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] May I now hand you over to Tomas Spurny, Chairman of the Board of Directors, who will lead you through this conference. Please go ahead.

Good morning, ladies and gentlemen. I welcome you on our regular quarterly call. I will refer throughout the presentation to materials that we published this morning on our website, which is titled Third Quarter of 2021 Results. And if I may ask you to turn to Page #4 to provide you with highlights of our performance year-to-date. MONETA delivered year-to-date net profit of CZK 2.9 billion. This is the result of generating operating income at the level of CZK 8.2 billion. We have incurred operating expenses of CZK 4.1 billion that translates into pre-impairment profit of CZK 4.1 billion, and we have incurred cost of risk at the level of CZK 0.5 billion. Based on trends that we will describe throughout the presentation, we take the liberty of increasing the net profit expectation for 2021 to the level of CZK 3.6 billion. If you turn the page and go to Page 5 briefly, our balance sheet development. If you look at our deposit growth, it came in year-to-date at 4.2%. We have had very strong growth, nearly 60% on asset management distribution due to conscientious effort to transfer part of the deposit balances into the off balance sheet asset management. In terms of expansion of the credit book of the bank, the bank generated, MONETA generated 11% overall growth in the performing lending balance. In terms of nonperforming assets, we've been successful to alleviate the impact of the COVID pandemic and the NPLs remain at 2.4%. And in terms of capital, we remain solidly capitalized with the capital adequacy ratio standing at 18.7%. Now if I may, key trends observed throughout the third quarter. We improved the net profit outlook based on combination of several factors. Number one, we have better-than-expected net interest income. This is a result of robustness in generating additional balance to the credit portfolio and also in rapidly changing interest rate environment. Secondly, we maintain our cost discipline and believe that we were able to mitigate the inflationary pressure, which is impacting our overall cost base and due to excellent repayment performance, negative formation of NPLs and successful disposal of legacy NPL assets, we maintain low cost of risk. The low cost of risk is also impacted by IFRS 9 modeling, where we have translated the latest forecast by Czech National Bank into the model, and that resulted in a provisioning release during the third quarter. We also commend strong capital base where the excess capital available for future growth, as well as shareholder distributions stands at CZK 9.4 billion or slightly above CZK 18 per share. The regulatory equity of the bank stands at CZK 30.6 billion. And we have main things slightly decreased the density of our risk-weighted assets. And if you look at margin evolution and cost of funds, first and foremost, we have decreased the cost of funding by 22 basis points to a level of 37 basis points. If you examine the quarterly results in the third quarter, the cost of funds came in, the core cost of funds came in at 29 basis points. So we have done a lot of work on optimizing the cost of funding, and that contributed to net interest margin stabilization at 2.7% level. This is a slight improvement compared to comparable quarter last year. Now if we turn to Page 7, we are also proud of being able to achieve AA rating by ESG MSCI. This puts us in the leadership group within 190 banks that are globally rated by this agency. And actually, if you examine the score that we have received, we have come in at, I believe, 8.4%, which is just a shade below the threshold for a AAA rating. So this is significant success of the bank. And coincidentally today, we also published the ESG strategy, updated ESG strategy of the bank, which contains updated KPIs for the senior management of the bank. On the following page, on Page 8, we would like to communicate that we are proud to have won all 3 categories of all of the major local competitions in the Czech Republic conducted by the leading economic daily [indiscernible] I sometimes jokingly refer to it as our local Wall Street Journal. So this is the first time since IPO that we have become -- we have received this accolade as the best bank. It is the fourth year in a row that we have been voted the best banking innovator in the country based on digitization of the bank. And now if I can turn to the report on the fulfillment of our medium-term strategy. We start on first block -- first 4 blocks of our strategy related to segments and digitization. If you examine our performance in the Retail segment on the asset side, we have garnered fairly strong growth of lending at 16.8%. This is driven by mortgages. And on the liability side, the main success lies on 2 fronts. Number one, we have increased current account balances of our retail customers by nearly 26%, and we have phenomenal success in the ability to distribute asset management products to our customer base with growth at 59%. The success of Retail is mirrored by a steady performance on the small businesses. If you look at the lending expansion of the small business portfolio, it came in at 15.7% supported by MONETA's success in distributing loans, which are covered by COVID related guarantees issued by the National Development Bank. We are actually, in this segment, a market leader in utilizing the government programs. On the liability side of small business, I would again say that we registered phenomenal success in increasing the overall deposit volume and that is mirrored by nearly 29% increase in current account balances. Now let me cover SME. We have a stable portfolio in SME. In SME, we've had some fairly significant repayments throughout this year. However, the lending volumes increased by nearly 18%. So we've been able to keep the portfolio stable. And as of end of third quarter, more than 5% of the overall portfolio is covered by state COVID guarantees. So we have also alleviated the RWAs and mitigated some of the risks related to the portfolio. And on the SME, we also registered success in increasing the overall deposit position inclusive of the current account strategy. If you then look at the digital distribution progress where we focus on distribution of credit and fee earning products. We have significantly increased this year, the weight of distribution channels in the overall distribution capacity of the bank on both assets and liability side, and we will examine that just a couple of minutes -- a couple of minutes later. The other 4 blocks of our strategy, which relate to risk capital efficiency and social responsibility. If you look at risk management, we continue to maintain a robust strong overall coverage of the loan book through loan loss provisions at the level of 2.3%. And aside from that, we [ water ] on stabilizing, decreasing the nonperforming book this year. Based on IFRS balances, we have sold CZK 1.1 billion of nonperforming assets. If you look at the capital strategy, I've covered capital but what is important to say not only that we command strong capitalization overall, but the CET1 ratio is super solid at the level of 15.9%. On cost base, we have generated cost-to-income ratio of 50.3%. This is year-to-date. If you then examine our quarterly results during the third quarter, the cost-to-income ratio came down to 45%. We keep steady, flat employment level at 3,025 FTEs to present increase, which was mainly driven by super strong demand on mortgages, which impacted our risk management and our back offices. And we have so far successfully mitigated the inflation pressure into the remainder of our cost base. And Jan Fricek will give you more detail on that. On the environmental, social and governance front. We have not only received the AA rating, but we've also worked in the last 6 months on updating our strategy inclusive of targets for the senior management, which consists of the management board plus 4 people and for the entire organization so our strategy, actually, which is available on our website, stipulates very clearly