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

Good afternoon, ladies and gentlemen. We are now complete on KB side, so let me welcome you to the presentation of the results of Komercni banka for the first half and for the second quarter of 2021. It is 3rd of August, 2021. Let me remind you that this call is being recorded. Our speakers today will be Jan Juchelka, Chairman of the Board and CEO of Komercni banka; Jiri Sperl, Chief Financial Officer; and Didier Colin, Chief Risk Officer. Also with us today are Jitka Haubova, Chief Operating Officer; Margus Simson, Chief Digitalization Officer; and Miroslav Hirsl, Head of Retail Banking. We will begin with the presentation slides, which will be followed by a questions-and-answer session. [Operator Instructions] So that's it from me for the introduction, and now I would like to ask the CEO, Jan Juchelka, to begin with the presentation. Thank you.

Hello, and good afternoon, everyone. Please can you confirm, Jakub, you can hear me?

Yes, we can hear you loud and clear.

All right. Thank you very much to all of you for being with us. It's my pleasure, together with our team, to present you and guide you through our presentation related to the results as of June 30, 2021, for Komercni banka. Please, can we move the pages? Thank you. So let me start with the highlights of the first half of 2021. Komercni banka was very active player on Czech market, supporting the economy by lending activities. The lending book grew by 4.7% on a year-over-year basis. The growth was driven mainly by retail in mortgages, but also by financing of corporate clients. The record-high sales for housing loans is somehow typical for this part of the year across the market. And Komercni banka, together with Modra pyramida, took the appropriate part of the market share. Going to deposits just quickly. They are continuously growing by 11.0% on a year-over-year basis. We will come to the composition of this growth. It is coming from both deposits from households as well as the businesses. The volume of clients' non-bank assets under management is also nicely growing by 4.3% for the 3 categories of products, which is mutual funds, pension funds schemes and life insurance product. The revenues are slightly down due to NII. We will come back to this point. Nonetheless -- I'm very sorry, guys. Please, who doesn't speak, could you put yourself on mute? Thank you very much. Nonetheless, the commercial activities of Komercni banka were very strong and very, very successful. We have net fees and commissions growing by 6.3%, the rebound of -- as a result of the rebound of activities of our clients, including our cross-sell success. Financial operations for clients grew by 30%. It's high growth related to our activities with clients, and this growth was driven mainly by hedging activities related to large deals or to DCM, debt capital markets deals on the market. With all these dynamics, we were very cautious in managing our OpEx. It went down by 1.5%, in spite the fact that the Resolution Fund charges increased. As you know, it's not in our hands, but we were able to absorb and further compress the OpEx by 1.5%. And I'm adequately proud of the team of Komercni banka to be so vigilant and so disciplined in managing our costs. The personnel expenses went down by 5.7% as a result of reduced -- continuing to reduce staff levels. Speaking about asset quality, the NPL remains very low, below 3%. Net creation of credit risk provisions reached CZK 0.7 billion, which results in 19 bps of average gross loans. As a result of all these elements, net profit attributable to shareholders improved by 15.5% to a level of CZK 5.1 billion. The return on tangible equity, adjusted for IFRIC 21, linearization is lending at double-digit in the RL of 10.5%, and the return on assets is at 0.9%. You know very well that thanks to the ability to produce new capital by our activities, there was also the restriction on paying out the dividends. As a result of those 2, we are sitting -- or the balance sheet is holding currently 23.3% of capital out of which almost entire portion is CET1 at 22.7%, which is highly above the applicable regulatory requirements. We are keeping the dialogue with Czech National Bank alive. We intend to release excess of capital by the decision of extraordinary shareholders meeting, preliminary planned for Q4 2021, and conditioned by the green lights of the Czech National Bank. So we can expect the return from Czech National Bank hopefully somewhere around the beginning of autumn this year. Despite these very dynamic lending activities, we are keeping the net loans to deposits at the level of 69.5%, and the liquidity coverage ratio is at the level of 203%. We as a corporate citizen of Czech Republic and Slovakia are taking seriously a set of actions related to ESG area. We don't do it only, let's say, for the marketing purposes, but we are embedding and implementing concrete measures and steps into our activities. We have committed publicly to reach the carbon neutrality by 2026. And in 2020, partly also because of the restrictions given by COVID, the carbon footprint by KB was reduced