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 First Quarter 2023 Financial Results. Please note that this conference call will be recorded. [Operator Instructions] May I now hand over to Mr. Spurny, who will lead you through the conference call. Sir, please go ahead.

Good morning, ladies and gentlemen. I have the pleasure of opening today's presentation of our first quarter results for the year. If we turn to Page 2, we've generated a net profit of CZK 1.2 billion. This is based on the strength of operating income of CZK 0.8 billion, which is 6% down compared to the comparable quarter last year. However, if you look at the structure of the operating income, we actually have a quite good performance on the net fees and commissions. On operating expenses, these are stable at CZK 1.5 billion. The operating expenses increased nominally by 1.6% and this is mainly due to an increase in mandatory charges that we have to contribute the regulatory funds. Operating profit of CZK 1.3 billion. We had a very good quarter with respect to the cost of base. We released CZK 90 million, and this is based on the good performance of the underlying portfolios and even more importantly, on a very successful disposal of NPLs in the first quarter, which not only supported the cost of rates, but also reduced quite significantly, both the absolute amount of NPLs and the relevant ratio. If we turn page to Page 3. If you look at our balance sheet, the absolute size of the balance sheet exceeded CZK 400 billion. This is on the strength of deposit growth. We had at the first -- at the end of the first quarter, CZK 350 billion, which constitutes 19% growth year-on-year. However, if you look at the first quarter, we have raised an additional CZK 16 billion in deposits. And we have a very high volume of high-quality liquid assets consisting of cash and government bonds. The HQLA increased by nearly 68%. And that [indiscernible] first itself into the highest liquidity coverage ratio ever, 274%. Now if we take a brief look at the asset side, our gross performing loan portfolio is CZK 267 billion, showing an asset growth of 3.4%. This is coming mainly from the retail. The loan-to-deposit ratio declined by 76%. So this is also the lowest loan-to-deposit ratio ever since we have come to the public market. And the investment portfolio to maturity is CZK 80 billion. If we then look at the relative metrics of the bank, this is on Page 4, we improved the yield on the loan portfolio overall by 40 basis points. So we expect by the end of this year, we will come near or at 5% through repricing of the existing portfolio. The cost of funds increased 2.9% for the first. We currently expect that our current strategy might climb up a little bit. Nonetheless, in this margin, the net interest margin of the bank at 2.1% for the remainder of the year, we expect this to be stable at 2%, and we also provide you later on in the presentation, our forecast of the net interest income for the following 3 quarters. Capital position consolidated the basis at 18.1%, and we will go through the detail of both consolidated and individual capital adequacy later on in the presentation. The result turns into a return on tangible equity of 16.8%. And finally, let's look at the operating platform. We currently operate 140 branches. As you can see yesteryear, we have closed 9% of the brand's network and this adjustment is rightsizing the nework to the efficacy of our digital strategy, and we will continue in this endeavour for the next 2 years. If you look at ATM infrastructure, as you know, last year, we have successfully entered into a line with the Commercial Bank subsidiary of [indiscernible]. During the first quarter, we materialized the [indiscernible] and Air Bank. So we have expense-free access now to more than 2,000 CPA machines in the country. And this will be last later on in the year to consider how to make withdrawals, how to put fees on withdrawals in the second half of the year or fourth quarter, and whether the non-alliance network can further include the net information position in the bank. In our fight against inflation, we have decreased employment in the bank's 2,553 FTEs. This constitutes a nearly 13% decrease year-on-year. The decrease is 50% related to improvements in productivity in the bank, and about 50% of the decrease is a result of lower demand, namely for our credit products. If you look at the client base, it's developing steadily. Even the growth slowed down compared to last year, somewhat last year. We recorded 5.4%. Now first quarter generated a 4.6% growth in the customer base. And we continue to have solid performance on the digital channels. If you look at our mobile banking platform within the year, it attracted 333,000 of new users. This is partly the result of our current security strategy, where we require personifications in the mobile banking platform to access the Internet bank. And also, we are trying to discontinue SMS messages as they have prone to cybersecurity fraud. On the following page, on Tuesday, 8 days ago, we held a shareholder meeting. The shareholder meeting was successful from our perspective. There were 4 key decisions made at the shareholder meeting. #1, we elected [indiscernible], the current CFO of PPF Group, into our Supervisory Board. Secondly, we approved financial statements, both consolidated and interior. Third, we have improved management and remuneration reports successfully. And the point is that we have received the shareholder's supply for 8 per share dividend distribution, which will be paid on the 20th of May if I remember correctly the day. With that, I will turn over to Clara, who will give you a brief view on the operating environment from the perspective of our macro Czech Republic.

Thank you. So I'm turning to Page #8, and let me comment on the macroeconomic environment. From the GDP evolution point of view, with the Czech economy slowing down, while the GDP growth for 2022 was 2.5% in the fourth quarter, it reached 0.3%, and in the first quarter of 2023 will be 0.6% negative. For the full year, the Ministry of Finance is expecting economic stimulation, the forecast stands at 0.3%. However, this does not seem to impact unemployment dramatically. In February, the unemployment rate was 2.5%. The full-year expectation is at 2.7%. The economy, therefore, managed to absorb the last year's wafer Ukrainian refugees into the labor market. The country continues to experience a significant budgetary deficit in 2023. This year, the budgetary deficit has been framed at CZK 295 billion. In March, it has already reached CZK 166.2 billion. The government seeks to consolidate the state budget by a lower spend and increased taxation. However, it seems to have limited ability to influence mandate expenditures in the short term. So while the government maintains the original target of CZK 295 billion, reaching an offer might be a challenge. The government debt as a percentage of GDP has reached 44.1%, which is way below the euro area. Now let me comment on Page #9 and the inflation at interest rates. The inflation remains high in March. It has reached 15%. The key contributors are food and housing. We can observe some decline in related costs. The expectation of the Czech National Bank for 2023 is 10.8%. Interest rates are reflecting this development and the monetary policy of the Czech National Bank. The Czech National Bank has been keeping the 2 weeks export rate at 7% since 2022, and we do not expect a decline in the near future. The yield curve remains inverted. The shorter 1-month driver is at 7.1%, while the long-term is at 4.5%. As a result of the inflation and the interest rate environment, we would expect interest rate decreases only later in 2023. So this is it for the macroeconomic environment, and let me hand over to Andrew for the digital successes.