what are the granular targets that we would like to hit over next 3 to 4 years. Now let me turn to Page 12, the operating platform of the bank. If you look at the branch and tire agent network, you see that we have worked towards further optimization of the tide agent network that we have inherited through the acquisition of the Wüstenrot franchise, and we have decreased the footprint, somewhat relying more or less on our digital and on branch network of MONETA. On the ATMs, we haven't done throughout the third quarter any changes, even though we would like to purchase more modern ATMs that are actually unavailable in the market due to chip shortages. So this will be pushed into 2022. We grow the client base with the rate of growth is relatively subdued as, I would say, the COVID pandemic and our pricing policy on deposits negatively impacted those figures. If you look at, however, the digital platform usage, we have a very solid growth on the mobile banking platform and continuous growth in registered users concerning our Internet bank. And I've commented already that the employment base is nearly flat. Now I would like to turn into operating environment in Czech Republic, and we go to Page 14. If you look at the key macroeconomic indicators, the forecast for GDP is at consensually somewhere between 3.4%, 3.5%. The economy has certainly rebounded and we have seen not only better demand for our products but also higher level of banking intermediation, expressed payments, in card transactions and such. Nonetheless, there are, going forward, some clouds on the horizon as the automotive industry has become idle due to supply chain shocks. And the question is how GDP will behave in the fourth quarter. So far, the going has been very good. We have seen strong rebound of the industrial production and also of foreign trade. Czech Republic's rating remains strong and solid with a stable outlook, even though the country is generating higher level of indebtedness compared to its GDP, which puts us to Page 15. If you look at the state finance deficits during the third quarter year-to-date, the country incurred a deficit of CZK 326 billion with the projection this year to CZK 500 billion. Next year gap between receipts and expenditures is estimated at CZK 370 billion with the newly formed government, which is in the making pledging that it will try to reduce state spending by CZK 100 billion. So this translates into estimated budget deficit to GDP at the level of 8.2%, which is quite high. Unemployment, so far, increased to 3%. However, the situation in the job market is fairly difficult for employers as the number of vacancies exceeds -- significantly exceeds number of applicants. And there is a very strong pressure on the wages. If you look at the latest wage numbers, the year-on-year increases in excess of 11% and the bank, as many other employers, experience increasing difficulties in recruitment and strong pressure on the existing payroll. If we go to page if we go to Page 16 and look at the interest rate environment. We have dramatic change taking place. First and foremost, inflation in September reached 4.9%. The estimate is that the inflation will keep on creeping up. End of the year, we could be looking at even higher number. On this basis, Czech National Bank elected to increase the rates by 75 basis points, which is quite a significant rise in the chart. You see how the 3-month libor has been developing. I would say that what is the most important for us now is next week's meeting of the Czech National Bank Board of Governors. The market expects -- 2/3 of the market expects 50 basis points increase, 1/3 expects 75 basis points increase. So the rate environment is changing very, very rapidly. Now how does MONETA performed compared to the banking market, which takes us to Page 18. If we start with the deposit market. The deposit market now holds volume of CZK 5.8 trillion, and the market grew by nearly 11%. Against that, we have posted growth of 4.2%. This is due to, I would say, 2 main factors that impacted our growth. Number one, is our pricing policy on longer-term products, namely on savings and term accounts; and secondly, the conscientious effort to convert deposit balances into asset management, namely across retail and small business segment. However, liquidity, LCR and loan-to-deposit ratio become priority for us for the next 2 quarters going ahead. Now on Page 19, the lending market. If you look at the lending market, it now stands at nearly CZK 3.5 trillion. The market grew 6% with a fairly strong rate of growth on the retail due to extraordinary demand for mortgages during the first 9 months of 2021. MONETA performs -- grows faster than the market and the rate of growth is nearly double that of the market. And during the third quarter, we have lower volumes on mortgages, but this is really a function of the increasing rate environment and also seasonality in demand in the third quarter is typically a lower demand quarter than the others during the year because of the holiday season. Now on digital distribution, a couple of words on that. If you could please turn to Page 21. If you look at our online production in the bubbles, we have the total share of the digital channels on volumes that the bank generates per quarter. So we have 2.5x the digital channel participation on mortgage origination. We originated digital mortgages on our refinancial platform and the volume growth is in excess of 460%. Secondly, on asset management, in the third quarter, the digital proportion of asset management sales increased to 15% as we have more customers signing contracts with us and subsequently, they buy and sell digitally through either Smart Banka or through Internet bank. We have experienced growth in volume of 165% on the digital channels. We are also fairly successful in distributing retail current accounts, nearly 1/5 of the current accounts are going through digital origination. And here, I would like to say that we are one of the pioneers and early users, also called Digital Identity. We are building this utility into our digital channels throughout next 3 months. So the competitive edge of the bank will be reinforced because you will not have to go through selfies, document scan, you simply go through the digital identity, and it's very simple. So we believe this will help us in the future to further leverage the digital capabilities of the bank. On the small business, nearly 30% is now done on our digital channels, 30% of lending. So I would say that we are actually very close to the original objectives that we published in 2017 in distribution -- structural distribution targets. On Page 22, you can see both of usage of our distribution and service platform, so Smart Banka and Internet banking. What is important on this page, If you look at the last bottom corner, you will see that the transactional intensity on the mobile banking platform in nearly identical to that of Internet bank and growing quite rapidly. So within next 12 months, it will most certainly supersede the previously important platform. So our Smart Banka is one of the best rated -- it's actually 1 of 2 best rated applications in the country and that investment certainly came to fruition. On Page 23, we are also having a very good progress on tokenization of our debit card portfolio where nearly 40% is now tokenized and this reflects into e-commerce transactions on Google and Apple Pay. And again, I would like to remind that we were amongst the first banks to introduce these platforms. And lastly, on the digital front on Page 24, you can see evolution of our web platform traffic in terms of both organic and assisted, and we have significantly increased the traffic on our websites, and we hope, believe that our updated pricing policy on deposits will lead to success in distribution of more deposit products. With that in mind, we have received AA rating ESG. We're very proud of that. We have received an important accolade substantiating quality of MONETA's franchise and we are at CZK 2.9 billion profit this year, increasing the outlook to CZK 3.6 million. And I'll turn over to Jan Fricek who will walk you through the P&L.

