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

Welcome to the conference call of MONETA Money Bank regarding First Quarter of 2022 results. Please note that this conference call will be recorded. [Operator Instructions] May I now hand over to Mr. Tomas Spurny, CEO and Chairman of the Management Board, who will lead you through the conference call. Sir, please go ahead.

Good afternoon, ladies and gentlemen. We will cover our presentation, which we published this morning, on the bank's website. So if I can have your attention on Page 4. We highlight our quarterly performance. First and foremost, the bank generated net profit of CZK 1.3 billion, it's a considerable year-on-year improvement as we increased profitability of the bank by 116% compared to Q1 '21 and 19% compared to fourth quarter of 2021. The composition of key lines on the P&L, we've generated operating income of CZK 3 billion. This represents growth of nearly 13%. We've also accomplished to keep the cost base flat at CZK 1.5 billion. Please note that this includes regulatory charges for the rest of the year as we don't accrue those, but we book them as they materialize. The pre-impairment operating profit CZK 1.5 billion, it's 29% increase. And due to improving quality of our loan portfolio, we were able to accomplish positive cost of risk through release of loan loss provisions at the level of CZK 95 million, which obviously enhance the result. Turning the page to Page 5. Key areas of balance sheet and return that we've delivered. On the deposit gathering activity, our deposit stood at the end of the quarter at CZK 294 billion. This represents 10.8% growth year-on-year. We've also accomplished good growth in distribution of the 35 asset management products that the Bank offers, ending the quarter with a balance of CZK 25.5 billion, which represents 27% growth. And on lending activity, our loan portfolio reached CZK 258.6 billion, generating -- during the quarter, we generated growth of 11.5%. The P&L result translates into return on tangible equity at the level of 18.8%, which is 910 basis points increase from comparable quarter in the previous year and capital adequacy of the banks to the 17.7%. On the following page, on Page 6, we have the key trends of -- I covered the profitability. On the excess capital position, we do have regulatory capital in the amount of CZK 29.8 billion. This translates into the overall capital adequacy ratio of 17.7%, and this is against the regulatory OCR requirement of 13.6% and management target of 14.6%. We have CZK 5.3 billion of excess capital. This excess capital number does not include the accrued dividend that we will pay out shortly, which is CZK 7 per share with the absolute demand of CZK 3.6 billion. And during the first quarter against backdrop of challenging capital market situation, we managed to place EUR100 million in senior preferred bond, which is MREL eligibles. We begin to build the MREL coverage position gradually. On the operating liquidity of the bank at CZK 70 billion. This remains broadly stable with a strong liquidity coverage ratio of nearly 170%, and we marginally decreased loan to deposit ratio to 88%. Now let me turn a little bit to macroeconomic environment here in Czech Republic. First, we cover the strategic KPIs on Page 8. So, we have 8 elements of strategy. First element, retail franchise development. Growth in retail, in the overall lending activity at 13.3%. The composition of the growth is strong across all of the product categories. On deposit-taking on liability side, overall growth in deposit base of the bank in retail 14.4%, augmented were supported by strong distribution of asset management products, while the conditions were fairly volatile in the first -- in the first quarter. In the small business development, we had a solid growth of 26.6%, backed by strong campaigns of the bank, focusing on high-margin, high return lending product categories. Small drop in deposit base and a notable shift towards higher interest earning products. We see very strong growth on the savings in term deposit category. Within the SME performance, again, we have a fairly good growth on the SME lending portfolio and this growth is matched by a slight increase of the SME deposits and again a notable shift to higher interest-earning products, which translate into cost, Jan Fricek will cover that later. We continue in development of digital distribution categories, and it is notable to say here that today or during the first quarter, we sold nearly 28% of our current accounts through online services and 43% of consumer lending is now going through the digital channels. So there is some strong improvement on that remaining categories remain stable. On Page 9, the other 4 elements of our strategy dealing with risk management first and foremost. So we have been quite stressful in decreasing the NPL loan portfolio by CZK 2 billion in last 12 months, CZK 1 billion during the last quarter. The NPL ratio came out at 1.8%. We, however, continue in a prudent posture with respect to coverage. You can see that the overall cover of the NPL loan book stands at more than 120% and the overall loan portfolio coverage is at 2.1%. So we have a fairly comfortable position there. On capital, I've covered the capital, what is perhaps important to add that we have marginally decreased the RWA density by 2.5% and the overall density stands at 43.7% as of the end of the quarter. On cost control, we employed on full-time equivalent basis 2,929 people, it's a 3% decrease year-on-year. If we adjust the cost-to-income ratio and subtract a relevant portion of the regulatory charges, we would come out 43%, which we consider good efficiency for the bank currently. So the cost base remains steady increasing by 20 basis points year-on-year against comparable quarter. And we are also building momentum in realization of our ESG strategy. Apart from other things, we launched ESG dedicated website where we will continue to regularly report on progress we are making on this dimension of our strategy. We've also published 2021 sustainability report, which we are proud of. The report also shows dramatic decrease of the carbon footprint that the bank achieved during last 5 years. And lastly, we have approved, in context of our CSR activity CZK 5 million grants through various NGOs and civic initiatives. On Page 10, briefly the evolution of the operating platform where the branch network or the physical footprint of the bank remains unchanged in the 12 months with some branch improvements being done during the last quarter. We have quite dramatically restructured the tied agent network that was acquired from [indiscernible] reducing the number of agents offices from 60 to 41 and restructuring this distribution arm of the Bank. On ATMs, no change really, except we are modernizing the network and utilizing higher proportion of deposit-based ATMs, which are highly popular with our small business customers, and we experienced strong growth in the volume of deposits through those machines. In terms of client acquisition, we had both strong -- fairly strong growth on the 12-month basis. The bank added approximately 70,000 customers -- 71,000 customers with a -- according to that we had during the first quarter addition of about 27,000 customers across the board. And a similar growth we are delivering on the digital channel usage. If you look at the mobile banking