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

Hello, and good afternoon. Good morning, ladies and gentlemen. Welcome from Komercnà banka and thank you for sharing your summer time with us today. It is the 1st of August 2024 today, and we are going to discuss the results of Komercnà banka Group for the first half and second quarter of 2024. Please note that this call is being recorded. Our speakers today will be Jan Juchelka, Chairman of the Board and CEO of Komercnà banka; Jitka Haubova, Chief Operating Officer; Jirà Šperl, Chief Financial Officer; and Didier Colin, Chief Risk Officer, standing by in case of questions for them are Miroslav Hirsl, Head of Retail Banking; David Formanek, Head of Corporate and Investment Banking; and Margus Simson, Chief [indiscernible] Officer. As always, we will begin with the presentation of results, this will be followed by questions and answer session. [Operator Instructions] So now I would like to ask the CEO, Jan Juchelka to hand over.

Thank you, Jakub. Thank you very much for being with us. Good morning or good afternoon to everyone. It's my pleasure to walk you through with my colleagues Jitka Haubova, Jirà Šperl and Didier Colin through the presentation of second quarter of 2024 and first half of 2024. Komercnà banka remained very strong in its capital base and its liquidity base. Our total capital ratio totaled at a level of 18.95%, liquidity coverage ratio of 170%. We are keeping excellent level of quality of our assets which is translated into 13 bps of cost of risk on a year-to-date basis. Despite pretty dynamic growth of our loan book, we remain in very safe territory of 78.5% of loans to deposit ratio. The business performance is framed in strong growth of deposits, both retail and corporate by 6.5% on a year-over-year comparison, with very latest trend of strengthening the current accounts. Whereas the global picture was more in favor of saving accounts and term deposits. Assets under management outside the balance sheet of the book, i.e., for us solution delivered together with Amundi or our private banking, private banking solutions grew by 26.2%. So very, very strong dynamism of growth. When you mix it together with pension schemes and subscribed investments in KomerÄnà pojiÅ¡Å¥ovna, KB Insurance business. The total growth remains double digit, close to 14%. Client loans, 3.7% overall, and we will go to the breakdown of this number. It's more driven by retail than corporate. But it's growing in both main segments. All that was translated into first half financial results of CZK 6.3 billion group net income, which is CZK 33.6 per share with double-digit ROE at the level of 10.5% and potentially 11 IFRIC 21 was linearized. Cost-to-income ratio of 51.7%. The second quarter contributed into the first half by CZK 3.5 billion net income, ROE at 11.6% and cost-to-income below 50% at the level of 49%. So we can move to the macroeco, where I will spend only a few seconds. We are still waiting for the decision of Czech National Bank Board today on setting the new level, potentially the new level of 2x repo rate currently at 4.75%. The GDP is growing in a very mediocre way in Czech Republic. It was in second half of -- sorry, in second quarter of '24 by 0.3% on a Q-on-Q basis and 0.4% on a year-over-year basis. In fact, the main, I would say if not the only, well-working engine here is the consumption of households. The tight -- the labor market remains stretched with almost nonexistent unemployment rate whereas the inflation is back to normal at 2%. Well, this probably good to see is the evolution on Czech koruna, which landed at CZK 25 per euro as of June 30. And we will see, as I said, with Czech National Bank will decide today. The longer-term rates were sloping slightly, positively since January. 3 months PRIBOR at 4.71%, which was down on a year-over-year basis by 242 bps. 10 years interest rates were at 3.89%, 5 years interest rates were at 3.85% in and 10 years [ Govi, Govi's ] at 4.24%. Next page is going to our business performance on the side of financing. The loans grew by 3.7%. On the right-hand side, you see the breakdown between group lending. So it's visible that what is growing pretty nicely is the -- everything what is related to housing, either it goes for Modra pyramida building saving company or from mortgages provided by the bank. Consumer loans are also pretty nicely growing by 5.1%, whereas businesses and other loans by 2.7%. When you breakdown those 2.7%, you see that SGEF is one of the main -- let's say, main contributor in the sense of growth, and it was our pleasure to -- obviously, to show our signed memorandum of understanding with SGEF International and SG Group on buying the remaining 49.9% and becoming a sole shareholder of this company. We like it. We do believe that by becoming the sole shareholder, we will be able to cement our position as a leading bank in financing of corporate clients. The whole-housing loans grew by 42.3% on a year-over-year basis and by a very strong 60.2% on a quarter-over-quarter basis. So we could say that this is bouncing back with very strong power, and we believe that we will be able to follow the market without making any pricing -- without leading any pricing raise or at least initiating them. So we can move to next page, which is the tombstones achieved by the transactions with our corporate clients. Here you see everything what is framed in green is either ESG eligible or green bonds or green loans. It's a nice mixture again, between the public sector and private sector between medium-sized companies and large companies. We are supporting our clients in their acquisitions and many others. So here, we remain very proud of being a strong supporter of Czech Corporate Clients. We can move to next page. Deposits grew by 6.5%. I already commented these deposits or assets under management outside the bank. So our cooperation with Amundi is pretty smooth and the benefit of both sides, which is translated into 26.2% growth together with the private banking, not only Amundi, but predominantly Amundi. 2% in life insurance reserves and another 2% in the field of pension schemes. The group deposits in total grew by 6.5%. When you break it down, it's mainly driven by business deposits together with retail deposits and, let's say, expected drop in -- or continuous slowdown in building saving. The mixture, not so much surprisingly. It goes to remunerated deposits. So [indiscernible] accounts, saving accounts a little bit less, but still growing in current accounts on a year-over-year basis. We can go to next page. Here, I'm handing over to handing over to JirÃ. Thank you.

