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

Okay, good afternoon, ladies and gentlemen. Let me welcome you to the presentation of the results of Komercní banka for the first half and also second quarter of 2023. It is 3rd of August today, 3rd of August 2023 apparently. Please note that, this call is being recorded, the recording starts now. Our speakers today will be Jan Juchelka, Chairman of the Board and Chief Executive Officer of Komercní banka, Jiri Sperl, Chief Financial Officer and Didier Colin, Chief Risk Officer. And in a later part of the presentation, we will also have a wrap on ESG topics provided by Jitka Haubova, Chief Operating Officer, Miroslav Hirsl, Head of Retail Banking; and David Formanek, Head of Corporate and Investment Banking. And we have also Margus Simson with us, Chief Digitalization Officer. As usually, we'll begin the presentation with the speech of the CEO and after the presentation part, there will be a questions and answer session when you will have an opportunity to ask for more details on the topics that are of interest to you. [Operator Instructions] So now let me hand over to Jan Juchelka. Jan, please.

All right, hello everyone, thank you for investing your time into this presentation in such a high amount. We highly appreciate your interest. It's my pleasure together with the management team of Komercní banka group to lead you through the presentation of consolidated and audited results for the first half of 2023 and for the second quarter of 2023. So we can move to the first page. So we are delivering CZK 8.1 billion net group income, which is slightly down below the first half of last year, whilst delivering very, I would say, strong ROE at the level of 13.5%. Cost to income ratio oscillates around 50%. In both cases, ROE and cost to income, should IFRIC be linearized through the year, it would be a slightly better result. So Komercní banka continues its very, I would say, strict and very disciplined delivery in the level of efficiency of its operations. Second quarter of 2023, it's at level of CZK 4.5 billion, which is by 27.1% higher quarter-over-quarter, and the ROE is at 15% cost to income below 45%. How it's composed. The client's loans were growing by 3.3%. We will show you a bit of detail. It's mainly driven by rebound demand on mortgages and housing loans as well as the corporate financing. Deposits on year over year basis are slightly down, but we see very strong tendency of growth, either year-to-date or quarter-over-quarter. And again, we will show you a bit of detail on that. Assets under management, which in our case, it's joint production together with Amundi or products provided by our private banking, was growing by double digits, almost 15% growth. Compared to the previous quarter, it was by almost 4%. Despite this very active activity, the loan to deposits ratio remains at very satisfactory 80.2% as well as other balance sheet related indicators remain very strong. Liquidity coverage ratio at almost 170%, total capital ratio at 20%, 19.5% Core Tier 1. And this is what the markets sort of appreciated or was sort of unexpected level, is net release of provisions, mainly thanks to the superb quality of our assets. In April, the first half for us was very busy. In April, we launched our brand new proposition for our clients, which is represented by new internet banking and new mobile application. Nonetheless, what is behind, not so visible for the clients, it's a state of art new core banking system and new analytical layer. So KB continues its implementation of KB 2025 strategic plan. Myself, I was elected as a president of Czech Banking Association with the effective date of 21 of June for 3 years mandate. We can move to next page. Thank you. Macroeconomic environment, GDP in Q2 was up by 0.1% on Q-on-Q basis, slightly down on year-over-year basis. So Czech economy, even for the entire 2023, is predicted to be in black 0 or plus 0.1% GDP growth. You may know that on fiscal side, the government is in the process of adopting so-called stabilization package to manage positively the structural deficit of state finance or public finance. In parallel with that, Czech National Bank keeps its rate at 7%. Hence, both of these tendencies are playing in favor of, let's say, slowing down the inflation. Inflation was at 9.7%. Our macroeconomic team predicts that we will be very shortly in 2024, close or even below 2% of consumer price inflation. The other part, which is playing positively in favor of our P&L and quality of assets and potentially negatively on the costs of, on the personnel costs, is frozen labor market. This is a long-term issue of our economy. We are very much speaking through our association and through the other associations of industries with the government on relaxing a bit the immigration law and allow the large and small employers to get a bit more, I would say, a lively labor market. Positively, it pays back through a low cost of risk, as I mentioned. The Czech National Bank, and it was already said, is keeping the base rate at 7%. Czech Koruna is slightly weakening, and we do expect that both the rates and Czech Koruna exchange currency rate will be a part of the maneuver of Czech National Bank rather in 2024 than in 2023, we will see. Next page is showing the business performance on the side of assets. So the total loans is 3.3% up. I mentioned already a pretty strong signal from mortgages and housing loans, which are up by 51% vis-à-vis the first quarter of 2023, even though still lower than the record high levels a year ago or even before then a year ago. The consumer lending is driven by successful offer of flexible loans, which we are selling predominantly online, or we are selling them at our branches. When we focus and pay attention to what is the lending towards businesses, it was mainly corporate clients who are driven the dynamics on that side of our loan book. Needless to say that, the most dynamic growth inside corporate lending is represented by euro-denominated loans. We can move to next page. In the next page, you see a traditional list of our remarkable corporate deals, which go again across the segments and across the sectors, including public sector, including private, with one exceptional achievement, which is the inaugural sustainability-linked loan for our dear client EuroVac payment solution company, where KB played the role of mandated lead arranger, coordinator of the syndicate, security agent and ESG coordinator. So here I wanted to thank our corporate clients. We are providing our services to municipal and municipal-related clients as well as private equity, which is the case of Carlyle, who is pretty active in Czech market. And we are proud of being the assistant of foreign investors coming to this country. We can move to next page. This is the deposits. I have already mentioned and commented the small decrease on year-over-year basis, but also a pretty dynamic tendency on the side of year-to-date or quarter-over-quarter growth of deposits as well as the double-digit growth of other assets under management. You see that even the net sales of fixed income funds are doing very well in cooperation with -- in cooperation with our friends from Amundi. What is the other tendency inside the deposits is that money are moving from current accounts to paid deposits, which is increasing a bit the net interest income, obviously, and is also increasing the funding costs for us. Nonetheless, we see that the situation will not last too long. I'm handing over to Jiri Sperl, who will invite you to deeper detail of all of these categories. Thank you, Jiri.