by 35% on year-over-year comparison. KB Group progressively reduces the exposure towards the coal sector. Let me move to the next page. The macroeconomic environment remains after 2020 on a very positive track. Our macroeconomics have reviewed positively the expectation for 2021 growth. Now it is displaying -- to grow expected by 4.2%, driven by household consumption as well as the investments from public and private sector. Czech car production was up by 31% in the first half 2021 compared to first half of 2020. Nonetheless, also suffering as globally all the carmakers with the shortage of semiconductors. So on Q-over-Q basis, there is 0% growth. Czech Republic and Czech economy, I might say, suffers from very low levels of unemployment. So currently, it stagnates around 3%, still somehow shielded by the government support programs. Nonetheless, we see that on the labor market that there will be a continuous shortage of labor more or less across the functions and across the professions. Inflation decelerated below 3% to 2.8% in June. Czech koruna, alongside euro, is stronger against U.S. dollar by 3.8% on Q-on-Q basis and 10.2% on the year-over-year basis. And in parallel, we said also stronger against euro by 2.5% Q-on-Q or 4.7% year-over-year. The short-term rates were increased by Czech National Bank, and we take it as the start of the hiking cycle. End of June, 3 months PRIBOR at 0.66%, so high by 30 basis points. More to be expected. And long-term rates are gradually rising, continuing along the trend since Q4 2020. 10-year interest rates were 1.85% and 10-year of 1.75% as of June 2021. So let's move to the next one. I will not comment too much on the COVID pandemic update, but let me say that we are keeping our position amongst Czech banks as the distributor of partly government-backed loans for SMEs where we are still occupying more than 50% of the market share. Recently, the government approved another extension broadening of the program also to the investment loans for small and medium-sized companies, again, with the same elements in place as for the working [indiscernible] facilities before. Czech Republic was approved EU with the next-generation EU recovery fund. So we have our national recovery plan in place. 42% of the sum should be dedicated to projects protecting the climate, 22% to digitization. Pre-financing in 2021 should reach approximately 30% of the total amount. And the vast majority, 70% to be committed in 2022, the rest by 2023. The overall money at stake are represented by approximately EUR 7 billion, which is 2.9% of Czech economic GDP. Let's move to next page. Maybe one more sentence on COVID. The economy is gradually going to be fully open. What we are not seeing too much is the foreign tourists appearing in the same numbers in the same amounts as it used to be back in 2019 and before. So let's move to the business performance, and I will start with the news related to sustainability. We have affirmed participation to index of companies demonstrating strong ESG practices, FTSE4GOOD, where we are ranked -- we were highly ranked among the other companies. We have launched a marketing campaign related to sustainability in Czech language, O CO2, what is it about, where we are promoting the responsible approach to making business across the country. Komercni banka people are also chairing the Sustainable Finance Committee at Czech Banking Association, and somehow leading the articulation of the Czech banking industry towards the rest of the population as far as sustainability is concerned. And we have launched dedicated websites to the same theme of sustainability. As I have already mentioned, we have committed ourselves to be carbon neutral by 2026. In 2020, we have reduced by 35% our carbon footprint, which is translated into 15 kilograms per client for approximately 21 kilograms per client. We are shifting heavily to paperless processes, digitization, recycling ATMs and others, alongside our strong investments into the fully digital proposition for clients by creating new -- completely new technological stack in KB, including the core banking. KB is progressively reducing its exposure towards coal sector. It's nothing new for us. Nonetheless, we are further strengthening the conditions for going beyond the originally defined, like newly created mines which are prohibited to be financed to companies which have more than 25% of revenues linked to thermal coal and others, or more than 50% of revenues coming from coal will be progressively decreased and potentially evaporating from the portfolio of KB clients. KB has implemented also a system for identifying managing environmental and social risks, which is embedded into our approval process connected with corporate loans. New products protecting climate currently comprise from discounted loans for household photovoltaic installations, ESG oriented mutual funds together with Amundi, preferential rates for loans with sustainable positive impact, solar energy as a service, which we are providing jointly with energy companies. And last but not least, our foundation Jistota cooperates with INCIEN Institute, which is an institute