Thank you, Tomas. Good morning, ladies and gentlemen. I'm on Page 26, and let me give you a bit more detail about our financial performance. Net profit increased by 51% is predominantly driven by a lower cost of risk. This corresponds to 14.4% return on tangible equity. Reported operating income is lower by 12.7% year-on-year. However, as you know, this is due to the 2 nonrecurring items with total gain of CZK 1.4 billion realized last year. Adjusting for that, you would see a 3% growth driven by better interest and fee and commission income. Cost base for the 9 months is up by 1.2%, which is mainly attributable to higher D&A, marketing expenditures, and regulatory charges driven by our funding base expansion and lastly, we report cost of risk reduction by more than 85% year-on-year. This is primarily due to COVID-19 related provisioning last year, and improved macroeconomic outlook this year, which led to a significant release in the third quarter. Norman will provide more detail on this in the risk section. The next page shows improvement of recurring profitability year-on-year, achieved through higher operating income and our strong cost discipline. If you follow the chart from the left-hand side, you can see that last year, we delivered the recurring -- on the recurring basis, pre-impairment profit of CZK 3.9 billion. We adapt to this number after adjusting the reported results for the 2 nonrecurring gains I just mentioned. The impairment profit on a recurring basis of CZK 4.1 billion is more than CZK 180 million or nearly 5% above last year. On Page 28, we provide you with the composition of net interest income. The 5.8% increase year-on-year is driven by a combination of lower cost of deposits and higher interest income generated by our investment portfolio, hedging derivatives, and free liquidity placed with the Czech National Bank, supported by increasing 2-week repo rate. Lending interest income remained under pressure, mainly on the consumer and mortgage lending market. During the first half of the year, we commented on the elevated early prepayments, negatively impacting mortgage yield through accelerated recognition of the distribution costs. Since August, we finally see change of this trend as the customers' motivation to refinance is diminishing on increasing market interest rate. And on the funding front, we managed to offset interest income erosion through the repricing. We reduced the cost of customer deposits by almost half year-on-year. However, in the rising interest rate environment that Tomas commented in his section, it is obvious that going forward, this will inevitably result in increasing cost of funding. Many banks, including MONETA, came up with more attractive propositions on customer deposits already in September. On the next page, we continue with the development of net fee and commission income. The income side increase of 1.8% is primarily driven by higher early termination fees. On the expense side, we reported 34% increase, mainly due to higher cost of card payments elevated during the process of migration from Mastercard to Visa. With respect to this change, we are getting much better conditions from Visa. However, the benefits will be visible next year after the migration is completed. Page 30 provides further detail about the fee income dynamics. The income from distribution of third-party products is slowed by 6.1% year-on-year. From the upper chart, you can see that while asset management increased by more than 40% to CZK 55 million, we have seen slowdown in insurance distribution, namely life insurance and BPI. In the bottom chart on the right-hand side, you can see a strong increase in early termination fees with nearly 35% and 39% year-on-year growth, while the servicing and transactional fees increased just marginally. On Page 31, we report in detail our performance in Asset Management. As I mentioned, we achieved increase of the commission income by nearly 41%. However, since we stopped charging the opening fee last year, our income is generated solely by the trail fee, which increased year-on-year by 79%. This superior growth was achieved through a combination of asset management balance growth by 60% and higher average trail fee, which increased to 93 basis points in the third quarter this year and with a higher share of activated funds. Now we can move forward the cost section starting on Page 32. Reported OpEx in the third quarter is at the lowest level out of the last 5 quarters. We recorded year-on-year a reduction by 8.7%. These are several drivers. First and foremost, since completion of the integration process, we achieved synergies and have no more integration costs. Secondly, earlier this year, we implemented several measures aimed at productivity improvements and savings, mainly in the areas of workforce management and marketing. And lastly, our development effort during the summer months was at lower intensity comparing to previous months average. Lower cost base, together with increased operating income resulted in cost-to-income ratio at 45.4%, which is well below previous quarters. The following 2 pages are added to provide more detail about our cost management. Firstly, Page 33 shows development of number of FTEs since the IPO. You can see that we achieved a significant productivity improvement through a reduction of the FTEs by 6.5%, while the consolidated balance sheet more than doubled and customer base expanded by 1/3 in the meantime. This is a result of successful integration of acquired mortgage and building savings banks, process automations and back office, as well as our investments into the digital platform, enabling optimization of our branch network. And now on Page 34. At the end of the second quarter this year, we decided to mitigate the risk of further increase of electricity market price through the hedging. While the electricity price on the market increased during the third quarter to the level which is 183% higher than in 2019, we negotiated fixation of our price for the next 3 years. And together with expectation of lower consumption, we estimate that our electricity budget will increase only by 19%. So this concludes the P&L section, and I will now hand over to Jan Novotny who will continue with the balance sheet development.

