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

Hello, and welcome to the MONETA Money Bank 1H 2023 Financial Results. My name is Terry, and I'll be the conference operator for today's webinar. [Operator Instructions] Today's speakers are Mr. Tomas Spurny, Mr. Jan Fricek and Mr. Jan Novotny and Mr. Carl Normann Vokt. I would now like to hand over to Mr. Tomas Spurny to begin. Please go ahead.

Good morning, ladies and gentlemen. I have the pleasure of covering the first part of our presentation. So if we can turn to Page #2. We first cover the quarterly results. In the second quarter of the current year, we delivered net profit of GBP 1.26 billion. This is 4% quarter-on-quarter growth. I think more importantly, if you look at the results of the quarter, we are also delivering strong net interest income. Net interest income increased more than 6% quarter-on-quarter, and it exceeds the forecast that we provided to you in February 2020 by about 180 million. So we look confident into second half of the year. The other positive news with respect to the quarter relates to net leasing commissions. On the quarterly basis, this category of incoming deep by 7.6%, and this is due to spend of our distribution in asset management as well as insurance delivering a solid result. If you look at the cost base of the bank on a quarterly basis, it has declined by more than 11%, even though we caused a tail end of mandatory contributions, namely to the deposit insurance fund, which has changed prices at the last minute, and we suffered a higher charge on insurance during May 2023. Nonetheless, we believe that the result is in line with our guidance and with our operating plan. During the second quarter, we incurred a risk charge of about GBP 150 million. The first quarter was impacted by both disposal of significant NPL portfolio, which produced material gain. And also, we had some releases of provisions very tail and to co-related provisioning. Now with that, I would turn to Page 3, where we look at the certainly annual results published this morning. If you look at the net profit, we stand at GBP 2.5 billion, rounded up by GBP 20 million. This is, in our view, a good results in a view of guidance, which we will cover at the end of this presentation where we increased the minimum net profit target to GBP 4.7 billion from GBP 4.3 billion. If we briefly cover the other categories, which will be commented upon by on-track on operating income, GBP 5.9 billion. So in order to meet the guidance for this year, GBP 12 billion, we have to produce additional GBP 6.1 billion in operating income, and we are confident that the number will come in based on evolution of the second quarter. Cost base is under control. I would mind you that GBP 2.9 billion has in it more than GBP 300 million of mandatory regulatory contributions, which always impact the first half of the year. This year second quarter, as I said, we suffered additional charge. The semiannual cost of risk is GBP 30 million combining the excellent first quarter with a normalized second quarter charge that we have in the P&L, which I covered on the previous page. Now if we continue to the balance sheet, if you look at our activity for the past 12 months in response to the high interest rate environment, we shifted the business model to focus on deposit gathering. The deposit gathering produces growth of 24% and the higher volume of deposits supports the growth of the net interest income. We ended up with GBP 368 billion. Nonetheless, if you were to add the additional GBP 2.8 billion that we placed in subordinated deposits is not included in this figure, the growth would be even higher. And I would like to underline that our growth of deposit base comes at 3x the market growth. The deposit base also positively impacts the liquidity ratios where we have increased by 120% or the effect of GBP 66 billion on a year-to-year basis. Now if we turn to the lending base to our performing loan portfolio, it stands flat at GBP 269 million. This is in line with our strategy where we focus on 2 aspects of the loan portfolio. First aspect is underwriting high margin, high rate products. Second aspect is gradual pricing of the portfolio. Both of states aspects will be covered by Jan Novotny in his part of the presentation. Now if we turn into the evolution of our operating platform. If you look at the operating platform, the most important development concerns employment of the bank last year, I believe it was in October 2022, we announced a target of 2,500 FTEs. So we come in at the target. We are actually 11 FTEs short, but the restructuring materially contributed to addressing the impact of inflation. About half of the restructuring relates to lower demand for credit products overall, namely on the side of retail and the other had is related to productivity improvement or discontinuation of some business activities, which we found in adequate in terms of return on capital. If you look at the other aspects of the operating platform of the positive, we reached agreement with 4 banks to not only share ATM infrastructure with respect to enroll, which we are planning to implement by the end of the year, functionality of deposits. We believe that this will not already improve our cost position, contribute to CO2 reduction targets, but also broaden reach of [indiscernible] for those clients that need to meet the ATM infrastructure for deposits. We grow the client base and digital, I will cover in a separate part of the presentation. Now with that in mind, let's take a look at the operating environment as we would like to present some key numbers. Now if you look at Page 7, the operating environment is frankly challenging. On one hand, you have economic stagnation with the most optimistic forecast with respect to GDP growth for this year, it comes in about 0.5%. And the economy is clearly slowing down. The positive factor remains with respect