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

[Audio Gap] regarding full year 2021 results. Please note this conference call will be recorded. [Operator Instructions] May I now hand over to Mr. Spurny, who will lead you through the conference call. Sir, please go ahead.

Good morning, ladies and gentlemen. Let me begin our conference call today. Our presenters today will be Mr. Jan Fricek, Chief Financial Officer; Mr. Carl Normann Vokt, our Chief Risk Officer; and Andrew Gerber, our Chief Product and Marketing Officer. If I may, I'll ask you to turn to Page 4 of our presentation, the highlights of 2021. We've accomplished to deliver operating revenues of CZK 11.2 billion. Against that, we've incurred operating expenses of CZK 5.5 billion resulting in pre-impairment profit of CZK 5.6 billion. And we had suffered risk charges in the overall amount of CZK 0.7 billion. All of this translates to net profit of CZK 4 billion. So we consider 2021 to be a very good year from perspective -- from 2 perspectives. First, we've improved the current profit by nearly -- by 9%. And second, we actually met or exceeded the original guidance that we've provided for the year 2021 as well as the upgraded guidance. On the following page, a little bit on growth rates and some other metrics. We've been able to increase deposit taking balanced by 10.8% year-on-year. Additional to that, we have excellent performance on distribution of asset management products where the distributed balance grew nearly 55%. What is important here is that this puts us in the lead of asset management distribution in Czech Republic. In terms of lending growth, our overall loan portfolio grew 12.8%. And our results support return on tangible equity, which for the year comes at a level of 15.2%, and we continue to be strongly capitalized with the overall capital adequacy ratio in excess of 17%. And not only have we done -- have we had a good year in terms of financial and commercial performance. But if we look at ESG position of the bank. This is on Page #6. We've improved rating received from the MSCI index to AA quality. We've also quite significantly improved the score from sustain analytics to 17.8. And thirdly, we've improved ranking that we received from Bloomberg Gender Equality Index to a level of 82.6%. Additionally, the bank reduced the last 5 years, the carbon footprint by 70% -- more than 70%. Beside from these improvements, according to Bloomberg, we achieved total shareholder return for the year at the level of 42.3%. On the next page, on Page 7, let me briefly comment a couple of key trends. I've spoken already about over performance with respect to the guidance. This is chiefly due to significantly better risk charge than initially expected, and we try to upgrade the guidance throughout the year to reflect our expectations. But nonetheless, our expectation was proven wrong by the better result on that front and Normann will explain the underlying trends with respect to risk charges. We've also have strong capital position with CZK 28.9 billion of regulatory capital This, in turn, translates to CZK 8.1 billion of excess capital, and this does not include the dividend accruals that we've made with respect to current earnings of the year 2021, where we plan to propose the CZK 7 per share. Aside from that, we successfully approved and paid CZK 1.5 billion of shareholder distribution in December of 2021. And at the closure of last year, starting in September, we've anticipated also the need to improve liquidity of the bank. So we've raised CZK 20 billion in retail deposits at a price of 2.5%, anticipating increase in interest rates. So this puts us in a good position for 2022. That action also resulted in improvement of the LCR ratio to nearly 178%, and we've lowered the loan-to-deposit ratio to a current level of 90% solidifying the overall liquidity posture of MONETA. Now let's go to the next section, where we report on key strategic metrics. This is on Page 9. In terms of development of our retail franchise, we've generated retail loan portfolio growth at level of 15.7%. This was driven by growth of mortgage balances and supported by growth in automobile financing. Even though that we've increased quite significantly lending to consumers, we suffered a small contraction in the consumer loan portfolio due to lower demand and a relatively high prepayment or extraordinary repayment levels. On liability side, in deposit taking, overall growth registered by the bank in retail deposits, 13% with a strong growth in the current account balances, which supports stability or slows down the increase of our overall funding cost. On small business, likewise, we had an excellent year with a very good growth of the loan portfolio, adjusted at the level of more than 22%. The growth here was strongly supported by our ability to harness availability of state guarantees in conjunction with the COVID pandemic. So now after 2021, more than 11% of that portfolio is covered by state guarantees, reducing existing and forward risk of -- credit risk of that segment. Now on deposit taking and small business, we registered a 12.5% growth, but even more importantly, small business contributed significantly to success in distribution of asset management products. On SME, we had a good year as well, expanding the SME lending by 11%. And and again, using the COVID-related guarantees to mitigate credit risk wherever this was possible. In terms of deposit taking from SMEs, we registered more than 9% overall growth in the balances. And we've also improved the digital distributions and service capabilities of the bank. Here, we focus, namely on distribution, and I would highlight 3 metrics. Distribution of consumer loans now constitutes 39% being done through online channels of the bank, which is quite good, and it actually coincides with the initial strategic target that we set for in 2017. Apart from that, we've had continued success on mortgage refinancing front to our platform, Refinanso, which cumulatively throughout 2021 constituted more than 18% of overall new volume origination and mortgages. And the third area that I would like to highlight is asset management, where we now distribute more than 10% of our asset management production through the digital channels, namely through a highly user-friendly Smart Banka application. And we've also, throughout last year, developed the ability to distribute current accounts and building savings products as a result of our acquisition of Wüstenrot. So we were first to digitalize that proposition. Turning page, going to the other 4 elements of our strategy on risk, we have a comfortable position with 100% coverage of the NPL portfolio. We've managed to decrease the relative NPL ratio from 2.3% to 2.2%. And as mentioned, the cost of risk or the risk charge translates to 29 basis points overall, so this is better, certainly significantly better than we expected more than a year ago. On capital, I've mentioned this, I would add here that we are continuously working to optimize the product mix. This concerns namely mortgages and small business lending, where we take advantage of lower RWA density. On cost control, overall cost-to-income ratio is below 50%. However, if you look at the last quarter, due to uplift in operating income of the bank, we are in the neighborhood of 47%. With respect to employment, we have stable employment. And we've stabilized the cost base through various actions at the targeted level of CZK 5.5 billion. I've mentioned the ESG, so I'll not go through this again, perhaps mentioning that we have signed the Global Compact by UN and the Principles for Responsible Banking. So we try to remain update on this commitment. On Page 11, we have the shape of the operating platform. Here, you can see -- if you look at the first 2 lines, you can see that we sought to optimize the brick-and-mortar presence, closing 5 branch units. This was in the first quarter of '21, and throughout the year, we focused on optimizing premises of our agents. So we closed 1/3 of their offices, co-locating these agents with our branches. This is related to the acquisition of Wüstenrot and mining of synergies from that acquisition. On access to cash through ATMs, we've improved the structure of our network, keeping it stable, where the main improvement concerns deposit-taking machines. And now we have 29% of the network's capacity is able to perform that service. So we are coming closer to our large domestic incumbent competitors. In terms of customers, we have acquired slightly over 40,000 customers throughout the year. So this is evolving pretty much in line with our plan and with our targets. And lastly, on digital channels, we see very strong demand for the smart banking mobile applications. And later in the presentation, you will see that this is becoming the predominant digital platform of the bank. Now let me walk you