Thank you, Jan, and good morning to everybody. I have the pleasure to walk you together with my colleague, Andrew Gerber, through the next part of today's presentation, the balance sheet and development section. On Page 36, you can see the development of both parts of the balance sheet for the past 5 quarters. You can also see more detailed split of each category, including the key components with the year-on-year growth rates. According to our strategy, we are focusing on growing organically the net customer loan group with earnings growth of more than 12%, while still keeping a good growth rate also on customer deposits to keep our very strong liquidity position. As you will see on the next slide, the loan growth is driven across segments with significant success, especially in our strategic mortgage book expansion. You can also see that year-on-year, we have significantly increased the investment in securities and more details about this category, you can find on the next slide, Slide #37. The overall volume of investment securities has reached almost CZK 50.5 billion. But as you can see, the main increase happened during the end of 2020 and in the first half of 2021. During Q3 2021, we have rather maintained the arrow. On the right side of the slide, you can see the development of the yield compared with the 2-week repo rate and the portfolio duration evolution. Now let's move back to the key category for the bank, the gross performing loan portfolio. On the Page 38, you can see the evolution for the past 5 quarters with a very solid growth of 11%. You can also see that according to our long-term strategy, we continue to increase the share of retail loan portfolio, which at the end of Q3 reached more than CZK 170 billion and is almost a 70% share on overall loan book. We are successfully growing also the small business franchise, which ended up above CZK 9 billion of GPR, and we are also back on track with profitable growth of our SME portfolio. Now moving to Slide #39. You can see the trends regarding the loan portfolio yields. As you can see, the yield level has stabilized across the segments. Overall bank yields has reached 3.8%. And as you can see on the right side of the page, the new level is almost equal for both segments with Retail on 3.8% and Commercial at 3.7%. Now let's deep dive -- let's dive a little deeper on both segments on book development trends, starting first with the retail loan book portfolio review presented by my colleague, Andrew Gerber.

Thank you, Jan. So if you move to Page 40, we show the detail of the retail loan portfolio. Overall, the retail portfolio grew 16.8% year-over-year, reaching CZK 170.3 billion, where the mortgage portfolio was the primary driver of the growth, up 30.7% year-over-year. Whilst the consumer loan portfolio decreased 5.7%, we see some stabilization in the latter quarters, but this market remains extremely competitive. So we will have to continue to work hard to turn that portfolio back to growth. In the auto loan portfolio, we were able to grow 4.6% amid strong demand for cars across both new and used cars. However, supply issues in both segments cast a shadow over that market, so we'll be watching this business very carefully as we go forward. And in the revolving products, we continue to decline more or less in the market and in line with the liquidity situation that we see amongst our customers, and the growing current account balance is reducing the need for or the usage of revolving facilities. If we go on to Page 41, we present some additional detail behind the growth of the mortgage and consumer loan portfolios. In mortgages, the new business volumes increased 132.7% year-over-year, reflecting very strong demand for mortgages, both new mortgages and refinancing with the investments that we've made into our mortgage business in the last few years, positioning us extremely well to capitalize on that demand and increase our share of the market. At the same time, we saw an increase in early repayment on mortgages. This was driven primarily by lower rates available in the market, creating an incentive for people to refinance. That started to reverse a little bit in the third quarter as rates moved up and also as we took a series of actions to try to mitigate the outflow. And there were a series of actions we took in November and October this year, which are not yet fully reflected in this number. So I hope that over the coming quarters, we'll be able to further improve the repayment performance on the mortgage portfolio. In Consumer Lending, it's a similar pattern. New business volumes up 27.3% year-over-year as consumer spending started to recover after a very difficult winter and spring. But at the same time, we saw a higher share of outflows in the portfolio, again, driven partly by the opportunity to achieve lower rates available in the market. But also in this segment, we saw a reasonably significant proportion of repayment from own resources, which again reflects the liquidity situation that we see amongst our customers. Moving on to Page 42, we look at the yield development on the key portfolios. In mortgages, the portfolio yield decreased 30 basis points year-over-year. However, you see that it started to reverse in the third quarter. This was primarily the effect of the lower early termination on the mortgage with the effect of higher interest rates yet to be visible in the portfolio yield. This, we will start to see in the coming quarters. In Consumer Loans, the yield dropped 60 basis points year-over-year amid continued pricing pressure in this market. And I'm afraid here, we still see no let up, although we will be trying to hold a strong operating position going forward. The market remains extremely competitive. In Auto, the yields are broadly stable. And in Credit Cards, we see small decline, which is driven more by the change in mix of the portfolio from revolvers to transact, as the portfolio continue to decline. And with that, I'll hand over to Jan, who will take you through the commercial portfolio.

Thank you very much, Andrew. Now let me walk you through a similar overview for the Commercial segment. As you can see on the Page 43, we successfully continuing our strategy in Commercial to steer the portfolio towards more profitable and better localized products and categories. Overall, portfolio remains on the same level compared with Q3 last year. However, we are back on the growth trajectory as the primary impact of COVID crisis was slowly fading away during the last few quarters. From a product category perspective, we grew up mainly in high-yielding small business products by almost 16% and as well as in working capital in SME realm, where, thanks to a wide usage of state guarantee programs behind the new originations, we were successful in growing by almost 10% year-on-year. We can also see a very good trend in investment loans in the last 3 quarters, and we remain rather cautiously optimistic about the investment loan portfolio growth going forward, given the recent negative development of COVID pandemic in the Czech Republic. Now let's move to Page 43, where you can see the evolution of across the product lines. You can see the yield stabilization across the products with first line of significant improvements, especially in working capital category as the vast majority of pricing of the loan book there is structured as floated based on the [indiscernible]. And now let's move back to Deposit side of our balance sheet. And for that, I will hand over again to Andrew.