to unemployment because the unemployment is hardly moving up. And this, in our view, contributes to benign credit environment of continued benign rate environment, which actually is most likely, and it's very strong as the metrics other expense or historical lows, and this will be covered by Normann in his part of the presentation. We continue to suffer from a high inflation, which is followed by materially high public budget deficit. As you can see, the public budget deficit is estimated at GBP 295 million this year at midyear, the leftist stood at GBP 215 million. So we believe that there is more upside or -- I'm sorry, more downside on government spending and upside through consolidation. The consolidation package, which is reduced public spending by GBP 15 billion in midterm is still in the parliament and pending approval of a fairly material obstructions and we think it might be altered during the parliamentary debate. If you look at indebtedness of Czech Republic with respect to GDP, that metric seems to be continually increasing. Now if you look at the next page, inflation. Inflation, the latest number reported by Czech National Bank stood at 1.7%. The annual number is in excess of 15%. The inflation is continued to be driven by housing costs, energy, groceries and this public disclosure -- some public discourse in the media. So our view, one of the house view is that this stage to subdue the inflation is certainly continuing but not yet over. And we believe that the rates will come down rather than at the end of this year by beginning of next year. That house view is framed or anchored in comments by at least 3 members of the Czech National Bank Board. This is the Governor and Vice-Governor [indiscernible] on potion that the markets might be too optimistic. If you look at the rates, the short-term key rate remained stable at 7%. And if we then examine the yield curve, we can see that the swap market since beginning of the year decreased its estimates of medium and long-term rates by about 25 to 50 basis points. So the medium view is fairly optimistic on ability to subdue the inflation. So now this is with respect to the operating environment and let me cover a brief update on our digital platform. If you look at our digital platform, this actually shows the tremendous importance of it or materiality that we gained over last 5 years. I recently looked at the presentation made to our staff and management. This was from 2017, where the digital platform at that time, processed about 20% of all transactions. If you look at the digital platform from the perspective of first half, on this year, we did more than 40 million transactions spread into the categories. Payments grew by 18%. If you look at our efforts to add service and customer relationship management features, this category grows by nearly 70%. And if you look at our distribution capability through the platform, we have more than 20% growth. On the following page, we tried to provide a simplified view of materiality of the digital platform with respect to distribution. Here, we focus as key products of the bank. And if I start with deposits, if you look at the individual lines, the digital today enables 40% to 60% share on key deposit products and so on and so forth. So this mainly gains materiality by every quarter. Nevertheless, the branch network still carries material parts of services, certain services and distribution capabilities for the bank. On the following page, we also show you the trend of the digital trending of the digital platform. On one hand, we had solid double-digit growth of users, unique users on the digital platform. But if you examine the growth of the mobile platform, the mobile platform actually exceeds the 11% growth by more than it's able, and the traffic is undoubtedly shifting onto the mobile platform. This is also visible from the share of transactions between Internet banking and mobile banking, where I believe that by the end of this year, 80% of the traffic, perhaps more than 80% of the traffic will migrate onto the mobile platform. Hence, the bank is updating its investment plan as we would like to further digitize product, distribution and service enablement for small businesses and SME companies, and this will be the focus of our efforts during the next 3 years. And now very briefly, on the branch network, how it complements the digital offers. If you look at the branch network, it has become largely irrelevant in terms of payment transactions. Today in the branches, we processed about 0.5% of the payment traffic. Nonetheless, the benches are pivotal to cash services where we processed during the 6 months, about 590,000 transactions. Nonetheless, you can see that the cash intensity within our branch network is declining. If you look at it from perspective of branch visits, we actually have good growth in branch visits because in many locations, some banks discontinue to provide over-the-counter cash services. We believe that being a rural bank serving communities with less than 10,000 inhabitants. It is our responsibility to ensure that cash services are available. Nonetheless, we will continue in rationalizing the network by the end of the year. We will close 7 branch units, which were selected during a review, during midyear review. From the perspective of loan applications, we see similar trends. The branch network reduces the number of application it receives. This is a function of lower demand, and it's also a function of brand closures, which were realized and executed through the first quarter of this year. And we expect the number of staff that we deployed in front offices throughout the branch network. You can also see that the reduction is consistent with the 13% reduction of staff overall within the bank. Hence, with that in mind, I will now turn over to Jan Fricek, who will provide you with detailed evolution of the P&L overall. Thank you.

