MONETA Money Bank, a.s. (MONET) Earnings Call Transcript & Summary

Dear ladies and gentlemen, welcome to the conference call of MONETA Money Bank with today's speakers, Tomáš Spurný, Carl Normann Vökt, Jan Fricek and Andrew Gerber. At our customers' request, this conference will be recorded. [Operator Instructions] I now hand you over to Tomáš Spurný. Please go ahead.

Good morning, ladies and gentlemen. It is my pleasure to present the results of 2019 as well as the fourth quarter. I would ask you to turn to Page 2. We have selected highlights of 2019 where -- let me start with the net profit. We have delivered the net profit of CZK 4.019 billion for the year 2019. Perhaps equally importantly, we have improved our core recurring performance by 13.4%, and we will show you that the bank realized lot less on one-off gains. Also, in 2019, we have enjoyed strong growth in lending activity, mainly on retail. And annualized on the entire portfolio, we registered 11.8% growth year-to-year. And our result translates into return on tangible equity of 18.2%. On Page 3, we highlight 5 key developments of the bank throughout 2019. So first and most importantly, during the year, we have returned back to growth in terms of net interest income. P&L category grew 7% per annum. Even more importantly, interest received accelerated by 11.8%, and we have added over CZK 500 million in net interest income throughout the year. During the year, we have also improved outperformance in terms of new-client acquisition. The bank, on net basis, acquired 64,000 customers, and Andrew will point out that a significant part of this comes from digital channels. On digital lending, our fully online retail lending grew more than 40%. And later on, we will also see that the small business fully online lending expanded by 170%. So we're getting a very good traction in terms of execution and commercialization of the digital strategy. During 2019, we have also completed a 3-year strategy to dispose and distribute legacy NPLs. Throughout the year, we have sold face value of CZK 3.2 billion, and we have generated an overall gain of CZK 358 million, which impacted both other income and cost of risk throughout the year. And lastly but also very importantly, we have committed a promise that we would convert the bank and implement -- convert distribution of shareholder value. We have instituted interim dividend last year. So we have paid in December CZK 3.30 per share, and the management plans to propose CZK 3.35 per share in the upcoming April 2020 shareholder meeting. On Page 4, we comment briefly 5 key elements of the bank and its development compared to the previous year. On profitability, we accelerated buildup of operating income. Overall, the bank generated an excess of CZK 10.5 billion, which is a CZK 350 million increase as opposed to the previous year. However, the previous year had significant one-offs also in the operating income line. On loan and deposit-taking activity, we have expanded lending by CZK 16.3 billion. So the net loan book stood at CZK 156.4 billion, and this was entirely or majority of self-funded through deposit-taking activity. And you can see that we've expanded by CZK 15.2 billion the deposit book bank to CZK 174.4 billion. On asset quality, in conjunction with conclusion of the 3-year NPL strategy, we've made significant advance. We improved the NPL ratio by 100 basis points to 1.8%, which is historically the lowest NPL ratio that MONETA enjoys in probably past 20 years. The cost of risk remained relatively subdued at 35 basis points. And if you look at the core cost of risk, it came in at 57 basis points, which is 15 basis points improvement as opposed to 2018. On liquidity, we continue to operate at comfortable liquidity levels with a loan-to-deposit ratio of 86%. And we've improved liquidity coverage ratio quite substantially throughout the year. And on capital, we enjoy a very solid capital adequacy ratio position of 18%. This was enhanced by our successful issue of subordinated debt in September 2019. And lastly, we managed very carefully the risk-weighted assets of the bank. You can see that the growth in risk-weighted assets is at the level of CZK 3.4 billion year-to-year, and this is quite important in terms of the relatively rapid expansion of the loan book. Next, on Page 5, I would like to comment on Wüstenrot acquisition. As you know, on December 12, we signed the share purchase agreement with our counterparty. We have committed to pay a purchase price of EUR 180.4 million for 2 subsidiaries of German Wüstenrot. This translates to approximately CZK 4.6 billion. In the SPA, we actually have a fixed exchange rate. Against that, the bank will receive equity position, consolidated equity position of, at minimum, EUR 205 million or CZK 5.2 billion. Should the equity be lower, there will be a downward price adjustment. However, we don't have that commitment if the equity will be higher. We purchased 100% of 2 entities. First is Wüstenrot stavebni sporitelna. This is a building savings bank. Second entity is Wüstenrot Mortgage bank. The first entity will remain as a subsidiary of the bank as it is governed by specific piece of legislation, and we cannot merge it into the bank. And we're now contemplating plans whether our mortgage business will be operated under 2 brands or whether we will fold it into MONETA, and we will make that decision prior to closing. We anticipate that the earliest date at which we could close the transaction is 1st of April. This is subject to 2 regulatory clearances. We have already, this week, received clearance from the Czech Antimonopoly Office, so the road is clear on that one, and we have filed application with Czech National Bank. The administrative process runs out on April 16. So should we receive the clearance and should we receive it [ earlier, ] we hope to close the transaction in order to consolidate the spinout for 3 quarters of 2020, but this is still pending. In today's guidance, which we provide at the end of the presentation, we will show you how consolidated MONETA will look like, including Wüstenrot. And we also, for comparative purposes, will provide you with a stand-alone as-is set of numbers so that you can see that the transaction is accretive, both at earnings per share and dividend per share level, in the next 3 years. Now I would like to move to Page #7 as we comment on the operating environment in Czech Republic. In terms of GDP growth, the projection for next year is 2.4%, which is above the level of EU27. It's slightly below regional peer group of Visegrad Four. Nonetheless, the situation in terms of growth remains relatively positive. If you then look at key macroeconomic indicators, we have set of negative numbers, mainly in the industrial production, is decreasing year-to-year. So the figure is negative, and this is definitely not a positive development. Secondly, inflation in the fourth quarter stood at 2.7%. And actually, December inflation had been reported at 3%. So there's an inflationary pressure, and the inflation is above the Czech National Bank's target. On the positive, unemployment remains very low. Also on the positive, wage inflation has decelerated in the third quarter of last year, and Czech crown has appreciated against euro. It's actually at a 5-year high. So we have some negative signs, but the positive indicators, I would say, overweigh that. On interest rate, there's no development. We provide you here with the forecast of the bank, which is equivalent to the forecast of Czech National Bank. We've expected some uplift. However, the rates remain flat, and I think there is a consensus that there will not be a movement on the rates today. If you then look at government bond yields, they have moved up by 40 to 50 basis points across maturities, which definitely reflects the inflationary environment. On Page 8, we provide you with an overview of the deposit markets in Czech Republic. Overall, the pool of deposit exceeded CZK 4.1 trillion. The market expanded at an annual rate of 7%. MONETA exceeded the market growth quite substantially. We have added almost 17% of deposits and reinforced the deposit book of the bank. The growth chiefly comes from retail deposits. You can see that the retail deposit pool is almost at CZK 2.2 trillion. The market expanded 7.6% whilst MONETA generated annual growth of 22.7%. So when Andrew speaks about the digital strategy, you will see that most of this comes from our digital platforms. On