through the development of the macroeconomic environment of the operating environment. Starting on Page 13, we comment the economic recovery, you can see that the industrial production of Czech Republic significantly recovered from the 2020 COVID shock, namely in the first and second quarter of past year. The third quarter, we again had COVID-related issues. However, the economy seems to be doing relatively well, also based on the fourth quarter GDP figures. In terms of foreign trade, here, we show you the evolution of imports and exports. The balance is still positive. Czech Republic is export-based economy. So now inflation and related measures Czech National Bank, strengthening the Czech Koruna create a little bit of worry on sustainability of the export -- of the export volumes and contribution to GDP and retail sales. We see strong recoveries during last year in the second and fourth quarter. This is related to both COVID and seasonality of the retail trade. On Page 14, a little bit about wages, unemployment and savings rates. You can see that the wage has been expanding quite solidly over the past 5 quarters. This has reached nearly CZK 37,500. So it's actually creating some challenge for our own cost base. In terms of savings rate in the second half of 2021, we see a decline in the overall savings rate, and this probably has something to do with the postponed expansion and relatively strong domestic demand. Unemployment rate peaked out in the first quarter of '21 and then decreased as the economy picked up. So Czech Republic continues to have very, very low unemployment level. On Page 15, GDP evolution. Going clockwise, we show you the development of the quarterly GDP and year-on-year growth, so [ 20 ] annual GDP, so -- the growth rate in 2021 at 3.3%. I personally consider this disappointing, especially in view of the large budget deficit, which we have here estimated at CZK 420 billion. This is the largest budget deficit that Czech Republic has since ever. We also have acceleration in public debt. The public debt now stands at CZK 2.5 trillion, and this drives the ratio of public indebtedness to a level of nearly 41%. So what is important here is that the newly constituted government of Czech Republic has pledged to cut the budget deficit by at least CZK 100 billion. And right now, we are operating in so-called budget [indiscernible]. So this will be hopefully finalized, a new budget will be finalized through the first -- before the end of first quarter. On Page 16, a little bit on inflation here. On the left side, you can see evolution of the inflation number in the fourth quarter, it reached 6.1%. Here -- 6.6%. Here, I would note that -- this is not including adjustments for the VAT forgiveness on energies. If that were calculated in, the inflation would have been in fourth quarter somewhere north of 8.5%. So we see alarming rate of inflation. There are 3 chief causes for that. It's the transportation, energy and food and beverages. And the outlook published yesterday by Czech National Bank is 8.5% full year inflation expectation for the Czech economy. On Page 17, how did the Czech National Bank reacts to your situation. Well the reaction came namely in the second half of the year. We had 5 hikes throughout 2021, and by the year-end, the 2-week repo rate reached 375 basis points. Yesterday, we had another increase. So the current level of the 2-week repo rate stands at 4.5%, and we provide you with detail also on a 10-year government bond PRIBOR and the shape of the yield curve. So our plan and guidance actually include this expectation and our plan and guidance actually includes the expectation that the rates will start coming down in the second half of this year, which might be optimistic, unless we take that assumption directly from the Czech National Bank. Now let's go to the next section, which is overview -- brief overview of market evolution. If you look at Page 19, you see the banking market for deposits. The market grew 7% and MONETA over performed this growth at a level of 10.8%. The key area of over performance where we grew double the rate or close to double the rate of the market is on retail deposits, where we posted growth of 13%, as opposed to market growth of 7%, and we've garnered year-end balance of CZK 217 billion. On commercial deposits, we performed slightly below the market, growing the realm of commercial deposits at 4.2% against nearly 7% market growth in the commercial deposits, and we ended the year with CZK 67.7 billion of deposits. Turning to Page 20. Let me comment briefly on the evolution of the lending market. MONETA outperformed, again, the growth -- with growth rate of 12.6% against 8.6% of the market growth. Our overall portfolio at the year-end stood at CZK 261.3 billion. Here, please note that this is the gross loan portfolio without netting through provisioning. On the retail, we grew 1/3 faster than the market, delivering 15.4% growth rate, and ended the year with a balance of CZK 179.3 billion. And on the commercial front, we match the market in terms of growth and ended the year with CZK 82.1 billion of absolute value. Now this has been the development of the banking market and MONETA's performance. And bear with me in terms of digital distribution. On Page 22, we show you both absolute volumes growth rates and proportion. Proportion is in the bubbles of our overall production, which is achieved through the digital channels. So here, I have spoken about this. This is a bit more detail on the really strong success in digital distribution of mortgages, focusing on refinancing existing transactions. Very good performance on the small business loans. We would grow -- we would have grown more, but inclusion of government guarantees, we were not able to digitize. It's very difficult to do, but good -- excellent growth on the asset management. And we see quarterly dip on the distribution of current accounts. But if you look at the total distribution of current accounts, digitally between '20 and '21, the overall growth in units in the past year was at the level of 9%. On Page 23, we show you more detail on the evolution of users of our distribution and service, digital platforms and transactional intensity. So here, in the left-bottom corner of the page, you can see that the mobile banking platform transactional intensity is now we call with that of Internet banking, and we expect that in the ensuing quarters -- within 2 quarters, we will see that the mobile banking platform will overtake importance of the Internet bank. On the following page, we give you 2021 overview of card transactions overlaying it from 2019. So you see the evolution and we have really respectable growth of nearly 50% in terms of number of transactions. But what is quite important here is that our share of e-commerce transaction is growing at more than 100%. And we also see solid growth of transactions conducted on POS terminals. This is quite important as we have done 2 significant investments in the past. One, we changed the core system for management administration of debit and credit cards, this was in 2020. And in 2021, we sought to optimize the cost base to a transfer of a card portfolio of MONETA from MasterCard to Visa in order to lower the cost and achieve higher transparency in the relationship and price billing or -- and we have done that successfully. On Page 25, a little bit more on digital platforms, Google and Apple Pay. So first and foremost, nearly half of our card portfolio is tokenized now, enabling our customers to use the payment instruments in the e-commerce realm. And secondly, you can see that these payment platforms are achieving more than double the growth of cards, where we see 100% -- 109% growth in the payment intensity and perhaps interesting for some people, Apple Pay is more successful with respect to MONETA customers than Google so far. And the last part, let me comment a little bit more the guidance and the results, if you look at Page 27, our guidance on operating income published in 2020, October. It was CZK 11.2 billion. subject to interest rate environment and difficulties we had in the first half of the year, we lowered the guidance to CZK 11 billion, but on rounded basis, we nearly matched it. We matched the original guidance. Costs, we left throughout the past year untouched. On cost of risk, we expected the losses from COVID to materialize in 2021. The opposite happened and Normann will show you detail on that, and it will also positively impact -- if the situation continues, it will positively impact 2022, so this is an overview. With respect to forthcoming dividend proposal, we will discuss with the regulator at the improved profitability of the bank puts us in a better position to hopefully negotiate the dividend distribution with the regulator. And with that, I will turn over to my colleague, Jan Fricek to walk you through details of the P&L.