Thank you very much, Jan. So just before I start, I'm just thinking now to pass over to Jitka, who will cover for KB also very important era, i.e., ESG. So Jitka, please briefly.

Sorry, it was my communication mistake, Jitka. I should have given the word to you already at the beginning. Sorry for that, Jitka and Jiri, sorry.

It's very okay. Good afternoon in the following moments. As was said, I would like to talk about ESG S1 of the notable client experience, enhancing philosophy, but also, let's say, passionately debated and highly regulated topic. To be specific, I have selected one story, the story of ATMs sharing with other 4 Czech banks. ATM [indiscernible] is a provision for an automated teller machine, which it's self-service banking terminal for withdrawing and depositing money. I would like to go through all three letters from G, governance perspective, and mainly client satisfaction point of view, our customers can make free withdrawals from 2,000 ATMs and make deposits in over 900 machines, which represents 40% of all ATMs in the Czech Republic. And it is good to say that in the Czech Republic, over 60% of citizens still prefer to pay by cash. This service is our regulatory duty and the most expensive service also. So logically, we try to reduce the cost. Concerning S, social aspect, clients now have better access to this 24/7 automated online service, thanks to moving dozens of machines to villages where there were none ATMs before. And this has given 250,000 -- 100,000 [indiscernible] citizens ATM access that they had none previously. In the Czech Republic, we have around 50% fewer ATMs than typical found throughout Western Europe and concentrated to the big cities. And from the environmental aspect, customer can see how we are able to save energy, how we can save money and how we are able to reduce our carbon footprint. Just generally, we have decreased our carbon footprint by 60% compared to 2019. Obviously, it is also saving of money because majority of savings is driven by energy savings. And this has been also positively assessed by rating agencies. As you can see on the slide, all ratings of our ESG strategy are at a high level, and we are among and the top companies throughout the world. Recently, KB has received also many other awards, which can be seen in the slide in the right-hand corner. I would like to highlight that we won Bank of the Year in 2023, including recognition for a bank without barriers. And the most visible feature was so-called Touch Card for used by blind clients. We were also delighted to be granted the Green Crown award in recognition of our product, green product, loan for sustainable technologies. By the way, our share of new corporate investment loans with the ESG parameters. It's around 50%, 5-0. And we have also lots of [indiscernible] for corporate photovoltaic plants. And also, we are providing eco mortgages. We are providing also comprehensive service and advice on preparing ESG strategies, obtaining new subsidies for our clients and also providing the energy audits. All of our ESG performance indicators can be seen here on the left hand corner, I already mentioned the major ones. Finally, the last bombshells the remaining regulatory activities, we presented double materiality assessment, which is important from the CSRD perspective. We presented a so-called business environment scan to ECB where we evaluated the climate risk. And also finally, we are assessing our clients and transactions applying to the ESG aspects copying KYC procedure because it is fundamentally very similar. To conclude, we are confident that ESG can be -- can offer benefits not only for bank and our shareholders, but also clients. JirÃ?

