Komercní banka, a.s. (KOMB) Earnings Call Transcript & Summary

Hello, and welcome to the Komercní Bank Second Quarter 2020 Results Call. My name is Courtney, and I'll be your coordinator for today's event. Please note that this conference is being recorded. [Operator Instructions] And I will now hand you over to your host, Jan Juchelka, Chief Executive Officer and Chairman of the Board, to begin today's conference.

Hello. Good afternoon to everyone. Thank you very much for being with us and giving us the opportunity to guide you through the presentation of Q2 and first half of 2020 for Komercní banka. My name is Jan Juchelka. I am here together with Jirí Šperl, the CFO; Didier Colin, the Chief Risk Officer; David Formánek, Head of Corporate Investment Banking; Margus Simson, the Chief Digital Officer; and Jakub Cerný, Head of Investors Relations. Let me kick off the meeting by bringing you to Page #4 of our presentation. Before I start commenting the concrete lines, let me say that we are obviously assessing the previous quarter as a particular one, especially in the light of the measures adopted by governments all around the globe in the context of COVID-19 pandemic. In that particular context, we believe you will appreciate the steps which we have done, and you will appreciate our view on what is happening in Czech economy currently and how we see the future. So let me start with a strong statement of our -- related to our capital base. We are currently recording 21.9% of total capital adequacy. And for those of you who might be first time on the line with us, let me say that only 0.6% of that is represented by other capital than Tier 1. So we are more or less on the highest quality capital, close to 22%, without chipping in the profits created in 2020. Also for -- as a kind reminder, the regulatory minimum provided by Czech National Bank, which is, by some of you considered as rather strict, it's at level of 16.2%. Speaking about capital, let me turn to liquidity in the same row. We are currently recording loans-to-deposit ratio at the level of 74.3%. Deposits -- client deposits being the only source of our funding, client deposits grew by 7.1%, and I will come back to it in a bit deeper detail in a few seconds. During these COVID times, we did not ignore our position of one of the key banks here in the Czech market, and we continue supporting the economy by providing the financing to households and companies. The total gross loans grew on a year-over-year basis by almost 5%, and we're totaling the loan book at the level of CZK 676.3 billion. As of July 17, KB has granted over CZK 5 billion to more than 1,000 clients in new loans through the loan -- guaranteed loan schemes provided by the Czech government through the Czech-Moravian Development Bank. Out of that, approximately 1/3 was provided to the sectors sensitive to the current crisis. We are standing by our clients also in the moratoria scheme, so approximately 46,400 clients applied for postponing the installments. We are speaking about the total loan portfolio of the volume of CZK 65.6 billion, which is almost exactly 10% of the loan book, those being more or less 50-50 distributed between the retail and business financing. During the COVID crisis, we were pushed to create quickly the working environment for our people to work from home, which we have achieved at the level of 2/3 of our employees, without any disruption on our capabilities and abilities to continuously providing services and products to our clients. So I need to again express my thanks to all people in the front office, but also back office and IT that, in a joint forces, they provided the necessary comfort for keeping the bank ongoing and keeping the bank providing the services to our clients. Speaking about clients, they also had to change quickly their habits, and you will see that in concrete numbers in a minute, and to work from home with their bank accounts. So on that front, we have adopted quite few, let's call it, tactical digitization decisions and solutions. Part of them will remain permanent solutions, and that here, I'm speaking about the solutions towards clients but also solutions towards employees, and I will elaborate a little bit more in a minute. The group -- the KB Group reported a 6.7% decline in revenues and 3.1% increase in OpEx. Those OpEx increases were stemming either from increased spendings on the equipment for our employees and the ad hoc digitization solutions adopted, but mainly -- and it has nothing to do with COVID-19 crisis by higher regulatory charges at the beginning of the year. Cost of risk is totaling to the amount of CZK 1.7 billion, and Didier Colin will provide you with details on this one. We are already reacting and reflecting on the impacts of COVID-19 crisis. As a result of that, we are displaying net attributable profit at the level of CZK 4.4 billion, which is down by 38.5%. We have also experienced positive news during these times. First of all, let me say, we welcome to a new Board member -- new management Board member amongst us. Ms. Jitka Haubova became the management Board member responsible for payment services, support services, investment banking services, legal services, including Corporate Secretary, and Jitka has a strong corporate banking background from the past. She's inheriting the portfolio of responsibilities after Vladimir, who left for a sabbatical leave. We have also experienced first time ever remote Annual General Shareholders meeting, which provided the necessary approvals for the accounts and the retention of the profit from 2019. Let me turn to Page #5 and to very briefly go through the page dedicated to our corporate social responsibility activities. We are remaining good citizen in the environment of Czech and Slovak Republic where we are making our business. As part of it, we are one of the leading parties when speaking to the Czech National Bank and to the government about conditions of the measures and programs adopted and provided, either on monetary side or on the fiscal side. We do it through Czech Banking Association. And one could say that the dialogue between the government and/or Czech National Bank with the banks is being kept in a constructive atmosphere and frame. Being good citizen, it goes hand-in-hand with the -- providing help to those who need it, which was mainly through our philanthropic activities through the foundation, Jistota, but also through decreased prices for small businesses, for example, for account packages related to this subsegment. We have consciously decided not to tap on the unemployment, the partial unemployment scheme for our employees. We have paid regularly our tax and regulatory charges. Doing this, we have strengthened our cybersecurity capabilities, not giving any free space for potential attacks coming from the cyber space. And last but not least, we have taken, as I have already announced, a couple of lessons learned from the first few weeks of the corona crisis and made them basis for acceleration for a couple of measures, which will be permanently with us for the future. It goes mainly to the optimization of branch structure. It goes also to digital solutions on the side of clients and on the side of employees. Speaking about employees, they are keeping high confidence and high engagement level towards Komercní banka as an employer, and we are able to, let's say, positively take the results of various polls and introduce so-called smart office, flexible workplace organization, which is, in fact, a combination of home office hot desking, which results also in certain, let's say, savings on the side of square meters or, if you wish, costs related to managing the portfolio of buildings in the headquarter but -- at the headquarter, but not exclusively at the headquarter. During these volatile times, we have collected couple of recognitions also from international organizations. So let me start with Lafferty 1000 banking recognition as the best bank in Czech Republic and one of top 100 around the globe. We have also collected award for our mobile banking solution website from our subsidiary, Modra pyramida, and a few more. We are -- we have started our campaign, image campaign, if you wish, on sustainability and responsible approach to doing banking business, which we don't want to only spend money on image-making. We are making the whole story around energy transition period a cornerstone of our corporate banking proposition and want to be #1 bank in that particular field of banking and create certain synergies, if you wish, with our parent company, Société Générale, on that side. So let me turn to Page #6. I will probably skip those lines, which I have already mentioned, but being more concrete on the branch network, left-hand side of the page, the lower part. We have accelerated optimization of branch network and closed another -- and decided of closure of another 100 branches. So we should be landing in 2020 at the level of 241, 242 branches, out of which there is less and less branches provided cash services, and we are moving progressively towards the