the commercial deposits, we have a good performance. We have managed to grow at the rate of the market, slightly exceeding it. The market grew at 6.4%, and we have posted growth of 6.9%. On the following page, Page #9, we show you the structural evolution of the lending market to resident, commercial entities and Czech households. The lending market altogether is more than CZK 3 trillion. The market on annual basis expanded at a rate of 5.2%, while MONETA generated, on a gross lending book, 10.6% growth. You can see that the growth has been centered around development of our retail franchise, where the overall market stood at CZK 1.5 trillion. We have posted growth of 18% against 7% market growth, so we grow roughly 2.5x faster organically than the rest of the market. On commercial portfolio, the bank focused on improvement of profitability, so we have delivered growth of 2% against market growth of 3.5%, and the market constitutes almost CZK 1.5 trillion. So you will see later on that we are focusing on the small business subsegment of this market. On Page 10, let me comment evolution of pricing. If you -- if we go clockwise, you will see that, on consumer loans, MONETA performed in the fourth quarter at 8.9% rate, average rate at which we sell our products to Czech households and consumers, whilst the market average stood at 8.3%. So we continue to operate at a positive premium to the rest of the market. On pricing of mortgages, you can see the development since 2016 and fourth quarter 2019, we effectively copied the market. We reduced prices in the fourth quarter to the market level of 2%, 2.5% amid a very strong competition. On commercial deposit-taking, we are below the market. And on retail deposit pricing, our cost of retail deposits, and Jan Fricek will take you through the details, it increased quite substantially. As by midyear 2019, we were lacking in liquidity to support our strategy and had to raise quite substantial amount of deposits through savings account promotion. Now I would like to move to Page 12 just to reiterate our organic growth strategy targets. We have strategy which is grounded upon 7 or 8 pillars. The first 4 pillars are commercial, first is maintenance and development of retail franchise, where we have 2 sets of targets to organically reach at least 5% in mortgage and deposit-taking and to maintain around 20% market share on consumer lending. Then you can see the targets on small-business banking, which is effectively to capture 10% of the small-business banking in Czech Republic. On the third element of the commercial strategy pertaining to SME portfolio, our main target is to improve our incremental return on equity above 20%. We embarked on this strategy 18 months ago, and we are nearly there, as you will see on the following page. And on development of digital capabilities, we have 2 key targets, and that is to acquire additional -- acquire into our mobile platform 400,000 customers and to produce 50% of our lending activity through online-supported channels. On risk management, our objective of the 3-year strategy was to deliver a gain of CZK 350 million from sales of NPLs, maintain core cost of risk at 75 to 85 basis points and manage NPL ratio below 2.5%. So again, here, on the next page, you will see that we are comfortably inside of those targets. On capital strategy, we have accomplished the objectives effectively of Tier 2 bond issuance because, in 2019, out of the CZK 5 billion, we issued CZK 2 billion. And in January 2020, which we don't cover in this presentation, we issued additional CZK 2.6 billion. So we're nearly there. On the dividend payout, assuming that the remaining dividend is approved, we will be, again, inside of the target. And we have received regulatory and shareholder approvals for the CZK 1 billion share buyback, and we have some time to execute that. And on cost control, I believe we are also inside of anticipated targets. If you go then to Page 13, you can see that, both from market share and growth point of view, we have -- we feel that we are inside of the targets and growth objectives and market share objectives in retail. On small-business banking, we have accomplished growth in excess of 50%, and more than 1/4 of the production is done through online. The fully online lending without interaction with our branches actually grew 170%. And on the small business, on the SME banking, the incremental ROE had been lifted to a level of 19.8% from previous year's performance at 17.3%. So we are also making significant strides to improve returns from that line of business that we operate. Additional to that, we have actually released significant amount of capital, specifically more than CZK 600 million from the SME franchise, and this will be discussed in the capital section. On risk management, we enjoy strong coverage of 109% of our NPL portfolio. This is total coverage -- specific coverage of Stage 3 will be presented by Normann, and it's in excess of 56% of 55%. I've commented on the NPL ratio, which is at a very low level, and we have improvement in the core cost of risk year-to-year. On capital, due to the Tier 2 issue, we enjoy a very strong overall CAR ratio. We are at 18%. So this was a buildup in view of the acquisitions. So we are in a fairly comfortable position. And as I said, the share buyback had been approved by Czech National Bank. It constitutes capacity to buy up to 11 million shares, and it was also validated through a shareholder vote in November 2019. On cost, our inflation of cost basis stands at 3.4%. We are slightly outside of the CZK 5 billion target. This is due to 2 facts, due to expenditures related to the acquisition and due to unanticipated accrual of the management awards. Nonetheless, we have closed, according to previous commitments, additional 23 branch units in 2019. And in the first quarter of 2020, we are closing additional 19 units on strength of our digital strategy. On Page 14, we reiterate our guidance adjusted through 2019 and confronted with the results of the bank. We believe that we've fulfilled and delivered our commitments with respect to the dividend distribution we planned for the entire 2019 to stay with the CZK 6.65 per share. CZK 3.30 had been distributed, and we plan to propose CZK 3.35 for distribution at the yet to be announced with respect to specific date shareholder meeting to be held in late April 2020. On Page 15, we provide you with an overview of our operating platform. So at the end of the year, we had 179 branches. You can see that we have reduced the floorspace of our branch network by about 5%, and we've also added 8 branches through the year, which were reconstructed to a new MONETA design. With respect to branch closures and optimization of the ATM network, you see that we operate less ATMs. We have plans to further optimize the network in order to manage the cost base as the client traffic moves into digital, and we will operate in 2 years a network of 500 to 550 ATMs. On clients, we enjoyed a good year because, after 2 years of reducing the number of clients due to sales of NPL portfolios and writeoffs of inactive clients, we returned back to growth. We stand 1,000 shy of 1 million, and you can see that across the 2 relevant segments for expansion, we are not only expanding the portfolios but also clients served both in retail and small business. On Smart Banka, our objective by 2021 was to have 400,000 customers. I think we will comfortably exceed that. And secondly and equally importantly, we are also deepening the usage of our Internet banking platform. And on employment, Jan Fricek will provide you with details of the employment evolution, but we have reduced last year about 150 FTEs and the total employment. On Page 16, we show you the quarterly evolution of the client intake and the churn that's on top of the page. And you can see the client intake is improving quite substantially. And below that, you can see the client base evolution. Here, what I think is the most important indicator is that the nonperforming customers have been more than halved in the last 12 months, and we are delivering steady growth in the underlying primary customer base. I will stop here. Our performance, if I summarize it, delivers the return on tangible equity of 18.2%. We also had a good ROE number, and we have delivered CZK 4 billion of profit. Now I will turn over to Andrew to give you update where we stand with the digital strategy. Thank you for your attention.