Thank you, Clara, and good morning, ladies and gentlemen. So going to Page 11. We again present an overview of the key aspects of the bank's digitalization strategy over the last 5 years. I'm not going to dwell on the detail here. But what I would do is just do a contrast with the things we focused on over the last 5 years and the focus that we've had in the last couple of quarters, where there's been a meaningful shift towards deposit products and deposit gathering, reflecting the environment that we're now in. And I think this is nicely illustrated on the following page, where you see that the digital distribution platform is now playing a pivotal role in our deposit-gathering assets. On the right-hand side of the page, you can see that the digital origination across all of the major deposit product categories is up significantly year-over-year, and the digital platform is now accounting for the largest share of origination across all of the deposit products. In contrast, on the left-hand side of the page, you can see the development of the digital origination on the lending products, where we are down year-over-year in all cases. And this broadly reflects a slowdown in demand in the market generally as well as some tightening of risk appetite on our side in the lending products. Going to Page 13, we present the development of the mobile and Internet banking platforms. As Thomas highlighted earlier, we've seen significant growth in the number of mobile banking users, up 54%, sorry, 55.4% year-over-year. And as Thomas said earlier, this is a reflective partly of growth in the client base and activity in the client base, but also a concerted asset on our part to migrate clients to the mobile banking application as the primary means of authentication for online transactions and logging into the Internet bank. And this is in the context of increased food activity in the market where we see basically across the entire European market increased in fishing campaigns, and we're much more able to protect our clients if they're onboarded into the mobile banking application. In terms of transactions, we see transaction intensity on the Internet and mobile banking applications increasing significantly, up 29.7% year-over-year and the growth is primarily driven by mobile, as you can see. Going to Page 14, we present some detail on the card portfolio. We see continued growth in the card payment transactions, up 23.8% year-over-year. This reflects, again, overall growth in the client base and increased activity and the move away from cash. And interestingly, on the right-hand side, we see the development of tokenized card payments. So these are card payments made via a tokenized card in a mobile phone or a smart watch typically. And here, we see a growth of 74.4% year-over-year as our clients become increasingly digital and adopt this technology. And finally, in the digital section. On Page 15, we present the App Store ratings of the mobile banking application in the 2 major App Stores, iOS and Android, where we, in both cases, are rating of 4.8 out of 5, reflecting the fact that our mobile application continues to be one of the most popular in the market. So that concludes the digital section. And with that, I will hand over to John, who will take you through the profit and loss section.

Thank you, Andrew. Good morning, ladies and gentlemen. I'm now on Page 7, and I'll continue with the profit and loss statement. Let me repeat the key financials. MONETA Group reported a net income of CZK 1.2 billion on revenues of CZK 2.8 billion and delivered [indiscernible] of 16.8%. Lower revenues driven by net interest income declined by 16.2%, partially offset by net fee and commission income up by 19%, and also more than doubled a breakdown. The cost base of CZK 1.5 billion remains broadly stable and is only marginally up due to higher monthly charges. On the cost of risk, we reported CZK 116 million net revenue against CZK 95 million last year. This favorable result was mostly offset by solid nonportfolio performance and NPL reduction. More to that will be provided by Norman in the risk section. On Page 18, we continue with the detailed analysis of NII. Firstly, lending interest income in the top right corner is up by CZK 368 million, achieved through a loan book expansion of 3.4% accompanied by a loan portfolio yield up by 40 basis points year-on-year. [indiscernible] income went up by CZK 1 billion, driven through a combination of more liquidity, expanded portfolio hedging derivatives, and also base rate increased by 2.5% year-on-year. Interest income increased by CZK 1.4 billion year-on-year and was more than offset by customer, deposited by the cost of customer deposits, which is up by CZK 1.8 billion during the same period. The main drivers of the continuing deposit cost pressure at 19% deposit base expansion is accompanied by persisting needs to reprice a significant portion of the deposit paid to the current market level. On Page 19, we provide you with the projection of net interest income and net interest margin for the rest of the year. Firstly, net interest income projection shows 9.6% improvement between Q1 and Q4 this year, predominantly driven by the continuing growth of high-quality liquid assets funded from expanding deposit base at a positive margin, accompanied by higher income from hedging telematics. With respect to the net interest margin, we expect stable development at 2% for the rest of the year. But this projection does not assume the politer pricing this year as the market conditions do not allow us to do so. However, we remind we will manage closely our deposit strategy and remain flexible to do the repricing immediately and market situation. On the next page, we continue with the development of net fees and commission income. The 19% growth is driven by higher commissions for third-party product distribution, together with higher transactional activity. At the same time, a higher number of transactions drive the fee expense up. The income side is starting to come down in [indiscernible] on the next page. The chart on the left reports transactional income growth of nearly 14%, accompanied by pickup in servicing fees, while preliminary early termination fees are below the last year due to limited opportunities for refinancing. Third-party commissions, on the right side, reached CZK 354 million, about CZK 100 million above the year ago. More than 42% growth was achieved due to strong performance of the insurance product distribution, further supported by new commercial conditions. I'd like to provide a detailed view on the insurance product and asset management distribution. The chart in the top corner shows quarterly numbers of pension insurance contract funds, which indexed year-on-year, and at the same time, life insurance annual premium equivalent increased by nearly 7% year-on-year. We seek to maintain these production levels achieved in the first quarter for the end of the year. On the right-hand side, you can see pickup in distributed volume of investment funds in the first quarter. As a result of that, we report increase of the outstanding amount of distributed investment funds by 21% year-on-year in the current period. And now we've arrived to the cost section, starting on Page 23. As mentioned before, the cost base remained broadly stable year-on-year, and the only increase is visible in regulatory charges, which went up by CZK 50 million and we were able to partially offset the impact through our personnel and administrative expenses. Both our development is further broken down on the next 2 pages. Page 24 first. On the right-hand side, we report the quarter development of the employment. And during the last 4 quarters, we reduced the employment by 12.8%. In the second quarter this year, we see to further reduce the employment down to 2,500 and keep stable at this level. And by this way to mitigate the negative impact of the labor cost inflation. And on Page 25, we provide details to the administrative cost and depreciation and amortization. Administrative cost on the left, 7% down year-on-year, primarily due to the lower intensity of marketing activities this year. And on the right, moderate growth of depreciation, amortization, and amortization is driven by ongoing investments into IT infrastructure and we are building digital capability, but lease costs remain broadest year-on-year. Now let me hand over to Jan Novotny, who will continue with the balance sheet section. Thank you.