machines, the intelligent ATMs, being able to -- from which we are -- the clients are able to withdraw money, but also deposit money with them. It's not an ad hoc decision. We were counting with this decrease in 2021, but being tested during the core COVID weeks how many branches are really like actively searched by clients. And having the statistics available, we decided to accelerate this wave of closure of branches. This 241, 242 should remain for a certain longer period of time before we accelerate the digitization path of our clients' proposition. Okay. On the side of cybersecurity, I have already probably mentioned the necessary. We did not move the direction of our strategic path. We want to accelerate the investments to digitization of front office but also middle and back offices. Speaking about -- one of the key, I would say, players in that field is our risk management was able to provide solutions for assessing the requests of state guaranteed loans during the recent period. Speaking about risk, we are scaling up our collection capabilities and capacity. After quite long consecutive years of releasing provisions, we started to create them. And as a consequent step, we do believe we need to reinforce our capabilities in collection activities. Smart office was commented. We want to save 35% of our square meters at the headquarter but not exclusively at the headquarter, and we are also cutting the number of FTEs as a reaction on the current situation. The macroeconomic environment, which is described in Page #8, after the revision of our macroeconomists should show us the decrease of GDP in 2020 at a level of minus 5%, with quite sharp recovery by 6% in 2021. There was a hot topic in public discussions in the last couple of days on quarter-to-quarter drop in -- of the Czech economy. Nonetheless, let me say that in the context of European countries and being closer to the dynamics of Germany, we believe that the number of minus 10.7% on a year-over-year basis is not a catastrophic one, but it's a strong signal that this economy, obviously, is not immune towards domestic and international situation. The Czech -- the car production in Czech Republic dropped by almost 1/3, which is a good indicator as car making is representing -- the whole automotive is representing slightly more than 10% of the GDP creation in the country. Labor market is a little bit uncertain and a little bit -- not so easy to read the situation because we have -- we are still keeping the unemployment rate -- or we are seeing the unemployment rate being quite low. Nonetheless, hundreds of thousands of people being in the scheme of so-called partial unemployment support from the government side, and we will see highly probability real numbers only at the end or -- at the end of this year or beginning of next year. Inflation is above 3%. On year-over-year, it's like 3.3% growth. Czech koruna, quite volatile, up and down. By the preparation of this presentation, it's strengthened by 2.1% on quarter-over-quarter basis. Nonetheless, year-over-year, it was minus 5.1%. The Czech koruna yield curve returned to upward sloping as of June 30, 2020; 3 months PRIBOR, 0.34%; and 10 years interest rates were 0.67%. Let me move you to the next page. Both sides, the monetary side represented by Czech National Bank's measure and the fiscal side by Czech government. We're working in, I would say, pressure symbiosis in the first weeks of the corona crisis. So let's start with the -- very quickly with the measures taken by the Czech government. They have approved the state guaranteed loans program, which I have already commented on, and adopted a law providing banks and the clients additional comfort in structuring the loan moratoria. Speaking about the loan moratoria, we are at the level of 10% approximately of our loan book, as I've already mentioned, and we are very, I would say, carefully and systematically monitoring who is moving from 1 3 months period to another 3 months period in making -- trying to make our picture on the potential future defaults here. The budget deficit in Czech Republic was announced at the level of CZK 500 billion, which is the highest ever deficit in the history, nonetheless, keeping Czech Republic still amongst the lowest [ indebted ] countries in the European context. You certainly noticed the huge program approved by European Union under the name of EU's recovery plan or next-generation EU fund, which is bringing to Czech Republic EUR 8.7 billion in form of grants and EUR 15.4 billion in loans, and making the government rather busy to put together the plan how to invest and where to invest these huge amounts of money into sectors and industries, which will elevate potentially this economy to new qualitative level. When we go back to monetary sides and the measures adopted by Czech National Bank, 2 weeks repo rate cut to 0.25% is publicly known. The countercyclical capital buffer went down to 0.5%. Let me say that with the combination of ban on dividend payments doesn't change too much in the capital structure of Czech Bank's balance sheet. And on the side of macro prudential regulation, there was quite huge relaxation and visible relaxation of the rules linked to mortgage rules, which is helping the banks, including our bank, to boost the business performance on the mortgage loans, and I will come back to it. So next page is showing that -- and confirming that we are not moving from our strategic path, we are still of the opinion that banks are not necessarily obliged to work out and put in place all potential services that we -- that it's a bit smarter to cooperate with either smaller or large companies who are providing the solution to clients, so we continue working with our, let's say, ecosystem of start-ups or larger companies in various forms, traditional partnership or potential investments into their equity, which was the case of Upvest, which is peer-to-peer platform, collecting money from investors and investing them into real estate. We were also -- we have also decided over time of stopping our investments into internal start-up named Cincink, which had the ambition to provide a client with the full range of services related to selecting, finding, financing and equipping the housing of a client. After, I would say, certain period of time, we didn't see that the takeoff will be sharp enough, and we stopped the activity, and we stopped investing into that. Very good, I would say, best of our own that we are able to stop investing to things which are simply not delivering what was expected. Mobile banking, payments through tokenized solutions, everything in a very, I would say, dynamically growing trend, mobile banking being probably the fastest-growing channel in our proposition. Hand-in-hand with that, we see quite sharp increase of KB Key downloads and KB Key subscriptions. KB Key is the authentication tool -- digital authentication tool for our clients to take care of their Internet banking and/or digitally signing documents. So let's move to business performance, some of those aspects were already commented. So gross lending, excluding repo operations, went up by almost 5% on year-over-year comparison and by 1.2% quarter-over-quarter. When we focus a little bit closer to business financing, you see that all of the relevant elements were growing rather fast, especially the small businesses and the leasing solutions provided by our subsidiaries get. Speaking about financing of households, it was -- the main driver was mainly -- was -- the strongest driver was mainly mortgage loans, where we are achieving, over time, almost 20% market share of our -- of the new production of the market. Having said that, the dynamic growth of the loan book is still keeping us in very safe territory of 74.3% net loans-to-deposit ratio and the liquidity coverage ratio of 232%. Okay. Let's go to next page. You see the 8 relevant [ tombstones ], which have the only ambition to show that we are working with smaller companies, with large companies, we are working with public segments, private segments and providing the necessary support across the relevant Czech economic players. Moving through financing to deposits. Deposits rose by 7.1% on a year-over-year basis and by 0.4% on a quarter-over-quarter basis. Focusing on the structure, here are -- the fastest-growing, our current accounts, which is, for us, a signal that both households and companies are creating the necessary cash buffers for future spendings and future investments, potentially also postponing those investments to more visible or more, I would say, predictable times. Nonbank assets under management, we don't -- we see 5% growth on a year-over-year basis. Nonetheless, the beginning of the crisis, which was mainly April, made the Amundi solutions and Komercní pojištovna solutions impacted heavily, whereas the pension schemes continue to be filled on very regular and very, I would say, disciplined. Okay. So that's the part of the business performance. I'm now handing over to Jirí Šperl, the CFO, to provide you with comments on the financial performance. Thank you.