platform, 600,000 users. And we have continued growth and penetration of the Internet banking platform of the bank. And I mentioned the employees, we have reduced staffing in the bank by 3%. Now let me cover a little bit about the operating environment in Czech Republic from macro point of view starting on Page 12. The GDP forecast for this year had been reviewed. It currently stands at growth of 1.2%. The budget deficit is forecasted for this year at CZK 280 billion, decreasing by about 40% from the previous year and the first quarter's deficit stood at CZK 59 billion. All of this is followed in parallel by increasing indebtedness both in absolute and relative levels, the Czech Republic remains relatively unleveraged compared to many other countries within the EU. On Page 13, the country continues to enjoy stable outlook, good rating, and if you look at the GDP contribution last year, it was driven pretty much by investments. This year the composition of contribution is similar. However, we are probably seeing tail end of the investment activity as interest rates are at the highest level since early turn of the century. In terms of industrial activity, during the first quarter we see a notable decline in industrial orders and the activity also, the growth of the activity went into negative territory as of end of February. Similar situation prevails in retail sales as people are bombarded on a daily basis by increasing price messages in the media and high inflation. And on the foreign trade, we see steady performance, slight growth on the exports. However, the imports are being -- have dropped during the first 2 months of the year. On the following page, Page 14, little bit on inflation. The latest inflation number 12.7% as Fricek reported at the end of first quarter. In the table below that, we have circled out the key contributors to inflation, which is housing, energy. We have price adjustments filling into food stuffs and transportation, and telecommunication. Let me show you the impact of increase in -- of prices in gas and electricity, which is quite rapid speed and this obviously contributes to the current situation. On Page 15, how does that translate into interest rate environment? So if we look at the 2-week repo rate -- key rate by Czech National Bank, this was increased on the 1st of April to 5%. We think that another hike of at least 50 basis points is imminent. The yield curve is inverted, so the short end is significantly higher than the long tail. This is consistent with the [indiscernible] growth forecasted for this year and we also see notable increase in the 10-year government bonds. The rates are coming up quite quickly and dramatically. On Page 16, what is our situation in unemployment? We see an incremental increase to 2.5%, so nothing dramatic. Continued increase of wages. In the graph we show you that the wage -- the wage acceleration, 6.1% for last year, and I would say that on the micro level, this pressure prevails and continues to be felt by the bank as we are faced with increasing demands that we increased wages across the board in order to help our staff to weather the inflation pressure. Savings rate for this year predicted at 15% in a relatively unchanged situation from indebtedness point of view. However, the data set is fairly old. So the next section on Page 18 deals with a quick review of the latest evolution of banking market. Here we use first 2 months of the year as the ending data point that the data were not fully available. However, commenting on the deposit market on Page 16, the market grew 5%. The Bank grew at 10%. You can see on the right-hand side of the page that our retail deposits continues to expand quite rapidly at 14% against market growth of 4.9%, and we had a slight drop in commercial deposits due to our pricing strategy, which we're augmenting in the second -- during the quarter of this year. On Page 19, the lending market. If you look at the overall retail and commercial lending market, the growth is 4.9%. The market reached nearly CZK 3.6 trillion. MONETA grew at 9.4%. So we overperformed in growth on the asset side. Retail, we're pretty much aligned in the first quarter with the market due to -- compared to previous quarters, we slowed down the growth in mortgages, but significantly we ended with a nominal portfolio of CZK 180 billion and on commercial, we have growth of 5.8% due to, as I mentioned previously, strong growth on small business and continued growth on the SME side. So let me comment in the next section, a little bit on digital distribution. This we have on Page 21. Here you can see a notable drop in mortgages. This is in the upper left hand corner where we did about CZK 700 million digitally. This is a 70% drop compared to first quarter of last year and CZK 1 billion drop compared to the fourth quarter. This is due to the fact that our existing platform is very much focused on refinancing of existing mortgages. And obviously, with the increase of interest rates, this business shrunk quite considerably. Nonetheless, even with this performance, structurally, we maintain about 14% portion of the new volume realized digitally. In asset management, which we sell mainly through Smart Banka application, we manage to keep this stable with a stable both absolute demand and proportion against the bank. [indiscernible] enterprise corrections in the equity and debt markets where we consider this a solid result. Dramatic growth in the current account distribution capacity. This was faced, I would say, by improvement of the process, but also during the first quarter we have seen a bank fail in the Czech Republic, which is national Sberbank that stopped trading and this enhanced our customer intake and current account sales. And on small business, steady online performance with a steady proportion. On the following page on Page 22, we provide you with a view on usage and transactional growth. So on the mobile banking platform, we are continuing to grow users by 25%, we reached 600,000 and this trend continues into the second quarter. Nearly 10% growth on the new Internet banking platform that we started modernizing approximately 1 year ago, where we have in excess of 1.1 million registered users. If you look at the chart below on the transactions, we have rapid growth of the mobile banking transactions, nearly 61% and nearly 8 million transactions per quarter. The platform has become bigger in terms of number of transactions at Internet banks. So this testifies to success of both our strategy and ability to execute and implement new functionalities modalities. On the Internet bank, 7 million transactions, you can see that compared to the previous 4 quarters, we have growth against 3 of those and solid growth year-on-year. On Page 23, we also -- we were the first bank in the market to implement Google and Apple Pay and you can see success in tokenization of our debit cards. The growth is nearly 50% and 480,000 -- more than 480,000 cards have been tokenized and registered for these big tech platforms. And we see dramatic growth in usage on the 25% and this trend continues and actually accelerates. The other existing improvement here is that Apple seems to be bit more successful in the Czech Republic. So with that, we've made nearly CZK 1.3 billion in net profit, delivered return 18.8% on tangible equity. And my colleague, Jan Fricek, will now take you through the details of the P&L.

