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

Dear ladies and gentlemen, welcome to the conference call of MONETA Money Bank. At our customers' request, this conference will be recorded. [Operator Instructions] I now hand you over to Tomáš Spurný, CEO. Please go ahead.

Good morning, ladies and gentlemen. It's a pleasure to start today's quarterly presentation. I have -- or we have the senior management team of MONETA, namely Carl Normann Vökt, our Chief Risk Officer; Jan Fricek, our Chief Financial Officer; also Jan Novotny, the Head of Commercial Banking in the bank; and Andrew Gerber, for Product and Marketing. So if you allow me, I will start on Page 4 with the highlights. In the first quarter of 2020, MONETA delivered net profit of CZK 731 million. Apart from that, we posted a very solid growth of the pre-impairment profit at 31% on a basis of strong operating income growth and a flat cost base. We also generated lending growth of 13.1% year-on-year, and we will cover a bit later where that growth originates from. On Page 5, 5 key developments. As already mentioned, operating income grew nearly 15% on the basis of fairly strong growth of net interest income and net fee commission income. Additional to that, we have successfully sold some sovereign bonds and generated CZK 277 million gain on that. Our operating base remains flat. Apart from flatness when we go to branches, you will see that according to the plan, we closed 16 units on the basis of strong development of our digital capabilities. On cost of risk, we had posted fairly strong charge in the first quarter translating to 173 basis points. The charge has inside CZK 475 million related to COVID pandemic, and Normann in the risk section will walk you through where that originates from. On liquidity, we enjoy a very strong position of CZK 44 billion of free liquidity. The LCR ratio stands at 155.6%, which is a significant improvement from year-end 2019. And on capital, we enjoyed a very solid position of 21%, mainly as a result of optimizing the capital base we issued, as you know, Tier 2 bond in the amount of CZK 2.6 billion in the beginning of this quarter in January. So we also had fairly good timing with distribution of that instrument. On Page 6, the key financial metrics. We had posted strong growth on operating income as a combination of all components of operating income. In lending and deposit taking, you can see that the bank on year-to-year basis generated very strong liquidity. We raised nearly CZK 28 billion of deposits, and we had posted growth of CZK 18 billion in excess of CZK 18 billion of loans. On asset quality, the NPL ratio has decreased to 1.9%. So we have a very strong position in terms of both the relative absolute size of NPL portfolio. And as you will see in Normann's part of the presentation, we also are increasing the coverage across of stages of our portfolio. On liquidity, very strong and solid position, which will further improve once we consolidate Wüstenrot acquisition in the second quarter of this year. And capital, I've mentioned. What is also important is that we have risk-weighted assets of CZK 128.6 billion on a year-to-year basis. This constitutes growth of 6.5%. And end of year, I believe it's 2.3%.

2.4%.