Thank you. Good morning, ladies and gentlemen. I am now on Page 15 and we'll continue with the profit and loss statement. In the first half of the year, MONETA net profit of GBP 2.5 billion, with the operating income of GBP 5.9 billion and delivered treatment on [indiscernible] of 18.9%. Lower revenue is driven predominantly by net interest income down by 14%. However, partially compensated by net fee and commission income growth of nearly 21% and more than double of the rigs. On the cost base, the airport GBP 2.9 billion, which is just marginal increase by 4% year-on-year. However, this year, we charged regulatory charges by GBP 188 million higher than last year. And last year, we obtained M&A cost reimbursement. On the cost operate slide, we report GBP 30 million and net cost for the [indiscernible] and such a solid result was enabled by continuing solid performance of our loan portfolio and also gain realized on NPL disposals. On the falling pace, can continue with net interest income development. In the second quarter, we increased the lending income by GBP 390 million year-on-year, mainly due to increased loan portfolio by 50 basis points. And also treasury income went up by GBP 300 million due to a higher balance of liquidity, high income from hedging derivatives and also the market interest rate increased by 2.5% during the 5 quarters. On this spend time, our corporate funding increased by nearly GBP 2 billion. This is a function of the deposit base expansion by 24%. And also we reprice a significant portion of the deposit base to current market level. As a result of that, our net interest income declined by GBP 300 million year-on-year. However, from the quarter development, you can see that in the second quarter, we increased the result versus the third quarter, which is actually in line with the project the projection we provided last quarter. And as we turn the page, which is already on the screen, Page 17. Here, we show the original projection of net interest income for the last 3 quarters of the year. You can see that in the second quarter, we out-performed their forecasted number by GBP 77 million, which was achieved by better-than-expected income for making derivatives and also small one-off gain. The projected income going forward basically the drivers of the projected improvement going forward remain the same. It is ongoing expansion of the deposit base with positive margin at into 2 big airport and also increasing loan portfolio. Well that, we report net interest margin in the second quarter, we outperformed the forecasted results by 10 basis points. And going forward, the project stability in this respect. On Page 17, we continue a bit detail about net fee and commission income, sorry, basic. In the second quarter, as was mentioned, we increased the overall result by nearly 22%. The income side increased by 20%, driven by higher transactional income and also increased income for distribution third-party products named insurance and asset management. Below that, you can see that expense side increased as well, however, at significantly lower rate, and this is in line with increased volume of client transaction. If we print the page, we can provide you a bit more detail about the income in. In this chart on the right side, you can see that year-on-year, we increased the income from insurance and asset management by 47%. And in the second quarter, the result at GBP 378 million in LA 50% of the total income in this category. And the driver is driven by improved distribution capacity and also improved commercial conditions negotiated with the insurance company. Then now we can continue with the cost base on Page 20. On a comparable basis, the airport is a stable development with GBP 1,372 million for the second quarter this year. You can see that the higher regulatory charges book up was compensated by a special costs and administrative expenses. Let me also pointed out that for comparable purpose, we adjusted the figure of cost base for the second quarter last year for M&A cost reimbursement between. On the next page, we provide more detail about personnel expenses development. In the second quarter, we achieved a reduction by 2.6% year-on-year, predominantly due to reduced employment by nearly 13%. And this was partially -- only partially compensated by increased average salary and mid high single-digit inflation on the later market the pressure coming from the later market inflation. And we complete this section with the Page #22, here we show a decline of administrative costs by nearly 7% year-on-year. Again, this is on a comparable basis. And the reduction was achieved predominantly due to lower market intensity in the first half of this year and small savings on other items. On the right side, in the chart, you can see that the D&A charge remained broadly stable. With that, let me hand over to my colleague Novotny, who will comment on the bank. Thank you.

