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

Welcome to the presentation of the results of Komercní banka for the full year 2020. It is 10th of February 2021. Please note that this call is being recorded. Our speakers today will be Jan Juchelka, Chairman of the Board and CEO of Komercní banka; Jiri Sperl, Chief Financial Officer; Didier Colin, Chief Risk Officer; Miroslav Hiršl, Head of Retail Banking; and David Formanek [indiscernible]. We will begin with the presentation of results, which will then be followed by questions-and-answer session. [Operator Instructions] So that is from me for now. And now I would like to you -- I would like to ask all of you to mute to keep [Audio Gap] Thank you.

All right. Good afternoon, everyone. Thank you very much for being with us at the occasion of the presentation of Komercní banka results of fourth quarter of 2020 and the full year of 2020. My name is Jan Juchelka and I'm CEO of the bank and it's my pleasure, together with my colleagues, to lead you through the presentation, which is also appearing on your screens. Let me start with Page #4. Here, you see the main highlights of of the year 2020, not yet 2021, as it is mentioned in the title of the page. So Komercní banka, and it's my pleasure to start with this announcement, was able to further increase the capital base of the bank by its business results. The capital is currently appearing at level of 22.3% of the total balance sheet. And we are not yet chipping in net profit realized in 2020. Let me just remind that the regulatory requirement is finding at the level of 6.2% (sic) [ 16.2% ]. Komercní banka expects that we'll have the conclusion of our ongoing dialogue with the Czech National Bank about the dividends based on the audited results, which should be delivered in March, and we will be able to guide the market afterwards in that particular decision. In 2020, the lending to customers expanded by almost 6%, and the total value of the lending book is at the level of very close to CZK 700 billion. And Komercní banka was one of the leading banks and instrumental banks in the dialogue, especially in the first quarter of 2020, in the frame of -- beginning of the pandemic situation in the country. We were providing Czech economy with a quite dynamic way with new lending and the growth was recorded on both sides, the retail as well as the corporate. Komercní banka was and remains a clear leader of distributing the state guaranteed loans to small and medium-sized companies known here in Czech Republic under the name of COVID III program. The total volume of loans delivered to SMEs under this program is totaling to CZK 12 billion at the end of last year. We are occupying more than 50% of the market share, and we strongly believe that it will help us in following stages of development of economic situation in the country. We are applying our standard risk assessment and underwriting processes for these loans just for the sake of excluding any potential discussion or question marks around that. The quality of assets, as Didier Colin will provide you in deeper detail, remains very strong and very good. After the expiration of payment moratoria by the end of October, it was only 4% to 6% of clients asking for the individual treatment of rescheduling the repayments of the loans. Deposits were growing by almost 10%, totaling in the balance sheet by close to CZK 900 billion level, which is providing additional liquidity to the bank and allowing us to keep the net loans to deposit ratio at very satisfactory and comfortable level of 76.1%. Revenues were down by 8.9%. The net profit attributable to shareholders reached CZK 8.2 billion, which is translated as 9% written on Tier 1 capital, which we believe brings Komercní banka to top-notch banks into European context as far as the return on capital is concerned. In 2020, despite the critical and crisis environment, we didn't stop ourselves planning the strategic targets for the bank. And we were able to put together a strategy for next 5 years between 2020 and 2025, which continues in the logic of keeping the bank agile, very efficient, very effective and nimble in the competition with other banks and in the competition with other players. As part of our 5 years plan named KB Change 2025. We are also approaching the change of our core banking system where Temenos became the provider of this part of the transformation. KB has also committed to became -- to become carbon neutral company by 2026. We are taking very seriously the commitments made by SG Group, and we are accompanying SG Group in its responsible approach to making business and a responsible approach to -- of behavior and corporate citizenship here in Czech Republic. We are also -- we have also exited the European diversity charter committing Komercní to promote diversity and equal opportunities for its all employees. Let me move to Page #6, where you will see that despite the turbulent times, Czech economy is showing quite a high level of resiliency against the pandemic situation and the GDP was compressed by approximately 5% in Q4 2020, which was already in growing trajectory compared to third quarter of the same year. In total, by -- for the entire year, we expect it will be compressed by approximately 6%, mainly due to lower household consumption and lower fixed investments by corporations. Czech car production, which we take as a good benchmark of the performance of the industry was down by 19.2%. The unemployment, though, is remain very shallow and was totaling like 3.1% in December, was growing afterwards to the level of 3.9% is back to 3.6% as we speak. So we see not only strong resilience and strong demand for workers in Czech industry, but also the positive effect of fiscal measures adopted by Czech government. The nominal wage was growing slower compared to previous years for obvious reasons. Inflation is back to the tolerance band of Czech National Bank, mostly due to food and clothing prices. In Czech krona, it is stronger by 3.5% quarter-over-quarter and weaker by 3.3% on year-over-year. The Czech National Bank has announced last year, a remaining low level of 0.25% of the base rate. The market rates on the longer end of the curve are achieving 1.28% for 10-year interest rate swap and 1.3%, 10 years seasoned government bond yield. Let me say -- let me move to next page, and let me say that despite all the changes required or provoked by the pandemic crisis are bringing the Czech economy to its base and showing that a strong industrial base is one of the advantages of the country as for the time being. The pandemic situation was also elevating in second and third wave and Czech Republic became, from the health care perspective, one of the most affected countries in Europe. There is distance learning adopted closure of HORECA segment almost entirely and all type of collective events are being prohibited currently. The nonessential retail is being closed as well. Public finance is helping either towards the household/employees, but also towards businesses and corporations, is achieving the highest level of indebtedness. Nonetheless, still in very, I would say, relatively comfortable levels of 40% coming from the territory of 30% of the relative indebtedness of the public finance towards the GDP. Czech Republic is putting together the national recovery plan, which is counting with usage of resources coming from next generation EU recovery fund, and we should be receiving resources close to the level of CZK 180 billion, majority of which in direct grants, part of it also in so-called financial instruments. Here, we see rather business opportunity for banks to prefinance and finance the projects stemming from this robust stimulus towards Czech economy. COVID guaranteed lending, as I've already mentioned, we played an instrumental role, and we became one of the most visible providers of state guaranteed loans. As far as loan moratoria are concerned here in Czech Republic, it was given by law. It ended at the end of October, and it was a very low level of of clients coming back to our bank and requesting individual treatment in rescheduling the repayment calendar. Let me move to Page #9. As I have already mentioned, despite the heavy operational work required from the management in 2020, we were able to put together a strategic plan for next 5 years. We are building it on our strong belief that the role of Komercní í banka is to build together with our clients a better and sustainable future through responsible and innovative financial solutions. We are aspirating for a leadership in new era of banking in Czech Republic with 2 million active clients. The strategic pillars based on which we are defining our strategic, key strategic initiatives is growth, helpfulness and responsibility. And the key strategic initiatives are routing our investments and attention and energy to building a strong digital proposition to our clients, achieving a higher level of efficiency and effectiveness in -- on the middle offices and back offices. For example, by building one mortgage loan factory for both the bank and the building saving company; searching constantly for new potential sources of revenues; confirming our market leadership for corporate banking; continue building highly adaptive and effective organization based on the logic of agile way of working; achieving full digital proposition and digital sales and services for our retail clients as well as corporate clients; confirm our leading position in the field of environmental, social and governmental fields, and by the way, becoming carbon neutral until the 2026; use in better way, our own data for preparing the tailor-made solutions for all our clients; and confirming our traditional strength, which is a low cost-to-income level. Let me move to Page #10, where we are showing that our digitization or building a digital proposition for our clients goes to the to the core of our bank. So we are also aiming to change and upgrade our core banking system by the cooperation with Temenos Transact company. Aspirating for massively simplified, fast, 24/7 fully online environment where we will be able much faster and continuously providing innovations into the market. Komercní banka and Komercní banka group is also continuing cooperation with external parties. We are -- after equity investments into fintechs of Lemonero, Roger and Upvest, we continue building the ecosystem around KB, allowing the clients to see wider range of potential products providing by this ecosystem. To secure our position -- for securing our position in the corporate lending, we were also active at capital markets. At the beginning of the year, first week of this 2021, we approached debt capital markets with an inaugural benchmark euro-denominated bond issue at the level of CZK 500 million -- sorry, EUR 500 million with 5-year mortgage-covered bond. This issue was rated at the level of AAA by Fitch and the final pricing landed at the level of mid-swap plus 12 basis points, which in a reoffer translation, is bringing us to negative territory. We want to activate this newly onboarded resources in favor of origination of euro-denominated loans, which is in our corporate portfolio, the fastest-growing part of the lending book. Our subsidiary, ESSOX, achieved partnership with Hyundai and KIA and became exclusive partner for financing their stock, and further strengthen its position amongst the main competitors. As I have already mentioned, we are taking seriously and systematically working on ESG area, including corporate climate policy, which we are incorporating into our business model and including the diversity charter. Let me hand over now to, I guess, Miroslav Hiršl, to provide you with information starting at Page #11. Thank you.

