareholder assembly, we are comfortable that the bank will maintain a strong and comfortable capital position further on. I would -- we are also very -- I've gone off 2 questions was related also about the cybersecurity. Now I have the list of questions. The idea is that definitely, we are much more attentive now on transactions moving online. Our number of transactions, operations through our network, physical network, decreased by half, which also encouraged us to keep half of our personnel at home for -- as part of our business continuity in case we can't -- we shall call them back to work. But also the online number of transactions increased a lot. On the other hand, because of our customer profile, mainly retail, micro and SME, this, let's say, are typical or higher amount of transactions while easy to catch and we are following them very closely. Our IT security department, IT department, risk management, keeping an eye. We are also, by moving things online, we don't want to lose our focus on KYC and AML, because unfortunately these are at the moments where there are very opportunistic people. But we are trying to, I'll say, create a rather convenient interaction for our customers. And we want to -- at least for the -- during this logistically very challenged times, we don't want to become a bottleneck for them. On the other hand, private sector in Romania and the small businesses are quite resilient, and we have seen it in previous crisis. So we see that solutions are being found even individually. That's why we are cautiously or pragmatically optimist about end of 2020, beginning of 2021, meanwhile, preparing ourselves a total different ballgame in terms of customer demand, because as I said earlier, we are expecting to focus more on rescheduling and restructuring then on the new loan generation. But I would say, we think, so far, the measures we have taken for business continuity and communication are paying back. We have seen also the Romanian government announced some measures in terms of postponing up to 9 months the installments of individual and SME customers. Although these are much more -- quite in line with our initial program that we launched before Romanian government request of ordinance, we think that the methodology, the norms of application of those ordinance are very important. And hopefully, we will see them this week -- towards the end of this week so that we can make our calculations about the impact and need. But our own programs seem to be slightly more customer-friendly and crisis, both as compared to official plans so far announced. I would like to, I'll say, start maybe with the Q&A. But also my colleagues who are in another office now, Luminita, Mihaela and George, if they would like to add up something, I would like to give the microphone to them.

Thank you, Ömer. So it's not maybe so much to be this year or -- except for the fact that operational wise, we were continuing or to underline once again that operational wise, we were very close to our clients and that we are very adaptive to the realities of the Romanian economy, which is also quite a lot cash base. That we were, on the other hand, also doing our best to protect our colleagues. And that in terms of business continuity, we were quite first movers. Whenever the disease came closer to Romania as we were trying to prepare the entire infrastructure of the bank in order to cope with the problem. And that also given our, let's say, quite interesting experiences when it comes to dealing with difficult period and with difficult situations. Here, we could mention the fact that we were taking over during the last couple of years, quite important number of clients with all kinds of situations from other banks, from the 2 banks we were acquiring. We were somehow having already prepared an infrastructure when it comes to dealing with customer requests, with addressing problems, which were not necessarily generated by the banks, by Banca Transilvania's own products and services. I'm not sure if Lumi, George, would like to add something. So this would be, let's say, from the other room where the rest of the team participating in the call would have like to say.

[indiscernible]

[Operator Instructions] The first question we have is from the line of Concorde Securities.

Can you hear me?

Yes, yes. We can hear you. Please start.

Can hear you.

Okay. I have 3 questions. Actually. So first on the budget and you have an NII projection. And I was wondering if you have included some debt moratorium impact already. Or you are still waiting for the finalized law or ruling? And the second question from my side would be on capital requirements. So do you expect some ease on CET1 or Tier 1 capital requirements so far? And my last question would be on your assumption when you made the budget. So what is your assumption on the situation now. So should it end in 3 months or 6 months, or it should be based on a 12-month basis, your budget?