Thank you very much, Jan, and good afternoon, everyone. Indeed, we are reporting a very strong quarter leading to a profit above CZK 8 billion, slightly below last year. As usual, the main drivers are visible in the left upper waterfall chart. So as expected, negatively, it's contributing mainly net interest income as a consequence of several factors, and I will touch them later, but the main one is increasing cost of funds. Somehow, naturally, also OpEx is higher year-on-year, and here the main reason, obviously, is high inflationary environment. Other avenues still at the waterfall chart, and I mean, here mainly fees and commissions and financial operations, are, on the other hand, contributing slightly positive. So at the end of the day, what changes the picture completely is a cost of risk, as mentioned by Jan, but as said, a release of provisions that is by almost CZK 1.5 billion higher, I mean a release, than a year ago. And of course, we will comment what was behind this evolution. Now the upper right chart is showing quarterly net profit evolution. Compared to the previous quarter, there is a non-negligible jump of the bottom line. At the same time, it's fair to say that it is mainly impact of IFRIC 21, i.e. in line with the regulation, we booked an estimated full year regulatory charges already in Q1. So here on this chart, it is kind of a base effect. From my perspective, a more valuable message is visible from the bottom right chart. What I mean is that our revenues, and that's on this chart, this red color bar, after peaking in Q3 last year, and since the time declining, reported some kind of sign of the recovery in Q2 this year. And again, it's mainly on NII side, and I will definitely touch it later on. So let's move, please, well, before maybe a couple of sentences about the profitability indicators. The profitability indicators are still strong, I would say, very strong. But at the same time, very much thanks also to the release of the provisions. So Jan was mentioning ROEs, so just to add, for example, ROTE hitting 16%. And now it's time to move to the balance sheet, please. Well, the balance sheet is growing significantly year-to-date by more than 12%. On the other hand, year-over-year, it is rather stable. The reason for significant growth of year-to-date is well known to you. The main driver on year-on-year basis on the liability side is very clearly the senior non-preferred loan from Société Générale from our own other company, instrument we have to have due to regulatory reasons. So that's related to MREL regulation. And that's on the chart, it is brown color. So here it is visible that from CZK 9 billion at the end of first half last year, it increased to [ 49% ], and I will touch it as well later. On the asset side, the majority of the funds have been placed naturally into the client loans. And the rest mainly to the Czech [ govs ] that are growing much faster than the alternative of the repo plus swap. And again, here the reason is that the first one is more, let's say, attractive and giving us more attractive yields. Let's move to the capital, which is still super strong. The capital adequacy further increased year-to-date by 54 basis points, and also quarter-over-quarter by roughly 23 basis points to the level of 20%, which means 2.4% above the minimal requirement, and that's described at the bottom right chart. And this was mainly influenced by profit generated, of course, adjusted by accrued dividends at the level of 65%. With the impact of this combination, with the impact in Q2, there is roughly 31 basis points, and the impact of the growth of risk-weighted assets was rather minor for the last quarter. In terms of MREL, we are gradually fulfilling the [indiscernible]. There is probably something wrong on the station of, Rachel.

We can hear you now. It's solved. You can continue.

Thank you. So just to complete the MREL of the note, so we are gradually fulfilling the requirement. So after EUR 1.5 billion issued last year in 2022, in the first half of this year, we issued another EUR 450 million, having now altogether almost EUR 2 billion in the balance sheet, and still some issues in front of us. So this was the capital. Now please, let's move to net interest income and other categories of our P&L. NII, year-on-year, went significantly down, so it's minus 9.5%, and the main reason behind here is on the deposit side, declining by 14% year-on-year. I would say there are not too many changes in the trends, as mentioned already 3 months ago. Last year, we were still benefiting from the rising interest rate cycle, and somehow delaying our up-pricing on the deposit side. Now we do not benefit from that anymore. The rates, and this is mainly the case of short-term rates are stable already more than 1 year, and long-term rates are already in the declining trend. On top of that, currently, we are already, as we were mentioning already last quarter, fully competitive in terms of pricing of deposit, at least versus Tier 1 for banks. And having said that, this is on one hand side stopped the trend of the declining of the deposits, but at the same time increased our cost of funds. And what is not naturally helping either is a continuing shift of current accounts to the paid deposits, as was already shown by Jan, but probably you noticed on the chart that the speed a bit decelerated, which is a good sign. In terms of loans, the trend of a very slight erosion of the margins unfortunately still continues, mainly in retail. We are not talking about big changes. It is 1 or 2 basis points, quarter-over-quarter, but the trend is there. True that the new production, and here and now, I mean mainly mortgage loans, is being sold for higher spreads than 1 year ago. At the same time, the maturing old loans in this category, with much higher spreads are overriding this positive effect, at least partially. On quarter-over-quarter basis, and that is the right bottom chart, there is already mentioned sign of recovery, and we believe that this recovery is in NII category. And we believe that this positive trend, it was expected, and we believe that this positive trend will continue even in the quarters to come. And the last comment on this slide is related to NIM, Net Interest Margin, shown in the upper left chart. So here we reported a slight decrease by 9, 10 basis points on quarter-over-quarter basis, and 2 basis points on, let's say, from year-to-date perspective. And it is now at a level of 2%, i.e. roughly 23 basis points down year-over-year. And again, we believe that the trend of the decline is already behind us. Next slide should focus on fees and commissions. Thank you. So they are growing year-on-year by 2.7%, and it is basically the case for all subcategories of this category. With 1 exception, and it is specialized financial services, where this quarter there was a kind of lower contribution from debt capital markets, financial services, less structure deals, et cetera, et cetera. You probably remember that this grey category is time-to-time a bit more volatile, depending on the structure deals generated by the bank or group in the quarter. Financial operations, please. Here, I would say, another great result, again, above CZK 1 billion, and basically in line with our expectation. What helped this quarter was the increased volatility on the market, influenced by evolving expectations for rates development, and also a couple of larger transactions, hedging transactions, contributed positively to the result. On a bit negative side, net FX gains from structural books, so that's the blue part of the charts are slightly down in the second quarter, partially as a result of seasonality of traveling. Anyway, for Q3, the upcoming quarter, in this chapter, we are expecting a relatively strong recovery. So we are not changing our guidance for financial operations. And finally, before passing on Didier, it's about OpEx. Given still very high inflation, it's, I would say, perfectly under control, growing by only 8%. Here, too, there came kind of 1 negative surprise. What I mean is the increase of the regulatory charge by more than CZK 100 million than expected. Part of that was related to the positive guarantee fund due to Sberbank Resolution or liquidation, if you wish. It's roughly 50% of this kind of unexpected impact, and the rest is related to Resolution Fund charge, where we have received the final invoice in April or May by roughly CZK 50 million higher as well. The personal expenses are growing by 7%, very much influenced by increase of base salaries at the end of last year. Administrative costs are up by 14% year-on-year, mainly due to higher marketing costs, real estate costs, and overall inflation-related costs, rents, et cetera. I was already mentioning regulatory, so only to say that depreciation and amortization is at 9% level year-on-year, which is simply reflecting the position in the, I would say, transformation cycle we are in right now. So it is reflecting investments in digital transformation. Cost-to-income ratio on a quarterly basis is 44.7%, as visualized at the bottom of the left chart, where I believe we are confirming a leading position in the market. So now let me pass over to asset quality and cost of risk. Didier, please, floor is yours?

