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

So, good afternoon, ladies and gentlemen. Let me welcome you to the presentation of the results of Komercni Banka for 9 months and third quarter of 2023. It is 3rd of November 2023 today. Please note 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. Standing by, in case you have questions for them are also; Jitka Haubova, Chief Operating Officer; Miroslav Hirsl, Head of Retail Banking; David Formanek, Head of Corporate and Investment Banking; and Margus Simson, Chief Digitalization Officer. As usual, we will begin with the presentation of results, which will be followed by questions-and-answer session. During the presentation part, all participants will be on listen-only mode. Please kindly keep your microphones muted during that time. Now let me hand over to the CEO, Jan Juchelka. Thank you.

Thank you, Jakub. Let me welcome you all to the presentation of Komercni Banka of the Q3 2023, where I will, together with my colleagues from the executive management, lead you through the presentation, and we'll be glad to answer your questions at the end of the presentation. So, we can move to the first page, which is representing the fact that Komercni Banka remains one of the main and very solid pillars of Czech economy when providing the necessary financing for both the households and corporate clients. The overall loans were increased by 2.7% on year-over-year basis. The dynamics between the previous quarter and this quarter were also positive by 1.7%. We are back in the positive territory for gaining deposits from the market, which are the predominant source of our funding on a year-over-year basis, plus 1.2% and Q-over-Q plus 2.8%. The assets under management outside the Bank's balance sheet, which in our case, is represented mainly by the solutions of Amundi [Technical Difficulty] or our private banking. Life insurance and pension schemes are growing by very sympathetic almost 15%; quarter-over-quarter, plus 2.2%. Overall, the loan-to-deposit ratio is in very safe territory of 79.3%. The liquidity coverage ratio almost 160%, we are sitting on more than comfortable pile of capital of 20.2%. You may remember that almost entirely composed from core Tier 1 and -- which came as a little surprise probably on this quarter to you. And thanks to very high quality of our assets, we were in the position to release provisions at the level of 16 basis points. The 9 months of 2023 led us to CZK 12.4 billion net income with the ROE at the level of 13.5%, and the cost-to-income ratio at 48.2%. Next page, please. You may remember that yesterday, Czech National Bank decided to keep the short-term rates at the existing level of 7%. It means that the Board of CN Bank is sending the signal that they are very cautious in closing the chapter of fighting against the inflation. And we do remain, together with our macroeconomic team, pretty confident that potentially the drop of the rates might come early in 2024, if not at the end of '23. The GDP was down by 0.3% in Q3 2023 based on recently released results by Statistical Office of Czech Republic. Our popular indicator of Czech economy and one of the main representatives of export, which is car production grew by almost 12% on a year-over-year basis. The contribution of exports in general were positive on a year-over-year basis, even though negative in quarter-over-quarter. Nonetheless, the main weakness of the current performance of Czech economy is stemming from weak households consumption and by delayed or unrealized investment decisions for this period of time. One of the long-term diseases of this economy, which is dried up or dried out labor market remains still the reality, unfortunately. The consumer price inflation is at almost 7% on a year-over-year basis. Next point, please. Business performance. Let's have a look on loans. We continued our strong delivery and strong contribution into the needs of Czech economy on both main segments, the retail as well as the corporate clientele. The overall loan book grew by 2.7% year-over-year and 1.7% quarter-over-quarter. You may see that the housing loans and mortgage loans remains pretty lively. Consumer loans grew by 6.9% for Komercni and the businesses and other loans grew by 1.4%. We are happy that the mortgages are bouncing back to some extent, but we remain very realistic about growing faster, mainly due to the level of interest rates. Group business and corporates and other loans grew pretty nicely by 1.4%. There was pretty good performance of our leasing company, SG Equipment Finance, whereas the corporate loans resulted to 1.1% growth and the small businesses remained stable. Again, loans-to-deposits at 79.3%, liquidity coverage ratio at 157%. The consumer lending is growing very fast in the field of end-to-end digital sales, mainly thanks to the presentation and the launch of our new digital bank back in April. We will come back to it at the end of our presentation. Next page, please. Deposits, plus 1.2%. Assets under management outside the Bank, 14.7% year-over-year. Let's focus on this category for 1 minute more. The mutual funds i.e., Amundi plus private banking, in our case, grew by 32.5%, whereas the life insurance reserves were slightly down by 1.2%. The pension scheme grew by 2% almost and partly impacted by the debates, which were held at the level of political decisions in the context of, in the frame of so-called stabilization package, which was adopted by Czech government and Czech Parliament recently. When we focus a little bit on the group deposits, they are growing in the field of business clients by almost 4%. They are slightly down on individual deposits. The same on building saving. Building saving is also going through a pretty transformative time after the cabinet and the parliament adopted new law on building saving companies. When we see the composition of growth and drops inside the composition of accounts, the current accounts are down by 11.7%, whereas the term deposits and saving accounts are growing by more than 25%, which is not a surprising tendency, obviously. Next page, please. Next page is the page of our CFO, Jiri Sperl and I'm handing over to you Jiri. Thank you.

