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] Now please let me hand over to MONETA team. Please go ahead.

Good afternoon. This is Tomáš Spurný speaking. I will begin today's presentation. So -- and we will have -- subsequently, we will have Jan Fricek, our CFO; and Carl Normann Vokt, our Chief Risk Officer. So if we go to the presentation. We will refer throughout the conference call to a presentation that we published this morning. This is first half 2021 results by MONETA Money Bank, and I would ask you to turn to Page 4. We report our results today, and I would like to comment a little bit on the key trends and shape of things that are influencing our result. First and foremost, if we look at the reported net profit and outlook for such, we report net profit of CZK 1.4 billion. This is 19% better than what we had in comparable period last year. At the same time, we've elected to adjust our outlook for 2021 in terms of net profit. We are now aiming for CZK 3 billion, and this is chiefly on the strength of performance that we are observing with respect to our asset quality and related cost of risk where we downgrade the expected -- or we upgrade the expected cost of risk by 20 to 30 basis points subject to performance that we've observed in the first 6 months of this year. And in conjunction of this, the cost of risk is also mirrored through stable nonperforming loan portfolio, which now stands at 2.5%. In the second category, capital, RWAs and excess capital. We currently command CZK 30.4 billion of regulatory capital, which translates into more than 19% overall capital adequacy level. This includes CZK 8.7 billion of excess capital against our capital target of 14.4% and translates into excess capital of CZK 17 per share. So we are well poised to support additional organic growth. We are well poised to finance and distribute dividend for both the previous periods. And consequently, in April of next year, subject to regulatory approval and acquiescence of such. Our net interest margin and cost of funding, albeit the first half of this year was difficult, we are actually pleased to have accomplished stability in the net interest income. The net interest income in relative terms, the margin stands at 2.7%. And we have more than half the cost of funding through tactical repricing and through optimization of the structural funding of the bank, namely through reduction of wholesale deposits in the bank. So if we turn the page, the shape of the results synthesized on Page 5 is that we have operating income of CZK 5.4 billion. This is about CZK 200 million below our expectations for the midyear. Nonetheless, if we adjust for one-off items generated last year, the recurrent revenue flow is 4% higher, and this we consider to be a fairly good performance, all things considered. On operating expenses, we've incurred cost base of CZK 2.9 billion. This is according to our expectations. However, we also do have some inflationary pressures outside of the regulatory charges. The regulatory charges we cannot avoid, but we observe pressure on administrative expenses, namely through inflation pegging of some cost categories. So we've taken measures in order to ensure meeting the CZK 5.5 billion target, and we are reasonably confident that we will actually hit the target at CZK 5.5 billion at year-end. On pre-impairment profit, CZK 2.5 billion. Again, if adjusted for one-off items, which is gained from acquisition and sale of government bonds, we have stability in the pre-impairment profit. The pre-impairment profit actually grew by 1.6% if adjusted for the one-off items. On cost of risk, significantly better-than-expected performance, and this is due to stability of NPLs. This is due to other performance metrics that Normann will cover in his part of the presentation. So we have to hope, trust, pray that this continues until the end of the year. All in all, exactly at 50% of the guidance, the net profit, CZK 1.4 billion and updated outlook to CZK 3 billion chiefly due to cost of risk performance better than expected. On Page 6, let me comment key developments of balance sheet. We have deposit growth of 3.9%. This was very much impacted by 2 elements. We have 58% growth in our asset management as we successfully turned CZK 9 billion into our core deposits into asset management balances, and this is a positive. Secondly, we have reduced wholesale funding of the bank by CZK 5 billion, leading -- again, contributing towards overall lower cost of funding. On lending growth, we continue in solid momentum. The momentum comes from 14% growth in retail. And secondly, the momentum is supported by 20% growth in small business around most profitable lending category that we have in the bank. Our nonperforming loans, you will see in the risk section that formation of NPLs is subdued and that we are continuing to manage provisions aligned with model output of our provisioning mechanisms in the bank. Strong capital position at 19.2% and strong liquidity position at 156.8%. However, I would comment here that we are beginning to observe the need for additional deposit gathering as the bank has strong demand for mortgages and our loan-to-deposit ratio has reached 90%. So we are managing the balance sheet very efficiently. However, we will soon need funding within 12 to 18 months period. Now, let me comment on our strategic objectives and we start on Page 8. Here, we have several positives. The first positive is that we continue to gain ground on mortgage franchise development, both through the brick-and-mortar and digital distribution, as you will see later. We also are continuing to focus the bank on retail. We are currently, with retail and small business, at nearly 72%. Additionally, we are growing both the deposit and asset management franchise. And very importantly, we are continuing to have strong momentum in bank assurance development, namely distribution of life insurance. This is contributing to our fees. And when Jan comments the financial performance, you will see it from the fees commission overview. We have unsatisfactory performance on the consumer unsecured, albeit we've increased production quite significantly. We faced very strong competitive pressure. And additionally, we faced effort of Czech households to deleverage. So early prepayments and terminations are impacting both mortgage book and unsecured book, but it's the most visible on the unsecured book. We have a relatively good performance in new client acquisition on small business, and the SME lending balance has decreased somewhat. This is due to several significant repayments that we've experienced at the year-end. And again, even though we've increased the production of loans quite substantially against 2020, we suffer lower volumes. Now if you please turn to Page 9. Here, we have sustainability and profitability targets. What is important in terms of incremental ROE, this is income minus variable expenditures. We see improved performance in retail, small business and SME lending, likewise. Later in the presentation, you will see that what we've accomplished is a stability in margins in SME and small business. However, the retail book is continually under margin pressure. We have stable customer base with some nascent growth of 10,000 customers in the period. So this is also slightly below our expectations, and we assigned that on the account of the pandemic. On Page 10, we provide more granular review of the key performance targets and accomplishments across the 3 segments and the digital. If you look at retail franchise, overall growth of 14%, driven by strong mortgage production and balance growth, also supported by strong recovery in retail unsecured lending and strong recovery in automobile finance. However, only in the month of June, we managed to stabilize contraction of those portfolios. So we look into the second half of the year with a bit more confidence, hoping that the stabilization efforts will pay off and continue and that we will return back to growth in those categories. On the liability side, what I would highlight is a super strong growth in the current account balances in retail. This is that level of more than 26%, and we grew the asset management franchise by nearly 60%, conscientiously seeking to convert some of the deposits into our fund offering. On small business, we continue to post growth at 20%. This is on the account of strong distribution capability of state-guaranteed loans. So we both expand the book, and we effectively reduced the risk by efficiently using the COVID pandemic-related guarantees issued on behalf of small businesses and SMEs. On the liability side of small business, this is a franchise of 100,000 customers, we've been able to garner growth of nearly 36% of current account balances. So substantially increasing the volumes of monies we held in the bank and contributing to stability of the net interest margin through low cost of funding that this product category holds. On SME, I've commented the contraction of the portfolio. What is important is that on the SME portfolio, we've been able to distribute CZK 4.4 billion of loans, which are covered by state guarantees. So effectively improving collateralization of this book to 55% overall. So this is satisfactory. And on the liability side, likewise, in retail and small