Nova Ljubljanska Banka d.d. (NLBR) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to today's NLB's call regarding COVID-19 situation. My name is Jake, and I'll be the operator on today's call. [Operator Instructions] Now I would like to hand over to today's host, Blaž Brodnjak, CEO, to begin. Blaž, please go ahead.

Thank you very much. Welcome, everyone, from the head office of NLB. We are mentally very strong and in this peculiar situation, unprecedented. But in the first -- this couple of weeks -- first couple of weeks, there was a sequence of steps, we, of course, needed to take. And the first one was to immediately stabilize the operating mode of the bank. So as we speak, 70% of the people are actually working remotely. We have significantly shortened the working time of branches. We have been opening less branches, approximately half of them. We have been introducing protective means and measures so that the people feel safe. The Managing Board has been acting actually in dual mode, meaning 2 remote, 2 in the office. And we have been rotating on a biweekly basis as it seems. And the same is true for the entire managerial level. So all B minus ones are actually rotating with their deputies and B2s with normal authorities. When it comes to all critical functions, they are all running well and in a normal way. So cash supplies to the society, we are mainly managing 70% of the country's cash is understood. The payments are running smoothly. The entire payment team practically working from remote locations. And the same is true for other functions. So contact center is currently operating from 2.5, we are working on the third location, so teams are split. Half of the team that is not working in branches is actually a reserve capacity. So that in case of any fallouts, we can bring immediately team after we disinfect premises. And this is true both for the vault operations, contact center operations as well as the branch network. We have had the first infections in the bank, 3, namely, but this has been immediately contained following the protocols, so undisclosed operations from that point of view. We have been frequently and continuously online with our subsidiaries as well in other countries. Situation has been very similar in a sense that, of course, it has been escalating in a sense of, of course, new identified infections. And the first, of course, casualties, but the situation in the health system so far has been contained. So we are no near to Italian or Spanish scenarios so far. The curve has been relatively flattened since, relatively, quickly. Significant quarantine measures were introduced both in Slovenia and in the countries, including even curfews and significant penalties for eventual offenses of this regime. So what we are now waiting for is actually for the phenomenon to fade out, to go to normalize, so the epidemic is still, of course, in the expansion stage. We have still a significant newly identified infections. But in terms of the -- what health system is managing as an emergency treatment of patients, it has been still contained and it has been still managed. Clearly, the issue has been, and it's not a specific phenomenon for Slovenia and the region, of course, how we can get to protective means. These infection materials are less of a problem, but then, of course, masks, especially for the health system are something that, of course, the government is trying to get ASAP and the same is true for the whole region. But there generally, otherwise, the public transport is canceled, practically, no -- there is no public life, more or less, just critical functions in place. And we expect that in a matter of couple of weeks, the situation should significantly improve. We have, of course, clearly not yet seen the peak of the phenomenon, but it seems to be contained. We have in Slovenia, approximately 1.1x factor of new infections, so 10% a day, which is not that critical. And it seems that -- to be at this level between 6% and 11% for a week almost. So it seems that we have been successfully flattening the curve as much as possible. And the people seem to be disciplined. So citizens seem to be disciplined. And the same I see, after just holding a call with subsidiary banks, it's true for other countries as well. So when it comes to the operational mode of the bank, I can confidently state we are well off. The bank is providing all critical services to clients, and this is not only limited to transactional universe, so not only payments and assistance in terms of online support, but also, of course, still assuming normal activities, of course, normal within given circumstances when it comes to offering the entire portfolio of services. It is clear that in this turmoil in the financial markets, of course, the distribution of asset management services has been, of course, not at the normal levels and of course, the -- also lending activity has been, of course, at this point of time, significantly reduced. On the other hand, what we are now actually waiting for as the next stage is to regulate -- clearly regulate the lending activity and of course, the status of all our borrowers. There will be a substantial number of borrowers in a distress since companies have been shutting down productions and there has been clearly broken supply chain. So in this respect, we are trying to understand the situation as much as possible. We have provided a short-term working capital lifeline for the facilities, more or less, for the ones that are still strong and have just a temporary gap. On the other hand, of course, we are working on portfolio solutions when it comes to retail clients as well with some automatic extensions of overdrafts and, of course, we are also trying to understand, as we speak, the regime that has been introduced from multiple countries. Of course, unfortunately, we are not following all the same patterns, so we need to understand the specifics of individual countries, but they are reacting. So -- and we hear the vocabulary from whatever it takes to, of course, a bit different ones from smaller countries that cannot afford necessarily and -- the packages of such a nature and are not part of the European monetary zone. But on the other hand, when you see Slovenian government, it is reacting, now, very decisively. Of course, the devil always lies in detail, and we still need to understand the regime to the larger and better extent. But we believe that together, we will be able to overcome this situation in a reasonable way. Of course depending on the time it is going to take. So if in the matter of 4 to 6 weeks, we contain the situation and some flow of goods is resumed and the companies can resume certain production, the pain would be lower. If this is to take 3 or even more months, then, of course, if you look at the publicly announced projections of some macroeconomic offices and research, we will be looking potentially at a more significant downturn comparable to 2008 -- 2009 and so on. So what I want to stress out is that the management board is fully on the case -- on top of the case, whatever is within our influence. On the other hand, we are, of course, talking to the government and the regulators now intensively, to come to a regime that is going to enable us to release liquidity constraints for companies with certain grace periods moratoriums that are not going to eat clearly into the forbearance restructuring consumption like -- capital-consumption like treatment. And EBA just published certain guidelines in this respect, to releasing certain pressure here. We are still waiting -- and Bank of Slovenia also provided some of the some of the guidelines here. So we are still clarifying final details. We are now trying to achieve that intervention act that were put in place or have been pending in the countries that are operationally manageable as much as possible. So one side is clearly how these deferred payments are treated in terms of regulatory regime. The other one is how we can operationally tackle the whole thing, right? So when we are expecting then bigger number of retail clients coming in, asking for grace periods, being put on the wait within the company. So even then losing employment. The new schemes of protection from the government seem to be addressing this significantly. On the other hand, of course, operational burden is to be handled. And what -- there are 2 elements. One is clearly the operational management capacity because we have reduced working hours and on the other hand, capacities in the branches. The other aspect is clearly the health aspect and self-protection -- self-protective behavior because, of course, we want to keep people, as much as possible, out of the branches. And by that, we are working on the regime that these would be able to be processed remotely. So that there is an online request and then there is online processing on the request. And on an automatic treatment of this -- with this, that is on a portfolio level. And when it comes to corporates, we are anyhow, more or less, communicating online these days, and this is working out well. So the big picture message is that the operationally, the entire group is working reasonably. It is not -- we overstretch to say that everything is normal, it is not, of course, we are learning on the go. Know how to improve certain things further, how to improve the bandwidth and the other elements of the remote work, how to actually be able to service clients from all the entire service portfolio. But all the critical functions are running smoothly without any interruptions. We didn't have any real hiccups in the last 10 days since the quarantine was, more or less, introduced, while stopping schools. And when it comes to the, of course, managing the credit risk, Andreas will be able to give you more information and when it comes to, of course, understanding some implications of the financials and capital, Archibald will provide further thoughts. So maybe I pass the word now to Andreas to guide you through some of the measures within the risk stream, and of course, how we are approaching some client relationships here, but mainly, of course, the -- some of the first thoughts of the credit risk. Andreas, if you can take over, please?

