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

Dear ladies and gentlemen, welcome to the Conference Call of MONETA Money Bank regarding the Third Quarter of 2022 Financial Results. Please note that this conference call will be recorded. This event will have a live presentation followed by a Q&A session. [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, Tomas Spurny speaking. I have MONETA's management with me, and we will walk you through the presentation. I'll make the opening remarks. So if we start on Page 2, MONETA's performance for the 9 months, we delivered net profit of CZK 4.1 billion. This actually exceeds the operating plan of the bank. It also exceeds in a way the initial guidance that we've provided. And thirdly, we believe that we have met and exceeded the analyst consensus. The net profit is constituted by operating income at the level of CZK 9.1 billion. where we garnered growth of 11.6%. We've managed to keep the operating cost base stable at CZK 4.2 billion, resulting in operating profit of CZK 5 billion with an increase of more than 22%. On cost of risk, we've incurred a release of CZK 150 million. So we have created additional provisions. Normann will cover that and the provisioning level of the bank increased approximately CZK 100 million and is at historically high level. On Page 3, the shape of our balance sheet. First and foremost, throughout third quarter, we increased the deposit base by CZK 23.6 billion to a level of CZK 320 billion, delivering deposit gathering increase of 20% year-on-year, albeit the increase comes at the cost as the interest rate environment provides challenges with respect to cost of funds and I'll cover it later on. The lending base or gross performing receivables increased to CZK 270 billion. This has increased more than 9%, albeit the growth of the asset side of the bank is slowing, and we will cover it also later on in the presentation. The overall balance sheet at CZK 371 billion, slightly over with issued bonds at 8.7% and accounting equity at CZK 30 billion. Looking at the key performance metrics, year-to-date, our net interest margin at 2.8%, in the third quarter, the interest margin declined to 2.7%, and we expect contraction of this metric over the next 3 quarters and then subsequent, again, increased widening of the margin. Cost-to-income ratio at 45.6% and our performance translates into return on tangible equity in excess of 20%. Capital adequacy at the end of quarter stood at 17%, slight improvement from the previous quarter and liquidity coverage ratio improved quite substantially to 198%. If we then look at the key trends, which are impacting our performance currently and which are likely to impact our performance into 2023. We are experiencing weaker demand for credit products. If you look at the overall underwritten or disbursed loan volume, the loan volume stood at nearly CZK 50 billion, specifically CZK 49.4 billion. This constitutes a decrease of 25% year-on-year. The decrease is driven mainly through a contraction of the mortgage franchise. However, on the consumer lending front, we also have a decline of 8.4%. We underwrote CZK 12.8 billion in the first 9 months, albeit at a significantly better price than a year ago. The second trend is partly positive and partly less positive. First and foremost, we improved liquidity of the bank quite substantially. This is evidenced by the very solid LCR ratio at 198% and also loan-to-deposit ratio declined to 80%. Nonetheless, the deposits come at fairly high cost impacting the cost of funds year-to-date at 127 basis points. This is more than 4x against the previous year. And the core cost of funds at the end of period stood at 176 basis points. The third challenge the bank has to contend with with respect to medium-term guidance is the likely windfall tax, which we have reported to you at the previous conference. The windfall tax will be applicable or slightly for the next 3 years. This is '23, '24, '25. We estimate a cumulative impact of the tax to come in at CZK 2 billion. And if you look at our targeted minimum cumulative profitability for the tax period, it should be at minimum CZK 14.3 billion. Hence, the windfall tax based on this estimate would impact approximately 14% of the cumulative profitability. The fourth development is the high inflation, 12.7% on an annualized basis, currently, were accompanied by continued nominal wage growth, which is at 4.4%. And if you look at our performance, we have reported 90 basis points increase in the cost base. If you strip away the one-offs, which are part of that reported number, the recurrent cost base of the bank increased by 3.7% year-on-year, which we consider a fairly good performance amid a very difficult environment where the inflation projects itself into most services and commodities that the bank procures in order to operate. On the following page, Page 6, we have the operating platform, here we have couple of significant developments. With respect to employment of the bank, we decreased the employment on a year-to-year basis by 7.3% and we will continue to do so until middle of the next year at approximately the same rate in order to combat the inflationary pressure on our cost base. On the positive side, we have continued growth in the usage of our mobile banking platform. The growth is quite good. We also had the highest growth in the 5-year period in our ability to acquire new customers into the bank. So the customer base of the bank expanded to 1.5 million and grew at 7.6%, which is roughly 70% higher growth than we had in previous years. Lastly, our agreement with Komercni banka, subsidiary of Societe Generale pertaining to ATMs, expanded our available ATM network to 1,400 ATMs. This is significant from a perspective of upcoming year and perhaps years. This agreement will enable us to optimize the dislocation of the network and hopefully optimization of the cost base contributing to our efforts at cost discipline. The branch network remains stable at 154 branches. And as every year, we will examine the width and breadth of the network again within the context of digital distribution and overall cost efficiency of the bank, and we will make decisions, if any, throughout the first quarter of 2023. Now let me comment little bit on the macroeconomic environment, it starts on Page 8. We believe the economy is likely to slow down into a recessionary environment. This is framed within the opinion of Ministry of Finance and Czech National Bank where the GDP growth is expected to slow down in the second half of the year and the full year should come in if we believe these predictions at 2.2%. This is Ministry of Finance and the