Thank you. Jan. Good afternoon, everyone. Indeed, on a year-to-date basis and now I'm commenting the left upper chart, waterfall chart. There are 2 categories deducting from the bottom line. It is visualized in red. It is NII and OpEx. On the positive side, cost of risk is changing the picture completely in the year. We'll comment on that later on. All in all, the net income after tax is at the level of CZK 12.4 billion i.e., roughly 5% lower year-over-year. From the quarterly perspective, that's right upper chart. We are also reporting a bit lower results by roughly CZK 250 million, mainly due to lower result of the financial operations category, and I will comment on that a bit -- in more detail later. This still leads to a very strong profitability indicators. As shown on the left bottom part of the slide. For example, ROTE is at the level of 15.5%, I'm using IFRIC adjusted figures. Let's move to the balance sheet, please. In terms of balance sheet, there is a visible and very dynamic growth on year-to-date basis, almost 16%. On a more comparable perspective, i.e., the year-over-year, the growth is lower. It is slightly above 1%. For the first time after some time, and Jan was touching that deposits were contributing slightly positive, but still, the main driver is a senior non-preferred debt or loan growing year-on year-by almost CZK 330 billion. That's visualized by brown color in liabilities part of the slide. On the asset side, the growth is driven solely by the client loans, while both repo and [ Czech lease ] are staying more or less flattish on a year-on-year perspective. Let's move to the capital, please, which is the next slide. Yes, it remains very strong at 20.2%. And it even further increased quarter-over-quarter by roughly almost 20 basis points; not surprisingly, mainly influenced by the profit generated in the Q3, while the consumption of the capital via the increase of risk weighted assets was limited. On top of that, the capital requirements decreased by 50 basis points as of October 1 this year. As CNB decreased the countercyclical buffer, it was already announced roughly 1 year ago, so no surprise for us, which means that as of now, as of October 1 and later, the capital adequacy is above the regulatory minimum by a very strong 280 basis points. In terms of SNP, senior non-preferred loans, we didn't conclude any during Q3 this year, but going to do that in Q4 to be fully compliant with the regulation. Let's move to revenues, and let's start with net interest income. It went significantly down in 9 months of 2023 by roughly 10%. And the main reason here is clearly on deposit side, declining by 14% year-on-year. As mentioned, I think already 3 months ago; last year, we were still benefiting from the rising of the interest rate cycle and also delaying our pricing of the deposits. Now we do not benefit from that anymore, the rates and mainly short term are stable already more than 1 year and long term are already in a declining trends. On top of that, currently, we are already fully competitive in terms of pricing of deposits, at least versus Tier 1 banks. And having said this; this, on one hand side, stopped the trend of declining of the deposits, as commented by Jan, but at the same time, increased slightly for our cost of funds. So, this was a year-on-year perspective. Anyways, more important for me is the quarterly evolution. And here, it's positive to see that Q3 NII is growing the second quarter in a row, not significantly, but the direction is clear. And the main driver of the growth here from this quarterly perspective is coming from the deposits that are growing by almost CZK 300 million quarter-over-quarter, positively influenced mainly by the volumes. Now loans; trend in for net interest income from loans remains the same, basically, i.e., slightly down. That's the blue part of the chart. The main reason is the continuing slight erosion on spreads, with one exception, and the exception is related to mortgage loans where we are reporting kind of flattish margins on mortgage loans already third quarter in a row. Net interest margin, that's left upper chart, reported slight decline quarter-over-quarter. It is by 3 basis points, and here, the main reason is due to the loans spread. That's about net interest income. So, let's continue with the fees and commissions. They were growing, I would say, nicely. So, year-on-year, it is plus 3.4% or 3.5%. And again, it is the -- gross third quarter in a row. The main driver are, traditionally, fees coming from cross-sell growing by 7% and following the dynamic new sales of the non-bank assets under management, mainly mutual funds, as already commented by Jan. For Q4, we are expecting seasonally higher result. And, as a consequence, we are sticking basically to our full year guidance at mid-single digit. The last chapter on the top line are the financial operations. So, they are down quarter-over-quarter, relatively significant to the level of SEK 775 million. That's right upper chart and that's mainly due to the weak capital markets results, reflecting slower real economy, weak confidence levels and also lower volatility, both of FX and interest rates. Always, we are reminding here at this slide of that this is kind of, by definition, one of the most volatile income category. And to say this is the kind of confirmation of this statement after 2 super successful quarter, as could be seen on the bottom right chart, when we generated more than CZK 1 billion. So, that is kind of a correction. On the positive side here, this correction was partially offset by the net FX gains from the structural book, reflecting mainly the seasonality of the traveling, transactions activity and also partially adjusted spreads. Next slide is covering OpEx. So, growing by 7.7% on a year-to-date basis, mainly driven by the staff costs, plus 9%. Just to say, this is clearly influenced by the effect of that -- due to the super high inflation last year, so the bank increased extraordinarily the [indiscernible] roughly 1 year ago as of November 1. So, this is kind of the base effect. In, terms of a guide, it's growing by 7%, and here, it basically goes across the board naturally and without any surprise, influenced mainly by the higher inflation, resolution flourished, but the deal has been done in the first half of the year, so now we have changes here, and depreciation is growing also up relatively significantly. So it's already double-digit 11%. But here, the reason is different and to [indiscernible] and it's reflecting the acceleration of the investments in digital transformation. In terms of cost/income ratio, and I'm commenting so if [ reclinerize ] because it makes more sense for me. So it is, on a year-to-date basis, at the level of 47%. So it is above the 1 year ago -- above last year. On the other hand, just to remind like, last year was really extraordinary -- extraordinarily successful and to the record yea, if you compare, for example, to a year ago, I mean, 2021, cost/income ratios is even better. At that time, you are fluctuating around 50%. So this is [ GoI ], and now it's my pleasure to pass word to Didier.