business, we've been able to deliver high-teen growth in current accounts and deposits overall. So this part of the franchise is also developing quite strongly. On digital distribution, I would highlight here that we have significant success with refinance of digital platform, which now accounts structurally for more than 15% of our production and contributed to the loan book, CZK7 billion of volume. This is low-cost distribution platform where we refinanced mortgages from competitors, and we've been able to revive both the small business lending and consumer lending. And we also have solid, stable and improving production on the liability products, where the key category that we would like to enhance is asset management together with building savings or in German, so called [ bausparen ] category, where we started the digital distribution last year in December after -- 6 months after acquisition of this platform. On Page 11, the other 4 elements of our strategy, I have covered the key shape of sustainable risk management. What is important here is that we continue to hold one of the best coverages of the portfolio overall amongst the Czech banks. We've -- I've commented capital. We have a strong capital position. But here, we have also reduced the density of capital usage through RWAs. This is on the account of successful expansion of both the mortgage portfolio and also successful usage of the government programs, enabling us to guarantee parts of the small business and SME portfolios. So this contributes to the lower density of RWAs. With respect to cost control, this is developing exactly to our expectations. And we have, as I said, taken some measures to reduce certain cost categories in order to ensure delivery of the cost target. And on ESG strategy, we have joined the United Nations Global Compact. So this is important to some of our investors. So we heeded that advice. Secondly, we are tremendously proud by -- in presenting CO2 emission reduction since 2016. This reduction has been actually validated by external parties under ISO. So hopefully, this will lead to a better rating of the bank on this front, and we are making strides seeking to deepen inclusion and gender diversity. On Page 12, the shape of our operating platform. So if you look at this, the platform remains relatively unchanged, but what is visible here is the second line from the top on the tied agent network. We have significantly reduced the offices. We are trying to focus the production into our branch network. So this leads to some additional cost savings in the realm of synergies that we've unlocked from that acquisition. On ATMs, in the first and second quarters, we continued investment namely to improve customer experience through deposit ATM capability and also removing some security risks that our network had. On clients, stable development. On digital channels, both Smart Banka and Internet Bank have 100,000 more users year-on-year. This is in line with our expectations, and we consider it a good performance. And on employment, we actually have 40 FTEs less this time, and we are seeking to reduce the number further probably to a level of 2,900 within a year in order to improve productivity and maintain cost discipline. Now if you allow me commentary on the operating space on the Czech economy and such on Page 14. We cover GDP, industrial production and foreign trade. You can see that the numbers are continuing to be negative, except for industrial production, which is probably one of the most important for our country, one of the most important indicators. And the trend is improving. The trend is supported -- the improvement is supported by continued government support into the first half of this year, and the rating of the country is so far stable. Even though in order to keep the economy in a sustainable or solid shape, the government has taken on significant debt in the last 12 months. This takes us to Page 15, where you can observe that the unemployment remains subdued at 3.4%. This is in line with external expertise estimates and the structural gap between those who seek jobs and vacancies, still tilted towards vacancy. So it's very difficult to find labor in Czech Republic, and the shortage of labor leads to wage inflation. This year, the deficit of the budget, the structural deficit will increase quite significantly. It is estimated at CZK 500 billion, and it is very likely to overrun this number, and the government is structurally taking on more debt. Czech Republic is the second country within the EU 27 with the highest growth in public debt after Malta, I believe. On Page 16, we have inflation interest rate commentary. On inflation in June, June the inflation was at 2.8% based on the inflationary pressure, the monetary policy change. the Czech National Bank increased the 2-week repo rate from 25 to 50 basis points. And this is reflected also in the PRIBOR benchmark, which you see on the right-hand side of this picture, and it reflects itself into the 10-year government bonds. And currently, Czech Republic has, judging by interest rate swap market, inverted yield curves. So this is the shape of things. For the imminent future, the market, if you judge it by the banks, which are portrayed here, the market expects -- everyone expects that the second rate hike is imminent, that it should happen in the third quarter. And we expect internally in MONETA that it will happen in the month of August. And we have Czech crown appreciating back to a level of the prepandemic levels. So there is relative stability in that. From our perspective, so far, the recovery is happening, and it is relatively strong. We see it internally in the bank from the intermediation numbers. I will skip today the banking market growth as we have a lot of content in this presentation. It's fairly self-explanatory. So if you will have questions on that, we will answer them. So if you allow me, I'll go to digital distribution on Page #21. Here, we portray for you what we have done in the first half and what we are planning to accomplish in the second half of 2021. The first priority is to strengthen credit distribution, this is both retail, small business; improve the transactional banking; competitiveness of the bank; and also enhance fee product distribution. For those investors or analysts who want to understand in detail what are our immediate targets, please look at the digital distribution strategy, which is published on our website. Moving now to Page 22, briefly, the development of commercial traction on our digital platforms. If we go clockwise from Refinanso, Refinanso now contributes actually more than 15% to our mortgage production. And in the approximately 15 months of operation, we have generated volume over CZK 7 billion. So we consider this platform to be actually the most successful endeavor to date on digital distribution of credit products, not only for MONETA, but also in the Czech Republic overall. In terms of asset management, the asset management now structurally reached 12% going through the digital distribution. This is mainly centered around our mobile platform where you can purchase funds against available funds on your current account. Speaking of current accounts, we have good performance on digital sales of current accounts. This is structurally 16%, 17% of our sales. We would like to further improve it, and the recent introduction of bank identity should enable this more seamlessly as the process will be simplified, and we plan to introduce on-boarding to bank digital identity by end of the third quarter. In small business lending, we have seen a revival in the first quarter, continuing somewhat into the second quarter. So here, we consider the performance satisfactory. On Page 23, you can see the overview of growth of users -- registered users, for both mobile and Internet banking platforms. What is key here is that in 4 years or 4.5 years of introducing Smart Banka, in the second quarter, we reached 5.8 million transactions on Smart Banka as opposed to 6.8 million on Internet bank. So very soon, we will surpass the density of usage on the mobile platform. And as you know, we've received for several years, either #1 or #2 awards for having the best mobile banking platform in the country. On Page 24, payment traffic through digital channels. On top of the page, you can see that we've accomplished now 360,000 in excess of 360,000 tokenized cards. And we have strong growth, almost 90% growth year-on-year in number of payments. we want to further improve tokenization and currently, the bank is undergoing switch from Mastercard to Visa. So this is from a short term, next 6 months point-of-view, but a bit complicated. On Page 25, how are we doing on our web platform. This is presentation of the bank on the web. What is critical here is if you look at the dark blue chart, you can see that the organic unpaid traffic has increased quite substantially against 2020, but several fold against 2018 and 2017. So we are gradually seeking to optimize the web presence in order to be very attractive for those customers who wish to seek information about MONETA, about its products or services through the digital channel. So this concludes my first part of the opening introduction. And let me now turn to Jan Fricek, who will walk you through details of our P&L.