dedicated for development of circular economy in Czech Republic. Komercni banka is somehow, if I may say, most visible and is leading the dialogue across the various industries on Czech market on that sustainability field. So let's move to our business activities. I will start with digital proposition to our clients. Let me say, we are constantly increasing our shares of sales through digital, mainly in consumer credit by KB. The positive delta is highest here because we were able to launch the fully digitized mobile banking solution for providing our credit -- our clients with a very, very, very fast consumer loan. ESSOX, if I stay in the same category as the consumer lending vehicle, is almost entirely in the partial or full digital proposition when selling the consumer lending to their end clients. The mortgages grew to 7% portion sold in a digital way, credit cards at 25%, the personal accounts at 11%. As far as personal accounts are concerned, we have gap to be filled. We will rather make our new proposition coming from the new digital bank the most compelling solution on the market instead of trying to grow by small increments in the current systems. Mobile banking. Volumes of payments initiated through mobile grew to CZK 65 billion in Q2 2021, which is up by 124% on year-over-year comparison. So you see that it's a real phenomenon, as well as the mobile banking and KB Key penetration, where we are slowly but steadily approaching the number of 1 million active users. Speaking about innovations in broader terms, let me say that we are proud of receiving the Award for Excellence as a pioneer by the inaugural euro denominated, mortgage-backed bond issue where we were awarded for innovation and for transparency. From other part of our activities, we have increased our stake in peer-to-peer platform, related mainly but not exclusively to real estate crowdfunding, to 31%. The company's named Upvest, and we were holding approximately 10% to 15% before, if I remember well. It's a small initiative. Nonetheless, we strongly believe that that might be one of the fastest growing platforms in the region, in the field of peer-to-peer solution. Next one. So the gross lending I have already mentioned is growing by 4.7% on a year-over-year basis, driven mainly by mortgages and building savings loans, which is the same category of loans. If you go to the Group business loans, we see that the main driver amongst businesses were the small businesses where we are showing you the performance of KB together with ESSOX. KB corporate lending grew by 1%, which is corporate loans by KB, ESSOX Wholesale, Factoring and other solutions. SG Equipment Finance grew by almost 1% alongside these dynamics. The most dynamic part of lending book growing is definitely the sales of housing loans where we are recording one high ever record of new mortgages after the other. Let's see how the cold shower coming from Czech National Bank through the increased rates will somehow potentially slow down the market. The net loans to deposits remained below 70%, as I have already mentioned. And we have, let's say, one element which is playing against the positive contribution, which is the appreciation of Czech koruna versus euro. So we can go to the next page related to deposits. Oh, sorry. Before going to deposits, here you see the selective deals of the second quarter of 2021. We were more or less all over the place as far as important transactions are concerned, either alone or together with the experts from associations in our group, which was the case for financing -- for raising the funds through DCM transaction for EPH. We were assisting the probably most visible M&A situation locally. It was a company tech group taking over a company named Best where Komercni banka was the coordinator, original lender and agent of the financing of the buyer, et cetera, et cetera. We were active across the industries, across the segments, including municipalities and others. So let me move to next page, which are deposits. Deposits grew by 11%. Assets under management outside bank were growing by 4.3%. Speaking of deposits, it was mainly the category of current accounts. So somehow we believe that that might be part of the future spendings of future investments. If we are a business active enough or commercially active enough, we will translate part of these newly collected deposits into long-term investments with our clients. The totality of the deposits on our books is at CZK 996.9 billion. Speaking about the non-bank assets under management, the mutual funds are growing by 2.5%, life insurance saving products by 2.9% and pension schemes by pension company of KB by 7.4% here. If I may remind you, we see like many consecutive quarters, the pension scheme is growing somewhere in the territory between 7% and 8%, more or less constantly. What is good in the composition of mutual funds, our clients started to allocate more into the equity and other funds more than through money market funds and fixed income funds. So this is last page from my side. I'm handing over to Jiri Sperl, who will guide you through the financial performance. Thank you.