Thank you very much. Good afternoon, everyone. Yes, that Q2, in fact, the first quarter where the COVID impact is almost fully visible. On a recurring basis, we reported a profit after tax at the level of CZK 4.5 billion, which is roughly 37% below the level of last year. Basically, I can say that it is in line with our expectations, and I will get back to that at the end of this presentation. Actually, we are not guiding kind of new changes in full year estimates, probably a bit changes in structure, but at the bottom line, not. In terms of the main drivers in the P&L, it's obvious that there are 2 ones, the main. First one is net interest income, missing almost CZK 915 million versus last year. And here, the reason is also obvious, it's mainly environment, and what I mean is that market interest rates and now referring to very short-term market interest rates went down by 90%, 9-0, from [ 2.25% ] to [ 25% ]. Another reason is cost of rates, Didier is going to comment on that. But basically, the valuation is CZK 2.1 billion. Year-over-year, which probably you remember that last year, we had kind of net [ release ] roughly CZK 300 million. And if we add CZK 1.7 billion creation this year, this leads to this CZK 2.1 billion. Impact into the profitability is visible as well, so it went down. Return on average equity is at the level of 9%, return on average of regulatory or -- that's Tier 1 equity is slightly above 10%. So the impact is visible, but at the same time, still, the indicators look sound. Let me move to the balance sheet. So total assets are up roughly 5.1% year-over-year. In absolute terms, it is slightly above CZK 60 billion, 6-0 billion. Out of which 2/3 are deposits, so it is CZK 41 billion on deposit side growth as a kind of evidence of perception of KB as a safe harbor. These extra resources have been placed mainly to the client loans, so that's 3/4 of the overall increase of the total assets, and the rest, into our investment instruments last quarter, and it was already the case of the first quarter of this year. We started redirected these investments. So repo loans with CNB went slightly down by roughly CZK 25 billion, and we invested much more into Czech govies. Basically, there are 2 reasons there: first one is the Czech government issued hundreds of billions of new debt, it's the first one; and second one is that the yield on that was attractive and always better than alternative investment, which is repo plus interest rates to open just extending the duration of the reinvestment portfolio. Jan already mentioned very strong liquidity, so just to reiterate, LTD, more than 70%; LCR, regulatory minimum is 100%; and our current level is roughly CZK 230 million -- 230%, so sorry. This brings me to the capital adequacy. Here, also briefly mentioned, we are almost at the level of 22%, which is probably the highest capital adequacy ratio in KB's history. As we know that the minimal requirement is 16.2%. It is roughly 5.7 percentage points above the minimum requirement. It's worth to mention that part of this very strong capital adequacy is -- or are retained 2019 dividend. So on the upper left chart, you see it's the blue part of them through the chart. In Q2, the capital adequacy increased as well by roughly 1 percentage point, and it's fair to mention that it was influenced mainly by decrease of risk-weighted assets. And what you can see behind is a methodological change implemented in Q2, which is related to SME supporting factor. So this covered or generated roughly CZK 6 billion restated as saving. Now let me move to the key categories of GOI. Let's start with net interest income, so it's minus 7.8% down. Again, in absolute terms, it is roughly CZK 0.9 billion. I would say that only 1/3 is related to -- of this gap is related to income from the loans, and the rest, 70%, is related to income from the deposits and reinvestment of our equity. What I see positively is quarterly evolution of net interest income from the loan. So now I'm referring to the upper right-hand side of the chart, where you can see that, basically, quarter-over-quarter, income from the loans is basically flattish. There is slight decline, but if you take into account the NPV adjustment coming from loans under moratorium, it is even slightly growing. Probably I mentioned it already 3 months ago that the reaction of the market regarding the down pricing on client loans rates is a bit delayed. It was also confronted during the second quarter. And if I should mention 2 figures, I would select margins on a new mortgage loans production, which, for the time being, it's at the level of 130 to 140 basis points, which is much more than, I don't know, 5, 6 months ago. And the same is valid for consumer loans, where, currently, we are fluctuating at the level of 500 basis points. Again, we don't think it is a new normal, probably the margins are going to decline a bit, but definitely, we think and believe that the new normal will be much higher than the old one from the beginning of the year. Impact into net interest margin is obvious as well. So it went down year-over-year, and I think that's much more relevant compared year-over-year by roughly 23 basis points. But if you did that by the impact of NPV adjustment, it would be roughly 16, 17 basis points on a quarterly basis. I'm moving to income from fees and commissions, so down by roughly 11%. Half of that is related to SEPA regulations, and we commented on that several times. So this was expected. Another half is related to COVID times, so of course, not budgeted, not expected. Majority of the gap is coming from the missing -- the fees from transactions, so year-over-year, it is almost 30%. But also we reported, let's say, lower fees coming from financial -- specialized financial services. After solid Q1, there were less issuance and syndication activities in the Q2. On positive side, still, fees coming from cross-selling are increasing soundly, significantly. So it was increasing in Q1. In Q2, on a year-to-date basis, it is plus 8%, so a very, very good result. Financial operations or trading income. So after weaker effect Q1, which was negatively influenced by CVA or DVA adjustments, IB delivered an excellent result this quarter. And by the way, it is now more than CZK 900 million, and that is the second best result in the last 5 years. So that's an achievement, which led to the year-over-year increase by almost 13%. Ex-growth, this extraordinary result was supported by the clients' demand for hedging of financial risks, and it was a risk to both FX and interest rate risk. That's true. And it's fair to mention as well is that this extraordinary result was partially offset by lower gains on FX from payments, so this basically, let's say, branches operations due to decrease in foreign transactions activities. OpEx, traditionally under control, so year-over-year, it's growing by 3.1%. Basically on, let's say, increasing site, there are basically 3 main reasons: first one, Jan basically mentioned, was higher regulatory cost, so it was almost CZK 100 million year-over-year extra; second one, COVID-19-related costs, so it was notebooks, respirators and so on and so on; and third one was -- and it's kind of a new piece of information, it's related to restructuring reserve. The bank decided to create a restructuring reserve at roughly CZK 94 million, CZK 95 million for covering of tactical measures coming from COVID-19 times. So all in all, this led to a 3.1% increase. If you put aside this creation of restructuring reserve, as we treat it as kind of one-off, the growth is lower. It is only 1.9%. And if you go into the structure of this, you see that, basically, HR costs are flattish. GAE, general administrative expenses, are decreasing relatively quickly, almost minus 5%, due to our marketing, travel, events costs and so on. While regulatory costs, so the solution I mentioned before, and the depreciation is at a level close to 10%. Cost-to-income ratio, it's at the level of 52.7%, and we are expecting by the end of the year improvements to the level of 60%. So that's briefly about GOI. And now I'm passing floor to Didier. Thank you.