I mean I would let George, our CFO, to answer further in detail. But the -- I think the discussion about the debt moratorium is -- because of definition maybe bound to have more negative connotation because it's about postponing the debt payments and it also the existing emergency ordinance is allowing the capitalization of the postponed interest rate payments as well. So that's almost customers might be paying interest on interest payments. And because we are amortizing loans, so that it doesn't impact neither the net interest income nor the positive net present value of the loans so far. But on the other hand, also, we have been witnessing increase because of the decrease of the reference rate, there will be some maybe pressure on the interest rates. But also on the deposit side, our current accounts are still growing. So we have decreased our net interest margin expectation from 3.5% or 350 basis to 300 basis points. But I'll say we are not sure if it will -- there will be further pressure or not. I don't simply think so. As regard to the problem, how long it will persist, depending very much, as I said, on the medical side of the story, Romania has been quite drastic, much faster than Italy or Spain to take the measures immediately after receiving the first cases. Although definitely also the authorities are saying that there will be an increased trend in terms of cases and unfortunate loss of life. That I'll say we -- while we were doing the budget, we looked at the first 2.5 months, almost the first quarter of the year, which was more or less in line with the normal rate, also as compared to previous years. And then also we factored in, I'll say, slight recovery from the health care situation made towards the beginning of third quarter. And economic recovery, starting with the last quarter in small steps, not big steps. I don't know if I missed anything. George, if you want to add something?

But first, regarding -- there is annual fee of the capital buffer.

So this is something that we are expecting clarity from the regulators from supervisory authority. But they are already giving some signs on the buffers that will be released or utilized.

However, when we were presenting and computing the budget, we were not taking anything like that into account. So all our capital positions and estimations there are without considering any kind of easening. If that's going to happen, that's going to have a positive impact or additional positive impact. But the whole budget and the whole of, let's say, estimation with regard to the -- any kind of ratios related to 2020 situation was done without considering any kind of easening in terms of the forecast requirements.

And coming back to the question related to how do we estimate the recovery, I think we have taken the view of our chief economist that now following the shock of the pandemic, there will be sort of like a V recovery in the second part of the year, towards the end of the year. And the economy will start to recover towards the end of the year. In terms of banking sector impact, the estimation is that actually end of the year effect will be sort of like a flat growth for -- or no growth for the year 2020, whereas initially I think there were estimates that were showing increases in loan books of about 5% for the banking sector. So I think this is like answering the questions.

The next question we have is from Catalin Diaconu from Raiffeisen Bank.

Can you hear me?

Yes, we can hear you.

So I have 2 questions right now. So first of all, could you walk me through the accounting for the debt moratorium? So the government already approved something, which of course does not have an impact on net interest income and the fair value of loans. But the thing is that, for example, we have already something for mortgage loans where the interest will not be capitalized but deferred for 5 years and guaranteed by the state. And also, we all know that in the parliament, we might get another thing. So the delayed payment for us with no interest at all. So what could be the accounting implications in these scenarios?

So first of all, we have to go back to the basics of the accounting standards. All the information that we receive from the ECB, from the Central Bank, from all the European bodies, always said that IFRS will still be in place. They are just clarifying the situation where we have, like in the case of the moratoria or a temporary release given to clients, that we will not fundamentally change the cash flow associated with the contract, but will actually shift the cash flows associated with the contract for a certain period of time. And we believe that in this case, if we apply the moratorium, if you take the effect of moving for 3, 6 or 9 months, the cash flow of the clients and there are no delays in the payments of the clients, so of course, this is an assumption that it's highly unlikely to happen. But in this case, we're talking only of the effect of the moratorium, not some credit risk impact due to the crisis. There could be a small impact in the effective interest rates for those situations where you capitalize the interest and you don't attach an interest to that capitalized interest part. But it should not be significant. Having said that, if we then end up -- and this is something that we don't know the effect at this point in time, and this is the part where in our budget we have estimated the impact, if we have clients that are further on affected by this situation, and even though we give them temporary relief for certain period of time and they still cannot recover after that, those clients will become, sort of, like will move from stage 1 clients, maybe they are now under IFRS 9 to stage 2 or even stage 3 in default. This is something that we cannot estimate at this point in time. And we have build the budget around some assumptions.