Thank you, Tomas. Good morning, ladies and gentlemen. Let me walk you through the profitability section starting on Page 29. Net profit increased by 53%. This predominantly driven by a lower cost of risk. And this result represents return on tangible equity of 15.2%, which is nearly 4.5 percentage points above the year before. On the revenue line, we delivered the originally guided income of CZK 11.2 billion with the support of higher interest rate in the second half of the year, together with 8% growth of the net fee and commission income. Despite significant inflationary pressures, we maintained our cost base stable year-on-year. And lastly, we report favorable cost of risk of 29 basis points. This is primarily due to strong prepayment discipline, low level of NPL formation and also improved macroeconomic outlook. Normann will share more detail on this in the risk section. On Page 30, you can focus on recurring profitability on the pre-impairment profit level. If you follow the chart on the left-hand side, you can see that in 2020, we delivered on the recurring basis pre-impairment profit of CZK 5.2 billion. We arrive to this number after adjusting the reported results by the 2 nonrecurring gains together in the amount of CZK 1.4 billion. Higher operating income by nearly CZK 500 million accompanied by stable cost risk contributed to the pre-impairment profit of 9.2% year-on-year. On Page 31, we provide you with a breakdown of net interest income. In the fourth quarter, we recorded year-on-year growth of 9.7%.This has 2 drivers. Firstly, lending interest income is up by 3.8%, driven by the loan book expansion. And secondly, it was higher interest income from our hedging derivatives portfolio and excess liquidity placed in the Czech National Bank. This is visible in the bottom chart on the right-hand side. On the other hand, chart in the middle provides development of our customer deposit costs. While in the first 3 quarters, we reported a decreasing cost of deposits. In the fourth quarter, this trend has changed. MONETA, as well as the whole market came up with more attractive pricing offers on saving deposits and metricizing market rates. This trend is likely to persist throughout 2022. More detail will be provided by Andrew in the following section. On the next page, we continue with the development of net fee and commission income. 21% increase is driven by double-digit revenue growth, sampling by several one-off bonuses from our partners, resulting in a stable fee expense year-on-year. On the following page, we provide a detailed view on the drivers of the revenue growth. First and foremost, it is higher income from investment funds distribution, which nearly doubled in the fourth quarter year-on-year. Secondly, penalty and early termination fees are up by 50%. And finally, higher transactional activity delivered 19% income growth year-over-year. On Page 34, we provide further detail about performance and asset management distribution. As I mentioned before, we achieved the increase of the commission income by more than 89%. This excellent growth was chiefly driven by expansion of asset management balance by nearly 55% year-on-year, accompanied by higher average trail fee. The average fee was improved from 83 basis points in Q4 '20 to 102 basis points in Q4 '21, thanks to a higher share of equity funds and also negotiation with investment fund providers. And now we can move forward to the cost-base overview on Page 35. As I mentioned before, despite significant inflationary pressures, we report stable cost base in 2021 against the year before. And moreover, in the last quarter, we recorded a decline of 2.4% year-on-year. Stable cost base was achieved through post-integration cost synergies, continued focus on productivity and also low marketing expenditures, which offset inflationary pressures, namely in personnel and admin cost categories. Increase of the personnel expenses in the fourth quarter is driven by the accrual for annual performance bonuses for the management, which we typically account for in the last quarter of the year based on our financial results. And cost-to-income ratio for the full year stood at 49.6%, which is an improvement against 2020 on a comparable basis. So this concludes the P&L section, and I will now hand over to Andrew, who will continue with the balance sheet development.