2.4%. So on Page 7, just couple of highlights on Wüstenrot. We've completed the acquisition on 1st of April. So as an event subsequence, we included here. We saved cash, EUR 175 million. The equity position of the companies we've acquired stands at EUR 207 million. So the acquisition is equity accretive from the day 1. Now we begin integration process of the companies, which constitutes a staff relocation. We actually relocated about 20% of the staff to our headquarters already. We will optimize the real estate, and we hope to do it by third quarter of this year. Within next 12 months, we would like to integrate the IT and legally merged by the end of the year Wüstenrot mortgage bank into MONETA. The Wüstenrot Building Savings Bank will remain as a separate entity, enjoying efficiencies of the MONETA's operating platform, and we are working on that. This is a requirement, by the way, of the regulator that we maintain separate license for that. Overall, as already stated previously, we continue to expect integration costs in the amount of CZK 400 million. Split CZK 150 million, we will most likely post this year, and CZK 250 million will be posted in 2021. So the full scope and impact of synergies is estimated at CZK 300 million, and it should come in fully in 2022 at the latest. On page 8, we show you the key metrics of the balance sheet that we've acquired. So it's nearly CZK 70 billion. What is notable here is that liquidity position of the bank overall will be strengthened by deposit base, the amount of CZK 58 billion, of which CZK 31 billion are building savings, which enjoy state support in form of subsidy of interest rate paid to the client. So this is an attractive product. On the lending side, we increased mortgage position by CZK 39.6 billion. So we will nearly double our market share, and there are about CZK 18 billion of other loans. Mainly, these are loans to retail residential needs, reconstructions, et cetera. So this is a significant acquisition that will bring the balance sheet of MONETA to excess of CZK 300 billion, and the loan portfolio will be nearly CZK 220 billion. So it's fairly material event from the, let's say, from the time of the IPO, we actually more than doubled the bank. On Page 9, we provide you with the financial performance in the first quarter. So Wüstenrot delivered in the first quarter net profit of CZK 118 million, which constitutes growth of about 36% on -- with respect to year-on-year basis, the overall operating income position was CZK 376 million and cost base CZK 226 million. Please note the regulatory charges, which are booked once per year in the first quarter. So the cost base is a little bit overstated. So all in all, both from a profitability point of view and from balance sheet point of view, the acquisition actually is fully in line with the expectations that we had during the diligence building our financial projections model and signing the SPA. So this had been completed. Now let's go into the operating environment and banking markets dynamics on Page 11. The COVID-related crisis has brought, what we call internally, a perfect storm. If we start in the upper left corner, you can see that the expectation as to GDP evolution has entirely changed. Here we use the Ministry of Finance forecast where 2020 is expected to come in at negative 5.6%, and recovery in 2021 in -- at a level of 3.1%. If we look at the exposed key macro data, what is notable is the evolution of exchange rate. Crown considerably weakened from the quarter before to a level of CZK 27.3 per euro. So this is clearly a negative development. With respect to inflation, the inflation actually increased in the first quarter to 3.1%. Unemployment had been reported as stable. Nonetheless, there are signs of increasing unemployment across-the-board as the economic inactivity over the last 9 weeks had considerably impacted the Czech economy. Another key development exposed our interest rate swaps and interest rate environment altogether. If you look at the pricing of the swaps, this had declined by 100 basis points from a quarter before reflecting the 2 consecutive cuts by Czech National Bank, reducing the 2-week repo rate from 225 basis points to 100 basis points. So not only that we have the headwinds of higher risk arising from the economic inactivity, but we also have headwind on the interest rate environment, and that is also -- has projected itself into 1-year government bond, which plummeted by 100 basis points thereabout in the first quarter of this year. Now on Page 12, let's cover a little bit the evolution of the banking market. First, we start with the deposit market. The deposit market overall reached CZK 4.7 billion. It grew -- the market grew at 12%. MONETA performed at 18.2% growth rate. Then we split it into retail and commercial. You can see that in retail, we have considerably outperformed the market. We posted a growth rate of 22.5% against market growth of 9.2%, and we also have a fairly solid growth on commercial deposits at 10.5%. As you know, we don't enjoy business of large corporate supplies depositors. So this is based on the strength of our SME presence in the market. On Page 13, we look at the evolution of the lending market, relevant lending market in Czech Republic. MONETA grew overall at 13% against the overall market growth of 6.8%. Again, in the retail market, we have posted significantly stronger growth in the rest of the market. We are -- we had been growing at 19%, whereas the market was at 6.9% level. And on commercial, we are fairly in line with the market growth posting 5.7% growth, again, 6.6% growth on year-to-year basis. So we are continuing to perform in a rather strong manner. On Page 16, key contractual pricing. I would like to caution, these are not effective yields, but these are contractual prices. If I go clockwise on consumer lending, for all that matters, we continue to perform at 70 basis points premium against the market. You can see that the market declined in the Q1 to 8.1%, whereas MONETA generated contracts at the average rate of 8.8%. At -- on the mortgage market, we are fully aligned with the market. In the first quarter, we were 10 basis points above. But this is the fastest-growing lending category of the bank, so we are competing at the market level. The price has stabilized in the past 2 quarters, and we expect some declines linked to both the 2-week repo reduction and also to some other competitive dynamics. On the commercial deposit pricing, we continue to overperform the market. And on the retail deposit pricing, you see that the overall cost of funds has gone down to 56 basis points from 63 the quarter before. So we have the first signs of the repricing that we promised in the previous quarter. Now I would ask you to turn to Page 16, and we cover the COVID-related situation in Czech Republic. And as part of this, we will provide you with some outlook on the bank's performance. Well, there are 2 key stakeholders: government and Central Bank. The government declared state of emergency on March 12. We've been impacted, broadly speaking, by 2 measures taken by the Czech government. First and foremost, it's the loan repayment moratorium or postponements of installments, which is also including a ceiling on consumer unsecured pricing, which exceeds 9% rate per annum. The ceiling -- the interest rate ceiling is now constructed as a 2-week repo rate plus 8% margin. So this will have some impact on repricing of some of portion of our unsecured loans namely at the level of MONETA and MONETA auto subsidiary where we financed typically used automobiles at higher rates. The government also communicated a commitment of CZK 100 billion of direct support and CZK 900 billion in state guarantees provided to enterprises in order to obtain additional liquidity from the banks. We've also seen a fairly significant compensation subsidy to self-employed individuals in the Czech Republic for the months of March and April. This constitutes a potential pool of 1 million people that are self-employed in this country. And the government provided a postponement on payment of taxes. The Central Bank reduced rates 2x to the level of 100 basis points. It also lowered capital requirement, namely the countercyclical buffer to 1% level. As you know, the countercyclical buffer was originally anticipated or mandated to increase to 200 basis points by middle -- by July of this year. So this is a good development. However, the regulator communicated a very strong message that there should be a suspension of dividends from banks across-the-board. And also, the Central Bank had taken some measures on the ability to deliver liquidity to the banking sector should it be needed. On Page 17, we outlined measures that we have taken on multiple fronts during the COVID crisis. What is, I think, the most important is that we've managed very well to keep the bank operating throughout this period. We had more than 50% of our employees working from home. 90% of our daily activities with respect to call centers were actually conducted on a flex -- on a home-office basis. So apart from that, the other highlight is that we've been standing behind our customers. We have worked several weekends in order to ensure access of our clients to COVID programs, and we changed our policies. Apart from that, we've also built a very solid plan for additional liquidity to be garnered by the bank to support the lending activity and existing customers. I suppose, most importantly, we have taken up a review of our cost base and came up with CZK 300 million cuts in the cost base. We also reduced the investment budget by CZK 170 million in order to postpone or cancel some activities. And we had been forced to move the shareholder meeting due to the restrictions placed upon us by Czech authority. On Page 18, we had also suspended guidance. So we've built a couple of scenarios, economic scenarios going forward. If you look at the chart on the gray, we have the previous prognosis that we've used with respect to GDP, unemployment, interest rate and inflation rates. And then we built 2 scenarios: moderate scenario is milder as it encompasses a very strong government support to the industry; and severe scenario projects a more steeper decline of the GDP spike in the unemployment, and the period of a recessionary environment is actually prolonged. So these are sort of U-shaped scenarios that were built at the end of March on the basis of information that we had available at that time, which was quite frankly, not very much. So this is a basis that we have used to actually construct on Page 19 some guidance as to performance of the bank in 2020. On total operating income, we expect a minimum level of CZK 11.6 billion. This could be higher. This could reach perhaps CZK 12 billion. It depends very much on if and when the interest rates are cut down to 0. That's 1 contingency. The second contingency is actually take-up of the moratorium, state-sponsored loan repayment moratorium because it includes impact on the effective interest rate in the unsecured portfolio, retail unsecured portfolio. And the third uncertainty with respect to the operating income is how much of the acquisition gain on Wüstenrot we will post in the second quarter of 2020. And we are -- we have taken a very conservative estimate into this number. So it could be slightly higher. On the cost base, we are fairly confident. We are confident that we can push the cost base down to a level of CZK 5.4 billion as opposed to the CZK 5.9 billion that we've communicated -- or CZK 5.8 million that we've communicated in the previous guidance. On the cost of risk, we foresee a range of 170 to 185 basis points where broadly speaking, 40% of this is linked to change of the economic indicators, and 60% is related to envisaged increase in defaults across the portfolio. Below, what we would like to emphasize is that this scenario sort of depends on strong government support. That is the CZK 100 billion of direct aid flowing into the economy and better part of the CZK 900 billion of state guarantees to be provided for SME lending. This also envisages a relatively mild unemployment of 4.1% and a relatively moderate GDP contraction. So we plan to provide a more detailed guidance in the -- at the close of second quarter when we will have a little bit more to go on than we had at this time. And we will also have the ability and integration of Wüstenrot into the overall guidance. So let me cover a third part in my presentation, which is strategic objectives and results. If you look at Page 21, this remains pretty much the same. We are aiming across the 8 dimensions or 7 commercial dimensions at a stellar performance. The only thing that we've altered is risk management where we would like to strengthen our ability for collection, recovery, restructuring. And we are focusing very much on building capability deals with issues that will come with the worst economic performance or worsened economic performance in Czech Republic. On Page 22, we reiterate performance against our targets in retail. We are performing according to the target posting strong growth. The same situation prevails on small-business banking. And in SME, we believe that we are continuingly or continuously improving the contribution that this business line generates for the bank. Digital strategy is on track. We are seeing our movement from the digitally-initiated to branch-finished to fully-online digital sales, and Andrew will cover it. On risk management, I have covered this. We have so far stable NPLs, and we have taken proactive, prudent view of the COVID pandemic consequence. And on capital, we stand super strong due to the issuance -- timely issuance of the Tier 2 at a very, I think, what today is a very respectable rate of 379 basis points. And on cost control, I believe that we continue to demonstrate commitment to manage cost. On Page 23, the overall platform remains pretty much unchanged except that we have fulfilled our commitment on branch closure. Later on in the cost section, you will see a 2-year evolution of the space, high-street space that we utilize to run the model of MONETA. And you see the level of efficiency. On employment in the bank, we have gone down by about 2% in -- on year-to-year basis. And you can see that we've reached the 1 million client threshold as we had written or sold a lot of portfolios. The customer base of the bank is moving in the right direction, albeit we would like the movement to be faster, and we have continuing strong utilization of the digital platform, Smart Banka, that we have built. And on Page 24, you see movements of our customer base. I think in the first quarter, we were impacted by -- during the pandemic nonetheless. We generated 9,200 of new customers. This is on top of the page. So the net amount is 9,200 customers after we take into account the churn of the customer base. You can see steady growth of 4.4% of the primary customers of the bank. And as I said, we are above 1 million of performing customers. And this is quite important. With that, I will turn over to Andrew Gerber, who will take you through the digital distribution and services.