Thank you, Jiri. Good afternoon, ladies and gentlemen. A brief overview of the evolution of our loan book quality in the second quarter. In fact, this will be very much a repeat of what we communicated to you last quarter. We have continued to record 2 very strong features that well describe this asset quality. Definitely not new, but in fact surprisingly persisting despite the sluggish macroeconomic environment. The first one is the continued low default intensity. In fact, this is a situation which is shared by our peers. In our case, there was a little deviation from that, which we recorded on our consumer finance portfolio, where we saw some sub-pockets with a higher risk profile, which we identified on time and treated quite swiftly. So it's rather just for your information and residual or marginal development. The second feature is also the continued very low migration intensity of clients between the S1 and S2 asset class. In fact, we continue to record migration going both ways below the level of CZK 10 billion, which compares to a total exposure for those 2 asset classes in the range of CZK 780 billion. So roughly 1% of this part of our loan book. So not surprisingly, those 2 strong features translated into stable risk ratios, starting with the S2 ratio recorded at 13%. And again, I will repeat what I said last quarter. What is probably important to remember is that our provision coverage ratio, so the stock of provision for this S1 and S2 asset class, evolved or more than doubled between 2019 and the second quarter of 2023 from 0.3% to 0.6%, as a result of our effort to build reserves during those 3, 4 years. And at the same time, during the same period, the credit risk rating distribution of our non-defaulted exposure remained very stable. Some minor deterioration here and there, but nothing that would be a source of concern. As for the S3 or NPL ratio, it's slightly declined Q-on-Q, and our provision coverage ratio for the defaulted part of the portfolio continued to be stable, slightly above 50%. Now turning to the cost of risk overview, on the next slide, thank you. So as mentioned, in fact, we recorded a level of net releases in the second quarter at a very similar level compared to the first quarter, i.e. slightly above CZK 450 million, which translated into a cost of risk at minus 22 basis points on a year-to-date basis. And I will give you the overview by segment, starting with the Corporate segment or corporate exposures, where we recorded a level of net release at roughly CZK 0.5 billion. And here we find again the drivers I was just mentioning before. The first one is this surprisingly strong level of recovery performance recorded on our corporate exposure, where we recorded a little bit above CZK 0.5 billion in net releases. And the second one is the low level of default rate on this Corporate segment. We had some residual level of net provision creations booked on the non-defaulted exposure, and the resulting cost of risk for this corporate part of our loan book was recorded at the abnormally low level of minus 52 basis point. Now looking briefly at the Retail segment and retail product, we had in the second quarter low level of net creations. In fact, we booked a bit of provisions on our consumer loan and small business loan exposures. And this was partially offset by some positive impact coming from the IFRS 9 related maintenance that we had to perform on our models as well as on our inflation reserves related to these non-defaulted retail exposures. So cost of risk for the first semester and for our retail portfolio was recorded at a low level of plus 6 basis point. Maybe one very brief note here to mention is that this second quarter of 2023, for the first time, we started to observe a moderate decline in the level of recovery performance for this Retail segment, which is the first time in several years, again, with a very mild intensity. Maybe one before going to the year-end guidance, one point to mention is that in the second quarter, we decided that we would not reduce our 2021-2022 inflation reserve in the second quarter as a prudent step. Had we done that? In fact, we would have booked another level of CZK 300 million. So the cost of risk for Q2 would have been in the range of CZK 750 million in net releases. But to stay on the safe side, we decided not to do that in the second quarter. Now I will finish with the year-end guidance. As you have seen, we adjusted it from the Q1 level at 15 bps to 10 bps in terms of net creations down to a new range between 0 and 10 bps. In fact, expected to be closer to 0 than 10 basis point in net creations. And the key factors or elements behind this adjusted guidance are first, the default intensity across all segments and retail products, which in fact, we reset that the 2022 level. That's the first factor. The second one is that we expect in the second half of the year, some further net recoveries on our corporate NPL exposure. We also have reserved some buffer to cover the occurrence of a large corporate client default if this were to happen. And the last element is that we would have some mandatory release of our non-retail or corporate inflation overlay as per the IFRS 9 principle and following the strong resilience of our corporate exposure with the question mark today of the possibility to recycle part of it in order to keep adequate or sufficient level of reserve for the non-defaulted part of our loan book. And on this, I will now hand over to Jiri. Thank you.