Thank you. Good afternoon, ladies and gentlemen. I'm on Page 25. Let me look through profit and loss statement. As Tomas already mentioned, in the first quarter this year, we delivered consolidated net profit of CZK 599 million, which corresponds to 18.8% return on tangible equity, nearly doubled year-on-year. On the revenue line, we achieved 13% growth driven by higher net interest income by 17% year-on-year accompanied by 3% growth of the net fee and commission income. Despite the double-digit inflation, we maintained cost base flat year-on-year. When the cost of risk declined, we report a net revenues of CZK 95 million against CZK 418 million for last year. This is primarily due to strong repayment discipline and decrease of NPL portfolio. Normann will provide more detail on this in the next section. On Page 26, we provide you with the composition of net interest income. Nearly 17% growth year-on-year as 2 main drivers. Firstly, lending interesting income is up by 14% year-on-year, which is predominantly a function of the loan book expansion by 11.5% and secondly, interest income growth is supported by hedging derivatives and excess liquidity in the Czech National Bank amid higher interest rate. This is visible in the bottom chart of net income of CZK 491 million. On the other hand, change in interest rate environment resulted in a significant pressure on the cost of funding namely on the saving account and term deposits. In the first quarter, we reported cost of deposit of CZK 656 million or 91 basis points, which is about 2x more than the year before. Increase in cost of deposits was inevitable from several reasons. Deposit base protection against the outflow to other banks, gathering incremental funding to enable the lending growth. And lastly, a reduction of the loan to deposit ratio to the target levels of 85%. Altogether, our net interest margin in the first quarter stood at 2.8%. In the 5-year horizon, we expect stable NIM operating around 2.8% as further yield upside will be mostly offset by higher cost of funding. This obviously might improve with the acquisition of Air Bank, which maintains a significant excess of liquidity. On the next page, we continue with the development of net fee and commission income. The 3.4% growth is driven by higher third-party commissions for distribution investment funds and insurance, and also by significantly higher number of transactions mainly card payments. Higher number of transactions is at the same time reflected in higher fee expense. The income side is further analyzed on the following page. The commission income from the third parties is up by 12.2% driven by asset management, which is visible in the top chart, and in the bottom chart, we provide a detail of other fee income categories of which fee income from transactions was the driver of overall 5.7% growth year-on-year. On Page 29, we provide further detail about investment fund distribution. In the first quarter, we report income growth by more than 82% year-on-year, with first quarter income of 73% was also supported by the time limited tranche fund distribution. And in the chart below, you can see that at the same time, the portfolio underneath increased by 27.4% year-on-year and stood at CZK 25.5 billion at the end of the quarter. And on now cost bases, starting or -- reported on Page 30. As I mentioned before, cost base in the first quarter remained stable year-on-year with cost-to-income ratio at 50.3%, more than 6 percentage points below the year before. The cost-to-income ratio is typically elevated in the first quarter of the year due to annual regulatory charges that are fully approved in January. Let me briefly comment also on the development of individual OpEx capabilities on the left-hand side. Regulatory charges went up in line with our funding base expansion. However, on top of that, the Central Bank has indicated that banks now be asked for an extraordinary contribution into the deposit insurance fund in order to refer the funds after the compensation payout in relation with the sale of Air Bank unit at the end of February. The extraordinary contribution hasn't been accrued it. So it is not in the numbers and will be accounted for once we get the amount. It should be in the -- during the second quarter. [indiscernible] that the extraordinary contribution that will become recurring at least for several years. So then personnel expenses, we reported a reduction in the first quarter, CZK 586 million. This is by CZK 15 million below first quarter last year and this is a function of 30% reduction of the FTEs, and the last 2 categories namely administrative expenses and D&A remain broadly stable. Altogether, we maintained the cost base in line with the full-year guidance of CZK 5.7 billion. Nevertheless, let me emphasize here that our guidance is based on the macroeconomic outlook, assuming inflation of 5.6% and the reported inflation reached 12.7% in March. Impact of higher than expected inflation that will become even more visible in the second half of the year, namely on personnel expenses, energy and rental costs. And if you ask me to quantify risk in the cost guidance, my estimate is up to CZK 100 million with respect to higher inflation plus the amount of the extraordinary contribution into the deposit insurance fund. The regular annual contribution to the deposit insurance fund is CZK 100 million. Before I hand over to Jan, let me summarize Q1 P&L. Delivered net profit of CZK 1,290 million represents 29% of the full year guidance. Operating income increased by 13%, cost base remained stable and then net release of CZK 95 million, which reported on the cost of risk guidance. Thank you.