Czech National Bank actually stands at 2.3%. So both estimates are very close to each other. The country continues to experience fairly significant budgetary deficits. This year, the budgetary deficit is expected at CZK 375 billion. The budget was originally framed with a deficit of CZK 280 billion. So the energy crisis, inflation and other aspects of what is happening in the Czech Republic contribute to higher public spending, which is a bad news for the country, but good news for MONETA and the banking sector as hopefully the higher expenditures will alleviate pressure on unemployment and subsequent defaults. The unemployment rate remained stable. However, the third quarter anecdotal evidence suggests that more and more companies are notifying labor office authorities of mass layoffs. MONETA is one of them, we notified the layoff of 80 people [indiscernible] and realized 30, the remainder of impacted staff will leave the bank at the end of November. When we look at inflation on Page 9, the inflation accelerated, the annualized inflation stands at 12.7%, the monthly stood at 18%. And since we have seen decisions on OPEC production and subsequent increases in petrol prices at gas stations, so this is likely to continue. And the annual figure will be probably anywhere in the range of 15% to 20% skewed more towards the 20% than the 15%. The yield curve remains inverted, and the interest rate, the key rate remains at 7%. Internally, we do not expect at the next meeting of Czech National Bank's Board, there will be a decision to increase the rate further. This is based on publicly available interviews of various officials and their expressions of how they will treat the interest rates. So we expect the probability is higher on stability of the rates rather than increases. Now let's look at briefly at the banking market evolution and MONETA's performance against such. Here, we provide you with August numbers as at publishing of this material, the September figures were not available. If you look at the deposit market, we have marked shifts in the deposit market, although the market grew at 8.5%, the growth is now concentrated in the commercial segment and the retail segment grew only at 3%. MONETA throughout the third quarter managed a significant growth on the retail front effectively growing at 4x the rate of the retail market. We are obviously at a disadvantage pertaining to the commercial segment as we are predominantly a retail bank and have small-sized customers on the commercial do not tend to have significant excess liquidity. On Page 12, we go to the lending market, and this is, again, shift is evident here where the market grew at 8%. This is roughly in line with the previous years. However, MONETA's growth slowed down to 7.7%. We are matching the market and exceeding it somewhat on the front of the development of our retail franchise. Nonetheless, we are approximately 2% below the growth of the commercial segment. What is notable here of the commercial segment based on information that we have from the Central Bank, 45% of volumes in the market on commercial segment are now denominated in euros. If you look at MONETA's lending, we are Czech crown bank. So we continue to lend predominantly in Czech crowns, and our exposure to euro lending stands at 480 million at the end of period. So we have very small exposure to euro lending to our commercial customers due to our policy. Now let me comment the digital distribution. We are making strong progress on digital. On Page 14, we took the liberty of summarizing the development of key features and innovations of the bank since 2017, and we try to quantify the impact of the digital strategy on our performance. This is on the right hand. I think what we are trying to communicate here is that we are an innovator. This is substantiated for instance, for example, by a recent Deloitte study, which third year in a row ranks MONETA as the most developed bank on digital front within the retail around of the market in the Czech Republic. But the main message here is that digital distribution becomes quite substantial for the performance of the bank. This is on Page 15, and if we start on the right-hand side, you can see that between 60% to 40% of our deposit products, which have termed are now distributed through the digital platform of the bank. This is due to excellent digital onboarding process that the bank developed over the 5-year period and also through contribution of so-called bank ID platform, which is shared among the banks in which we help and we were one of the cofounders of this market utility. 30% of our current account now are delivered through an online process, and this is an increase of nearly 200% year-on-year. The increase is at 187%. And if you look at the lending side, nearly 50% of volume on lending, specifically 46% are now delivered through the online platform and through pre-approved limits to our existing customers. This constitutes actually 75% of units that we sell are going through the online processes. So going forward in '23 and beyond, the bank will now focus on replicating the digital distribution process for small business customers and hopefully SMEs as we have developed capabilities that will enable us to do that over a period of next 24 months. And incidentally, the strength of the digital distribution also contributes to our efficiency on the cost front. On Page 16, we further substantiate the growth and the penetration success of the mobile banking platform, which is quite substantial as the customer usage grows at nearly 37% year-on-year with a strong performance on the transactional side where the growth exceeds 50%. And what is more important than that, if you look at the volume of transactions that we put through the mobile banking platform today, it vastly exceeds those that we are now doing on the Internet banking platform. So the Internet banking platform will be now developed to serve small businesses and SMEs as they have slightly different needs than our retail customers. So the progress here is clearly visible. On Page 17, just a brief comment. The transactional intermediation of the bank is increasing quite well, namely here we use the example of the debit card space where the number of transactions increased by 23%. But if you look at our digitized payment capability through tokenized cards, the growth is at almost 4x that base. So the digital strategy of MONETA is doing quite well. However, going forward, we have the challenge to now digitize the space, the small business and SMEs. With that, I will turn it over to my colleague, CFO, Jan Fricek, to provide you with a detailed commentary around our P&L development.