Yes, Blaž. Thank you. That came also from my side. Yes, I mean, in that situation, of course, one pretty part is that early warning indicators, like you would usually see it, don't really fly because for such situation, they're a little bit too slow. What, of course, we are doing is we are in very intensive contact with our clients. Because, honestly speaking, that's at the moment an important way to get information. And obviously here we see here are a wide range of feedbacks. But overall, if you look it from a portfolio point of view, I mean, I would split it maybe in 2 parts, so one is the corporate part and then retail. So from the corporate part, where we are, to a good extent, as funny as that may sound, profiting in -- from the restrictions we had from European Commission in the last couple of years because a few of the most impacted industries were restricted in the last years. So that results now in that, that are the most impacted industries, we are clearly below 10% with our exposures or share of the total corporate exposure. And on top of that, also the -- what we define for the time being, is medium impacted industries. So for example, here, a big one is automotive, especially in Slovenia. But also here, the total exposure is around 20%, a little bit below 20% compared to the entire portfolio. So that is, I think, compared to what we could have, if you would have been a little bit more aggressive in the last couple of years, I think, already you are a good news. And in -- obviously, not very surprisingly, in the corporate area we see at the moment, rise in usage of revolvers and overdrafts. That's not a metric increase if you see percentage-wise, but of course, we clearly see that. And on the other side, obviously, we see requests in all of the countries for restructuring. And that's not the classical restructuring, but that's more referring to what most of the countries are doing, that they are allowing for certain moratoriums. These moratoriums, which in some countries are provided for corporate and in some countries for corporate and retail, from a simple regulatory logic or law stipulations, this is all set up a little bit hasty and not unique. So it's different from country to country. This doesn't make it easier, of course, to get here a structure into that. But the basic idea is that for these measures, clients would not be flagged as forgone or as default even. So that, obviously, is helping in the entire logic. What we're doing independently for that -- for the better client base or not highest risk ones and also the ones, obviously, under [indiscernible] ratings, that we are offering additional liquidity support. So up to 1-month turnover of the client as a liquidity line, if needed. And obviously on the smaller corporate clients a more SME and micro, we were already pretty much drafting some kind of moratoriums, what we would be ready to give. This was now largely -- in the meanwhile, to be honest, overlapped by government and regulatory actions. So I think here, we will now, in reality, use the frame, which is anyhow now foreseen from the lawmaker side or from the regulators. And yes, I mean, what we have to expect, of course, in the corporate field, so primarily from the high risky industries is increased cost of risk and increased default rates. I mean, that's very clear. For the time being, it's a little too early here. We need to talk about concrete figures. But what is also clear is that from the first impact analysis like we did it, it all seems manageable, but obviously, it will be also very, very visible. So it's not just behind the comma. But honestly speaking, compared to where we could have been, we've been more aggressive on the corporate side. I think we are still here rather okay-ish, and that's in this situation -- well, for the time being, I guess, rather good news. Retail -- on the retail side, obviously, we also see many clients contacting us. But this is, for the time being, if you ask me much more on the one side fears, so what is happening if I lose my job? What is happening if I get less salary? And also this part, of course, is now overlapped with the moratoriums, which are coming through regulators and legal provisions. And in reality, if you ask me here, we don't see yet any bigger imminent problems yet, except, of course, many people asking. And in reality, if you see the retail portfolio, what we are seeing at the moment is less and less usage of revolving lines on the current accounts. And what we see is considerably less usage of credit cards. So people simply stay at home or work from home. And obviously, for the time being, simply spend considerably less money. So here, we see, in reality, of course, a lot of clients being afraid what might come. But on the other side, from the portfolio quality, we basically see 0 impact and rather reduction of used lines. Of course, what is true both for corporate and for retail, is that looking forward, we will be, for sure, extra cautious, especially in new business, but definitely, we will not stop business, that's for sure, which for sure will not be a clever idea. But we will be extra careful. And anyhow, what you can also expect is also a considerably reduced demand for new loans for the time being. I think, for the corporate side, as soon as things start getting more normal, we will see how that splits. On the retail side, I would expect that we see for sure, I mean, at the moment obviously, considerably reduced volumes and then subsequently, I think that the people for a while will be more careful. But on the other side, depending on which part of the client base we talk, there might be also some increased leads, and we might still have solid clients here. So these things, for the time being, we have to take a little bit how they are coming because what -- of course, no one knows yet exactly on how long the government measures will take. Simply on restriction of movements, on restriction of opening of businesses. And that will, in that respect, for sure, also have a certain impact this or that way. I would say for the very beginning, that would be it from my side. Of course, then later, I'm happy for additional questions. With this, I guess, I would hand over to Archibald.

