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 customer's request, this conference will be recorded. [Operator Instructions] May I now hand you over to Tomáš Spurný, Chief Executive Officer and Chairman of the Board of Directors. Sir, please go ahead.

Good afternoon, and good morning to the U.S.-based shareholders. Ladies and gentlemen, I have the pleasure to open today's conference call on our results of third quarter of 2020. I would ask you to turn to Page #4, where we comment highlights of our financial performance. The bank generated operating income of CZK 9.4 billion as of end of third quarter. This obviously includes the one-off gain that we have from the acquisition that we closed in the second quarter. The one-off gain is CZK 1.1 billion. During the same period, we had accrued operating expenditures at the level of CZK 4.1 billion. Additionally, the 2 items result in pre-impairment profit before loss provisioning in the amount of CZK 5.3 billion, which represents 28.5% increase year-on-year. In terms of cost of risk, due to COVID pandemic, we have elevated cost of risk, which came in at the end of the quarter at CZK 3.1 billion. All of that summed up constitutes net profit after tax of CZK 1.9 billion. On the next page, on Page #5, we look at growth rates and sustainability ratios. In terms of deposits, the bank has grown year-on-year 48%. We've also expanded the lending activity by more than 46%. This makes us the fastest-growing bank in the Czech Republic. With respect to quality of assets, we continue to enjoy subdued nonperforming loan ratio at the level of 1.5%, and we stand also very well capitalized. We enjoy capital adequacy ratio of 17.4%. On top of that, the bank commends formidable liquidity to support future growth. The liquidity coverage ratio is 195%. So if we can turn to Page 7, we wanted to share with you our medium-term targets with respect to balance sheet structure, market shares and growth rates across the segments that we serve through our business model. If you look at retail and small business proportion in the balance sheet, we are seeking to have 75% share of the 2 currently after the acquisition. And as a result of organic growth, this proportion is at 69%. Then in medium term, we would like to obtain market shares of 10% in mortgages and retail deposits, respectively. We currently commend 7% market share in the deposit category and 6.6% market share in mortgage category, and the bank is currently experiencing record demand as of third quarter in origination of mortgages. Currently, we have already pipeline of transactions in the amount of CZK 16 billion matched with off-balance sheet commitments to our customers in the amount of CZK 7 billion. So we are fairly well on the way to fulfill this aspiration. With respect to unsecured retail market share, this is consumer lending. We are continuing to defend market share. The minimum benchmark for us is 17.5% share. And in addition to that, we would like to obtain 5% market share in distribution of asset management and grow our bancassurance franchise at a rate which exceeds 15%. With respect to business -- with respect to small business targets, we would like to maintain growth at 15% in this very profitable segment of the bank, expand the customer base to over 150,000 clients in the horizon of 3 years. On SME, the growth rates are 1/2 of the small business. This is the middle market where we would like to grow effectively with the market, focusing on profitability. Speaking of profitability targets, on Page 8, we have both financial metrics and sustainability. So the bank aspires to deliver a return on tangible equity in excess of 15%. Based on medium-term business plan, we believe that we will return to this level or slightly below this level in 2022, and subsequently, overperform it in 2023 if the assumptions that we have made in the business plan prove to be correct. And here, we also portray the levels of the incremental ROEs that we wish to achieve as minimum under respective business lines. Speaking of sustainability, we put a relatively high figure on NPL ratio because we believe that in the next 12 to 18 months, we will see significant inflows into the nonperforming category due to difficulties of customers as a result of the COVID pandemic. We would like to maintain solid coverage of the portfolio. We currently have stock of provisions divided by portfolio, which we call overall coverage of 2.5%. And we set the minimum benchmark, too, and we would like to continue with strong cover on the NPL portfolios. This is -- these numbers assume that we will continue on annual basis to clean the balance sheet through NPLs disposals as we have been doing during this calendar year and during the previous 4 years that the bank is publicly-traded. On client base expansion, we would like to reach a minimum 1.5 million customers through organic growth and increase the primary customer base to 1 million from existing 648,000, namely due to cross-selling efforts ameliorating the customer base that we have purchased from Wüstenrot. On Page 9, we briefly summarized the current growth rates. If you look at our development of the retail franchise, the portfolio as of end of third quarter expanded on a year-to-year basis at more than 68%, matched by nearly 71% increase in deposit volumes. As I mentioned, we have spectacular performance on mortgages. However, on the consumer lending, we expect -- we are experiencing year-to-date drop of about 30% in the volumes that we underwrite. The third quarter was slightly better. We were in the third quarter on consumer unsecured at about 90% level of 2019. Development of the small business also enjoys strong growth rate. We have 21.5% expansion in the loan portfolio. This is on the strength -- amongst other things, on the strength of COVID program, state-guaranteed lending. And this growth rate is matched with strong growth in deposit base, which equals about 20%. Similar performance is notable on the SME franchise, where the growth rate is nearly 17% on loan portfolio and 18% on core deposits. Again, this has been chiefly supported by state-guaranteed lending as a result of the various COVID-related programs put out by the Czech government. Here, I would like to mention that in procurement of state guarantees, we have about 3x the natural market share, and we are fairly on par with some of the large banks in Czech Republic. We also continue in development of the digital distribution capabilities, where the share of digitally-sourced consumer lending reached 42%. And we are doing through fully online and branch-based online, actually more volume than through the physical distribution. And what is also notable, if you look at usage on daily banking of our Smart Banka platform, this is growing. The usage is growing at 57% rate per annum, so this we consider to be a solid result. We have taken strong prudential position, increasing coverage of NPLs to 166% plus from year-end position where we had cover on NPLs at 109%. Apart from that, we still enjoy subdued low NPL ratio at 1.5%, and this is mainly due to our success in managing collections, but also cleaning continuously the balance sheet. And in the third quarter, we've realized sale of receivables in the nominal amount of CZK 320 million. The cost of risk year-to-date stands at 207 basis points. We still believe that the full year will come within the guided numbers, which I will come to in a minute. And we've also increased through provisioning, the overall cover of the portfolio to nearly 2.5% level from 194 basis points at the year-end to previous year 2019. On capital, it's according to our expectations that CAR is standing at 17.4%, with healthy, robust 14.4% CET1 ratio. And when our CFO covers the RWA density, you will see that we have substantially decreased the overall RWA density in the business model. On cost discipline, although we have nominal increase of the cost base at 9.3% on pre-acquisition, on the pre-acquisition, perimeter costs are stable, and we are confident that we have locked in and we'll realize CZK 300 million in cost synergies from the Wüstenrot acquisition. On Page 10, speaking of the acquisition, commercially, MONETA -- sorry, Wüstenrot, our MONETA Savings -- Building Savings Bank now takes about 12% market share in origination of state-subsidized saving programs, and we consider this to be fair-to-good performance. We have also secured regulatory approval for combination of MONETA and Wüstenrot Mortgage Bank. The combination -- the legal combination will take place at the end of 2020, so this is proceeding according to plan. Additionally, we have closed 18 units or we are in the process of closing 18 units of the branches that we've inherited from Wüstenrot, and we've completed the rebranding. I've already mentioned the disposal of $370 million of nominal value under IFRS of nonperforming receivables from Wüstenrot that's generated in the third quarter, CZK 74 million extraordinary gain, which is split between revenue recognition, and majority of it was booked into cost of risk. In the fourth quarter, we put out an announcement that we sold additional CZK 520 million, and this will be subject to fourth quarter reporting. So from our perspective, we have fulfilled the commitment to sell about CZK 1 billion nominal, which we've announced at the conference at the end of second quarter 2020. Synergies, I've commented. We feel very confident that this will be visible, partially in the fourth quarter and fully throughout 2021, hence our business plan and our guidance on the overall cost, which we will come to in a couple of minutes. As of September 1, we had leased nearly fully the legacy headquarters of Wüstenrot. Therefore, we've avoided significant restructuring charge as we do not have to impair the building. And we are proceeding with IT integration, trying to rationalize the cost base there. The main project that we are running, and so far, knocking on wood, it's doing very well, is on automation and integration of regulatory reporting. This is one of the major initiatives that we have, and that is to be completed at the end of first quarter 2021. On Page 11, we show you a top-down view of the operating platform. So despite adding 300 employees in the second quarter on the acquisition, if you look at employment in the bank, it is nearly flat at 2,973 FTEs. You can see that the bank on the pre-acquisition perimeter reduced employment year-on-year by about 150 FTEs, and we've added, with the acquisition