Thank you, Jiri Ezri. Good afternoon, everyone. So I will give you a brief overview of the evolution of our asset quality and credit risk profile during the third quarter. And in fact, what we've seen is the same key features -- 2 key features as the one we already commented during the first 2 quarters of 2023, namely, the first one relates to non-defaulted exposure, and is about a continued low migration between the S1 and S2 asset classes. This low migration dynamic having a net 0 impact on the quality structure of our loan book. To be a little bit more precise, in fact, the level of migration flows was again below CZK 10 billion, both ways from S1 to S2 and from S2 to S1, which compares to a total of CZK 800 billion, which is the total exposure of S1 and S2. This low migration dynamics was mostly recorded on -- as expected on our retail segments. The second key feature, also not new, is the low default intensity with a migration from S2 to S3 or NPL had net 0 impact on the quality structure of our loan portfolio, and with very low volumes of flows between those 2 asset classes, defaulted and non-defaulted translated into default rate. This second feature gave us the following picture. The decreasing trend for the Corporate segment since the fourth quarter of 2022 was further confirmed, which means that our default rate for the corporate portfolio continues to be at historically low level. At the same time, we recorded some moderate increases on the retail side, but still below the pre COVID levels for the small business and mortgage loan portfolios, while for the consumer finance portfolio, we reached levels that are slightly above the pre COVID level. So, these 2 key trends translated, as you can see on this slide, into a very stable S2 ratios and S3 ratios or NPL ratios, respectively, at 13% and 2%. The same applies to our provision coverage recorded at 0.6% for non-defaulted exposure, and 50% for the defaulted exposure, so very much in line with the levels of the previous quarters. Now, going to the cost of risk overview. As Jan mentioned earlier, in the third quarter, we booked a level of net releases that was lower than in the previous 2 quarters for CZK 138 million or 16 basis point on a year-to-date basis. This level of net releases is, as I just said, substantially lower than the one booked in the first semester at roughly CZK 500 million per quarter. Overall, this net release pattern since the beginning of the year is mainly driven by first, strong level of recovery performance recorded on our defaulted corporate exposures. And second, as I just mentioned, by the exceptionally low level of default rate for both our mortgage and corporate exposures. You have in front of you the view by segment, and I will start with the Corporate segment. So, we booked roughly CZK 200 million in net releases on the corporate portfolio. And here, there are 2 components. In fact, the first one is CZK 270 million in net releases from the defaulted portfolio concentrated on 6 client situations. So, as in the past. And this was partially offset by 70 million in net creation from the non-defaulted corporate portfolio. And this amount was recorded and we call it on 3 client situations. So again, not a sign of portfolio deterioration. And then this was also partially or residually offset by some very small releases coming from our IFRS 9 results. Retail segment generated a level of near CZK 150 million in net provision creation. And this is the simple reflection of the marginal increase in default rate, which as I just mentioned earlier. There are 2 additional side notes or comments to be made. One is this near SEK 80 million, which was recorded as a one-off recovery on legacy situation, which was finally closed after more than 20 years of legal proceedings and successfully closed. And the last point to be mentioned is that we decided to freeze our inflation reserves, both for the corporate and the retail segment until the end of 2024. This has a simple measure of precaution due to the uncertainty of the macroeconomic environment. Now I will finish before handing back to Jiri with the adjustment of our year-end guidance for the cost of risk. So we issued back at the beginning of August, a level of 0 to 10 basis point, plus 10 basis point. So creation, net creation, and we have adjusted this down to a level at around 0 for the full year, obviously. And this 0 level is, in fact, being driven by 3 main elements. The first one is that we still expect a few net recoveries coming from our corporate defaulted portfolio. This trend of net recoveries that we booked in the recent quarters being expected to come to an end in 2023, so at the end of this year. The second element is, as I mentioned before, some continued lower-than-expected level of our default rate, especially for the mortgage and the corporate portfolios. These 2 portfolios covering roughly or approximately 75% of our total loan book. And the third element is just some reserve for possible isolated jumbo default situations that could come from our corporate loan portfolios. And on this, I will now hand over back to Jiri, who will complete the outlook overview for 2023. Thank you.