Thank you, Jirí, and good afternoon, everyone. So turning to the Slide 24, which is dedicated to the credit risk profile of our loan portfolio. We, as of the end of the second quarter, in fact, continue to show a relatively stable asset quality structure, and there are probably 2 or 3 reasons for that. Obviously, the first one, already mentioned, which is for the governmental supporting measures, which have been implemented in the recent period. Another one is also, as already commented, the pre-crisis resilience of our portfolio. Now if we look at the S-2 class, meaning the exposure [ despite that ], we have a stable level at 5% -- 5% to 10% of our total exposure, so similar to the level as of the end of Q1. In fact, it doesn't show here that we started to record the high level of volatility into this category and out of this category, meaning higher volumes of client being transferred into S-2 from S-1 and from S-2 into S-3. So we expect the share of this asset class, sensitive on the asset class, to grow in the coming quarters. Now if we look at the NPL category, there is a very moderate increase recorded in the second quarter. And in fact, this simply reflects the transferring to default of a couple of our large corporate client situations as well as our decision to further support one of our clients already in default category in Q1. And this moderate increase, in fact, was a little bit offset by some write-off activities as well as some NPSL activities in the second quarter. All in all, the provision coverage ratio for the total exposure continued to slowly decrease from 56% in Q1 down to 53% in Q2, again, reflecting the entry of -- into default of these couple of large corporate client exposures, typically provision in the range of 30% when entering the default zone, therefore, explaining this moderate decrease of our provision coverage ratio. Now if we move on to the next slide, which is dedicated to the overview of the cost of risk for the second quarter. As we announced in the previous quarter, in fact, we have booked the -- what we call the IFRS 9 forward-looking components, which is a component that forecasts and accelerates the future cost of risk ratio on our nonreported exposure based on our macroeconomic forecast as per to the IFRS 9 provisioning start-ups. So as we announced in the first quarter, we booked almost CZK 1.3 billion for this forward-looking factor impact, which represents on -- for the first semester, 40 basis points, or on an annual basis, 20 basis points, again, in line with what we announced in the first quarter. Now for the other component of our cost of risk for the second quarter, this is the underlying cost of risk. We recorded rather moderate level of 13 basis points, and I'm commenting on first semester figures on an amount of slightly above CZK 400 million. And the main underlying factors were almost CZK 300 million created upon those 3 or 4 large corporate client situations in defaulted category and this reflecting the impact on the COVID downturn. We also booked almost CZK 200 million related to the increased profile of our small business client exposure as it was expected. At the same time, our loan portfolio on initial clients continued to show a quite strong level of resilience. And on a net basis, we didn't have to create any provision on this [indiscernible] client segment. Now going to the next slide, which -- like we did in the first quarter, I'd like to give you an overview of our credit risk setup. I will start reminding you of the part that is related to credit policy. In fact, we have benefited and we will continue to benefit from historically prudent underwriting standards. At the same time, we have continued to invest into the limitation of more advanced risk management technician models, which, by the way, are helping us already to provide the expected support of the Czech economy in turbulent time, and this will continue to be the case. Now we, in the second quarter, performed a certain number of portfolio reviews, and I will share with you the key elements coming out of those portfolio reviews, all of them, again, illustrating the good level of resilience of our credit exposure. The first one relates to a review of our large corporate of -- loan exposure on large corporate clients. Here, we performed a comprehensive review, and this portfolio is slightly above CZK 250 billion. And during the period from -- just before the start of the COVID downturn until the end of this year, we expect breaking down the way in the pro forma standard to watch category to default or with some other portfolio in the range of 5%, which is a relatively low number. If we zoom on the more sensitive industry sector, the expected breaking down the intensity is slightly above 10%, but again, showing the good level of resilience of our portfolio. On the SME client segment, we selected first portfolio for review where we crossed or intersected the most sensitive industry sectors with our moratorium portfolio. And this intersection calls at a low level of 5% of our SME exposure, which is in the range of CZK 150 billion. So again, showing the good level of resilience. If we look at the sectorial dimension, the exposure we have on the most sensitive industry sectors such as hospitality, entertainment, car manufacturers or car parts manufacturers, couriers and transport, we are at the level of 15.8% of our loan exposure, which compares to the goal of 19% for available of the Czech and GDP, so again, showing a positive point when looking at the industry sectors I mentioned. Also, one comment related to our moratorium portfolio, the loan exposure on the installment moratorium for a total amount of CZK 66 billion, which is, as you already heard, roughly slightly below 10% of our total loan exposure. This gives us a level of market share of 15% out of the banking sector, which is slightly below our natural lending market share, which is more like in the range of 17% to 18%. We have almost 60% of this CZK 66 billion on retail segments, while 40% or slightly above 40% on corporate segment. And in terms of maturity, we have a listed amount, which already exited this moratorium stage in the range of CZK 4 billion, while the vast majority is expected to exit this moratorium stage after a period from 3 to 6 months, which, said differently, that is 75% of this portfolio will exit the moratorium stage in October this year. What is important to mention is that we are running intensive surveys, and we are -- you can see client interaction, first, to make sure that we provide our clients with the proper supporting during this downturn time but also to forecast the expected default rate on the portfolio. And if you take the most adverse forecast, we are still sufficiently covered by our cost of risk guidance, which is at the level of 70 basis points. The last point, which was already mentioned by Jan earlier regarding our credit risk setup is about the readiness of our loan recovery function, which is valid for both our retail and corporate exposures. And here, maybe 2 or 3 comments, first, those portfolios prior to the beginning of the long term were at historically low level; and second, we are -- we have started and we continue to invest in -- for the retail part, more sophisticated collection tools, techniques and models; while for the corporate part, we are making sure that our staffing is adequate -- or sufficiently adequate given this downturn environment. Now moving to the last slide dedicated to the credit risk section of this presentation. We, in fact -- so this is Slide 27 on the cost of risk outlook. We, in fact, under this IFRS 9 macroeconomic scenario, which is, again, weighted average of different sub-scenarios from previous scenarios such as rebound all the way to the stressed scenario. Under this macroeconomic -- IFRS 9 macroeconomic scenario, we maintain our previous guidance on the impact from the IFRS 9 forward-looking factor of delivery of 20 basis points, which means that the underlying cost of risk is expected to grow from the current level, slightly below 15 bps all the way to a maximum level of 40 to 50 basis points by the end of 2020. I will finish by reminding that this forecast is made on the level of uncertainty that is fairly high due to, on the one hand, the severity of the economic downturn; and on the other hand, the massive support that are being provided to, not only the Czech economy but the economies around the world. Now this concludes the credit risk-related part, and I will now hand back to Jirí for a summary of our outlook for 2020.