by the end of third quarter, 168. So we are trying to maintain discipline with respect to employment in the bank. On the branches, the number is unchanged at 160 from previous quarter; however, we have made a decision to close additional 7 units or branches by end of January 2021, and this will, again, bring savings of about CZK 40 million on 2021 basis. So we are continuing to optimize and rationalize the network. And the third notable change is on ATMs. We have pulled back the network, reduced about 80 machines, which were not meeting our performance requirements, and we are continuing to upgrade the network as such, which is visible on the contactless and deposit ATMs. So if I can go to the next section, if we go to operating environment, we provide you with a bit more detail on the quick economy. On Page 13, you see -- going clockwise, you see that the GDP is forecasted to shrink quite considerably. The Bloomberg consensus published this number of minus 8.2%. The Czech authorities are slightly more -- rather more optimistic at the drop of GDP at 7 -- 6.7%. Next year figures also differ, where the Bloomberg projects growth of 3.5%, whilst the Czech authorities, 4.5%. If you look at industrial production, we've seen 3 consecutive quarters in the red numbers, and the production had fallen quite significantly, more than 23% in the second quarter of the year, and we continue -- we expect this trend to continue albeit in the third quarter at a better rate than in the second quarter. Foreign trade also suffered through the COVID events. You can see that we have 2 quarters of drops in both import and export figures. And if we look at GDP, the government, through fiscal stimulus, is the only net positive contributor to the GDP position, whereas across the board, the situation is quite negative, nonetheless, Czech Republic, being fairly stable in terms of rating and in its capacity to borrow to finance the state deficit. On Page 14, we show you dynamics of the labor market. Currently, the unemployment -- if we start again clockwise, the unemployment stands at 2.7%. It is heavily subdued or reduced by government programs, which help to keep employment. So the next year consensus from Bloomberg is 3.8%, and this is quite -- I'm sorry, by the end of this year, it should come to 3.8%. We think that the unemployment will get worse in the first half of 2021 rather than by the year-end. If you look at labor demand, unemployed versus vacancies, there is still positive gap in demand, so demand is higher than the number of unemployed; however, this gap is being reduced quite considerably. Overall, the situation also projects itself into retail trade growth, which has been negative, rebounding in the summer, and we believe that this number will worsen again due to the restrictions that Czech Republic has instituted recently. Then if we continue on Page 15, what is the situation with respect to inflation, rate forecast and currency exchange rates. If you look at the consumer price index, the numbers have peaked in August at 3.5%. We believe that the official forecast might be slightly optimistic and tend to believe more the Bloomberg consensus, where the 2020 should come in at 3.4%, and we will see what the inflation will do next year. On the second part of the slide, you see evolution of PRIBOR and the government 10-year yield evolution. So this is quite dramatic drop in both measures. And below that, you can see that the optimistic forecast on PRIBOR as next year, we do not fully share. And our view is matched by views of the -- of major banks in the Czech Republic, where the rates are expected to move anywhere between 5 to 25 basis points. There is 1 outlier there, but the general consensus is that the rates will stay fairly low. All of this project itself negatively into the exchange rate. This is visible on the other parts of the graphs. On Page 16, just very briefly, wages. The rapid growth of wages in the Czech Republic has effectively been arrested by the crisis. You can see that the median wage is flattening. The savings rate is very high in Czech Republic. Traditionally, last year at 13.2%. We expect this figure to go to 15% -- anywhere between 15% to 17% as we see it on the inflow of liquidity into the bank. And we also predict some stagnation in the purchasing power development of the Czech households. And if you look at the industry, utilization industry in Czech Republic constitutes around slightly more than 30% of the GDP. The peak was in 2008 when the industry was operating at 91% of capacity. Currently, as of July, the industry operated at subdued capacity of 76%, which is probably not going to get better in the fourth quarter. On Page 17, we give you a peak on insolvencies and bankruptcies declared by entrepreneurs and private individuals. There is nothing dramatic here. You see on the stack graphs development over 2019 and '20 and the trend has been actually downward going, so nothing dramatic here. This undoubtedly is being supported by the loan repayment moratorium, which expires on Monday and various measures to sustain people and to sustain individual entrepreneurs that the government is taking, so nothing alarming yet on this front. Now the next section of our presentation covers MONETA's performance against the overall development of the banking market. If I could have your attention to Page 19 where we look at deposits, the overall deposit market year-on-year expanded by 14%. As previously mentioned, MONETA delivered growth in excess of 48%. The most notable growth you can observe on our retail deposits, which increased nearly by 71% against growth rate of 9.6%. On Page 20, we show you the macro view of relevant credit markets. The credit market on a 12-month basis expanded by 3.7%, while we've expanded our portfolio by nearly 45%. This is again driven by close to 67% expansion on the retail front against the market background of 6%. This is obviously driven by the acquisition. It's driven by additional mortgage portfolio. It is driven by additional construction loan and refurbishment loans from Wüstenrot. If you look at our unsecured position, it actually decreased somewhat due to net sales and our change of credit standards in second quarter. On commercial loans, we have healthy 15 -- more than 15% increase. And as I said, this is driven, to a large degree, by the acquisition and by the bank's tremendous success and traction in distributing state-guaranteed loans to both small businesses and commercial clients. On the following page, Page 21, we provide you as traditionally with a glimpse to market pricing. These are not effective interest rates, this is contractual pricing, where we've continued to operate at a slight premium to the market on the unsecured. Nonetheless, the premium to the market decreased to 30 basis points. And at least as of July -- sorry, as of August, our competitors have raised their pricing actually by 30 basis points, incorporating some additional risk into their view. However, I believe that you will see additional erosion in pricing in the following months. On mortgages, we are tracking the market, and on both commercial deposits and retail deposits, we are repricing the portfolio, so you see first sign of that repricing coming through the National Bank's reports. And Andrew and Jan Novotný will walk you through what is the development on the cost of funds, which is quite positive from our perspective when we cover the balance sheet. Now let me cover guidance and highlights of our medium-term business plan. This is set forth on Page 23. If you look at 2020, we have upgraded the guidance on the operating income by $200 million. This comes chiefly from better performance than expected on net interest income, which we believe has stabilized in the third quarter and will improve in the following quarter on the basis of volumes, but not only volumes, on the basis of deposit repricing. In terms of operating costs, we've actually worsened the outlook to maximum of CZK 5.5 billion from CZK 5.4 billion, and this is due to the fact that we've incurred some additional marketing expenditures as we strive to improve performance into the third and fourth quarter of the year as second quarter was quite disappointing on the volumes as we pulled back. So we have also -- we also incorporate some restructuring charge this year for branch closures. I said that we are closing 7 additional units in MONETA network, and this will also impact this line. On the pre-impairment profit, we expect at minimum CZK 6.5 billion of pre-impairment operating profit. And on cost of risk, we have lowered the guidance, and this is due to the fact that, as of today, we have about CZK 190 million of the CZK 200 million gain, which we have not initially incorporated into the guidance due to execution risks and uncertainty regarding demand for NPL portfolio. So all in all, this year, we would like to achieve, at minimum, CZK 2.4 billion on the calendar year 2020. I would like to note here that we are continuing to accrue 80% of profit into the dividend potential. So it's not recognized into our capital, and this is visible from the capital section. We've also elected to publish our business plan, which seeks to model several key assumptions. Number one, in the business plan, we have elevated cost of risk, which is using assumptions regarding the peaks, and through the cycle, losses that we have experienced in the bank previously since 2008, 2009. So we think we have good assumptions on the cost of risk. Second assumption in the business plan is that we are able to maintain the cost at CZK 5.5 billion and grow it proportionately with anticipated inflation. The third big assumption of this plan is that we use the interest rate forecast of Czech National Bank, where we see increase in rates being the prognosis covering 2024 and 2025. So this provides some lift to the revenues. And the fourth assumption is that we will continue in the same tax regime as we have been subject to previously. So all in all, if you look at this horizon, we are forecasting that the bank, on a 5-year basis, will make CZK 21 billion of cumulative profit. And on 2020, we should have CZK 2.4 billion. The business plan also assumes that we will consistently accrue, across the board, 80% of our earnings into potential dividend distribution, subject to regulatory acquiescence. So ladies and gentlemen, thank you very much for patience with me. Now I will turn to our Chief Financial Officer, Mr. Jan Fricek, who will walk you through the P&L.