Yes, sure. Thanks Didier. Generally, we are confirming the 3 months old outlook with a couple of adjustments. In macro, it's a slight downgrade of the GDP growth this year, I mean, from plus 0.1% to minus 0.3% In terms of repo rate stays at 7% per annum. So, no changes. Banking market grows, there are no changes neither. What I mean is the loans mid-single digit and deposits mid-to-high single digit. In terms of KB business outlook, we are slightly downgrading the growth of the loans from mid-single to low-to-mid-single digit, mainly due and mainly in the area of the CIB corporate loans. And there are no changes in deposits i.e., growing by mid-single digit on a full year basis. Now, KB financial outlook. So here, we have to downgrade a bit as well from low to mid-single digits to mid-single digit drop or they're down compared to 2022 levels. And basically, there are 2 main reasons behind. First one and I was mentioning already during NII [ chapter ] is kind of slowdown of the corporate loans, and the other one, even more material is related to the changes or canceling of the remuneration of mandatory minimum reserves that are deducting or cutting or having impact in our NII at the level of CZK 120 million per month. It is not a small impact, we even issued the regulatory information at that time. So that's the main 2 reasons why we are downgrading the revenue guidance. In terms of OpEx, it is kind of remain under tight control. So here, we are confirming the guidance, i.e., high single digit, and cost of risk was already commented by the Didier. So the last sentence, in terms of potential risks to the outlook, we are not changing at all. So that's probably for this slide. So from me, returning words to Jan.

All right. So let's spend last couple of minutes on the strategy and its implementation. Here at Page #24, you see the initial purpose and vision statements as well as the main pillars around which we are building our story, including the main company objectives. We can move to next page. Here, we have the first set of the company objectives and key results. I will just pick up the main ones, which I feel are probably the most important. We have launched our new retail bank under the name of KB+ and started migration of clients together with onboarding of new clients. Currently, we are growing above 70,000 users, learning and improving the pace and composition of migrations and working hard on adding new products into this solution. Let me remind that the design and logic of the architecture is the same for mobile application, Internet banking as well as our working environment for our bankers in branches. We are fully on T24 new core banking system provided by Temenos. We have on new TSYS Prime payment and card platform, which is fully operational. Next objective I would like to mention here is the digitization of our service and sales. We are growing pretty nicely by 11 percentage points in total digital sales ratio and the KB+ plays a positive role in it as well. Let me, also from this particular page, pick up the one mortgage factory. As you may remember, we are moving all our customer journey related to housing which, in our case, next to the mortgages is represented also by housing loans and housing savings of Modra pyramida building savings company under one roof, and we want to achieve certain level of synergies, certain level of optimizations, et cetera. We are almost done on the technological part. It became live a week ago and we are preparing a large migration exercise for the second quarter of next year. Next page, let me say that we are making pretty large steps forward in everything which is related to ESG Scope 1, Scope 2 and Scope 3. In Scope 1, we are down by 44% in -- with our own emissions -- sorry, Scope 1 and 2 compared to 2019, we are increasing and improving our level of data collection and reporting on the side of Pillar 3. We started to monitor the loans which are ESG compliant, and they are pretty dynamically growing by almost 33%. And the portion in our loan book is currently exceeding CZK 53 billion. We are making our steps up also in all the measured international ratings by MSCI, by S&P Global or FTSE4Good. We have finalized the existing stage of electrifying our car fleet. So, currently, we are running 211 battery electric vehicles, which is probably the largest in the country. Let me remind that it's not only for job services but also for private usage of our employees. As far as the operational efficiency is concerned, we are constantly and very systematically working on lowering the number of people working in the bank, targeting 5,500 people in 2025. We are also very successfully implementing the program of reducing the number of branches. So, they are down by 130%, almost 40% compared with 2019 to approximately 212, if I remember well, and focusing the number of 200 in 2025. In the field of operational efficiency, let me remind, we have signed contracts with other banks who are sharing the ATM infrastructure network. So, we have created the largest fleet of ATMs, exceeding 2,000 machines in the country. We also continue working on the so-called One group project, where the subsidiaries are outsourcing their support functions to Komercni Banka. We are finished with factoring KB, almost done with KB Penzijni society and in very like developed stage with Modra Pyramida Building Saving Company. We can go to next page, and I would like just to pay -- just to bring your attention to the targeted NPS external. So, clients. NPS internal, so people, where we are on good developments in the field of individual clients, let's say, pretty unchanged or slightly improved in the field of small businesses and still waiting for the relevant data as far as midsized corporations and large corporates are concerned. Looking forward to next stages where we believe that we will be growing to the targeted 50 positive points. The Bank clients, 2 million targeted clients on standalone for the Bank. Here, we are growing nicely, but not fast enough. Let me remind that part of our story is that we would like to grow the portfolio also by inorganic way, which has not been happening yet, and we are not currently working on any transaction, which would create the good expectation here that we will be quickly at CZK 2 million. So, we are doing our best in the job of onboarding new clients to KB+ and believing that we will be as close as it gets to CZK 2 million in 2025. I have already commented bank branches. I have already commented employees. You can see the tendency or the development here, which is going in the right direction. Employees engagement, we are in the middle of gathering data from a large, I would say, worldwide SG employees barometer. The last, which was made locally is at 78 positive points. Let's see well where we will be landed with their existing one. ESG assessment I have already mentioned, slowly but steadily growing up to the targeted numbers. Last page related to the implementation of strategic plan. I would like to ask Jiri Sperl for his comments here.