Thank you, Tomas. Good morning, ladies and gentlement. I'm now on Page 19, and we'll continue with the profit and loss statement. Let me repeat the key financials. MONETA Group reported net income of CZK 4.1 billion, EPS of CZK 8.1 on revenue of CZK 9.1 billion and delivered a return on tangible equity of 20.6%. Nearly 12% revenue growth is driven by higher net interest income, up by 14.6%, accompanied by net fee and commission income up by 9.3%. Cost base was kept broadly stable at CZK 4.2 billion year-on-year despite the double-digit inflation. And on the cost of risk line, we report a net release of CZK 126 million resulting from a material reduction of the NPL portfolio, update of IFRS 9 [indiscernible] macroeconomic outlook, partially offset by creation of management over. Normann will provide more detail in the risk section. On Page 20, we continue with NII. Firstly, lending interest income in the top right-hand side corner is up by nearly CZK 600 million, achieved through loan book expansion of 9.2%, accompanied by improved portfolio yield by 50 basis points. Treasury income in the chart below increased by CZK 742 million, supported by steep market rates increase and offset nearly 2/3 of the CZK 1.2 billion increase of cost of deposits year-on-year. Repricing the deposit base was inevitable step in order to limit the outflow and maintain a growth in the high market rate environment. During the last year, we have expanded the core deposit base by 20%, which also contributed to the cost of funding increase. Our NIM on the year-to-date basis stood at 2.8% and 2.7% should be reported for the whole year. Nevertheless, in the next 6 to 9 months, we expect a temporary compression by about 30 to 40 basis points due to the significant cost of funding pressure more than offsetting rising loan portfolio. Subsequently, NIM should start picking up, subject to our ability to start repricing deposits down, and we are forecasting NIM to be back at the current level by the end of next year. On the next page, we continue with the development of net fee and commission income. The 14.8% growth is driven by higher commissions from the third-party product distribution together with higher transactional activity of our customers. At the same time, a higher number of transactions is also reflected in increasing fee expense, which is, however, more than offset by a higher bonus test from our partners in comparison with the third quarter last year. The income side is further broken down in 2 categories on the next page. Third-party commissions reached CZK 273 million against CZK 232 million last year. Nearly 18% growth was achieved through solid results in both product categories. The overall 2.3% growth of other fee income categories in the bottom chart is mostly driven by a higher number of transactions, while servicing and penalty fees are declining. Further detail on asset management is provided on Page 23. The income growth of 38% was delivered on the basis of several one-off fund tranches distributed during the year, outstanding balance expansion by nearly 6% and also opening fee introduced in the third quarter this year. Now we can move forward to the cost section starting on Page 24. Cost base in the third quarter was reported at CZK 1.356 billion, up by CZK 94 million or 7.4% against the third quarter last year. This increase is visible predominantly in administrative and personnel costs, mostly impacted by the inflation rate reaching 18%. Cost-to-income ratio of 44.9% is maintained below last year. Personnel cost dynamics is explained on Page 25. During last 5 quarters, we had used the employment capacity expressed in the number of FTEs by 7.3 or 219. And at the end of the third quarter, we report 2,800 FTEs. Despite the employment reduction, we reported a 4.6% growth in personnel expenses. Nevertheless, on a comparable basis, adjusted for one-offs, we achieved stable cost base year-on-year. And on the next page, we complete this section with the decomposition of other 2 cost categories. In the chart on the left-hand side, we report administrative expenses adjusted for M&A-related costs that were reimbursed. More than 13% growth year-on-year is predominantly a function of higher energy bills together with other facilities related expenditures and also a higher cost of cash transportation. Depreciation and amortization charge is up by 7.6%, resulting from ongoing investments into the digital capability and IT infrastructure. So with that, let me hand over to Andrew Gerber, who will continue with the balance sheet section. Thank you.