Maybe it's important to mention that the budget was built according to our own assumptions before the ideas, which came lately from the government. So we were working on the budget. So like 2 weeks ago, or we were updating it like 2 weeks ago prior to having let's say, the ordinance, which was published yesterday. And in addition to this, we are also -- it's rather difficult for us to make now very clear assumptions because the whole methodology with regard to these ordinance is also still to be public. So right now, we are trying to explain, or it's easier for us to explain what we were thinking in our budget, but it's not directly connected to the way in which the moratorium was published yesterday by the government.

Understood. But still coming back to that so in a very adverse scenario where the parliament would pass a law in which practically the people will not pay also interest for the next 9 months, what would be the impact on net interest income and whatever else? So basically, we could see a big hole in the net interest income for the next 9 months and/or a negative adjustment to the fair value of loans?

No, it is not to be expected to be like that because we are not going to not accrue the interest. It just maybe a matter of cash flow depending on how payments are going to be delayed. So accounting-wise, figures are going to be partially reflected as in the past. Some of them have to be unwinded like reflected for a longer period of time or performed, let's say, in time. But in terms of the income, it's going to be accrued, cash-wise. If they are...

Yes, Mihaela, sorry.

Yes. So cash-wise that -- it might be that the payment is not going to happen given this performance. But it's not, let's say, the accrual is going to continue to happen.

But then it's not about governmental haircuts. It's about we are discussing here the cost of funding of the interest corresponding to the monthly installments for the next 6 to 9 months, which is for the whole banking system for the next 5 years, the impact should be plus/minus RON 100 million for the whole banking system. Because again, it's not about a debt moratorium as the state. They didn't -- even the populist, the more populist social democrats didn't ask for the cancellation of the interest because this is not some solution that they are looking after. That -- they said that the payments, including the interest payment to be postponed. So here, the only debate between different political parties and the financial sector is that will be available -- able and are we be willing to apply interest on the interest part of the 9-month installments or not. The impact is quite insignificant for the whole system actually. I personally -- we think that this discussion at this point of time is consuming too much precious time. And the banking system should be able to give up on the insistence on charging interest on interest payments.

And just like our own view, in this case, we were never considering that it would be, let's say, correct for the clients being hit by this crisis to put interest on the interest. So that was now, let's say, among our ideas when it comes to assisting clients. So that was not on our agenda.

Understood. And just one more question from me. So I saw in the budget that the cost of risk jumps towards 230 basis points or something like that. But the thing is that what were the triggers here? So basically, what do you see, the sudden jumping in the cost of risk? And why would you book it starting from this year and not from the next one, things would be much clear after the moratorium?

So the point is that, again, the budget was built. So while the -- let's say, the public moratorium was not present in the market, there were discussions, but we were not having a formal kind of paper. And what we have done there is to be on the, let's say, safe side when it comes to how the bank should handle the provisioning requirement, even if we are not taking -- or we are not going to see too many, let's say, easening actions being taken by the supervising authorities of the banking sectors in Europe. So we were starting from the point that there are going to be shifts between the different stages in which loans are going to be part of, given the decrease of their financial repayment capacity. So we were doing stress tests, we were doing analysis, and it was built on, let's say, on our own assumption with regards to how our clients are able to respond to the crisis without considering any, let's say, ECB intervention, which would decrease the level of the impact when it comes to the value provision.

I mean here, Ömer again. It's -- we are only 3 weeks into this situation, most probably it will last 4 more weeks from now on. We are discussing with different industry leaders in Romania and customers to understand the impact on how they behave. It's very difficult to make a very fair, direct calculation. But on the other hand, even if the supervisory body, both European and local Romanian National Bank will allow us to postpone the impact, we all know that there will be some damage done in the economy. And if we will have more clarity on that, we would prefer to, as a distributor, impact of the provisions also to maybe this year and next year instead of trying to create a big snowball effect for the next year. But also, I think this year, we will be -- not only us but all the banks listed or unlisted, we will be obliged to adjust our budget on almost on a quarterly basis. And I'm sure that once we close the second quarter, we will have more clarity, and we might be even coming with a budget revision, a more, let's say, detailed and academic one at that point.