Yes. Well, the financial ambition remains generally intact. Anyway, due to some unexpected circumstances, we have to adjust slightly the ROE and cost/income ratio targets. Now I'm referring to the table at the very bottom of this slide. Originally, you were communicating a cost/income ratio below 40% and ROE above 15% in 2025. Newly, what we are saying is that the targeted cost/income ratio is only around 48% and ROE around 15%, right? The main reasons are relatively the recent ones, and I would say you know them. So first let me list, at least the most important out of them. So first one, it's canceling of the obligatory reserves remuneration. We already touched during the NII, but the impact is really significant. Of course, it is converging or it is dependent on the level of the market interest rates. But for illustration, the impact in 2024 is expected at the level of CZK 1.2 billion. That's first. The second, it's impact of the austerity package approved by the parliament presently, it is still going to the Senate, but it is expected that it's going to be approved definitely. And here, there are main 2 impacts. First one and already communicated 3 months ago, corporate income tax increase by 2 percentage points and generating a negative impact to the bottom line at the level of CZK 400 million. And also the taxation of the employee benefits, which is kind of adding into the cost side, another CZK 100 million. And third, to mention is the fact that the savings from decommissioning of some components of the legacy banking infrastructure will be delayed by 1 year. Originally, it was expected to complete by the end of 2025, but it will happen still as late as in 2026. So that's in a nutshell about the update of financial targets. And now let me pass words to Didier back. Thank you.

Yes. So, probably, this is the end of the presentation. Jakub you can ask our guests...

Yes, yes. Thank you very much, ladies and gentlemen. So, this has concluded the presentation part of this meeting. Let me remind you that this meeting is being recorded. We will be happy to answer your questions now. [Operator Instructions] So our first question comes from the line of Mehmet Sevim from J.P. Morgan.

I'd like to understand whether there is anything you can do on the NII front to maybe get back some of the negative impact that will come from the reserve requirement or minimum reserve remuneration cancellation in 2024. Some of the other banks are talking about some potential efforts there. Anything that you can highlight on this front? That will be very helpful. And maybe, just more general. How should we think about full year 2024 NII now? I mean, obviously, you mentioned the CZK 1.2 billion impact coming from that, but I'm thinking about loan growth and maybe also potential rate normalization in 2024, what would be your views for that? And then secondly, one question on cost of risk. So, the 0 basis point guidance would now imply about 50 basis points of quarterly cost of risk in the fourth quarter and Didier mentioned some of the drivers there, which make total sense. But what I'd like to understand is, whether some of those could spill into the new year. And essentially -- basically, for example, the insulated corporate defaults, et cetera, and whether then we could see some higher cost of risk in the new year as well? Or you would expect a more normalized level there? And finally, on dividends, if I may. Obviously, you're accruing your normal dividend payout ratio level so far. But capital is quite strong and we've seen some decrease in the countercyclical buffers recently as well. So, do you think there is any room to maybe surprise the market at some point with a higher capital payout or how do you think in general about this? I mean you all remember last year that you had announced that [Technical Difficulty] very excited about it. So, I'm just trying to understand what -- how are you thinking about it and distribution in general?

So, there is like 4 or 5 questions. So, I will go one by one and then pass word probably to Didier. So, the first question was about the impact of minimum obligatory reserves and how to mitigate the impact as best as possible? Of course, that's something what we are doing. We are trying to do our best because it is actually a cost directly allocated to the deposits. So, we already have started to charge at least internally the deposits. And in upcoming weeks, this is going to be kind of transposed also to the client rates. Of course, we are going to start mainly with the corporate clients and retail will come later. But it is important to say that it very much depends how also the competition will behave because if we do that just ourselves, simply we will not be competitive in terms of the pricing. This is one point. And the other point is, the impact is calculated in a simplified way on a full deposit base. But from the presentations, you can see that more than half of our deposits are current accounts and to allocate these costs to the rates, which are already at 0, simply it is not possible. So, the space for maneuver is relatively limited. So that's minimum obligatory reserves. Now I will touch the point related to the mainly growth from perspective of 2025 KB change. Yes, so it is still growing strategy. So, our expectation in terms of, for example, loan growth is that the market is going to grow by, let's say, mid-single digit in 2024 and 2025. And we would like to gain at this market [ a bit ] market share in a bit different way because so far, we are gaining, mainly in the corporate loans, starting from 2024 and partially already in 2023. So, we are going to allocate real more equity to the retail loan production, mortgage loans, consumer loans et cetera. And thus, to benefit from the completed retail transformation. So, market mid-single digit, we should normally -- or it is our ambition to grow a bit more. In terms of why business loans are basically going to follow the market? So of course, we are not targeting a decline of the market shares, but not gain significantly, as was the case last, I don't know, 2, 3 years. In terms of deposits, it's a bit similar story. So, for '24 and '25, again, expecting mid-single digit of the market growth, and we grow again, a bit faster. And again, here, it should be covered more by individual deposits following the same reasons like in the loans area. On top of that, the individual deposits are, of course, bringing higher margins than for corporate ones. Your question was also related to our expectation of the market interest rates. So as one of rather exceptions on the market, we were guiding repo rate at a 7% slate or down, first cuts as late as Q1 for next year, which was confirmed also yesterday by the decision of Central Bank. So, our guidance here is that next year, the CNB is going to cut rates relatively quickly, and our expectation is that at the end of 2024, we will be already at 4% and getting to the standard kind of through the cycle normalized interest rate of CNB at 3% starting from '25 and beyond. So, this is our assumption. By the way, it also means that in 2024, we are still expecting that the yield curve will be declining. So that's probably all from first set of questions. The other one was probably back to Didier and Jan or myself are going to comment what then the dividends and capital management in more general way. Thank you. Didier, please.