Thank you, Jan. So going to Page 45, we look at the development of the funding base of the bank. Overall, the funding base grew 6.7% year-over-year, reaching CZK 285.4 billion, where the retail deposit portfolio represents roughly 70% of the total and wholesale share increased to 7% as a result of repo operations, which helped manage the liquidity of the bank and also to improve the cost of funding, which you can see on the following page. The cost of funds is decreasing driven by deposit repricing across both Retail and Commercial segments as well as an increasing share of current accounts in the overall deposit mix. The overall cost of funds was down 22 basis points year-over-year, with core customer deposits decreasing 21 basis points driven by Retail down 24 basis points and Commercial down 12. And at the same time, the wholesale cost of funds decreased 60 basis points. Going on to Page 47. We look at the development of the Retail Deposit portfolio. The Retail portfolio grew 4.7%, reaching CZK 199.9 billion. And again, here, a strong development in current accounts, up 25.9% with the primary driver, whereas the savings term and other deposits decreased 4.1%, primarily as a result of our strategy to migrate part of that volume into the asset management businesses Tomas alluded to earlier. On Page 48, we present the development of the Commercial Deposit portfolio, which grew 2.6% year-over-year, reaching CZK 66.7 billion. And again, current accounts being the primary driver, up 17.3% year-over-year. And finally, on Page 49, you see the development of the wholesale funding base, which was up 61.3% year-over-year driven primarily by the repo operations I referred to earlier, which are visible due to banks and other, which is up 307% year-over-year. So overall, I think we've delivered a strong performance in the loan portfolio development, up 11% year-over-year, driven primarily by mortgages and small business. We've also seen significant growth in the investment portfolio, up 60 -- sorry, up 86% year-over-year, and we've shown solid development in the funding base, up 6.7% year-over-year with continued growth in the current accounts being the primary driver, which has also contributed to a 22 basis point improvement in the cost of funds. That concludes the balance sheet section. And I will now hand over to Normann who will take you through the risk metrics and asset quality.

Thank you, and good morning. We are on Page 51, where we have an overview of quarterly cost of risk for the last 7 quarters. During the first 9 months of this year, we recorded cost of risk of CZK 453 million or 26 basis points. This is a significant improvement compared to the same period in 2020, but also shows a positive evolution throughout the first 3 quarters of this year. If we just look at the third quarter '21 here, cost of risk closed with a net release of CZK 299 million. This is largely driven by strong core performance, debt sale gains and the release of loan loss provisions due to an update of macroeconomic scenarios in our IFRS 9 models. Most importantly, because of improved outlook on GDP, as disclosed by the Czech National Bank in the third quarter this year. If we move to Page 52 here, we showed the evolution of the loan portfolio, loan loss provisions and overall coverages over the last 5 quarters. Provision balances grew year-over-year from CZK 5.6 billion to CZK 5.8 billion. However, if you look at the second and the third quarter, here, we have seen a drop by around CZK 360 million, driven by debt sales and the aforementioned release triggered by the macroeconomic updates. And as far as the overall coverage is concerned, it still stands at a solid 2.3%. Moving to Page 53. Here, we show the evolution of nonperforming loans and outflows over the last 4 quarters. The third quarter development of this year was positively impacted by a slowdown of NPL inflows, overall improving delinquencies, repayments of COVID-related downgraded receivables, as well as debt sales. As a consequence, the NPL stock dropped by around CZK 200 million between Q2 and Q3. Now going to Page 54. Here, we have a more detailed overview of the entire NPL stock, how it evolved over the last 5 quarters. The peak of the NPL stock was reached in the first quarter this year and has been steadily dropping since then, thanks to debt sales, upgrades of receivables and regular repayments. And as a result of that, the NPL ratio has been dropping from 2.8% in Q1 to 2.4% at the end of September. Going to Page 55. Here, we have a breakdown of COVID-related NPLs. So out of the total NPL stock of close to CZK 6.1 billion, around CZK 2.7 billion are COVID-related. Out of the CZK 2.7 billion, around CZK 300 million are covered by payment holidays, around CZK 400 million are past due and almost 3/4 or roughly CZK 2 billion are being repaid regularly. Hence, should the payment behavior continue to be satisfactory, then part or all of this CZK 2 billion of receivables are subject to potential upgrades and subsequent release of provisions underneath. On the next Page 56, here, we show the evolution of delinquencies, 30, 60 and 90 days past due over the last 4 years. Overall and across delinquency buckets, we have been observing an improved performance. This positive development is largely driven by a solid core performance and in particular, the better-than-expected payment behavior of COVID-related or COVID-affected receivables contributed to this development. So summarizing the risk section, the core message is that the positive risk performance observed in the second quarter this year has been continuing in Q3, visible in comparatively low delinquencies and good core performance. On the back of this development and based on the updated GDP outlook provided by the Czech National Bank published in August, this made us decide to update our IFRS 9 scenarios in our reserving models, which led to a release of provisions of close to CZK 500 million. And at the back of this, we expect full year cost of risk for '21 to come in better than initially assumed and should be somewhere in the range of 30 to 40 basis points. At the same time, there has been quite limited progress in new vaccinations in recent history, whilst the infection rate has been increasing quite a bit in the last days and weeks, which makes it more difficult to predict how this will impact the economy this fall and winter. Supply chain interruptions, shortages in key raw materials, increase in energy prices triggering inflation constitute additional uncertainties in the months to come. And bearing this in mind, we remain cautious and vigilant, and we continue monitoring both our portfolio and the overall environment whilst maintaining a prudent approach to provisioning levels. And with that, I hand over to Jan Fricek.