Thank you, Tomáš, and good morning, ladies and gentlemen. I think 2019 was another successful year in terms of our digital strategy. It was a year in which, in addition to continuing our carefully targeted expansion of our digital capabilities, we turned our focus to accelerating the commercialization of the investments we've made. And if you go to Page 18, you see our continued success in attracting new clients to our digital banking platforms. Our mobile banking platform attracted 100,000 new users during 2019 compared to 78,000 new users in 2018, a growth of around 28% year-over-year and this despite the fact that we're now approaching 60% penetration into our active client base, which I believe is in line with the global benchmark for the most advanced digital banks. So I think this is a strong performance. It's also important to say that, from the 100,000 new users, approximately 42% were new-to-the-bank clients in 2019, which I think demonstrates that we're now gaining traction in using our digital offering as part of our strategy to bring new clients to the bank. The Internet banking platform, on the other hand, is more mature, having been the singular digital platform of the bank before 2016. But despite that, we added 62,000 new users in 2019, again reflecting primarily the intake of new clients into the bank. Looking at the transaction intensity on these platforms, we saw continued growth in both as our clients continued to migrate away from branches. But what's also clearly visible is the mobile banking platform taking an increasing share of transactions whilst the Internet bank is declining in relative share. And what's important to say here is that, through digitalization, we're not just migrating activity from other channels, but we're actually seeing an increasing transaction intensity across the bank, and I will touch on the impact of that a little later. But first, if we go to Page 19, we've seen exceptionally rapid adoption of the 2 main mobile banking platforms, Apple Pay and Google Pay. We're amongst the leaders in the rollout of both of these platforms into the Czech Republic. And you see that we added 94,000 users during 2019, and we saw 2.7 million transactions on these platforms. I think these, together with our mobile and Internet banking platforms, is driving significant growth in overall transactional activity and, as you'll see later on in the presentation, contributed to 9.4% growth in transaction and other fee income, and this despite the negative impact of the SEPA cross-border regulation, which came into force in this country in the fourth quarter of '19. Turning to Page 20 and focusing for a moment on the second pillar of our digital strategy, which is loan origination. As Tomáš said, we continue to enjoy considerable success in both retail and small business and particularly in the fully online lending, where the client does not have to come to the branch at all during the process. In retail, online-originated lending reached 34.8% of the total volume in 2019, and I believe we're on track to reach our target of 50% by the end of 2020. If I look specifically at the fully online lending, this grew over 40% year-over-year driven by our continued success in targeting existing clients through the digital banking platforms and specifically through preapproved credit limits, where you see in the bottom-left chart, we increased the number of limits to 309,000 and the total potential exposure to CZK 79 billion, which I think also shows the huge potential remaining in the portfolio. In small business, the picture is broadly similar, with 44.4% year-over-year growth in online-originated lending, reaching 27.4% of total new volume for the segment and outstanding growth of 169% in the fully online component as we continue to improve the proposition and process for these clients. Again, preapproved limits are an important driver here. And in the bottom-right chart, you see, we now have 32,000 limits available to small-business clients and CZK 11 billion of potential exposure there. What's not visible here is our push into digitalization of our mortgage proposition. We developed a market-leading online mortgage platform for brokers over the last couple of years, and we've been widely recognized as being a leader in this space. And more importantly, in Q4, we began the rollout of our new online mortgage refinancing proposition, which we call Refinanso. This is a unique capability in the market and one which we hope to scale into a highly disruptive player in mortgage refinancing over the next couple of years. It's still at relatively small scale at this stage, contributing around 5% of new sign-ins month to month. But we see huge potential here, including integrating it into our digital channels in the same way as we have consumer loans, and we plan to do this later in the year. Going on Page 21, you see a summary of the key digital deliveries during 2019. I've already mentioned Refinanso, but the other notable developments were the highly successful online savings account we launched in the second quarter, which attracted, as Tomáš said, around CZK 13 billion of new deposits during the second half; digitalization of life insurance in Q3 and of asset management in Q4, both of which are important for our continued growth in third-party fee and commission income, which was up 24.9% in 2019. Our road map for 2020, which is on Page 22, continues to focus on key digital distribution capabilities, whilst at the same time, we'll obviously have to dedicate considerable effort to the integration of Wüstenrot and the completion of the card platform upgrade, which is currently in progress. However, I would add that this is far from a zero-sum game as both will provide significant additional opportunities to leverage and further develop our digital capabilities and our broader distribution opportunities. So I think we have another challenging year ahead of us, but I'm confident we will deliver as we have until now. And with that, I will hand over to Jan Fricek, who will walk you through the P&L and balance sheet development.