So, your question on the cost of risk; In fact, I will probably start with just reminding ourselves with this through the cycle cost of risk forecast which we have, which you could call the normalized cost of risk, which is in the range of 20 basis point to 25 basis point. And this is a through the cycle measure. So, it's not really something that you could directly consider and apply for 2024, for which I'm not going to volunteer with a guidance at this point in time. Now, what is sure when we look at 2024? There are a few points to keep in mind. The first one is more in form of a question, are we going to continue to see this exceptionally low default rate, especially for the mortgage and the corporate portfolios? So that's a question. And that's an important variable for this normalization of cost of risk next year. The second one, which is also important to keep in mind is that our estimate today is that our potential for net reversals of provision on the defaulted corporate exposure as its potential has come to an end or in 2024 it's going to be near 0. And maybe now going back to '23 and the Q -- the fourth quarter of 2023, yes, we've built or we have put a bit of reserve side for some possible default. And here, in fact, the comment I would be making is that you probably remember that we spent the last 2 to 3 years in proactive monitoring. Two years ago, we had probably described to you what we used to call our Russia portfolio, then we had a second portfolio under specific monitoring, which was focused on the energy sector. And this is the simple outcome of this proactive management. I would not comment in terms of possible spillover of this into 2024. In fact, this reserve that we have put aside is precisely targeted in fact. And when looking at '24, I would, again, go back to the question, what is going to be the evolution of default rate? Is it going to continue to be abnormally low or not? This is a question, and this is not an easy one. And this is why I refer to this through the cycle forecasted cost of risk, which we have anywhere between 20 bps and 25 bps. And I will stop here and hand over to Jan.

Yes. Even though we see together with you the pile of capital, which is appearing in our balance sheet, we don't have any new guidance related to dividend payments. So, we continue our dialogue with the Czech National Bank on their requirements. We do have pretty lively dialogue as Czech Banking Association also with the Czech National Bank on their decision related to the topic, which you mentioned in the first part of your questions, which is the cancellation of remuneration on the mandatory reserves. So should we have any news, we will come back to the market. For the time being, it is the previous guidance on distribution of profit, which is -- which remains in place. Thank you.

Thank you. And now, I would like to ask Mate Nemes from UBS to ask his question.

I have 3 questions please. The first one, I wanted to go back on NII. If I heard you correctly Jiri, you were saying that the market is expected to grow mid-single digits in retail and we'll see on corporate. But in retail, clearly, you have the ambition to do better. That suggests perhaps at least a mid-to-high single-digit loan growth in 2024. And if I have put that together with the expected [ MRO ] or headwinds, that suggests very little or any gearing into the rate cuts. I think you said you expect about 300 basis points next year. Could you give us a sense whether this thinking is correct? And if so, what did you do on the treasury side on your swap portfolio to mitigate the impact from lower rates to such a large extent? Have we seen a significant increase in any duration? Anything you can share on that would be helpful. The second question is on the 2025 cost-to-income ratio target of around 40%. In order to get there and taking into account, you're guiding for roughly flat costs in 2025 versus '23, I think you would need to have about CZK 7 billion higher revenues, which would suggest 9% to 10% annual revenue growth. To what extent do you expect that coming from inorganic growth i.e., from acquisitions? And what is the organic component there? And lastly, on KB+, I think Jan, you mentioned 70,000 clients now on KB+. I was just wondering if you could share perhaps the most significant positive surprises? What have you witnessed in terms of behavior of those clients? Can you share anything in terms of client activity levels or how your staff interacts with clients through KB+?

Okay. So, let me start. First question was basically about NII sensitivity and the expected decline of the market interest rates, mainly in the short end. Generally, our structural position, hedged structure position didn't change compared to the earnings call 3 months ago. Having said, it's -- I'm confirming that KB is not exposed to the moves of the market rates anymore. We benefited from the significant increase during the last 2 years. At that time, the sensitivity was positive in front of the increase of the market rates, which happened. Currently, are more or less neutral, which on one hand side, is a bit hitting our current net interest income because we are concluding, and receive longer -- receive fixed swaps than we are paying. But at the same time, this is, let's say, somehow immunizing us from the expected decrease of the market interest rates. In terms of 2025 cost/income ratio, as mentioned, we are guiding around 40 and the impact or contribution of potential M&A is not a part of this simulation. 2025 is coming, so we are not saying M&A is not coming in upcoming 12 months, but end of 2025 is here relatively very soon. So, to answer your question, there are no revenues related to M&A in our plan now. And the third question was related to KB+. I didn't get it exactly, but I think this...

Yes. So, I think it will be Miroslav Hirsl answering here, the Head of Retail. Thank you.