Thank you, Jan. Hello, everyone. I will guide you through the page that we named enriching digital ecosystem. I will not speak about every single point that you see on the screen, but I'll do my best to highlight all that I believe are of highest relevance for you. And in this case, let me start by a few short comments related to new services introduced in Q4 2020. And to no surprise, I will start by naming bank ID service. Famous already initiative that we believe will have a high impact, not only on the banking sector, but it will go far beyond impacting, in positive way, the whole economy and the whole society. And I'm happy to say that the project is on the track. We are proud to be one of the driving forces behind this initiative. We started with pilot operations, and we are getting ready for the full rollout of this service. And the second one on this list that is worth mentioning definitely is same-day crediting of almost half of all foreign payments, which is the current status. And before this change was implemented, this feature applied to just a few percentage of all our foreign payments. So we believe that this is another nice progress and step forward. Moving down on the left side of the slide. And let me say that the quarter was quite fruitful in terms of different awards going to retail area. The first one that we appreciate a lot, Mobilní banka, our mobile bank application was awarded the top application award, the first place. And in competition sort of benchmarking that was launched for Czech and Slovak market. Another success that we scored in terms of award goes to non-purpose consumer lending. We are awarded by independent portal finparada.cz as the best consumer non-purpose loan on the local market. And the last out of these 3 goes to our building savings offer and our building savings subsidiary. In financial product of the euro competition, our building savings got the bronze medal. Let me now move to the core of our digital ecosystem, and let me illustrate a few things that are happening in the bank. And I will start by steady growth in mobile banking penetration. As you know, the mobile banking is our flagship in our digital presence. You can see that we've been recording very solid progress over last years, and it's not slowing down. And the last figure achieved is close to 57% of all KB clients using this application. And I'll be happy that one day, in not-too-distant future, we will be able to touch the 60%, and it should really happen. From the same area, digital wallet, we talked about it already a few times. You can see that comparing Apple and Google Pay, the curve for Google is not as steep as for Apple, but the growth has been quite solid recently, and now it represents approximately 1/3 of all the transactions. This is another confirmation of how much our clients value the comfort and this is something that is very highly appreciated. And we still keep Garmin and Fitbit devices in the offer as a nice complement to the others. Moving to sales. When you look at the right upper side of the slide, you see a few main product categories and the split of sales per channel. Consumer lending is still our flagship in digital sales. And by the way, when you look on end-to-end proportion of sales, it went up for all main categories. It went up a bit compared to last quarter for personal account, consumer credit and credit cards. So we are happy to see and observe this steady growth. Some other -- those of you who have been serving [indiscernible] our results might notice that in consumer credit, the part that is partially digital went down compared to the previous quarter, but this is mainly because of COVID context and the lockdown because in partially digital, you just need the human element inside and the human element was, for various reasons, not always available. I don't see any reason why this should not boost up, once again, in very near future. And thus far, more good news going to consumer credit. Just a week ago, we launched a new fully digital, end-to-end digital process, 5 minutes consumer loan, and we have already first 100 of cases going through, which means we are just now testing the stability of this solution, and technical aspects, and we are getting ready for full commercialization. The last topic on my list on the bottom right-hand corner, authentication by KB Key. This is something that we believe in very much, something very important. And I'm happy to see that we are almost reaching 50% of all KB clients using this new device or new method. And these are clients with active authentication. So it's not enough a new buy or subscribe, you really need to activate it. And it is an important -- let me say it like that it is an important door or gateway to any service that the bank is providing and this will even increase in the future. So anytime you are in touch with the bank on remote basis, be it a branch or be it a call center, this is the primary method of authentication. And its importance is even growing now as because of PSD2, we are using this as a very comfortable way of authentication or validation of all payment transactions done with payment cards in online selling. And the number of use cases is going to increase even further. And we very much believe that this is something that we need to stretch to as many of our clients as possible, and you see that it's happening. That's all for me now, and I hand over to David Formanek.

