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

Ladies and gentlemen, the Management Board of NLB welcomes you to the webcast where they will present key highlights and business performance of NLB Group for 1Q 2020. Today's presenters are Blaz Brodnjak, CEO; Archibald Kremser, CFO; and Andreas Burkhardt, CRO. [Operator Instructions] Before we go on, we would like to draw your attention to the disclaimer on Slide 2 of the presentation. By this, I pass the word to Mr. Brodnjak.

Thank you very much, and welcome also from the side of the Management Board. We hope to have you here in Ljubljana today actually for the first ever Investor Day physically so that you could visit us and see where and how we work actually in Ljubljana and the region. Unfortunately, this was not possible still this time through the extraordinary circumstances, but we look forward to such occasions in the future. The first quarter was relatively normal. I would say very solid in terms of evolution until, of course, for the second half of March when the COVID situation, of course, resulted in the lockdowns all over the region. But up to then, we have seen very solid performance practically in all key segments above -- apart from the Slovenian retail business evolution where we already announced in last autumn, where the restrictions were introduced that this will be impacted. So we have seen in the Q1 significant impact already pre-COVID on the new production of retail lending, and this practically completely stopped the growth. And of course, since the second half of March, it was much more even then, of course, impacted. We believe that these measures have been, of course, unproportionate and irrational, but there are still -- they still remain enforced as we speak. In other key segments and other markets, we have seen solid evolution comparable to what was targeted for. Whereby, of course, due to the specifics we have seen, of course, in the second half of March, also a bit more drawing on working capital facilities for the companies preparing clearly for the uncertain times to come. So we have seen a solid -- quite a solid growth in, especially working capital financing in corporates, whereby the retail growth has been mainly impacted in Slovenia, [ we are very able to deem ] but in other markets, still solid. So given the COVID outbreak, clearly, there have been measures introduced in all the markets of our presence. Beside these measures, we must say, so the lockdowns were quite quick and were comprehensive and have been yielding results because the region has been, if you compare to some other countries that are practically lying in the neighborhood, solidly contained. We have seen in the last 14 days, practically, the first half of May, less than 3 on average infections per day in Slovenia. And Slovenian government has actually, as the first in Europe, this night decided to actually declare epidemic to stop with 31st of May and by that, entering the second stage of containing eventual follow-up waves to come. We have seen opening up, and it has been quite significant in last week. And we expect gradual, of course, full open up of Slovenian markets and the economy and then, of course, other markets as -- in the coming weeks and months. Clearly, some industries have been more impacted than the others and affected than the others. Tourism is, in Slovenia, of course, and in other markets, significant part of the story but has been -- and has been impacted. On the other hand, clearly, automotive is sharing the destiny of other markets. But Andreas will show you the slides and will present a bit more, of course, what does this mean in terms of exposure of the NLB group, which we believe is contained and manageable. And in this respect, we believe we're very solidly positioned. In this quarter, we clearly signed a very important deal for the NLB Group, and this was the sales and purchase agreement on the Komercijalna Banka acquisition in Serbia. As we have been discussing on previous occasions, Serbian market has been, of course, one of the most attractive markets for expansion of our business in the region, where we are, of course, clearly a niche regional specialist and believe that we understand the markets well enough that we can, of course, also exploit these opportunities in a lucrative way. We have been, of course, working now on the follow-up of the signing, which is, of course, applications to the various regulatory bodies and supervisory bodies across the region and also Europe. We have been working on this now intensively, and the time line has not changed. So we would hope to have, of course, closing debates around summer and beginning of -- or the mid of the Q4. So this has not changed so far. When it comes to our capital position, it has been very strong. So as you know, group issued a couple of Tier 2 instruments last year and this year. They are entering clearly now the capital adequacy. And as per the end of Q1, the position has already been very strong. We are working on other follow-up measures such as MIGA and including minorities. And Archibald will give you more flesh on what is the forward-looking development of capital position of the bank, which is very, very strong and in this respect, of course, a very solid basis for covering the still present uncertainties in the market. We have been in the Q1 already showing first effect, so we tried to the best of our knowledge and