Yes. Thanks, Didier. Well, let's focus briefly on outlook for the rest of 2023. Well, there are not too many changes in majority of cases we are confirming the previous one. There is a couple of exceptions. 3 of them are pretty minor. One really material and that's what Didier was commenting quite right now, material and positive. So let's go through on macro eco-front. The change or adjustment in the guidance is that 3 months ago, we were expecting economy to grow by on top of my head, 0.6%. Now it is rather a flattish 0.1%. First, second, also our guidance for the interstate outlook has changed slightly. 3 months ago, the expectation was that we would end at the end of the year at 6.25%. Currently, the expectation has changed and we think that rates, CNB repo rates will stay stable by the end of the year, i.e. 7%. In terms of growth of the banking market, no changes at all. So on loan side, mid-single digit, on deposit side, mid to high single-digit, and here relatively fast indeed corporate segments. Our position on this market guidance haven't changed neither. So we are targeting mid-single-digit growth in loans, but at the same time, we would like to grow a bit faster than the market and thus to confirm, let's say, gaining market shares, which was the case last 3 years. And in deposits, it's mid-single-digit base, but basically here the target is to go together with the market after we lost a bit of market shares consciously, the market shares of last year. Financial outlook, no changes in revenues, so they should decline somewhat from 2022 levels. Let's say, low to mid-single digit. Very much influenced by NII retreat. OpEx, and that's a third slide adjustment of our guidance to grow by high single-digit. Some of you remember that 3 months ago, we are saying mid to high, but it was before the charge coming from the resolutions and deposit guarantee funds of authorities. So that's just one change. Otherwise, we are sticking to the guidance and the cost of risk is the chapter itself. So I think the year was commenting in a full details and risks simply we are leaving the same as was the case 3 months ago. So that's for outlook. And now let me pass words to Jan and other colleagues for the dedicated part of this presentation focusing on ESG. Jan, please.

Jiri, thank you. Thank you very much. We wanted to bring back to your attention what do we do in the area of ESG, because for us, ESG is not a slogan. It's a set of principles, which are flowing in our business model through the regulation. So it's related to everything what is risk, what is compliance, what is governance, but also to businesses, both retail and corporate and to our own, I would say behaviors as an institution. So for us, we are part of the family of Société Générale group. You know that our global group has its own ambitions in this area, Komercní banka wants to be the role model on the Czech market, but also inside the family of Société Générale group. We are very much putting in our strategic program KB change 2025, the parameters of ESG. We have the pillars which will be further elaborated by my colleague Jitka Haubova for our own operations and our overall ambitions in ESG sphere and by David Formanek for the corporate banking and Miroslav Hirsl for the retail banking as well as Didier Colin for the part related to risk management. KB Group integrates into its ESG strategy, the Sustainable Development Goals, which are set by the United Nations and the principles set by the Paris Agreement on Climate Change. Our strategic ambition is to be the leader in sustainable banking on the Czech financial market. We believe that the various awards as the Sustainable Bank of the Year, as the Banking Innovator of the Year in the field of ESG as well as the recently received prize for us named Green Crown is also positioning ourselves properly in the eyes of general public and of clients and non-clients of Komercní banka. The investment which is needed to adapt to of our economy, our Czech economy is of huge magnitude. We believe that the only way forward is the smart combination of public and private capital. And we feel that we have strong role and business opportunities stemming from that in the field of financing the transitory period of well-industrialized Czech economy to its low emission stage. Let me hand over now first to Jitka, and then to the other colleagues for commenting the next pages. Thank you.

Good afternoon. I will continue. We divided our ESG strategy in 4 pillars, a culture of responsible, environmental transition, positive local impact and being a responsible employer. So the first pillar is creating a culture of responsibility. You can see on the next slide, the materiality assessment where we review on an annual basis with all stakeholders, including clients, employees, shareholders and partners, the importance of a specific topic and its business impact. So we selected the data security, business transition, because the breadth of investment needed to adapt our economies, especially here in the Czech Republic, not been seen before, which is both challenging and promising. Next is operational resilience and of course the digitization. This approach mirrors on the next slide. I will start with ESG governance. The main -- next slide. The main owner of the sustainability concept is [ DKB COE], Jan Juchelka, and the sponsor is the operation manager, me. The activities are coordinated by the working group where key departments are represented. Sustainable targets measured by OKRs have been incorporated into the incentive systems also for senior management and are regularly reviewed. ESG is incorporated, which is I believe very important into the standard KB processes at every level of our organization. Achievements are reported in KB sustainability report that is prepared under the sustainability finance disclosure regulation and is reported in the annual reports and posted on KB's webpage. You can see all -- overall basic principles of our governance as 2-tier management, for example. What is also interesting is rooted in our capacity of innovation and building new standards. I would like to mention at least 2. Our leadership role in the Czech banking associations platform in creation on the market standard of ESG related data collected from clients by Czech banks and imposed to the regulation data will be kept in one shared register and clients will be asked for the data just once. Additionally, the data will be harmonized and more reliable. And I believe it is a very similar unique system comparable to the online checking of AML client data through the Czech state register as a result of the bank ID authentication method established by Czech banks, allowing Czech state to digitalize free of charge in this category. Regulation is a vital aspect of course. KB carefully follows all ESG related regulations. Since 2021, we have been publishing the sustainable financial disclosure based on the regulation. Then we published also the requested entity level principal adverse impact disclosure. And at the beginning this year, we of course published the non-financial report. In February, 2020, we started implement environmental and social risk process, which is closely related to KYC process and creditors approval process. And now I will hand over to Didier who will further elaborate on this crucial topic.