Thank you very much, Jan, and good morning, ladies and gentlemen. Let me now walk you through the balance sheet development section of today's presentation. As you can see on the Page 27, our overall balance sheet has hit a record of almost CZK 45 billion, mainly thanks to the very successful deposit raising and all channels and especially in the digital realm as mentioned already by Andrew. We have achieved very strong 19% growth in the key category of core customer deposits, where we have reached CZK 35 billion level at the end of Q1 2023. We have still achieved solid growth also on the net customer loan category on the asset side, where we have achieved a level of CZK 266 billion with 3.3% year-on-year growth. This is fully in line with our strategy to focus more on customer deposit growth, and we will continue to follow this strategy going forward. Now moving to the next slide, Slide #28. Here, you can see the evolution of our lending base in the last 5 quarters, and you can see also the evolution of the second share on this book with a slight share increase in the high-yielding small business on our own portfolio, ending with a 5% share, retail was 69% and 26% share of SME lending. On the next slide, Slide #29, you can see also the [indiscernible] of our own portfolio. The left side of the page is depicting the overall portfolio. And on the right side, you can see displayed by segment. We have also noted the impact of the hedges for the portfolio. And you can see that after adding the impact of the hedges, the overall yield has reached 5% for the bank and 4.8% for the retail portfolio. The effect of hedges is rather small in commercial, as large portion of the loans are based on flat pricing and therefore, the hedge density in commercial is rather on the lower level with limited impact. Now let's dive a little bit deeper into the product and segment development of the year, starting with the retail portfolio. And for that, let me hand over to my dear colleague, Andrew Gerber, our Chief Product and Marketing Officer.

Thanks, Saja. So moving to Page 30, we present the development of the retail loan portfolio, which grew 4.1% year-over-year, driven mainly by the drawdown of pre-existing mortgage commitments . The mortgage portfolio grew 5.6% year-over-year. And what's important to say is that when we look at the new originations in the mortgage business, these are new deals signed and entering the pipeline. We're seeing very low origination down 90% year-over-year. Is the trend that's reflected broadly across the market. And this will -- this is starting to impact the inflow into the book and you will see the portfolio growth starting to slow over the coming quarters. In consumer lending, the portfolio has remained flat year-over-year. And this again, reflects lower new volume origination, down 30% year-over-year, partially offset by lower early termination on the portfolio, which was down 26% year-over-year. And in auto, we see the portfolio continuing to grow 7.6%, which is broadly continuing the trend that we saw in the previous quarter. And in the revolving product, the portfolio declined 1.4%. Again, this is a continuation of what we saw in the previous quarter. Moving to Page 31. We present the yield development on the portfolios where we see improved new volume yields across most of the product areas. In mortgages, the new volume yield has increased to 5.9%. Although I would say that given the very low volume being originated in the mortgage business at the moment, this has a limited effect on the portfolio yield. And what's really driving the portfolio yield up is, to a small degree, the retaxation but, most significantly, the impact of the hedging. In consumer lending, the portfolio yield has reached 9.3%, the new volume yield has reached 9.3%, and this is helping to stabilize the portfolio yield. And then this market remains fairly subdued, so we will see how it develops over the coming quarters. And likewise, in auto and supplementary housing loans, you see the new volume yields continuing to improve and gradually flowing through to the portfolio yield. So with that, I'll hand it over to Jan again, who will take you through the commercial part.