understanding at this point of time and -- to assess the situation. So you would see IFRS pool provisions already booked in Q1. Andreas will give you more deals on that. Clearly, there have been some regulatory support to management of this situation. Unfortunately, in the European context, this is mainly tracking, on one side, liquidity, which is not necessarily something that is an acute need for the banking system in the region since we have been very, very liquid and fully self-funded, so independent from international financial markets when it comes to funding. So of course, we are more interested in capital release measures to be able to boost lending on one side. And that's why, of course, we are also looking forward to finally remove certain restrictions imposed by the Bank of Slovenia because, especially within the exit period where we will need a revival and private consumption pick-up, we see a clear need to enable a comparable production and comparable underwriting standards when it comes to retail lending to our peer countries, of course, neighboring countries as well belonging to European Monetary Union. In terms of MREL requirements and other liquidity and capital positions, of course, Archibald will give you more details. And we can move on to more or less COVID impact. We have assessed -- tried to, in Q1, assess how this is impacting our P&L and, of course, balance sheet when it comes to the macro changes. Of course, for the time to come, it is going to become more relevant, how they had this impacted or will be impacting individual clients. And this goes both for corporates and retail. Across the region, there have been various measures introduced by the governments and regulators. Of course, they have not been fully uniform since, of course, also countries have been in different positions when it comes to either their access to international financial markets, supernational support and of course, their relations to the European Commission and other parties globally, like International Monetary Fund and so on. But there has been a development. So especially in Slovenia and Serbia, we see a very decisive instrumentarium on being put in place, both in terms of covering certain social contribution, covering working -- waiting for work statuses and so on. So this has been a solid contribution by the government. On the other hand, clearly, now we are working on guarantee schemes to, of course, provide liquidity to the system, which means -- which is very important in the times to come, especially since now, of course, orders that have been delivered in March, April are supposed to be paid. And there has been lack of production and new orders in April. So this period now will have to be covered to overcome this liquidity squeeze over the couple of months. On one side, the moratoria have helped. Throughout the region, there have been various modes introduced, so from 3 months obligatory almost across the board for the clients to somehow voluntary and up to 12 months. And there have been different criteria used as who is eligible and how can this be applied for. But this has been evolving, and Andreas will give you more details on this. So the real impact of -- on clients will then be more or less realized once this moratoria expired, and then we will see, of course, the capacity and ability of clients to come back to a normal stage of servicing their financial obligations. So we have been looking on, of course, how other or meaningful institutions have been projecting and forecasting developments for this region for the upcoming period, and we have been deriving in our models from the most relevant ones from our side. If you look at the last day development, there have been some that have seen the situation a bit more positively than the regional assumptions. So as said, the economy has been opening up. Of course, Slovenia and regional economy is significantly dependent on especially European Union, some markets more, some markets less. Serbia seems to be especially strongly positioned. Their dependence on European Union is lower comparably to Slovenian. They are fully self-sufficient in terms of food supplies. Of course, they have relationships also with other parts of the world still and in this respect, seems to be robust, and also forecast for the Serbian market have been the most optimistic in terms of potential backdrop. But generally, also in Slovenia in last weeks, we feel a bit more confident that the originally believed catastrophic scenarios might not be actually then evolving in case there would be no, of course, further lockdown. So what we now see is opening up. There is a positive spirit. But on the other hand, clearly, if there were follow-up lockdowns happening, this would reintroduce certain uncertainty. That, of course, at this point of time, we don't -- we cannot assess. We have introduced in Q1, as said, the cost of risk assumptions, which are somehow guiding for expected cost of risk, potentially also for the full year. And we believe this is the best assumption we could produce at this point of time. It's not yet, of course, the final picture, but Andreas will give you more flesh to it. And by that, I would pass the word actually to Andreas to guide you through the -- some of the assumptions on the evolution of portfolios and main risks that have been materializing at this point of time and how the bank has been reacting. Thank you. Andreas?