Thank you, Andrew. Good morning, ladies and gentlemen. Let me continue with the P&L section starting on Page 24, with evolution of our recurring profitability. In this view, we adjusted reported net income, mainly for one-off gain generated from the disposal of our legacy NPL portfolio. And as you can see, in 2019, we achieved a superior year-on-year growth of 13.4% or CZK 440 million. The main driver was the expansion of operating income underpinned by favorable core cost of risk, partially offset by higher regulatory charges. What I would like to highlight here is that our recurring profitability has become much less dependent on one-off gain support by the share of the recurring profit on the reported one has increased to 93% in 2019 from 78% the year before. On the next page, we summarized profit and loss statement. In 2019, we have delivered a solid net profit of CZK 4.019 billion. This was translated into 18.2% return on tangible equity, which is 30 basis points improvement year-on-year and also 16.5% return on accounting equity. Net interest income went up by 7%, resulting from our successful execution of our lending strategy. Net fee and commission income reached 3.1% annual growth rate, enabled by our strong cooperation with third-party providers of insurance and investment funds. On total operating income, we reported a solid growth of 3.5%. The cost base has slightly increased by a similar growth rate, 3.4%, which resulted in the cost-to-income ratio, 47.7%, which is exactly the same ratio as in 2018. On the cost of risk line, we observed ongoing positive development of the cost performance standing at 57 basis points for the full year 2019, which means a 25 basis points improvement against the year before and, on top of that, realized CZK 334 million gain on disposal of residual legacy NPL portfolio. As we have pointed out before, in 2019, we have completed our legacy NPL strategy. Moving on to the development of core net interest income, which is up by 4.6% or CZK 89 million year-on-year in the fourth quarter. This is a result of our strong portfolio growth, which more than offset the pressure on the NIM, resulting from the increasing cost of funding in the second half of 2019. Net interest margin in the fourth quarter went down by 10 basis points to 4%, and we expect that this pressure will continue in 2020. I will provide you with the detailed explanation of the trends later in the balance sheet section. On Page 27, we continue with the evolution of net fee and commission income reaching CZK 1,950 million in 2019, which is by 3.1% above last year. This solid growth is driven by the increase of net fee and commission income by CZK 71 million, partially offset by marginal growth on the expense side. As I mentioned on the third quarter results call, quarter expenses is a bit distorted by various bonuses from our investment partners and card associations. Of course, we try to book a growth on monthly basis always when we have certainty about the amount and timing. However, not all can be predicted upfront. On the following page, I will provide you with the income development drivers in more detail. First, we have decomposed the income side in 2 to 3 areas, each generating an uplift for the income. Two of them are expanding, which is the third-party commission income stream growing by 25% year-on-year and transaction fees by more than 9%. The growth in the third-party income stream is essential part of our strategy out of the declining trend of the servicing and penalty fees income. Drivers of the 15.4% decline remain the same. Those are regulatory limitations and strong competition on the retail lending together with significant reduction of nonperforming portfolio during last 2 years. Here, I would like to highlight that, after several years of decline, we can finally see a stabilization in the second half of 2019. Page 29 shows breakdown of the servicing and penalty fees. Declining trend of this -- of the deposit servicing fees continues in the fourth quarter, where our retail customers effectively convert their current accounts to our 3 account proposition. Lending servicing fees is the only growing category where small-business portfolio expansion more than offset decreasing income in retail. And finally, the 29.4% decrease of the penalty and early termination fees is driven by penalty income going down as a side effect of our successful reduction of NPL portfolio, while early termination fees remained flat during the year. On the cost base, we move to Page 30, where we see a moderate year-on-year increase of 3.4%. There are 2 main drivers of this increase. Firstly, in Q1 of '19, our contribution to regulatory funds was by CZK 50 million higher than in previous year. And secondly, depreciation and amortization charges has increased by 59%, reflecting our investment into the IT infrastructure and digital platform and as well as IFRS 16 implementation. Nonetheless, if you look at the evolution of past 4 quarters, we believe that we took appropriate measures to mitigate the cost inflation, mainly on personnel and administrative expenses. And moreover, depreciation and amortization charges have almost a broader stable level going forward. And finally, if you look on our MONETA stand-alone guidance at the end of the presentation, for the next 3 years, we aim to maintain the cost base stable around CZK 5 billion. On Page 31, I want to share with you key drivers of savings on [ parex ] and admin costs. In the top chart, you can see development of branches count showing that, over the last 24 months, we reduced the number by 48 by also reducing the number of square meters. On a year-on-year basis, this means an 11% reduction compared to December of 2019 -- 2018. Besides that, as Tomáš already mentioned, we are going to close additional 19 branches at the end of the first quarter 2020. This strategy is obviously enabled by our successful expansion on the digital front, which Andrew presented in detail in the previous section. On the bottom of the page, you can see evolution of our workforce. At the end of 2019, we employed 2,943 FTEs, which is by 156 less than a year before and by 10% less than a number 2 years ago. This helped us to mitigate the 7% wage inflation rate on the labor market in the Czech Republic reported for 2019. P&L section is completed on Page 32 with the decomposition of the depreciation and amortization charge together with the evolution of the fixed asset base. A reason for the significant increase in Q1 in '19 was adoption of the new accounting standard, IFRS 16, which requires the recognition of our existing lease commitment as a right of use. The second category, which is property and equipment, and as you can see, we managed this category stable over past 5 quarters. And the third category, intangible assets, has increased by 27.6% year-on-year, reflecting our previous investments. Coming to the balance sheet section, starting with overall development on Page 34. Our balance sheet position remains strong, simple and highly liquid with LCR at the north of 170%. Net customer loans are 11.6% up; and investments, 25% up year-on-year. This growth was funded by core deposits increased by 16.9% over the same period. Cash and reverse repo operations with the Central Bank decreased by CZK 14 billion, out of which CZK 11 billion is driven by a reduced volume of so-called opportunistic repo operations, reflecting the less opportunities available on the market. Investment portfolio development is provided on the next page, 35. We held the investments mainly in the Czech Republic, and approximately 54% of the balance is hedged against the interest rate risk. Reported yield on the portfolio was at 190 basis points in the fourth quarter. And at the end of 2019, the portfolio generated unrecognized revaluation gain of CZK 159 million, which is visible in the bottom chart. In January this year, we realized the majority of this gain within CZK 2 billion bond sale, releasing collectibility that we will need for the Wüstenrot acquisition. Next page, 36, shows development of the gross performing loan portfolio, which is up by 11.8% year-over-year. This is largely driven by the retail and small-business segment, up 20% and 52%, respectively, as this remains our key focus areas of growth. The SME segment saw a decline of 1.4% year-on-year as we stay there focused primarily on profitability improvement. On the bottom chart, there is visible continued shift in the portfolio towards retail and small-business segment in line with our mid-term target share of 75%. And by the way, we will be almost there after the consolidation of the Wüstenrot. Moving on to Page 37, where you can see yields broken down by segment. The model's new-business yield, which is represented with the dotted line, remains 20 basis points above the portfolio yield. This enabled us to achieve gradual stabilization in the overall portfolio yield. In retail, you see the new business remained at the same level as the portfolio yield, which reflects fairly similar product mix of originations and portfolio. In commercial, the differential narrowed to 30 basis points as we have seen increased competition in the SME lending, especially in the fourth quarter last year. Let's turn the page and continue with the details of retail gross performing loan portfolio. The 20% year-on-year growth was driven by continuing excellent performance in mortgages, almost 40% up year-on-year as well as by consumer unsecured book expanded by 9.2% during the same time. The strong growth in our core lending products was partially offset by a decline in revolving and auto lending, which follows a general slowdown on the relevant markets. Moving on to Page 39, showing trends of the related yields. In the fourth quarter, we decided to move down with the new-business pricing of mortgages following the extremely competitive market in order to hold the new production market share. And as you have seen on the page with the pricing evolution on the Czech banking market, in the fourth quarter, we reported the same price of the newly signed mortgages as the whole market. We start seeing improvements in January as most of the big players, including us, already increased rates by 20 to 30 basis points. In consumer loans, the new-business yield remains just a tick below the portfolio yields, which supports its stabilization going forward. Now we can continue with the commercial portfolio, starting on Page 40. As I have mentioned before, the growth came exclusively from this small-business segment with the portfolio up by 51.5% year-on-year, broadly repeating the 2018 growth rate. The auto and leasing portfolio continues to decline, reflecting market slowdown. The investment loans also marginally declined as we are focused there on profitability improvement and optimizing capital allocation. And finally, working capital. Total volume of provided credit limits went up by 6.4% year-on-year while 5% decline in their utilization resulted in a bond drop by CZK 200 million. Development of commercial yield is then provided on the following page. New-business yields were above the portfolio with 2 exceptions: one was the working capital. But in the last quarter, we provided several credit limits at marginal incremental profitability under a huge competitive pressure. The other was a small business with the new-business pricing temporarily lowered within Q4 campaign. Moving on to deposits, starting on Page 42. In 2019, we realized the deposit-gathering capability at marginal incremental cost becomes critical element of the future growth of the bank and its profitability. In the second half of the year, we added more than CZK 16 billion of retail deposits and achieved growth of 22.7% year-on-year. This was primarily delivered through attractive savings proposition where approximately 80% of the inflow came through the digital channels and more than 50% was attributable to new-to-bank customers. In commercial, you can see a growth of 6.9%, which was primarily driven by a large term deposit, further improving our liquidity position. On the next page, you can observe gradual increase in the cost of funds across all segments in average by 33 basis points year-on-year. This change in trend reflects our inevitable effort to strengthen our deposit base and liquidity position in the second half of 2019 as well as increased competition enabled by the base interest rate at 200 basis points. And as I said, we expect this trend will continue throughout 2020. However, with Wüstenrot acquisition, we will significantly expand our deposit-gathering capability for a new state-subsidized building savings product. Cost of the wholesale funding further increased in the fourth quarter due to repayment of euro funding from EIB. Page 44. This page summarize development of the retail deposits. Drivers of the growth of -- in 2019, I have already explained before. Hence, on this page, I would like to highlight gradually changing composition towards more costly savings accounts. We achieved there more than 46% increase of the bonds while current account bonds remained broadly stable. Our limited ability to expand current account balance was mainly caused by more attractive sales account propositions available on the market offered either by us or by our competitors. Significant cost differential between the current and savings account is provided on the following page. Our cost of current accounts remained stable at 2 basis points during the year. Cost of the savings and term deposits jumped up by 60 basis points year-on-year. In order to slow down the increase, we took a decision already before the year-end to reprice down savings accounts originated during the campaign by 50 basis points effectively from the 1st January. What is important to mention is that this reprice did not trigger any significant outflow from the bank so far. I'm now on Page 46. Showing commercial deposit base expanded by 6.9% year-on-year, which is sourced almost equally from all 3 product categories visible on the right side. Breakdown of the cost of commercial deposits we show on the following page. Likewise, in retail, the cost of current account was kept at very low level between 6 to 7 basis points during the 2019 while the overall cost price was driven by higher interest rate of savings and term deposits in average by 52 basis points. Continuing on Page 48 with the wholesale funding overview. Significant volatility of balances quarter-to-quarter can be explained by our opportunistic approach to the repo operations and available market opportunities. The year-on-year growth of the balances to banks is linked to partial replacement of intercompany funding with external loans in MONETA Auto, which we realized in September. Impact of the -- already mentioned the repayment of the loan from EIB is visible in the fourth quarter. We complete this section on Page 49 with the wholesale cost of funding overview. While cost of repo operations was stabilized over the last 3 quarters a tick below 2%, the cost of other funds increased to this level only in the last quarter. This was driven by a combination of higher volume of external financing through our subsidiaries and decreased share of the euro funding. Before I hand over to Normann, who will take you through the risk metrics and asset quality, let me just briefly summarize outcome of the P&L and balance sheet section. Our recurring profitability increased by 13.4% in 2019, driven by a growing NII and operating income, broadly flat cost base and favorable core cost of risk. The strong asset base expansion was fully funded by increased customer deposit base, however, at higher incremental cost. Thank you for your attention. Normann, microphone is yours.