Yes. Thank you, Jitka. Financial results. So let me start with a big picture, i.e., the main drivers of the profitability year-on-year at the upper left part of the slide. Overall, the bottom line is, as already mentioned by Jan minus 21% with weaker for NII and the financial operations, but at the same time, it's a very solid fees and for commissions. So that is also visible to all the visible positive contribution of the regulatory funds at the level of almost CZK 500 million. So otherwise, OpEx growing but still under control. And what makes the main difference year-on-year is the cost of risk were this year, in 2024, after re-leases, heavy leases last year, we created by almost CZK 1.5 billion small provisions. So in the area of cost of risk, it's clearly the base effect. From the quarterly perspective, that's the upper right chart, there is a jump from CZK 2.8 billion to CZK 3.5 billion influenced mainly by regulatory charges, as cost [ have moved ] already in Q1 this year as it is the obligation. But even if we adjust by this effect, there is a quarter-over-quarter growth which is positive through it is influenced by positive cost of as contribution. And for [indiscernible], it leads to the double-digit profitability indicators, as mentioned by Jan, to mention in here of at least a return on Tier 1 capital at the level of 13.3% IFRIC adjusted. Let's move to the next slide, please. It is about balance sheet. So the balance sheet slowed down a bit, growing 1.1% year-to-date. But still, there is a solid growth year-over-year at the level of 4.5%, i.e., roughly CZK 70 billion, 7-0 billion Czech crowns, in absolute terms. On the liability side, still the deposits are the main driver of the growth on a year-on-year basis growing by a strong 10%, while both money market operations and accounting capital went slightly down, decline of the capital, [indiscernible] only as a payment of the dividends last year profit dividends in Q2 this year. On the asset side, half of the new resources have been placed to the loans and the remaining part to the operations with the [indiscernible] Bank. It's visible that liquidity still remains very high, very excellent. Jan mentioning LCR at level of 173% to complement also a little longer liquidity profile, measured by NSFR is also at a very safe level, i.e., 144%-plus when regulatory limit is at 100% Let's move to the net interest income, please. Yes. Thanks. And let's start with the year-over-year perspective. Here, NII went still down by 2.4% influenced mainly by, first, declining income from the deposits in still, would say, challenging environment. Second, increased costs of senior and nonpreferred loans. It is, let's say, regulatory-wise linked to the MREL. Last year, we were still in this era of building -- in the building phase of this regulatory obligation, regulatory duty. While this year, the impact is transposed into the P&L and NII here already [indiscernible]. And third reason of reason is the impact of the minimum obligatory reserves implemented -- cancellation implemented as of October the 1st last year, with also not negligible impact. If we focus, however, more on the trends, i.e. the quarterly evolution, at the bottom right chart. We see that for both income from deposits and loans have grown. Not significantly but the growth is there. And to say only categories declining are 2 categories, other NII income. And that's mainly -- that's the pink color. That's mainly because we paid dividends in May. And the other one is NII from investment banking, which is by definition more [indiscernible]. So having said this, I believe that I can say that fundamentals for the quarters to come are healthy in terms of core net interest income. This also transposed into net interest margin, as shown in the upper left chart, where there is a slight move up on a year-to-date basis. And we think that the trend is to continue in the growths to come. Let's move to the fees and commissions. So they have grown solid pace, even I have to say, a bit better than we expected. There are two main reasons for this positive evolution. First, it's fees from cross-selling, growing year-on-year by a very strong 10%. And here to mention an important driver of the cross-sell fees is a dynamic evolution in the insurance business, where the gross premium written is growing on non-life, plus almost 18% year-on-year, and on life insurance a bit less, but it's sub-category Risk life insurance by a very strong 12%. And the second reason for such a positive evolution of the fees and commissions is behind specialized financial services were thanks to better income from private banking, bonds issuance, custody, depository services. And in Q2, also for loan syndications, it was growing by a super strong 100%. And this is bringing me to the financial operations. Thank you. So here to mention after a super high result in 2023, there is a correction, a clear correction down by roughly 18% and this correction is solely influenced by lower investment banking income. What's behind mainly is a weak client demand for interest rate and FX hedging due to the development and expectations for Czech crowns rates, both FX and interest rates. On a positive, much more positive note, much less volatile FX income from the structural book, that's blue part of the chart, is running great, supported mainly by higher, much higher volumes, of the transactions year-over-year. Many cards payments and also by some kind of adjustments in the pricing. At this front, I mean, the blue part of the chart, we are expecting the trends to continue. At least in Q3, but probably also in Q4 due to seasonality, Q3 is typically the highest quarter -- one of the highest quarters due to the traveling seasons. Last point before passing over to Didier is about the OpEx. So there are traditionally under control year-on-year flat and even EBITA down minus 2.2%. At the same time, it should be reminded and I was touching that already at the beginning of my speech that this chapter has been very much supported by much lower regulatory charges. So that's the resolution fund and deposit guarantee funds that decreased year-on-year. That's the pink color in the chart. On the underlying basis, i.e., without this positive effect, the growth of the cost would be whatever, between 5% and 6%. And I will get back to that during the outlook for the full year. If you go briefly into the structure, personnel expenses growing by 7% year-on-year. Effected, of course, mainly by the regular annual increase of salaries and roughly yearly by another element, which is kind of successful in-sourcing activities in IT area. I'm not sure I was mentioning last time that the bank is very successful in-sourcing activities, i.e., replacing [indiscernible] or third parties, developers by the employees. And of course, it has -- on one hand side, that is increasing HR cost, of course. On the other hand, it is deducting [indiscernible] from that are, and that's the red part of the chart, flat and even slightly declining. So for, let's say, comparison purposes, these two categories should be taken prudently together. And finally, depreciation, growing low teens percentage points as a reflection of digitization investments and activation of these investments as a part of our transformation. Transposing to cost income ratio, that's bottom chart. IFRIC [indiscernible] landed at 49.5% on a year-to-date basis. Now it's time for Didier Colin focusing on asset quality and cost of risk. Thank you.