Thank you, Tomáš. Good afternoon, ladies and gentlemen. I will now continue with the profit and loss development, starting on Page 25. Tomáš has already provided highlights of our financial performance, and I will now add a bit more detail. As you can see, the 19% operating income growth is a combination of increasing NII together with gain on acquisition, partially compensated by moderate decline of net fee and commission income. Our cost base increased by 9% year-on-year, primarily because of the acquisition, while on the pre-acquisition perimeter, we recorded 1% reduction. This resulted in a strong pre-impairment profit increase by 28.5% year-on-year. Normann will, later in his section, provide you detailed update of the cost of risk evolution. So let's turn the page to the composition of NII. In the third quarter, our core net interest income from lending and deposit-gathering franchise increased by almost 4% against the second quarter, mainly through the reprice of our customer deposit base. Unfortunately, this positive trend was more than offset by further erosion on the other net interest income lines due to the change in interest rate environment. In the second and third quarter, we were off together about CZK 300 million in this category comparing to the run rate of previous quarters. And in the last quarter, we expect stabilization around 0. On the next page, we provide you with the evolution of net fee and commission income reaching CZK 500 million in the third quarter, and thus, remaining flat year-on-year. This shows positive development and return to the pre-COVID level after the Q2 negatively impacted by the pandemic and related restrictions. On the right-hand side of the page, you can see year-on-year increase in both income and expenses, which is predominantly related to the acquisition. On Page 28, we did compose the income side into the 3 parts. If I go from the bottom-up, the long-term declining trend of the servicing and penalty fee income was finally reversed into a year-on-year growth of 6.8%, supported by the building savings product generating stable income in form of the monthly servicing fee. Drop of transaction activity amid COVID-19 restrictions, together with the regulation of cross-border payment fees, resulted in 10.9% decrease of transactional fee income year-on-year. And finally, third-party commission income stream expanded by 26.2% amid continuing solid results in distribution of insurance and investment funds, further strengthened by the specialized sales force which we have deployed earlier this year. Let's flip the page to OpEx. In the third quarter, we reported 19% year-on-year cost inflation, driven by almost CZK 200 million of running costs of newly consolidated entities, together with the one-off related with their restructuring and integration into MONETA. On the pre-acquisition perimeter, we stayed just to think about the third quarter last year. The 2% increase is mainly driven by higher marketing and D&A costs. All together, the cost-to-income ratio for the third quarter stood at 48.5%. And on the next page, we provide evolution of the key cost drivers. Over the last 4 years, we closed 30% of branch units, which was enabled only by gradual expansion into the digital. And in the bottom chart, you can see a reduction of number of FTEs, again, build 3,000 in the third quarter, which was achieved through solid progress in the integration of acquired businesses. Currently, we report only 65 FTEs above the Q1 pre-acquisition number despite adding 280 employees of mortgage and building savings bank in the meantime. So this concludes the profit and loss section, and I will now hand over to our Chief Commercial Banking Officer, Jan Novotný, who will continue with the balance sheet development.