Thank you, Tomáš. So if you go to Page 26, we provide a brief update on refinance of our fully digital mortgage platform, which we developed over the course of last year. We began to scale this business up in Q1 2020 during which we approved 626 applications and signed 151 contracts, which represents roughly 20% of the bank's total flow in mortgage refinancing. Whilst the flow of new deals here has obviously declined dramatically since the onset of the pandemic, we will continue to invest in developing this platform as planned as we still believe this will have an important role to play in the future of our mortgage business going forward and perhaps even more so than would have been the case before the -- or without the present crisis. Going on to Page 27, we continue to see increasing adoption of the 2 main mobile banking -- mobile payments platforms, Apple Pay and Google Pay, albeit at a slower rate as in the case over the last year. At the end of Q1, we had 135,000 cards active across both platforms, up 113% year-over-year although you see the quarter-on-quarter growth has slowed as the penetration into the portfolio has increased. The same patterns are visible in the transaction volumes, which are up 268 -- 268.3% year-over-year. Going on to Page 28, online origination. Online-originated lending declined year-on-year in both the retail and small business segments, down 5.9% and 5.3%, respectively, reflecting the broader slowdown in the unsecured lending during Q1. At the same time, the fully online component has continued to grow in both segments, up 35.1% year-over-year in retail and 48.2% year-over-year in small business. We broadly maintained the available preapproved limits for both our retail and small business clients during Q1. However, as the severity of the situation became apparent during April, we took measures to position ourselves more conservatively while still seeking to maintain the availability of credit to our existing clients. This will be visible in the second quarter where you will see some reduction in the number of limits as we avoid lending to the riskiest clients, but mainly a reduction in the size of the individual limits offered to position ourselves a little bit more conservatively than we have been. On Page 29, on the weekend of the 4th of April, we completed the migration of our cards business from an internally-managed platform hosted in Australia, which was the legacy of our previous owners to a multiclient-outsourced platform based in Frankfurt. This is a market-leading platform with 80 million accounts on file in the EMEA region for more than 30 large clients. This move will save us more than CZK 50 million per year over the 10-year life of the agreement and also allow us to benefit from the extensive capabilities available off-the-shelf and, therefore, largely to avoid custom development. This was a very substantial exercise for us, which has been in the planning since 2017. And when you consider that 3 weeks before the go-live weekend, we suddenly faced the prospect of having to replan everything for execution remotely. I think it's a remarkable achievement that it was delivered on time and without any major disruption to the ongoing operations of the bank. I won't dwell on the digital road map on Page 30 except to say that we continue to increase our focus on deposit-related initiatives to complement our excellent progress in credit distribution and at the same time, we're working rapidly to integrate Wüstenrot into the bank's propositions and services. And with that, I will hand over to Jan Fricek, who will take you through the P&L development.

Thank you, Andrew. Good morning, ladies and gentlemen. Let me continue with the P&L section starting on Page 32 with our profit and loss statement. In the first quarter of 2020, we have delivered consolidated net profit of CZK 731 million, which corresponds to 12.7% return on tangible equity, 3.5% down year-on-year. The overall result was negatively impacted by higher cost of risk affected by IFRS 9 adjustment of CZK 475 million booked in Q1 amid coronavirus pandemic and versus macroeconomic outlook. Normann will provide you with more detail about the impact later in the presentation. In the first quarter, the business reported excellent 31% growth of the profit before tax and impairment, which was delivered through operating income expansion by 14.7% and broadly flat cost base year-on-year. Nearly 15% increase of the operating income was sourced by more than 4% growth rate in both net interest income and the net fee and commission income categories both I will comment on the next pages. Total operating income line was also significantly supported by CZK 277 million gain on bond sales reported within the income line -- income from finance operations. On the next page, we provide you with the DuPont tree of the profit before tax over the last 5 quarters. As you can see on the left side, despite more than a 30% growth rate of the pre-provision income, our overall result before tax declined year-on-year by 26%. The main reason, as I mentioned before, is the IFRS 9 procyclical credit loss provisioning booked in the third quarter. On the right side, you can see that significantly higher cost of risk more than offset the operating income growth, while operating expenses remained broadly stable year-on-year. Moving on to the further breakdown of the operating income on Page 34. Net interest income reached $2.043 billion in the first quarter this year at 4.9% growth rate. This is a result of the double-digit loan portfolio growth, which more than offset the pressure on the NIM resulting from the increasing cost of funding in the first quarter of 2020. Net interest margin in the first quarter went down by 30 basis points to 3.6%. This was mainly a result of a strong growth of mortgage portfolio and lower albeit stable yield on consumer loans. We will provide you with a detailed explanation of the trends later in the balance sheet section. Net fee and commission income increased by 4.3% year-on-year to CZK 486 million, mainly supported by higher third-party commissions, and exceptional growth of the other operating income resulted from the bond sale gain of CZK 277 million. Now on Page 35, we continue with the composition of our net interest income. The main driver was 8.2% growth of lending interest income amid our loan portfolio expansion, which you will see in more detail on the next page. The income growth was partially offset by higher funding costs we paid for the expanding customer deposit base. However, in the first quarter, we observed a stabilization compared to the previous one. Other net interest income grew by 47%, primarily due to still favorable interest rate environment and higher excess liquidity in Q1 this year. On the next page, you can see the lending interest income growth broken down into drivers where average lending portfolio expansion at 12.3% growth rate more than offset 20 basis points decline on the loan portfolio yield year-on-year. Andrew Gerber and Jan Novotny will comment on the drivers in the balance sheet section later. Moving on to the last page of the NII breakdown, page 37. Interest expense from customer deposits increased by more than 160%, which reflects our inevitable effort to strengthen our deposit base and liquidity position starting in the second half of 2019 and continuing in 2020. Here, I'd like to focus your attention on the cost stabilization in the first quarter this year, which resulted from our intentional repricing of CZK 20 billion retail sales deposits, down by 50 basis points effectively from the 1st of January this year. Fortunately enough, we haven't seen so far any significant deposit base erosion as the new rate was set on still very competitive level. On Page 38, we continue with the evolution of net fee and commission income reaching CZK 486 million in the first quarter, which is by 4.3% higher year-on-year. This solid growth was primarily driven by the income side going up by 6.5%, which I will comment in more detail on the following page. Here, as you can see, we have decomposed the income side into the 3 components. Continuing expansion of the third-party commission income stream is essential part of our strategy, how to offset the declining trend of the servicing and penalty fee income. In the first quarter, we reported excellent growth of the third-party commissions by almost 34%. This result was supported by newly established sales network focused exclusively on the distribution of investment funds and insurance. Transaction fees ended up by 3.3% billed last year, which is a combination of 2 negative effects: firstly, new restrictions on cross-border payment fees, which came into the effect in December last year; and secondly, also lower transactional activity in March amid COVID-19 pandemic outbreak. Driver of the 6.9% decline of the service and, again, penalty fee income was continuing erosion of the deposit servicing fee while the other 2 subcategories remained broadly stable over the last 5 quarters. Now we move to the cost-based development on Page 40, where you can see that we kept our cost base broadly flat year-on-year at CZK 1,332 million amid inflationary pressures and higher mandatory contributions to the regulatory funds. Our cost-efficiency program is primarily focused on 2 areas: Firstly, this year, we reduced the personal expenses by 1.8%, which is a function of declining number of average FTEs and also several other measures we put in place. And secondly, increasing productivity through the optimization of our physical footprint, and expanding in the digital significantly contributed to 4.2% savings on administrative and other expenses year-on-year. Before I will provide you with more detail on the next page, let me briefly comment on evolution in other 2 categories. Higher regulatory charges is a pure function of our expanding funding base. And depreciation and amortization line increased by 4.5%, amid our investments into the IT infrastructure and digital. Nonetheless, we are starting to see gradual stabilization of this category. Now we can move on Page 41. On the top of the page, you can see development of number of branches showing that over the past 12 months, we reduced the number by 31, of which 18 were closed in the first quarter this year. What is even more important from the cost perspective is that since 2017, we reduced the lease space by nearly 30%. This was enabled by our successful expansion on the digital front as well as improving sales effectiveness per banker. On the bottom, you can see the evolution of our workforce. At the end of the first quarter 2020, we employed 2,908 FTEs, which is by 158 less than a year before. And here, I'd like to highlight strong track record of the management where since 2017, the bank consecutively reported quarterly reductions in number of FTEs, in total, by 11.7%. Obviously, this trend will be interrupted for 1 quarter after the Wüstenrot acquisition, which incrementally brings almost 300 employees into MONETA. The P&L section ends on Page 42 with the composition of the depreciation and amortization charges together with evolution of the underlying fixed asset base. Reason for the overall 4.5% increase was mainly driven by higher amortization by 15.9% year-on-year. On property and equipment, we kept the balance bill the last year as well as the depreciation chart. And our capitalized lease commitments under IFRS 16 declined by 17.1% year-on-year, which is mainly driven by shorter residual lease terms of our branches and headquarter buildings. Now ladies and gentlemen, I will hand over to Jan Novotny, who will continue with the balance sheet.