Thank you, Jan. Good morning, ladies and gentlemen. I have a pleasure to walk you through the next section of today's presentation, which is the balance sheet development section. Let me start on the Page 34, where you can see the evolution of our balance sheet for both asset and liability side. You can see that the very steep growth of more than 15% year-on-year is driven by very successful deposit gathering campaign. In the key category of core customer deposits, we have achieved 24% year-on-year growth, and this growth contributes quite significantly to the improvement of the interest income generation capacity. We have also slowed down our growth in net customer loan portfolio as we have focused mainly on the repricing of the current portfolio as focusing on originating especially the high-yielding products. Overall balance sheet has reached GBP 423.8 billion, and we will continue to grow the balance sheet according to our strategy. Now let me move to the Page #25, where we are showing the total gross performing loan portfolio spread per segment. As you can see on the previous slide, the portfolio grew up by 0.8% year-on-year and has reached GBP 269.2 billion, but a slight decrease in retail share, very stable share of the SME portfolio of 27% and continuous growth in high-yielding small business where we reached almost GBP 13 billion in assets. In appendix, you can also see the detailed road expect in each category. Now on the Page 26, on the next page, you can find the evolution of our loan portfolio for the last 4 quarters with a sole line depicting the portfolio yield and the openings affecting the year, including the hedge results. Overall yield is already at 5.2%, thanks to a significant focus on the reprice of current 36, new origination at the high level and also increased interest rates for hedging of the portfolio. You can also see the split on the right side of the page for the retail and commercial part, retail at 4.9%, commercial already at 5.8%, both continuously growing. On the next 2 pages, Pages 27 and 28, you can see the detailed analysis of the year evolution. There is just a small remark. On those sides, the looked line shows the new origination yield and the solid line shows the portfolio yield. Across both pages, you can see that we are keeping the news volume significantly above the portfolios, which, together with the repricing efforts, supports portfolio growth for both retail and commercial programs. Now talking about the reducing of our current portfolio. Let me please move to Slide #29. And where you can see the detailed split of the portfolio into variable rate, fixed maturity and fixed recitation period. And you can see that it has a huge portion of the portfolio, which will reprice in the future. It's 29% within the next 12 months, 47% within the next 24 months and more than 70% in next 36 months. This all creates an additional room for NII improvement in the next 3 years. Now let me move to the funding base section. On the Page 30, we are showing the steep growth of our customer deposit base with almost 24% growth year-on-year. This is a very big success of our strategy in the last few quarters, and it helps not always increase the profitability, but also to improve even further our excellent equity position in a very healthy and greener structure with 73% share in retail, 32% share in commercial and only 5% in the wholesale category. On the next page, Page 31, you can see the return position of the cost per fund in more detail products. You can also see that the growth of cost of fund has significantly slowed down in the last 2 quarters, and we expect further slowing down going forward, there is an expectation of pride decrease either at the end of 2023 or beginning of 2024. So that was all from my side. Thank you very much for your attention. And I will hand over back to Jan Fricek to walk you through the liquidity and interest rate management section of press presentation. Thank you very much.

Thank you. And let me briefly comment on the electivity and interest rate management. I don't pay say [indiscernible] already mentioned by Mr. Spurny at the beginning. At the end of the second quarter our position and high-quality ice assets stood at down GBP 2 billion. And this is more than 100% or actually 12% up year-on-year. You see [indiscernible] position against the core customer deposit base, the share increased from 18% last year to 33% this year. And also in this page, it is visible that our strong liquidity position of the balance sheet has been improved from 88% loan-to-deposit ratio to 73% in the second quarter this year. And on the following page, we provide a structural picture of our balance sheet from the interest rate sensitivity point of view. You can see that at the end of the second quarter, we maintained GBP 177 billion of viable interest rate. This contributes a share against 23% share reported last year. These assets predominantly consist of liquidity placed at the Central Bank own portfolio with a variable interest rate and also fixed rate loans so to variable through hedging derivatives. In the lability side, we reported a position of GBP 226 billion with variable interest rate, and these liabilities predominantly consists of savings accounts, which we are contractually able or capable to reprice within savings. As a result of this structure, we estimate that a reduction of 2 weaker by 100 basis points will bring us GBP 485 million of incremental net interest income. With that, let me hand over to Carl Normann Vokt. Thank you.