Thank you, Jan, and good morning, ladies and gentlemen. So moving to Page 37, we present the development of MONETA's balance sheet, which continues to remain resilient and highly liquid, supporting lending growth through an increasing customer deposits by CZK 27.7 billion. Net customer loans increased 13.1% year-over-year whilst the core customer deposits increased 10.8% year-over-year, and we'll go into some of the detail behind that on the subsequent pages. On Page 38, we present the segment composition of the loan portfolio with retail and small business moving incrementally towards the objective of 75%, increasing by CZK 25.6 billion year-over-year, now representing 72% of the total portfolio. Going on to Page 39, we present the yield evolution on the loan portfolio, which was positively impacted by improved interest rate environment in the fourth quarter, especially in the commercial segment. You can see that overall yields decreased to 380 basis points in the third quarter and then increased in the fourth quarter, especially in the commercial portfolio where 35% of the portfolio is on floating rates. In retail, on the other hand, the portfolio is almost 100% fixed rate, although you see stabilization coming through there as the increase in new business pricing starts to have an impact on the portfolio yield. Moving to Page 40, we present the development of the retail loan portfolio, which increased 15.7% year-over-year due to strong growth in the mortgage segment, which was up 25.6%. And this reflects generally strong market in the Czech Republic across the year, but also very strong performance on our side where we are growing at twice the growth rate of the market and increased market share from 6.9% at the end of 2020 to 7.9% at the end of '21. In consumer loans, on the other hand, you see the portfolio declined 2.7% year-over-year, and this reflects the continuing intense competition in the market, particularly from smaller players who have been gaining share. The auto loan segment grew 11.5%, reflecting increased demand for cars generally across the market, both new cars and used cars. And in credit cards and overdraft, we saw a decline of 10% year-over-year in drawn balances which is broadly in line with the development of the market and reflects the higher liquidity in the market generally, which I think is evidenced by the savings rate peaking at 25.6% in the first quarter of the year. Moving on to Page 41, we present some additional detail behind the development of the main retail loan segments. The mortgage new business origination increased 64.3% year-over-year. Again, as I said, driven by a combination of strong market and particularly strong performance from our distribution channels. However, at the same time, we saw increased early repayments in the first part of the year which then improved later in the year as the interest rates increased, removing some of the incentive for clients to refinance their mortgages [ away ]. Similarly, in the consumer loan business, we saw an 18.6% increase in new business volumes, also accompanied by higher early termination on the portfolio. And here, the combination of these 2 factors led to the 2.7% decline in the portfolio, which you saw on the previous page. Moving on to Page 42. We present the yield development on the retail loan portfolio, where you see the increase in the mortgage yields in the second half of the year, which was driven by the decreased early termination on the portfolio. And on the consumer loan portfolio, you see the decline continuing in line with the trend, which, as I said, reflects the intense competition in that market, which we don't see letting up despite the series of interest rate hikes, which we've seen in the second half of the year. Moving on to Page 43. We look at the commercial loan portfolio with both small business and SME segments generating strong growth. The overall portfolio was up 7.2% year-over-year with the small business portfolio growing 22.3%. And reflecting generally strong underlying performance of the business, but also our success in distributing state-guaranteed loans, which represented 23% of the production. And as Tomas said earlier, 11.5% of the portfolio is now covered by state guarantees. Moving to Page 44, we show the yields on the commercial loan portfolio, where we see increasing interest rates positively impacting the yields in the SME segment, particularly in investment loans and working capital. In small business, you see the yields declining. And this, I think, as was mentioned earlier, is driven by the uptake of the guaranteed product, which came with lower yields as well as a marketing campaign in the fourth quarter, which also attracted more aggressive price positioning. Moving to Page 45. We present the development of the funding base, which grew 13.4% overall. And on Page 46, we present the yield evolution -- sorry, the cost of funds evolution, which began to increase in the fourth quarter amid increasing market rate and was further accelerated by a marketing campaign that we launched on retail savings, and you can see this coming through in the increase in the retail cost of funds in the fourth quarter. Moving to Page 47. We present the development of the retail deposit portfolio. Core customer deposits in retail were up 13% year-over-year. with strong performance in both current accounts up 14%, and savings and term deposits up 12.6%. And on Page 48, the commercial deposit portfolio. Overall, core customer deposits in the Commercial segment were up 4.2% year-over-year, with current accounts contributing 8.6% growth and savings and terms deposits, 16.7%. Whilst the financial institutions decreased 37% year-over-year, reflecting our reduced reliance on this source of funding. And finally, on Page 49, we present the development of the wholesale funding base, which grew 84.5% year-over-year driven by repo operations with the Central Bank, which are used to manage the operational liquidity needs of the bank. Overall, I think 2021 was a successful year with loan growth of 13.1% and improving yields in the fourth quarter, although the consumer loan segment remains challenging. And obviously, the Deposit business is becoming more competitive as rates increase, putting upward pressure on the cost of funds, which we will need to manage over the coming quarters. So with that, I will hand over to Normann, who will take you through the risk metrics and asset quality.