Thank you, Normann. I'm now on Page 58. You can see that MONETA continues to report strong capital position with capital adequacy ratio at 18.7%, which is more than 5 percentage points above our regulatory requirement. Our accounting activity stood at CZK 29.9 billion, but our regulatory capital visible on the right-hand side reached CZK 30.6 billion. The growth of both is driven by the retained profit and the regulatory capital position on top by the issued Tier 2 bonds. Chart in the bottom right-hand side corner reports continuing reduction of RWA density, which supports our capital adequacy position. And on Page 59, we show a detailed development of our excess capital position measured over the capital management targets of 14.4%. At the end of the third quarter, we report the excess of CZK 9.4 billion, which constitutes about CZK 18 per share. As you can see, this position includes accrued dividend of CZK 2.3 billion from the net profit of 2021 as well as CZK 1.5 billion from the net profits of 2019 and 2020, in line with our dividend strategy. Bottom chart documents development of risk-weighted assets during the year. While we recorded RWA growth of 6%, the performing loan book grew by 9.5%. Of course, this ongoing trend is supported by increasing share of mortgage lending with low capital consumption. So this concludes the capital management section, and I will now hand over to Tomas for the full year outlook and final remarks. Thank you.

On Page 61, we have revised expectation of management for this year. Before I delve into that, we will update our 5-year outlook in February 2022. This is quite important as we see some upside through the net interest income. We also see some upside through the balance sheet side nonetheless. What we have against that is a huge uncertainty how the COVID pandemic and inflationary environment and the supply chain shocks that we are seeing around us will impact the cost of risk clients. So we would like to simply understand better the dynamics of the credit portfolio and all these factors are combined into one. So we feel that we face a number of quite significant uncertainties and historically pre-COVID. We were always publishing the plan in February last year. We did it in order to support rebound of the value -- how the value of MONETA is perceived by shareholders as we were very unhappy with the value of the bank as expressed in market capitalization. Now on Page 61, for this year, we actually upgrade the operating income by CZK 200 million. So we would like to reach a minimum CZK 11 billion. This is a combination of interest rate increase and slightly better balances than we've expected. On operating expenses, we confirm the cost base level of CZK 5.5 billion. As I said, this is being impacted by slightly more people. We have about 50 more people than we expected in the employment due to extraordinary demand for mortgages. We also faced higher regulatory charges, and we have pressure on the cost base of the bank with respect to those contracts, which have inflation-related revaluation of our obligations. On cost of risk, we spoke about that. Effective tax rate should be at 20%. This translates into estimated net profit at minimum CZK 3.6 billion, if that materializes, this is CZK 7 per share minimum return on tangible equity -- estimated return on tangible equity of 14%. So ladies and gentlemen, this concludes our presentation, and we will be happy to answer your questions.

[Operator Instructions] And we have received the first question. It is from Robert Brzoza, PKO Securities.

I have a question on your [indiscernible] deposit pricing policy. I've noticed that you started offering quite attractively priced 12-month deposit. How does it fit into your strategy, given that also in the 3Q, you have substantially increased the wholesale funding. In other words, how much of funding do you think you need? Going forward, what's the potential for increases on the deposit funding and what your strategy in this regard? And also maybe when talking about our cost of funding. In an interview given to press this morning, I spotted that you expect the targeted net profit in the future, that strategy that you referred to, to be revised by, say, 6 -- in the range of 6%, 5%, right? And that strikes me as rather conservative. So if you could please comment on your longer-term outlook, whether this relates to the competition in the, for example, consumer lending or whether that rather relates to the higher expected cost of funding going forward?

Okay. I will try to tackle the question. So if you look at the bank structurally, we have LCR ratio of 137%. So against the regulatory requirements, we have about CZK 13 billion of available liquidity currently. So that's the first part of the question. Second part of the question, we've offered attractive rate to our primary customers. The attractive rate is at 1.5%, and we try to be amongst the top 3 offerers in the market, and we will continue that policy going forward, probably 6 months. The bank's ideal target is to have the LCR north of 150 and to have the loan-to-deposit ratio south of 90. So this is where we would like to get. And if you look at the business plan -- if you look at the business plan of the bank, which is actually published in the appendix, next year, on a revised basis, we are facing need to fund, what is it, CZK 25 billion increase in the -- -- it's actually CZK 30 billion -- sorry, CZK 20 billion increase in the loan book. So we then quite easily calculate how much we need in order to maintain LCR of 150 where we would like to take the deposit position. That being said, the CZK 20 billion funding of the loan book also has to take into account our market share targets on asset management distribution, which is to double the market share. So we need about CZK 10 billion to CZK 15 billion of deposit inflows in order to be able to continue with the expansion of asset management franchise and its policy of the bank to reduce the wholesale funding. So all in all, we need between CZK 35 billion to CZK 40 billion in the next 12- to 18-month period. This is basically the target of our pricing and product offering strategy, and we would like to, at the same time, broadly maintain the split between current accounts and savings products across the segments. So this is the first part of the question. This morning, speaking to Reuters and Bloomberg, I said that I see the potential upside 4% to 5%, if I may stand to correct you. And this is a combination broadly speaking, of 3 factors. First factor is we will garner slightly better in net interest income than expected. But if you look at the interest rate increases, they were built pretty much into our plan. It's just a little bit ahead of the curve. We have about 3 months ahead of the curve. So one is better revenue generation position. Second is that we are under tremendous cost pressure both on the payroll, on the real estate, on energy, and on other cost categories such as software services, cash handling and other, because whatever has labor input in -- or energy input in Czech Republic is increasing quite strongly. So I do expect that we will have to reevaluate the cost base robustness next year because we simply did not expect the inflation to reach and the pressure to reach this level. And thirdly, we have to really examine the anticipated cost of risk because it would be fairly naive to think that the rapidly rising cost of energy inputs is not going to translate into higher defaults on the commercial front. It's also linked to the fairly rapidly increasing cost of funding for our commercial customers. And it's also linked to potential disturbance if and when -- and hopefully, this doesn't happen, if and when we have further restrictions related to COVID pandemic, which coincidently is at the level of last February, March in the Czech Republic and the -- unfortunately, the vaccination level is that of a developing country. We have vaccination at 56% compared to, for instance, Denmark being nearly at 80%. So we have to be very, very careful. So the upside 4% to 5% I provided this morning is a conservative back of the envelope. All these factors taken into the account, it could be better.