Thank you, Jan. Good morning. We are now on Page 51 with an overview of cost of risk for 2019 and '18. As was mentioned earlier, we came in with a cost of risk of 35 basis points in '19, which is an increase year-over-year. The main and almost sole reason for the high cost of risk is attributable to the lower amount of NPL sales, which we conducted in 2019, as is visible on the bottom of the page. We had debt sales which contributed 51 basis points in 2018. And in 2019, it was only 22 basis points, which is in line with our NPL management strategy, which essentially has come to an end in last year. If you look at the core cost of risk, which is adjusted by NPL sales, then here we saw quite an improvement year-over-year. We came in with 57 basis points. The biggest improvement we saw in the retail segment, where we saw an improvement from 1.18% to 65 basis points. In commercial, we saw an increase, but this has solely been attributable to a few isolated commercial defaults, which occurred last year. On the left-hand side, here, we have an overview of quarterly cost of risk. And as is clearly visible, throughout 2018, we still benefited from fairly strong positive impact of NPL disposals, which was not the case anymore in 2019. And last but not least, on this page, when it comes to the total NPL coverage, here, we saw a fairly strong increase by almost 10 percentage points, and we ended up with a total NPL coverage of 109.2%. Moving to Page 52. Here, we have an overview of the evolution of our gross loan portfolio balances and the NPL stock. Now while the gross loan portfolio balances increased by more than 10%, we saw a significant drop of our NPL on balance sheet balances by almost 31%. And consequently, this led to a significant drop of our NPL ratio from 2.8% a year ago to 1.8%, which is the lowest recorded ratio ever in MONETA. We didn't only work on the on-balance sheet NPLs, but we also tried to reduce our off-balance sheet NPLs. And as you can see on the bottom of the chart, we reduced it from CZK 1.4 billion a year ago to a tick above CZK 100 million, which I believe is more or less the bottom line we can achieve. On Page 53, here, you see an overview of the quarterly evolution of in and outflows of NPLs. If you look at the NPL formation as a percentage of average performing receivables, this has been very stable over the last couple of quarters and is somewhere between 0.5% and 0.6%. What is also visible is that the contribution of writeoff and debt sales has been coming down throughout the year, which is a consequence of the completion of the NPL disposal strategy. And the last page in the risk section, Page 54. Here, we have an overview of our gross loan portfolio balances broken down into stage 1, 2 and 3. Now Stage 1 receivables increased by more than 11%. Underlying portfolio allowances increased to a lesser extent, the reason being that we saw a fairly significant growth in secured receivables like residential mortgages, which, by definition, have lower coverages. The overall coverage for Stage 1, very stable throughout the last quarters, and it's in the range between 0.7% and 0.8%. When it comes to Stage 2, here, we saw an increase year-over-year of close to 22%. Allowances underneath increased by 15.7%, again here, this is due to the portfolio mix since we had a higher share of secured receivables in Stage 2. The main drivers of the increase in Stage 2 are, one, that we changed the methodology how we calculate economically related groups, which happened in the third quarter; then also adjustments as a result of macro inputs in the IFRS 9 model; and last but not least, a few isolated commercial customers, which we moved between Stage 2 and Stage 3. Lastly, Stage 3, here, we saw a significant drop of the NPL stock from CZK 4.1 billion to CZK 2.8 billion. That's a drop by almost 31%. The drop of allowances was even bigger. Again, the reason here, since we have significantly disposed of aged receivables and the bulk of our receivables is now in default for less than 2 years. The coverage underneath for Stage 3 is at a solid level of 55.9%. With that, I hand over back to Tomáš Spurný, who will be sharing you more details on capital management. Thank you.