Thank you, Tomáš. Good afternoon, ladies and gentlemen. I am now on Page 27, and let me give you a bit more detail about our financial performance. Net profit increase by 19% is driven by a lower cost of risk and diligent cost discipline. This corresponds to 11.2% return on tangible equity. Reported operating income decreased by 18.3%, which is a function of 2 nonrecurring items with a total gain of CZK 1.4 billion realized last year. Adjusting for that, operating income improved by 4%, mainly supported by higher fee and commission income, increased FX transactional activity and the revaluation of hedging portfolio. Total gross base for the first half of the year is up by 6.3%, which is mainly attributable to higher depreciation and amortization, regulatory charges and administrative expenses. And lastly, we report cost of risk reduction by more than 70% year-on-year, primarily due to higher pandemic-related provisioning last year and strong credit risk performance of the loan portfolio this year. Next page shows stable development of recurring profitability year-on-year, achieved through improvement in operating income and focused cost management. If you follow the chart on the left-hand side, you can see last year, we reported pre-impairment profit of CZK 3.9 billion, adjusted down for nonrecurring items to CZK 2.5 billion. Operating income on adjusted basis increased by CZK 208 million and more than offset cost base increase of CZK 168 million. As a result, the impairment profit on recurring basis is CZK 40 million above last year. On Page 29, we provide you with a decomposition of net interest income. Decline by 1.3% year-on-year is mainly driven by persisting pressure on consumer lending market, accelerated recognition of distribution costs amidst increased loan portfolio prepayments and recent interest rate environment. These factors contributed to a 7.1% decline of lending interest income visible in the upper chart on the right-hand side. We managed to offset the interest income erosion through a repricing of the customer deposit base. On a year-on-year basis, we achieved a reduction of the interest expense by 1/2. Decline of the interest income from other assets and liabilities is fully attributable to lower income from the hedging position of interest rate swaps, partially offset by higher income from the investment portfolio of government bonds. As Tomáš already mentioned, at the end of the second quarter, Czech National Bank increased 2-week repo rate by 25 basis points, which happened one quarter sooner than we expected in our business plan. This will give us an upside to NII by about CZK 30 million this year. With respect to expectations of further hikes, we added the table showing sensitivity of our balance sheet on 2-week repo rate increased by 25 basis points. You can see that full year upside to NII, we estimate about CZK 130 million. On the next page, we continue with the development of net fee and commission income. The income side increased by 17.6%, arising from successful distribution of third-party products, supported by growth in all other fee income categories. And on the expense side, we reported a 19.8% increase, primarily due to higher transactional activity in the second quarter, amidst relaxation of pandemic restrictions. Now, Page 31 provides further detail about the fee income dynamics. Our strategy focused on asset management and insurance product distribution recorded commission income growth by almost 25%. This was accompanied by strong increase in early termination and transaction fees, reporting 13.9% growth, which is visible in the bottom chart. Now we move to Page 32, where we report in detail our performance in asset management. You can see 57% increase of commission income year-on-year, which was delivered on a basis of a proportion of growth of the asset management balance. This excellent growth rate were delivered through our continuous focus, proposition with no opening fee and also specialized sales force deployed in the first half of last year. Now if you flip the page, we can continue with assessment of our growth performance. Reported OpEx in Q2 is 1.3% below the second quarter last year. This was mainly achieved through post-integration cost synergies that absorbed the higher depreciation and amortization and administrative costs, mostly on marketing. Summary of the integration process, I'll show you on the following page. And finally, our cost-to-income ratio in the second quarter stood at 49.3%. While for the full year, we expect cost-to-income ratio of [ book bill ] 51%, primarily due to persisting pressure on the income side. And on Page 34, as promised, provides update on cost synergies and evaluations against our pre-acquisition target. In Q2, we successfully accomplished integration of Wüstenrot 6 months ahead of plan. Just to remind you, in Q1 last year, we communicated cost synergies target of CZK 300 million to be achieved in 2022. However, current run rate indicates that we should outperform the original target by 25% and on top of that already this year. Estimated cost synergies of CZK 375 million represents 51% reduction of the acquired cost base, while our original target was set at 40%. And at the same time, we kept the integration costs within the budget of CZK 400 million. So this concludes the profit and loss section. And I will now hand over to Tomáš, who will continue with the balance sheet development.