The next question is from Simon Nellis.

Questions. First question would just be -- maybe it's too early for this, but how do you expect your conversation with the Czech National Bank to go when you had a dividend out of '21 earnings? That would be the first question. Second one is, I was hoping you could elaborate a bit more on the outlook for consumer lending growth. Still seems to be -- do you expect a rebound anytime soon? [ Change ] is on high fee expense and to be driving lower use quarter-on-quarter, if you could just elaborate on what's driving that. And last on how much provisions do you have forward-looking kind of ECL and who would lead to further effects.

So I'll take the dividends, consumer lending will be taken by Andrew Gerber together with the fee expense. and Andrew is running the migration to Visa and provisions. I'm not sure I understood the question, actually, if you could repeat the question.

How much is the forward-looking ECL for macro variables? And I guess also the precautionary provisions for restructured credit run through [indiscernible] used to happen for the write-backs.

Yes. So let's take it piece by piece. Dividend and Czech National Bank. If you look at our accounts, we have accrued CZK 2.3 billion into anticipated dividend. And this is excluded from our capital recognition applications that we submit to Czech National Bank. So Czech National Bank is well aware of the fact that we intend to pay 80% dividend. And we haven't had any discussion on the topic with them so far. We've had different discussions as we have undergone to very deep inspections this year. We've discussed the Czech National Bank quality of our payment services, asset management distribution. This is closed. And we are completing now Czech National Bank inspection on credit, retail credit, underwriting and management of our portfolio and this is anticipated to be finished in mid-November. On Consumer Lending, when do we come back to growth and see expenses, I would ask Andrew to provide a comment.

So regarding the consumer lending, I mean, what we see in the market is we see an uptick in the new volume. The market overall if I look year-over-year, it's up about 16% in terms of new business volumes over this time last year. I think there is some sign that consumer spending is returning and that's driving demand for consumer. However, we still see, and you can see it in the current account, strong liquidity position on our clients, which is partly mitigating the need for higher consumer lending. So I think, overall, we've -- in this market environment, it was hard work and I think a reasonable achievement to stabilize the portfolio where we are now. And I think we will have to continue to work harder over the coming quarters to maintain that stability and return it to growth. Midyear next year, probably. Of course, if the pandemic situation deteriorates further, this will have an impact on demand for sure. So it's a relatively uncertain outlook. Regarding the fee income development, as Tomas referred to earlier, we're in the process of migrating to Visa, where we were able to achieve lower cost per transaction going forward. So in the numbers right now, you see 2 impacts. One is overall higher transaction volume leading to increased cost. But also, we're in the process now in the second half of this year where we're dual running Visa and Mastercard and this is leading to increased cost in the short term. This will be completed at the end of this year. And going forward, we will have optimized -- second quarter. We see it in the numbers. You will start to -- yes, in the second quarter, you will start to see it in the numbers as we reach the optimized position. And this will help us to achieve a cost saving in the short term but also to mitigate higher cost increases as the portfolio grows and transaction volume increases over the coming years.

We've seen in fee expense in the second quarter.

Yes. And on the cost of risk, if I understand your question correctly, what is the magnitude of the forward-looking provisions which we have on the books. It's a bit difficult to answer that. First of all, we don't -- we have not disclosed this in the past, but just to mention the following 3 comments. Number one, you have 2 areas where you have the provision setting. One is the NPLs. And here, we have very transparently disclosed the CZK 2.7 billion affected by COVID, out of which CZK 2 billion are paying regularly. Now as you can only change the classification once customers -- for as long as customers pay over a period of 12 months, the upgrade can only happen thereafter. Now should this materialize, that here is a potential for upgrades in the first half of 2022, I'm assuming an average coverage of anywhere between, depending on the product, between 20% and 50%, and we would have to go into the details, which we don't disclose. This is the potential for upgrades. But as I said, it's too early to anticipate what is the magnitude of such releases because we are going into a period of utmost uncertainty for the reasons which we have outlined before. And as far as the second point is concerned, the macro we have made a change in our macro input in our IFRS 9 models, which led to this CZK 500 million release. But if you look backwards, at the macro forecast provided by the Czech National Bank, the one in May this year and the one in August. The difference was significant. So also here, I wouldn't dare now to tell you what is the impact if the macro moves to XYZ going forward, both on the GDP and the unemployment rate, because it's simply premature to come up with a meaningful number. But needless to say, should the macro continue to be positive even going through the winter and the fall period, then obviously, there might be some upside. This is clear.

Also just the -- So you're saying it was CZK 500 million release from macro variable changes. That was the impact in the third quarter, yes?

This was the impact in the third quarter, correct. By using the GDP forecast as published by the Czech National Bank back in August this year.

And then just 1 follow-up on the dividend. So clearly, I mean, you're accruing 80% of profits, which you intend to pay. But is there room to pay out more, because I think you still have capital [Audio Gap] you're just paying out 80% of [ those ] earnings.