Thank you very much, Jan. So now please let me, together with my colleague Andrew Gerber, to walk you through the balance sheet section of today's presentation. And let me start on the Page 44 where you can see our balance sheet position and its breakdown to the main components as of the end of Q1. We have reached almost CZK 250 billion balance sheet with a very strong and balanced structure. We have also achieved a very good growth in the key category, net customer loans of almost 13% year-on-year. But as you can also see, we have -- and this is even more important in the current COVID and post-COVID environment, grow our core customer deposit category even faster than the loans, and we have achieved an excellent growth rate of 18% year-on-year. This achievement help us to further strengthen our balance sheet. You can also notice the increase on both repo and reverse repo operations as the market is still offering a favorable conditions for such a transaction. Now let me spend a bit more time on the investment securities category and walk you through some additional information on the Page 45. First of all, let me mention one important event in Q1 as we have completed very successful sale of bonds in nominal value of CZK 3.8 billion, and we have realized a gain of almost CZK 300 million. You can also see the development of the share of our bond portfolio being hedged by the interest rate swaps that we have started to do in Q1 -- Q2 last year. And we are now oscillating around 50% of the portfolio being hedged for the last 3 quarters. You can also see the evolution of the balance of the securities. And most importantly, on the bottom of the page, the evolution of its yields, which stood at 1.8% at the end of Q1. On the next page, Page 46, you can see more detailed split of the key category, our gross performing loan portfolio by customer segment. And again, we have achieved superior growth in all strategic areas being it retail portfolio, small business portfolio, or in further growth in profitable portfolio in SME segment. We're able to maintain the fast growth of previous years, and the overall balance has grown up by more than 13%. Overall share of customer segment develops in line with our strategy to gradually increase the share of the retail and small business segments in line with our strategy -- in our overall strategy. As you can see on the bottom of the page, we have reached 58% of the retail share on the overall MONETA group exposure. Also given the completed acquisition of Wüstenrot, you can expect the shares to grow significantly for the Q2, 2020. Now moving to the Page 47. Here, we can see the evolution of both loan portfolio yield and new production yields split by volume. You can see that the intense competition, declining market rates and especially higher share of mortgages drive the shapes of the curves. But I would like -- I would suggest to go directly to the detailed product overview on next few pages. So let me hand over to Andrew to walk you through the key successes in retail segment.

Thank you, Jan. On Page 48, we've added some detail on new production volumes in our retail lending categories. Overall, new production was up 1.7% year-over-year. However, this was driven by strong growth in mortgages up 35.8% year-over-year as the result largely of a strong pipeline of deals coming into the new year. In consumer lending, on the other hand, we immediately felt the impact of the pandemic with production falling 19.2% year-over-year. Auto benefited from a stronger start to the year but also suffered a dramatic slowdown in production during March when the dealers on which we relied for distribution were essentially forced to close, resulting in volumes down for the first quarter overall, 2% year-over-year. Going to Page 49. We look at the retail portfolio overall, which grew 19.2% driven by the mortgage portfolio, which was up 38.3% as a result of the strong acquisition, which you saw on the previous page. The consumer loan portfolio grew 6.6% year-over-year, which is slowing from 9.2% for the full year 2019. In auto and leasing, balances decreased 10.1%, driven primarily by the decline in leasing and the revolving products declined 7.2% continuing the long-running trend, which appears to have been somewhat exacerbated by the crisis, which has removed many of the normal opportunities to spend and also encourage clients to think about conserving liquidity. Going on to Page 50, we show the portfolio yield along with the modeled new production yield, which is slightly different to the new volume rate, which we showed on Page 14 but are used here to be consistent with and comparable to the portfolio yields, which we show on this page. The yield on the mortgage portfolio has stabilized at 2.1% supported by new business yields, which appeared to have bottomed out at around 2.2%. But it now remains to be seen how low interbank rates will go and how mortgage lenders will respond to this. We already see some signs of renewed price pressure in the mortgage market with some lenders beginning to reverse recent rate increases. In consumer lending, the decline in portfolio yield continues to slow, supported by stabilization in rates on new production. Although, again, in Q1, we saw lower new volume yields as a result of increased competition for volume as the market slowed. In auto and leasing, you can see the improving trend with portfolio yield increasing 140 bps year-over-year as we improved the pricing for new production. And finally, in the cards portfolio, yields have remained broadly stable. And with that, I'll hand back to Jan, who will take you through the commercial section.

Thank you very much, Andrew. Now let me go just to the Page 51 and summarize the key growth rates of the new production in the commercial segment. We have achieved a very good overall growth of 10.4% year-on-year. And as you can see more detailed growth rates for separate direct categories on the right side of the page. We had a good growth in investment loan category where the growth rate was partially driven by additional new volumes booked, thanks to several profitable medium-sized transactions. But the growth rate was also partially driven by lower production in Q1, 2019, comparatively. Interestingly, the new production in SME was not much affected yet by the COVID crisis in Q1 as the most of the transactions have the processing time rather in weeks than in days due to collateral appraisal of cadaster registration, et cetera. In contrary, in small business, we already see some drop in the new production in Q1 as here the production and the customer-investment-plan horizon is much shorter compared to SMEs. Last category I would like to comment is auto loans and leasing production where the business was very much influenced by the state decision to close all the car dealers since March and therefore, for example, for auto, the new production at the end of Q1 dropped below 30% of the normal production. Now let me move to the next page. And on the Page 52, you can see the evolution of the commercial gross performing portfolio. And again, you can see a good overall growth of 5.8%. This good result was driven largely by the small business segment where we have achieved a growth rate above 40% year-on-year. But from a portfolio perspective, it is also important to mention the growth in dispersed working capital. This is the chart in the middle bottom of the page, while the increased utilization is not driven by the increased demand for the working capital due to COVID crisis but is driven by the drawing of some well-priced larger facilities already during February. And we expect those lines to be drawn until the end of the year. Now on the Page 53, similar to retail, you can see the yields evolution on both new volumes and portfolio levels. I will probably comment mainly the small business yields that have dropped to 6.7% due to a very successful TV campaign in spring. However, the campaign was stopped due to COVID situation mid-March, and the current yields in Q2 are significantly above the portfolio levels. However, with the significantly smaller new production and given the market condition, we expect to keep the status quo at least for some time. In investment loans and auto, we maintain increased pricing on the new production and working capital. The fluctuation of new volume yields is caused by limited new origination, the euro-CZK mix and on the portfolio level, I already mentioned, dispersed high-priced facilities. So that was the story for the lending part of the balance sheet. Now let me please hand over to Jan Fricek to walk you through our results on the liability side.