If you look at the balance sheet development, currently, we stand at CZK 316.4 billion. This shows gross loan book growth of 10%, 3.9% growth on the deposit side and off balance sheet, we have the 59% growth in asset management. So our loan book nominally stood at CZK 239 billion, at the middle of the year. Now if we look at the asset side categories on Page 37, we've increased the sovereign bond portfolio to CZK 51 billion. We show you evolution of the yield against the 2-week repo rate and also the duration. So the bonds -- the full impact of increasing the bond portfolio will translate itself into the revenue stream in second half of this year, and it will positively impact our ability next year as the target for 2022 is CZK 11.6 billion of operating revenue. On Page 38, you can see the loan book evolution from a structural point of view. We're going right to left. Retail now constitute 68%. A year ago, it was 65%. Small business constitutes 4% weight. It was 3% a year ago. And we decreased reliance on SME to 28% from 31%. So we are trying to balance the book towards retail and trying to focus on the key areas of development, which is mortgage banking, small business banking and consumer unsecured lending. Therefore, in the first half of the year, we were successful in 2 out of the 3 categories. On Page 19 (sic) [ Page 39 ], you see development of the loan book yield. The loan book now generates 3.8%. This is a significant 60 basis points decrease year-on-year. In retail, it's even more pronounced. The decrease is 80 basis points, and majority of that is attributable to change of structure of the loan book going more towards mortgages from unsecured lending. And I would say on the commercial side of things, you see a remarkable resilience of the yield of the commercial book, and this is due to the fact that we are increasing the small business weight of the book, and we are also seeking to maintain the profitability targets and capital returns on the commercial book. On Page 40, we have decomposition of the retail book, which stands at CZK 163.4 billion, CZK 111 billion is constituted to mortgages. This is 27% growth year-on-year. You can see contraction of the consumer loan portfolio to CZK 47.3 billion. The portfolio contracted by 6%. And I would say 2/3 of the contraction are related to prepayment, early prepayment; 1/3 is related to downgrades into stage 3, which you can observe from looking at the risk part of the presentation. So downgrading part of the book contributed to the contraction of the performing receivables that we present here in this section. On automobile lending, CZK 2.2 billion. Again, contraction of 4%, but very strong growth in the second quarter. We observed more than 100% growth or nearly 100% growth in volumes, so we believe that we will turn this situation around. And on the revolving product, CZK 2.4 billion balance, and this is a long-term issue of Czech banking market that the retail revolving products are suffering lower balances. On Page 41, just to comment on production and repayments. So if you look at from left to right, on top, we have the mortgage volume. And you can see that in the first half of the year, we were doing more than CZK 12 billion of production each quarter, significant growth year-on-year. However, what is happening at the same time, we see significant increase of early repayments. This is 2.5x increase, and this actually pulls down both the balance and puts pressure on the net interest income as we amortize acquisition cost over 8 years or 9 years. If the loan is repaid, we have to take the full amortization at that moment. So this pushes against our net interest income on both the retail unsecured and on mortgages. On retail unsecured, the early prepayments rose 175%. And therefore, the 140% increase in production was not able to accomplish growth in the nominal balances, the performing balances. Nonetheless, as we have put out this morning, we have stabilized the balance of the portfolio in June, it seems, and we hope, we actually pray, that this trend will continue. On Page 42, yields. You can see that under the low interest rate environment, the mortgage yields declined quite substantially by 40 basis points. We also see a decline by 50 basis points on the consumer loan yield, and similar development is take -- developments are taking place across the key product categories. So the low interest rate environment really put a huge pressure on the banks as it was accompanied by lower interest, lower demand for products, except for mortgages, where the volumes have increased quite substantially. Moving on to commercial on Page 43. You can see that the -- our commercial book is nearly CZK 76 billion. We have very strong performance on small business. This is the 20% growth stability in the investment loan book, and we've increased or have underwritten strong growth in working capital limits. However, the limits remain fairly unchanged year-on-year. So this contributes to the flat slightly decreasing performance in the overall commercial performing balance. On Page 44, we dissect for you the portfolio yield into the major categories. And you can see that out of the 4 categories, 2 are fairly stable and 2 are decreasing. On the working capital, the yield erosion is pretty much driven by the interest rate decline year-on-year. And similar trend is in the small business where, on average, this underwriting yields 60 basis points less than a year ago. However, here, it is very much impacted by the volume of state guarantees. The loans with state guarantees carry lower interest rates and their weight changes the overall yield profile of the portfolio. Now let's go to the liability side of the balance sheet on Page 45. The deposit position -- the structural core deposit position of the bank is CZK 276.7 billion mid of the year with CZK 200 billion -- or CZK 199 million in retail and CZK 67 million in commercial. And you can see that we have substantially reduced the wholesale funding. The wholesale funding is at CZK 10.5 billion. A year ago, it was at CZK 15 billion. So this was one part of the effort to push down the cost of funding, seeking to protect and maintain stability in the net interest margin. On Page 46, you can see a DuPont tree, which shows you the repricing effect on the core deposits split into retail and commercial, and you can see that the impact of the repricing effort as well as the impact of reducing the wholesale funding of the bank, reducing the cost of wholesale funding. And all in all, this translates into second quarter cost of funding at 37 basis points, which we consider significant success in the first semester of this year and also year-on-year. On Page 47, you can see the evolution of the retail funding. What is very important is that structurally, the current account balances have significantly higher weight in the total deposits as opposed to a year ago, and we consider this, again, a good development as it contributes to profitability and low cost of funding as such. On Page 48, same view of the commercial deposits where the vast majority of this funding sits in current accounts and develops positively at the rate of growth in excess of 20%. So this is also, in our view, solid, strong performance in cultivating these relationships. And finally, wholesale funding, you can see that we have reduced both the issued bonds through repayments and maturity. And secondly, by CZK 2 billion -- more than CZK 2 billion, we've reduced reliance on large term deposits provided by institutional investors instead of relying more on the retail and small business deposits. So this is the balance sheet, 14% growth on the -- I'm sorry, 9% growth on the loan book overall, 3.9% on the deposits and 58% on the asset management. And now I will turn to Normann to walk you through the risk metrics and asset quality of MONETA Money Bank.