Thank you, Jan. Hi, everyone, once again. The Slide 15 is visualizing what Jan was already touching at the very beginning of this presentation, so only in brief, the Group generated strong CZK 5.1 billion profit in the first 6 months of this year. It is almost 16% above the same period last year. The main contributors can be seen in the waterfall chart. I would say almost everything is better than 1 year ago, except net interest income, where the bank is still absorbing the huge drop of the market interest rates in Q1 last year. To remind, at that time, the rates went down from the level of 2.25% to the level only 0.25%. What also contributed negatively, as Jan mentioned as well, our regulatory costs, more specifically, a Resolution Fund charge that were higher by almost CZK 100 million. And also so-called others where the drop is kind of technical nature, and it relates to the profit attributable to the noncontrolling owners. Very good result has been generated in the area of fees and commissions, adding almost CZK 200 million, and for financial operations, I think roughly CZK 440 million above the last year. And also OpEx that is traditionally under control is lower by roughly CZK 215 million year-on-year. The [indiscernible], and Didier will talk a little bit more, is cost of risk that added to our profitability and other almost CZK 1 billion as a result of excellent repayment discipline of our clients. To be frank, nobody was expecting such a positive development in second half of the last year. All banks were rather concerned there will be impact of the finishing moratoriums and other support programs, but it hasn't materialized at least yet. All in all, it naturally transposed positively into the profitability indicators, mainly returns on equity, that are already at double-digit levels again. So it is the case both for return on Tier 1 capital, 10.9%, and the return on tangible equity at the level of 10.5%. If I can move to the balance sheet. And if I should use only one word for this slide, it would be a word Growth with a capital G. The total assets are progressively growing and achieved for the first time in the history of the group of KB Group the size above CZK 1.3 trillion, growing year-over-year by roughly CZK 70 billion. So it is roughly, in the roughest terms, roughly 6%. On the liability side and the same months ago, there are still 2 main drivers of the growth. It is deposits growing by strong 10.6% and also capital growing by roughly 9%, reflecting the fact that the profits from 2019 and 2020 are so far fully retained due to [ berma ] by our regulators. On asset side, roughly 1/3 of the new resources have been placed into the loans, and the remaining liquidity surplus mainly to the placements with CNB. The dynamics of the government bonds slowed down a bit in first half of 2021 as the yields on the [ gowees ] on the market were lower than the another investment alternative we are using. It is a repo with CNB [ blasa plain 1 LR ] interest rate swap. Concluding on this page, all in all, the balance sheet is very healthy and strong, both from its mix perspective, liquidity perspective and capital. Some liquidity indicators have been already commented by Jan, so I will focus now on capital. So please next slide. Capital adequacy increased further, both in first half and the second quarter of this year, and currently is at the level of 23.3%. It is roughly by 710 bps above the regulatory requirement. If the [ F ] on top of that, the [ infinite ] profit of H1 of this year, it will be even more, and it will be above 800 basis points. So it's roughly 820 basis points. In the waterfall chart on the left side, you can see the main drivers in the first half of this year. So basically, there are two components, first one positive, which is related to retained 2020 profit, which was added into our regulatory equity. So this generated 180 basis points, partially consumed by our organic growth. What I mean is mainly increase of risk-weighted assets related to credit risk. Such a neutral level of the capital must necessarily generate questions about the usage of this capital surplus. Jan already touched this point, but I think it's worth to iterate on that. So briefly, as you might remember, we applied for the maximum dividend payment held by CNB from 2019 and 2020 profits. It is CZK 4.5 billion before end of this year and waiting for the approval from our regulator. CNB