Thank you, Jan, and good afternoon, ladies and gentlemen. Please let me walk you through the next section of today's presentation, the balance sheet development section. I will give the presentation together with my dear colleague, Andrew Gerber. Now please let me focus your attention on Slide #32, where you can see the chart depicting our assets and liabilities composition and its evolution throughout the last 5 quarters. The overall size of the balance sheet has reached almost CZK 368 billion, with a very healthy growth mainly in both net customer loans and core customer deposit components. In both cases, almost 11% year-on-year. Overall, MONETA maintains very resilient and highly liquid balance sheet. Now on the next page, Page 33, you can see more detailed information about the customer segment representation in gross performing loan category. This portfolio has reached CZK 258.6 billion and as you can see, we significantly grew in all segments and then with retail portfolio size at CZK 178.1 billion, which represents the share of 69% on the overall portfolio. Now let's move to the next slide, Slide #34, it shows the loan portfolio yield evolution. On the left side of the page, you can see that the yield on the total loan bank portfolio grew to 4% due to increased pricing on new origination, as well as strengths to the change in interest rate environment. On the right side of the page, you can see the split of the evolution per type of customers the stabilizing results on the retail side and growing loan portfolio yields on commercial side. Now let's dig deeper into the product results, including the yields evolution split by the segment, and we start on retail products presented by Andrew.

Thank you, Jan, and good afternoon, ladies and gentlemen. So moving to Page 35, we present the development of the retail loan portfolio, which increased 13.3 year-over-year due to growth across 3 out of the 4 major product categories. Obviously, mortgages continue to be the primary driver here, up 19% year-over-year, reflecting continued strong performance of the market, but also our continued increase in market share, which increased from 7.2% to 7.8% year-over-year in February, which is the last month for which we have market data. In consumer lending, the portfolio stabilized, growing slightly 1.5% growth year-over-year after 3 quarters of decline and this reflects both stronger new business performance, new business origination, which was up 20% year-over-year, and a significant improvement in the early termination on the portfolio where in 2021, where we saw significantly higher early termination and in Q1, we have been able to bring this back in line with the long-run average. In auto lending, the portfolio increased 13.2% year-over-year, reflecting generally strong demand for cars, both new and used. And in the revolving products, we continue to see decline of 2.5% year-over-year, which broadly reflects the trend in the market. So moving to Page 36, we go onto look at the yields in the major retail loan products, where what we see is that the price, the rate increases in the market have yet to be fully reflected in pricing in the market, with the exception of mortgages where new business pricing has increased between 250 and 300 bps year-over-year. Looking at the mortgage portfolio, you can see that the portfolio yield increased 10 basis points year-over-year and we expect now to see continued increase of 20 basis points to 30 basis points over the course of the rest of the year. As new originations comes into the portfolio at higher rates and part of the portfolio goes through refixation, which again is at similarly higher rates. We expect roughly 25% of the portfolio by the year end either to be newly originated or refixed at current rates. And we also present the yield, including the benefit of hedging instruments, where we see a 90 basis point increase year-over-year as we benefit from the hedging instruments underneath the portfolio. In consumer lending, the portfolio yield dropped 50 basis points year-over-year. However, you see that for the first time in a very long period, we had stabilization quarter-on-quarter, reflecting the fact that new business pricing in the market is now at very similar level to where our portfolio is. We would love to be able to keep this stabilization through the coming quarters as the new origination rate aligns with the market. I'll now hand over to Jan who will take you through the commercial portfolio.

Thank you very much, Andrew. Now, let me please focus through the finance state also for the commercial. On the left side, the Slide #37, you can see the [indiscernible] portfolio size that at the end of Q1 has reached CZK 80.4 billion with the year-on-year growth of 7.6%. On the right side of the page, you can see more detailed split. A very solid growth on investment loans and working capital portfolio where we continue to focus on growing the profitable and low risk customer relationships, very good growth on auto -- auto loan portfolio, given the fact that this portfolio contains also the results of our leasing subsidiary that we put under the run-off mode. But the key success is continuous growth of high yielding small business segment where we were able to an extensive usage of state guaranteed programs to grow our portfolio by more than 26% year-on-year. On the next slide, Slide #28, 38 sorry. you can see the evolution of the portfolio yield category. You can see increasing yields in investment levels as the new production pricing is significantly above the historical levels and we should see increasing yields also going forward. The key change has been on working capital portfolio again due to significantly higher pricing on new origination as well despite the fact that a large portion of the working capital lines is based on still increasing primary rates. Remaining 2 product categories are stable slightly increasing despite higher new volume pricing. However, those product lines still remains to be one of the most profitable portfolios from the return on equity perspective. So that is an update on the asset side. Now we will walk you through the results also on the liability side and for that, please let me hand over back again to Andrew.