Thank you very much, Jan. So now let me please, together with Andrew Gerber, to walk you through the balance sheet development section of today's presentation. And let me start on the Page 32, where you can see the overall development for the last 5 quarters on both assets and liabilities side. And you can see that we have achieved excellent growth in both key categories in net customer loans with 44.8% year-on-year growth, and also in core customer deposit category, where we have achieved even faster growth of 48% year-on-year. Even more important is the fact that this growth was not only achieved through the acquisition of the former Wüstenrot entities, but it was also driven by the organic expansion. Now let me please move to the Page 33, the next page, where you can see the detailed split of the segment growth dynamics within the loan portfolio. And you can see that the development is fully in line with our long-term strategy to become more retail-focused bank, and then we are more than successful in increasing our retail position in both nominal values as well as in increasing the share of the retail on our lending portfolio. As of Q3 2020, we have reached CZK 145 billion in retail loans, which represents more than 65% share on the overall portfolio. We have also successfully managed to grow other few categories, especially small businesses, but also the SME portfolio where those 2 segments combine to the 35% share of our lending portfolio at the end of Q3. Now on the next page, Page 34, you can see the development of the loan portfolio yield. On the left side of the page, you can see the blended yield for all segments. And on the right side, you can see the split into retail and commercial loans. The overall yield is slightly going down due to further expansion of mortgage lending on the retail side and due to bigger share of loans secured by the state guarantees on the commercial side. This newly introduced guarantees allows us to better and to better the price of Wüstenrot trade-off while increasing the relative profitability of the new origination in the commercial segment. And now please let me hand over to Andrew Gerber to walk us through the latest development in the retail part of the lending portfolio.