indicated to get back to us in September. And if everything goes well, the intention of the management is to call for the extraordinary general meeting still before the end of 2021. The potential usage of the remaining surplus is going to be discussed with regulator very likely in Q4 this year. Next slide, please. So that's net interest income. Let me say a couple of sentences here. It went basically in line with our expectations in Q3. It is stabilization in Q2 compared to the previous quarter. The hike of repo rate at the end of June materially didn't influence net interest income performance here. On 6-months basis, that's the bottom right-hand chart, NII is still down by 8.2% and still influenced by income from deposits as a residual effect from drop of interest rate I was mentioning before. On quarter-over-quarter basis, that's upper right-hand chart, there is already visible kind of recovery that will continue strongly in the second half of 2021, positively influenced mainly by improving net interest income from [indiscernible] of deposits. This will naturally also transpose into NIM, net interest margin, left upper chart, that is in June still a bit down by 3 basis points quarter-over-quarter and 30, 3-0 basis points year-over-year. For the full year result, we are expecting improvement here in this category by at least 10 bps on full year basis. Let me move to fees and commissions. Here, again, we are reporting a very good result, both year-over-year and quarter-over-quarter. On 6-months basis, that's again bottom chart, the growth is 6.3%, driven mainly by cross-selling. It is plus-17% year-over-year. And fees from specialized financial services, and here are strongly supported by several and I have to say non-recurring large DCM and advisory deals. On a negative side, fees from transactions are down by roughly 13%, mainly due to lockdown in Q1 this year. If you have a look on a quarter-over-quarter perspective, there is a visible rebound in this category. What I mean is category of transaction fees. And on a growth rate basis, the growth is around 18%, 1-8 percent. Why? Answer is, from my perspective, on the chart on the left where we are showing newly Google Mobility Indices versus Stringency Index. And clearly, starting from April, the economic activity of our clients has increased significantly. By the way, the chart also suggest that there is still a potential to grow as the Stringency Index is above the pre-COVID levels. And we believe it's a legitimate expectation it will get back there in near future. Next slide, please, is focusing on net profit from financial operations. So again, another great quarter. Not as good as was the previous one, but still significantly above our run rate. Focusing now on quarter-over-quarter evolution, that's upper chart. Our investment banking, of course heavily supported by all business lines, delivered very good results, mainly due to increased volatility both in the area of FX and interest rates on the markets, and subsequent -- or subsequently increased demand of clients for hedges. But what is also worth to mention is a recovery in net gains on FX from payments, or if you wish, FX income from [ statua ] book. In the chart, it is a blue color that increased significantly quarter-over-quarter and almost got back to the level of Q1 last year. Why? It's very much linked to partial recovery in traveling and travel-related currency conversions. And finally, costs. They went down by 1.5% year-over-year, have positively influenced by -- mainly by personnel costs and GAE. In terms of personnel costs, it's minus 6%, which could be easily explained by the chart on left upper side, which is average number of employees. Simply average number of employees decreased by almost 6%, so that's the answer for the impact in this accounting category. GAE going down also by 6%. But here, it is fair to mention that comparison is influenced by creation of transformation provision in Q2 last year, almost CZK 100 million. So if we put this aside, these GAE costs are, on underlying basis, rather stable. So just 2 categories which are, I will say, increasing our OpEx base: our resolution and similar fund charges I was already commenting; and also depreciation, which is a natural answer to our, let's say, increase and accelerated investments into our KB 2025 program. So that's for GOI, and now I'm passing over to Didier. Thank you. Didier, we cannot hear you.