Thank you, Jan, and good morning, ladies and gentlemen. So moving to Page 28, we present the overall balance sheet of the bank. MONETA significantly strengthened the funding base through growth in core customer deposits, which were up 20% year-over-year, whilst the net customer loan portfolio grew more modestly at 8.6%. And together, this resulted in an improvement of the loan-to-deposit ratio to 84%, significantly improving the liquidity position of the bank. Going on to Page 29. We look at the gross performing loan portfolio, which increased by CZK 22.8 billion year-over-year, driven primarily by retail and small business, which now account for 73% of the total loan balance of the bank in line with our strategy, which focuses on these 2 segments. On Page 30, we present the development of the loan portfolio yields. The yield on the loan portfolio increased 50 basis points year-over-year to 4.3%, driven mainly by floating rate loans in the commercial segment, while the yield in the retail segment remained broadly stable, reflecting a combination of continued shift in the portfolio towards mortgages and some continued decrease on the consumer loan portfolio yield, which we will detail later on in the presentation. Going to Page 31, we present the overview of the retail gross performing loan portfolio, which grew by 9.3% year-over-year, preliminarily driven by mortgages, which were up 12.2%. And as Tomas commented earlier, this is kind of reflecting the pipeline that we had coming into the year and in the first quarter of the year whereas what we are seeing now is significantly lower new business volumes, which will be reflected in lower revenue in the coming quarters. In the consumer loan portfolio, we grew more modestly at 2.7% and again this reflects much lower new business volumes year-over-year. But at the same time, we've seen a decrease in the prepayment on that portfolio, which is helping to maintain the portfolio broadly stable. In the auto segment, we see continued growth at 6.6% and in credit cards and overdrafts, the portfolio declined 1.2%, which is slight moderation on the decline we've seen over the previous quarters and broadly reflects the trend in the market. Going on to Page 32, we look at the yields on the retail loan portfolio, where the favorable interest rate environment has been reflected in much higher new production yields across all product categories. In mortgages, you can see that the new production yield increased 350 basis points to 5.5%, whilst the portfolio yield increased 180 bps to 3.4%. Though it should be pointed out that this is the yield, including the impact of hedging, whereas if we look at the underlying yield on the portfolio, it's increasing more slowly up 40 bps year-over-year due to the fixed interest rate structure of that portfolio. In consumer loans, the new business yield increased 260 bps, up to 9.1%, whereas the portfolio yield declined marginally down 20 bps. And as I said, this reflects mainly the continued repayment of some of the older high-yielding exposures in that portfolio. In auto, we saw yields on new business increased 320 bps to 8.5%, and this is starting through flow through to the portfolio. And in the credit card portfolio, we see the portfolio yields decreasing marginally and this reflects the fact that recently, we've been focusing origination on a lower-priced simple credit card product, which is priced at 14%, and that is generally shifting the mix towards lower yield. With that, I'll hand over to Jan Novotny, who will take you through the commercial portfolio.

Thank you very much, Andrew, and good morning, ladies and gentlemen. Please let me walk you through the [indiscernible] performing portfolio this time for commercial part of our business. As you can see on the left side of the Page 33, we have achieved overall growth of 9% compared to the same period last year. And the commercial portfolio has reached CZK 84 billion at the end of Q3 2022. On the right side of the page, you can see the split of the gross per product. In the upper part of the slide, you can see the 2 main SME products, investment loans and working capital, both with a very solid growth, while at the same time, we continue to increase the gross ROE profitability threshold throughout the year. At the bottom of the page, you can see the evolution of our small business franchise portfolio with fantastic growth of more than 35% year-on-year. Let me emphasize that this is a very profitable and capital-efficient business that we are serving with fully automated loans and throughout the dedicated small business sales network as well as through our digital channels, as mentioned earlier in this presentation. I've already mentioned the increased profitability of the new origination, and this is visible on the next slide, Slide #34. And let me start with the investment loan category, where you can see that the new origination average year has reached 6.9% at the end of Q3. This average yield still doesn't fully show the increased pricing based on the increasing price raise in June and July. And we expect, based on the latest numbers, further increase during the Q4. In the upper left part of the page, you can see the fair values for working capital. The situation here is a different as the vast majority of the portfolio pricing is folded based on [indiscernible]. So you can see a very fast response of the book with a portfolio already on 7.8% year and new origination even higher, ending at 8.7% average for Q3. At the bottom of the page, you can see the evolution for the small business. Similarly to investment loans, the new origination average pricing still doesn't fully show the increased pricing throughout the quarter. And again, we expect further improvement in Q4 as the average yield on the new origination for August was already at 9.8%. Now let me move to the [indiscernible] page of our presentation, where we are showing the evolution of the new volume origination per [indiscernible] category compared with the same period last year. You can see the drop of the mortgage new volume due to significantly lower market demand and also according to our strategy, as Andrew already commented. There is also a small drop of the new volume origination in consumer lending as a result of a decline in market demand. Small business origination has grew up thanks to both organic growth as well as thanks to a very successful TV campaign or for example, excellent results on cross-selling of automated products to smaller SME customers. Let me also comment on the investment loans where the new volume has reached 26% increase on the origination, which helped to a healthy growth of the portfolio as we are more than able to replace leading customers due to increased profitability requirements. On the next page, Page 36, you can see the overall lending portfolio of the bank, meaning combined retail and commercial portfolio, split based on fixed and flow trade repricing. You can see that approximately 65% of overall MONETA loan book will be repriced or repaid within the next 36 months. You can see the split of our portfolio to 3 bank categories, float, fixed maturity and fixed refixation period. On the right side of the page, you can see more detailed split, including 12, 24 and 36 months impact of quantification. And now let's move to our liability section of the presentation. And for that, please let me hand over back to Andrew.