Thank you, Jan. On Page 35, we share the detail of the developments of the retail loan portfolio. Overall growth of 68.1% was significantly driven by the integration of Wüstenrot, which added CZK 49.9 billion in receivables. However, underlying organic growth was still healthy at 11% year-over-year, which is close to double the rate of the market at 6%. Mortgages continue to be the key driver of growth with the portfolio up 122.3%, including the acquisition. The underlying organic growth remained strong at 27% year-over-year. The mortgage market in the Czech Republic generally remains robust. And despite our relatively conservative approach during the second quarter, as Tomáš said earlier, we've been able to build an exceptionally strong pipeline during the third quarter, which will see the strong growth trajectory continue into the first half of next year. The consumer loan business grew 25.2%; however, on an underlying organic basis, the growth is slightly negative, and this is due to our extremely cautious positioning during the second quarter in the first wave of the pandemic. In the third quarter, we gradually came back to the market, and we've seen production start to increase, but we think the development here will be slow as the market generally remains soft and our positioning remains slightly more conservative than a number of our competitors. The auto loan portfolio declined 14.9% year-over-year, driven by lower sales, partly as a result of the total shutdown of the dealer networks with the onset of the pandemic in March and generally lower demand for used cars, which is the key part of our retail auto loan business. Our revolving portfolio continues to decline as we see lower demand for short-term credit facilities, coupled with higher current account balances as clients appear to be preserving liquidity in the face of the pandemic. Going on to Page 36, we look at the yield developments on the retail loan portfolio. The yield on mortgage -- on the mortgage portfolio remained stable at 2.2%. On consumer loans, the yield continued to decline, reaching 8.7%, as the market remains extremely competitive and lower funding rates allow the market to drive pricing further down. As we showed earlier on, market new business pricing in August was down to 8.1%, and I believe we'll continue to see pressure for the remainder of the year with rates declining towards or perhaps even below 7.5% across the market as this segment remains extremely profitable, creating plenty of room for more aggressive pricing in this environment. Our auto and credit card yields remain stable, as you can see on the bottom of the page.

Thank you very much, Andrew. Now on the next page, Page 37, you can see similar view on development of commercial portfolio. On the left side of the page, you can see that we continue the very strong growth in overall portfolio size, which is now on the level of CZK 77 billion, which represents more than 17% year-on-year growth, again, strongly driven by both acquisition and by organic growth. More detailed split by product, you can see on the right side of the page, we have achieved superior growth in almost all categories, except tiny auto loan portfolio where we have decided to minimize the loan new origination in our leasing subsidiary. The main growth area for commercial segment stays, especially in small business and in working capital loans. This is where we have significantly improved our product offered by introducing new loan products covered by the state or EU guarantee schemes, namely COVID 2, COVID 3 and cosmic COVID or state agriculture subsidies. Just as a reminder, those guarantee programs are covering up to 90% of potential losses with 30% portfolio cap and allows us to allocate significantly less capital to such loans. This helps to improve the product offer from customer perspective while achieving a very strong return on allocated capital. Now talking about the profitability and yields, you can see the product yield development on the next page, on the Page 38. As already mentioned, there is still a slight decrease in Q3 across the categories due to the decreased PRIBOR that has happened in Q2, but there is also an effect of a higher share of lower-priced guaranteed loans on the new origination. And now before I hand over back to Andrew to walk you through the liability side of our balance sheet, just a short comment for the Page #39, where you can see that we continue to invest our excess liquidity into the Czech government bonds and that we have ended up at the end of Q3 at the level of CZK 27 billion of portfolio with the average yield at 1.4%. Now let me thank you for your attention. And let me, for the last time, to hand over back to Andrew for the funding overview.

So on Page 40, we look at the funding base of the bank. We continue to see strong growth in the funding base with balances up 43.7% year-over-year, driven partly by the acquisition, but also by strong organic growth, primarily in the retail segment. And looking at the segment breakdown, you see retail increased to 66% of the core deposit base in line with our strategic objectives. On Page 40 (sic) [ Page 41 ], you see the cost of funds development. Overall cost of funds dropped 19 basis points quarter-on-quarter, driven by 17 basis point decrease in core customer deposits and 22 basis point decrease in the wholesale funding part. Our core customer deposits began to benefit from a series of repricing actions, which we initiated in the second and third quarters. In total, we've repriced CZK 70 billion in savings balances, and the effect will be rolling in starting August and continuing into next year. Based on the actions we've already taken, we anticipate further improvement in the core cost of funds through to the middle of the next year when we expect to be at or below 35 basis points. To date, we've been able to achieve this without triggering outflows. And in fact, we continue to see strong growth in balances, especially in retail, which you can see on Page 42. Retail deposit balances are up 70.8% year-over-year, significantly supported by the acquisition again, which added CZK 58.9 billion, but also by strong organic growth, which continued at 18% year-over-year, which is nearly double the rate of the market. In the commercial segment, we saw strong growth in current account deposits, up 19.7% as we see clients postponing investments and generally holding on to more cash. On the other hand, commercial savings accounts, term deposits and financial institution deposits have all declined as we've consciously chosen not to compete for these higher-cost resources. And finally, on Page 44, we detailed the development of the wholesale funding base, which was up 16% year-over-year. The major driver was the incorporation of mortgage-backed bonds in the amount of CZK 4.2 billion, which were acquired with Wüstenrot. So with that, I will hand over to Normann, who will cover the risk metrics and asset quality section.