The next question we have is from the line of [ Rob Scatia ] from [indiscernible].

I guess just a follow-up around the issue of asset quality. So yes, I take the message that the budget was drawn up before the ordinance and so doesn't have some of these special kind of relief measures. But just to understand, in terms of -- when you're doing the assumptions, in terms of how much of the book do you think will take up the kind of offer, of the kind of restructuring or rephasing of cash flows? Like is this something that you think like half of your clients are going to take up? And how do you -- how the customers qualify for the relief?

Because we don't have the methodology announced yet, we are also not sure. There is also the -- has the so-called force majeure or the emergency state certificates, which can be -- will be issued online or not. I'll say it depends on the -- both bureaucracy and cost of getting such packages. We try to imagine that in the mostly affected sectors, especially in hotel, restaurant, catering, tourism. A big portion of the customers will opt for it. But in other sectors, we can see definitely lower percentages, maybe 10%, 15%, 25%, I don't know. But also, we are just at the very beginning of the packages. The package itself is not enough as compared to other European or international country, and this is the first of the measures. And even for that, the methodology is not clear. That's why it's very difficult for us to answer, let's say, certain numbers so far.

Okay, got it. Great. And when you were doing the exercise to the budget, so we're kind of assuming that IFRS 9 would kick in. And yes, I mean, I guess you put through a big negative GDP numbers through the model and run through the sensitivities. And so that's 230, 250 basis points cost of risk. Under normal circumstances, that would all kind of come through, I guess, in Q2 because it should obviously, you should be kind of downgrading your asset quality quite quickly.

It is possible that in Q1, we are going to have some hint because the situation is already in place. So rather difficult to give you now exactly a figure as we are going to release the Q1 figures end of April, but most probably some items are going to be seen in Q1 as well.

So from the point of view of the SLI impact, we are working with the chief economist to update macroeconomic scenarios and to even put the impact into Q1. What we have in the budget is actually on top of the macro scenario estimate that we have now. Also the impact of, sort of, like the effect when the economy start to bounce back, as I said, following that V-shaped recovery. Whatever effect will happen as an estimate, as we have done at this point in time, in terms of clients that we actually exhibit difficulties from the point of view of crediting, either moving from stage 2 to stage 3 or moving from stage 1 to stage 2, which we are not able to capture at this point in time because it's too early. And they are benefiting from the relief effects of the new legislation, but we will be able to actually see the signs in the second part of the year.

Yes. Okay, great. Perfect. And then the other question I have is just if you do get like a reasonable portion of clients who suspend their payments for a period of time. Like how do you go about monitoring asset quality and what's going on there? So I guess, normally, it's very easy when someone stops paying you to realize there's a problem. But if that's happening system-wide, like how do you keep on top of that?

We will follow a certain number of early warning indicators, and we will discuss actually this to the big 4 companies. We look for actually employees of certain industries that we know are going to be more affected than other industries. Also, the businesses activating in those specific industries that we see are struggling. And most of them we look at actually sort of like a portfolio analysis from that point of view, when we analyze this throughout this year. And of course, if we see individual significant amounts though, those will be treated proactively because we are keeping track and discussing with our clients. And as we've seen that ordinances, which is right now neither in the case of what we have proposed to our clients or in the case of the ordinance we are applying -- we're not applying sort of like a blanket forgiveness for everybody or postponement. So this is like, on a case-by-case basis, they have to call in, explain what the case is, read some documents. Even though they're in electronic formats to help them not come to the bank, they will be contacting us to discuss with us.

And for the period in which they are not going to have, let's say, the bank payment, when it comes to retail clients, the majority of our clients having loans and have their salary accounts with us, so more or less the entire relationship when it comes to their income is monitored, and we have access to details with regard to their income during that period of time. And when it comes to the company clients, we have a very clear style with regard to how our relationship managers and the entire sales force in the network is going to be close to them in order to see their financial standing. So it's not that the bank is somehow interrupting the connection with those clients for the period when they are not coming to repay the loans. So if -- the monitoring is going to happen like in the past, in fact, it's going to be much tougher as especially the sales force will have this specific focus now as we are not going to speak that much about new production, but it's going to be more about making sure that the customer relationship is well-known by the bank.