Thanks, Didier. Yes. For the purpose of the earnings call, we updated our baseline outlook for second half '20. I think Jan has already mentioned some macroeconomic expectations. So briefly, GDP this year, minus 5%; next year, plus 6%. We are expecting an average inflation at the level of 3%. And in terms of monetary policy, 2 weeks repo is expected to stay flattish at current level, at least by the end of 2021. In terms of growth of the banking market, our expectation is that both lending and deposits market should basically grow mid-single digit. KB is going to follow this evolution. On the lending market, we would like to gain a bit of market share. Probably, this is just one exception where we changed a bit the guidance versus 3 months old, one, because at the time, as I can recall, we are guiding low to mid-single digits for loans, now it is rather mid-single digit. The change is that we guide also retail loans to grow mid-single digit, which was not the case 3 months ago. And also behind is very successful new production of mortgage loans in Q2 and a very rich pipeline even as of today. In terms of financial outlook, we are confirming what we said at that time. So on top line, high single-digit drop, very much influenced by net interest income and fees and commissions, while the financial operations should grow slightly on the back of higher demand for hedging costs, confirming original guidance. So basically stable or I would say, even at 0. And cost of risk was already commented by Didier, so at the level of 70 basis points. If I should mention one risk to the outlook, no surprise, it's a potential risk of second pandemic wave. So that's it for now. And now I'm passing floor to Jan to conclude the presentation. Thank you.