Thank you, Andreas. It's Archibald Kremser speaking, the CFO. And I will very briefly elaborate on where we stand on capital and capital measures. And I'll leave the floor for questions then. So on capital front, I mean, I would just reiterate, we run a very strong balance sheet. We have been lucky enough, privileged enough for both. We have done most of our capital agenda already pre-crisis. So as you know, we have issued in excess of EUR 280 million in Tier 2 capital, which is, of course, now a very -- well, not just caution, but of course, also the necessity to absorb KB. As, of course, all of you are aware, we have signed the SBA in relation to KB and so in this sense, we are prepared not just for KB, but also for stress scenarios, should they occur as indicated by Andreas. And what we, of course, hold back for the time being is the continuation of the capital measures on AT1. We are, of course, closely following market conditions, but clearly, at the moment, the market is not open for riskier issuance. If and when market conditions resume, we would, of course, pursue such a transaction. We have done our homework with regards to any such issuance and are prepared and ready to go, but of course, this is clearly subject to market conditions. In this sense, I would just reiterate, we run a strong balance sheet. Liquidity, obviously, is no issue whatsoever. And also given that Tier 2 program is completed, we are also done, as I said before, with most of our capital agenda. I think what was helpful from ECB's point of view, is that now the so-called Pillar 2 requirement is now also accommodating for the capital structure. So it doesn't need to be CET1 only, but can be a composite of Tier 1 and Tier 2. So in this sense, that was a welcome action and this, of course, helpful to some extent. And by that, I would basically conclude the intro and open the floor for questions as we are sure there are many.

[Operator Instructions] The first question comes from Jovan Sikimic of RCB.

Hello, good afternoon. Can you hear me?

Yes.

Thank you very much. Thanks a lot for your call. I think it's quite helpful. So I would have a couple of questions. I mean, you mentioned Komercijalna, I mean, now we see the banking multiples going to which direction. I mean, is it any way or anyhow possibility for you to renegotiate the transactional terms? Because I think the purchase price was 0.77 book value. So it's almost, I don't know, almost double of current your multiples. And the second -- I mean, you mentioned -- thank you for this, I think the risk industry's exposure of 10 -- below 10% in total corporate exposure. Can you just specify which sector do you include? And whether wholesale and retail trade is also in it.

Thank you. Maybe I would take the one on KB. And I mean, you will appreciate that this was a state-sponsored transaction, so in other words, this is followed, processed and even legal framework as per the Serbian country, so it's not that you go just back to the negotiation table. In the sense, there is no immediate ability to just renegotiate. Fundamentally speaking, we think this transaction still has strong merits that the fundamental question hasn't changed, and the -- in our view, the fundamental outlook and prospects of the region and for the Serbia, in particular, haven't changed. KB is still a very strong franchise in the market. So we, of course -- and the -- that market multiples have changed. I think the value creates some potential for us and how we see the merits of the transaction have not necessarily changed. And I think market valuations after I think the first immediate shock has receded, will also would be my assumption, get back to some kind of normal levels. We've seen those movements yesterday in this regard. So I wouldn't take the bottom of the market after such a huge shock when basically everybody went out of every risk to be taken as a benchmark. So by that, I would pass on to Andreas to address the second part of the question.