The next question we have is from the line of Robert Brzoza from PKO BP Securities.

I have a few top-down questions first. Do you think that at some point, if there's any discussion on that, interest rate caps could be introduced, be it on mortgage or consumer lending? Second, is there any sizable discount help in form of wage subsidies, be it either to stopped workers or the work is put on flextime, et cetera? And what's the size, the potential size of that help package? And finally, what scope of the interbank rate adjustment would you expect over the coming months following the rate cut decision of the Central Bank?

So I think I will start with the second question. In terms of the social security and unemployment, the government announced that companies, who are being affected, can send their personnel for 3 months to this technical unemployment. In Romania, still, there is no Kurzarbeit or flexi-working schemes, although the part-time working is also regulated by the labor law. The package, as per their calculation, this is more of a question for me through finance, not for us, but for the public information. This is a package of -- this part is almost RON 4 billion or close to $1 billion. But in regard to the interest rate, the last question, you said it, actually we see quite fast the impact in current market. It has also impacted also the fixed income markets. We have seen that the yield curve is tilted down on an equal basis, that the interest rates were going up. Sorry, I forgot the first question, but if my colleagues keep in mind, they can answer.

It was about rate, interest rate caps for either existing or new production loans.

I mean I don't expect the new production to be any -- of any significance to impact the net interest margins or -- I mean it will be quite low. The government packages -- the government support packages may include some interest rate caps. But if you compare how the provision of nonperforming loan versus lower interest earning, I think everybody would hope for the second one, as long as you have the certainty that customer will perform at least for that period of time. But we don't see it, I mean, all the discussions so far. Although the populist politicians will never get tired of surprising us, even in Romania, we didn't see any discussion. It was quite competitive market because of the high liquidity interest rate on the new loans was quite low already. So probably just 3 to 6 months ago, Romania was offering mortgage lending or customer lending rates equal to France or Italy. Now I don't see possibly any pressure. At least, we don't have any information on that. But even if it will be on the new lending, we don't expect it to be significant in the short and medium term.

The next question we have is from the line of Alex Boulougouris from Wood & Company.

So my first question is just to clarify on the interest rate assumption. So in your budget, you assume the 50 bps reduction and nothing else going forward? That is my first question. My second is regarding the bank tax. I assume there's no inclusion of the bank tax anymore in the budget, if I'm correct? That's my second question. My third, if you could give a color of how a percentage of your clients that are directly or severely impacted by this crisis. Is it 20%, 25%? The ones that we know that definitely will take up the moratoria measures. And one fourth question, if possible, the results of the scheme of the government guaranteeing some loans. And I would like if you could give us a bit more color on how that will work on your P&L, if possible.

I will start with the first question. We are -- this is not an information that we are sure of, but we are estimating, forecasting that there might be another single or maybe 2 consecutive rate decreases from National Bank of Romania. I don't think they are in a rush, because now we don't have enough demand. Even if the interest rates would have been 0 today, the demand wouldn't pick up, couldn't pick up because everybody is at home watching Netflix. But I guess when demand starts picking up, National Bank will try to amplify this and come with further rate decreases, maybe 50 or maybe twice 50 basis points. On the other hand, we cannot be sure of that. With regard to banking tax, it's not valid anymore. It is -- obviously, it had been with 2 consecutive emergency ordinances that had been canceled. One of the first ordinance had been canceled by Constitutional Court's decision, but then it was remade. And we don't expect -- I mean, again, repeating, none of the political parties are insisting to reimplement it. Everybody is aware of that. So we didn't include it in our numbers. And it's -- when we're making our budget estimates, we were thinking that between 25% to 30% of our customers will opt for different restructuring of bailout packages. But how the government package is going, again, they announced only probably the first of a few dozen decisions, of which we don't have the methodology so that we are not sure exactly how it will be applied. But definitely, it will be positive on the -- keeping the cost of risk limited. We have, I would say, it's good that they are coming through some structures, which is functioning on the previous functional or operative structures like the national fund for the SME guarantee scheme. And this has been already working functional, so that -- we think that it could bring good result. But also, we think that the government is quite -- so far, quite slow on announcing several measures. Maybe they want to be more -- it's focused on the health care situation. From now on, we will expect, and then we can calculate, but the budget that we presented is based on 25% to 30% of our customers being severely impacted by the coronavirus situation, and then us to restructuring and scheduling them for longer terms. And -- which is also guidance of more government program, it might be longer if the health care situation will persist over the summer. It might be a different situation. That's why I said that we might be coming with a budget -- revised budget proposal during the third quarter of this year.