Blaz, thank you. Yes, also welcome from my side. First of all, maybe just as a reminder because you are, I guess, mostly aware of it on our portfolio composition. Obviously, still the majority of our portfolio is here in Slovenia. And in the meanwhile, approximately 40% of our portfolio is in our core markets outside Slovenia. So that's one of the basics and the other one is the split between retail and corporate. Retail, obviously, something like 40% of the portfolio, consumer and mortgages relatively equally split. And the rest, obviously, on SME, corporates and state-related exposure, whereas SME and corporates are here another 40%. When we look on the industry distribution, then I wanted at least to show you here a split to see more in detail where we see sensitivities and how business sensitivities in reality from our point of view are. So apparently one big subpart is accommodation and food service, so restaurants and so on. And as you see, the total portfolio here is something like EUR 95 million, so honestly speaking, very moderate. It's 2.5%, 2.6% of our exposure. It's obviously indeed times of high attention points. And on the other side, when we look on manufacturing, manufacturing as such is not necessarily elevated in its risk, but it's, of course, elevated whenever it's related to automotive. Automotive, you see an exposure of EUR 126 million, EUR 127 million, so 3.4% of our total exposure. And last but not least, of course, transportation. When we are talking about pure transportation without storage, we are on EUR 514 million. But here, the key message is that the big, big part of that is with a state guarantee, that state-owned company, which has a state guarantee behind. So that's almost EUR 400 million. So the -- well, a big part of that exposure in the remaining part is something a little bit below EUR 120 million, so obviously, a little bit more than 3%. The ones of you who were present at the last presentation have this picture already. But this year, it's now more in detail so that you also can -- give you a little bit more detail of what I was broadly already talking about last time. Now portfolio response. Portfolio response means moratorium. The data which you have here in front of you are as at 1st of May. Things are, of course, evolving, but you see actually already most of it here. We are currently now approaching totally something like EUR 2 billion, a little bit less than EUR 2 billion. You see here already almost 1.8, so obviously the dynamics are decreasing. The growth here is split in 2 parts, I would say, I mean, our little world. And that's on the one side, Slovenia and other hand, Herzegovina, where the percentages are relatively low, so 15%, 20% of the portfolio, and the rest is ranging between 40% and 60%. You saw earlier in the presentation part from Blaz, actually, that the logics behind these moratoriums are largely different. The country at the moment where we don't have obligatory moratoriums is Bosnia and Herzegovina, so there is voluntary in a sense of the banks don't have to give these moratoriums. We actually do. So we offer such moratoriums obviously under certain conditions. But we made here actually the experience that many clients who were originally applying then even subsequently withdraw again because they felt the situation less dramatic. And in the rejected part, that's maybe not the perfect formulation. You also see these moratoriums, so meaning where the clients actually then rejected and withdraw actually. Then we have, on the other extreme, if you want, we have Slovenia, where the moratoriums are the longest, so it's 12 months. The client also has to apply for it, but he can apply up to 12 months. And if he doesn't fulfill the criteria, the bank has to grant it. In that sense, I think the percentages which we see here, as I told you before, are rather comforting, so we don't see it exploding, actually. And then, as I said, the rest of the countries, they have different logic. So in Serbia and Macedonia, mostly it's given to everybody who doesn't reject and that, obviously, is increasing the percentages considerably. And in Kosovo, many people seem to do it for precautious reasons. Here, the moratoriums are also relatively short compared to other countries, but many people seem to do it precautiously. So that's driving up the percentages here. Overall, I would say, honestly speaking, in the range of expectations, EUR 2 billion is obviously a big number. But if you look closer behind, not a shocking number or something which should make us extremely worried. But obviously, what is true is what Blaz already mentioned before. To a certain extent, we will only see clear after the moratoriums expire because then we will see more clearly which clients might really face troubles. But on the other side, what is basically true in all of the countries is that clients have increased reporting duties, so for example, here in Slovenia on a monthly level. So we will follow them very closely. And actually, the logic, which is from the European regulators, introduced is that a moratorium as such obviously is not a default criteria, but we will look on cases individually. If we see a client unlikely to pay, also obviously, that should happen during the moratorium, then we would reclassify obviously to NPL and that expectedly and obviously would also trigger loan loss provision. On loan loss provisions, we have now in the first quarter done a first step. So given the changed macro outlook, we have changed or adapted actually our calculation of pool provisioning. And as already mentioned, that had an impact of roughly EUR 25 million, exactly EUR 24.7 million of additional loan loss