Yes. So for the second part of the question, major higher-risk industries, as we see it right now, has to do with accommodation. So meaning hotels, restaurants and so on and so on. And on the other side, transportation. What -- at the moment -- so in this split, it's not in the high risk, but in the medium risk category is wholesale and retail trade. If you would move wholesale and retail trade to this category. So if you would not see it as medium but high-risk, then we are in these high-risk categories, slightly above 10%. If you don't put it in there, like we're doing it right now, we are clearly below 10% of overall corporate exposure.

So the next question comes from Mikhail Shlemov of VTB Capital.

Yes. Good evening, gentlemen. Thank you very much for hosting your call. My question is actually on the financial impact on the restructuring and renegotiating of the loans, which you are most likely to go through during the Q1 and the Q2. And specifically, perhaps you could elaborate how it's going to be the accounting treatment of renegotiated loans in terms of the general provisions, which you would be creating against those loans, especially in the IFRS 9 framework. And second thing, if you so far have been negotiating with some corporates about the term -- about some terms about the repayment holidays, perhaps you can provide us with some idea how long this credit holidays could be at least in Slovenia?

I will just answer regarding the holiday, and then I will pass the word to Andreas to give you more insight into the booking elements of it. In principle, the Slovenian government has implemented the Intervention Act, which is actually allowing up to 12-month grace period. It's actually acquiring 12-month grace period. And this is something that is then an automatic right for someone that's eligible according to the criteria from this act. Otherwise, we have been talking mainly about 6 month graces with the companies and comparable then -- also then with retail. But I would pass the word to Andreas to give you more flesh regarding the regulatory and accounting treatment.

So I mean, first of all, let's not mix topics. I mean, what would happen with such moratoriums, that's not a restructuring. So basically, that's a systemic measure. Of course, it's also a good question. We have also restructuring clients, and these are, of course, on average, weaker clients. But the portfolio here in the meanwhile is rather limited. So that's -- and here, of course, you can assume from the tenants a bigger impact then for regular clients. But in the figures I mentioned before, these are total figures, these are also including already the restructuring part. Again, the current restructuring in the bank is relatively small. We will see what is coming. Concerning the moratoriums, again, I mean, the regulators at the moment, see this rather as a systemic risk. And so that means we will not see an immediate impact. But of course, subsequently, then step-by-step, we have to analyze, as timely as possible, of course, all of the clients, which seem to have troubles and some clients who will get a moratorium may after that not have any troubles and others may have big troubles. And of course, we are trying to get a grip on that like in our regular course of business as early as possible for every single client. And of course, what I'm expecting is that we simply see this with a variety of clients, that simply the business logic which they were pursuing so far is under the new circumstances not working out anymore. And some of them will go over the cliff. At the moment, I said it before, it's still a little bit early, really, here to talk concrete figures. What we are trying to do at the moment is to cluster them. That's why I gave you before these risk categories and their percentages because obviously the higher the category, the bigger percentage of clients we expect to fail at the end. And obviously, this will then have the impact both on the NPL and on the provisioning level. But as I said, I mean, for the big, big majority of clients where now these moratoriums are applying, especially if they are going according to a ideologic or regulatory logic, there's not an immediate impact foreseen from that, but the impact is more coming then from the following period when we really understand how much the clients business is impacted and whether he will survive in the current form or not.

[Operator Instructions] Our next question today comes from Dino Dürrigl of InterCapital.

In Croatia, the Central Bank has required banks to retain 100% of their 2019 earnings. Do you think that we might witness the same scenario or a similar scenario in Slovenia? And if not, could you give a bit more comment on the dividend policy? Are we going to see a revision of the dividend policy? Or are you still maintaining the 70% payout ratio as the medium target?

I would just give... Maybe, Dürrigl, just short information from my side regarding the treatment of regulators and Archibald will be talking about, of course, the position of the bank and dividend policies. So we see various practices from various countries. In Slovenia, there has been no such move yet. We see such tensions in Serbia, and we see other regulators discouraging dividend payouts. And this is still something that is pending, and we need to understand that. And Archibald please, more details from your side?

Yes, exactly. I mean, I think it's fair to say regulators in the region have reacted with some caution, some wording a bit stronger than others. But this is a shock at such a level and significance, I think, a normal regulatory reaction. We haven't heard actually anything like that from ECB. And ECB actually has been giving supportive comments in regards of their, let's say, both IFRS 9 logic and also in regards to test their willingness to observe banks eating a little bit into their buffers while supporting the economy in such a crucial period of time. And so I think, of course, ECB wouldn't like such a thing to happen while paying out dividends. So that's also clear. And in this sense, I mean, obviously, we have now a twofold challenge. One is absorbing this crisis. And the second thing is absorbing KB. And we have to be very, very careful in declaring any dividend. We have said specifically that a dividend for '19 will be synchronized with the ECB approval process of KB. Now obviously, this process runs more tension as also clearly the market at the moment for AT1 is closed. And we have always communicated that the '19 dividend is pretty much subject to our ability to issue such an instrument. Now in regards to our plans and ambitions and medium-term policy, nothing has changed. But of course, we will have to get through that period in order to resume this policy. So for '19, I think our wording was quite clear and specific. And then we'll have to take it from there with how big the fallout of COVID eventually is going to be, and there is still a wide range of outcomes as Andreas, I think, has indicated. So in this sense, this is still, of course, a pending conversation.