It seems we have lost Didier for a minute.

Didier, you are muted.

We can see you, but we cannot hear you. So Jiri, why don't we go to the outlook part, and maybe Didier could try to somehow rejoin. Or shall we wait?

Can you hear me now?

Yes. Perfect.

Sorry. So good afternoon, everyone. Sorry about this little disconnect. Now focusing on the asset quality for the second quarter, as you can see, our key credit risk indicators confirm the stabilization of our reclassification and of our credit risk profile. And this is well illustrated by both the S2-sensitive exposure and the NPL ratio, as well as by our default rate across all client segments and product categories. What is interesting to mention is that this resilience of our portfolios was further confirmed by the low level of migration dynamics across risk classes, and this for both the non-defaulted and the defaulted portfolios. So as you can see, the S2 ratio remained stable and below the level of 6.5%. In fact, contracting a little bit from 6.4% to 6.3%. And as I just said, with very well-contained level of portfolio dynamics. We had very marginal migration into default, and this being concentrated on the small business and small SME segments in the range of CZK 100 million to CZK 200 million on a portfolio, total portfolio near CZK 690 billion. So quite residual. Same between S1 and S2 exposure categories in the range of CZK 1 billion to CZK 2 billion of migration, and this as the reflection of our active loan monitoring portfolio activities. And without any material net increase within the S2 category during the second quarter. The same observations and comments apply to the NPL category and NPL ratio, which was posted slightly below 2.9% at the end of the quarter. This well in line with our previous guidance for the year-end 2021, which was in the range of 3%, and also in line with the Czech banking sector average. In absolute terms, the NPL exposure margin decreased by CZK 100 million, so no need here to further comment. There is, as it was mentioned by Jan and by Jiri, on one of our appendix slides, some illustration regarding our terminated moratorium portfolio. I will not go into the details, but as you will see in this Slide 35, the default rate continued to be significantly below our initial projections, which were produced in the second half of last year. In fact, twice as below as we initially forecasted, while the payment incident rates continued to be at the level below 1% of this portfolio. Going back to Slide 23, and one last comment on the provision coverage ratio for the NPL category. This ratio was posted at 42.2%, which is a level in line with the EU average, which is, if I'm not mistaken, in the range from 45% to 50%. And with our previous guidance, we confirmed in the range of 50%. Now turning to the next slide, which gives you the overview of our cost of risk for the second quarter. So on quarter-to-date, we posted a level that was, in fact, near 0 net creation, CZK 82 million in net provision creations. Being made of 2 main components, using simply the segment view, we posted a net creation of near CZK 140 million on our corporate segment. And this component is in fact made of some portfolio results on some potentially more COVID-sensitive corporate exposures for CZK 200 million in provision creations. And this was partially offset at the level of CZK 18 million on net provision releases on exposures both from the S2 and S3 exposure category. These releases being, again, as in the past, concentrated on less than 5 corporate client situations. Now turning to the retail segment. For the second quarter, we posted, as you can see, a level of net provision releases slightly above CZK 50 million. And here, again, made of two components. One, in the sense of creation, which is a small amount, slightly below CZK 50 million on some loan restructuring operations for our small business clients. This being more than offset by a continued strong level of recovery performance on our mortgage portfolio, which, as you have understood, was well supported by the context of a dynamic residential real estate market. Now based on these developments, favorable developments in the second quarter, and at the same time, following the point in time IFRS9 provisioning startup, our guidance -- cost of risk guidance for the full year has been materially lowered from what it was at the end of Q1, i.e., 40 basis points, down to 10 to 20 basis points. And here are mainly reflecting 3 drivers. The first one is some expected releases on our retail portfolios. Again, as a reflection of the continued resilience of our terminated moratorium portfolio, the continued favorable recovery performance on our defaulted mortgage on exposures, as well as the low creation levels on our small business portfolios and the low creation levels from our [ hadell ] subsidiaries, Modra pyramida and ESSOX. The second driver goes in the same direction in terms of net releases and is coming from higher releases of our macroeconomic forward-looking results, and here as the simple reflection of the improvement of future macroeconomic forecast under our baseline scenario. Those 2 release drivers will be partially offset by some level of net provision creations expected to be booked on our corporate portfolios. This last driver being, in fact, the hardest to predict accurately. All in all, we expect year-end cost of risk, as I said before, in the range of 10 to 20 bps. And this favorable credit risk profile development reflects a bit it's true; the point in time logic of the IFRS9 startup. But more importantly, the COVID resilience of our loan book and the capacity of the bank to stand by its clients through more troubling times. And now I'm handing over to Jiri for the full picture of our baseline scenario outlook. Thank you.