Good afternoon, and thank you, Miroslav. Let me guide you through the main highlights in the area of corporate banking. So first of all, we are very proud to be the true leader in financing of the SMEs and corporate through the so-called COVID III governmental program. This is in the orange box on the down left side. This program has been prepared -- declared by the Czech government in the middle of last year as a support for financing of the midsized and corporates, providing the banks with the state guarantee. And KB has become a market leader in providing this type of financing to the corporate with the market share exceeding 50% by the end of last year. We have also developed our abilities and expertise and business in the area of sustainable or so-called green finance, where we have expanded, especially our advisory skills. So in order to be able to advise our clients being on one side in corporates, but also municipalities. In the area of various investments projects leading to water saving, energy saving, environmentally friendly, power production, circular economy, so that also provide them with the support, which type of support coming either from the state or from European Union can be used for various types of projects. And obviously, to co-finance these projects. We have also introduced new services, which we can call part of the so-called digital offer or digital banking. So one of the services highlighted here is the service called MujPodpis, meaning my signature, which is the offer to authorize or to let -- basically to authenticate our clients signing documents with their partners. So this is a kind of B2B or B2C service. We also incorporated new app coming from SWIFT in order to enable faster international payments. And in the area of so-called tactical digitization, we expanded the number of documents, which we exchanged with our corporate clients in online way, so remotely and signed remotely, 10 times. Obviously, this has become also something really needed and appreciated by the clients due to the lockdowns. We have started the cooperation with fintechs. We acquired minority stakes in the companies Upvest, Roger and Lemonero. Upvest being the online portal for real estate crowd funding, where we are developing together their business using Upvest as a source for mezzanine financing for our real estate projects, also offering Upvest as an investment opportunity to our retail clients. Roger being active in the area of receivables financing or supply chain financing, is becoming one of our channels to provide our small companies, small businesses with the working capital lines. And also provide our bigger clients with the offer of supply chain finance. And company Lemonero active in the financing of small e-shops using a unique way of analyzing and scoring the risk of these small e-shops. Yes, also, besides, let's say, the equity partnerships, we are also developing a commercial corporation, like with the company Fidoo. Fidoo is an application to simplify, to our corporate clients, their area of corporate spend and travel expense controlling and accounting. Or another example, company Fakturoid, which is invoicing and cost administration app, especially for small companies. We are also here showing one of the rewards we are proud of. This is a reward from Euromoney, and we are -- we have been declared as the market leader in the cash management area. We can move to the next slide, where we are showing you a number of selected large transactions of the second half of last year by -- obviously, we have the permission of the clients. Here, let me just comment few of them. So first of all, I would like to comment the transaction for the client FVE CZECH, which is the biggest photovoltaic power plant situated north of Prague, and we are very proud that we are the financing partner of this power plant. For Kiwi.com, maybe some of you know, this is a major global site for air travel booking. We have provided syndicated financing under the umbrella of so-called COVID Plus. COVID Plus is, again, governmental sponsored program, so governmentally guaranteed program for large or export-oriented corporates. So this is, obviously, guaranteed loan in order to support Kiwi.com in, let's say, difficult times for this company. We have been part of the first IPO of -- we did first IPO ever on KB. This was for the company Ceská zbrojovka. So Ceská zbrojovka is a traditional producer of short guns and also internationally expanding corporation. And maybe last but not least, we also -- our major partner for municipalities. One example is the investment loan for the city of Ceský Krumlov in South Bohemia. And now let me pass the word back to Jan.