Thank you, JirÃ. Good morning, good afternoon to all of you. Turning to the evolution of our asset quality in the second quarter. I would briefly start with giving you an overview of our default rate evolution, not disclosed on this slide, but being a little bit the anchor of our asset quality in three points. The first point is that our SME portfolio, which started to record some default rate increase in the first quarter. In the second quarter, stabilized. So this is a first piece of good news. And still in the corporate segment, we continued to record a near zero cost of risk level for the large corporate portfolio. The second point concerns the consumer loan and small business portfolios, and I will briefly mentioned it because, as you probably remember, those two portfolios were also a little bit under some default rate hikes in the recent quarters. And this past quarter, we continued to witness the stabilization of those two portfolios. And the last brief comment goes for our mortgage loan exposure, where here, we continue to see some levels near the 2022, historically low point of default rates. So overall, a good evolution in the second quarter. The translation of this into the IFRS 9 classification gives you what is on this slide, basically with our exposure classified as to slightly down again, being the reflection of a strong resilience of our loan exposure on the private individual segment, which more than offset some moderate risk weighting deterioration observed for the small business portfolio as well as a couple of watch listing situations for our corporate segment. And what is also a good persisting point is that the intensity of migration that we regularly measure between S1 and S2 continue to be in the second quarter at low level. The exposure classified default, the S3 part of our portfolio also slightly decreased, simply being the direct impact of a positive resolution of the situation of one of our large corporate client as well as being the mechanical result of our recurring write-off campaigns, which we perform on small [indiscernible] exposures with limited recovery potential. So this gives you, as of the end of the second quarter, stable S2 ratio at 15%, a stable NPL or S3 ratio at 2% and a stable provision coverage ratio for our defaulted portfolio. How this translated in terms of cost of risk is on the next slide where you see that for the second quarter, we booked a mature level of provision compared to the first quarter at only CZK 100 million in net creation of provisions with, in fact, two opposite pictures between the two main segments. Starting with the corporate segment we recorded CZK 100 million in net reversal. A little bit like in the past, concentrated on a few client situation. And overall, giving you the confirmation of a continued good level of our recovery performance for this corporate segment. Going the other way, for the retail segment, we booked a little bit more than CZK 200 million in net [ programme ] creations which is a level that is a bit higher compared to the levels recorded in the previous quarters. And here, this CZK 200 million is made of two components. The first one at CZK 100 million comes for -- from what we call the core cost of risk creation being, in fact, cost of risk coming from a transition into default. And the second CZK 100 million came from our decision to further build up our IFRS 9 provisions, this being split between our inflation overlay and our forward-looking macroeconomic reserve. Talking about those reserves for the second quarter, we kept them flat at the level of CZK 2.3 billion. In fact, this stable level is justified by the content -- the context of the recent default rate hikes on the consumer loan, small business and SME portfolios. And this is a stability for this result, which we expect to see until the end of 2024, given or taking into consideration the uncertainty of the macroeconomic environment. We also presented for the first time, the structure of our year-to-date cost of risk at 13 basis points, which you have on the bottom right of this slide. I will not comment it in detail, but what it tells you is a little bit, 3 points. The first one is the reconfirmation of the resilience of our credit risk profile despite those recent default rate hikes on some of our portfolios. Second element that -- our second message that it conveys is the strong recovery performance primarily on the corporate, but to some extent, also coming from the retail portfolio. And last point is our prudent approach to portfolio provisioning applied to the non-defaulted exposure. Now taking into account -- and this will be the end of this brief overview, taking into account the content evolution of our risk credit profile in the second quarter. We've decided to revise downward our guidance for the full year from its previous level in the range of 15 to 20 basis points to the new level of 10 basis points. And this lower level, in fact, relies on three main expectations. The first one being the expected improved outlook for one of our core large corporate clients by the end of the year, for which there is a significant amount of provision. The second one is the lowering of our default rate assumption for the large core portfolio, taking into account what we observed in the first semester. And the third assumption is the continued stabilization of the risk profile for those three portfolios that went through some default rate hike in the recent quarters being consumer loans, small business loan and SME. And on this, I will hand over back to you, JirÃ. Thank you.