Just to clarify, the -- all these customers, the 25% to 30% that are severely affected, you have included the provisions for these restructured loans in your budget? I mean in this [ 900 ] and 230 basis we had previously.

Yes. That's the -- that's why the cost of risk increase is coming, as you see.

But it's too soon to give a cost of risk based on the new -- like if we exclude this 25%, 30%, let's say?

If we would exclude them, we would be in the same situation like last year. Meaning if we wouldn't have this situation, clearly, the way in which the portfolio was saving the behavior in the first 2 months, it was just like with the same perfection as in the past 2 years.

But even if the Central Bank says, you don't need to book provisions, you may proactively take general provisions in order to be on the safe side and not have in 2021, some of the restructured loans defaulting again.

So this is the way in which we were looking at the situation indeed. And especially, as there is really no full clarity with regard to the way in which, let's say, exemptions are going to be granted to the banking sector, not to put those provisions aside. So we went -- we were using the safe side, the conservative side. So we didn't want it to be too optimistic with regard to how this, let's say, measures which could be taken by the supervising authorities are going to be in the end looking like.

The next question we have is from the line of [ Christian Mitri ] from [ NMN ].

Can you hear me? Can you hear me?

Yes. Please go ahead.

Coming back to the cost of risk question. So you are including 25% to 30% of the customers in difficulty when you make the assumption of 230 basis points?

Yes. This was the assumption which was used.

Okay. And the second question, I know that the first impact is on income, but have you identified any cost cutting that -- and any trends that will happen after this epidemic, especially in strengthening your line...

I mean we are not going to make as we don't think that's necessary. If you ask about headcount restructuring, we will not do it. If -- some investments definitely be postponed, but on the other hand, we will be investing more on the digital -- digitalization of the bank, so which is also required. We have decreased our investment budget slightly, but not fully.

Do you see any opportunities in the market in the coming months, taking into account your liquidity?

Liquidity? To capture liquidity or to get rid of liquidity?

Or maybe M&A, maybe some other banks.

Maybe next year.

So this year, we will concentrate -- or at least for a while, we will definitely concentrate on making sure that we are safeguarding our existing client. But Ömer, please also answer.

Well, I mean I'd like to discuss this. This is a sign of normality, and I wish we will be challenged by such questions more. But I don't think any potential sellers would come to the market now because it will be, I'll say, it's not a good market to sell an asset now, at least not this month or in the next 2 -- few months. But on the other hand, our focus will be definitely taking care of our existing customers and bringing to the shore what we have. It will be quite aggressive us assuming such a transaction. On the other hand, I'll say, if in the summer we'll hear something, we will definitely -- I will say we will be with our peers, quite open and attentive.

The next question we have is from Lucian Albulescu from IPOPEMA.

So from my side, actually, just a few more technical questions remaining. So first related to the budget, you are mentioning no big cuts in expenses, but I see actually in other expenses, there's quite a significant cut, almost like RON 200 million. Is that because you still have something related to restructuring of Bancpost's integration?

No. Lucian, I'm going to make a joke here, and it's not so much a joke. We are not targeting any M&A this year. So that's the point. No fees with advisers.

Okay. That's quite a big job. And then maybe second one, there has been some accommodation, or more like a guidance from the ECB that no dividend should be paid before October. Does this apply? Or is there any discussion with the Central Bank that it will apply in Romania as well?