Thank you, Jan. We are not covering the risk section, and we start on Page 36 with an overview of cost of risk. So in the first half of this year, we recorded a net creation of provisions of GBP 30 million or 2 basis points. The commercial book produced book of GBP 31 million with the retail portfolio so many things to NPL sales and that release of GBP 1 million. Compared to the first half of '22 where we significantly benefited from upgraded COVID related receivables. The first 6 months of this year were influenced by NPL sales, having a positive impact on the cost of risk line in the amount of GBP 249 million. And apart from the aforementioned sales of nonperforming loans, the other main drivers of the positive results are so far observed solid core performance and good payment morale of previously downgraded receivables. On the following Page 37, here, we show 5 snapshots of the development of the loan portfolio, loan loss allowances and overall coverages, while the gross receivables grew by around GBP 1.8 billion year-over-year. Loan loss allowances dropped by around GBP 300 million, largely driven by a drop in our NPL stock. With regard to the total stock of provisions in the amount of almost GBP 4.8 billion, here you can see then that more than GBP 900 million constitute managerial overlays, attracting increased risks stemming from high inflationary environment and higher interest rates. And as for the overall coverage, this drop come 1.9% a year ago to 1.75%, which is largely driven by the reduction of our NPL stock in the reporting period. Moving to the next page, Page 38. Here, we show the development of NPL in and outflows since June '22. The second quarter of this year shows an NPL formation of GBP 960 million, which was lower than the GBP 1 billion information we observed in Q1. However, due to lower NPL sales in the second quarter compared to Q1, has led to a minor net NPL formation of a bit more than GBP 60 million. And as for the NPL stock, this decreased from GBP 3.8 billion a year ago and currently stands at GBP 3.6 billion at the end of June. Going to Page 39. Here, we have a more detailed overview of how the NPL stock evolved in the last 5 quarters. So year-over-year, both the retail as well as the commercial NPL stock show drops and stood at close to GBP 2.8 billion for the retail book by GBP 800 million for commercial, respectively. And as for the NPL ratio, it's dropped from 1.4% a year ago to 1.3%, which is identical to what we repurchased in the first quarter. And the last page of the risk section, Page 40. Here, we have an overview of how our delinquency rates developed across all markets, as you can see here, delinquency rates continue to stay on a comparatively low level and are still well below levels seen before 2020. So summarizing the risk section, I would say the core message is that the performance of the credit portfolio remains solid, judging from the fairly low delinquency rates observed so far based on the most recent macro releases, inflation dropped below 10%, so already in June and is expected to continue declining in coming months. On the other hand side, key metrics around consumption and trade still show a rather mixed picture. So far, it seems that the challenging macro environment has not influenced the labor market yet. However, to which extent this will stay like that remains to be seen. So on the back of the so far positive development of the core credit risk metrics, we are lowering our guidance on cost of risk for the full year from the current 25 to 45 basis points to 15 to 35 basis points. We, of course, will continue monitoring portfolio performance metrics against the macro and the retaining stock of provisions. And this will be subject to reviews going forward. And with that, I hand over back to Jan Fricek. Thank you.

Thank you, Normann. Let me` go through the capital management section. I start on Page 42 is the overview of capital requirements of the individual and consolidated levels. In the second quarter, Technical Bank decided to reduce the company's cyclical buffer by 25 basis points effectively since the 1st of July. And with that, our capital management target on a consolidated level decreased to 16.35%. This is including 1% management buffer and it is expected to remain the same for the rest of the year. But on the individual basis, our capital target on Ireland at 2.85% and is expected to increase to 22.95% by year-end due to higher final requirement. The following be show our capital line advancement of capitalizing [indiscernible] both levels. But you can see that both position is at about the expected it management target or even a requirement. And on following the 2 pages, we'll go into more detailed view on both technical positions starting on Page 44 with the individual level. At the end of the second quarter, our capital stood at GBP 38.8 billion, and this is including [indiscernible]. The increase in the second quarter was achieved by successful distribution of separated deposit of GBP 2.8 billion, which was already mentioned. And this instrument is reported at -- the [indiscernible] ratio, which is reported below 23.7% is well above the current capital target. However, and this is even more important, it is by 75 basis points above the expected capital target volume around at year-end. Is that our capital position is largely enough or provide sufficient cushion against the requirements to continue growing 80% of our consolidated net profit for future dividends. And on Page 45, we complete this section with the consolidated view. Our are operate capital on consolidated level stood at GBP 33.8 billion at the end of the second quarter. And since the incremental Tier 2 instrument is predominantly utilized on the individual level to cover the ML requirement. We decided to show excess capital on Tier 1 capital level as it better represents our dividend capacity. From the chart in the bottom on the right, which is the excess capital development, you can see dividend accrual of GBP 2 billion, which represents 80% of consolidated net profit. And besides that, we maintain excess capital of GBP 3.3 million. This amounts together of GBP 5.3 billion represents our capital for future dividends and growth. This also is we combine it to -- if divided by number of shares, it is 10.5 rotation. With that, I will hand over to Mr. Spurny for final remarks and an update on guidance.