Okay. We are on Page 56. I go clockwise. As I said before, the bank enjoys a very strong capital adequacy ratio, which is at 18%. This was supported by the issue of Tier 2 bonds. If you look at last 2 years, we're operating at lower accounting equity, against both years, a significantly larger balance sheet. In terms of regulatory equity, the regulatory equity is stable. Over 2 years, it's actually increasing. And this is mainly due to the issuance of CZK 2 billion of Tier 2. You can anticipate for first quarter before we close the transaction that the equity level and regulatory ratio will further improve because, in the -- in January 2020, we issued an additional CZK 2.6 billion of Tier 2 capital. If you look at the adequacy ratio, we stand at 18 -- 16.4% is CET1 ratio, where we still have a significant reserve or cushion, if you wish, against regulatory requirement. And on density of our risk-weighted assets, the graph shows the credit portfolio density, and we have reduced that quite substantially year-to-year and very substantially over 2 years, and this is through better usage of collateral underneath the portfolio but also through change in nature of the legal relationships that we have with the clients of the banks. If you turn the page, on Page 57, we portray the excess capital. So the bank has, against management target, currently, almost CZK 2.7 billion excess capital, and against the regulatory minimum of CZK 4.3 billion at the end of the year. And if we go left to right, you can see that the excess capital has been enhanced by inclusion of earnings both 2018 and 2019, then decreased by almost CZK 5 billion. This is the CZK 4.8 billion paid in shareholder distribution. This is our 2018 dividend plus the interim dividend paid at the close of 2019. We also have positive impact from the CZK 2 billion of subordinated debt. We had to increase the capital target. The management target went from 15.5% to 15.9%. So this caused almost CZK 500 million decrease of excess capital. We have CZK 450 million from intangibles as a result of our investments into improvement of the operating platform and, finally, the net amount in RWAs. So I would say that, at the end of the year, the bank stood at a fairly comfortable position. We've -- and this is important, for the first quarter, we issued additional CZK 2.6 billion of Tier 2. And therefore, in the first quarter, we will have a very high capital adequacy ratio. Below that, you can see risk-weighted asset evolution going from CZK 122.2 billion to CZK 125.6 billion. And this portrays effectively the big change from strategy of the bank. If you look at the commercial book, it actually released significant amount of risk-weighted assets, almost CZK 2.4 billion. This is the first part on the left side -- the second part on the left side. And then you see the consumption or creation of RWAs through expansion of mortgages, retail unsecured. Financial operations have almost no impact because we are not -- we don't have really a trading book. And you also see the derivative impact of completion of the NPL strategy. Reductions of NPLs gave us over CZK 580 million reduction in the RWAs and the other items. And also, our finance people have managed pretty much the deferred tax position to reduce the RWA level, and we manage the RWAs, if not on biweekly, then on monthly frequencies very, very tightly. On Page 58, we have slightly changed this page in order to provide you with a very clear view of capital requirement evolution. So as we stand now in the first half of 2020, currently -- this is the fourth column from left to right. Currently, the legal requirement that the bank has to fulfill is 14.65% capital. Over that, we have 100 basis points of management buffer. Hence, we increased the management target to 15.9% due to the fact that, starting in July, we will have to comply with the 14.9% requirement. And this is solely due to the fact that the countercyclical buffer had been raised by the regulator gradually. You can see the evolution here that it has been doubled over the time period. Nonetheless, we were able to manage a decrease of the Pillar II from 3% to 2.4% in the same period that we portray here. I am fairly confident that in 2020 SREP, we should accomplish still reduction of the Pillar II requirement, and that's due to the fact that the bank should enjoy improvement through NPL reduction, and we've also managed down increased rate risk in the bank very substantially. If you look at, at your discretion, in the presentation, we hedged significant part of the balance sheet for interest rate risk. So I hope that there will be a further reduction on the Pillar II by the regulator that we will be recognized for the effort. On the chart -- on the lower part of the chart, you actually see the composition of the Tier 1 requirement, which is currently at 12.65%, and this will increase in the second half of the year to 12.9%. So as you know, we have CET1 ratio of 16.4%. So we are very well placed to accommodate the regulatory requirements. So this completes the capital section. And if we can move on to Page 60, we provide you guidance on basis of accomplishing control of Wüstenrot by 1st of April. So this assumes for 2020 we would consolidate Wüstenrot result for the 9 months of this year and then on 12-month basis for the outer years. The management aims to deliver this year, at minimum, CZK 4.5 billion net profit. We would like to accomplish on that basis earnings per share of CZK 8.80 and pay out, at minimum, dividend of CZK 6.65 with the return on tangible equity of -- in excess of 18%. In the outer years, in 2022, we would like to improve the profitability to a minimum level of CZK 4.8 billion, and this is assumed on the basis of realizing the full synergy from the Wüstenrot acquisition. So on this basis, the cost base of the bank in 2020 will be negatively impacted by absorbing 9 months of cost base of Wüstenrot. And in addition to that, we have to absorb whatever restructuring charge we will elect to make for either tangible, intangible assets, cancellation of leases and potential severances. Nonetheless, on the operating income level, we aim this year at CZK 12.5 billion. So both the organic growth of operating income and 9 months of Wüstenrot should give us additional revenue stream of CZK 2 billion in order to secure the net profit. In the outer years, we anticipate growth in the operating income, and we would like to reach CZK 13.1 billion level by 2022, again with CZK 4.8 billion of profitability and maintaining the relative profitability on tangible equity in excess of 18%. On Page 61, we show you what would it be like on MONETA stand-alone basis if we were not to accomplish successful closure of the acquisition. So the -- if I start from the net profit, we will generate this year at minimum CZK 4 billion. This is on the basis of increasing operating income by additional CZK 500 million and keeping the cost base flat, financing from the delta, the stability in net profit and also anticipating significantly higher cost of risk in absence of additional significant NPL sales and anticipating also worsening of the credit cycle in the next 12 months. This would translate into earnings per share of 7.8% (sic) [ CZK 7.8 ] with again anticipated dividend payout of CZK 6.65 with return on tangible equity of 17%. If we look at '22, the net profit of the bank, we model at CZK 4.2 billion -- we model and commit. Hence, both from an absolute profit point of view and from a return on tangible equity point of view, we believe that the acquisition of Wüstenrot gives us significant potential to improve our performance and move from a defensive position in terms of profit to an expansion and growth in earnings in the next 3 years, and this is a monumental change for MONETA since the IPO. On Page 62, we will be present at 3 conferences. We plan to be in New York on the 25th and 26th of March to ensure our shareholder interaction. We will publish our results on 5th of May. This will be the first quarter result publishing. And then we plan to attend Goldman Sachs conference in Rome -- in Rome, Italy, to avoid confusion, on the 10th through 12th of June. So we will be at your disposal to discuss with shareholders and analysts the current developments in the bank. I am tremendously grateful for your attention, and we will entertain Q&A now.