Thank you, Tomáš. Good afternoon. We are now on Page 51 with an overview of cost of risk for the last 6 quarters. In the first half of this year, we recorded cost of risk of around CZK 750 million or 65 basis points. This is a significant drop compared to the first half year number in 2020 and also shows an improvement between Q1 and Q2 this year. The retail segment produced a cost of risk of CZK 423 million in the second quarter, which included increase of coverages for COVID-related exposures in stage 3. And the commercial book delivered a net release of provisions due to improved macro parameters within the models, largely in stage 1 and 2. And moreover, we did not really record any major defaults in the commercial segment. In addition, in the first half of this year, we had conducted sales of nonperforming loans with a positive pretax P&L impact of around CZK 116 million, which supported the positive cost of risk results. Moving to Page 52. Here, we show the evolution of the loan portfolio, loan loss provisions and overall coverages over the last 5 quarters. Provisioning balances grew year-over-year from CZK 5.2 billion to CZK 6.2 billion. And as for the overall coverage, this grew from 2.4% a year ago to 2.5% at the end of June this year. On the next page, 53, here, we show the evolution of nonperforming loan in and outflows over the last 5 quarters. The second quarter of this year was characterized by a significant slowdown of COVID-related downgrades of receivables, overall improving delinquencies and lower degree of NPL inflows as well as debt sales. As a consequence, the NPL stock dropped by more than CZK 300 million between the first quarter and the second quarter this year. Going to Page 54. Here, we have a more granular view of the entire NPL stock. As you can see, the bulk of the NPL increase occurred in the retail segment, which grew by 93% year-over-year, whereas the commercial stock increased by a comparatively moderate 25% in the same period. Due to the slowdown inflow of new NPLs as well as the debt sales, which we conducted in the second quarter, the NPL ratio dropped from 2.8% in March to 2.5% at the end of June. On the next page, 55, here a more detailed breakdown of the COVID-related stock of NPLs. So what you can see on the right-hand side, out of the CZK 6.3 billion NPL stock, CZK 2.7 billion are COVID-related. And out of this CZK 2.7 billion, around CZK 500 million are covered by a payment holiday, around CZK 350 million are past due and almost 70% or roughly CZK 1.9 billion are being repaid, which de facto means are performing. Therefore, should the payment behavior continue to be satisfactory going forward that in part or all of this CZK 1.9 billion of receivables are subject to potential upgrades in the future and subsequent releases of provisions underneath. On the next page, 56, here, we show the development of the payment moratorium since the beginning of the pandemic. The peak of balances under the moratoria was reached in June last year and amounted to around CZK 34 billion. Thereafter, these balances have been steadily coming down and stood at approximately CZK 0.5 billion only at the end of June this year. While at the peak of the payment holidays, the penetration ratio was around 15%. At the end of June, only 0.3% of retail and 0.1% of commercial exposures were affected by payment holidays. Going to the next page, Page 57. Here, we have an overview of loan portfolio balances, and coverage is broken down into stage 1 through 3. While at the beginning of the pandemic, we saw a significant increase in stage 2 receivables, the last 3 quarters showed migrations from stage 2 to stage 1 or 3, either due to losses crystallizing reclassification or improving PDs. As for stage 3, here in the second quarter, we have seen a drop of balances due to debt sales. Overall, the coverage increased throughout the last 3 quarters as coverage levels of COVID-related NPLs increased and has been largely aligned to standard NPL coverages in the relevant segments and product categories. And finally, on Page 58 here, we show the evolution of delinquencies, both 30, 60 and 90 days past due since 2018. Overall and across delinquency buckets, we have been observing improvements. These were driven by payment holidays granted obviously to our customers, but also debt sales and solid core performance. In particular, the better-than-expected payment behavior of COVID-affected receivables contributed to this positive development. So summarizing the risk section, the bottom line message is that over the last 3 months, the risk performance was clearly positively affected by lower NPL inflows, improved core performance and debt sales. Needless to say, it remains to be seen as to whether, despite progressing vaccination rates, a fourth wave of the pandemic can be avoided in late summer or early fall. Also, government support might not be available for the full remainder of the year, which in turn could trigger challenges both for businesses and private households. So it's still too early to predict how final expected credit losses from the pandemic will evolve over the next quarters. Notwithstanding the foregoing, cost of risk is expected to come in better than previously guided and currently is believed to reach a level in the range of 60 to 70 basis points in '21 as opposed to the 80 to 100 basis points we disclosed during the Q1 earnings release. And with that, I hand over to Jan Fricek.