Okay. Thank you, David. I will be very quick with showing the business performance. The gross lending is up by almost 6% on year-over-year basis and flat between third and fourth quarter of 2020. The most dynamic growth was seen at the level of financing of small and medium-sized enterprises. Nonetheless, corporates as well as financing through SGEF leasing solutions were growing by single-digit -- by single-digit growth. The main, I would say, investment activity for households appeared in the field of origination of new mortgage loans and housing loans from KB or from Modrá pyramida building saving company. Having said that, despite or thanks to strong movements also on the deposit side, Komercní banka remained at very comfortable 76.1% loans-to-deposit ratio with liquidity coverage ratio exceeding 200%. Let me move to deposits, which I have already started to comment with Page #16. Here, we are close to 10% growth. Both retail and corporations are piling up the cash, hopefully, for the future spendings or investments. What is interesting to see is that the most dynamic growth was recorded in the category of current accounts. You can -- I can guarantee you that our sales force is helping the clients to turn part of these deposits into investment or insurance products. Speaking about nonbank assets under management, let me repeat again, as almost every quarter now that the pension schemes are growing by almost 8%. We have recorded a rather moderate growth of insurance of insurance products and slight decrease in the period of mutual fund solutions based on year-over-year comparison. I am handing back to Jirí Šperl with financial results -- with financial performance. Thank you.