The next question comes from Alex Boulougouris from Wood and Co.

Hello, a question on Komercijalna first, regarding the time line. Initially, you mentioned, I believe, that this should be closed September, October, and you will announce the dividend then. This time line has changed, I guess? And when would you expect regulatory approval? Because I understand the acquisition is subject, as you have said, to the approval of ECB and the Bank of Slovenia. That is my first question. My second question is related to the measures that have been taken by Slovenia. You mentioned the Intervention Act, if you could clarify this 12-month grace period refers to the retail and to -- or to corporates as well? And is it only for retail that has been affected by the closures, exactly? If you could provide more color, that would be great. And also one last question regarding the ECB announcements on capital. Just to clarify, you mentioned that there will be a relief in the countercyclical buffer and -- but your total capital will not be a bad effect. That is correct, my understanding. Or it's only that you are able to use Tier 2 -- part of this Pillar 2 requirement can be used as Tier 2? If you could clarify that as well that would be useful.

Okay. I'll take the capital question and pass then on to Blaž on the Intervention Act. So yes, you're right. The overall capital requirement is not affected. It's just that there is no more room for Tier 2. But this is a published way to treat things, and we are, of course, no different than any other ECB regulated bank. On the KB process, we are in advanced stages of the application, to be submitted to ECB as a first draft. We are in close conversation and contact with the JSE team, we have met them on several occasions on the matter. So the closing process, we've always said, is complex. And we have to run not just regulatory but also antitrust approvals. We have at least 2 major regulators to talk to. It's not just ECBs, also the regulator in Serbia. And then we have 2 smaller subsidiaries of KB also to be approved by their respective regulators. That's Montenegro and Bosnia. So in this sense, to be fair, the September seems probably still ambitiously realistic, I would say, but it's hard to tell because, obviously, when we previously would have said, we aim for September, that was pre-COVID. Now I guess, also ECB is a bit busier with other topics. But of course, we will proceed as suggested with the highest possible energy and efforts. And in this sense, we will do our best. But obviously, it's not only in our hands.

And when it comes to the extraordinary Intervention Act, clearly, this is applying to both corporate and retail clients. And there are some, of course, eligibility criteria. We are still trying to understand it into the last detail, but in principle, all clients could apply. But would have to fulfill certain criteria. So for large corporates, the company would have to have clear managerial statements that they are under threat of that and that. And when it comes to retail, there is also no automatic right for just about everyone. So this -- there are details that needs to fully clarified and will be clarified in a couple of coming days. But in general, it is very important that this is then within the regulatory regime treated as not capital consuming excessively on one side. And on the other side, that we operatively can manage, and we are working on solutions that we will be able to do that. So it is both corporate and retail. But in the next coming days, we will have all the details. I'm sure we will manage it operatively.

And it's for both interest and capital. So basically, they do not pay any installment for that period of time. Is that correct?

Yes, they do not pay a capital and interest for the time of the grace, yes.

Also we...

What about interest income on your P&L? I mean...

We will be charging accounting for interest, but we would not be, of course, collecting it within the grace period, but it would be accounted for.

Accrued interest, okay.

So these are cash relief matters. That's I think important to establish.

Okay. And then the clients will pay all of this in a lump sum later or these loans get deferred -- get a restructuring maturity for one year? So if you have a mortgage, it's mature for one more year or once you have loan...

Yes. There is a 1-year extension. Maybe the annuity burden should remain the same, so there is a 1-year extension of the whole thing.

[Operator Instructions] And the next question comes from Rob Skepper of Ashmore.

Yes, I just wanted to ask in terms of, like, any fiscal measures, that might be coming out of the Slovenian government, have you heard anything?

Yes. They have been announced, quite some of them. And they are going in various dimensions. So the first Act was actually Intervention Act on the grace period on the financial obligations in the banking system and towards the tax office. And now there are other packages being put in place, and they are in the amount now of EUR 2 billion. So combined, I think is so far, EUR 3 billion, whereby the government communicated that they will do whatever it takes. So I would expect more buckets to be available later on, especially what we are still waiting for is a guarantee scheme to guarantee for the fresh money and this is not yet in place. So the financing scheme through the Slovenian Development Bank, SID Bank, is just partially in place, and it is couple of hundred million and it's not enough. Others are mainly now talking about, of course, tax releases, credit holiday of payments and on the other hand, certain direct subsidies to people that will get unemployed and the people that are affected directly by the state measures from banning businesses like restaurants, businesses and some self-employed people and so on. So they will be getting some minimum compensation in -- from the next -- from the April on, I believe. The same is true for some -- the most endangered pensions, retired people with the lowest pensions. So there is some direct cash, if you wish, a helicopter money on funds of some kind. But what we are still waiting for is then the fresh money, the liquidity boost for the companies. This is yet to come. It has been announced, but it has not yet been clear to what extent it's going to apply.

Okay, great. But the -- when it comes to the moratoriums on the bank loans, that's something that you guys have to shoulder, right?

Yes. Well, shoulder to the extent that, yes, it's not burning too much capital. And of course, yes, that we are then deferring payment that we believe are going to come, right.

Yes. Okay. And then...