Thank you, Jan. I'm now on Page 54. In the first quarter of 2020, our funding base continues to grow in overall by 24.4% year-on-year. In retail, we achieved 22.5% growth rate, which was primarily delivered through attractive sales proposition offered during the summer of 2019. In commercial, you can see a growth of 10.5%, which was mainly sourced by term deposits, further improving our liquidity. And finally, more than 60% growth in the wholesale reflects by almost CZK 10 billion higher volume of opportunistic repo operations. We reported at the end of the first quarter this year in comparison with the last year, plus in September and January, we issued Tier 2 bond in total amount of CZK 4.6 billion, also reported within the wholesale line. On Page 55, as you can see, we entered the COVID-19 pandemic with the healthy and strong liquidity position, reporting LCR nearly [ 56% ] above the regulatory environment. Please note that this number was already adjusted for the anticipated settlement of the purchase price for Wüstenrot. On the right side, you can see that the highly liquid assets increased by 17.7% year-on-year. Mainly sourced by the deposit base expansion, while the net outflows increased by only 4% in the same time. On the next page, there is a first decomposition of the cost of funds. Even though overall cost of funds increased by 32 basis points year-on-year, we can see a stabilization in the first quarter of 2020. Lower cost of customer deposits was mainly driven by successful repricing of savings deposits in retail, while commercial segment remained stable over the last 3 quarters. And wholesale funding costs increased by 80 basis points year-on-year, which is driven by higher cost of opportunistic repo operations as well as newly issued Tier 2 bond. Page 57, summarized development of the retail deposit base. Drivers of the year-on-year growth, I have already explained. On this page, I'd like to highlight gradually changing composition towards more costly savings accounts where we achieved more than a 46% increase of the balance, while the current accounts remain stable. Our limited ability to expand current account balance was mainly caused by more attractive savings account propositions whether offered by us or other market competitors. However, recent cuts of the 2-week repo rate might reverse the trend going forward in favor of the cost more beneficial current accounts. Cost differential between these 2 products is provided on the following page. While the cost of current accounts remained stable at 2 basis points, cost of the savings and term deposits jumped up by 48 basis points year-on-year. Visible decline in the first quarter this year is a positive effect of the repricing of savings accounts, which I have mentioned before. I'm now on Page 59, showing commercial deposit base expansion by 10.5% year-on-year, which was primarily driven by increasing bands of term deposits from financial institutions, namely insurance companies or pension funds, accompanied by growth in both current as well as savings account propositions. A breakdown of the cost of commercial deposit be present on the following page. Here, you can see that commercial cost of funds remained stable compared to the previous quarter, however, was up by 21 basis points year-on-year. Cost of current accounts [ stabilized ] between 6 and 7 basis points, while the cost of savings and term deposits increased by 54 basis points due to gradual stabilization over the last 3 quarters. We continue on Page 61 with the wholesale funding overview. Significant volatility of balances quarter-to-quarter can be explained by the opportunistic repo operations. And apart from the repo operations, the wholesale funding expansion is also driven by issuance of the sub-debt together with the external financing engaged for MONETA auto in total amounts, CZK 2 billion. And we completed this section on Page 62, with the wholesale cost of funding overview. Cost of repo operations has dropped in the first quarter this year, the cost of other funds increased in the same time by another 68 basis points mainly due to additional issuance of the Tier 2 bond. So this concludes the balance sheet section. And now I will hand over to Normann, who will take you through the risk metrics and asset quality.