[Operator Instructions] The first question is from Anna Marshall of Goldman Sachs.

Two questions, please. First one on buyback. I see that there have been some comments in the press about potentially launching buyback in Q4 this year. Could you please confirm this and also how it interacts kind of vis-à-vis the planned acquisition? And also, at which point would you consider, say, expanding the size of the buyback? And what would be the process for that in terms of further regulatory approvals, further shareholders' approvals and so on, whether that would be required? So that was the first question. And my second question is on the cost, please? Could you please quantify the amount of or the magnitude of one-offs that you mentioned, which were in Q4 '19? And also, what exactly would be the measures which would be implemented for keeping kind of in a stand-alone scenario MONETA's cost base flat over the next 3 years basically? Anything else on top of the branch reductions?

Okay. I'll take the first question, Anna. On the buyback, we will evaluate our excess capital based on second quarter result, and the excess capital has to accommodate absorption of the acquisition. It has to accommodate our business plan. It has to accommodate the dividend payout -- interim dividend payout for the year 2020 because we anticipate to repeat the previous year performance. And if and when there is excess that we feel is usable, we would theoretically, we could theoretically come to market in the fourth quarter of 2020. Nonetheless, it has 4 A's. We have never ever committed to expand the program beyond 11 million shares. And we have regulatory approval now, which is valid for one year. It is very likely that we will seek for 2021 to renew the regulatory approval on the same basis that we have approved it for this year. But I would like to underline we have never committed anything beyond that. It has to be evaluated in a mutual discussion with the Czech National Bank, and we have to consider all aspects of this. Should we decide to expand it, that decision wouldn't come sooner than in the first half of 2021, and it would be subject to approval by Czech National Bank, number one. Number two, it would be subject to approval of shareholders. So it would not come any time before April -- 2021 April, because we traditionally hold the shareholder meeting then. This pertains to the first question. The second question was split of cost and extraordinary items pertaining to the acquisition, and we don't wish to be sort of appear to be cagey about how we see the acquisition, but we're not prepared now to comment on composition of the restructuring charge nor on the composition of the extraordinary gain. We don't want to provide these estimates because, simply, we are in the process of calculating the fair value on the latter one. And on the former, we basically are starting now the integration work with an external party and have a team of 20 people inside of the bank who will actually finalize the numbers. So we have previously, I think, publicly stated that the gain could be anywhere -- gain against purchase price against fair market value could come in the range of CZK 500 million to CZK 700 million and that we assume restructuring charges in total of CZK 350 million, if I remember correctly, is what we have stated publicly. And they would be spread over 2 years. But beyond that, we don't want to really precise it because we now need a realized confirmation of the numbers. And on the cost base, further, we anticipate that the network will have 160 branches by the second quarter of 2020. And on stand-alone basis without Wüstenrot, we have committed a CZK 5 billion flat cost base. It is in the stand-alone presentation on Page 61. So we've actually -- if you study our numbers, we've suffered personnel expenses, CZK 626 million. And in the fourth quarter -- and Jan can provide you comment on why this was -- why this was at relatively high level. It's nonrecurrent. So I'll turn over to Jan.