All right. Thank you, Andrew. Good afternoon. We are now on Page 46 with an overview of cost of risks for the first 9 months of this year. After the significant book-up of provisions in the second quarter across segments and products, the approach we have taken in the third quarter was to focus on portfolio monitoring, in particular, receivables of customers, which have been covered by the state-sponsored payment moratorium ending at the end of October. All together, year-to-date, around CZK 13.8 billion of receivables were downgraded to Stage 2 and 3. As a result of these activities, the cost of risk for the first 9 months amounted to CZK 3.1 billion or 2.07%. The COVID and macro-related shares is together 1.6%. The impact of the acquisition earlier in the year was 17 basis points, and if you wish, the core cost of risk amounted to 0.3%. Moreover, as a result of the significant book up of provisions, also our total NPL coverage increased year-over-year from around 103% to 166%. Moving to Page 47. Here, we have a breakdown of the CZK 2.4 billion book-ups due to COVID-19 macro changes and portfolio-monitoring activities. There are essentially 4 categories which drove the book-up year-to-date. The biggest one stems from macro changes in the IFRS 9 models, as outlined before. This amounts to CZK 1.3 billion. The second biggest book-up of more than CZK 800 million is related to migration of exposures to Stage 2 and 3 based on moratorium monitoring to address potential future deterioration of credit quality in post-moratorium environments. This also includes migrations of big parts of repostponed exposures covered by the moratorium to Stage 2. Another CZK 47 million is a book-up connected to a portfolio reserve for industries more endangered by the pandemic. And last but not least, a further CZK 200 million charge is related to individually managed commercial exposures. Here, we continued with the bottom-up portfolio monitoring exercise we initiated in the second quarter based on dedicated questionnaires for commercial customers, where we filtered out those with a potentially increased risk profile. Going to Page 48. Here, we have an overview of NPL balances for the last 5 quarters. The NPL stock dropped by around CZK 250 million between the second quarter and Q3, supported by the loan moratorium, but also driven by debt sales and write-offs. As for the NPL ratio, this dropped from 1.9% a year ago to 1.5% at the end of September, and the overall portfolio coverage steadily increased over the last quarters and now stands at 2.5%. On the next page, Page 49, you can see the quarterly development of our nonperforming loans in September 2019. During this entire period, the NPL stock increased from CZK 2.94 billion to CZK 3.37 billion. The increase in the second quarter is largely influenced by the acquisition. As for the new NPL formation, expressed as a percentage of average-performing receivables, here, we observed a continuing stable development where the values oscillated between 0.5% and 0.6%. The comparatively low value of 0.3% in the third quarter is supported by the payment moratorium and relatively stable cure rates. I think the next page, Page 50, is also fairly important since it shows that the core performance, with respect to delinquencies, has been stable throughout the last 4 quarters, both in terms 30, 60 and 90 days past due. Needless to say, the improvement in the third quarter was influenced by the payment moratorium, but at the same time, around CZK 15.5 billion of receivables came out of the 3 months payment holiday, which ended at the end of July. And these customers so far have shown an acceptable payment behavior, and we'll obviously continue to carefully monitor this payment behavior also in the forthcoming months. On Page 51 and the next 3 pages, we have an overview of the development of our gross loan portfolio balances and the underlying provisioning balances and coverages. The changes in balances and coverages in Stage 1 and 3 are largely driven by COVID-19 and anticipated worsening of the macro indicators. The biggest changes obviously can be noticed in Stage 2, where we saw a significant inflow coming from Stage 1. Overall, around almost CZK 14 billion of receivables were downgraded over the last 3 quarters to Stage 2 and 3. Also, Stage 1 provisioning balances increased by almost 82% year-over-year and stood at CZK 1.9 billion at the end of September. And coverages in Stage 3 have been stable over the last quarters and stood at around 56%. The changes in provisioning balances in the third quarter were largely driven by write-offs and NPL sales. As for the next 3 pages, which is Page 52 to 54, you can see more granular details per product, both in retail and commercial. Basically, the evolution of Stage 2 and provisioning balances are all driven by the COVID-19-related measures, as outlined before. Altogether, around CZK 8.7 billion of retail and CZK 5.1 billion of commercial receivables have been moved to Stage 2 and 3. On Page 53, around CZK 3.1 billion of residential mortgages and CZK 5.6 billion of retail unsecured receivables were moved to Stage 2 and 3 to date. And on Page 54, we have more details on the commercial book. Here, we downgraded together around CZK 5.1 billion SME and small business receivables to Stage 2 and 3 over the last 9 months. And as far as Stage 3 for SME is concerned, here, the drop of balances is largely driven by write-offs and recoveries. And last but not least, Page 55. Here, we have an overview on the penetration ratios of the payment moratorium in our portfolio. While the penetration ratio of receivables covered by the moratorium stood at 15% at the end of June this year, the ratio dropped to 8% in retail and 9% in commercial at the end of the third quarter and around CZK 15.5 billion of receivables left the moratorium after the end of July, which leaves around CZK 18.6 billion balances under the moratorium ending this weekend. Summarizing the risk section, the bottom line message is that year-to-date, we have built up a significant provisioning coverage level in the amount of almost CZK 2.4 billion to cover potential future credit risks related to COVID and macro environment. The coverage buildup is driven by the models, and in the third quarter, was further enhanced by more portfolio monitoring activities which led to a Stage 2 receivable balance of almost CZK 18 billion and almost CZK 1.9 billion provisioning balances. CZK 15.5 billion left the moratorium, and so far, are showing a satisfactory payment behavior, which is fairly positive. Needless to say, the next weeks and months will then show the payment behavior of customers having come out of the 6-month moratorium ending this weekend, which obviously can trigger further movements between the 3 stages, both in terms of receivables. For customers, which will have or continue facing financial difficulties post the moratorium, we will be providing support by means of payment modification and restructuring tools where possible and applicable. And as far as the full year cost of risk is concerned, we currently estimate that it will come in around 175 to 190 basis points, which is better compared to the previously guided full year numbers. And this is largely driven by NPL sales, which we have already locked in, and we expect a total pretax gain of around or slightly above CZK 200 million until the year-end. The better cost of risk guidance for 2020, however, does not anticipate any major inflow into Stage 3 before the year-end. Should there be a significant worsening of the macro or an unprecedented inflow of restructuring requests coming from customers, ultimately triggering forbearance, then the full year cost of risk would have to be reassessed. With that, I hand over to Jan Fricek.