Thank you, Andrew. Good morning. We are now on Page 51 within the overview of our quarterly and full year cost of risk in '21. So in the fourth quarter, we recorded a cost of risk of CZK 242 million or 38 basis points, whereas the full year cost of risk amounted to almost CZK 700 million or 29 basis points. The '21 result is a significant improvement compared to 2020 and also much better than initially anticipated in early '21. The key drivers of this positive development are a strong core performance, which is also visible in low delinquencies, which we'll be sharing later with you and be the updated macroeconomic outlook in our IFRS 9 reserving models, which we did in the third quarter. Then see, we continue disposing NPLs. And we have been seeing a very strong payment morale of our customers on the COVID-related restructured portfolio. On the following Page 52, here, we show the development of the loan portfolio, loan loss allowances and overall coverages over the last 5 quarters. While gross and net receivables grew by roughly CZK 8 billion in the fourth quarter, loan loss allowance is [ up ] by around CZK 100 million, largely driven by a drop in our NPL stock, thanks to NPL sales and solid repayment behavior. As far as the overall coverage is concerned, this currently stands at a solid 2.2%. Moving to the next page, 53. Here we show the evolution of NPL in and outflows throughout '21. The fourth quarter development was positively impacted by write-offs, debt sales and repayments. And as a consequence, the NPL stock dropped by around CZK 400 million between the third and fourth quarter. Going to Page 54. Here, we have a more granular overview of the NPL stock, how it evolved over the last 5 quarters. The peak of the NPL stock was reached in the third quarter last year, and has been steadily dropping since then, thanks to debt sales, upgrades and repayments. And as a result of that, the NPL ratio has continued to drop and now stands at 2.2%. On the next page, 55. Here, we have a breakdown of the COVID-related stock of nonperforming loans out of the CZK 5.7 billion, close to CZK 2.7 billion on COVID-related. And out of this CZK 2.7 billion, around 75% or CZK 2 billion are being repaid regularly. And assuming a continuing positive payment behavior of these receivables then there's a substantial potential for upgrades in coming periods. 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 these delinquencies buckets, so far, positive trends observed in the first 9 months of last year, have also been visible in the fourth quarter. And this positive development is largely driven by solid core performance and in particular, with the better than anticipated payment behavior of COVID-related restructured receivables contributed to this development. So summarizing the risk section. The core message is that the positive risk performance we have seen in the first 9 months has been continuing throughout the year, including Q4 and has been much better than initially planned. So despite the Omicron wave, which has not yet reached its peak, we have so far not seen any adverse impact on the credit portfolio performance. At the same time, we continue staying vigilant by monitoring the portfolio as a result of the elevated inflation environment, high interest rates and the public debt consolidation, potentially impacting the liquidity situation of both retail and commercial customers. And as regards to COVID-related restructured portfolio here, we see a solid performance, where we stand a good chance of upgrades to Stage 2 in the next quarters. And with that, I hand over to Jan. Thank you.

Thank you, Normann. I'm now on Page 58. And here, we can see a detail of our capital position with a capital adequacy ratio at 17.1% and CET1 ratio at 14.4%, which is more than 3 percentage points above the corresponding regulatory requirements. Our accounting equity stood at CZK 29.5 billion, final regulatory capital reported on the right-hand side, reached CZK 28.9 billion. Growth rates of both positions are driven by the retained earnings by the regulatory capital on top by the issued Q2 bond. RWA density reported in the bottom right corner decreased to 53%, further supporting our capital adequacy ratios. On page 59, we report in detail our excess capital development measured over the management capital target of 14.4%. At the end of 2021, we reported the excess of CZK 8.1 billion, which constitutes about CZK 16 per share. The chart in the bottom part portrays risk-weighted asset development. While the loan book grew by 13.1%, our RWA position grew only by 9.8%. This ongoing trend is mainly supported by increasing share of mortgages as well as state guarantees in small business lending with low capital consumption. So this concludes the capital management section, and I will now hand over to Tomas for the guidance and final remarks. Thank you very much.

So if we look at what we expect for '22, we have that one on Page 61 for the year 2022 on a stand-alone basis, we expect to reach minimum level of operating income at CZK 12 billion or more. On the cost base, we would like to put a ceiling of CZK 5.7 billion. This is CZK 200 million more than we've incurred in '21, and it's driven by inflationary pressure across the cost categories. With respect to cost of risk, we provide a range of 20 to 40 basis points. And the minimum net profit target stands at CZK 4.4 billion or 8.6% -- CZK 8.6 on per share basis. The year 2022, we would like to achieve a minimum tangible equity return of 16%, and I stress this is a minimum. With respect to the outer years, we have not changed the profit guidance, we changed somewhat the geography of the numbers, the topology of the numbers. And here, I would like to stress that the year '22 and to some degree, year '23 are impacted through the assumption that we will have good performance on the cost of risk, and that the cost of risk will benefit from the COVID-related anticipatory provisioning that we've made throughout 2020. This could prove wrong as we have been always on the right side of being wrong. This is really an assumption that the economy continues to perform well and that we continue to have a fairly benign credit risk environment. On Page 62, we provide an overview of the key assumptions underlying the plan such as GDP growth, unemployment inflation and the interest rates. So on the 2 week repo rate and on PRIBOR, you can see that for '22, we have reached the level of [ 348 ], which is imputed into the plan, and we also envisage strengthening of the of the Czech Koruna against Euro. However, this does not materially impact our results. On Page 63, we show you evolution of the 2 key categories of the balance sheet, which is a portfolio loan -- loan portfolio on a gross basis. And secondly, core customer deposits. So what is perhaps notable about this plan is that with the higher interest rates, we -- and a lot of uncertainty in the economy, how the economy will perform. We try to sober our assumptions on growth, and we envisage that during the period of the plan, the loan portfolio should increase 6.2%. If you look at the last 5 years, we've actually exceeded the growth rate of 18%, both organically and through the acquisition of Wüstenrot. So perhaps we will do better than that hopefully. And on funding side, we envisage minimum growth of 6.5%. We also in the plan make assumptions that the cost of funding will materially increase throughout -- namely throughout 2022, as we had observed that trend in the fourth quarter of 2021. Ladies and gentlemen, thank you. We're grateful for your patience with us and now we turn back to you, and we are ready to answer to your questions.