Thank you very much, Andrew. Now let's move to Slide #32, where we have prepared some space for the portfolio for the commercial part. On the right side of the page, you can see that the commercial portfolio ended up at CZK 82 billion, which represents 2% year-end growth. There is also a visible drop of the portfolio in Q1 by CZK 1.2 billion, caused mainly by the repayment of 2 large exposures in the working capital category. On the right side of the page, you can see the evolution of different products with 0.5% growth on investment loans. Already mentioned a decrease of CZK 1.2 billion on the working capital and a very strong growth on the small business loan portfolio, where we have reached 18.5% year-on-year growth. This growth, however, is slightly slowed down in the last 2 quarters, caused mainly by lower demand, tightened risk approval strategy for the segment, and also by increased pricing. Looking into the next slide, Slide #33, which is showing the evolution of the portfolio yields as well as the yield on the new volume origination. You can see that we have maintained high profitability requirements on new origination as well as for the replication where applicable, which is resulting in a quick portfolio yield growth across all the product plants. Now let me move to the Page #34, where you can see the detailed analysis of the resuccession or repayment of the current MONETA book, meaning retail and commercial combined. And if you can see, 67% of our loan book will be repriced or repaid during the next 6 months. You can also see the split into variable rates, fixed maturity, and fixed refixation period, including its respective amounts in the next 12, 24, and 36 months. So that was the overview of the evolution of our lending portfolio. And now, let's move to the similar overview also for our funding position. And for that, please let me hand over back to Andrew.

Thank you, Jan. So moving to Page 35, we present the development of the funding base of the bank, where we've seen significant growth up 17.7% year-over-year, driven, as we said, through strong deposit gathering activity. And the deposit growth is broadly based across both the retail and the commercial segments. Bring to Page 36. We present the development of the cost of funds. Overall, the cost of funds growth continued in the first quarter year-over-year, the cost of funds has increased [indiscernible], and we see a similar increase in the cost of funds, both things, core customer deposits, and wholesale funding. And within the core customer deposits, again, we see similar growth across retail and commercial, slightly higher in commercial, slightly -- sorry, slightly higher in retail, slightly lower in commercial, but broadly, cost of funding is growing across all segments. And as Jan said earlier, we're not especially optimistic about market conditions allowing significant repricing later in the year, but we remain ready and very flexible to implement repricing when the conditions allow. On Page 37, we present the development of the retail deposit portfolio, which has grown 19.6% year-over-year, driven by strong growth in savings and term deposits, up 35%. And we see a continued decrease in the current account deposits driven by customers moving excess liquidity out of current accounts and into higher-yielding savings accounts. We believe we're beginning to approach the point where the current account portfolio should stabilize. This is partly due to the growth that we have in the portfolio as those clients become active. We hope to see them building balances and partly due to the fact that when we look at the individual accounts, we feel we're close to the point where what we're seeing in the accounts is the monthly float that's required rather than any excess liquidity, but we will continue to monitor that and see how it do over the coming months. Moving to Page 38, we present the development of the commercial deposit portfolio, where, again, we see strong growth overall, up 17% year-over-year. And again, it's very similar to retail. Strong growth in savings and term deposits up 69.7%, and continued outflow from [indiscernible]. And finally, to the deposit section on Page 39, we present the wholesale funding base. The wholesale funding base decreased 9.7% year-over-year, driven by the growth in deposits -- in core customer deposits, enabling us to reduce our reliance on more expensive wholesale funding, particularly in the due-to-bank segment, which decreased 47.7% year-over-year. So that concludes the balance sheet section. And with that, I will hand over to Jan, who will take you through the liquidity and interest rate management.

Thank you, Andrew. Let me take you through the section regarding liquidity and interest rate management. We are on Page 41, where you can see that at the end of the first quarter, our position in highly liquidated assets stood at CZK 108 billion. On top of that, we keep between 2.5 to 3 cash sitting advances [indiscernible]. The high-quality liquid asset position increased by 68% year-on-year, predominantly funded by customer deposits expanding. And if we look on the high pointers liquidated assets as a share to customer deposits, you can see that the increase in the liquidity share from 22% a year ago to 31% at the end of the first quarter. On the next page, we report the split of customer deposits from the insurance point of view. At the end of the first quarter, out of 350 bar of customer deposits, 83% were covered by the insurance. Furthermore, this setup's high share was further increased during the year by 2%. I'm glad that in the Czech Republic insurance covers retail and commercial deposits at individual client level up to EUR 100,000, which is equivalent of 2.4%. On Page 43, we provide you with the spread of assets and liabilities based on variable and fixed interest rates. On the asset side, the balance of variable [indiscernible] assets stood at CZK 151 billion or 39% of the total, which represents a significant increase from 25% a year ago. This asset called it from free liquidity than variable rate loans and also fixed exposures swapped to variable through hedging [indiscernible]. The increased share of variable assets provides protection against high-interest rate environment persisting for longer period. On the liability side, we maintain liabilities with bearable interest rates of CZK 208 million. This represents 55% of the total, and it mainly consists of CZK 157 billion of savings accounts, which we can replace within 3 months. At the end of the first quarter, our simplified NII sensitivity shows that interpret reduction would improve the NII by about CZK 450 million annually. This estimate that the benefit from repricing deposits more than offsets lower net interest income on the asset side. On the next 2 pages, we show details of the investment portfolio classified as a whole to [indiscernible]. The chart on the left shows the breakdown by resection profile, including hedging derivatives. And as you can see, a slight majority of the portfolio has an expectation date within 3 months. On the right side, we report portfolio yield and interest margin about the cost of funding where the yield doubled during the year, and the interest margin improved by 30 basis points to 1.7% in the first quarter [indiscernible]. And on the last page of this section, Page 45, the report duration of the investment portfolio. During the last 12 months, we shortened the duration from 6.7 to 4.1 years or 40% in the relative terms through increased hedging density, which you can see on the right side, went up from 26% to 53% this year. So this concludes the section dedicated to liquidity and interstate management, and I will now hand over to Norman, who will take you through the resection.