Thank you very much. I wanted to conclude by saying that, obviously, we have made a number of tactical decisions over the second quarter. What we have sticked to, though, is the overall strategic direction. So we are still ambitious enough to keep the company modernized, to have appropriate, updated and upgraded IT assets in place after the large, I would say, organizational change under the agile implementation at scale of more than 40% of the headquarter of KB. Second point, we are keeping our leading position on the corporate banking. You have may noticed that Société Générale group was awarded as the best financing bank in Central Eastern Europe. We take the appropriate portion of this award to us because on the side of large corporate financing, we are assisting together with Société Générale group almost the entire market of the Czech large corporations. You see the dynamics on the retail side where we are not stopping servicing our clients on both financing side and deposit side. Next time, we believe we'll be able to show you a better granularity on our strategic plan, which is simply having the ambition to elevate the overall quality of the bank to the new level and to confirm the leading position across the segments as a modern, agile, fast, smooth, and friendly bank towards a -- and a responsible bank towards the client and the society. Thank you very much. It was all from our presentation. Now we are open to answer your questions. Thank you.

[Operator Instructions] The first question comes in from the line of Samuel Goodacre calling from JPMorgan.

I had a question on cost of risk, particularly in the next couple of years. I appreciate on the slides you do say it's very early and uncertain, but you do make the comment that you would expect a degree of burden to be felt next year and in 2022. So I perhaps hope you could just remind us what a normalized level of risk cost would be for Komercní and what sort of magnitude or delta difference we would be seeing in the next couple of years? Effectively, are you expecting, without giving us a precise bit of guidance, for risk cost to be above normalized all the way out until the end of 2022?

Thank you. So the normalized cost of risk under the new norm has not been precisely defined yet. So I'll answer you based on what's known in the last 10, 15 years, and through the cycle level of our cost of risk is anywhere between around 30 to 40 bps. So that's the first piece of answer, but that has, given the current context probably some limited value. Then in terms of guidance going beyond the end of 2020, it's probably, well, be a very tough call to make. We, as of today, expect the 70 bps overall to be a ceiling level. So we expect this level to start decreasing in 2021. But it all depends on how the macroeconomic scenario and conditions are going to evolve in the coming months. So that's probably the best answer I can give you at this time.

No. Okay. I appreciate that. And that's very useful. The other question I was interested in is the impact on your digitization and nonbranch distribution efforts because of COVID. There, obviously, has been a behavioral shift, and you do have quite impressive branch closure numbers. So could you give us a bit of perhaps more qualitative kind of feedback on how digitization has accelerated because of COVID? And do you expect a lot of this behavioral shift, therefore, to stick, hence, the ability to close so many branches?

Okay. We don't have the head of retail banking with us today, so I will try to answer on my own, giving a bit of logic behind our decision. First of all, we are closing only those branches where we believe or we saw limited traffic already before the COVID. Second, we are not getting rid of 100% of our employees there. We are -- part of them will be reused or readdressed into branch, which is closest to the one which we are closing. We have also shown you in the past in our presentation the ultimate, let's say, number of expected branches being around, let's say, 200-plus, which we have slowly but steadily heading to. And last but not least, we have put in place our digital dashboard and started to systematically measure our capabilities in digital sales, which are -- without disclosing today the details, which are giving us the appropriate feedback on what to do and what are going to be our ambitions on the digital sales in order to not to create any gap between our ability to sell our products. So let me invite you to the next quarter presentation where we will be disclosing a bit more details of our strategic path between now and 2025, which will be more, I would say, granular picture of what we do and what we are going to do on the side of digitization.

The next question comes from the line of Máté Nemes calling from UBS.