[Operator Instructions] And our first question is from Unger Thomas.

Can you hear me now?

We can hear you as if you were standing next to us.

Wonderful. Thank you very much for the chance to raise a few questions. First of all, maybe if you could give us an update on where you stand with the Air Bank acquisition and the time line. Has that moved? What do you expect? When would you expect the closing of that acquisition? And secondly, on the guidance for midterm, but also maybe more specifically, for 2022, can you give us some details on what you expect for net interest income growth. What is the volume effect that you anticipate, and how much of a margin effect do you anticipate for this year? And then also, you mentioned, of course, the inflationary pressures on operating expenses if you could just talk about what are the main factors here that made you increase the guidance and what makes you confident that you can hold that level of CZK 5.7 billion as a ceiling, as you mentioned it in the presentation.

Okay. So I will take the acquisition and Jan Fricek and my colleagues can comment on the on the NII metrics, volumes, margin and inflationary pressures. On the acquisition, we have actually signed the application to Czech National Bank for MONETA to obtain control of Air Bank yesterday. And we've engaged in more than a month long dialogue with the regulator, how to structure the application. So I expect that hopefully there will be no surprises from the regulator as we engag and close, let's say, dialogue with them on that. The application has administrative procedure of 90 days. So we will see how long that takes. But speaking from experience of one, which was Wüstenrot, it really took 90 days for us to receive the formal clearance. At the same time, we are applying to Czech -- to Slovak National Bank as they have to approve it as well due to Home Credits Slovakia and this will be done most likely next week. With respect to the big picture, the plan is that we go through April Shareholder Meeting that has no bearing on the acquisition, but we finished the year come April -- sorry, come May, we should do the first round of the capital increase where we plan to offer the shares at the previously communicated CZK 82. And if there is a need for a second round then we would proceed through June. We are discussing now the process with a feasible partner as we will need help to conduct the capital increase, and we are close to, I think, reaching an agreement on that. Concerning the closing, there are 2 potential dates. One, 1st of July, if everything proceeds according to fairly tight schedule. And the second possible date would be 1st of October depending on technicalities in accrual and in the capital increase. And as you know, the capital increase is in the second round guaranteed by BPS. So we will see all of that proceeds. So far, we have no reason to change the schedule in any form or shape. But it's fairly complicated, a process where we need regulatory approvals from 2 jurisdictions. So -- but so far, we are on plan. And I'll turn it over to Jan to tackle the NII growth, the expected level of NII volumes, margins and how will we deal with the inflationary.

Okay. So -- on the -- I start with the yield. We expect that with the increasing market rates, we will be able to increase average yield by about 30 basis points from 2021 [indiscernible] 3.8% to about 4.1% in 2022, predominantly through higher rates on mortgages and higher rates in commercial loan book. However, this increase on the yield will be pretty much offset by higher cost of funding where in 2021, the average cost of funding was at the level of 35 basis points. For '22, we expect about 110 basis points. So 200% increase year-on-year on cost of funding, which will result in a stable year-on-year NII at a level of 2.8%. So this is to the profitability on NII of the loan book. In terms of the volume, in 2021, we originated CZK80 billion of new volume out of which CZK 60 billion was originated in retail and CZK 20 billion in commercial. For 2021, we expect a drop of a new production to CZK 66 billion, but the drop will predominantly come from a lower expected new volume in mortgage lending. But in 2021, we originated CZK 50 billion. For 2022, we expect a slowdown on the market and our production should be around CZK 25 billion, maybe a bit lower than that. So this is for the volume and I will take the inflationary pressures as well. Obviously, our cost assumptions going forward assume that we would challenge inflation predominantly in terms of energy prices, rental costs and as well as average salaries, so the personnel expenses. However, we expect to already plan to offset part of these pressures through higher productivity resulting in a reduction of FTEs. As you saw in the presentation, we ended 2021 with the FTEs of nearly or a tick below 3,000 in our plan, we expect that this number will go down by about 100 FTEs throughout the year.