Thank you, Didier. So let's continue with the capital. As Jan already mentioned at the beginning, the capital outlook is still very strong, despite the fact that we are accruing 100% of the profit for this year for dividend. And it's even slightly increased in the first 6 months of the year, mainly due to the slowdown of the loan growth in corporate. Currently, it is at the level of 18.935%, which is roughly 2.5 percentage points above the minimum requirements and even a bit above the management buffer for the capital adequacy. It's probably worth to mention here now that there were some changes in the minimal capital requirements recently. First one, the decrease of the countercyclical buffer by 50 basis points from July the 1st this year. And the other one, increase of systemic risk buffer by the same 50 basis points. But as of January 1, 2025. So basically, these two changes are offsetting each other. There is also, let's say, shift in the time, which is bringing me to the last slide of the presentation. So that's outlook for 2024, is usually updated it. And there are some changes. I would say, both directions compared to the 3 months of the guidance. Let's start with the Macro eco. So our experts downgraded a bit GDP growth from, I remember 1.4% 3 months ago to 0.7%. Now Jan was already commenting on that, so no more comments here. The key policy here by CNB are expected to land at the end of the year a bit higher than we thought 3 months ago. At that time, it was 3.5%. Now our macro economics expect 3.75%. And yes, in the meantime, I see the first CNB Board already decided today. So the decision is covered by 25 basis points, which is in line with our Macro economics. So that's Macro eco front. In terms of banking market, there are no changes in this outlook, i.e. both loans and deposits are expected to grow mid-single digits. For KB business outlook, we are confirming the outlook for the growth of the loans, i.e., mid-single digit probably after a bit of slowdown in H1, mainly in the CIB loans production I would add the lower end of mid-single digits, but mid-single digit. On the flip side, we are upgrading the growth of the deposits from mid-single digit to mid- to high single digits, thanks to the successful first half of the year at this front. The revenues. On the revenue side, we also confirmed basically, our guidance, i.e., revenues are going to grow low to mid-single digit, mainly supported by the growing business and improvements in the balance sheet structure. However, the same like for loans growth, the guidance, has a bit changed to the also lower edge, or lower end, of the ultimate growth due to some elements observed in H1, mainly a slowdown of corporate loans and also slower shift in the deposit structure in favor of unpaid deposits than expected. No changes on OpEx side. So we are confirming a low single-digit growth. And to complete -- to be complete, we are improving the guidance for cost of risk, as already commented by Jiri. So it's from 15 to 20, 3 months ago to 10 -- around 10 basis points. And finally, there is a one-off positive effect impact into our P&L, which is extraordinary income from sale of Václavské náměstà 42 subsidiary which is going to be booked in Q3 this year as the closing was at the beginning of July. And in terms of the qualifications where we do not no exact impact, but it will be whatever between CZK 2.4 billion and CZK 2.5 billion. So to be booked, you will see that in the figures in 3 months' time. So that's it. That's it. And I'm passing toward to Jakub.

Thanks to all the presenters. Now we will be happy to answer your questions. Ladies and gentlemen, I'd like to remind you that this meeting is being recorded. [Operator Instructions] So it seems Mehmet Sevim from JPMorgan, wish to ask the first question.

I have Three questions, if I may. One, loan growth clearly tracking a bit behind your initial expectations and also lower in the sector trend. But clearly, as you also suggested this is coming from the business segment more visibly. So can I just ask what is driving that? Is it a surprise to you? Or was it in line with your expectations? And when we think about the second half of the year, are you really comfortable that you can reach the mid-single-digit target? And maybe connected to this also NII. Now given the quarterly drop driven by all these other segments and the IB business looks like it will really need a big recovery in the second half to reach the guidance again, how comfortable are you on that? And finally, just on the sale of the headquarters building and the upcoming net proceeds from it, can I confirm that the earnings from that will be accrued for dividends in line with this year's 100% policy?