Thank you. So on Page 39, we present the funding base of the bank which expanded by nearly CZK 32 billion year-over-year or 11.6% where retail has been the primary driver accounting for around 88% of the increment. As Jan said earlier, it's inevitable that in this environment interest rates will increase. But we've tried to play a more proactive role in the deposit repricing so as to ensure that through this we're able to attract additional volume not just repricing the portfolio and I think in this we've been fairly successful. On Page 40, we look at the cost of funding impact that obviously comes through this. So cost of funds overall increased 57 basis points year-over-year where core customer deposits is obviously the primary driver up 60 basis points with both retail and commercial contributing. I think 1 important thing to say here is that the bulk of the deposits that we've -- have been brought in on our own savings accounts where we have the possibility to reprice once the market starts to move down and this is something we will be looking for the opportunity actively as and when the situation changes. Moving on to Page 41, we present the development of the retail loan -- retail deposit portfolio, which increased 14.4% year-over-year and, as I said, the savings accounts and term deposits were the primary contributor up 20.5%. We saw limited growth on current accounts and this I think will continue as with higher interest rates we see more interest in the deposits -- in the savings and term deposit products which are paying interest. In commercial, the portfolio was broadly stable growing 0.6% year-over-year and similarly you see the shift towards the savings and term deposits, which were up 17.4% whilst the current account balances declined 6.3% year-over-year. And finally on wholesale funding. The base expanded by an issuance of MREL eligible bonds in the amount of CZK 2.4 billion in the first quarter of 2022. Overall, the growth was 31.6% year-over-year where the bonds in issue increased 27.9%. And you see under due to banks and other, you see our growth of 40.3%. However, obviously in the last quarter this declined as the increased deposit balances gathered through the retail and commercial proposition reduced our need for retail operations. So with that, I will hand over to Normann who will take you through the next section.

Thank you, Andrew, and good afternoon. We are now on Page 45 with an overview of cost of risk for the last 5 quarters. So in Q1 this year, we recorded a net release of risk provisions in the amount of CZK 95 million or 15 basis points, which constitutes a significant improvement year-over-year, but also quarter-over-quarter. The main item behind this positive development is the solid performance of the COVID-related restructured portfolios, which led to an upgrade of around CZK 1.2 billion of receivables from Stage 3 to Stage 2 leading to a release of around CZK 290 million of loan loss allowances. Furthermore, we have been seeing a continuing solid core performance visible in low delinquencies as well as NPL disposals, which we conducted in Q1 this year. On the next page, Page 46, here we show the evolution of the loan portfolio, loan loss allowances and overall coverages. While gross receivables grew by almost CZK 25 billion year-on-year, loan loss allowances dropped around CZK 650 million largely driven by an update of some forward-looking macro scenarios in our IFRS 9 models, the drop in our NPL stock thanks to our credit restructured receivables, NPL sales and also the solid repayment morale of our customers. As far as the overall coverage is concerned, this currently stands at a solid 2.1%. Moving to the next page, Page 47. Here we show the development of NPL in and outflows since March last year. The first quarter development was significantly and positively impacted by more than CZK 1.8 billion of receivables which were covered, out of which more than CZK 1.2 billion comes from upgrades of COVID-related restructured receivables. And as a consequence, the NPL stock drops by more than CZK 1 billion in the first quarter and by almost CZK 2 billion year-over-year. Going to Page 48, here we have a more detailed overview how the NPL stock evolved. So year-over-year both the commercial as well as the retail NPL dropped by around 30% and as a result of this, the NPL ratio dropped from 2.8% in Q1 '21 to 1.8% at the end of March this year. On the next page, Page 49, here we have a breakdown of the COVID-related stock of non-performing loans. As you can see on the right hand side, out of the CZK 4.6 billion, CZK 1.6 billion are still COVID related and out of this CZK 1.6 billion, around 70% or around CZK 1.1 billion are being repaid regularly. And assuming a continuing positive payment behavior of these receivables, then this will be subject to an upgrade from Stage 3 to Stage 2 in the coming quarters. And the last page in the risk section, which is Page 50. Here we have an overview of our different delinquency buckets 30, 60 and 90 days past due. Overall and across delinquency buckets, delinquencies remain on a comparatively low level. Still significantly below levels we have observed during pre-COVID time. However, we would expect given the inflationary pressure, cost pressure and also the expected implications coming from the war in the Ukraine that delinquencies will gradually rise again to a higher level than the current ones. So summarizing the risk section. I think the core message is that the assets which we have taken to support our customers in the previous 2 years by means of payment holidays and restructuring appear to have paid off. This is clearly visible from the upgrades, which we could conduct in the first quarter. Now whilst the negative implications coming from COVID appear to be coming down, at the same time the impact stemming from inflation, energy price increases, increased interest rate environment and last, but not least, the implications stemming from the war in the Ukraine, this still remains to be seen. We are carefully monitoring our portfolio. We have also assessed trade relationships with our commercial customers with the conflicting parties and for the time being we have not found any evidence that we would have to anticipate any material impact on our customers. But as said, the developments are quite dynamic and we will be vigilant and carefully monitoring the portfolio as we move further into the next quarters. And with that, I hand over to Jan.