And on this, I would add -- if you look at our employment structure, we have the core employment base. And then we have a portion of our colleagues on limited contracts or on a one-time basis. So first, we will perhaps not renew some of the limited contracts, which typically are in the back-offices, which typically are in the call centers and other areas where we have an ultimately significant staffing. So we are trying to dynamically adjust the model to the throughput in terms of number of pieces in volume and we have already began that process in terms of review and making some decisions. So this is one. On energy, hopefully -- thankfully, last year, we have fixed some of the energy prices forward and we are benefiting from that decrease against the current market prices sort of in the neighborhood of CZK 15 million. It's not a big number, but still it's actually significant in terms of not increasing the cost base. And on branch network we are examining what to do or what not to do. We would like to first gear up a bit more of the -- a bit more the digital distribution before we get confidence in further rationalization of the branch network. So we haven't made any decisions on that. But if we see that we have a cost problem, we will act quite decisively. And in terms of other aspects of cost, we have actually reduced the car fleet of the bank by approximately 10% in the fourth quarter of the year. This has partly -- dimension of cost -- it partly has dimension of ESG. So we have done some steps. So the bank is seeking to really address it. However, at the same time, we have to have a reasonable compensation policy with respect to our core employees as we have been -- we typically raise salaries of approximately 55% to 60% of our staff throughout the year. We will watch very closely what we need to do to keep the bank stable in terms of remaining an attractive employer. And that's why we face a lot of pressure in some professions more and in some professions less, but the pressure is quite strong.

Okay. Did I get it right, when you were talking about the margin development, you expect a stable net interest margin for 2022?

[indiscernible] Right, 2.8%.

Okay. And can you just maybe on the total income guidance for 2022, the step-up from '21 is about around at least CZK 800 million. Can you break that down into NII fees and other income?

Rather not. We have never published these figures, we don't have to comment on that. But the major -- if you look at it, actually, the major improvement in the guidance from what we put out in October 2020 to what we are putting out now for the year 2022 is the fact that the cost of risk is assumed to come in the range of, what we have, 20 to 30 basis -- 20 to 40 basis points. And this is driven by the anticipation of provisioning release from the portfolio with COVID downgraded exposures, which Normann highlighted in his presentation, where we expect that a portion of this portfolio will be upgraded through the first 6 months of the -- majority of this will be taken of the benefit will be taken from that portfolio in the first half of 2022. That's the main driver of the improved guidance.

And our next question is from Andrzej Nowaczek, HSBC.

Thank you. My question is on interest rates. It seems that we -- in this interesting situation when interest rates may need to be cut soon, and I can see that your forecast as well. But if inflation and interest rates stay high, do you expect this to have eventually a negative impact on asset quality? And also, if they do fall what do you expect the asset and liability repricing dynamics to be?

First part of the question, whether we expect -- yes, because if you look at the plan, the guidance, you see gradual increase of the cost of risk in the guidance. And one of the drivers of that is that we take the release of provisions in '22. However, we see the situation normalizing and that normalization expects that the core cost of risk of the bank will be higher in years '23, '24 and beyond, and then it settles in the range of 40 to 60 basis points and 45 to 65 in the last 2 years of the guidance. However, this does not include a shock to the portfolio, which would come from prolonged high interest rates because our plan is based upon assumption that rates should be up to [ 4.5 ] and then start coming down with the abating inflation. Should we [indiscernible], we will in [indiscernible] next year to reevaluate that plan across all metrics.

Does that answer your question, Andrzej?

Yes. But as a follow-up, you did raise a lot of deposits in the fourth quarter, CZK 20 billion that you've mentioned. On the expectations that rates will go up, if they go down very quickly?

And we are able to reprice it very quickly because we don't have any commitment on -- we don't have any commitment on repricing or not repricing these deposits. So effectively, the repricing ladder on that is 3 months. The only portion of our balance sheet where we are locked into deposit rate is the [ Bospar ] with the building savings where we typically make a 6-year rate commitment. However, that portfolio, Andrew, can tell you the exact figure is around 1% effective cost because it's subsidized by government through interest rate subsidies. So otherwise, we have a fairly good ability to replace the liability side of the balance sheet.

[Operator Instructions] Our next question is from Simon Nellis from Citi.

Tomas and team, thanks for the call. Yes. Just a quick question on the dividend. Can you give us any color on how confident you are that you'll get approval to pay out that CZK 7 per share? That will be my first question. And then secondly, can you just elaborate a bit on the outlook for the unsecured consumer lending portfolio keeps going down, yields keep going down? Do you expect any turnaround there?

The second question is easier that will be taken by Andrew. The first question on the dividend, how confident I am. I am confident that we will do whatever is possible to argue with the regulator to enable us to pay the CZK 7 and the arguments are quite clear. We made CZK 3.9 billion, plus CZK 84 million. So the SEK 7 per share is in line with the 90% payout. And the 90% payout is in the [ dividend ] policies [indiscernible] to regulator is aware of the last 5 years. So that's #1. #2, from a capital adequacy point of view, recommend good capital base with some excess plus we [indiscernible] yesterday the additional EUR 100 million in secured -- in senior debt in a very difficult market. We were able to raise [indiscernible] and the [indiscernible] requirement is satisfied. So the regulator cannot argue that we face [indiscernible]. Third argument is that we've never been as provisioned as we are now because we carry more than 1 year profit and no provisioning, and we have 2.2% overall coverage on the book. We covered the NPL at [ 101% ]. And we are well performing stable bank and we need to pay our shareholders the dividend because for many, we compete on the dividend yield. So I hope that the regulator will accept these arguments. And we have also actually quite successfully manage the NPL both ratio and the absolute level through proactive management collections and were able to dispose CZK 1.5 billion of NPLs throughout '21. So I would argue it's difficult to point at any metric in the bank on a structural basis and say that we shouldn't pay dividend, but I cannot guarantee. I can guarantee that we will do whatever is possible to convince the regulator. And now Andrew will tell us when we stabilize the consumer portfolio.