Thank you, Normann. Let me continue with the capital management section on Page 57. MONETA maintained strong capital position with the regulatory capital of CZK 26.8 billion, which is more than CZK 4.1 billion above 2019, and it was translated into total capital adequacy ratio of 17.4%. This is 3% above our management capital target, and it basically provides sufficient room for further growth organically or through another acquisition. Continually decreasing RWAs density, which is visible in the bottom right-hand side corner, is driven by gradual strong increase of share of mortgages as well as focused capital management, presently in commercial segment. And if we turn the page, there is more detail around in the bottom chart, showing that while the loan book grew by 41% year-to-date, the balance of RWAs increased by only half, 22%. The chart in the upper part of the page provides evolution of our excess capital over the Tier 1 capital requirement plus 100 basis points management buffer. In the third quarter, MONETA maintained excess capital of CZK 3.1 billion, broadly flat versus December '19 despite more than CZK 4 billion of Tier 1 capital consumed by the acquisition in the second quarter. This was achieved through a combination of several factors, namely inclusion of net income and the reduction of contracyclical buffer by 150 basis points. And I must emphasize again that on top of the CZK 3.1 billion, we keep separately CZK 1.5 billion accrued for the dividend payment from 2020 net profit. Currently, we are also closely watching and preparing data for expected update of the capital regulation regarding the intangible assets treatment, which would become effective in the first half of next year. We estimate that it should bring us a significant release of regulatory capital above -- about CZK 800 million. On the last page of the capital management section, I'd like to give you a background about the minimum requirement for own funds and eligible liabilities, so-called MREL, which MONETA recently received from the Czech National Bank. The requirement becomes effective only from 31st December '23 and is relevant only for MONETA Bank on a stand-alone basis, and the requirement needs to be covered from the excess of regulatory capital or eligible subordinated liabilities. According to the MREL regulation, the Czech National Bank classifies MONETA into the group of banks providing at least 1 critical function, which is taking customer deposits. And in our case, the requirement is defined as the share of insured deposits on total liabilities and Tier 1 capital, multiplied by sum of Pillar 1 and Pillar 2 requirements, and subsequently, multiplied by RWAs. This calculation currently produce MREL requirement in the amount of CZK 7.4 billion, which will be upgraded on a regular basis. Perhaps the most important information on this page is that our business plan already assumes CZK 5 billion issuance of senior unsecured bond in 2022, which means that our related costs are already build in our guidance. With that, let me hand over back to our CEO.

I would like to -- I will skip the measures related to COVID-19 pandemic in Czech Republic because, I think, if you have particular questions, we can try to cover those in the Q&A. At the end, inside of the presentation, we also have highlights on the development -- on anticipated development of our balance sheet, underlying the published highlights from the medium-term plan. I think today, I would like to really thank my management team because last few weeks have been fairly difficult here in Czech Republic. So with that, I'm tremendously grateful for the efforts that people are putting into managing the bank throughout this difficult period. So now we are ready to take your questions, and we will try to answer as best as we can. So ladies and gentlemen, thank you very much for your attention to our presentation. Let's go to Q&A.

[Operator Instructions] And the first question is from Anna Marshall, Goldman Sachs.

Two questions for me, please. First topic is the dividends. What is your expected kind of time line of communications from the regulators between now, and basically, the dividend payment in -- or the AGM season, so to say, in spring? And would you expect the Czech regulator, if they were to lift demand on dividend, so would you expect any kind of conditionality or differentiation between different banks? And if yes, how would you expect MONETA to fair up on those metrics? My second topic is asset quality. And I just wanted to confirm, in terms of your cost of risk guidance for both 2020 and 2021, what assumptions were made regarding this second wave of the pandemic and second wave of restrictions?

Okay. Anna, this is Tomáš speaking. With respect to dividend, we had a number of -- we have a number of discussions with Czech National Bank, so we've discussed actually potentially approving a conditional dividend in August AGM, which we have just realized was 2 months ago. This was squarely turned down. Then in the conversations, we have been told that the bank will be assessed individually. We were not told or it was not disclosed to us what would be the minimum criteria for acquiescence to pay dividends. So this, in my view, so far remains undefined. Then the third piece to this jigsaw puzzle is that his excellency, Vice Governor, Mr. Nidetzký, who is responsible for supervision, amongst other things, has stated publicly that banks will not be allowed to pay dividend as long as the public support is in place. It was not very clear from the remarks which public support he meant, but this was stated in early September, I believe, and it was stated to the media. So this is the background. Typically, we engage in the conversation once we have the result, which is in February. So from mid-February onwards, we engage the Central Bank, communicating our intentions. Typically, the intention is acquiesced to or approved between 3 days to 1 week prior to the AGM. So this is our experience from the last 4 years, where the most difficult discussion was in 2017 when we paid a CZK 5 billion dividend, and we received the acquiescence effectively on the evening before the AGM. So this is the reality. It's not like there is a structured process, which would be followed by all parties. This is quite unpredictable from my perspective. But we typically have the meeting in April, and we engage the regulator in late February, and we try to get their view on the payment. Asset quality and second wave and the business plan, this is Normann's realm. So I'll ask Normann to comment on that.