Thank you for the questions. I will start and probably at least for first question, my colleagues from business line [indiscernible] me. So in terms of the loan growth and whether it was in line with our expectation or not. I would say, not fully in terms of retail loans and more completely mortgage loans, it was in line. And even if you have a look on the sales side, in Q2, it was, let's say, a huge recovery, which is not in the balance sheet yet. So it is coming in the second half of the year. We were expecting a bit more dynamic growth of consumer loans, but it seems that the market a bit slow down versus our original expectation. So at the end of the year, probably are going to grow a bit slower than expected 3 or 6 months ago. And I would say the biggest kind of miss is coming from the CIB here, loans, where we were a bit declining and that's something where we need to get it back to the dynamics. So maybe to mention what is the expectation for the full year. So I was mentioning last time, but the growth should be generally driven more by a retail as we are already somehow benefiting from the almost completed transformation. So for retail, it is mid-single-digit for plus and supported mainly by [indiscernible] on her mortgage loans. So in terms of corporate, our guidance is now rather, let's say, low to mid. And thus offset the GAAP from the first half of the year. I don't know whether my colleagues Mirek and David would like to comment on that?

Yes. Just a short comment from my side regarding the business or corporate financings. Generally speaking, the sentiment of the corporate, especially industry is a kind of hesitant, and the companies are reviewing their options and being postponing some decisions regarding further investments also given the economic situation in Germany being the largest export market for our companies. Nevertheless, we report a number of quite interesting projects in the pipeline also on the side of the large companies. Not only investments, but also in the area of acquisition financings and real estate. So basically, this gives us confidence for the second half of the year to be stronger in the generation of new loans and especially a generation of new assets.

And if I may, I'll just use one sentence to say that I share the optimism on mortgages. I see the pipeline that are pretty full. The market has been growing 80% compared to the last year in first 6 months. and we should be soon after the one mortgage factor implementation in a shape to take even more than we did in the first 6 months of the year. So on the optimistic side there.

Let me add one sentence, if I can, from my side. On that front, we have made a tremendous move in migrating clients in the retail part of the new digital bank from the old world to the new world, whilst onboarding new clients. So we are now having in our relationships more clients than we had too. And then we would love to have them banking with us in larger scope that only with the initial bank account opening and, let's say, debit card. So we are building another part of foundations for growing further on the side of retail. The tendency of selling of new sales of new mortgages is pretty promising. We will gain further on our side of processing them after building after building and putting in place the new one mortgage factory. And in parallel with that, and this is outside the NII, but more on the side of fees and commissions. We do believe that we will continue selling the non-life part as well as life part of our insurance by double digit as it was the case on a year-to-date basis. So on both NII and fees and commissions, we see rather promising horizon here. And let's say, underline probably by today's decision of the Czech National Bank.

Yes. And I think that that's the first question. The second question was related to hope to reform to the comfort of the management to deliver NII in the second half of the year. So well [indiscernible] a changing target, but we strongly believe that it will be delivered. And I can list several reasons why we feel -- so first one is -- and I was touching that even before it's kind of acceleration of the loans in second half versus half 1. So that's clear. The other reason is that we are expecting the deposit spreads are going to continue slightly up. Maybe here, first to mention that Q2 this year was the first quarter after, I think, 6 or 7 when the cost of deposits went down. And we are expecting for this plan to continue. Third point is also back -- and Jan was touching this point during his part of the presentation. But as a matter of fact, during the Q2 the structure of the deposits improved. And after some time, current accounts, one of the most profitable products in the bank's portfolio was growing faster than the paid deposits at least quarter-over-quarter. And we believe that this is going to continue even in the quarters to come. Maybe here, one technical detail of the change of this, let's say, structured paper versus non-paper has happened rather at the end of the quarter. So you don't see any figures, the impact yet, which is, let's say, increasing our comfort for the quarters to come. Third -- maybe it's also kind of technical base effect, but it's also necessary to take into account the first 3 quarters of this year, on a year-over-year basis was or rather hit by the canceling of the minimal obligatory reserves. And here, the impact, as I remember well, was around CZK 1.1 billion. And on a base effect, it will not be the case of Q4 for this year anymore, right? So because this happened with [indiscernible] October 1 last year. So Q4 this year will be, for the first time, kind of be comparable like-for-like basis. And last point to mention is -- and again, Jan was touching the point, but we are growing a number of the clients significantly. And this trend is expected to continue even by the end of the year. And naturally, the new clients, of course, with some delay, but also among others bringing the deposits with them. So that's kind of a list of, I don't know, four or five reasons what is behind our guidance. Thank you. And there was still a third question. Head office building. To say the capital level of as I was commenting on that is still super strong, even we are agreeing to the 100% of the profit. So we do not stand to change the dividend payout ratio. In other words, I don't see any reason not to pay it also as a dividend, of course. And I have to say if a subject to approval by the general meeting. But again, I do not see any reason why not to pay. I think we have covered all 3, right?