So it's only in terms of liquidity burden. I mean, that's important to establish. Our reading is that this is a liquidity burden, not an interest income burden.

Yes, except, I guess, it's a bit of a nightmare on the risk side of things to understand like who's really distressed and who's not, right? Because...

That's right. Yes. So yes, I mean, that's obviously the trick because risk management systems are not built primarily on the situation that the client doesn't pay one year. And during this period, you have to understand how well he's doing. That's a certain challenge. We'll need more intensive communication with the clients. We'll need more information gathering. I think it's not an impossible task, but of course, it's a task which will have a higher error rate than in a normal situation. That's clear as well.

But there are -- the law of the Intervention Act is regulating obligatory monthly reporting of clients on the status. So this is something, at least that we will have something from clients. It's going to be enormous operational burden, clearly, to manage this on a monthly basis. But at least you have a way out, if they deceive you, if they provide wrong information and so on. And you will be able to actually somehow check.

Yes, got it. Okay. Great. Good stuff. And then I just wanted to understand on KB, so just to make sure I've got it clear in my mind. So you're saying, because of the way the process kind of happened in the stage that it got to, the valuation has all been agreed and you're obviously going down the path of getting regulatory approval? I think, obviously, it's very -- everything has kind of changed, right? In terms of the environment. And obviously, the challenges that everyone is going through and you guys are going through trying to manage the bank now. It seems pretty unrealistic that you should continue with this process on the old time line. And you should at least look to see what the lay of the land is like kind of post COVID world rather than kind of moving ahead for now. Is there kind of any mechanism? Is there any way for you to kind of put the brakes on in that manner?

Well, clearly, we -- I mean, we signed an agreement, and of course, we will respect the agreement. The agreement has some customary provisions as regards to make clauses and things like that, that, of course, will be looked at. But as I said before, the fundamental logic and merit of the transaction are still the same. The fact that the market environment is as we would see temporarily now in shock and distress isn't necessarily changing fundamentally, the outlook of the economic prospects of the region. But of course, we might see -- I mean, everybody is discussing various scenarios of how this crisis plays out. But I think it's still very early stage in us understanding what eventually is going to happen. So clearly, there's a contract in place. Clearly, we have to respect the contract. Clearly, the contract at the time was making a lot of sense. I think it still makes sense. And more importantly, the fundamental merits of the transaction are still in place and still the same. And regarding process, again, we will do our best to complete in a given time frame. And of course, we depend on the regulator to do its part. And as I said before, it's a complex process.

It is as Archibald said, it's early days. I mean, we will be evolving from week-to-week, I guess, how far this goes. I mean, we don't know, frankly, in all the dimensions yet.

[Operator Instructions] The next question today comes from Jovan Sikimic of RCB.

Yes. Thank you. I just have one more. I mean, just -- maybe you told about this at the beginning, about how is the business in, let's say, in the last days in terms of transactionality and going on. Also loan demand must be kind of falling sharply. So if you give some kind of indications where -- how, let's say, the coming weeks might look like in terms of particularly fee income, yes?

Yes. It is, of course, difficult to fully understand that because, of course, in the full quarantine, the visit of branches have been reduced to minimum. On the other hand, we have been, of course, openly encouraging this because we wanted to act in a self-protective way, right? So we were discouraging clients to come to branches, and we were moving them to the digital channels. Well, I'm actually especially happy about is that we managed to achieve that the consumption of cash has been reduced significantly because there were some concerns whether that would be run for cash and so on. But actually, what we see in last weeks is that there is significantly lower demand for cash and also the traffic at the ATMs is lower. Generally, transactional world has, of course, been impaired since there is limited, the room for spending even since, of course, no shops and restaurants and other facilities are open apart from, more or less, food and pharmacies. And in this respect, of course, people do simply spend less and do simply commute around any facilities less. I cannot give you exact numbers yet, but there's significantly less traffic, in all dimensions, which is for the time the most acute period of quarantine. I think, very good because this signals people are disciplined. And it is now then a bit too early to say what will happen once this stabilizes a bit in 2 to 3 weeks. We had a very, very good trend until 20th of March when it came to loan demand. Now of course, everyone is, more or less, paralyzed, waiting, "will I have a job or not have a job in the 2, 3 weeks from now?" And because some companies are being stopping the production. And of course, the shops are closed and all the service industry has practically stopped. So I cannot give you, of course, clear numbers here, but it is significant impact clearly. And what we expect is that once the quarantine is off, it would, somehow, normalize. What is the new normal? No one can say at this point.

Yes, yes, yes. So I think -- I mean, your base case or whatever can be called like it's, I don't know, 1 month lock down and then return to normality. So maybe during coming weeks it will be possible to give some more -- or you'll be able to give some more flair.

That's what I said before.

We live from week-to-week now. Because, more or less, an understanding of where the quarantine works? Where will we peak? And where will we start seeing less infections and less acute spending circumstances and people in intensive care? And this is a matter, if you ask me, of 7 to 10 days because of the quarantine. The results -- future results. If this is not showing results, then we can only shut it down entirely like China did.

Yes, yes, yes. All right.