Thank you. Good morning. We're now on Page 47, with an overview of risks with our 5 quarters. So in Q1, we recorded a net release of provisions of CZK 116 million or 17 basis points, is slightly better than the cost of risk of the first quarter of '22, with a significant improvement compared to Q4 in '22. Both the commercial as well as the retail book showed net release of provisions, the latter largely driven by sales of nonperforming loans. The main drivers of this result are continuing solid core performance, good payment morale of previously downgraded and forborne receivables, and most importantly, nonperforming loan sales, which generated significantly better results than initially anticipated. The pre-tax P&L gain on these NPL sales in Q1 amounted to a total of more than CZK 220 million Czech Pounds. On the following page, Page 48, here, we show the evolution of the loan portfolio, loan loss allowances, and overall coverages for the last 5 quarters. While gross receivables grew by around CZK 7.7 billion year-over-year, loan loss allowances dropped by more than 13% over the last 12 months, largely driven by a drop in our NPL stock, thanks to upgrades of downgraded receivables to performing stitches, NPL sales, and so far experienced solid coal performance. With regard to the total stock of provisions in the amount of CZK 4.8 billion. Here, you can see that more than CZK 900 million constitute managerial overlays, which we have built up over the last 12 months while still addressing increased risks stemming from our energy prices, inflation, and higher interest rates. And for the overall coverage, this dropped from 2.1% a year now to 7.8%, which is largely a result of the reduction of our NPL stock in the reporting period. Moving to Page 49. Here, we show the development of NPL in and outflow since March 22. The first quarter of this year showed a net NPL reduction of more than CZK 280 million, supported largely by repayments and NPL sales, as indicated earlier. As a consequence, quarter-to-quarter EMPL stock decreased by almost EUR 300 million and stood at CZK 3.5 billion at the end of Q1 this year. If we move to Page 15. Here, we have a more detailed overview of how the NPLs stock evolved. Year-over-year, both the retail as well as the commercial NPLs to showed significant drops and stood at CZK 2.7 billion for the retail book and CZK 779 million for the commercial book, respectively. And as far as the NPL ratio is concerned, this dropped from 1.8% a year ago to 1.3% at the end of Q1 this year, which is the lowest level recorded ever. And last but not least, in the risk section of this document on Page 51. Here, we have the evolution of the delinquency rates. So overall and across delinquency buckets, delinquency rates remain on a comparatively low level and are still below pre-COVID levels. And in particular, in Q1 this year, we saw a further improvement compared to Q4 in '22. So summarizing the resection. And I would say the main message is that the core performance of our credit portfolio remained solid. And overall, we have not seen any significant changes in key risk performance metrics despite the adverse indications stemming from increased energy costs, high inflation, and a changed interest rate environment. As it is currently wise expected that the full-year inflation will remain north of 10%, and GDP will be at most slightly positive for the full year. And despite the better-than-expected Q1 performance, on the cost of risk, we maintain a cautious view on the overall impact on the quality of our credit portfolio. The key unknown, obviously, is still in which direction the labor market is going to move as the unemployment rate remains still on a fairly low level. In our provisioning approach, we try to address these risks by having accounted for a potential deterioration through extensions of the management overlay framework. And as I said before, at the end of March, we had a total overlay of more than CZK 900 million. And this will be subject to review going forward and where necessary, we would even further increase it. And with that, I'll hand over to Thomas on capital management. Thank you.

Okay. If you look at Page 53, we provide you with an overview of the capital requirements. If you look at the consolidated basis, which is on the left-hand side of the page. This year, we faced an increase of 50 basis points, and this is due to the cyclical buffer going from 2% to 2.5%. And if we move on to the right, resales an increase of 2.6%, and this is composed of 2 components, one component going up is the countercyclical buffer. The second component is the [indiscernible], which increases from 4.7% to 6.1% by the end of the year. And in the midterm, we have to meet 4.7%. So all in all, we need to, on an individual level by midyear, so I will meet 21.1% and end of the year, 23.2%. Now where do we stand? On the following page, you can see our current position on Page 54. On top of the chart, we have consolidated position, and you can see that unconsolidated went well ahead with 18.1% capital adequacy ratio with the CET1 ratio at 15.4%, a 40 basis point improvement from a year ago. On Individual, we are currently at 21.5%. So we have 40 basis points over a requirement and the composition is similar, or the overall capital equity stands at 19.1% with the CET ratio in excess of 16%. On the following pages, we show you the stand-alone individual and then the consolidated composition of evolution and regulatory capital and the liquidated assets and in the mall adequacy ratio. So in a nutshell, going forward, by the end of the year, we need a minimum of CZK 3.5 billion of Marel-eligible instruments. We will begin marketing subordinated deposits in the second half of May, we will target our existing customer base, and we hope to be done with this by mid of July latest. If we do not raise sufficient amount, we might repeat the process in August and September. And then, if that is not sufficient, we will move on to the international debt markets and look for a window to issue it. Now if we look at the consolidated basis, similar picture. However, what is perhaps of interest here, we ended last year with CZK 2.3 billion of excess capital. If you look at how the position in excess capital changes, it is clear that the regulatory requirements, increasing regulatory requirements are eroding the excess capital, CZK 860 million went in that direction. We have optimized RWAs. However, we are not able to offset the RWA optimization, and we also are 10% off of net profit. If you look at the RWA, the optimization is clearly visible from the density bundle, which is under the spec. We are at the end of the first quarter, slightly over 40%, and you can see the 2-year development and in the rest of the page is fairly self-explanatory. Now let me move on to Page 50, comparable comments regarding the minimum target, profitability that we provide you. If you look at this, this is the amputation of the guidance that we gave in February 2023. Cumulatively, we seek to achieve minimum profitability in a 5-year horizon of CZK 23.6 billion. That would constitute an 18% improvement over the past 5 years when we delivered CZK 20 billion. This holds, '23, we stated a minimum target of CZK 4.3 billion. We are currently redoing the operating plan as the conditions are fairly unpredictable. We will update the minimum target, and based on what we see and what we have done in the fourth quarter of last year and this quarter, it is -- there is some likelihood that we will move the minimum target up as we did not work to be able to do that. With this, I thank you for your attention. I thank my team for the fantastic presentations, and let's move on to Q&A.