I had 2 questions. Firstly, on NII. Given your guidance on year-on-year high single-digit decline in interest income, is it fair to say that Q2 NII could mark the trough and you could see some improvement in the second half of the year in terms of quarterly run rates? And secondly, on costs. Given the ongoing branch closures and savings on the headquarter office place that you mentioned, could you give us some sense of what we should expect in terms of cost outlook for 2021?

Thank you for the questions. First, back to the net interest income, maybe it's worth to get back why net interest income in this quarter was as it was. Basically, I can see there are basically 3 main reasons. The first one is related to the fact that simply, the drop of market interest rate was too high and, at the same time, too sudden. So you are right, the highest impact has been booked already in Q2. And for the upcoming quarters, we are expecting not a huge but a slight recovery. This is one thing. The other thing is related to the fact that in Q2, we booked kind of NPV adjustment on the debt under moratorium, so it was not extremely high but, at the same time, not negligible, so the impact, in first Q and Q2 was roughly CZK 160 million, CZK 1-6-0 million. Third reason was related to I'd say kind of limited down pricing capacity on deposits. It was helping us in the previous 3 quarters, second half of 2019, when the market interest rates were increasing relatively significantly. But at the same time, the banks in the Czech Republic didn't increase significantly interest rates on client deposits. So at that time, it supported net interest income. But at the same time, it means that down pricing capacity for the time being is relatively very limited. And to you and [ we have ] exercise roughly 1, 2 months ago on a retail individual deposit. And even if you go exactly to the 0 level, the impact would be at the level of CZK 100 million, so very relative. So why we believe that slight recoveries and at the same time, I'm saying NII is bottoming down in Q2 is basically a shock of a huge and sudden drop will not be the case anymore. That's one reason. Another reason is that the impact of NPV adjustment will be much, much lower than in the first half. So we are talking and guiding roughly CZK 180 million on a year-to-date basis, so only extra CZK 20 million, CZK 30 million on top of the order booked. Third, we are guiding that I'm expecting that longer-term interest rates are going to recover at least slightly. And as you know, our hedging policy, this should support NII as well. And the fourth reason, and I mentioned it during my comments on net interest income, is that we believe that spreads on loans, at least spreads on new production loans, will continue its positive trend as was the case during the Q2. So that's net interest income. In terms of costs, I'm not sure we were discussing that 3 months ago, but Jan mentioned some, let's say, technique or more structural measures implemented in Q2 and Q3. So that's about exploration of branches closure, cutting of FTEs at the head office, adjustments in cash strategy, smart office and so on, which are going to generate some savings but definitely not in 2020. So for 2020, we are confirming a flattish cost base where the cost of these measures will offset the savings generated this year. But for next year, we are expecting impact of these measures, these specific measures, in slow or low units of percentage points positive saving on our cost base. I hope this helped.

Absolutely. Very detailed.

The next question comes in from the line of Simon Nellis calling from Citibank.

Actually, I missed the last thing you said on cost. So you're saying that in the future years, you'd expect further cost savings? Is that what you're saying? I kind of missed that.

What I said is that the impact -- isolated impact of measures implemented in 2020 will not generate any savings in the OpEx 2020. But at the same time, these measures will generate savings in 2021 and beyond. But at the same time, I'm not saying that OpEx is going to decrease next year because, at the same time, there will be wage inflation and other stuff. So I'm specifically talking about these, let's say, tactical measures Jan was describing.

Got it. Okay. Sorry, it wasn't completely clear. My question is actually on capital. Could you just explain the quite strong capital improvement over the quarter? And kind of your outlook for -- any comments you can think about dividend distribution, given that your capital is kind of all-time high. Under your current guidance, you're clearly still looking to be profitable, and loan growth is okay but it's not super. So yes, any comments there would be helpful.

Okay. So in last quarter, the capital adequacy increased roughly by 100 basis points. Roughly half of that was related to the fact that there was a methodological change coming from SME-supporting factor, so it was roughly 40, 50 basis points. And another reason beyond was in the OCI and for other, and specifically, what I mean is the kind of improvements in so-called lack of provisions, which haven't been part of our capital adequacy ratio in Q1 but added positive roughly 30, 40 basis points in Q2. So that's the past. And regarding the dividends?

Yes. We are keeping ongoing dialogue with the regulator. You have probably -- or certainly noticed the recommendation expressed last week by ECB about prolonging the period of time when banks should not pay out dividends until the end of the year. We are of the opinion that Czech National Bank will follow this idea. So with high probability, there will not be any dividend payment event happening in 2020. As far as 2021 is concerned, again, we are keeping the dialogue ongoing. The entire Czech Banking Association is, let's say, searching for the answer, and we somehow believe that we should get it as soon as it gets in 2021. But it's more in the hands of the regulator than in the hands of banks.

And in terms of the level of capital you think you need in this environment, about the 16.2% requirement, do you have any revised guidance on where you feel comfortable?

Simon, basically, we are not changing our management buffer. So probably you remember that it is 50 to 200 basis points. So once it is possible, we are going to, let's say, release the capital surplus, which is on top of this buffer.

Okay. Actually, just one other question, though. This time on fees. Just wondering if there's any visibility on the outlook now that you're kind of out of lockdown and, I guess, transaction volumes are starting to pick up. And when do you think you might be able to get back to kind of a more normalized level, which, I guess, is the first quarter level? If you could comment on that.