Yes, thank you and it's a pleasure. The question went to a few elements, the first one being what we like about it and what are the directions of clients and what are the first lessons learned. So, I will start on those positive points. The first one, the onboarding process seems to work quite well. This is the first thing that we wanted to be sure about. And I'm pleased to say that almost 1/2 of the clients is being onboarded through mobile in a customer journey coming to the bank, being acquired through mobile without any human assistance, which I believe is an excellent achievement. The second thing we needed to get was migration. As you remember, we are building a new bank parallel to the old one, and our intention is to move the business, the whole client portfolio from the old platforms to the new solution. And this is running. The technical reliability of the migration is 99% plus, which is, again, quite an achievement. And we started on very small numbers per day. Now we are in units of thousands. We are in units of thousands per day, and we aim to be at around 5,000 clients per night, which is the target speed, and it seems to be very much achievable, which was proven just a day or 2 ago. So, this is the second lesson learned. The third one, new clients like it a lot, when somebody becomes a client and is onboarded directly to KB plans, the satisfaction score is very, very high. What is less positive is that when you migrate the old client to the new platform, the first [ factions ] is, but probably expected one. "Okay, so there is a change. I have to adjust myself, get used to the new things." But we see that this perception is improving in time. So, if you take advantage of clients migrated in particular months, and you keep monitoring the satisfaction over for another 3 to 6 months, you see the positive trend. And this is the evidence that the job is done quite well. Then Jan said, about 70,000 clients, since this morning it's -- by 2,000 tomorrow. So, it's really moving forward. And we believe that the original ambition to get to 100,000 users by Christmas will be achieved much, much sooner. I would say, give us 2 to 3 weeks, and we are there. So, we are on the track at the moment.

Maybe I will just add to both elements of the answers, which were mentioned by Jiri and by Miroslav afterwards. When speaking about the proportion of future revenues coming from inorganic growth, you can also extend the question to number of clients. We did calculate with certain inorganic growth also with the number of clients to achieve the CZK 2 million. If there is no transaction until 2025, we continue doing our best in onboarding new clients and to get our number of clients for Komercni Banka as close as it gets to CZK 2 million. So, this is also, let's say, related to your question of part of the revenue stemming from potential inorganic growth. When Miroslav is speaking about -- and now to the first observations stemming from the first users, new users of the KB+. Miroslav is very humble to say that there is like good part of it, which are the newcomers who likes it and migrated clients who are less in comfort because they need to make one proactive step in order to enter the new world of KB+, which is very much understandable and this is what we expected. But the fact that we are migrating those clients in -- as a business migration, so we need to have an interaction either through digital channel or through the distribution channel or through the banker on the phone. We are also trying to use this opportunity to cross-sell and upsell to existing clients and counting with the fact that newcomers are super happy with what they see and discover with KB+, we believe will create the positive traction on the side of numbers and on the side of growing net promoter score. Thank you.

Thank you. The next question will be asked by Ahmed El Saharty from Rohatyn Group.

My question is related to increasing your deposit base this quarter. I'm just trying to understand, is this a strategy to defend your market share and keep deposits from competition or is it more a strategy to gear your book towards a declining interest rate by parking in longer duration, which should obviously serve you well going forward once the cuts begin. And lastly, you mentioned that your expected target for deposits is a 5% year-over-year increase by year-end, But you're up about 15% year-to-date roughly. So, does this mean you expect to shed away or return deposits to client in the fourth quarter? I just want to understand I got that right. And -- yes, that's it for me.

Well, I can take the questions. So, I will start with the question #2 and of end of year expectation. Currently, we are growing less, but at the same time, probably you could see on the deposit slide that in 2022, there was significant drop of the deposits, not only for KB but on the markets. It was because of -- and I was explaining several times, shrinking the balance sheet due to a resolution fund charge. But end of 2023 is the first year when -- this is so important because in 2024, the fund will be completely full, which means that end of 2023 balances will be important only for kind of running a charge to the Resolution Fund in 2025 or so. So that's why we believe that the drop in Q4 this year on deposit side and generally on the balance sheets of the banks will be a bit smaller. Now, to the, let's say, longer term perspectives, the question was that we are expecting to -- so, now I'm a bit lost. The question was why we are increasing deposits. It is easy because last year we lost a bit because we somehow delayed a pricing curve of the KB's deposits, and simply this year, we would like to regain it back. Don't search behind anything else.

No, I mean -- again, let me clarify that I guess. Right now, the market rates is still competitive, right? You're still seeing heavy competition on the deposit side. And I want to argue that next year, it will be a little bit easier and less expensive to gather these deposits. So why run towards gathering the deposits this quarter or maybe next quarter whereas you can sort of intensify your competition and once the interest rate come down and regain that market share. So, what one might say you're sort of gearing up the book towards longer duration by hedging through swaps. And yes, so that's what I'm assuming, but I just want to make sure that, that's the case. If not, it might be a little bit early to gather to come into the competition this late.

Well, at the same time, we are not buying market shares. Our deposits pricing is at the level of the competition. So that's our current strategy. Of course, once market interest rates are going to go down, we'll react accordingly. On the other hand, the pass-through rates, for example, on saving accounts, will not be as fast as you would imagine, because for the time being, despite the rate offering offered to the clients is whatever, between 5% to 6%. These rates are applicable and valid only for a relatively small part of saving accounts. So of course, once market rates go down by [ 80 ] percentage points, the impact into cost of specifically saving accounts will not be equal.

And now let me ask [indiscernible] from Autonomous Research to ask this question. [Technical Difficulty] David, can you hear us?

We cannot translate this language. Can you repeat please?

There seems to be an issue. Let's wait a second. Okay, in the meantime, please, if you have a question and you are not in the team's application, you can unmute yourself and ask your question directly via telephone. We have also received a new question coming from Kamil Stolarski from Santander.