Thank you, Jan. Good afternoon, everyone. In terms of 2020 financials, we delivered what we committed to deliver. The results are fully in line with our expectations with one exception. It is a cost of risk that ended in Q4 even better than we expected and guided to the market roughly 3 months ago. Didier is going to speak about to that in a minute, but from my perspective, it is another great proof of a good and resilient quality of our loan book. So now let's have a look at how we did on a year-on-year perspective, one by one. Naturally, COVID hit our performance, no doubt. But still we are bringing a very resilient result at the level of CZK 8.2 billion. The main drivers are not surprising, and they are visualized at the waterfall chart on top of this page. So the biggest impact compared to 1 year's or last year's performance is the cost of risk despite the fact that Q4 was better that is sort of increased provisioning more than CZK 5 billion. Another, let's say, driver, which hit us was, in core revenues, was drop in net interest income. Here, very much influenced by the environment. Maybe just to remind Czech National Bank, let's say, decreased, dropped rates by almost 90%, 9-0, in March of this year, from 225% to 25%. And also, we are missing net fees and commissions almost CZK 800 million, and I'm going to talk about it in a minute. How this transports into our profitability indicators, as Jan already mentioned, return on average Tier 1 capital. So let me -- at ROE, which ended at a strong 7.4%, which is still pretty higher than the average ROE of European banks even in pre-COVID times and is, without any doubt, one of the best performance in CEA region in 2020. This is just proving resilience of our bank, even in not an easy environment, and we are sufficiently proud of that. This brings me to talk of assets or the balance sheet. So there is also strong growth, almost 10% year-over-year, exactly 8.3% on liability side, of course, driven by deposits, more than 10%. But this year or in 2020, also by capital, which was growing by almost 8%, and there is, again, very clear, it's return for dividends from 2019. How we place these new extra resources, of course, in first-line to loans, which were growing by more than 5%, Jan was commenting on that. And also, the trend from previous quarters is continuing. What I mean is that the liquidity surplus was -- it was mainly placed into government bonds, Czech government bonds. Why? Because still it's more effect is bringing more attractive yields than alternative investment, which is repo plus net plus interest rate as well. Maybe to mention the last two points on this slide. Quarter-over-quarter, we reported a drop almost CZK 100 billion. Probably, you remember why it's about, let's say, optimization of the balance sheet at the end of the year linked to a resolution fund charge. And maybe to say this CZK 100 billion drop, let's say, created a saving at the level of CZK 150 million in OpEx 2022 versus if we do not do anything. So all in all, the balance sheet is sound and healthy, both from liquidity and capital perspective, I will get back to that later. Jan was already mentioning some liquid indicators before. So I only would like to add that the covered bond that he was mentioning is not still on the picture. Why? Because we completed the transaction as late as the beginning of 2021. So you will see that next quarter. And after this, of course, liquidity indicators will become even higher. Couple of sentences about, let's say, gross operating income. So we'll start with net interest income, year-over-year down by 9.5%. Very much influenced negatively by drop in income from deposits hit by fall in reinvestment yields. At the same time, income from the loans went down slightly a bit as well. Probably some of you might remember that I was indicating signs of recovery when new loans spread during Q3 earnings call. Unfortunately, this trend hasn't been confirmed in Q4, were mainly retail loans spreads dropped down. It's partially influenced by the increase of the market interest rates starting in Q4, while the banks didn't -- or haven't adjusted their pricing and hopefully, they do that quickly. From quarter-over-quarter perspective, net income is basically flattish. And already, it is partially influenced by the recovery in long-term interest rates. Net interest margin went down a bit more than we were expecting, so that's year-over-year by roughly 30 basis points. And I'm afraid that the trend of decline of of NIM is going to continue even in 2021, of course, not as fast as last year, but it will go still down. Fees and commissions, year-over-year minus 13%. I was mentioning already before that there are two main factors: first one is related to regulation, [indiscernible] as SEPA regulation, which covers half of this decline. And then simply, we are missing the transactions due to COVID. So all is visualized in transaction fees part of the bottom chart -- bottom right-hand chart, which went down almost by 30%. On positive side, fees from cross-selling were growing by relatively strong cash 7%, and we are expecting a further continuation of this trend. Upper chart is focusing on quarter-over-quarter evolution. So you can see here a relatively huge jump, almost 10% up. It's partially influenced by recovery of the transactions at the end of the year. But at the same time, it's partially also seasonality effect, which also you can see 1 year ago that Q4 is rather strong in terms of generating fees and commissions. Net profit from financial operations, on a full year basis, is still up. So it is plus -- almost 3% up, coming to roughly CZK 2.9 billion. Of course, this income is more volatile than the other chapters. Always, we are repeating that around our run rate for quarter income is, whatever, around CZK 700 million to CZK 700 million. This would lead annualized to CZK 2.8 billion to CZK 2 -- CZK 3 billion. So we are basically in the mid. It was, of course, positively influenced by second quarter, but also in third and fourth quarter and there is relatively solid and solid performance. There are two main contributors or effect, if you will. First, excellent result in capital markets. Our investment banking, which was growing by almost by 50%, the third part of the chart, but this was offset by by lower gains on FX from payments, and that's mainly due to decrease in foreign transaction volumes, less inbound and outbound traveling and related currency conversions. This is bringing me to OpEx. So I would say it's traditionally very much under control. It's flattish 0 4%, as we committed. In terms of structures -- and now I'm referring again to right-hand bottom chart. In terms of structure, the cost categories, which we have fully in our hands and even down, so decelerated to personnel costs and GAE. On the other hand, there are some costs, which we do not have fully in our hands. And a good example is resolution fund charge, which was growing last year significantly. And we strongly believe that this is not going to be repeated in 2021. I think it's also worth to mention that this result also does include extraordinary, some extraordinary costs, let me mention some of them. So it's, for example, extra cost related to COVID, so that was -- and we were reporting to you 6 months ago. So purchase of notebooks, respirators, agent equipment and so on. Second, cost of structure measures implemented in second half of the year. So that's about closing of the branches. We closed 1/3 of the branches, severance of 2020 and so on. And at that time, I was telling you that these measures are rather expensive. So we are able to absorb. Third restructuring reserves. At the end of the year, we created another restructuring reserve, not big one, it's around CZK 65 million for severance payment of 2021. At the same time, we are able to accelerate investments into digitization and -- or more generally into our future. So all in all, this led to cost income in line with the expectation at or about 50% supported by the decrease of FTEs. And that's for GOI. And now it's my pleasure to pass over to Didier. Didier, please floor yours.