Thank you, Normann. Let me comment on our capital position on Page 52. In the first quarter, our accounting equity stood at CZK 30.8 billion while our regulatory capital stood at CZK 29.8 billion. The increase in the positions is driven by the retained earnings. Focused capital management is demonstrated in the chart graphs. On the left hand side, our risk-weighted assets stood at CZK 168 billion, which represents 9.1% increase against 2020 while our loan portfolio expanded by 14% at the same time. This favorable development supported further reduction of the RWA density, which stood at 43.7% which is by 6 percentage points below the 2020 level. And on Page 53, we report our capital adequacies and excess capital development. In the first quarter, we reported a total capital adequacy of 17.7%, which represents a 3.1% excess over the capital requirement including 100 basis points management buffer. And on Tier 1 capital adequacy, here we reported 15% against 11.7% of capital requirement so the excess stood at 3.3%. And in the chart below, we provide the development of the excess. Excess capital stood at CZK 5.3 billion at the end of the first quarter, which considers [indiscernible] and fairly has pressure. So this concludes the capital management section. And I will now hand over to Tomas for the update about upcoming share issuance and final remarks. Thank you very much.

Very good. So on Pages 55, 56 and 57 we tried to summarize the key highlights of the process and we provide details -- contact details if anyone wants to get more detail. We will effectively start publishing very soon subscription will work. I suppose what is very important to mention here is that MONETA Money Bank has obtained regulatory clearance to acquire Air Bank. This came in I suppose yesterday. And few days before that, we were notified that PPF has received regulatory clearance to pass the threshold of 30% and acquire up to 100% of the bank. So if I simplify things a lot. We are currently working on the prospectus document, on the offering document for the share subscription. We expect that we will receive the regulatory approval for such address made by -- made to [indiscernible]. Therefore, subject to fulfillment of this assumption, the process of share subscription will begin in the beginning of June. This is illustrated on Page 57. So initially we will publish the document. The document will be available for shareholders to study for a period of 3 weeks and this is sort of a rough period. So in the 3 weeks, shareholders can look at the document and suggest questions to the transaction. And consequently, we would like to finish and settle the first round of the offering by the end of June. Should there be any shares left, then second round should begin at beginning of July and be completed by the end of the month. Again for clarity, the first round will be share will be offered at CZK 82 per share. Each shareholder has a right to subscribe 1 share for holding 2 existing shares. And in the second round, shares will be offered at CZK 90 per share. The full subscription is guaranteed by PPF so they have to take any and all excess remaining shares if there is no demand for those from other shareholders. Subject to successful increase of capital, we would then aim to close the transaction during -- before the end of the third quarter and we will continue to publish information as we go through the process. And on Page 58, we provided a diagram how the shareholders can access the share subscription in a simplified format. I would encourage anyone who wishes to know detail about this process to contact our Investor Relations and our Chief Legal Counselor. Tomas Cerny can answer questions either today or in the due course to help people navigate through the process. So much for the share subscription. We have received the key approval, PPF has the key approval and now we have to approve the issuance and the offering document and then it will be a go. Pertaining to the first quarter, we would like to reiterate couple of things. We are maintaining our guidance, which calls for minimum net profit to be achieved by MONETA Money Bank in 2022. The minimum is CZK 4.4 billion. We feel comfortable that based on the first quarter results and the trends prevailing during the month of April, we feel confident that we will deliver this target and hopefully we will do more than deliver this target. Nonetheless, we have cost risk. One part of the risk is coming from failure of Russian owned Sberbank in the market. So we will have to contribute more than we anticipated in our annual plan to the resolution fund. We hope to find soon and once we find what this cost is, should it be material, we will timely communicate to the market. So this is probably 1/3 of it. Second part, 2/3 of the cost base are related to wage inflation as we are under tremendous pressure to adjust compensation in the bank and we have also real estate and other cost categories with the suppliers and vendors are putting us under tremendous pressure. So we are trying to deal with that. At the moment, we quantify the entire cost at CZK 100 million and we will continually report that. The second challenge is cost of funding. As the rates have increased beyond the assumptions of our business plan, the business plan floor so interest rates at a lower level, there is some risk to the cost of funding. But we will seek to adjust also the revenue streams in order to deliver both, as I said, the net profit target and the revenue and the operating income target. And Normann mentioned the risk of consumer default or other risks related to the conflict in Ukraine. So it's too early to tell. However, I will also say that we have good upside in the CZK 1.6 billion COVID-related portfolio and we are also making significant progress on distribution or sales of NPL assets where in the second quarter of this year, as we speak, we are marketing a fairly substantial portfolio and I'm sure we will as always deliver a solid result. So we very much want to thank you for your patience with us today and we are open for any questions that you might have.