The difficult question here is not so much how Slovenia will get out of this, but how the rest of the planet will get out of it. And how much that will ultimately then fall back on an economy like Slovenia. I think Slovenia itself is quite well prepared. There is a solid infrastructure. There is a very disciplined population, people are following the laws and the government is quite strict and rigid. So I think Slovenia will manage. The fallout globally is a bit harder to predict and to some extent, it will influence and impact Slovenia. Also, personally, I believe Slovenia itself, even if this situation is prolonged, will probably manage quite okay. Just that if nobody is buying cars globally, the Slovene car suppliers will also are to some extent [ up ].

And frankly, more -- much more afraid about exactly what Archibald said, situation in United States and some -- and maybe Southern America and so on, because Slovenian public health system is very, very strong. It's practically exclusively public health system and everyone is secured. Practically every person in Slovenia is insured for acute tough situations. There is no single individual that's not insured, practically. And if I look at the United States, I can really only pray.

Yes, you're right. And if I may, a last question? If you have refreshed this NII sensitivity on lower rates because I think last one that I have or that we have is from annual report 2018. So maybe if you can just give a number or projection on that?

Well, I mean, there are -- I mean, sensitivities in various ways. I mean, one is how the short-term rate would move. And we don't see much change in short-term rates. So the situation here is pretty much unchanged. Of course, now, I mean, the crisis somewhat changes everything a little bit again because on one side, there is an effect on loan demand, at least temporarily. On the other side, I mean, the pricing power of banks, if you want, has just a little bit improved, because in times of distress, it's not -- it's banks no longer throwing around with cheap loans. So -- and then of course, there's big volatility on the long end of interest rates as you for sure follow as well. And to some extent, we're exposed here not so much on the -- I mean, on both interest income but also on valuation results as we said, we run a quite material bond book as well. But it's a complex equation.

The next question today comes from Simon Nellis of Citibank.

Just 2 quick questions. One, I missed the beginning of the call -- sorry, for that. So you might have said it in there. But just on the exposures to the risky segments. What I heard was that you have around less than 10% of your portfolio -- of corporate portfolio to hotels, restaurants and transports. And if you'd include wholesale and retail trade, then it will be above 10%. And I think I heard that you have 20% of your corporate book to the auto sector? If you could just kind of outline the segments most at risk and what percentages, that would be helpful. And then just on the moratorium side, a follow-up question there, but we can take that next.

There is also -- so maybe on this part, you correctly recall that we have accommodations of hotels, restaurants and so on in a very risky category than transportation, and that is clearly below 10%. What we have in medium risk categories is primarily related to automotive industry and then whole and resale trade and to a certain extent, real estate when being rented out. And that one is around 20-ish percentage. Also here, well, a little lower. And so -- but just don't add it, now, up twice. What I said is if we would take the wholesale and retail trade from this medium risk, so lower the percentage here, we would come on the higher risk to a percentage somehow above 10%. So but it's not a category, this wholesale and retail trade, which would be neither in high-risk nor in medium risk, but currently, we see it in this medium risk. So you move either here or there, don't double it, please.

So the above 10% would be the high-risk ones that you pointed out, plus auto, basically?

Exactly.

Right. Got it. Okay. And then on the moratorium, so my understanding is, if I understood again correctly, was that the payments will be deferred for one year. And then the loan term will just be extended by one year. But I guess, the installments will stay the same, right? So you won't adjust the future installments for the lost NPV of this year's payments, will you?

I mean, the law said specifically that they should be calculated according to the contract. And the way we read that is that post moratorium, you would, of course, recalculate with interest. But to be fair, that's our reading of the law, and it's subject to discussion with the bank association.

So the NPV, in theory, shouldn't change unless these discussions go otherwise?

Yes.

The next question comes from Mladen Dodig of Erste Group.

Thank you, gentlemen, for the call. I don't know the provisions and interest of the contract for Komercijalna Banka, but I guess you do have -- or do you have any insights in how they are handling this situation? I guess, that the state also kind of committed that they will do a proper job until the bank is fully in your hands. But I mean, can we expect, maybe in the future, that you might give also some kind of color of how this new subsidiary is performing and handling the situation?

So first of all, I mean, KB is a listed bank, so they will have their own disclosure requirements to follow -- to start with. Second, we have agreed with them on a regular reporting, the first one of which is to be due anytime soon. So that's going to be a monthly reporting. And clearly, we would expect in -- as part of this regular reports to also learn how KB is handling the situation. I mean, we also have an own fully operating subsidiary in Serbia. So clearly, we understand the situation on the ground. And I wouldn't expect the situation for us, very much different to KB. So in a sense, we have a proxy of what's going on in Serbia. That's our own entity. And of course, we expect to learn more as we go along.

[Operator Instructions] And the next question today comes from Andraž Grahek of Capital Genetics.

Thanks to the management for this call. Essentially, my first question is related to the NLB Vita disposal process, so can you update a bit on that, whether -- do you expect this to go through smoothly and where you're standing with the CP on this deal?

So this is a regular closing process, and we haven't heard any particular difficulties, so it's pending approvals from antitrust. And otherwise, I don't know, Blaž, if you want to add anything?

We are -- I mean, majority of those as far as we have done have been acquired already. And this is now more or less in the final stage, and I don't expect it to break. And this is simply following the contracts.