Thank you, Jiri. Good afternoon, everyone. So now turning to the asset quality. The fourth quarter [indiscernible] confirm the resilience of our loan book through the cycle. And as you can see on the slide, this is well illustrated by the evolution of our stage 2 exposure, so sensitive -- non-defaulted exposure, which grew moderately from 5% at the end of 2019 to 6.4% at the end of 2020. The same evolution was also recorded on our defaulted exposure with a small growth from 2.3% at the end of the last quarter to just 2.6% at the end of last year. And one brief comment regarding our provision coverage on the defaulted exposure, which was posted at 50%. So showing some more decrease compared to the previous quarter, that was explained, in fact, by the entry into default of exposures, typically provision at a lower rate than the average provision coverage for this NPL part, and benchmarking this level of 50% versus the EU average level. We are quite comfortable, the EU average level being in the range of 45%. So now turning on the next slide. This is probably the best illustration we can give on the resilience of our loan book in 2020. This slides, in fact, give you more details on our terminated loan moratorium and our exposures. As you probably remember from the previous quarter, it reached, in 2020, a peak of a bit more than CZK 73 billion. And this moratorium being closed finally at the end of October. Our clients started to be in repayment mode, which explains this decrease of CZK 4.5 billion, which is in line with the scheduled amortization, showing the repayment capacity of our clients now in the repayment mode. Another interesting indicator is that this part of the portfolio represented [Audio Gap] total loan book, which puts [Audio Gap] our key position compared to the banking sector, the same type of exposure at [Audio Gap] the banking sector being at a higher level of 12%. Now if we look at the risk profile, this is probably [Audio Gap] information here and sign of our resilience to the crisis. The measure of default in the last 3 months of the year was recorded at a level of 5.8%, which is significantly lower to the same measure that was recorded at the level of the banking sector measure that we assessed based on the Czech National Bank information at the level of 8.5%, so quite substantially higher. And as you can see, the level of payment discipline in the last 3 months of last year was excellent with the payment incident rate below 1%. Now turning to the next slide. You have here the overview of the full year structure of cost of risk for a total of 68 basis points or near CZK 4.6 billion. And I will -- first, as it was mentioned by Jiri, I remind all of you that it's slightly below the guidance that we provided in November when communicating on the third quarter results. And in fact, the main reason for this favorable gap is the positive favorable evolution of our terminated loan moratorium portfolio in a significantly better way than what we expected a few months ago. There are -- on this structure, there are three main takeaways, which I will share with you. The first one is the amount out of the 68 basis points. [Audio Gap] on our corporate defaulted exposure at a level of 26 basis points. And here, there are two positive comments to be made. The first one is that this 26 basis points were recorded on default from the COVID period. So our clients impacted by the COVID pandemic. And in a number [Audio Gap] related without any sign of wide opportunity deterioration. And at the same time, looking at the defaulted exposure -- defaulted pre-COVID, on this part of the portfolio, we recorded some net provision release for an amount of 3 basis points, which is a sign of the clean situation of our portfolio pre-COVID as well as the continued good recovery performance. The next important takeaway on this cost of risk structure for 2020 is the level of reserve we booked under the IFRS 9 provisioning standard on the non-defaulted exposure. For an amount of CZK 1.8 billion, which is an improvement of 27 basis points. And this reserve being based on quite prudent and conservative macroeconomic assumptions. And the last important point on this cost of risk structure is the amount of provision we created on retail defaulted exposure for a magnitude limited to 7 basis points, again, confirming the resilience of our retail loan book. So this is for the cost of restructure for the full year 2020. The next slide gives you a zoom on the fourth quarter, for which the cost of risk was booked at a level of CZK 1.2 billion. I would now comment it as this CZK 1.2 billion was essentially reflecting the provisioning or the reprovisioning on these few defaulted corporate clients situation that I just commented. And it was the main component. And I will conclude this brief credit risk overview with a couple of words on our 2021 cost of risk guidance, which we have renewed at the same level as last year, so in the range of 50 to 60 basis points. This level is built on a rather conservative set of assumptions related to the COVID pandemic environment, which means that this guidance contains some upside potential in case of accelerated positive development of the macroeconomic environment. And on this optimistic note, I will hand over back to Jiri for the capital dividend and broader outlook section. Thank you.