Thank you, Normann. I am now on Page 60 where you can see that MONETA continues to report strong capital position with capital ratio at 19.2%, which is nearly 6% above our regulatory requirement of 13.4%. Our accounting equity stood at CZK 28.5 billion, which is CZK 4 billion above 2019, driven by accumulated retained earnings. Our regulatory capital, provided on the right-hand side, reached CZK 30.4 billion and recorded 34% increase since the end of 2019. The increase was further supported on top of retained earnings by issuance of subordinated debt and lower the deduction for the value of software. Strengthening of the capital adequacy ratio by 1.2% since 2019 was also enabled by a reduction of blending RWA density by 10% amidst mortgage portfolio growth and diligent quarter on management. On the next page, you can see that the excess capital measured over the capital management target, including 100 basis points, grew by 10.2% in the first half of the year and reached CZK 8.7 billion. The upside was sourced by generated net profit, partially consumed by lending growth. Chart on the bottom part documents our diligent capital management, where our position in risk-weighted assets grew by 3% against performing loan book growth of 5.9%. Of course, this ongoing trend is heavily supported by increase in share of mortgage lending with favorable risk rate. So this was capital management section, and I will now hand over to Tomáš for the full year outlook and final remarks. Thank you very much.

So we are now on Page 63, we provide you an overview of the original guidance for the year 2021 and again our current outlook. So on operating income, we would like to reach at minimum of CZK 10.8 billion. This is potentially CZK 400 million less than originally anticipated due to the challenges that we've outlined throughout the presentation. On cost base, we keep this flat. And on pre-impairment profit, this translates into CZK 5.3 billion. On cost of risk, we've elected to revise the outlook to 60 to 70 basis points range, subject to qualifications that Normann has made. There is still a lot of uncertainty out there. And last year, where we put out the guidance in October 2020, we had absolutely no clue that we would go through 2 additional quarters of lockdowns, which was the fourth quarter and first quarter of this year here in the Czech Republic. So we need to remain cautious and alert to the risks which are lurking. Nonetheless, we do believe that we will deliver at minimum CZK 3 billion profit this year, which translates to an estimated earnings per share of CZK 5.9 or better per share and return on tangible equity of 12% or potentially higher. Now how does this translate into our position for 2022? So far, we have done an analysis where we believe that we can still, in 2022, generate operating income at the level of CZK 11.6 billion. We do believe that this is contingent on the additional increase or other increases of interest rates. We will receive the full benefit of investment that we've made into government bonds, and we will make significantly better income from the new lending generated in 2021. And additionally, if that materializes, we could see some balances from stage 2 walking back into -- from stage 3, forgive me, walking back into stage 1 through upgrades. And this would again improve our net interest income as currently on the stage 3, we realized so-called unwinding as opposed to recognizing the full amount of revenue that these loans generate. So, so far, we have no basis to adjust 2022, and we will provide further commentary on 2022 once we report the third quarter results on the 22nd, I believe, of October -- 29th of October of 2021. On Page 66, you can see our planned shareholder interactions, which are in the 4 boxes here. So we will seek to attend 3 conferences. And on top of that, 4th event, will be the conference call, the quarterly conference call. As the last comment, perhaps, we have outstanding with the Czech National Bank application for dividend distribution, CZK 3 per share, and we expect to receive the answer by end of September. The regulator cautioned us not to comment that. But I suppose it will come in the second, third or fourth week of September, and we will communicate to the market the decision of the regulator through an ad hoc statement and call shareholder meeting immediately thereafter if there is a reason to call it to approve the dividend payment. And this relates solely to CZK 3 per share, which is the allowable maximum, allowable payout from retained earnings accrued through years 2019 and '20. So this is the catch-up dividend for those years. Thank you very much for your patience with us, and now we are ready to answer your questions.