Thank you, Jan. So on Page 37, we present the development of the funding base of the bank, which expanded by more than CZK 45 billion or 15.9% year-over-year, mainly through retail core customer deposits, which were up 22% year-over-year. At the same time, commercial deposits increased 14%, whilst the wholesale funding decreased and now accounts only 3% of the overall funding base of the bank. Going on to Page 38, we look at the cost of funds development, where you can see that the growth accelerated in the third quarter in both retail and commercial. Overall, the cost of funds increased 144 bps year-over-year, reaching 181 bps. And this is reflected, as I said, across all components of the cost of funding. I think as Jan's mentioned earlier or Jan mentioned earlier, we anticipate that the cost of funds will continue to increase through into the first quarter of next year when we have the opportunity to reprice part of the deposit portfolio. And depending on market conditions, we hope to start to reverse the trend at that stage. Going on to Page 39, we present the development of the retail deposit portfolio, which grew 21.9% year-over-year driven by savings accounts and term deposits, which were up 41.2%, which is a function of our strategy to remain competitive in these segments in order to maintain the portfolio and attract new money. At the same time, we saw a decline in the current accounts by 13.5%, which reflects a change in customer behavior, where in the lower interest rate environment, many of our clients were content to leave larger balances in the current accounts, whereas now with attractive savings accounts available, this money is moving very quickly into savings accounts. And with that, I will hand over to Jan, who will take you through the commercial part of the deposit portfolio.

Thank you, Andrew. Now let me walk you through the same split of commercial deposits. On the left side of the Page 40, you can see that we grew up the balance of commercial deposits by more than 14% in the last 12 months. And as you can see, there was a decrease of the current account balances by approximately CZK 6.2 billion, while we have increased the saving accounts and current deposits by CZK 14.9 billion. The current accounts, however, continues to be under a huge pressure due to significant difference between the rates and customer as expected, optimizing their deposit balances across the products. And now we are getting to the last slide of the balance sheet development section of today's presentation. And before I hand over to Normann on the risk part, please let me briefly comment on Page 41, where you can see the development of the wholesale funding, where as we were able to raise more customer deposits, we start to replace the less advantages to wholesale funding, especially due to banks and other category with 81.6% year-on-year. This is all from my side. And now please let me thank you for your attention. And with that, I will hand over to our CRO, Normann Vokt, to kindly walk you through the next section of the presentation.

Thank you, Jan. Good morning. We are now on Page 43 with an overview of cost of risk for the last 7 quarters. So in the third quarter, we recorded a cost of risk of CZK 124 million. This is largely driven by adjustments of macro variables in our IFRS 9 provisioning models as well as an extension of managerial overlays for our retail and commercial portfolios. The latter shall account for the lack of sensitivity of our provisioning models towards the very specific macro and geopolitical situation we are currently facing. Moreover, we still benefited from upgrades of previously downgraded for borrowing receivables from Stage 3 to Stage 2. Despite the aforementioned overlays, which were extended in Q3, the year-to-date cost of risk remained positive, leading to a net release of CZK 126 million or 6 basis points, which is a significant improvement compared to the same period in 2021. On the following Page 44. Here, we show the evolution of the loan portfolio, loan loss allowances and overall coverages over the last 5 quarters, while gross receivables grew by more than [ CZK 20 ] billion year-over-year, loan loss allowances dropped by around CZK 700 million, largely driven by a drop in our NPL stock, thanks to upgraded restructured receivables, NPL sales and so far experienced solid repayment of our customers. As far as the overall coverage is concerned, this currently stands at 1.9% and remained unchanged quarter-over-quarter. Moving to the next Page 45. Here, we show the development of non-performing loans in and outflows since September last year. The third quarter of this year showed a fairly balanced development between new NPL formation and cured receivables. As a consequence quarter-over-quarter the NPL stock remained on a comparable level. Going to Page 46. Here, we have a more detailed overview how the NPL stock evolved. Year-over-year both the commercial as well as the retail NPL stock showed significant drops and stood at CZK 807 million for the commercial book and CZK 2.9 million for retail, respectively, at the end of the third quarter. As a result of this, the NPL ratio dropped from 2.4% in Q3 last year to 1.4% at the end of September this year, which remained unchanged compared to the second quarter of this year. And on the next page 47. Here, we show the evolution of delinquencies, 30, 60 and 90 days past due. So overall, these delinquency buckets, delinquencies remain on a comparatively low level, in particular compared to pre-COVID times. In the third quarter, we saw slightly increased delinquency levels, which however developed much less pronounced than we had initially expected. This is also attributable to intensified collection activities conducted by our collections department. So summarizing the risk section, the core message is that despite slightly rising delinquencies, the core performance of our credit portfolio remains stable. The continuing uncertainty around the future development regarding inflation, interest rates, energy prices, the COVID pandemic and the overall geopolitical and macroeconomic situation made us decide to extend managerial overlays in Q3. And in addition, we also enhanced our staging algorithm in the third quarter, adopting a more prudent approach to classification by moving more receivables to Stage 2. Both activities provide incremental coverage and such protection for a potential accelerated deterioration of our credit portfolio. And as regards to full year cost of risk. Now this very much depends on the evolution of the factors as I outlined before, and how this will affect the liquidity situation of our customers in the weeks and months to come. Should we currently observe portfolio performance and the macro outlook, not significantly changed and should we not see any major commercial defaults. And the full year cost of risk might even end up in a range of 5 basis points to 15 basis points, which is below the current guidance of 20 basis points to 40 basis points. And with that, I hand over to Jan Fricek on capital. Thank you.