[Operator Instructions] The first question comes from Mehmet Sevim of JPMorgan.

I have a couple of questions on the deposit liquidity increase, please. Your proactive decision was very timely given the increased focus on bank liquidity right now globally. And I'll have 3 questions here. So, first of all, do you expect this growth trend in deposits to continue at a similar pace throughout the year? So with deposits well exceeding maybe CZK 400 billion or is there a level of liquidity that you won't target to exceed once you reach that level? Secondly, what are your strategic plans with your newly acquired liquidity longer term once the rate environment normalizes? In the short term, I understand you're deploying a portion in government bonds, but longer term, maybe, is it fair to see it as a preparation for a higher growth environment or is that a structural shift in the balance sheet with LDR to stay low through the cycle? And finally, how do you assess the flight risk of these newly acquired deposits and customers once rates come down, given arguably the primary motivation of these customers is the premium pricing that monitors at the moment?

Excellent question. The internal target is in the range of CZK 375 million to CZK 390 billion in core deposits for this year. [indiscernible] our ability to maintain both steady profitability at the same time offer competitive rates to the market, and we will adjust the pricing strategy. I would say, 75% waste is on ability to deliver the profitability target and 25% is to enhance the absolute value of the deposits that we carry. The third part of the decision-making is to granularize, as much as possible, the deposit base into insured deposits below CZK 2.4 million insured amount so that we have a granular as possible deposit base in this work for the last 12 months. What do we plan to do with liquidity? Our policy, the cost at the HTC portfolio should be 25% or lower with respect to the structure of the balance sheet. And then, we have an appetite demand across the segment that is commercial and commercial and retail. So number one priority from an 18-month perspective is to continue to strengthen support to self-employed and micro or small enterprises, where we currently have exposure of CZK 12.5 billion. And if I can be slightly [indiscernible], I would like to double it because this is the most profitable business line that we've created since the [indiscernible]. Secondly, at some point, we will come back to the unsecured market with more rigor on the pricing and if the inflation comes down and the situation stabilizes, you will be able to also open some more of the ferritic underwriting criteria. We will become very selective in mortgage lending. Lending to digital, focusing on the refinancing of existing mortgages, seeking to have a low cost of distribution. Then we have the SME segment, where we discontinue lending to commercial real estate, and we will focus on our traditional customers, which is agriculture and related because we have a strong franchise in that element. And the deployment will be pretty much proportionately similar across the balance sheet. However, I would like to take the retail and small business ideally to 80% of the balance sheet within next year horizon. Flight rate as of the deposits. As a matter of fact, yesterday, we had an asset-liability committee and we have new results for the sensitivity of the deposits and the sensitivity on the savings product, both retail, commercial is about 33%. So we will make a concentrated effort to seek to cross-sell those customers with current accounts and hope to anchor them in the bank to transactional banking. And this has worked for the next 24 months where we need to enhance how we spend our marketing budget and how we focus the incentive teams in the bank. If you look at Andrew, if you look at Jan's KPIs and also a distribution for the first time in his sale of the bank, they actually have deposit efficacy inside of their KPIs and we have conciliary focused the sales force from lending to current account distribution and activation. So I hope this answers the question.

That's all very helpful. Just one question, if I may. You mentioned 33% sensitivity in retail deposits, if I got this correct. How do you calculate or define this, please?

Well, I'll have to ask Jan reach out because I have no clue how they do it.

Just from a point of view, we run models in our asset and liabilities team, management team and these models are based on measured behavior of our customers, how do they react on changes of the interest rate in this environment as well as in our deposit pricing proposition. And based on that, we saw during the last months, increasing senility although these deposits hanfully incorporated or we updated the assumptions in the model going forward. So it's -- I would say, 80% behavior-driven and 20% assumption-driven.

The next question on the line comes from Simon Nellis of Citigroup.

My question is on the net interest income forecast that you've given us nicely for the next 3 quarters. I think if you add them all up, you get to NII of around CZK 8.5 billion for the full year. So I think your target for revenues is around 12, so how confident argue that you can hit that CZK 3.5 billion?

Thank you for your question because we expected it. So yes, I'm going to cover this one of the bank. Okay. So in our guidance, our CZK 12 billion revenue guidance is based on the net interest income of CZK 8.5 billion. On the net fee and commission income, we estimate at a minimum CZK 2.5 billion, and on the other income, the rest, which is CZK 1 billion. The drivers of this compares estimated balances against 2022 actuals, the increase of net commission income is predominantly driven by higher volumes distributed in life insurance products and also the renegotiated commercial conditions, which is what I mentioned in my previous section. On the other income, we will benefit from a higher FX margin this year in both segments, retail and commercial. And at the same time, last year, we reported a negative result of FX pots of about CZK 300 million in the other income, and this does not repeat this year as we stopped doing the opportunistic [indiscernible] within the other income and the other line has a positive impact on the net interest income. We start doing these operations because they are no longer economically viable with the increase of rates in the UL in the euros. So the other income will be significantly stronger than last year.