Thank you, Jitka. So yes, I will continue to give you a brief overview of how this important domain of ESG is structured and approached from the perspective of the second line of defense, if you will. So there are 4 main streams to put it simply. The first one is in terms of our organization logic and structure, or in terms of the operational setup. In fact, we defined who does what between the first line and the second line of defense between Komercní banka and its mother company, SocGen. In terms of processing all client information and client profiles, processing all client transaction flows. And in this first stream, we have 2 particularly important areas of focus. One is the automation of processes. And the second one is to meet this requirement to implement an holistic approach, taking into consideration the risk views, the compliance views. And this is what we have done under this first stream of our organization logic and structure. The second stream is more specifically about the risk management framework in the environment area of ESG. And here we have been working on several aspects. The first one is in terms of risk measures, starting with the transition risk and we'll continue with the physical risk as well as with the biodiversity risk. We also are working actively on the evolution of our credit and sectorial policies. And there's a special focus when it comes to the real estate collateral management policies and activities centered around these famous ESG certificates. We are also actively working on this climate stress testing at the requirement of the regulators, the Czech National Bank as well as the ECB. And not forgetting the management of all the monetary disclosures. So this was for the second stream being the risk management framework with a special focus on the environment area. There's obviously the very important stream of data management where it's about sourcing, processing and storing of all those data needed for the management of this environment component of our ESG program and activities. And the last stream is related to the needed and adequate IT architecture with several dimensions such as the proper coverage of the compliance and the risk domains, the proper distribution and segregation between the first line and the second line of defense as well as the distribution between what is done here at the level of KB Group versus what can be done at the level of the SocGen headquarters unit. So that's the overview of the ESG from the [ LOD2 ] perspective. And on this, I will hand over back to either you Jitka, or David, or Miroslav. Thank you.

So maybe on the next slide, you can see a second pillar that is dedicated to business. And I would like to invite the most qualified colleagues to join the discussion. And we will start with corporate. David Formanek.

Thank you, Jitka. Good afternoon to everyone. So just let me comment briefly, or let's say supplement the information provided by Jitka and Didier what's being done in the area of corporate banking. So generally the assessment of the environmental and social risks or so-called non-financial risk has become an integral part of the general risk assessment and basically part of the decision-making when onboarding new clients or we're deciding on new financings. We measure our investment loans, or we assess our investments loans according to the taxonomy and we mark them as sustainable positive loans. The loan book on the group basis has grown year-over-year by 42%. This is combined KB and SGEF. And now it has reached almost CZK 48 billion. When we look what is the portion of the sustainable positive impact loans on the generation of new investment loans. So it's also over 40%. We have also incorporated into our offer towards corporate clients specific products or services like sustainable linked loans and bonds, or so-called green loans and bonds. So green loans and bonds are dedicated to financing of some investment having clear sustainable positive effect. The sustainable linked loans and bonds have certain parameters, which are to be fulfilled by the client. And as has been mentioned previously, this year, we have been mandated as ESG coordinator for a landmark transaction for the WAG, where this syndicated loan for this group, or has defined certain parameters and is now sustainable linked loan. One year ago, we have acquired the consultancy company very active and experienced in the area of decarbonization and energy, energy savings, Enviros. And we have combined our teams from the internal teams KB advisory and the Enviros. And we are now able to provide our clients also with very technical advice and expertise in the area of decarbonization, energy savings, et cetera. We have also specific, and I would say, quite unique financing offer for our clients. We call this offer a photovoltaics for CZK 1 which has been developed together with our subsidiary SGEF and in partnership with the company CEZ ESCO from CEZ Group, and which gives the clients opportunity to save their energy costs and basically being or having installed a photovoltaics power plant for free, which is being repaid over a long time out of the proceeds from the electricity production. In the area of communication, we operate a specific webpage called together sustainable.cz where we share various news and also references or examples of various projects in the area of sustainability. We have also applied or we apply sectorial policies. So we have now 9 sectorial policies. The most important are in the area of the thermal coal where we have clear objectives to reduce our exposure towards the coal sector to zero by 2030, but also other sectorial policies which again played an instrumental role in assessing our environmental and social risk, which I mentioned at the beginning. And now I pass the word to Mirek to speak about the retail banking.

Thank you, David. Good afternoon to all of you who are with us today. Sincerely appreciate it. ESG is everybody's cause and everybody's task. And I have selected 2 topics to comment a bit with a few sentences to demonstrate that on the retail side. The first one I'd like to spend a few minutes is new digital bank. Already commented by Jan Juchelka at the beginning, you all know we launched this initiative in April this year. So we've been through for a few months. The number of users is decently growing. We will soon be at 30,000 of users there. It is probably happening today. If not today, it will for sure happen tomorrow. And this, I would say inflow or number of users is going to further increase as we will accelerate the migration effort and acquisition effort will keep moving. And when I say NDB, what is the ESG aspect of that? There are 2 that I see and both are quite material. The first one is NDB solution is fully paperless, meaning no paper at all, nowhere. Okay, you may argue that we have just 30,000 clients now, but gradually we will have every single retail client there and at the end, every client there. And this would mean no printers, no cartridges, no paper. So super positive impact on the environment. And the second aspect of that particular point is not that often discussed, but I believe is very much positive. And this is many services for which you need to get in touch with the bank and quite often come to our branch can be in the new platform done in a self-assisted manner. Or if you insist on having a human being talking to you, you can still do so, but through a very secure video call. And it's not just talking, by getting in touch with such a person, you can basically execute everything that you can do on a branch. So I believe this would result and will result 1 day in much, much lower traffic on the branches. On the other hand, not jeopardizing our quality of service or sales volumes at all. So this was the first thing I wanted to share with you. The second, and it might be even like more immediately seen already, is all kinds of our retail financing, supporting basically energy efficiency and reduction of carbon footprint. You can see in the middle of the page that this is not just Komercní banka as a product provider. These are other companies from our group on the Czech market, speaking about also Modrá pyramida, the building saving company, and speaking about ESSOX. And altogether we provide all needed variety of solutions for sustainable technologies and sustainable housing. To give you some figures, in last 6 months or first half of this year, altogether we sold a bit above CZK 400 million of these kinds of loans. The average size of the ticket is around CZK 200,000, which means that we served more or less 2,000 clients. So it's very concrete and happening. It's not just a product that would sit on our webpage. And by the way, the demand is increasing. What are those loans used for? The usual topics such as photovoltaic panels, heat pumps, recuperation units, but also other things linked to water management and waste water management in particular. So let's hope that we will see further growth of demand and we are ready for that. So those 2 highlights on my side, and I am returning the floor to Jitka, you or anybody else.