[Operator Instructions] The first question comes from Simon Nellis from Citi.

Yes. My first question is somewhat technical, just on the capital build. Can you just indicate how much of the first quarter earnings were retained? It's not completely clear to me that drove that increase in the core Tier 1. On the cost side, you mentioned some figures. Can you just clarify? I think you said that the -- you see kind of CZK 100 million upside risk to your cost guidance from the resolution of Sberbank Europe, but you also said it could be a multiyear event. So could you just clarify that? And then I think another CZK 100 million from just higher inflation. So a little more on the costs would be useful. And then you mentioned kind of your proactive deposit pricing strategy and you said that's going to change a bit in the second quarter. Could you just elaborate on that? And where you think yields both on the asset and liability side will kind of peak and then go to? What's your new kind of thinking on that?

I don't really want to comment too much on our deposit pricing strategy. We are aiming to remain in a corridor of 2.7% to 2.8%. This is sort of the aim coming out of the business plan and we are taking tactical steps to raise additional CZK 10 billion of deposits until the closing of the transaction. This is broadly the target we have. With respect to retention of profit, in the first quarter we retained 72% of our net profit into capital of the bank. With respect to the elevated cost, I said CZK 100 million is the risk. We think we have taken actions to adjust the salaries of our lowest earners, the most vulnerable part of the population. 1/3 of it was done effectively in February and 2/3 of it are done -- will be done 1st of June. We quantify this pressure to our cost base somewhere between CZK 30 million to CZK 40 million annually. This is number one. The rest of it, I don't have to speculate on the resolution fund because it's very difficult. We pay -- how much do we pay, CZK 100 million and it's unpredictable to -- if you compared it to assess how much the regulator will set as the minimum watermark. If you look at Sberbank, the insured deposits were CZK 27 billion and I don't remember how much money were in the deposit fund -- 32. So they will want to rebuild the balance as quickly as possible as it always is. So the pressure will be significant. So I'm just flagging this issue. Based on my inquiries, I didn't get any good answer, but we should sort of close the hedges and prepare for the worst on that one. It will be steep and it will be painful. With respect to our cost guidance, I simply don't know. The rest, it's difficult for me to put a clear number on it because we are trying to optimize the cost structure. However, we see not only energy price increases, rent increases where we have inflation again. But we also see a doubling of insurance costs namely on cybersecurity-related issues. Even though we never had a claim, we see 20% plus on the overall insurance cost of the bank other than cybersecurity. So it is -- this inflation is everywhere, it's like COVID. Very difficult to stop.

Yes. And sorry, just on the Sberbank. So you're saying that you have to pay CZK 100 million. Is that the number that's already been given out or wasn't clear to me?

So we typically pay on a normal year.

On a normal year CZK 100 million. Okay, and that could be...

That's the baseline and let's see what comes out of the regulator, but they will increase it and as the banks are posting better profitability, I suppose the regulator will see there is space to take the money from the banks that have nothing to do with that. So -- and the banks, we are the first to report the results. We'll see what comes out of the market, but I don't want to speculate, but it will be. A key emphasis is that some probability would be attached to it.

Our next question comes from Thomas Unger from Erste Group.

First, I just wanted to confirm the provision releases that you booked in Q1 now. The amount that was mentioned in the presentation I believe was CZK 290 million. Is that correct? That's the first question. Then secondly, on the -- coming back to the capital build in Q1, what was the reason for the RWAs to be down quarter-on-quarter?

Good management.

Okay. And the deposit growth you just touched upon that and the LCR. I think in the presentation you said you're comfortable at the LCR level of 170%. Is that correct?

It's correct. However, as we have seen with Sberbank, we have a target with this year to take loan to deposit ratio to 85%, which is still a very relatively aggressive posture especially on the balance sheet. We have one of the highest LTDs as we have optimized the balance sheet through performance. Nonetheless, as we lack an international or reputable model, we feel that we need to probably reevaluate this policy as we have seen with Sberbank was illiquid in a matter of 2 days. So we just want to play it carefully and want to reinforce the deposit position. Thirdly, if you look at our mortgage commitments, on-balance sheet commitments, off-balance sheet commitments undrawn range somewhere between CZK 7 billion to CZK 8 billion. Our pipeline on mortgages still around CZK 11 billion -- CZK 10 billion to CZK 11 billion. And we do post strong performance across, so we need the liquidity.

And to answer your first question, yes, it's around CZK 290 million provisioning release related to the upgrade from Stage 3 to Stage 2 receivables.

Okay. And just on Sberbank, I understand you don't want to speculate. If you could tell me what is the relationship between the secured deposits and total assets? Is there any hope for when assets are sold off, recovered that you'll be -- that the contribution to the increase in the contribution to the resolution fund will be lower than what you're fearing now?