Thank you, Normann. Let me continue on Page 49, we report projection of the group capital requirement and also MREL capital requirements relevant for MONETA Bank as a stand alone regulated entity. Group management capital target as reported in the upper table currently stands at 15.6%, including management buffer of 100 basis points. By the end of '23, the requirement will increase by 100 basis points, driven by higher countercyclical buffer. Pillar 2, our so-called SREP requirement remained stable at 2.6% also during the next year, which was confirmed by the Central Bank this week. On the stand alone basis, the management target on MREL adequacy ratio stands at 18.5% and is projected to increase to 23.1% by the end of '23 driven by a combination of higher countercyclical buffer and also MREL requirement. This 4.6% increase will consume additional capital or MREL eligible instruments in total amount of CZK 7.8 billion on RWAs of CZK 170 billion. On the following 2 pages, we report both capital positions in detail. Let's start with the consolidated one on Page 50. At the end of September, we reported regulatory capital of CZK 29.6 billion, capital adequacy ratio of 17% on RWAs of CZK 174.4 billion. Our excess capital stood at CZK 5.7 billion, which consists of regulatory capital excess of CZK 2.4 billion, an accrual for future dividend of CZK 3.3 billion, which is not included in the regulatory capital. On Page 51, we continue with MREL requirements, which became effective this year and is relevant for the stand alone bank only. At the end of the third quarter, we reported regulatory capital position of CZK 32.8 billion, including MREL instrument in amount of CZK 2.5 billion issued in the first quarter this year. Risk-weighted assets stood at CZK 167.5 billion, resulting in MREL adequacy ratio of 19.6% with an excess of 1.1% above the target. As I have highlighted at the beginning, coverage of the projected requirement increase of 4.6% is the key challenge for the capital management. On top of the current capital access of 1.1%, we need to raise a minimum CZK 6 billion of MREL eligible instruments by the end of next year. Due to unfavorable situation on the international fixed income market, we are working in parallel on other options, namely issuance for local retail investors, introduction of separated deposit products to our retail customers, an issue of MREL instrument on the local market. None of us, according to the latest market indications, the cost of MREL instruments will be close to our cost of capital, hence we are also considering strengthening of the capital position through adjustment of our dividend policy and retention more profit. Currently, we are accruing 80% of consolidated net profit for future dividend. However, there is about 50% risk that this ratio will be temporarily decreased. So this concludes the capital management section, and I will now hand over back to Tomas.

So with that positive news. On Page 53, we provide a review of the guidance against the third quarter result and we are now at 94% of the minimum guided amount. Now if you turn a page, our 5 year guidance is on Page 54. So if I had to summarize the key challenges from perspective of the management, it is number one, to deliver profitability of CZK 14.3 billion cumulative for the years 2023 throughout '25, this is the number one challenge, whilst securing the coverage of the MREL requirement this is the second challenge, and we effectively face 4 options. Number one, we will seek to distribute to retail investors in the Czech Republic. Number 2, we will do a private placement in the Czech Republic. Number 3, we will enter international debt markets and issue such instrument. And number 4, we will adjust our dividend policy to reflect new reality, which I would like to underline is vastly different from what were our expectations during third quarter of 2021. So this is the pallet of options. From a process point of view, we shall discuss these options with our Supervisory Board throughout November. Thereafter, we will see what happens with the profitability of the bank by the end of the year and come early February of 2023, we shall make a decision on how to treat shareholder distributions with respect to 2022. So the risk is there, however, the decisions were not made. So the first challenge is the cumulative profitability, second challenge is coverage of MREL, and the third challenge is to equip the bank with anticipatory provisioning which will enable us to have predictable and solid performance throughout 2023 and '24. There the horizon is slightly shorter as we expect that the recession will come and will have an impact on the credit performance throughout first and second quarters of 2023. These are the 3 broad high level challenges. The fourth one is to manage the cost of funding and repricing of the book, but this is more tactical as we have an excellent prospect to reprice a significant portion of the loan book throughout next year and adjust the performance of the bank. And the last comment I'll make is that, if you look at our performance this year, throughout second quarter, we were beginning to struggle with liquidity. We have faced outflows, both from the bank and from MONETA's Stavebni Sporitelna building society. Hence, we took action. And I think on the positive side, the bank exhibited significant success to raise retail deposits in a very difficult environment, and that success had been matched actually also on the commercial side. So with those comments, we will turn over to you, and we will seek to answer questions that you might have to our performance and the future of the bank.