I will continue or I will move to the area of our own operations. In 2020, we began reducing our own carbon footprint and we have decreased it by 44% compared to 2019 base. It was driven by energies and it decreased by minus 27%. This focus on reducing our energy consumption proved to be very beneficial, especially during the energy crisis, when our energy bill nearly tripled. Within the last 3 years, we have adopted several, let's say, both decisions. We have closed 200 branches, because we are confident that many clients can manage their standard operations via mobile phone or internet banking. We have relocated 2,500 people to modern, more environmental friendly buildings in Stodulky, where I'm sitting now. And we have sold 30% of our buildings. We scanned extensive amount of paper documents, and again, we sold several other buildings. I can share that we have a nice interactive modern application based on the Internet of Things, which automatically detects waste and utility. I hope you know about our ATM sharing. We shared our ATM network with 4 other banks which is very interesting for our clients because we link our network and our clients can now make cash withdrawals and starting next year also depositing free of charge. And of course, there are certain cost saving benefits, but also we were able to provide this 24/7 service to clients in distant regions because we moved already more than 60 ATMs to the regions. In the middle and back offices, we are moving from let's say manual paper based work to having flexible teams using end-to-end digital workflow process measured and be more effective. We were able to light up more than 20% of colleagues in this area. And we have also launched a completely new payment and card infrastructure for all clients. It's important to highlight that everything we do is for clients good because there is more stable environment, more secure operations, ensuring 24/7 mode, but of course there is also lower cost maintenance. Next slide. Next slide shows Jakub please. Next slide. The 2 remaining pillars. We have high client satisfaction and we have been awarded as a bank without barriers because our mobile app has several advanced functions for disabled people. And I would like also to mention that we have charity, Jistota Foundation and during 2022 we saw extreme events, fear and changes, but also huge solidarity and we somehow distributed record amount of money. The last pillar features the responsible employer framework, including for example gender balance, equal pay, support for social inclusion. KB aims to close its gender pay gap by 2025 and to increase the share of senior management position held by women to 30% and I have to say that we are very close. And the final slide is summarization of our awards for sustainability activities and our commitments to this area. Above all, we have improved our position in international ratings. I can mention the MSCI ESG rating we climbed from BBB to AA. And that brings me to the end of the presentation. We believe that our approach that prioritizes ESG will lead to outperforming our peers in the long run.

All right, so that's it. Not only for the part of ESG, that's it also for the presentation. We have still a few pages in the appendices. I don't know if someone wants to comment or we turn now the voice back to the analysts and open the Q&A session. Thank you.

Yes, indeed. Ladies and gentlemen, this is completes the presentation part of this meeting. Now we will be happy to answer your questions. Let me remind you that, this meeting is being recorded. [Operator Instructions] So we have a first question which is coming from Mate Nemes from UBS. Mate, please.

I have 3 questions, please, if I may. The first one is on a new housing loan or duration. I think we've seen quite a strong pickup from the bottom in the first quarter about 50% higher now in the second quarter. Could you just give us a bit more color of what has been driving that? Is it pent-up demand? Is that increased confidence? What is that really and how sustainable is it? That's the first one. The second question is on the net interest income and net interest margin. I think in a previous call, you guided for about 30 to 35 basis point decline from last year. Year-on-year. Has that changed in any way? And also given, I think you've shifted your expectation with regards to rate cuts. Could you give us a sense regarding your expectation of NII next year? And the last question is on cost of risk to Didier. I'm not sure I understood it. Does the 0 to 10 basis point guidance incorporate the release of the CZK 300 million inflation reserves? If you could clarify that.

The first related to mortgages can go to Miroslav in potential in combination with Jirí.

Yes. Look, when you have the figures for the mortgage market, I would rather call it normalization of the development. Still, you overview the first half compared to a year ago is down on the market almost by 60%. KB is down by 40%, so outperforming the market in pretty decent way. And those last 2 months were promising. This is true. And we hope it will keep. We see the pipelines and the pipelines are quite full of loan applications. I think there are a few explanations. One of them is that once this super high interest rate environment started, which made mortgages really, really expensive, people started postponing their investments and purchases. On the other hand, you can't keep postponing it forever. So many just decided to somehow digest the increased cost and go for the plans and projects. So this is definitely one of those drivers. The second one is certain correction of real estate, real estate prices, because you can get a bit better price today with the demand supply balance that is different than it was before. Sustainability. We believe that this can stay as it is. It might even grow now. But once again, it's rather returning back to a normal level because the market was very much down and it was a huge difference compared to the boost that we experienced before. So if you ask me as a commercial person, I'm rather on a relatively optimistic side for the mortgage production in coming quarters and years.