Thank you Jan. Good morning. We are now on Page 64 with an overview of cost of risk for first quarter 2020. Now due to COVID-19 and the expected adverse impact on the macroeconomic development, adjustments of the key macro variables, in particular, unemployment rates and GDP of our IFRS 9 provisioning model were made -- which led to a significant increase of cost of risk compared to the first quarter last year, where we also still benefited from significant gains from NPL sales. As a result of that, Q1 2020 cost of risk amounted to CZK 684 million or 1.73% compared to a net lease of CZK 14 million or 4 basis points back in Q1 2019. If you look at our 2 key customer segments, retail cost of risk amounted to 1.66%, and commercial 1.81% or an absolute number, CZK 379 million in retail and CZK 305 million for the commercial segment. The impact of COVID-19 related measures like the payment holiday as well as the adjustments to the macro variables amounted to 120 basis points or CZK 475 million. The cost of risk-adjusted for that impact would have been 53 basis points, which is comparable to the Q4 2019 number, which was 56 basis points, which actually, at that time, was worse than in the first quarter of this year. As a result of the significant book up of provisions, also our total NPL coverage increased by more than 10 percentage points from 108% to close to 119% at the end of Q1. Moving to Page 65. I would like to provide you with a more granular overview of what's within the CZK 475 million book-up due to COVID and macroeconomic changes, which we have made. There are 3 key components: The first one is the core model-driven impact, which amounts to CZK 350 million. This is driven by the increased PDs, which in turn moved migrations between Stage 1 and Stage 2, and also an increase of the underlying coverage shifts in those 2 stages; the second impact is related to the reclassification of some of our larger commercial customers, where we see an adverse impact resulting from the economic downturn. So here we move then from Stage 1 to Stage 2 as a total provisioning impact of CZK 81 million; and last but not least, the third impact, this is related to the loan moratorium, which was granted in the course of March and April. Here, we saw book-up of CZK 44 million. Now also the bulk of these exposures we have decided to remain in Stage 1, also in line with the recommendations of Everon and the regulators. But we have embedded a model of increased risk within the staging algorithm and around 15% of those who were granted payment moratorium moved and were reclassified to Stage 2, which entered that to the CZK 42 million book-up. Moving to Page 66. Here, we have an overview of gross loan portfolio balances and the NPL balances. While the gross loan balances increased by 13% year-over-year, most importantly, within the retail segment, the NPL ratio increased only by 6.5%. If you look at the overall NPL ratio, this dropped from 2% to 1.9% at the end of Q1. And if you look at the off-balance sheet NPLs, here, we saw even a more pronounced drop of more than 85%, and we ended up with a balance of around CZK 140 million at the end of Q1. Moving to Page 67. Here, you have -- you see an evolution of the inflows and outflows of NPLs over the last 4 quarters. I think it's a fairly positive picture. And it shows that the percentage of the NPL formation expressed as an average of performing receivables remained very stable on the level of 0.5% over the last 2 quarters. Moving to Page 68, and also the subsequent pages. Here, we would like to give you a bit more granular overview what happened actually within the 3 stages and migrations underneath. So on Page 68, as you can see here, the balances and coverages in Stage 1 and 2 are largely driven by COVID-19 and anticipated worsening of the macro, which led to higher PDs within the IFRS 9 model. The biggest changes can be noticed in Stage 2 where we saw a significant inflow from Stage 1 to Stage 2. The increase was more than 120% year-over-year and balances more than doubled quarter-over-quarter and now stand at more than CZK 8.9 billion. The underlying provisioning balances increased by more than 93% to CZK 681 million. Stage 3 balances increased by 6.5% year-over-year, where [ percentages ] dropped from 67% (sic) [60.7%] to close to 56%, which reflects the fairly young aging structure of the NPLs and also partially a higher share of secured receivables requiring lower provisioning coverages. On Page 69, here, the portfolio balances we show separately for retail and commercial. Year-over-year, Stage 1 retail receivables increased by more than 17%, and the biggest driver is mortgages, and we will see this on the next page, whereas commercial grew by 1.2% year-over-year. As for Stage 2, again, due to COVID and macro adjustments, we saw an increase north of 100% in retail, it increased from close to CZK 1.7 billion at the end of last year to CZK 3.4 billion and in commercial from CZK 2.6 billion to CZK 5.5 billion at the end of Q1. And as far as Stage 3 is concerned here, we saw an increase in retail by 9.5% and in commercial, an increase by 1.4%. Moving to Page 70. Here, we have a breakdown. Within retail on the left-hand side, you have the secured products, which is the potential mortgages portfolio. And on the left-hand -- on the right-hand side, the retail unsecured gross loan portfolio balances. Residential mortgages grew in Stage 1 by almost 36%, where Stage 2 increased by more than 140% since the model shows the higher sensitivity on PD changes. Stage 3 receivables dropped by 16% and coverages overall across all 3 stages, remained fairly stable and on a fairly low level, due to low LGDs, which is also reflected in the observed very low through the cycle cost of risk, which we have seen for mortgages in the last 12 years. Retail unsecured Stage 2 balances increased around 10% (sic) [110%] and by 12.8% in Stage 3, respectively, and Stage 3 coverages have been stable over the last 3 quarters. Moving to Page 71, that's the last page on the staging overview. Here, we show an overview of the commercial book. On the left-hand side, you have the so-called individually managed gross loan portfolio balances. On the left-hand (sic) [right-hand] side, the so-called pool managed, which includes the small business, most of MONETA leasing and MONETA auto. Here, you can see Stage 1 balances increased by 1.2% in both subsegments. Again, Stage 2 driven to COVID by more than 110%, respectively, 120%. And in the Stage 3 and the individual managed, we saw even a drop of the balances by 12.5%. And in the pool managed, we saw an increase by more than 13% year-over-year. Coverages underneath remained fairly stable over the last couple of quarters. And last but not least, since we released, this is very important also to give you an overview of what happened on the payment moratorium over the last 2 months. What you can see on Page 72 is an overview of the penetration levels. On the left-hand side for the retail portfolio. On the left -- on the right-hand side, for the commercial portfolio. We have broken it down to what has happened until the end of March and also the most recent data, which is the 27th of April. So all in, 16% of our retail customers asked for the payment moratorium. And in the commercial segment, it's altogether 12%. If you take this together, combined, the balances underneath are CZK 22.5 billion, which were subject to the payment moratorium until the 27th of April. And with that, I will hand over to Tomáš Spurný.

Just briefly on capital structure. If you turn to Page 74 we depict the requirement -- regulatory requirement and the structure and where our overall target stands. So we have decreased the capital target of the bank to -- from 15.9% to 14.9%, and this is driven, as I mentioned already, by the countercyclical buffer decrease as communicated by Czech National Bank. On Page 75, you have an overview of our accounting and regulatory equity positions. On accounting, we have CZK 25.5 billion. So you can see that year-on-year, the decrease is about 1.2%. And from a regulatory equity perspective, you can see how we have optimized the position through issuance of the Tier 2 bonds initially CZK 2 billion, now in total, CZK 4.6 billion. So the regulatory equity is CZK 27 billion, enabling us the very comfortable total capital adequacy ratio of 21%. In the second quarter, we expect to be in the range of 17.5% to 18% including consolidation of Wüstenrot. And then on the right hand, on the bottom right hand, we show you the RWA density evolution on a year-to-year basis. This actually declined quite considerably by 9.4% and we stand at 63% on the loan portfolio, and the regulatory number is just below that. On Page 76, we show you evolution of free capital and excess capital and evolution of the RWA since the beginning of the year. So starting with RWAs, we have growth of 2.4%, which is quite good taking into account how the bank grows overall. On the walk, you can see that -- you can see the increases coming from credit risk categories and the overall development. On excess capital, we currently -- or prior to the acquisition of Wüstenrot, we had almost CZK 8.2 billion of excess over the legal requirement. So again, we have plenty of capital to absorb Wüstenrot and to continue -- to continue in expanding the bank's activity. I think at the closure of the presentation, what is important is that we try to provide you a view on how the total operating income will evolve at CZK 11.6 billion or likely higher, CZK 11.6 billion is the absolute minimum. On the cost base of the bank, we have fairly aspirational goal to take the cost base to CZK 5.4 billion, which is significantly below the now canceled guidance published on February 6. On the cost of risk, we would like to stay in the range of 170 basis points and slightly higher, as communicated in the COVID pandemic section. Overall, I am extremely thankful to my colleagues and to the staff of the bank because we've operated continuously under very difficult circumstances in the -- during the first quarter. And I would like to reiterate that apart from keeping the bank operating well, we've accomplished 2 strategic goals, which is acquisition of Wüstenrot, we've bought it at a lower price. And we've completed a high value-added project on migration of the card ecosystem onto a new provider, which will provide estimated cost benefit of CZK 50 million per year. So now everything depends on how the Czech government will support the Czech economy and mitigate the impact on MONETA. Thank you very much, and we are open to your questions.

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

Two questions, please. Firstly, on cost of risk, could you please indicate what the cost of risk guidance would have been if you were to assume the adverse scenario that you showed in the presentation? And also in case there were no support measures from the point of view of customers like repayment moratorium and so on. Also in case you already have some sort of indications in terms of cost of risk for 2021, at least directionally, if not specific. So that is my first group of questions. And the second one is on dividend policy. How do you foresee the redemption of dividend's path in terms of interim dividends, special dividends [indiscernible] from 2020?