Two questions from my side. I'm thinking about NIM because I remember that, for example, a few years ago, NIM at Komercni was 2.6%. Just before COVID, it was 2.2% Now, it's 1.9%. And if I compare this to trends that I see for Polish banks or to Hungary, it's like the direction is so much different. And I was wondering like in the mid-term, do you see like chances for the NIM to normalize at the levels that Komercni was historically reporting? So, like, we know what went wrong. These deposits, it's most often attributed to deposits, but I wonder what's the outlook and the chances for normalization? And if you are happy with the current level of net interest margin? And second question was about the cost, operating cost in 2025, because at least in my model, I'm assuming that the 2025 costs should be lower than in 2023 because of this headcount reduction. There is still some -- a few branches for the closures. And because of the fact that today you are having this additional cost of the transformation, which should be gone. And I was wondering whether your guidance for 2025 cost being at the level of 2023 is just cautious or this is what the base scenario that we should be assuming? So, these are the questions.

So, it's likely for me. So, first one was about NIM midterm and some kind of variations versus the Polish market. You were mentioning 2.4 pre COVID I think. Well -- but it was kind of -- no, no the 2.4% was the...

I was mentioning 2.1%, 2.2% pre COVID and then 2.4%, 2.6%, around 7, 10 years ago.

Yes, 2.4% margin was in 2022. Again, there was a lot of reasons why it jumped relatively significantly. I was mentioning some of them already today. So, delaying the of the up-pricing of the deposits. We were positive to the increase of the market interest rates, et cetera, et cetera. So, we had 2.4% from my perspective, was not kind of sustainable anymore. You can see that even in the margins evolution this year. So, we are dropping to 2% from known reasons. If you have a look beyond 2023, of course, now what is not helping at all is -- or are measures by CNB in canceling the remuneration of the minimum obligatory reserves. But the guidance for the NIM for 2024 would be probably at the level of '23 with a rather risk of a slight decline because already the impact of minimum obligatory reserves is, I don't know, 6 basis points or 7 basis points, so it is not negligible. At the same time, this should start to be offset by the positive impact of the change of the, let's say non-paid over paid deposits ratio. I think I was guiding 3 months ago that we are expecting that this ratio is going to bottom in Q4. So, we still believe that this is going to be the case. So, let's say, progressively, this is going to bring the positive impact also into our NII partially in 2024, but almost fully in 2025. So that's why we believe that in 2025, our first NIM could be not at 2.2% to 2.4% as we achieved last year, but between 2.1% and this level.

And on 2025 cost?

And yes, this was the other one. The guidance is to have it basically flattish. Your expectation or you would expect that we would have even lower cost, but we do not see that. I was mentioning one of the reasons, and that's the fact that decommissioning of some components of our [ old stack ] is going to be delayed. Of course, resolution fund charges should help. But at the same time still, there is some inflation and there is significant increase of the depreciation because the acceleration of these assets coming from the digitization, et cetera. So, we do not see there is further potential for the decrease of OpEx by 2025.

And in the meantime, David sent his question in writing. So, probably for Jiri, if the management can comment on deposit betas, where they are now and how you expect them to evolve from here, possibly splitting retail and corporate betas.

Well, thank you for this question. Actually, on top of my head, deposit betas for the time being are at roughly 65% for retail and much more for corporate. I remember the figure at 85%. In terms of the outlook, I'm not in a position now to comment, but we can discuss offline unless my colleagues do not want to complete me.

I'm just adding that these were betas for paid deposits, excluding current accounts. Yeah. [Operator Instructions] Okay, so there seems to be a question coming from Marta Czajkowska-Baldyga. So, Marta please go.

Can I just ask, you mentioned in the presentation, potential upcoming catalysts, positive catalysts for the mortgage sector in 2024. Can you comment on that?

In more general terms, the mortgages currently are growing, let's say, moderately and adequately to the needs of the clients. We are facing us and not exclusively as the only country in Europe probably, the fact that the affordability of new housing, especially for the young generation is not the highest. And the main catalyst for 2024 highly probably will be the decreased rates. So, we have few more ideas at the level of Czech Banking Association how to potentially like help the market, even potentially with the help of the state. But it's so early stage of discussions that it's not worth to mention any detail here. But the price will speak mainly.

Yes. If I may, to complement by one sentence. Of course, interest rates and other, let's say, impulse could come starting from January 1. And by the way, it is part of kind of austerity package. And the change is that starting from January of next year, the value of VAT for the construction work is going to decrease from 15% to 12%. So, this could help to, let's say, generate some accelerated demand after the January next year as well.

Thank you. Thank you, Marta. So, we don't seem to have any further questions at the moment. So, I'm handing back to Jan for a concluding remark.

Yes, thank you very much, everyone, for investing your time into our presentation, and thank you very much for very interesting questions and feedback you are giving us at these calls. We obviously remain available for any further questions you may have in between and we are looking forward to see you and to discuss with you at the occasion of the next quarter results presentation. Thank you very much. And I thank also to all my colleagues for preparing, organizing, and answering and presenting the paper. In the meantime, let me wish you good afternoon, and peaceful weekend. Thank you.

Thank you very much. The [ talking ] has ended. You may now disconnect. Thanks a lot.

Thank you. Bye-bye.

Thank you.