I mean, I didn't say that I fear that it's going to double. I said there is a potential for it to double. Czech Republic does not have a very, how shall we put it, high recovery rate on failed banks historically speaking. So, we will see what will come out of that. It's difficult for us to judge this as we are far and we make sure that we stay far away from that process. So this could take long time. And we have a conservative and prudent regulator, we think that they will try to maximize the contributions to the fund. But where that lies, I really don't want to speculate. But I think it will be substantial.

Okay. And lastly, sorry, if I am taking too much of your time now. But just on the Air Bank, the timeline again, if you could just repeat going into the first capital increase, when do you assume this to begin and what approvals are required for that? And then the closing, I believe you moved it to the beginning of Q3, right, as an assumption?

That's correct. So the approvals which are required from our side is the approval to take over Air Bank, to buy 100% shares in Air Bank and 100% shares in Home Credit Czech Republic, Slovakia. For that, we need approval of Czech National Bank. That we have secured, Jan? We also need 2 approvals from Slovak National Bank, 1 for the bank and 1 for the payment services. So we need 2. These are pending. And the fourth one that we need is approval of the offer documents or prospectus, which describes the opportunity and lists related to the opportunity. So it should be documented to shareholders as the basis for a decision whether to subscribe or not and this is in the process. And we actually said that we expect the approval will be forthcoming anywhere between mid-May till end of May. And the last part of your question was the subscription. We would like to finish the subscription by the end of June. We hope that everyone will subscribe shares in the first half so we don't have to do the second half.

[Operator Instructions] We have a follow-up question from Simon Nellis from Citi.

Yes. So just back on the retained earnings. So are you providing any -- I guess, just 28% is left, right? So is that the kind of new payout ratio that you're kind of guiding for, or what's the intention there going forward with dividends?

[indiscernible] we simply want to retain now some capital in order to reinforce the bank for the closing at the moment.

That's what I hoped to hear. And then on the consumer lending side, good to see that it stopped contracting, actually starting to grow. What's the outlook there would you say? I mean, do you think you're going to continue to see growth in that book?

I mean to reach 8% as quickly as possible. There's no average for the portfolio, but we are reflecting to the new rates. We will transparently show you next quarter at what rates we are underwriting. And we are -- in terms of number of transactions, we are doing about 60% of number of transactions online. So we typically achieve a better rate. It's also a function of how much we do with brokers and how much consolidation we do because the pressure is on the consolidated loans highest. So to provide a simple answer. Andrew and we will target 8% as quickly as possible and we are pushing the range 10 basis points to 15 basis points weekly. And we are basically repricing the minimum rate to reflect that. But if you look at the market shares, we are -- as everyone is doing consumer loans, we are normalizing the market share to the size of the bank. So we are now with respect to market share, about 17.5% in balances and new volumes in the first quarter I assume we had somewhere 12.5% to 13% market share on new volumes. And this is off the top of my head so please don't take -- take it with a grain of salt. So we are between a stone and a hard place, we're trying to balance both the rate increase and to maintain the portfolio because albeit we have better stickiness to loans. The early prepayment is still extraordinarily high on the consumer loan portfolio and the second most impacted portfolio from a [indiscernible] perspective is the MONETA auto portfolio because as you get -- as you get the repayments, you have to recognize the remaining commissions that we have on the -- capitalized into the effective interest rate and this prepayment effectively pushes down the yield that we have on the portfolio. So we are trying to work with that. But the trend is clearly that Czech households are trying to diminish the leverage or decrease the leverage -- household leverage because everyone and I will use vernacular, is freaked out by their financial bills and they haven't gotten the mortgage bill yet. So that's the next month sort of which is lurking in the dark.

Yes. And then just one other one on the SME portfolio, which has been growing nicely. Do you think that's going to slow down substantially, now that I guess these COVID state-guaranteed packages are expiring or have expired?

Perhaps Jan can give you a view on that.

On the SME portfolio, we would like to keep the growth throughout this year. Now it depends mainly on the evolution of the war in Ukraine. I think that will be probably a bigger hit than the guarantee drop. So we hope they will be able to continue to grow the assistance funds.

Simon, more complex answer is that most likely this will really diminish. And we see what we experienced is a fairly strong demand for euro-based lending from medium-sized to small customers. And as I have lived Hungarian and Romanian experiences, I'm extremely opposed to provide euro-based loans closed and have revenues in local currency. So we see that it's causing a conflict inside of the bank and we see that the market is more posturing itself towards FX lending because it sort of slows down the inevitable with some customers. So we see really, I would say, decline in demand across because people reevaluate their investment plan. So we can give you the -- we will try to deliver the business plan, but it's becoming a bit more difficult.

We have no further questions. So I'll hand back to the management team for any closing remarks.

Ladies and gentlemen, I would like to thank my colleagues for delivering as always very above the ground performance. And I would like to thank you for spending time with us, it's very important to us. And I tremendously thank you all for the very good questions we received. So we're looking forward to seeing you next time. At the next quarter, we will be present at some conferences. So the management will try to have a post-COVID interaction with the investor and analyst community and rebuild our presence in the capital markets. Thank you very much and all the best. Bye-bye.

Ladies and gentlemen, this concludes the call today. Thank you all for joining. You may now disconnect your lines.