My next question, I guess, to the extent possible, you can answer it. You have a number of kind of new core shareholders? I see PPS is now on the board. Can you maybe discuss who these new shareholders are if they have -- do they have any influence on the bank and if there's any change in strategic direction that you see. And I think combined the 4 new larger shareholders, they have just over 50%. Do you see any potential for them to consolidated, one of them consolidating control?

Not currently on the second part of the question and on the former part of the question, whether they offer the influence. I think that we treat them as any other shareholder, so far, they are not going to project any of, I would say, strategic directions. I meet frequently with all 3 shareholders and discuss with them what I can discuss with them without discussing what I'm not supposed to discuss with them. So far, we enjoy consecutive enabled and excellent relationships across the 3 shareholders. I mean it's known that we have PPF, the change in the Supervisory Board is a function of the 30% they owned in the bank. I know [indiscernible] the last 20 years she is an excellent CFO for PPF. I enjoy a very good relationship with her. But she is also very qualified and asks questions on the Supervisory Board. So I think all in all, she is a strong addition to the Supervisory Board. Second, I am in the second shareholder publicly announced their stake is [indiscernible]. It's actually a fund, and I have a point of contact there, which is a senior, and we discuss things that we can discuss and against the relationship. I would call him as excellent and very productive from a shareholder's point of view. And of course, we do have some cooperation and somewhere we compete. So we have to deal with that. And the third shareholder, we also publicly disclosed his stake in the [indiscernible], and again, I meet with them frequently to discuss things that I can discuss and the relationship is very good. So it might seem absurd, but I actually find it much easier than in the time prior to concentration of the state because I had to travel a lot. So I can displace that. So now I take a metro to Jet Play. So I think its environmentally sound as well.

Absolutely. One last question on the tax. What portion of the tax is the windfall profit tax? And how is that -- is it booked quarterly or how does it work? I'm not sure.

Well, the in the fall tax, we prepaid the amount based on the '22. This is the estimated tax, and now as we have a higher bond holding, which is exempt from corporate income tax, we shall not pay domain fall tax unless the government changes the rules. So under the existing rules, our working thesis is that with the measures we have taken in the fourth quarter and the first quarter of this year, we will be not liable for the in fall tax. And on this front, I would like to mention that our contribution to state budget in 2022 increased by 60%, and this is not the prepayment, the down payment on the forex, but the other taxable items that we contribute to the same budget. So 60% up, and the absolute amount we paid is CZK 3.6 billion to the state treasury. So we have in -- we optimize the tax position and we will update in fall tax -- it's as simple as that.

And is there any rumblings from the government side that they might change the formula on you?

So far, no. But if you look at the large competitors we face, Mr. Baja [indiscernible] -- like I said that they will pay nothing. And it is also based on the same time as my view on the statement of, I think, CEO of [indiscernible] also downplayed the expectations on revenues from this. We've increased, I mean, the taxation of profits per meliorate and withholding taxes increased by 16%. It accounts to CZK 3.6 billion. This year, it will be even more, assuming we increased the deposit base. So we think that the government should consolidate the budget and take the money for months because we contribute significantly more to this spending by the government, and we optimized the position [indiscernible].

The next question on the line comes from Thomas Unger of Erste Group.

The first one beyond the guidance on 2023, that's when you ended the presentation. I appreciate the comments that you gave us, the further details on the NII and other revenues. But did I get you correctly, you see upside in the profit estimates for 2023? And where do you see the upside in the P&L, that will be my first question. And the second will be on risk costs. The risk indicated was very solid in Q1. I didn't see any deterioration yet do you see anything now? And have you seen anything in March, April, anything visible, or anything expected in the coming quarters? You've extended the overlay, which is now at quite ample level. So do you see any potential for narrowing the range for the risk cost guidance of 2023? And then lastly, I would just like to get a feeling of your thinking on a management board-level strategy approach. Has anything changed with the banking crisis now in March? Has that had any impact on your approach? And also, if you could tell us about deposit movements in April? I'd appreciate that.

Deposit movements in April are positive. We continue to gather deposits at a fairly strong rate. I think on the 14th, well, we had a peak commitment, and we had about $27 billion in deposits. So this evolves during the second quarter of the [indiscernible]. With the crisis in the U.S., we were amazed that you can read sole government papers quickly in the state of California. So I think we don't [indiscernible] 3 facilities that we have with Czech National Bank, and we are fairly confident. Other than that, the decision to improve the liquidity of the bank was taken with my colleagues in August 2022, and then I have communicated it. So I think we didn't change anything because we took the decision to preserve liquidity to summer 2022. What has changed is independent of what happened in the U.S. is that we've taken a different view on the duration of high-usage environment in the Czech Republic because we just don't see how the Central Bank will justify cutting the rates in the near term. However, the bank is now positioned to benefit on cutting days, and we are well insulated against other increases in rates. So we have a very good position to sort of both ways, more favorable is take-up trades, but why we expect it just to happen at the beginning of the third quarter? We think it will be launched later. Norman will answer when he wants to narrow the range or whether he wants to buy the net.