Okay. Thank you on that. And the second one, a bit on the risk management side, we understand that this, I would say, intervention by the state on the moratorium side, but they are still going to be reporting and covenants may be breached on the credit contracts. And I know your credit contract because I've seen some also have provisions where you can reprice some of the risks, so in, I would say, the spreads can increase. So -- and the collateral may be valued in the due course of the 12 months. Can you sort of share a bit how you sort of see the situation as you go along? Have you discussed this? Whether you're going to reprice some of the collateral which affects, of course, coverage ratio? And whether you are looking to reprice any of the risk because, obviously, the income statements are not going to be that great for the next couple of months?

So I mean, on repricing, I mean, what this moratorium logic clearly foresees is that except of this 12 months grace, if you want, no other conditions would be changed. This is specifically written in the law. So I think repricing in that context will, if you want, unluckily not fly. But to be honest, that's also fair because it's a little bit of a burden sharing. I understand we will see now, of course, elevated risks and elevated risks would, of course, ask for different pricing. But I don't think that we are in a position, especially for these cases with moratoriums to reprice now because that's a specific provision in the law. On the other side of the collateral, obviously, we will -- so I mean, in most of the cases, collaterals are real estate. And obviously, we are regularly monitoring and get new evaluation reports on a yearly basis. And yearly doesn't mean one year from now, but it's happening month-by-month that -- they are coming in, relatively regularly. And of course, I mean, we will have to see how much toll on the real estate, this is taking. And then we have to see -- I mean, we have parts of a collateralized portfolio, which is technically speaking, even over collateralized. So here, you need a certain drop until anything is happening because otherwise, you are still covered for more than 100%. And we have other cases where the coverage is not that comfortable, so meaning if real estate prices would fall then the coverage ratio of the loan obviously is falling. And here, we would see subsequently, of course, also impact on provisioning. If it's a performing client, then the impact is obviously quite moderate. It's visible, but it's moderate. But on nonperforming clients, to the extent they are still in the balance sheet, meaning not 100% provisioned, obviously, this has an impact. Yes, that's true.

And the last question would be, what are you hearing from the rating agencies as far as the rating of your outstanding debt is concerned? Is there any sort of review that's been taken on? Or is there some event that somebody would need to sort of have a focus on?

So we are in touch with rating agencies as we speak. But it is -- it's a bit premature to conclude. These are pending conversations.

We have no further questions, so I'll hand it back to management for closing.

Okay. Thank you very much, all, for being with us. It is a challenge. It's clearly a challenge, unprecedented one. As I said at the beginning, we are learning on the go. But I must say that I'm extremely proud of the team, and this is not only true for Slovenia, but the entire group. We've been able to secure the operational continuity of the bank, practically, in a matter of hours and days. And we don't have any -- we haven't got any hiccups. So we have been providing continuous service. On the other hand, we are now moving into the Stage 2, which is clearly understanding much better what's happening with our clients. I'm happy to see the evolution on the regulatory and governmental fronts. So there are measures being introduced as we speak, that are decisive, that should be an important changer of the whole situation and positively impacting it. As I said, the devil always lies in detail, so we need to understand them still better. And we are working this -- on this. Now of course, in all the countries, since unfortunately, there is no one common view and one common approach. But simply the signals we are getting from the government and from the regulators are this time much more encouraging as they were in the previous crisis because here, we now really see immediately, now, practically, in a matter of days and weeks, significant packages being put in place and being committed to and also the language of whatever it takes being introduced. So obviously, everyone has understood that this is the different one because, of course, production is been stopped because, of course, discontinuity in certain services is being in place, because people are not allowed to move freely and so on. So this is a different one. But it's -- I believe that through the discipline that has been now demonstrated throughout the region. And I hope, will be globally the case, because what we discussed really is something that we have to prevent also for the future. So secondary contagion then coming from the external world, once you manage the situation at home. And I -- we really stand in a position that if this is then to be contained within 4 to 6 weeks, we will have a manageable situation. And for the other things, it's a bit too early still to say what -- how this going to impact all dimensions of our business. But we believe we are on top of it. We have been not only privileged, but thankful to also our teams that we have completed with the capital measures. The most important ones, actually prior to this escalating, so we are in a very solid position, both in terms of the balance sheet and, of course, the capital structure. Liquidity has been on record levels, so differently to previous crisis when we had to repay billions to international financial markets. We are sitting on a very robust pool of retail and corporate deposits. Corporate deposits will be, of course, a bit under pressure. Retail is still a very, very solid position. So the bank is very well positioned for this one. It's going to be a challenge, but I'm sure that we will be able to overcome it, and we are mentally extremely strong. At the end of the day, in Slovenia, the last crisis was a corporate crisis, and it took us from 2009 to 2014, 6 years, practically. So we are able to work under stressful conditions for a longer time. And we believe this one is not going to take that long, and we are going to be able to overcome as I said. And I thank you very much again for your attention and your interest in our business. And we are looking forward to other interactions in the future. Thank you very much for being with us. Thank you.

Please be in touch with our Investor Relations function for any follow-up questions. They are gladly taking your call 24/7.

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