Thanks, Didier. I would say that the environment is expected to be more positive than was our expectation of last quarter. So quantified in couple of figures, GDP is expected to grow by more than 4%, one important thing. Another important thing is the monetary policy normalization. So our baseline scenario now are 3 hikes per 25 basis points in 2021. So in time, it's expected at June, August and November. So that's macro market assumptions. And otherwise, with the exception that Didier was mentioning, we are basically confirming our previous guidances. So in terms of banking market outlook, we are expecting -- still expecting lending to grow mid-single digit in 2021 for full year. KB to gain EBIT on this growing market. So it's a mid- to high single digit. In deposits, the same like 3 months ago, we are expecting faster growth. So very high single digit for the market, and KB will follow basically this speed. And financial of -- still, revenue for this may be too precise a bit. It was also the case last time. But here, what we meant was, let's say [ net zero ]. So your EBIT upgrading to [ bank zero ], very much supported by the financial operations, by trading income. OpEx, sticking to the previous one, so it remains flattish. And the cost of risk that Didier was mentioning, the new updated guidance between 10 to 20 basis points. But are there potential risk, again, in one sentence, sometimes whatever negative unexpected development mainly around COVID. So that's probably end of the presentation, and I'm passing forward to Jakub back.

Yes. Thank you. Great. Thank you very much. So ladies and gentlemen, this has indeed concluded the presentation part of the session, so now we will be happy to answer your questions.

Let me remind you once again that this meeting is being recorded. [Operator Instructions] So our first question comes from the line of Gabor Kemeny from Autonomous.

My first question is on the dividend. You mentioned that you expect a discussion with the regulator about deploying your excess capital in the fourth quarter. Can you talk a bit about your expectations around this discussion? Because right now, as the ECB lifted -- is lifting practically the dividend restrictions from September, the CNB's guidelines look pretty restrictive. If you could comment on why the CNB may want to be more restrictive than the ECB, given that Czech banks, and including Komercni, has a fairly resilient capital buffer? And the other question was just if you could comment on do you expect any more credit risk RWA movements in the next few quarters which would impact your capital ratios?

So I will maybe take the first part, and I will ask Jiri to add a few words on dividends. So just for a slight precision of the time line, we do expect the dialogue with Czech National Bank to be finished at around the end of September, beginning of October. They are keeping the dialogue ongoing on an individual basis with each bank. So there, we will see the outcome related to Komercni banka. As far as the fourth quarter is concerned, this is the timing of potential extraordinary shareholders meeting where the shareholders should decide on the potential approval of distributing part of the capital in the form of dividend. Jiri, maybe you can add a few words on that front. It's very hard to make any judgment related to the regulator here, but maybe you can try on this side.

No, no, absolutely. That's exactly what I wanted to say. It's another question for CNB, a discussion for CNB. But maybe to put it other way, policy of KB is to [ hand it out ]; not to sit on shareholders' funds. So that's why we established a so-called management buffer, which is 50 to 200 basis points above the minimum requirement. So I can only iterate or to repeat what I think. I'm not sure that I will think last time. So to show you a kind of a simulation, what is really a space for dividend payments or a potential M&A transaction or whatever. So currently, we are more than 800 basis points above the requirement. So assuming that we pay 100 basis points in December, which is in absolute terms CZK 4.5 billion. At the same time, assuming that we pay the remaining dividends up to 65% from profits of 2019 and 2020, which is altogether CZK 10.5 billion, and also, so far, undisclosed part of profit of 2021, this will still lead to the situation that we are above the management buffer. So that's a current situation. And it seems to me that CNB very much prefers to discuss that in phases. So to complete the first phase before the end of the year, and in September during Q4, to start and to open discussions about the rest.

And just to follow up on the time line. So as a base case, this year, you expect to be able to pay that CZK 23, CZK 24 dividend per share? And then what do you think is a kind of realistic time line for kind of paying out that 75% of the retained earnings, which would still leave you with such a big capital buffer.

Gabor, I'm not able to answer better than I did before because it is not in our hands. I think very strong -- can you please put you on -- very strong statement is that we don't want to sit on a surplus of equity above management buffer. This is one thing. Otherwise, it's about discussions with CNB. So this is maybe a good question for CNB. And I'm not expecting we will get some, let's say, tangible. I'm talking now about there is not [ 100 billion ], but we will get some tangible output before Q4. It will be October, maybe November, the second phase. Sorry for that.

Okay.

Didier, maybe you can take the part of the question related to credit risk and RWA.