It's Jiri Sperl. Absolutely. I think Mirek covered almost everything. Maybe to add or to complement, what is also helping demand for mortgage loans is a relatively very dynamic growth of the income of the household. It's year on year by 10% on top of my head. And also a small decrease of the real estate prices. And the household do not expect a further decrease of these prices. So it's a combination of all these things. And the output is, as you can see in the slide. So this was about housing loans. There was a question for me related to NIM. The first sub-question was whether we are confirming a decline of NIM on a 4-year basis at 35 basis points. Yes, it is still the case, confirmed, even if you are saying 30 to 35. So in one word, the answer is yes, confirmed. And the other one was related to rate cuts, impact and potential implications into 2023. I'm not sure, if I did, but I think I did comment on that last time. We compared to the situation 1 and 1.5 years ago. We set our interest rate risk position in a way that we basically are not sensitive for the movements of the market interest rates. So the fact that our guidance for the key policy rate has kind of extended by the beginning of next year is not hitting us too much. So having said this, we are expecting that for next year, the NII should continue recovering through mainly influenced by volumes. But at the same time, we believe that NIM neither should continue declining. So just a very first indicative guidance would be NIM at the same level and NII driven by volumes. And you know usually what are our targets, both in deposit sites and loan sites. So from that, you can relatively easily calculate what is our full next year NII guidance. I think I covered the questions.

And I will finish with your third question on the cost of risk guidance. This year-end guidance definitely includes some reversal of our inflation overlay. And it does just because we are expected to do so as per the IFRS 9 regulation basically. The uncertainty factor is in our capacity to identify another potential deterioration area in our portfolio and to develop the argumentation and to book a reserve. And this is what we will be working on. And this is where we don't know is it going to be for 100%? Is it going to be for 50% of what we will have to release? Coming from this corporate inflation overlay, this is a good question where we do not have an answer yet.

The next questions come from Andrzej Nowaczek of HSBC.

Yes, my question is on ESG. Your presentation was very interesting. I want to ask specifically about Scope 3 emissions. Can you help me understand how advanced you are in your Scope 3 emission calculations? I can see in your sustainability report it includes investments, employee transport waste. But presumably it doesn't include any lending, does it? And what are you doing to be able to improve your disclosure on Scope 3 emissions? Are there any requirements to disclose everything anytime soon? And how do you compare in terms of disclosure specifically on Scope 3 from Société Générale?

I will start. Today we are measuring the Scope 1, 2, and partly 3 regarding the suppliers to Komercní banka. Regarding the clients, as also Didier mentioned, we have the assessment process, which is called the environment and social management process, where we are gathering, let's say, 80 questions from our clients. They will help us to gather all the information to be able to calculate Scope 3. But unfortunately, today only the large Czech companies are able to disclose such information. For example, what is your portion of the green energy? What is your carbon footprint based on the client's level? So after we are able to calculate the client's footprint and also the client's transaction footprint, we will be able to disclose the Scope 3. The regulation is saying you have to do it in 2025.

[Operator Instructions] Okay, so the next question is coming from Robert Brzoza of [ Ekal ] BP.

A quick question for me. One on the NII outlook, again. If I recall correctly, you had roughly CZK 80 billion at savings accounts. And my question is if that figure is still correct. And what is your expectation regarding the pass-through, given the 3 percentage points of rate cuts expected throughout 2024? How do you expect the reduction in the rate offered on savings accounts to be an additional driver to the NII in 2024? So my question is whether that reasoning makes sense. Second question is on the windfall tax. Do you still expect some additional tax payments to be made this year or in the coming years? My understanding is that the windfall tax is actually not an issue anymore. But I want some confirmation of that reasoning. I mean, mostly due to the fact that we had a declining, especially NII, with negative impact on the net level and operating level this year in particular.

Yes, thank you for the question. The first one was NII outlook. Well, I would like just to confirm that NII is going to be down on a 4-year basis year-over-year in high single-digit territory. I would say that NII is going to be driven by volumes, and here we are expecting higher dynamics on the loan side, mainly in corporate. You probably noticed that in the first half of the year it was around 2.5%, so at the end of the year it should be mid-single-digit. And also mortgage loans, as we were showing you with Miroslav, the new dynamics of the sales. This is the first thing. The other thing is that, from my perspective, the majority of the deposits have re-priced already. What I mean is that the clients sensitive on interest rates either left the bank or switched their current accounts to the paid deposits. Of course, we are not still at the end of the process, but I strongly believe that the ratio of current accounts versus TDs or paid deposits, if you wish, is going to bottom up either in Q3 or Q4 this year. Another element to mention is that we are expecting that also IB is going to contribute to NII, at least at the level of Q2. So all-in-all, we believe that the trend of increasing NII in upcoming quarters, I don't know, the run rate is around 3% to continue. This is one point. The other point you were mentioning also kind of buzzed through or better in terms of paid deposits on the retail side. Currently, we are paid, so it is not a mix with current accounts. Currently, we are at the level of roughly 65% in retail and much more in corporate, of course, 85%. So that's probably just to complete your question. But let me know, please, whether I answered it. If yes, a couple of sentences about windfall tax. Here, to say we do not have any new information on top of what we told you last time, i.e. in 2023, limited impact. In fact, if any, maybe here it is also worth to mention that relatively very recently, one week ago, Minister of Finance, Mr. Stanjura, publicly confirmed that he still considers windfall tax as kind of extraordinary tax used for extraordinary spendings. Like energy caps, et cetera, et cetera. He mentioned that in the beginning of 2024, he plans to open a discussion about preliminary abolishment of this tax if the energy caps are not prolonged. On the other hand, this is, please take it just as a kind of indication of Minister of Finance opinion and not opinion of a government or government coalition. So we should not definitely count on this, but we are indicating this 3, 6 months ago, so now it was somehow publicly mentioned.

Although I have to admit, I thought that the positive impact in 2024, obviously, coming from potential reductions in the CNB rate and then passing on to lower term deposit rates, savings accounts in particular, I thought they would have a much more positive impact on the NII outlook in 2024. So that's something I don't quite understand, but that's okay.