Anna, now when it comes to the second wave, when we do the planning for cost of risk for this year and next year and the subsequent years, we didn't look at it from a perspective, is there a second, third or fourth wave of the pandemic. We have actually 2 areas which we look at. One is the model, and the key ingredient parameters for the model are GDP and unemployment rate. We have communicated that the numbers, so for -- on a full year basis, we expect a negative GDP of minus 7% for this year. We still would see negative GDP also in the first quarter of 2021, and then moving into positive territory. And the unemployment rate would peak in the first half of next year. So this is part of the MONETA's plan. The second one, which I have mentioned already during my part of the presentation, we are more closely looking to individual accounts, what happens with our customers, what happens on the current accounts, what happens with the payment behavior of those customers coming out of the payment moratorium. And as I said, those who came out at the end of July, so far, have shown a fairly satisfactory payment behavior. I think what will be critical is what's going to happen later in the year, November and December, when these CZK 18 billion, so far still covered until this weekend will come out of it and have to resume payments, number one, and number two, to which extent the government potentially would extend or strengthen the lockdown of the Czech economy for the rest of the year or potentially even stretching into 2021. This, we have not anticipated, as we have not factored in into our scenario because right now, it doesn't look like that. But I think what will be critical is when the companies will start to lay off people later in the year or early next year once the government support will cease to exist or will come down, yes? So these are the key assumptions made for our cost of risk planning.

And the next question is from Simon Nellis, Citibank.

My question will be on funding costs. You made good progress in bringing down funding costs, and I think you're still optimistic. Did you -- did I hear correctly that you're expecting that funding cost will go down to roughly 35 bps going forward? So if you could comment on that, that would be my first question.

I mean that's correct. I did say 35 bps. I think to be clear, this is on the core customer deposits part of the funding base. And this is our forecast based on the pricing actions that we've already notified into the deposit base. So these things -- or given with 2 months' notice by law, and then depending on the specific conditions of the product, it takes some time to roll in if there was a guarantee or some other commitment made to the client. So that started rolling in, in August and will continue through to about April next year. So by the middle of next year, we'll see the full impact.

And how does that compare with the 56 basis points, I think, total funding cost that you reported in the third quarter? I mean what could that number be for full year next year, I mean, roughly?

30.

Okay.

This is Tomáš speaking. It will be 30 to 32, if you want a range.

And then just a clarification on the capital. So if I heard right, you're looking for roughly CZK 800 million RWA relief from the software intangibles, potentially on the deposits?

No, no. Andrew will clarify.

No. This CZK 800 million, this will be -- this CZK 800 million will be a benefit on the regulatory capital because currently, intangible assets or the net value of assets is immediately deducted from the regulatory capital. However, going forward, significant portion of that will go through the regulated assets. So we will get an upside immediate on the higher balance of regulatory capital, or effectively, a lower deduction from the regulatory capital in the amount of CZK 800 million.

So after 3 years, Simon, you have to turn it -- you can turn it into RWA. So there is a significant reduction of the young assets from the capital reduction. So if you keep on investing, you actually get a capital really after 3 years, it turns into 100% deduction from the capital. And as we have been investing in the last 4 years fairly significantly into IT infrastructure or IT application landscape, the digitalization of the bank, we will get this benefit. And it could be either at the beginning of next year or middle, it depends on flex-place at the EU parliament.

Right. But the way that we'll see it is through roughly an CZK 800 million increase in the CET1 capital?

Right.

That's correct.

Yes. And actually, just on the whole intangibles topic, I saw that the growth in intangibles quarter-on-quarter was quite small. I mean you've been growing quite aggressively. I think it was only up CZK 28 million. Is that likely to be the going forward run rate? Or is that going to increase back to kind of the over CZK 100 million "a run rate" we saw in the past?

No, it's the function that, in the past, we basically started with from the low very base. And then now as we are keeping the same investment budget this year as last year, we are somehow reaching the stable level of intangible assets.

Okay. So it should continue to be slow.

It will continue at a slightly faster pace because the third quarter is, I mean, we have this summer. And typically, most of activation of assets happens in the -- at the end of the year because some of the projects are evaluated and activated at the end of the year. So I think you will see a more robust increase at the end in the fourth quarter. It should be somewhere between CZK 90 million to CZK 120 million.

If I look into our business plan, with that CZK 800 million of annual investment, we stabilized the intangible assets at the level of CZK 2.8 billion over the more going forward.

Okay. Okay. And then just one last one for me, which is, what would the -- I mean, again, roughly, what would the impact be on the business plan if rates never went up to the CZK 150 million, I think, that you're targeting here?

Yes. If the rates did not go up, I think you would see a slower growth of the top line. If you look at '24 and 2025, the impact would be between CZK 700 million to CZK 800 million in the outer year of 2025. Andrew, am I correct, that the upgrade is about CZK 700 million to CZK 800 million?

Actually, I would expect it maybe a bit more because we wouldn't -- CZK 700 million.

Maybe CZK 900 million.

Maybe CZK 900 million, yes, of course.

It also -- Simon, it also very much depends on our hedging policy because we have effectively ran -- we have run a policy, where the EVE, economic value of equity, the indicator we kept neutral -- neutralized at nearly 0 level when we were expecting the rates to go up, and we will probably take a bit more risk on that and do less hedging because we are typically long on fixed rates, and we have to swap the rates into variables. So we are slightly augmenting our hedging policy in light of the development. So it very much depends on the hedging policy forward.

And there are currently no further questions. [Operator Instructions] And we haven't received any further questions at this point. So I hand back to the speakers for closing remarks.

We very much thank all of you that attended the call. As I said previously, we have moved the calls to afternoon as significant part of our shareholder base is domiciled in the United States or in Canada, and this way, we can cover all shareholders. So if you have any feedback on the timing, please provide it to our Investor Relations, to Linda and her team, and we will consider what is the most convenient time for the call. Again, I'm very, very thankful to my team because we've presented a good level of details, and we will try to continue in the same spirit. And we wish you very good weekend and look forward to the next reporting cycle. Thank you very much, and bye-bye.

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