Thank you, Didier. I'm at the Page #30. So I would say that the capital adequacy has continued growing further through the roof, even in Q4. So in Q4, we were reporting another 70, 7-0, basis points, due driven mainly by a method of changes stipulated by the regulator. We're not talking about -- it's mainly change in intangible assets treatment, so it's mainly software that is not deducted from the capital ratios anymore. And another reason for increase of the capital, it was partial decrease of market risk weighted assets due to shrinking of the balance sheet at the end of the year, I was commenting on that 10, 15 minutes ago. So we ended at 22.3%, as already touched, even without the profit of 2020. That's for this slide. I would say that the capital strength is nicely visualized at the following page. And I'm referring to the right-hand bottom chart. So here, you can see that our minimum requirement by regulator is 16.2%. If we add, on top of that, 200 basis points, which is upper edge of our management buffer, which is 50 to 200 basis points. So this is bringing me to 18.2%. And basically everything put is on top of that is something, which we could define as a kind of capital surplus. Despite that -- and we also added a profit of 2020 [indiscernible]. Despite that, we are not suggesting any dividends now. And the reason is clear and strong. Simply our regulator, CNB, has recommended KB, but not only KB. It's a recommendation that is for all Czech banks to refrain from making any dividend distribution. Unless reaching mutual consensus during the prior joint discussion between the banks and the supervisory authority. Of course, we decided to accept this recommendation, and we are expecting that the discussion will start as soon as possible, but it seems that for that we will need a final audited figures, which means that this would be some time in March. For year 2021, the Board of Directors approved the dividend policy 0% to 100% payout. I agree with you that it's sort of a wide range. But given the uncertainty, it's, from our perspective, fully justified and gives us the needed flexibility. However, given so huge capital surplus, as visualized on the chart, I'd like now to emphasize on the fact that, that the management of the bank intends to return capital in excess to the shareholders as soon as the regulator allow and it could be generally either in form of extra dividends or also M&A. And at the same time, we are declaring readiness to call for Extraordinary General Meeting already during 2021 in a very optimistic case. It could be already even in Q2. But from my perspective, more realistic is rather Q3. And this is bringing me to last slide of this presentation, which is baseline outlook for 2021. I'm skipping macroeconomic assumptions because Jan touched them, maybe to mention only our expectations on inflation. So it's expected to slow down to 1.8%, so below the targeted value by CNB. In terms of policy rates, we are not in our planning documents as optimistic as CNB, which is suggesting [indiscernible] are suggesting 3 hikes. So what we have in our assumptions is only 1 hike, and it will become at the end of this year. So November is our months with [indiscernible]. Moving to banking market outlook. Lending still continue to grow. So whatever around 5% would be a good guess and base for our planning deposits are going to grow a bit faster than the loan. So we are guiding slower than in 2020, but at the same time faster than loans. So whatever, between 7% to 8% would be a good guess. KB would like to gain some market share in 2021. As was the case in 2020. It's mainly the case for loans, and it's a relevant, both for retail and corporate segments. So it basically goes across the board. We don't intend to gain market shares in deposits. Why? Because so huge, let's say, liquidity position of the bank. In terms of financial outlook, we are guiding revenues flattish. And there are basically two effects. The first one, net interest income is still continuing to be under pressure. And mainly, it's due to continuing negative effect from lower investment yields ratio. So spread in time by KB's hedging policy. On the other hand, fees and commissions are expected to grow -- to rebound to grow at the level of mid singe digit. And also financial operations should increase. And here, we are expecting even high single-digit, very much influenced by, I would say, FX income from structural booking. OpEx, we are expecting to remain flattish. And cost of risk was already commented by Didier. You wouldn't be surprised by the biggest risk, which are listing here. So everything is related to COVID, both local and global. So it started to insufficient vaccination results, worsening of external environment and also what wouldn't help us is if, for whatever reasons, there would be further decline in Czech interest rates. So that's baseline for in 2021. And I'm passing floor to Jan. Thank you.

Sorry, Jan, maybe unless, of course, you want to continue. I think that has concluded the presentation part of this session. And now there will be opportunity for the participants to ask the questions. [Operator Instructions] So I'm now going to ask Gabor Kemeny from Autonomous. He has asked for the first question.

hello, can you hear me, please?

Yes.

My first question is about dividends. As I understand, you assume that there might be a positive decision on dividends by the third quarter, potentially in the second quarter. If there is, do you think the CNB could potentially deviate from the ECB as a sense dividend guidelines in either way? And yes, my other question is on M&A. So there seems to be a kind of consolidation shaping up in the Czech consumer lending business around the proposed Moneta transaction, Raiffeisen is doing an acquisition. How do you see this yourself positioning in this space? And do you see room for -- do you see M&A opportunities in the retail banking space, given your level of excess capital?

Okay. I will start with dividends. Of course -- so far, we do not have enough information what will be the position of CNB. But at the same time, we strongly believe that they will be able to, I call that, deviate from ECB recommendations. Our understanding is that for Czech banks, much more relevant regulator than ECB is European Systemic Risk Board, which -- of course, which, let's say, prolonged the ban by the end of September as well. But at the same time, allowed the banks to pay dividends, of course, after some discussions with the local regulator. And ESRB and neither Czech National Bank didn't define any, let's say, limits. Well, what they said was that the dividends should be significantly lower. So the question is how to interpret the word lower. But definitely, it is not quantified as quantified by ECB, who said that maximum dividend paid is the lower value from 15% of accumulated profit of 2019 plus 2020 or 20 basis points of risk-weighted assets, which, for us, would mean only in absolute terms, roughly CZK 1 billion of dividend. So concluding, we believe that it is not relevant for us. And the rest is on our discussion with Czech National Bank, which will start probably the beginning of March. And there was a second question. Jan probably will take it.