So first, let me comment on what we've seen in the market. So over the course of the last year, we saw the market rates broadly stable from end to end. However, during the middle of the year, they were down 70 basis points. So on average, rates are continuing to decline, and these are new business rates across the market. And as I said earlier, there continues to be intense competition where the large 3 -- the big 3 banks in consumer lending, where we're #2, have been losing market share to the smaller banks who are playing very aggressively in this market. So that's the market. I think probably continuing to see some price pressure on new business rates in the market, but the decline appears to be a little slower in '21 than it was in the prior year. And as I said earlier, we haven't seen any sign of appetite for increasing rates despite 425 basis points of cumulative hike by the National Bank over the course of the last year and a bit. As to our own -- the development of our own business, you saw that in the fourth quarter, the consumer loan yield reached 7.3%. And what I would say is that -- now when the market is reasonable and i.e., there's reasonable demand in the market, we're able to hold the origination rate close to that level, which is some sign of a prospect of stabilization. However, it's also true that as the market -- when the market goes through tighter periods, we often have to price slightly below that in order to hold on to some volumes. So I think it will still be difficult to stabilize, but we're getting close to the point where new business origination is at a similar rate to the portfolio yield.

And our next question is from Mr. Robert Brzoza.

Yes. Hello, everyone. I'm from PKO BP Securities. Also, thank you for the presentation. I have a few business-related questions. First on the new set of the government, really interested to know how many new clients did you manage to get, thanks to your marketing campaigns in the 4Q, the marketing of deposits of course? Secondly, on fees development, you've had pretty solid growth in insurance-related fees and fund sales. My question is whether that's related more to the existing clients and with the issuance fees to the new volumes of lending or whether that's more independent? And also here, what's your outlook for the cross-sell potential regarding the new clients coming to the bank?

Okay. So let me start by taking the point on savings accounts. So we gained roughly 25,000 new clients on savings accounts, and we opened significantly more new savings accounts for customers within the bank. The offer was available to both. And so this is broadly the impact on the customer base. Obviously, this provides an interesting opportunity for us now to activate those client relationships, there's new client relationships and realized [indiscernible] for them -- from them in the coming year.

The second question was the elements of cross-sell, I think for '22 our key target is to achieve the higher cross-sell ratio on the mortgage portfolio because if you look at our most profitable client relationships on retail, it is coming from those clients where we have a mortgage and additional set of products. And with respect to the savings account customers that Andrew referred to, we have target to quite substantially increase the asset management distribution this year. Whilst in '21, we had a CZK 12 billion target, and we've met it. This is the gross sales of asset management funds. This year we have a target to sell CZK 15 billion of asset management. So this focus is on both existing and obviously, the new customers. On the fees, I didn't really understand the question, but that's majority, 98% pertain to new customers. And I wouldn't be too optimistic about the fees because part of the late and prepayment fees will be under pressure last year -- if you look at -- next year. If you look at 2021, we've reintroduced the mortgage repayment fee. In the fourth quarter, we collected CZK 12.8 million on that, and we were forced, just a couple of weeks ago, to step back from the fee as the regulator has fined a subsidiary of Komercní banka CZK 5 million. So we will not be able to collect that fee because the regulator is quite, let's say, how to put it, uncompromising on that front. So I'm -- 98% of our fee income more probably is from the existing customer base with the bank.

Thank you. Regarding insurance fees, what I had in mind, in [ Poland ], at some point, the [ key ] the inference part of the key business growth was very much related to the new volume of lending. And my question was whether that's also the gains at MONETA or whether there's a different driver for insurance fee growth?

No, this is not our case. If you look at our fee growth is coming from 3 areas. One is asset management; insurance is the second; and third is the transactional intermediation; and fourth, our delayed penalty fees and fees for prepayment, but we have a relatively small fee income from new lending. And typically, if there is a fee, the fee actually gets recognized as part of interest income because it's accrued over the life of the product. But we are not really charging any fees on lending upfront to customers anymore. The competition took care of it.

[Operator Instructions] It appears we have no further questions registered. So I will hand back to Tomas, to make any final remarks.

Okay. We would like to thank you for participating in the conference. With respect to 2021, we believe that we have delivered good performance, not only due to the cost of risk, but I would focus, emphasis on the 9% increase of recurring pre-impairment profit of the bank. This is quite important. We have also accomplished, across the board, our growth targets. And the performance on the consumer loans was pretty much driven by the early prepayments rather than failure on origination, but that's the situation of 2021. Second on 2022, we plan to expand the loan portfolio at the rate of 6.5%. We hope to be able to accomplish it. We will match the growth through focused attention to deposit taking and we have significantly lifted the anticipatory cost of funding as we have to pay better interest rates in this high inflation [ marine ] environment, so it's part of our plan. Those assumptions are part of our plan and the volumes that we plan are quite sober except a quite significant increase on the asset management distribution. And lastly, we have the good potential, a high chance of getting a benefit from upgrade of loans that were downgraded in December 2020 and continue to have good performance. So we will see that in the first half of this year. And with that, we look with confidence to be able on a stand-alone basis to deliver this year minimum level of profit of CZK 4.4 billion. With respect to the acquisition, we are proceeding according to the plan. And with respect to CZK 7 dividend per share, we are committed to seek to convince the regulator to enable us to make this distribution as we see it, not only as a part of 2021 distribution but catch up for the year 2020. And with that, we wish you a wonderful weekend, and we look forward our next call when we announce the first quarter results of 2022. So thank you very much, and have a nice weekend. Bye-bye.

Thank you to everyone who has joined us today. This concludes the webinar, and you may now disconnect your lines.