[Operator Instructions] Our first question comes from Metin Esendal of Millennium. Can you repeat your NIM and COR expectations for quarter 4 2022 and 2023?

Well, Jan projects that the quarter 4, we should come down to 2.7% NIM. And then he said that the NIM should contract in the range of 30 basis points to 40 basis points throughout first and second quarters of 2023 and subsequently recover by the end of the year until the current level of 2.8%.

Second part was just cost of risk in the fourth quarter and in 2023.

Yes. I mean for the guidance for '23, we have guided 24 basis points to 45 basis points, this still holds. And for the fourth quarter, as I have indicated, the current formal guidance is CZK 20 million to CZK 40 million. But assuming no further deterioration in Q4 and no major defaults cost of risk could come in at -- within the range of 5 basis points to 15 basis points.

[Operator Instructions] We have a question from Thomas Unger from Erste Group.

First of all, I would like to ask about the risk costs in -- you talked about the management overlays. Can you give us how you stand right now and how much you increased? [Technical Difficulty]

We did management -- extended management overlays in Q3, both for the commercial as well as for the retail portfolio. The total amount we created in Q3 was CZK 590 million. The bulk of that was for the retail portfolio, including small business, which is around CZK 465 million and CZK 125 million for our commercial portfolio. That's what we have done in Q3. We already had a managerial overlays in previous periods in the amount of CZK 344 million, largely for the mortgage book. So altogether, we have currently around CZK 750 million management overlays for these portfolios.

Which constitutes about 15% of our provisioning stock, Thomas. And what is not visible from the number is that we didn't put the emphasis on that is that the bank disposed of nearly CZK 600 million face value of non-performing receivables and this created an extraordinary gain of CZK 167 million throughout the 3 quarters where a vast majority of that gain went through the cost of risk line. So this alleviated the impact of the overlays. And secondly, as Normann said throughout his presentation, we actually changed the macroeconomic model in conjunction with using Oliver Wyman to help us to do the better algorithm for Stage 2 and the macroeconomic model. And when we were implementing that the model produced a significant release. So instead of putting the release through the P&L as a release, we actually kept the provisions and transferred them into the managerial overlays, which is the industry trend based on the advice of our advisors.

And presumably for the -- more than you would probably also extend the [Technical Difficulty] because you're expecting the NPL ratio in the [Technical Difficulty]

Yes. By the end of the year, we are not really projecting a significant increase of the NPL. And as Normann said, this is subject to not facing the major default, which we have as of today, no evidence that such would be brewing anywhere in the portfolio. So we actually have additional positives going for us. There is a planned additional sale of NPLs between now and the end of the year, which might prove to provide some relief, and Normann can give you detail on that.

Altogether, for Q4, we plan incremental NPL sales of around CZK 300 million. A good chunk of that we have already done in October. So this will help managing the NPL ratio to keep it sort of in check. Moreover, we'll be still seeing now to a much lesser extent, further upgrades from Stage 3 to Stage 2 from previously before bond receivables, of course, against which we will have new inflows. But on balance, we believe the NPL ratio should remain on a comparable level, what we have seen in Q3, plus/minus 10 basis points. But all under the condition that we don't see any sudden deterioration of macro factors, unemployment rates or commercial defaults, which we don't see at this stage.

And perhaps more importantly, if you look at the CZK 3.7 billion NPL volume approximately 2/3s of it are performing in the sense that there are either forborne restructure or producing regulatory payments. So we have a relatively thin layer of really defaulted exposures, which are absent where there is an absence of cash flow. So our strategy or tactic, if you will, by the end of the year is to prepare the bank for the recessionary environment and to really strip away whatever we can crystallize through a disposal to clean the books in order to prepare the bank for inflows. So this is how we want to manage the managed NPL level in the bank throughout 2023.

Right. And that's what I meant for next year. I think you have talking to -- you mentioned that the NPL [Technical Difficulty]

We can accommodate anything between 2% to 3.5%. It can end up anywhere. It is very difficult for us to make this prediction.