Sure, Jan. And here, I will not really venture into some forecast because, as you know, there are 3 main forces in action. One is the volume driver. Another one is the risk intensity. And the third one is all those new regulations that we are expected to implement in the next 4, 5 years. So I would probably not give you any forecast, given this quite complex situation.

Maybe -- yes, please go ahead.

And in any case, I don't think we ever gave some guidance, at least regarding the risk weight indicator, for all the reasons I just mentioned. But Jiri, please.

Yes. Let me give couple of briefly compliments to the year. Probably you are referring to what you are discussing, I don't know, 3 or 6 months ago, that there are some methodological changes coming in 2021. They have a kind of negative sign compared to a positive sign in 2020. So at that time, I was mentioning something like 70 basis points of impact into our capital in 2021. So to say, already roughly 2020 is in the books and first half, another roughly 50 are expecting to be implemented in the second quarter. And the main change is probably will relate to PD and LGD on execution. So this is current baseline. Beyond 2021, it's rather difficult, as was Basel IV. It's in our projections as well. So that's it. Thank you.

Thank you, Gabor. And now I would like to ask Andrzej Nowaczek from HSBC to ask his question.

I have a couple of questions. First, what does the structure of your securities portfolio imply with regards to reinvestment income? Are we looking at the parallel yield curve shift scenario here, or is it more complicated? And the second question is on asset quality. Ignoring COVID, the moratorium, the level of interest rates and changes in interest rates and all of those other cyclical factors, structurally, are there reasons why your cost of risk in the future should be lower than it was historically?

I will start with the question number one, so securities portfolio. In terms of the risk, 80%, 90% of all our securities are Czech gowees. And before that, we have some Polish gowees and the Slovak gowees, and for a very small part of Romanian gowees, but it's really negligible. So that's a credit perspective. In terms of a potential impact into our equity, and this probably what you are referring too, it should be rather limited, because once we invest into government bonds with fixed rate, at the same time, we are hedging it. What it means is that the potential impact into our OCI would be rather limited and would be linked only to potential changes in the credit spreads, which for the time being are not expected. So that's a first question, and the other one was related to cost of risk, so I believe, Didier.

Sure. Thank you, Jiri. The first piece of answer I would like to provide you with is that, in fact, our cost of risk evolution is, at least in terms of trend, very similar to what you see toward the banking sector, whether regionally or internationally. Second element of answer is that for some parts of our portfolio, it's true that historically, we've taken an approach, provisioning approach that was probably on the conservative side. And this is one element of explanation, especially now that we are fully navigating in this IFRS9 startup, which is, as you know, a point in time. Then if your question is how through the cycle cost of risk, which historically we communicated to be around the 30 basis point, should it be changed? I would say for the time being, not. But it's not impossible that after this unprecedented context mix in COVID and IFRS9, we might revisit this through the cycle view, and in which case we will let you know.

And just a follow-up on the first question. So what's the difference between the back book and the front book yield on the treasury portfolio?

Andrzej, I do not have anything in my mind. We will respond to you after the call.

So thank you. The next question will be asked by Robert Brzoza from PKO BP.

Can you hear me? Yes?

Yes, fine.

All right. So a follow-up on the cost of risk. When I'm comparing your developments regarding the level of Stage 2 and Stage 3 exposures across the regional banks, what's visible is that more or less in a similar market situation, and most other banks on average have seen in their absolute level of Stage 2 and as well as Stage 3, exposures going down. However, this hasn't happened in the case of Komercni. So I'm wondering what's the reason here? And under which circumstances you might see a decline, particularly in Stage 2, exposures with the most likely commensurate decline in provisioning for Stage 2. So that's my question number one. And the second question is on the NII development. Could you perhaps comment in a bit more detail on the state of competition in the corporate segment? There is a graph on Page 18 of your presentation implying that basically the sector is seeing still a compression of the average business loan rates. I'm wondering where do you stand against the sector and whether you need to offer your clients a discount to the average sector rate in order to get volumes being produced. And what's your sort of expectations regarding the peer, so to say, interest income from loans only going forward as opposed to the loans plus repo-derived business?