[Operator Instructions] We have a first question, it's from Simon Nellis, Citibank.

I was just wondering if you could quantify the potential uplift from the reverse unwinding effect and what's the likelihood in your view that you could actually see that coming through...

We estimate -- Simon, we estimate on the CZK 1.7 billion or CZK 1.9 billion, we estimate CZK 30 million to CZK 50 million.

CZK 30 million you said? Okay. That's helpful. And then just on the proposed merger that didn't get passed. I mean have you had further talks with PPF? Is there any chance they could come back with sweeter terms? Or is this kind of whole process now on ice for a while?

I would say when there is a belief, there is a hope. We are anticipating that we will see something concrete. And hopefully, this will get settled before the year-end as we should resolve the situation. Right now, we are focusing really on ensuring that the bank is able to fulfill its organic growth targets that we are able to instill cost discipline or to maintain cost discipline. We are also struggling with the post-COVID syndrome of flex place, where many of our people have gotten used to through the 14-month long on-and-off lockdowns to sit home and work from home, and this obviously does have effect in many quarters of the bank on productivity and speed of doing things. So we are trying to remind our people what is the culture of the bank that we have aspiration and can do culture of the bank. And this is about as popular as the acquisition. And what else are we doing? We are really focusing also on IT strategy of the bank because we have to deal with some legacy issues. So I expect that come end of fourth quarter, when we report the fourth quarter, Klára, our Chief Operating Officer, will provide an update on the foregoing IT strategy and related investments. So we are really absolutely focused on delivering the results as we had commented it. And we are waiting for our anchor shareholders, if I may put it that way, to come up with a resolution of the impasse, if I can call it that.

Understood. Understood. And then just maybe last question on me. I mean is there any sign of hope on competition for margin spread for loan spreads? Because it looks like the competition remains pretty fierce, both on the mortgage and the consumer lending side.

I think I would strictly answer in 2 categories. If you look at the new volume on retail market, on the retail consumer market, the market is now at 7.3%, 7.4% yield on new production. It's 7.4%. We've had in the second quarter performance at 6.5% as we tried to provide very competitive offer to our clients because roughly 85% of our lending concerns MONETA clients, and it had a disappointing result in the following sense. We increased the volumes by, as we've reported, by 45% on the consumer lending. However, they're not able to move the needle on the volumes. So we have now elected to increase the pricing, and we are aiming at about 700 basis points average yield on the consumer lending volume. The competition in this round is fierce, and the situation is not better, and we are sandwiched between [ Ceská pojištovna ], I'm curious to see their results, and the neo banks, the small banks, which are pushing us really in a very uncomfortable quarter. This is the reality. This is the reality. On mortgages, we are aligned with the market. where the key preoccupation is that we will implement a prepayment fee on mortgages as we had, let's say, yielded to regulatory pressure as Czech National Bank recommended to all banks not to charge this fee. We followed. And there are several banks which do charge this fee, putting us at a competitive disadvantage. So we are now contemplating to reinstate the early prepayment fee on mortgages from, I think, 1st of September this year in order to prevent some of the outflows. But I would say that the situation actually got a lot worse. Low interest rates, low demand leads to a lot of push. And the strongest push is on the unsecured front, where the market is flat. The market increased 2% year-on-year, and the small banks are leading the charge. So Air Bank is benefiting. Equa bank is benefiting. It's the small banks that are winning the battle.

We have the next question, it's by Malte Schmitter, Petrus Advisers.

And just a question on the guidance [ for 2022. It is good to see, ] revenue guidance is not changing. I would still like to see some kind of a buildup of the data between the 2022 number and the revised 2021 number. So can you provide this in terms of how much is contributing from net interest income versus fees versus stage 2 -- stage 3 releases? Because at the end, this is a 7.5% increase, and a little bit more color would be very helpful here.

Yes. We can provide that number. I mean, verbally, if you look at the CZK 10.8 billion target on the operating revenue now or the outlook, rather, versus the CZK 11.6 billion next year, this has 3 or 4 components, and Jan Fricek will answer. That's basically what it is, and we can put it in the next quarter's presentation for people to see the bridge. I think we provide so much detail that we didn't want to have more detail because it's a lot of detail that we provide. Jan will answer the question for you now because we've calculated it actually.