Very well. On the basis of the results we elected to upgrade the guidance -- we upgrade not only in 2023, but we have also based on the current knowledge adjusted to following the following 4 years. So this year, the minimum target that we would like to deliver concerns GBP 4.7 billion. This is on the basis of adjusting some of the metrics, namely the cost of risk, as we believe that the cost of risk will come in in the range of 15 to 35 basis points provided that we do not have some systemic or isolative event that would -- that would change that. If you look at the 5-year guidance on the following page, we also illustrate the 5-year guidance against the previous 5-year result. In the period between 2018 and '20, the -- what was it, '22, the bank made GBP 20 billion. This includes the COVID year, when we made significant provisioning charge against the potentially anticipatory charges with respect to COVID. So one could argue that it's not fully comparable, but these are the actual numbers. The minimum 5-year cumulative target that we would like to deliver and I stress towards minimum is GBP 25.4 billion. So this constitutes a relative growth in cumulative earnings of 27%, and it also includes the 3 years when the windfall/wall tax will be levied upon the banking sector. Now if we turn the page, we also disclosed the key assumptions under the guidance. And on the following page, we also disclosed the minimum threshold with respect to performing loan portfolio and deposits. Here, I would like to comment that we typically provide the guidance with a view that we would like to over perform it on an annual basis by a certain margin, hence, there is a degree of conservatism on the lending side. I would say we are being super conservative nonetheless. This guidance is framed in a very aspirational plan how to increase market share on the deposit gathering in the Czech Republic. So with that in mind, our perspective is roughly the following. We have made GBP 2.5 billion during the first 2 quarters of the year. We have accrued about GBP 2 billion for shareholder distribution, the shareholder distribution is unimpeded by the a requirement as we have successfully removed that obstacle do play spend of GBP 2.8 billion of eligible in 2 months. So this pertains to the larger picture, if you look at the micro components of the larger picture, we have a positive trend on NII, which has returned to growth, and we expect to continue in that performance. We likewise expect to continue the performance at the level of net fee commissioning. We are confident that the cost base of the bank is under control, meeting the employment target and prospectively seeking to implement additional cost reduction charges this disclosure of 7 branch units, which will impact the results of 2024, and we are also consolidating headquarter space subject to successful execution. This should also have a marginal positive impact on the cost base. We are confident with respect to the best metrics of the risk performance, nonetheless, if the stagnation of the economy continues for a longer period of time, we believe that the cost of risk picture might actually deteriorate. Nonetheless, the guidance cost GBP 400 million additional profit for the current year. Thank you for your patience, and we will answer your questions as best as we can. Thank you very much.

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

My first question would be just around the tax rate. I see that you're looking for the tax rate -- effective tax rate to go up by 50 basis points. But I think the statutory rates going up by 200 basis points. So can you just describe why you think the effective tax rate will stay so much lower than the statutory. And also, do you see any risks on that front given the fiscal position. And then on my second question would just be about your loan growth aspirations for next year, I think that you outlined on Slide 50. So it seems like you're expecting a contraction in gross loans, if you could just unpack what's driving that? What's behind that?