Yes, yes, you have. Thank you. I really appreciate the comprehensive answer.

[Operator Instructions] The next question is coming from Michal Konarski from M Bank.

I just wanted to confirm. So it is still possible that commercial may pay out 100% next year, if I heard correctly? And secondly, maybe I would like to once again ask about this net interest income guidance because if I'm calculating correctly, if you would assume even that net interest income would grow by 1% year-on-year, this would mean that the current net interest income, quarterly net interest income run rate, should increase about 9%. So this is a lot, I would say. So this is a very, very optimistic guidance, I would say. And thirdly, I would like to ask if your assumptions regarding the base rate for the end of the year will somehow support this NII outlook. This is, I guess, yes, if I'm not mistaken, 25 bps higher right now, the base rate at the end of the year than you expected a quarter ago. Yes, that's all from me. And maybe one more question. This one off in the third quarter, this 2.4 to 2.5, this is a gross or net amount?

Okay. So question number one for the answer is yes. That was about [indiscernible] dividends confirmed, understood well. Question number two, again, touching the relatively expected huge and significant growth in our NII. You are saying 9%, my figure is rather 7%. I'm confirming that this is our guidance. I'm confirming it is a challenging target but deliverable. And maybe to add one or more of one last comment that's true that it is a rather sensitive for some, let's say, assumptions used. And probably the most important assumption here is, again and again, and we are touching that 3 months ago, 6 months ago, is the structure of the deposits. So once this assumption is confirmed, it will be there. And the third point is -- I didn't get it fully. So it was something about the base rate, where is our expectation of base rate. I think I was touching that during the outlook part and -- and the guidance of the bank is 3.75% at the end of the year. I mean, the 2 weeks [indiscernible] rate of Czech [indiscernible] Banka. Was this the question?

Well, a quarter ago, there was a guidance for 3.5% base rate. So the central bank book had a base rate to 3.5% versus 3.75%. I know this is a very small difference right now, it's more change in the forecast, but I was wondering if it will impact net interest income in any way?

Okay. Okay. Sorry. I've got it now. Well, not because the structural position of the bank hasn't changed, meaning that that the bank is basically neutral to whatever moves of the market interest rates. So the shortest answer is no.

Okay. And actually, the question about this one-off, if it's gross or net, the impact you presented? And one more question maybe regarding the outlook for 2024. Let's say that Komercnà banka will not be able to deliver NII growth for 2024. Let's say, it will be flattish. Would you then try to make any effort to cut costs to maintain cost to income guidance, yes?

Yes. So two follow-up questions. First one, one-off further. It is a gross impact or net impact I'm not sure I understand fully, but the impact -- net impact into the P&L of the bank will be CZK 2.5 billion. So probably according to your definition it is net, right? So it is selling price basically minus the book value, so net. And outlook for 2025 probably let me -- here be less concrete because we are going back to the outlook for 2025 during the next earnings call. Of course, if the bank is not delivering, let's assume the result on the revenue side, we would do the best of some collections adjustments also on OpEx side. Yes.

Yes. I think you see Michal was more in 2024 still. . .

Yes, that is correct.

. . .but the answer remains the same.

So the next question is coming from [indiscernible]

My question is on the impact of market interest rates on NII. When we think about it, which rate matters to your NII profile more? Does it -- is the repo rate the key rate for you? Or is it the 10-year yields? And if there's -- those two diverse, meaning repo rate goes down, but 10-year yields don't, as it oftentimes happens, what would be the impact on NII profile from loan deposits or your hedges perspective?

Well, naturally, the bank is more sensitive for the short-term interest rates. So as we have a really huge amounts invested into repos. At the same time, hedging operations are more or less offsetting that or less fully i.e., the -- and I was commenting on that like 6 or 9 months ago, EBITA adjusted our hedging policy and focus more on [indiscernible] net interest income, i.e., short-term impact, but only partially. The impact of longer-term rates is lower. But if I'm talking about, let's say, neutralization of the structural position in terms of interstate risk, of course, we are hedging both books [indiscernible] short and long term.

Understood. And my second question is on the mix of current accounts in the total deposits. We see -- of course, we saw migration from current accounts to interest paying deposits as the rates rose. Now on the rates going down, how do you see this mix evolving? Do you see the current accounts as a percentage of deposits going back to where it was before it rose or do you think there is a reason to believe that the customer behavior has changed and maybe the clients might put money in term deposits or mutual funds, et cetera, and the [ car issue ] can actually come down?