I can probably take the second question. Yes, you are right. We are closely observing the -- what is happening around. And now that the excess of capital should be wisely put at work. We, see only three potential ways, either we will activate maximum of the capital in the form of our loan origination business. We will pay it back to our shareholders through dividends or we will more actively search for potential acquisition targets. We are definitely keeping our eyes open. This is like consistent message, which we are delivering to you over recent quarters. On the other hand, we would potentially react only on those opportunities, which would make sense and would fit to the product portfolio or portfolio of clients of Komercní banka. Let me remind that we have drafted and started implementing a strategic plan, KB Change 2025, which is mainly built on organic growth and is, to a certain extent, open and we remain open for potential M&A situations. Obviously, as I have mentioned already, the overall assessment must be done properly before we can make such a decision. For the time being, in our pipeline, there is nothing concrete on which I would be speaking.

Our next question comes from Marta Jezewska-Wasilewska from Wood & Company.

I would maybe ask for the guidance on 2021, mostly with regards to fees and net interest income outlook. You are guiding fees to grow in mid-single-digit manner, pointing to some specific fees drivers being cross-selling mostly. This would be quite a twist in the long-term fees trend. Do you plan -- do you hope for the raising activity of clients? Or do you have in mind any repricing potential? That would be my first question. The next question on NII. The guidance is somehow very cautious. Do you see potential that this may end up better than what you're guiding currently if the interest rate environment proves to be more supportive in the latter of the year? There is a discussion about [indiscernible] raising rates. Potentially, the yield curve could steepen. Any color on that would be appreciated.

I will start with the question number two, net interest income and then move to fees and commissions. Well, despite the fact that we are targeting relatively huge growth of volumes, but still not prevailing our -- the other effects, let me list the most important of them. First one, I already probably mentioned, it's continuing a negative effect from lower investment yields, which is spread in time by KB's hedging policy. Second, relatively high base from 2020s Q1, when the repo rate was still at 2.25%. And the third one is related to continuing pressures on loans margins. In 2021, we are expecting average spread on loans, and I'm talking about back book now to continue down not significantly, as was the case in 2020. But on top of my head, it is roughly minus 3 basis points, but still miss an impact. Of course, the final result will reflect the timing of the beginning of rate normalization cycle, which is, as mentioned before, currently assumed by us in November of 2021. So not influencing net interest income in this year. If whatever is accelerated, of course, this would help improve our net interest income. Maybe for sake of completeness, our guidance for NII is a low single-digit drop. So that's net interest income. Regarding fees and commissions, our guidance, just to reiterate on that, is mid-single digit. And the main drivers will be de following: first one, we believe on a rebound of client activities. So far, we do not have, on our desks, anything about, let's say, making the services more expensive or any other price adjustments. So this is one driver and another driver is, without any doubt, further increase and not negligible increase of our fees coming from cross-selling, and mainly the pension societies and insurance and mutual funds. I hope it helped.

It did. If I could have one more follow-up question regarding your capital position? Clearly, the capital requirement right now is 16.2%. You reported 22.3%. I understand that management utilizes and usually uses some cautionary buffer on top of the capital requirements. Can we just understand where do you see a very safe level for your capital ratios at which you would like to function? So you could guide us on what level of surplus capital we maybe looking at currently?

I think I touched this point during the comments on Page #31, which was focusing on, let's say, our proposal for dividend payment. So from our perspective, the capital surplus is whatever above management buffer. So if you let me go into the [indiscernible] simulation mode, so this is not a statement. It's rather simulation because all we have simulations of our capital planning. Let me add that it suggests that if we pay now our, let's say, sustainable dividend payout, which is below 2/3 of the profit or, say, 65%, both for '19 and '20, this will still reach to the capital adequacy above our management buffer. But of course, this is going to be -- all this is going to be discussed with Czech National Bank. And our understanding is that the key base for these discussions will be -- have a severe scenarios of the future evolution. So that's probably everything I can say now.

So we don't seem to have further questions through -- asked through the platform. So now I would like to invite participants who are connecting through telephone. [Operator Instructions]

It's Andrzej here. Can you hear me?

Yes. Hello Andrzej. So please go on.

Yes. So this is how it works. I have a couple of follow-up questions. One on the NII outlook and one on M&A. On NII, how would you describe the current pricing environment? Obviously, everybody is in the same boat, rates have decreased. Should we expect that loan rates or loan spreads, on newly issued loans, could go up? And could commercially price the loan above the market average?