So as you know, from the guidance, we have a cost-of-risk range of 25 to 45 basis points for this year. It is clearly higher than what we currently have since we had a net release. Now as I tried to explain during my part of the presentation, the net release was the result of various factors. One, still solid core performance, the upgrades for bond receivables, and most important, the NPL sales, which we have -- the big one which we announced in Q1 is also front-loaded in Q1. So this helped us very much on the cost of this line for this year, and we saw a significant appetite on that portfolio, which generated significantly higher than initially expected profit. Obviously, the environment we are in is unprecedented as it has been for the last 3 years. So models do not fully capture what we see on the macro front, most importantly, the high inflation, the energy costs, and also the daily suddenly increased interest rate environment. GDP is subdued at most, I mean, small growth, if we are lucky this year. But I think that -- let me call it like is an interesting cocktail or a mix of macro key indicators, which make it increasingly difficult to predict how both retail customers, as well as commercial customers, are going to deal with that going forward. Now should we see a continuing positive trend in the second quarter and should be managed to monetize NPL sales, which we have in our plan? And to be specific, we plan to monetize roughly an equally sizable portfolio as we sold in the first quarter for the rest of the year. So give or take 500 million to 600 million face value. And should we generate solid results, then we will be looking at our currently provided guidance to which extent it could be changed. Also looking at the parameters on the overlays, but that's something which we're going to look at going forward.

So the answer, Tomas, the answer is the second quarter earlier, maybe the third quarter, we want to be absolutely certain that the time line between the lower GDP growth and translation into NPLs this 6 to 9 months, which is why I see what happened. So far, the sky is blue and the sunshine is raining on us, but this can change. Now you asked about the upside or downside. So if you look at the revenue, operating income, the 12 billion what not is actually a very aspirational target. The downside of that is 100 and the maximum upside on that is in the range of 50. So, this is not going to move the needle a lot this year. However, with 24, we do have significant upside because the mortgage portfolio will be priced partially, and we will also benefit from whatever volume of deposits we are able to manage. On the net income, there is some upside, but the number will come close to what Andrew said, which was $2.5 billion, and you can look at $60 million up and down, up and down difference in the upside would have become from significantly higher transactional intensity coming in the second half of the year, it comes with some economic recovery, but it's highly unlikely that it will happen. So the revenue or operating income is pretty much spoken for. We have some upside on the costs. We have really worked on the cost side a lot. The first quarter and second quarter will be still a little bit impacted by some one-offs, which tend to be negative and the net results could be seen in the second half of the year. This has to be taken with caution because we are under huge pressure to adjust majors across the bank. So pretty much everything is [indiscernible] as always. But we can't predict what will happen, and we are very cautious on the cost of living.

The next question on the line comes from [ Carl Nedzed of CO Banca ].

My question relates to capital management and requirements. So how confident are you that you will meet your [indiscernible] requirements, meaning that you will get those CZK 3.5 billion needed in the first round of offering growth subordinated deposits on May or later in the year? And basically, how attractive do you make these subordinated deposits? Can you share with us the details of your offering? And as a related question to the capital management follow-up question. Do I understand it correctly that if you fully meet the [indiscernible] requirements of this year, then we can anticipate the payout ratio to be still 70% of how that payout ratio would vary depending on the success of moral requirements.

This question always amazes me because we have a published dividend policy which is part of our corporate disclosures, and that policy is amongst us around the left side of the bank, and it has not been changed. So the minimum payout the 70% is a bad dividend policy. So if we were to change it, we will publish [indiscernible] as the bosses of the Investor Relations was send best to the market, and we will notify all analysts and the whole world. So that remains unchanged, and this is not so 70% is the minimum. But this is the rule under which the offering is. So this is number one. Number 2, if you are asking me how confident I am, I am 100% confident we will succeed. If you ask me what will be the attractiveness of this subordinated deposit, we will price it based on a 5 years sold. And what we think is that it is quite a premium for the bank. We discussed this in the shareholding meeting, and I have to think question, and I said, okay, if I look at the spot market today on Tuesday, I detect it will be somewhere between 6.5% and 7.5% for the 5-year return given to shareholders, which 5 interest will be paid monthly. So we are aiming at a specific segment of the retail market. And we agreed in general in the bank that related ordinated deposits will have a minimum investment value of 100,000 grams. So there is no barrier in the amount of deposits. I have confidence in my people. I have a wonderful team of 55 retail bankers who are responsible for the distribution of collected investment. And I have a great analogy of distribution. We actually always ask questions at the management conferences, and I have a great head of distribution of the retail branch and forth. I am 100% confident they will succeed because they were there well paid for succeeding. And if that fails in the midyear, we will have a digital platform on which to realize, so we will widen the scope of distribution to the digital in September 2023. So again, I am 100% confident we will succeed.

[Operator Instructions]

Excellent. The team probably have no additional questions. If you allow me just 2 seconds. We delivered about $1.2 billion. We are on the way to meet the minimum profitability target of 4.3%. We will adjust the profitability target based on the current forecast of the bank. The forecast will be finished in May, and we will publish the results together with our second quarter results. We have discussed the upside and the downside. We are not going to reprice the deposits in the second quarter because we do not believe the market conditions are able to do that. The first possible date for review of the positive risk range is midyear. It might come in the third quarter based on our consensus on the lack of barrels window timing. On wind fall tax, unless the rules changed under the existing rules, we have inoculated the income in a way that we will not pay wind fall tax and I stress and on contribution to state budget has been 60% higher in '22, and it will further increase this year because of the indirect taxes that we finance. With that, we are looking forward to the second quarter. We are optimistic figures with good energy in the bank. We will get them more under control. You will see that. I'm confident that our people will not fail in that endeavor. And we will look forward to present to you our results for the second quarter. Until then, I'm grateful for your interest in the bank. Thank you very much, and have a good weekend.

This concludes today's webinar. Thank you all for joining. You may now disconnect from the call. Goodbye.