Exactly. You're perfectly right. And this was already happening during the last quarter and very strongly believe that it is going to continue. In our projections, of course, we see and know the behavior of the clients from the pass-through or different cycles. So we [indiscernible] that these shifts are continuing. At the same time, we are not very aggressive on that front. What I mean is that our expectation in the planning documents is that that this pay versus un-payed ratio will not get back to the original levels because currently, simply the world is a bit different and with the continuing digitization of course, declines to manage there are liquidity, i.e., or say, current accounts, the base deposits much more efficient. So there is expected increase of -- or improvement in that regard, but not as fast and high as was the past.

Yes. One last quick question, if I may, on the new digital bank. As we see a very fast client growth, once these accounts. Can you comment on how -- what would be the deposit ticket size of these accounts compared to traditional Komercnà banka clients? And do you expect maybe in 1 or 2 years' time, a kicker to come in the form of deposit growth as these digital bank accounts get funded? What is your expectations on those things?

So if I may take the first part of the answer. What we see on the inflow, which is quite high, is that the characteristics don't look too different from the clients that we have been acquiring in, I would say, before this campaign and before NDD was launched. On the other hand, it is rational to expect a bit higher churn after some time. We included the assumption into the business case, we say probably 20% of clients acquired this way, will not stay with us. We believe that for the rest, they are start behaving more or less the same way as standard KB clients always are. But this is still to be tested because it's a bit too early to conclude. For the moment, I have to say that what I see from the behavior of this sample of clients there are no major deviations from what we expected. Does it make sense? Am I reacting to what you want to wanted to know.

Yes, yes. That's helpful.

[Operator Instructions] And we have one coming from Kamil Stolarski. [indiscernible]

I have just one question about the 2025 guidance and your targets of the strategy from what I understood, we are supposed to see like this accelerated improvement in cost to income starting from 2024 and going into 2025. This was also a result of this rollout of the new digital bank. My question would be, would we see something still this year? Is this delayed? Or is this guidance valid of the cost to income?

Okay. I will start. The first comment is probably I touched it a couple of minutes ago. Let us comment and update -- potentially update the guidance for during the next earnings call, which will be the dedicated session. So we are sticking to the fact that in 2025, there should be rather a significant jump in revenues. Why? Because of benefiting from the completed rice transformation and monetizing on that. which in the combination service the increased significantly increased number of declines and increase the digital sales will significantly improve the picture. On the OpEx side, I can probably indicate already now that we are expecting even a decline of the cost in 2025. One of the reasons on top of the increase, the efficiency is also the regulatory-wise impact, I mean a further decrease of the [ resolution ] fund charges. So that's probably what I would mention now and to stop now. And if you don't mind, to give you more details in 3 months time.

Definitely -- Kamil, we will definitely come back to you with more like detailed breakdown of how we are doing in the field of implementation of the strategic plan. But please just more a reminder that the fact that we have, in the first stage, reshaped pretty massively the organization of the headquarter here in KB. In the second step, we have been investing into the new technologies. We are awaiting that -- or expecting that there will be a twofold effect. The first one is that we are massively simplifying the client's proposition and everything what is behind that. So let's say, everything would is not visible for the client. So our internal processes. And hence, higher level of end-to-end digitized sales. On the other hand, or let's say, asset sequence of that we need less branches, we need less people inside the bank. And here, we are -- we have been delivering so far what we promised as far as the number of branches is concerned and as far as the trajectory of FTE is concerned. But we will come back to you with a detailed breakdown. But for the statistics are not complete yet because we have 0.5 million users of the new bank application out of which almost 50,000 completely new clients. So we believe that next quarter, we will be more comfortable to give you more like a 360 view.

Let's se if there are any more question in the queue, lets wait a few to see if one comes. It does not seem so, so I would like to hand back to Jan for a conclusion.

All right. Thank you very much for being with us. Thank you also for your very concrete and straight to point questions. We very much appreciate it. I would like to thank all my colleagues who presented or who answered your question. We do appreciate the coverage of KB share from your side. And we obviously stay at your disposal for any questions you might have in between, and we are very much looking forward for the next quarter presentation which -- with you, which will be enriched as we have just ended with that. Also by a bit deeper dive into the deliveries of our strategic plan. In between, enjoy the rest of the summer season, and have a good afternoon. Thank you very much, everyone.

Thank you. bye.

This has concluded our meeting today. You can now disconnect.

Thank you.

Thank you.

Thank you. Bye-bye.

Goodbye.