And if I could just -- if you put one of the main challenges producing, of course, the net profit that you've guided for, for the coming years. But where do you versus the currently valid mid-term guidance, where do you see the main changes [Technical Difficulty] likely cost inflation? And on the revenue side, what do you expect for the [Technical Difficulty]

Let me provide frame of the response and then my colleagues can contribute. We are in a process of constructing the plan to 2023, '24, '25 and beyond, where the '23 is the most precise plan. When we did the base plan, we ended up with the impact of tax close to, let's say, in the range of CZK 4 billion to CZK 4.2 billion, facing a shortfall of approximately CZK 400 million. And we are now in the process of having a plan put together which seeks to close the shortfall of CZK 400 million through various actions, namely on book repricing, on managing risk-weighted assets, on managing fee income, and shaving off CZK 100 million from the OpEx. So CZK 300 million of the shortfall will be on the P&L operating income side and CZK 100 million will be on the OpEx side, whilst we have, as Normann commented on the cost of risk, we are leaving the cost of risk at fairly high level, Normann commented 25 basis points to 45 basis points. So we want to make sure that if we have a higher level of provisioning throughout the year that we can manage the shortfall. And I would put it this way. As with the previous guidance that we've provided, we've always had 60% to 70% certainty that we would deliver the number, because the last portion positive delta between the operating plan and the guidance. Next year, we will not do that. So the probability of delivering the [ 4.6% ] under what I would call adverse conditions decrease to approximately 50% or below that. This will take a very, very significant effort on part of the management to deliver at the 4.6%. It is becoming a bridge too far, but we will try to deliver and that's why we've elected not to change the guidance, we will change -- We will provide fresh guidance as we always do in February. Nonetheless, we want to be as always transparent and honest pertaining to challenges that we have to contract with and the challenges are probably most difficult since we've listed the bank on the stock market.

[Operator Instructions] Our next question comes from Robert Brzoza from [ PKO BP Securities. ]

I'm sorry if this question would be repeat, because I joined late, so I didn't hear the entire call. Could you explain the reason for the increase in the Stage 2 exposures quarter-to-quarter? What this has been related to? And maybe a little bit elaborate on the '23 cost of risk outlook. I've seen already the statements that you expect the rising NPL ratio. So where does it lead us uptake? So that's the question for me.

Yes. So when we -- banks have their methodology to decide what is a significant increased credit risk determining what moves from Stage 1 to Stage 2. We have looked at that and awake also of the current anticipated macroeconomic environment and expect the development going forward. And we believe we want to be more prudent. And so we have added additional variables determining what is a significantly increased credit risk. And as a result of that more receivables from Stage 1 to Stage 2. The delta, I think between the end of June this year and the end of September was around CZK 6 billion. So we have currently overall around 7% of Stage 2 receivables, which is exactly the average of the Czech market, what banks do have in the Stage 2 bucket. The MONETA's coverage is actually quite a bit above the market average, which also confirms our approach to prudency when it comes to the classification of such receivables. The second question, which you had, I think, on NPL ratio. As I said earlier, you might not heard it, have heard it, but we anticipate a similar ratio by the end of the year compared to the Q3 ratio. Obviously, all under the condition that we don't see any deterioration, be it in the pool managed portfolio, predominantly retail unsecured, but also mortgages and not assuming any major defaults. We believe this is possible, given the fact that we have further debt sales and non-performing loan sales in the pipeline for Q4. A good part of that has been already realized in October and the remainder shall be done in the month of November. So assuming that is going to happen, this will drop the NPL ratio, while with that, we can manage the regular inflow into the NPL bucket. And on balance, should allow us to keep the NPL ratio on a level of 1.4%, 1.5%. And for next year, this is indeed a bit difficult to predict. We do not change our guidance, which you see in the presentation. Here, we have a cost of risk guidance in a range of 25 basis points to 45 basis points. Obviously, on the back of the managerial overlays, we have been built up this year. We believe this is a number which we can manage. Needless to say, we anticipate increased net default rates for next year. But I think this is really a short-term view, we have to really observe the development over the next months to come how the macro situation, the COVID pandemic and also how customers deal with the significantly increased inflationary environment and the pressure coming from increased energy costs. But the guidance, which we have put here stays, and as Tomas already mentioned, we are in the process of reviewing our operating plan, and we provide an update to that during our Q4 earnings release.

And there is no further questions registered. So I'd like to turn the call back to Mr. Spurny for any closing remarks.

Ladies and gentlemen, just a couple of remarks to net profit, CZK 4.1 billion in excess of our operating plan. The upside on the net profit, we estimate that the level of 10% or more this year. This is subject to not facing any unexpected development on the cost of risk. That's one part. The second part, we're putting together operating plan where the management will seek to absorb the tax into net profit of next year. We would like to deliver CZK 4.6 billion, however, as we have said, this is still under consideration whether we are able to actually deliver -- to deliver that. On capital, we have pallid of 4 options to cover the MREL requirement. We will examine all of that together with our Supervisory Board, we will weigh the cost and benefit of such issuance, and we will report at the time of fourth quarter earnings, what are our intentions with respect to management distributions. But I want to be very clear that there is risk that we will have to adopt our dividend policy to the new market realities and to the requirements and to the cost of covering such requirements. So with that, we are tremendously grateful for your participation in the call, and we are looking forward to our next quarter's reporting. And with that, have a good day. Bye-bye.