Right. I think if you look at the statutory rate and our projection, this is simply a function of increased size of the investment securities where we obtain benefit of income tax exempt interest income, which we received from those securities. So this mitigates the tax increase. Simon, on loan growth next year, frankly, if you look at the guidance, you don't expect any as we want to see how the environment will pan out or turn out in the next 6 months. But broadly, on the lending policy of the bank, we adjust the thresholds for minimum living expenditures. We adjusted some other prudential aspects to our underwriting model on the retail. And secondly, I think we are exercising caution on -- even on the SME side. So in the current environment where we believe the jury is still out how things will behave in the second half of the year and first quarter of next year. For the moment, we are keeping the plan flat on the size of the lending base. This might change. And if it changes, we will accordingly communicate the change in policy.

Very clear. Actually, just one more, if I could. The increase in insurance commission was pretty impressive, up 60% year-on-year in the second quarter. Can you also just elaborate on that? And is that sustainable growth? Do you expect continuation of high double digits?

I think the growth will take it off. If you look at next year, it will certainly be lower than this year. Throughout the closing stage of 2022 put incredible pressure and my colleagues can testify if you wished led to improve distribution of pension funds, insurance has increased more than 200% year-on-year or close to 200% year-on-year. We've also, like I said, to renegotiate the terms and conditions amongst our insurance partners, and we are successful in that. to the abatement of some market participants. And we also would implement the significant changes into incentive schemes of the bank. So the incentive schemes are now dependent about 40%, if I simplify on lending and 60% on fees and deposit volumes. Whilst if you look at 2 years ago, everything was geared about 80% towards performance on lending. So we have entirely changed the tank. And next year, I expect that this will taper off because we to, it took some time for our people to adjust to this change. And like with everything else, sometimes you mind the potential new harvest or aging truth and then it will become a bit of a steeper going up the hill. So I don't want to commit to the same growth on NFC. This growth is part and parcel of our efforts to adjust the business model to the current conditions, and we will, as always, remain very flexible to whatever happens in the market.

And sorry, just on the insurance, what's the key product that you've been selling? Is it mostly on...

We sell credit products. We sell identity protection products. This category is broadly stable. The main advance we made is in pension fund distribution and in life insurance distribution.

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

Firstly, I would like to ask you on your expectations for windfall taxes. How does how do these expectations, your projections for the year-end have they changed with your new guidance with the upgrade and then guidance in net profit? That would be my first question. The second question is on NII. Now your projections that you had for the quarters Q2 for 2023. You left Q3 and 4 unchanged despite the fairly significant beats now in Q2. Does that mean that you view the or the performance now in Q2 as a one-off? I know I understand that you said that mostly came from hedging derivatives and a small one-off, but I'd like to have your view on what you think has changed for the coming quarters in underlying trends? Or if it's all according to expectation. And lastly, on risk costs and the management overlay that now stands at GBP 931 million at the end of the first half. If the risk environment stays the same for the next 2 quarters, Q3 and 4, what do you expect to do with this management overlay? Do you reallocate your roll forward? Or do you expect -- would you expect to release? I understand that it is very uncertain what -- how the environment will develop in the next 2 quarters, but I'd like to have your view on this.

Thomas, on the NII and the forecast that we provided, I would start with saying that I think we are the only bank in the Central Eastern European perimeter, that provides forecasts like SANSU, clearly both analysts and investors. We elected not to changes in order to have some space for overperformance. It's as clear as that what has fundamentally changed is that we added moral subordinated deposits, which carries 7% interest rate. So this is a higher expense. So this one is negative. Second one, which is positive, is that we are repricing the portfolio year-to-date and midyear, we underwrote we replaced about 21 billion of volume in our loan portfolio subject to UA. This is visible from the pages that were presented by Jan Novotny, so this one is a positive. Third one, we have some volume that originated in the second quarter, which will actually produce results only in the third quarter because that's the nature -- that's the nature of that. So we feel confident with respect to the forecast we provided. And frankly, we are not very attributed to provide more than that because we take that we have to keep some margin of other in order to manage the performance according to your expectations, your expectation in Príbor. With respect to management overlie, we are back testing these Currently, the policy is to hold the position as we face uncertainty. Whether we do something with it, I would say the probability is low. We are looking at the year from the prism of the guidance that we've provided and the guidance is very clear on the range of cost of risk. And from the guidance it is clear that we will not --under the current circumstances, which could change. But under the current circumstances, we have no plan to touch it. With that in mind, the overnight are guy back tested, and the back tests are typically done in fourth quarter and they are done in conjunction with the external iterate. So if anything is done, it will be subject to the back test. And obviously, we cannot comment on that until we do the back steps. So I would leave it at that if you don't mind.