Sorry. Lucian, can you say again?

So for ECB, there was some guidance that no dividend should be paid before October. Does this apply in Romania? Or is there any discussion at the Central Bank level that is going to be applied in Romania as well?

I mean definitely, a strong recommendation, as also ECB stated out. It's I'd say almost an order, but also as you have seen, not all the banks in Europe comply with it. It's definitely very important if the regulatory body is comfortable, local regulatory is comfortable about your capital situation and the trend looking forward. That's why we have decreased, actually, as you remember, we were having a dividend guidance, much more aggressive, I would say, with the number corresponding to 60% of our profit. Now we have decreased it substantially, and we think that this is a comfortable level. We don't know if local regulatory National Bank of Romania will come with an objection there. But if they will come, this is not something that we can discuss or debate. We will comply with it. But on the other hand, when we made our proposal, we tried to factor in their expectations. Maybe we'll take the last question. And if further questions, definitely, we'll try to do. I'd say we will come back to the market more often with such teleconferences. But I'll say if you have also questions that we couldn't address or which will come up later, please don't hesitate to contact us. Mihaela and her team will answer immediately. So let's take the last question.

The next question is from the line of Daniela.

I'm Daniela Mandru from Swiss Capital. My question is regarding the budget. I suppose your budget is based on a best-case say scenario. Could you please tell us what would be the next in the worst-case scenario or in the best-case scenario?

Daniela, so we are -- usually, we are coming with a conservative budget to the market. Also, in this case, we can say it's conservative. Definitely, let's say, it could be better if things are improving a lot significantly in a short period of time when it comes to the health situation. When it comes to getting worse, it's rather difficult to assume too much getting worse if things are going to be under control when it comes again to the health situation in the country and in Europe. So we see it as a rather, let's say, with a high probability to happen if the assumptions coming, especially from the health experts, are going to be proven correct that, yes, we are going to have other 2 months of problems and then things should get back to the better quite rapidly. However, as Ömer was mentioning a couple of times during the call, most probably the moment we are going to see clear trends in the economy, we might -- we are going to come with a revised budget, which is going to be presented in the second part of the year.

Okay. And another question, do you have any assumption regarding the percentage of net loans affected by this COVID found in the quarter? But what percentage of those borrowers would be unlikely to -- it's on their creditworthiness after the COVID?

Well, what we were mentioning was that the budget for this year and the cost of risk, at which we were lending at, was linked to a scenario where 25% to 30% of our portfolio is going to be hit directly by COVID. When it comes to estimation, so with regard to, let's say, future development of those businesses, that's rather difficult to have now an opinion on.

But if also interest rates -- or guide you in a way to make these assumptions?

Which we have done, so it's there. So -- as we were never presenting like a couple of years kind of budget. And it's not going to -- we are not going to start this year. We, for sure, let's say, are going to monitor properly and reflect properly the situation of those clients in the way in which the quality of the loan book is going to be monitored.

I mean when we look at the analysts' so-called scenarios or variation, it covers everything possible: worst case, best case, standard case. As we have to present the budget to our investors and shareholders, and also we have to be both prudent and pragmatic innovation. So what we did propose at least under the circumstances of last week, it's quite, I would say conservative, not necessarily pessimistic, more pessimistic than the situation is. But if there will be any revision necessary because the market would also swing with how the index is. So one day, we are speaking about recovery in April, then we are speaking about recovery in 2022. So we try to maintain focus with the real economy that we are dealing with. And based on the customers' feedback, we try to build this budget, not based on just market economic models.

Thank you. There's no further questions at this time. I'd like to hand back to speakers for any closing comments.

As I said, if you have further questions, please do not hesitate to send. And if we have more important information to share, we will share, we will come back to you. Thank you very much.

Thank you. Ladies and gentlemen, this concludes -- and thank you very much for your attendance. This concludes your conference call. You may now disconnect. Have a great afternoon or evening ahead. Thank you.