[Operator Instructions] Our next question is coming from Mehmet Sevim from JPMorgan.

I just had one follow up to the windfall tax question. I know you historically don't guide for effective tax rate, but just conceptually, could you help us think about tax rates going forward, as one of your peers has revised it down quite significantly recently, putting everything together, including the windfall tax and the increase in the corporate tax rate and the tax exempt government bonds that you have on your balance sheet. So how should we think about that concept? Actually, any other would be helpful. And secondly, just on the rollout of the new bank, since April, I see that you've on-boarded about 22,000 clients so far in the new Digital Bank. Can I ask, is that basically a controlled rollout so far, so that you're determining who comes or is that basically this number 22,000 was that basically in line with your previous expectations? And where do you see this going forward based on the feedback that you get so far? And do you expect a significant acceleration in that, for example, going forward? And maybe other color that you may have would be helpful.

I will start with windfall tax, or taxes, generally. Our corporate tax for the time being is a level of 90%. And our effective tax rate is by 1 or 2 percentage points, points per slower. To mention that part of the austerity package announced by the government, I don't know, 3 months ago, is also the increase of the corporate tax by 2 percentage points. So this is probably an impact we will have to bear. At that time, we made kind of a quantification of the impact on that line, and it was around CZK 400 million. For windfall, well, there are basically 2 elements impacting the size of windfall. And the first one is, of course, in a simplified way, per-tax profit, which is influenced by, let's say, all chapters. But other thing is also, and as you are correctly saying, change of the structure of the revenues from, let's say, tax perspective. And some of them are taxable, some of them tax exempt. And that's exactly the case for, let's say, newly issued government bonds since the beginning of 2021. And of course, the banks are, and started already in January 2021, are continuing in these investments, which is further, let's say, decreasing the tax base for the windfall tax payment.

Mirek, just if I can add one sentence, let's not over-engineer the perception here. The windfall tax was not a systemic approach to the composition of taxes in Czech Republic. It was an ad hoc decision, which was imposed on only 6 banks in this country under the explanation that it will serve people who will be short of paying their electricity bills, right? And it was at the beginning of the ergo crisis. This one is hopefully over. The purpose of imposing this tax is over. We hear the finance minister speaking loudly and publicly about shortening the effectiveness of this law, which needs to be approved by the government and needs to be approved by the parliament, which has not yet happened. So we will probably be in a better position to give you more answers in the future. I'm afraid that when composing this structure of taxes, the policymakers did not make your analysis ahead of adopting the law. In contrary, we see, even though we would not like it, we see the 2 percentage points of increase of corporate tax for all the participants in the market as not so much favorable, obviously, but still a systemic decision and legislation. I will kick off also with the first part of the answer for the next question, which was what about NDB, New Digital Bank, whether the composition of the newcomers is in line with our expectations, et cetera. We should probably make it clear that we are building completely new core banking system and new front ends for the branches, for our mobile banking and for our Internet banking, for the existing clients. And we build it also as a tool for onboarding new clients. So the composition of those 22,000 is the existing clients, rather the cohorts of, let's say, simple clients, so current account or current account plus a payment card. And we have our calendar of migrating clients from the old stack to the new stack and the calendar for phasing out and decommissioning the old hardware and software. So I'm inviting Miroslav, if you would like to put more details on this frame.

Yes, I would add a few more figures to that today, what you see. And by the way, as I was commenting during my short speech, we are just about to reach 30,000. So it's nicely growing because the figure you saw in the presentation, it's 4 weeks old, of course. It's a mix of on-boarded clients and migrated clients. And mainly, the migration component will keep increasing now because we will accelerate. And why we will accelerate as this is business migration, we always need to wait for deployment of new products and new functionalities so that those clients who will be migrated can really get transferred with everything they have in the old platform to the new platform. And as looking at the plan today, we are opening the migration process for approximately 20,000 clients or 15,000 to 20,000 clients per month. This number will multiply during the autumn, reaching 70,000 to be migrated clients in October and even 110,000 clients ready for migration in November. So we will gradually over the autumn reach the ultimate speed. And if everything goes according to the plan, all retail clients of KB will be migrated in 2025. So if you ask us where this is going to lead to, migration plus acquisition should get us to have everything in the new platform in 2025. So, so far, it's more or less around the business case assumptions. We still need to work on the structure of tariffs and paid and non-paid customers, but it's not too far from the original expectations. And the figures are almost in line. So touching the wood, it looks quite promising at the moment.

We don't seem to have any further questions at the moment. [Operator Instructions] Nothing coming in, so I would like to ask Jan for a concluding remark.

Yes. Thank you very much, everyone, for spending your time today with us. We very much appreciate your interest. Komercní banka and its team, its management team and the broader team of KB is very much dedicated to both delivering the value to shareholders and implementing its strategic plan, KB 2025. In parallel with that, we are and we are trying to position ourselves as an active contributor into the strategic changes, which would be happening soon on the side of Société Générale group by sharing our expertise, by sharing our value, which we have been creating on composing the new technological investments into our core banking system and others. We do believe that 2023, even though it will be a bit of mediocre growth of the GDP, will continue being rather a stable year from macro economical perspective, which was during our call also confirmed by the decision of Czech National Bank to keep the rates where they are. And for the future, we believe that on the longer -- on the longer term or midterm, we will gain technological advantage vis-à-vis the other banks, and we will continue creating value for the shareholders also through that, and not only shareholders, but also for our clients. In the meantime, let me wish you a successful and joyful second half of the summer, and we will be looking forward to seeing you at the occasion of the next quarterly results, or in between with any individual questions should you have such questions. Thank you very much.

Thank you. This has concluded today's presentation. Thank you very much. You can now disconnect.

Bye.