Okay. Anna, let me try to do it in reverse order. So on dividend policy, we are committed to pay dividend. We hope trust that come third quarter, we will be able to reassess the situation and return back to normal. So the working hypothesis is that we would first set all the balance of the 2019 dividend, and we would consider adding to it an interim dividend for first half of 2020. This depends on the bank remaining profitable. This depends on the bank remaining liquid. And this demand -- this depends on the bank being above -- remaining above the capital adequacy target that we have communicated today, which is CZK 14.9 million. So I would say that the probabilities that we will satisfy these components of consideration are very high. And lastly, it depends on our ability to manage the discussion with the Czech regulator, Czech National Bank not to prevent us from doing so. So we are committed to this, and we will do anything and everything possible to reverse the situation, provided that these conditions are satisfied. On the moratorium, overall, we are currently at the level of CZK 32.5 billion. This is number as of yesterday. We expect that the number could go up to anywhere between CZK 35 billion to CZK 40 billion. Whereas we used to see 2,000 applications flowing into the bank on a daily basis. Now we are reaching a level of 500 and the inflow is considerably decreasing. So we think that we are actually seeing an end of the moratorium. And I would like to stress one thing, which doesn't come out of the numbers. The fact that we've provided the voluntary moratorium, which is structured for 3 months, we have actually mitigated the situation quite considerably. Because if you look at the penetration, there are 2 moratoriums. One is the voluntary that we initiated on March 19. And then there is the state legislated, which was initiated on April 12. So far, the state is less than 10% or thereabout in terms of impacted portfolio. So the voluntary is shorter, is for 3 months, and the voluntary doesn't include the interest rate ceiling of 9%. So as long as the clients do not ask again, we will not have to change the price in both the term and the interest rate matter is quite considerably. On cost of risk, absolutely no view to communicate today on 2021. And we don't want to speculate on the severe -- on the severe scenario. Because at the moment, any shape of this scenario that we will create is really highly subjective. No one knows what will come. We have tried to communicate what is our intent on the cost of risk in order to maintain a prudent position in terms of charges that we take, in terms of coverages that we've maintained. And maybe Normann wants to add a couple of words, but I don't want to speculate on a U-shaped, long, prolonged scenario because we are not at that moment as of today.

This is Normann. Just a few additional points to give some more flavor to the uncertainties which we are facing apart from the overall macroeconomic outlook. But if you take the payment moratorium as such, what does it do? Essentially, it is freezing the portfolio and also prevents banks from getting value of portfolio data who is becoming delinquent not because all the customers will stay current as long as they use the payment merit moratorium, and it goes until the end of October at the latest. So this is #1. So what we have to find out is how we can attack customers without knowing whether they become delinquent or not, but using other tools to see who is most likely to stay current after moratorium and which customers are going to default. This is the challenge #1. Challenge #2, unemployment rate, which is extremely critical also within our IFRS 9 model. If you look at the data for Q1, we still haven't seen any pickup of unemployment rates so far. But obviously, it will increase. But the question is, when is it going to increase and to which magnitude? So far, customers have benefited now from the moratorium on the one hand side, but also from the government-sponsored programs like [indiscernible] support for entrepreneurs but also companies, which will probably delay potentially of [ workforce ] in businesses. So the longer this lasts, the less likely it is that you will see major layoffs, but if the government-sponsored programs will not work or will cease at one stage because they cannot be continued and carried on ad infinitum, then probably you will see major layoffs, and this will obviously translate into a higher forward-looking PDs due to the IFRS 9 rule. So I think these are 2 current key challenges, which I see, in particular, for the retail unsecured portfolio because it's very much depending on the actual and anticipated future unemployment rate.

Right. I would also add one very important thing. We will -- the moratorium on retail expires at the end of October. Then if you look at the odds of defaulting our unsecured portfolio, we actually have around 60% penetration through payment protection insurance. So if people then lose their jobs, and are unable to pay us, the odds are 60% of them can claim the benefit of the insurance and the insurance will cover 6 payments. So we are anticipating in whatever thinking that we have today that the peak of default, we will actually see sort of towards mid of next year and beyond. So until then, under whatever scenario we are actually well protected, but philosophically, the management has the position that as we have a very strong provisioning capacity as we generate a very good pre impairment income, we will take more or less conservative position on provisioning, given the magnitude of uncertainty and difficulties with models that were not built for this situation. So from conservativeness point of view, if there were a scale 0 to 10, we are 6.5 to 7 on that scale.

Yes. And maybe one more point on the IFRS 9 model. I mean, the IFRS -- new IFRS 9 world with the forward-looking expected losses, this is the first time that it's going to be tested. And those who invented that, not quite sure whether they all had in mind the crisis of that magnitude and of that nature, which is the global crisis. So I think what will also be necessary to review IFRS 9 model that banks apply differently across markets and countries. So I think a review of IFRS 9 models also will be very important to understand what the crisis of that magnitude and potentially also lasting for a longer period of time, is going to do with the model. So I think it goes hand-in-hand. Model understanding, model review, together with the macro, which we're going to observe and put the adjustments into the model as we move.

The next question is from Simon Nellis of Citibank.

Thanks very much for the call. Your presentation is very comprehensive. Anna Marshall always asks questions first. It's hard to come up with new questions. My question would actually be more technical on the capital. I think you mentioned that you have part of last year's profit included in the first quarter CET1 and some of the first quarter profit. Can you just clarify what actually you've included? And what is the, if any, dividend deductions that you'll be making on a quarterly basis if you do intend to reinstate a dividend later this year? Or are you, for the time being, just accruing all of the quarterly profits into the CET1? That will be my first question, and then I have one other.

Okay. Hello Nellis, this is Jan Fricek speaking. So regarding --

Simon.

Either one is fine.

I apologize. I'll call you Nellis. To your question, the retained net profit of the previous year is automatically included in the regulatory capital in the first quarter next year. So CZK 1.7 billion of suspended dividend was automatically included in the regulatory capital in Q1 2019, which pretty much constituted the growth. However, of the Q1 profit this year, out of that CZK 730 million, we have asked Czech National Bank to include 20% of that into the capital, expecting that the 80% of the net profit will be available for future or for distribution as a dividend in the future.

And I would add, Simon, one more thing. When we paid the interim dividend in 2019, we paid it in December. Technically, that was paid out of retained earnings of 2018, which were included in the capital because of a quirk. In Czech legislation, they have to have full set of financials audited in order to pay the dividend. So this should not be the fact that we automatically include the retained profit of 2019 should not be taken as any signal of significance because the interim dividend in midyear always comes from the previous year's retained earnings. So it means absolutely nothing. What means a lot is that the first quarter profit, the second quarter profit, the third quarter profit, if there are any, will always be included at a low rate in order to have a position for, let's say, constructive debate with the regulators so that we are consistent in this approach, and we have not changed that approach. That is the significant signal.

Okay. So going forward, it sounds like you'll ask for roughly 20% of quarterly earnings to be included.

Right.

That's clear. And then my other question would just be back on the moratoriums. You're not capitalizing interest, right? So do you expect an NPV hit? Would that go through, I guess, NII net-net interest income? And what is the magnitude?

If you look at the guidance, the CZK 900 million decrease from the previously guided CZK 12.5 billion of operating income, we are at CZK 12.6 billion. And the interest, which is incurred on the voluntary -- on the voluntary moratorium is repaid through additional installment. So effectively, the 3-month delay on the voluntary results in 4.5 months because there are sort of 2 installments attached at the end of the loan.

I mean, in practice, the way the way it works is that the interest is collected at the end of the 3-month repayment holiday. So in effect, it's very similar to capitalizing it after the end of the 3-month payment holiday, on the voluntary scheme.

On the state, it works differently.

So on the state's -- on the state's scheme, we are obliged to hold the unpaid interest until...

In a separate pocket.

In a separate pocket until the very end of the loan until the final repayment or until early prepayment. And effectively have this as a separate outstanding, which is not interest-bearing for the remaining period. So it's the last thing to be repaid.