Actually, for days, now there are some signs of normalization. Probably, I can say that Q2 has been at the bottom of 2020 as well. And for -- on the Q3, we are expecting kind of a recovery, mainly positively influenced by transactions. So no doubt that in some kind of transaction center, it's probably the most relevant case for the cash transactions, so we don't get back to normal pre-COVID. But on the other hand, we see very promising trends in cards transaction and other digital means. So we are expecting recovery in second half.

The next question comes in from the line of Gabor Kemeny calling from Autonomous Research.

A couple of questions on asset quality, please. Can you talk a bit about your IFRS 9 macro scenario assumptions? So what do you assume as the upside case? What do you assume as the downside case? And what kind of probabilities do you assign to these different scenarios? It will be also useful to get a sense of what is the provision sensitivity from moving to the downside macro scenario to the baseline or the upside macro scenario. And on the debt moratoria, I think you mentioned that you expect like 75% of the debt under moratoria to recover, so to exit the schemes this year. Can you comment on what kind of loss ratios do you assume on the remaining 25%?

So starting with the first question. In fact, we have the baseline scenario. Well, we -- in fact, as main viable GDP and unemployment, and the GDP for 2020 is minus 5%, minus 6%; 2021, plus 5%, plus 6%. Unemployment is -- for 2020 273 bps increase; in 2021, 200 bps improvement. So this is how they are defined. That's the baseline. We have positive or pre-COVID or rebound scenario. And then we have 2 stress scenario, a first level of stress and second. And regarding the weight that we apply, we have, for the baseline, 65%; for the first level of stress, 25%; and then the 2 other so-called extreme scenarios, positive or kind of tail-risk scenarios negative, 5% and 5% each. So that's how it's constructed. And this is reassessed on a quarterly basis. So we will do it on the future results and on. And regarding your second question on the moratorium portfolio. In fact, we have also 4 different scenarios mirroring a little bit this mapping I just described, meaning rebound baseline, stress 1 and stress 2. And for each of those scenarios, we, as you said, forecast the expected default rate for our clients under moratorium. And I will not disclose more details on that. But what I said is probably the most important, which is that our year-end cost of this guidance covers the most adverse scenario. So this is probably the important information.

Yes. And just a small follow-up on the macro scenarios that you gave us the probability, is it possible to quantify where the provision may increase if the stress scenario were to materialize? So if you can comment...

We don't really disclose this kind of information. We do have it, but it's probably not the type of information we would like to disclose.

The next question comes in from the line of Martina Matouskova calling from Jefferies.

Thank you for the presentation, it was very clear. Can I have just very 2 quick questions? First one is about volumes. You slightly upgraded the guidance from low-digit to mid-level digits, and I know you said it's mainly because of the retail production, which was very strong in H2. But I just wondered how much of the guidance includes the state guarantee loans, because as far as I remember, I think the uptake was very low so far. So -- or do you expect to actually increase going forward? And whether that is included in the kind of the mid-level -- mid-single-digit guide items? And the second question, you did mention that you had about 40 or 50 bps from the SME sectors. Do you have a clue or do you have a guidance what it could be from the [ RSCRE ] package, meaning mainly the software deductions?

Thank you for the questions. I will start with loans volumes. You're perfectly right, the main change in our guidance is related to retail driven by mortgage loans. In terms of corporate or the business loans, we adjusted it slightly as well. And the main reason is that the COVID-guaranteed loans grow slower than expected, but still, you are at the level of mid-single digits. So this is one thing. I'm sorry, but I didn't get fully your second question. So it was related to SME factors and the impact of 40 basis points. But what's behind the question, please, once again?

No, I know -- sorry about that. So this quarter, you got about 40 to 50 bps from the SME sector. Do you get 100 benefits from the CRE package following quarters? So I am mostly asking about the softer deduction of capital, which some of the banks are guiding for.

Okay. So we are still expecting some positive impacts coming from the methodological changes, but definitely not as high as was this impact. This is one message. And another message, let me briefly indicate that for 2021, we are counting also with other methodological changes, and that's mainly about PD and GD collaboration models. And the expectation is that this will increase risk credit assets. So far, we are not in a position to be precise and to quantify, but it's fair to mention that methodology impact is -- or have a positive impact this year but will have negative next year.

The final question comes in from the line of Robert Brzoza calling from PKO BP Securities.

I have just a quick question regarding the Stage 2 exposures. Could you provide more detail on what the share of Stage 2 exposures as of now versus end of 2019 and what's their coverage which takes to provision it?

The Stage 2, as on -- as you can see on the Slide 24, the Stage 2 exposure, is that CZK 37 billion, which is roughly, as I said, 5%, 5.5%. And regarding the [ forging ] coverage ratio, I don't have it off the top of my head. We will provide you with this information. So we'll send this to you by e-mail.

Okay. That does conclude today's question-and-answer session. So I shall turn you back across to your host for any closing remarks.

Okay. Let me thank you all for your participation and very interesting questions. I hope we replied to your satisfaction. I'm stating on behalf of the entire KB team that we are fully ready to face the next stage of the impacts of the COVID-19 crisis here. As you see, our capital and liquidity equipment, we are fully equipped and ready to go through this period of time. We also believe that the Czech economy will react in a fast and flexible way on the next challenges created by the situation, and we will be able to play our important role in the economy. We will keep you updated on the relevant strategic moves, and are looking forward, obviously, to hearing from you, at latest, the occasion of the next quarter presentation. In the meantime, we stay at your disposal for any further question you might have. Thank you very much. And let me wish you a good day. Thank you.

Thank you for joining today's call. You may now disconnect your handsets. Host, please stay connected and await further instructions.