Okay. Thank you. So I will specifically take the question regarding the incremental one-off booked in the fourth quarter. In total, we booked CZK 40 million of additional cost into the personnel. So out of that CZK 626 million, CZK 40 million, roughly CZK 40 million represents a one-off that consists of 3 types of [ ec loss ]. The first one, we book an [ ec loss ] for layoffs. We decided about in the fourth quarter, and we will either realize that or we will do that in January or February this year. The second part is the undrawn vacation. We try to minimize the number of days that people don't use for the vacation. However, there is still some portion moved to the year. And the third one is we increased the management performance bonus [ ec loss ] regarding the full -- the phantom shares, especially of the phantom shares, reflecting the full year performance of the bank that was above the plan -- and also, the -- also the higher shareholders value delivered throughout the year. So the management incentive program is sensitive to our stock price. And as the stock price increased in the fourth quarter, we had to book -- out of the CZK 40 million, we had to book incremental amount into the reserve for payment -- for the deferred payments because the value that the bank owes to those who were awarded phantom shares increased quite substantially in the fourth quarter of 2019.

[Operator Instructions] The next question is from Robert Brzoza of PKO Securities.

I have a question regarding the increase in the fee and commission income cost expenses. Could you provide perhaps more detailed comment whether that was a seasonal effect or whether you might expect, and you will then drop in the first Q? Then second, could you quantify the impact on the NII of this increase in the EIB-related funding withdrawal as well as the size of the deposits on -- which will be affected by the cut in the rate offered, which was mentioned during the call?

Robert, the size of deposits which will be affected is about CZK 15 billion in retail, by the cut. Nonetheless, for 2020, we estimate an increase to the overall cost of funding for the bank by additional 15 basis points because our biggest challenge in order to execute the strategy of the bank is no longer finding adequate opportunities on the lending side. Actually, the challenge -- the biggest challenge for us is to maintain funding of the bank. So irrespective of the impact, we anticipate 15% increase [indiscernible] 15 basis points increase in our cost of funding. So we will get some efficiency out of that. But in the business plan, we've actually assumed a higher number. On the EIB repayment, essentially, the cost of funding increases because you have the -- if the prepayment happens in the middle of the quarter, you don't have it in the average balance, and you keep the expenditure that you pay to EIB because it consists of regularly paid interest plus prepayment penalty fees. So I believe the facility that we repaid was EUR 80 million, and we suffered some prepayment charge. But on a net basis, we had actually over-liquidity in euro-denominated currency, and we don't want euros because of the interest rate environment, and we essentially don't want to lend euro except on exceptional basis because we basically feel that it is not prudent. On the fee expense, we suffered -- so if you look at the transactional fees, so as we have higher volumes with the card associations, we have -- we suffered some higher expenses, and this is, by definition, seasonal. And it's also, by definition, driven through, as we seek to make very accurate accruals, unfortunately, the card associations are not always very good at billing on time. So we suffer volatility due to the fact that it takes fairly long time before we find out what is our actual liability. So as we adjust the liabilities, as we adjust the accruals against the invoices, this creates volatility. And this is not our -- this is not under our control. It's specifically Mastercard who creates huge issues in the billing.

If I may, just to specify the magnitude, in the total cost for the whole year, it includes about CZK 100 million of these volatile components. So about 1/3 of total is this volatility that you can see why the balance fluctuates quarter-to-quarter quite significantly.

Can I ask -- once again, I'm not sure if I understood correctly. After this repricing, which took place on the depo rate, at the end of the year, do you expect any additional downward depot rate repricing during the year for the savings deposit outstanding balances or not? And also, I forgot to ask about the cost of risk outlook. With Wüstenrot acquisition, is it inclusive of NPL sales or without?

There are 2 questions. The first question is on the deposit pricing tactics. With all due respect, we will not discuss that. I answer your question because I said that our cost of funding overall at the enterprise level on stand-alone basis, without Wüstenrot, is to increase 15 basis points. So this is MONETA deposit-taking activity. That's the first part of the answer, and we will not discuss forward-looking pricing on the analyst call. And the second part of the question is that, yes, it includes the 3-year guidance with Wüstenrot, includes a view on cleaning up the books of Wüstenrot. Yes, it does.

As there are no further questions now, I hand back to the speakers for the closing remarks.

We're grateful for your attention. We apologize that we overlapped with another bank. It probably creates a challenge, but this was not of our own volition. We were first, and they chose to publish their results on the same day. So we apologize for that, and we will try to agree with them not to do it again, but it might be difficult. We have good prospects, I think, going forward. As I said, we have turned the corner, and the management is -- MONETA is excited that we will, from a defensive position, defensive in terms of net profit and rebuilding the operating income through the acquisition, we feel that we're 2 years ahead of the organic plan. So we're looking forward to that. And we will seek to deliver CZK 4.5 billion profit in 2020, and we will seek to really make the best out of both the organic strength that we have as a bank and the additional capacity that Wüstenrot will bring to us, and let's hope that it will all go better than expected. And we thank you for your participation today.

Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect now.