And hence, the philosophy and hence my statement that we actually save the bank a lot of money. Because on the state scheme, you are not allowed to charge interest on the deferred interest, which is held until the end of the loan. So the fact that we have a penetration of about 10% of the total deferred by the state is very cost saving because the politicians, as they always do, created a scheme which pushes part of the losses on to us. So by providing the voluntary scheme, we actually minimized the decrease of net present value. Hence, we also minimized the potential writeoff of the variable distribution costs, which are capitalized on our balance sheet and amortized through the effective interest rate. So when -- at the height of the crisis, we actually conceived a plan how to provide an alternative to our clients, which is more symmetrical from interest point of view. And now we face also the uncertainty and this is linked to the guidance of how many people will opt later on for the additional 3 months that the state loan repayment moratorium offers them, i.e., the length, the difference between 6 and 3 months, 6 state, versus 3 months voluntary. This gets a little bit technical, but the economic impact, given the anticipated volume of CZK 35 billion to CZK 40 billion under the moratorium is actually quite considerable.

And how much roughly would that be if -- I don't know, all those customers came back and asked for another 3 month extension under the state program?

I'm afraid we don't have the number at the ready now, but it's in hundreds of millions. And we will -- we can give you an indication. We never care to actually calculate this, but back of the envelope calculations that we done on that, make it quite considerable because you have 2 effects. One is you prolong the moratorium to 6 months, hence, the interest that you charge increases and the fact that you have to backload it into the loan and you can't charge any interest on it, actually amounts to providing free loan interest -- interest-free loan at a loss to each customer. And the calculation is actually quite difficult because you need to understand not only the penetration of the moratorium, but the average duration of the portfolio. And the other impact that it has is that it significantly reduces the NPV of the loan. So whatever you carry on your balance sheet in terms of capitalized commissions that you previously paid to distribution agents you have to write off actually. So there is a double whammy of negative impact.

Maybe just to confirm then, in a little bit more complicated applies to retail and small business regarding the legal entities, we can postpone or keep on postponing only the repayment of the loan but the customer is still charged and paying the interest. So it is a bit complicated.

So they've created a fairly big complexity, not only intellectual complexity but also, there is implementation cost to all of this because you have to augment the operating platforms based on product lines. And then you also have to slice it by customer segment or legal definition of your customers. So it was not a small task in here. I'm really grateful to my colleagues, both management and staff of the bank because, if you look at us, we are able to effectively turn each request into loan deferral within 24 hours today. So we've automated 85% of the workload behind it and you have many permutations on the same theme because of how the legislation has been written on the government loan repayment moratorium. So this was a huge pressure on the bank operationally in first quarter.

The last question is from Andrzej Nowaczek of HSBC.

I have 2 simple questions, one on revenues and one on costs. Can you please confirm that your operating income guidance includes 100 bps more of policy rate cards. And also does it include further -- does it include further gains on the bond portfolio?

Of course, it does.

Yes.

Okay. And what is the Wüstenrot acquisition gain assumed to be? If I remember, it was around CZK 500 million?

Well, it's anywhere between CZK 500 million and CZK 825 million, depending upon the fair market value calculation. And the CZK 825 million is simply taken as a difference between the consideration paid and the book value available at the moment of acquisition. It's highly unlikely that we would go -- we would agree to fair market value calculation, which is above the book price, the net book value. So CZK 825 million is the delta between the cash paid and the net book value, the CZK 500 million is a considerable, let's say, estimate, conservative estimate that the fair market value is lower than the book value of the entity, and we simply don't know the answer what it is because we are currently working with Ernst & Young to establish the calculation. And then we will have to discuss the calculation with our auditor, Deloitte to agree to it. So it could be anywhere there. That's why I said that the operating income guidance is 11.6% and that has built in assumption of CZK 500 million gain on the acquisition. If the gain were to be CZK 825 million then the guidance would obviously be CZK 325 million higher than that, but we don't want to commit to that because we simply don't know the answer.

Okay. And on costs, how do you think about the CZK 300 million savings? Does it mean some of these costs will show up next year? Or is it a permanent, so to speak, reduction?

So the cost base, the CZK 300 million in the cost base is a temporary reduction because it constitutes very significant -- very significant reduction of discretionary spending. For instance, it cuts our marketing budget by close to 40% of -- on a 3-quarter on committed basis. So whatever we haven't spent in the first quarter, we cut quite significantly. So -- and many of the other cuts are considered by the management as temporary because we simply respond to a situation where some of the projects that we have to do are being postponed into 2021 as we want to conserve the pre-impairment profit capacity of the bank to finance whatever [ state ] charges they have to make to maintain conservative position and still remain profitable, and still maintain ability to pay dividend. So it is at the moment -- at the moment, it is temporary. In the medium term, I think if you take the guidance published on February 6, this remains our target medium-term as medium-term, we would like to make CZK 5 million in net profit.

So I hand back to the speakers for the conclusion.

Okay. Do we have any more questions from the audience, please?

There's one question from [ Miro ] [indiscernible] of PKO Securities.

Hello, everyone. Can you hear me?

Yes.

Hello? Okay. I'm sorry, I'm...

[indiscernible]

Yes, I'm calling from mobile and I'm really having some troubles following the call. [Technical Difficulty] repeat some of the questions. But really quickly, what is the source of the difference between the original guidance on the operating revenue and the current guidance? Is it coming from the downward adjustment in the NPV of the moratorium included loans? That's question #1. Question #2, can you repeat what the total bad will -- following the Wüstenrot acquisition? And question #3, did you incorporate any further rate cuts in your operating income guidance for this year?

I'm sorry, I thought we've covered it, but the cut on the operating income is coming mainly from the decrease of the interest rate. This is the main source. And yes, the operating income guidance assumes additional cut down to 0. And if you look at the moderate scenario, you actually have the timing of the cut in the third quarter of 2020, down to 0. So we anticipate 0 interest rate with this guidance. On the bad will, as you called it, the range is CZK 500 million to CZK 825 million. CZK 825 million constitutes the difference between price paid and the net book value of Wüstenrot at the time of acquisition. And as I said, we are working with an auditor and adviser to establish the fair market value so it could be anywhere between CZK 500 million and CZK 825 million, as we've communicated.

And our aim is to book the gain in the second quarter, and we consolidate Wüstenrot for the first time.

And the rate cut outlook?

Sorry?

The rate cut outlook.

The rate cut outlook Is published on the Page 18 in the presentation, you can see the timing of the cut, the graph of the moderate scenario and the severe scenario, both are clearly disclosed in the presentation.

On Page 18, on the right side, bottom chart shows that the 2-week repo rate should go down to 0 in the third quarter in severe scenario and in the fourth quarter in a moderate scenario.

There are no further questions.

Well, the last question, would there be one? And then.

There are no further questions.

So we would like to thank you all to participate on the telephone. Our objective was to provide a wider presentation. So we apologize that it took a bit longer, but we wanted to provide you with additional detail on production of loans and deposits in the bank and also the COVID related outlook. And in the risk section, we expanded the breakdown of the staging and in the appendices of the presentation, you also have migration figures. How does migration look between different stages. We are grateful for your participation, and we are looking forward to the next quarter's call, and we'll provide you with additional details. And we will publish relatively soon our next anticipated date for the regular shareholder meeting. We haven't set it, but we hope to hold it in the month of June 2020 as we were forced to cancel the April shareholder meeting. Thank you very much. Have a good day, and we are looking forward to the next conference that we have. Thanks.

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