And then maybe your comments on the windfall tax.

Under windfall tax will be marginal at best.

The next question on the line comes from Mehmet Sevim from JPMorgan.

I'll just have a couple of follow-up questions on your deposit base, please. So first of all, as you're getting close to your deposit volume target for the full year, how are you thinking about your ongoing campaign, particularly in terms of deposit pricing? And assuming no change in the policy rates, what would you expect core deposit funding costs to peak? And how would it continue from that point onwards. And maybe on the deposit growth guidance beyond 2023, it still implies some very strong growth of 5% CAGR through 2027. Does this mainly reflect your expectations for a rebound in the market in general? Or do you intend to continue to grow faster than the market as you've been doing so far? And if so, can I ask quite so particularly in the context of subdued loan growth expectations?

As long as we can raise deposits at marginal cost, this is favorable against the short-term rates, we will continue to do that. So if you look at the turnaround in the NII, it's driven by largely by the liquidity position of the bank. So this is part and parcel of transformation of the business model to adjust to the highest interest rate environment. And the longest high interest rate environment prevails, we will seek to continue with that strategy apart from the fact that it supports the rare MONETA franchise, the customers see us as one of the fair banks. And this is, let's say, proven by the fact that tonight, we will receive a very important public awards, which is subject to bolting by public, not by some expert panels. And obviously, noise competitors, which is a derivative benefit towards the redoing. So we will continue with that. We expect the year-end cost of funding at 3.6%. So the full year number should be at 3.5%, we believe, and this is margin of conservatism. It is obvious that if we -- if we are not able to continue to doing this at a marginal profit, which doesn't consume capital. We will offer that policy. So you can say short term, unsustainable. We believe it's sustainable until the first quarter of next year. And yes, we are close to the target. However, short of it by about GBP 20 billion and has today is additional GBP 20 million in order to meet the target. So I wouldn't be too optimistic to say we are at it. And we don't know what the large banks are going to do because based on my discussions, the journalists from writers and other [indiscernible], we are significantly annoying the competition with the approach as we have the distribution power as opposed to small banks, which are paying at higher rates than we are. But this is our tactical approach to the current market conditions, and it has been over towards last 9 months. And on the -- just maybe a comment on the asset side, we expect to reprice this year until the end of the year, about anywhere between GBP 20 billion to GBP 25 billion. So it's not only that we are increasing the cost of deposits, but we will actually improve the yield on the portfolio quite substantially until the end of the year.

Our next question is a written question submitted from [ Ted Karen Nagash ] of White Oak Capital Management. Question is, how are the CZK 2.8 billion subordinated deposits in June 2023 different from additional Tier 1 securities, who are these investors? And what are the salient differences between these deposits at CET1 bonds.

Jan Fricek will cover will cover the question.

First of all, the separated deposit is classified as a Tier 2 instrument from the Sand Bank of regulation point of view, and this is superior to the CET1, and it's subordinated to the [indiscernible] instrument, which we also have on the [indiscernible]. The currency do not have CET1 bonds. So from that perspective, this is the subordination potential is irrelevant. And the customer or investors' point of view, there's both purely retail product. So we distribute the product and one of the retail customers. The operated deposit is for 5 years, and it provides a fixed interest rate coupon at 7%. And it's price advantage to -- is price advantageously again the estimated spread over the swap rate, which we obtained from several investment banks. We did do some sort of distribution costs. And also to achieve the lower distribution cost to the distribution through our internal distribution capacity and we avoid paying range price to an external distribution.

[Operator Instructions] We currently have no further questions, so I'll hand back to Mr. Tomas Spurny to for closing remarks.

Thank you very much for your questions. Thank you very much for your patience with us. The remark is very simple. We have delivered 2.5, the minimum target is 4.7. This constitutes GBP 400 million improvement over would be estimated in February 2023. We hope to -- we actually test to deliberate and hope to deliver perhaps smart. We look forward to next events that we will have subjective end of third quarter. Thank you very much, and all the best to all of you.

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