Okay. So Malte and the others, CZK 800 million increase of the income will be sourced from CZK 600 million to CZK 650 million, high net interest income and CZK 150 million to CZK 200 million high net fee and commission income. There are 3 drivers basically of improvement in NII. First, Tomáš already mentioned, 2-week repo increased by 50 basis points, which will give us approximately CZK 260 million on annual basis. Then bond portfolio, full upside from the bond at CZK 51 billion. That will give us incrementally CZK 100 million. And the first one is the [indiscernible] loan book growth by 9% year-on-year, will improve NII by approximately CZK 250 million. And on the net fee and commission income. Here, as you know, our strategy is predominantly focused on distribution of investment funds and insurance. And here, we assume an increase of the income by approximately CZK 150 million on income.

Well, CZK 100 million comes from asset management. The asset management revenue target for this year is CZK 200 million. Next year, it's CZK 300 million, and if we continue the performance, we will hit it. And the additional CZK 50 million is from distribution of life insurance, where the total bucket of life -- on all insurance in our fee structure, the target this year is CZK 637 million. And next year, it will be approximately CZK 60 million higher, reaching CZK 700 million in 2022. So the sector, close to CZK 150 million, plus CZK 100 million from asset management and CZK 50 million from life insurance. And I'm rounding it out the numbers.

Yes. Okay. That's very helpful. And then one other question on excess capital. And more specifically, the distribution of excess capital after the acquisition of the PPF assets has collapsed now. We just want to understand that -- how we should think about it? Because including the expected dividends for 2021, if we just assume 80% payout time to target net income, we get to CZK 19.5 per share excess capital, and this is on top of the CZK 3 per share dividend for 2019 and 2020. And what's kind of the plan for distributing this excess capital to shareholders? And will this include share buybacks as well rather than dividends?

Yes. It's [ 1,701 ] now, minus 3. That's [ 1,401 ] plus 3...

So this is already assuming the second half of '21, assuming that target was delivered?

So let's call it -- it will be somewhere between CZK 17 and CZK 19, and that's an assumption. Hopefully, on the basis that Czech National Bank will allow us to pay the CZK 3 dividend. So it could be as high as CZK 20 to CZK 22 if they don't. So the plan is our dividend distribution policy, which calls full minimum payout of 70% annually. This is institutionalized in the bank. It's actually on the website of the bank in key documents, and this was instituted in 2016 and respected every year since. If conditions allow and there are no acquisition opportunities to be had for that cash, we will obviously try to distribute it back to shareholders. Because what would we want to do with that? But as things stand today in Czech Republic, you have ECB communicating that it will drop the embargo on dividend and buybacks end of September. Czech National Bank so far has not made any comments on this apart from the fact that in every conversation we have with them, they caution us against shareholder distributions or any kind of buyback. So I can't give you a better answer. So if the COVID goes away, if there is no recessionary environment, we will argue with the regulator for maximum distribution, and I think the management of MONETA has a very strong track record in this. In 2017, we had paid, what was it, per share? Approximate [Foreign Language]

2017, [indiscernible].

We paid CZK 8 per share, which was exceeding our earnings. So it is our policy that unless there is something to do with the capital, we would seek to distribute it.

Okay. And kind of we can think of the total capital management target of, what is it, 14.4% as kind of the floor for distributions, but that should also be the target, assuming that the regulator plays along. Is that correct?

I don't want to be Pinocchio here, but the 14.4% holds only until June of next year. Starting July of next year, we assume the target at 50 basis points higher. So it will go to 14.9%. It's published. We've published it previously. So there needs to be a warning label on the capital. So if you put in your model, 15%, you get a very good benchmark of the target of 14.9%. I -- and this is my view. This is not the bank's view. This is Tomáš Spurný's view. I think the target will again increase because I'm sure that the Central Bank will take measures to make robust, more robust, either Pillar II for us -- or that's individual. Our Pillar II was reduced from 3% to, what is it now, 2% -- 2.3%, 2.4%. So we did 60 basis points reduction. But I think it will be either that or the buffers will go up. Czech National Bank wants to maintain a high capitalization of the industry at any cost until the COVID risks prevail, and I think the outflow of capital will be about 18 to 24 months after the COVID risks in their view are finally abated or lowered. So I wouldn't be too optimistic on sudden dividend payment, which exceeds given calendar year earnings. I do not believe we will be allowed to do that for the next 2 or 3 years. And here, sorry for the long response, but we have parliamentary elections in this country in October. And if you look at the lineup of the contenders, none of them are exactly, how to put it politely, low tax environment parties. So the equation in the elections is being skewed towards political elements which we'll want to most likely somehow -- I'm looking for the right word, well, plug out the hole in the ship through taxes because they have this pirate party fashioned after Germany. So we have a lot of uncertainty what will happen on the taxation front in Czech Republic.

[Operator Instructions]

Okay. I suppose we do not have any more questions. So on behalf of my colleagues, I want to thank you for attending the conference call. We look forward to our investor interactions through the 3 conferences or individual meetings, and we are certainly looking for our ability to report good results on the 29th of October, and we will immediately inform the market as to the decision of Czech National Bank, whether it provides us with acquiescence to pay to 2020 and 2019 dividend stream, which we have applied for on the 26th of March 2021. Have a great rest of the week, nice weekend, nice rest of the summer, and we look forward speaking with you again. Thank you. Bye-bye.

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