We will discuss that with the Supervisory Board. I think it's too premature. We have -- first juncture is November 9. We have a Supervisory Board on November 9, and this will hopefully lead to agreement to call the shareholder meeting in order to pay a dividend for 2019-20. This is the CZK 3 per share that the Czech National Bank acquiesced and we would like to pay it this year. So that's the first milestone. The second milestone will come in when the audited results of the bank -- when the preliminary results of the bank is ready and we will have a discussion in early March with the Supervisory Board and consequently, we will take the proposal to Czech National Bank. And here, I would like to underline that MONETA and its management always behave transparently. In this respect, we've tried to pay good dividend schemes and at the same time, retaining capital, which is necessary for development of the bank. So we will conduct ourselves in exactly the same manner from the first quarter of 2022. And if I can add just one sentence. It's actually, I think, slightly absurd situation because in 2020, October when we published the guidance, we were told from many quarters that the cumulative targets and the target for 2021 are unattainable. And now we are discussing what is the depth of the upside. And I would like to remind everyone that if you examine our business plan where we disclosed the assumptions, again, nothing has really changed from our assumptions. We have been very fortunate in having our assumptions materialize into fact, except for inflation, which is running wild. It's actually perhaps stagflation. We will find out fairly soon. That's number one. Number two, we did not predict the doubling of the energy price. And number three, we did not predict that 44% of Czech population wouldn't vaccinate itself. And we would have -- we did not predict that again. We have infection levels, which are similar to the height of the lockdown of last year. So we did not predict any of that. So I would actually argue that the -- apart from the interest rate, there is fairly little which is positive, and I would like to remind that if the newly formed government cuts the fiscal deficit by CZK 100 billion as they're promising to do so. This is probably not going to have a positive effect on defaults. Quite the contrary. So on the upside, I would be fairly careful right now.

The next question is from [indiscernible]

Just a few questions from my end. Firstly, on MREL. Can you please provide an indication of what the time line is here for bond issuances and what we can expect in terms of cost of funding? And then also in terms of capital targets, I mean we should see it at 14.4% for excess capital calculation. But shouldn't we consider -- or did you start considering the 15.4% target given the expected increase in the countercyclical buffer?

So the first part of the question, we will have to maintain capital instruments at the level of what is it, 20.6% by end of '23. With respect to our plan, we will submit it to Czech National Bank next week or in 2 weeks' time, this is the MREL fulfillment plan. And we plan to do an international MREL bond issue in January or February 2022. We are actually working on that. And on the price, I would not dare to comment now because it is fairly difficult to predict. The bond issue will be conducted in euro, as we wish to place it with international investors. And this involves a lot of work. The size of the issue is CZK 200 million anticipated or perhaps more. This depends on the appetite for MONETA. And yes, you are right, when we calculate the excess capital, we should take into account the forward-looking target which goes up by September. We are not doing that for transparency purpose. We simply take whatever is the target now or whatever is the requirement now to provide clear, clean calculation based on the current rules. But yes, the requirement goes up. And we still have not received the share -- letter for Pillar 2 this year, and we anticipate to get it before Christmas. So it could go further up. But the policy of Czech National Bank is very clear. It wishes to retain capital in the banking sector in order to mitigate any and all risks coming from the current economic and pandemic situations in the Czech Republic.

Okay. That's very helpful. And maybe just 2 quick follow-up questions on capital. One is, as you -- or are you considering a share buyback as an alternative to dividend payments going forward? And then secondly, the European Banking Authority has published these guidelines on criteria for the use of data inputs into the risk measurement models. And this will become effective from January 2022 onwards. Will there be any impact on your business? And what do you expect the impact to be on the consumer finance peers in the sector?

Yes, we -- let's start with the second question. The impact on the consumer finance book, I would put a ballpark together of CZK 300 million to CZK 500 million. Once the model inputs are changed, this could be the total impact on the loan book, and this is from previous experience that we could look -- we could have that, but it should be if and when we have in the second, third and fourth quarter of next year upgrades, due to continued discipline on repayment by those clients who obtained moratoriums, this would be probably renewed or washed. So that's the first part of the question. On the -- what was the capital question? Share buybacks. On the share buyback, we had approval in 2019. Currently, there is no plan on share buyback. As we have social responsibility to contribute to the state budget, we prefer dividends because dividends do yield some withholding tax for the Czech Republic. And as you know, Czech Republic is deeply in that and we would like to behave responsibly because we feel that potential buyback will create a very difficult situation that we do not wish to pay taxes in the country. And this could lead ultimately to introduction of sector tax. So we will be very careful with that because it's being criticized by many of the leading personalities in the to-be-formed government. So probably no is the answer.

So far, we have no further questions. So I would like to hand back to the speakers for some closing remarks.

So far, third quarter has been successful. It has been successful from profitability perspective. It has been successful from our ability to develop the business. This is substantiated by the strong growth observed on small business, mortgage lending and volumes being generated to stabilize the consumer portfolio. The biggest challenge of MONETA going forward is to secure adequate funding at low cost as we have consumed the funding that the bank acquired through Wustenrot, through expansion of the balance sheet. So this is one challenge. Second challenge, which we do not quite control, is the competitiveness in terms of the consumer loan market and of its pricing. And third challenge is to mitigate potential negative factors related to inflationary pressure on our customers and again, potential impact of the COVID pandemic. Nonetheless, all of that being taken into account, we disclosed our view for this year CZK 3.6 billion net profit or better. We've also said that the upside is 4% to 5% on the business plan, and we will upgrade the business plan where we have a little bit more firmer footing on some of the variables come February 2022. So we thank you very much for your participation and interest in MONETA and we wish you all the best for the upcoming weekend. Bye-bye.

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