provisions in quarter 1. Usually that's not a Q1 exercise but a Q2 exercise, but we have uploaded it to Q1 due to the changes, which we obviously saw already in Q1. This means that obviously, here, you wouldn't see a bigger effect anymore in Q2. For NLB d.d., we have already quite precise figures, so I wouldn't expect any changes in the subsidiaries. It's a little bit more of assumptions, which we had to use due to the time pressure. And that means that we might see slight corrections in the second quarter on that one. But also here, I wouldn't expect any big figures anymore. Anyhow, to give you a feeling, EUR 15 million out of this total sum is NLB d.d. and roughly EUR 10 million is for the rest of the group. Now I guess the interesting question, obviously, is what will happen during the rest of the year. So as I said, I wouldn't expect any changes in pool provisions anymore, but obviously what we will start seeing dropping in are the individual provisions. And here, obviously a concentration will happen primarily on the industries, which we saw before, as highlighted and on the other side, to a certain extent, of course, on retail clients, especially if they lose their jobs. And I think that the bigger part, obviously, we will see this year, but what is also true is we will not see everything this year because it can happen that either moratorium has not expired and we don't have any other indication or that's simply the situation for the client, actually, only escalate and really in next year. So next year, will, for sure, still be elevated. But the key question for us obviously now is the, first of all, 2020. In our models and logic, which is actually in the meanwhile quite robust, so we calculated it top down, so model based but also down side up, so meaning going through, as much as possible, single ticket and trying to establish probabilities of default and impact on the single ticket base. And from both directions, actually, what we would expect for the entire year is a cost of risk of, very roughly speaking, something around 150 bps. So that comes to EUR 112 million, EUR 115 million in euro terms. And obviously this is clearly above our midterm target. So I think we have to say here it's extreme kind of a shock, obviously, also no one predicted in that way. But given the circumstance, I think that this is still a figure which shows, as Blaz mentioned before, that we are actually quite robust. So given the region in which we are working and given the circumstances, I think that's still quite, yes, if I may say, manageable figure. Obviously, it will depend largely on whether we see additionally better prices or not. At the moment, everything looks more going into a positive direction and actually faster in a positive direction than we were assuming. So that's rather comforting, but obviously we will have to see whether this trend continues. So the assumptions which we are basing this for calculation on are obviously here the key determining factor. They are assuming obviously that the trend will go in the direction we are currently seeing. What I have to say is both when we are discussing with customers but also with subsidiary banks, the feedback which we are getting are sometimes more positive than that. So the 150 bps cost of risk are really much methodologically based and much based on logic outcomes, which we would see from clients losing income, losing business. That's not always corresponding fully with the subjective feeling. So the subjective feelings, both from clients and also from management levels of subsidiary banks are sometimes more positive, so that would rather indicate a lower figure. But for the time being, being the CRO of the group, I can tell you that we still have to be here a little bit cautious and not get enthusiastic about something which is in reality still a very harsh impact compared where we still saw it a few months ago. Yes. Asset quality as of 31st of March, obviously, you know that in the last years we were largely, largely reducing NPLs. And we are a status quo, obviously, on a quite reasonable level already and this is, obviously, also reflected here in this asset quality slide. The real interesting question will be, of course, what is now to come. And I think as you've heard, both from Blaz and from me, we are not expecting evolutions. But of course, what you will see this year is for sure a certain deterioration. So we will be on higher NPL levels at the end of the year than at the beginning. But as it looks like, it's not a dramatic jump but is obviously clearly visible. Yes. On the next slide, here you see, well, the same story, if I may say, a little bit differently, obviously, in third -- in the first quarter this year. You can see is that another time, the coverage ratio was going up. That's not very surprisingly. I told you we booked this EUR 24.7 million on pool provisions. But that also tells you that if you deduct at least EUR 24.7 million then we would have slightly reduced actually figures in Q1. EUR 137 million out of this figure have delayed, so approximately 1/3. As I told you in previous occasions, these are primarily restructured clients, which are not yet fully healed. We have actually 1 or 2 clients who, despite of the COVID, currently really coming close to a healing, so we might see even a positive news here from that part. But again as the CRO of the group, I really believe it if have all the groups on my table and if we upgraded them, so that's still a little early days to say that. But even in times of COVID, we don't only see negative surprises. And obviously, as you can see on the right part of the slide, in Q1, obviously, effect of the pool provisioning, which I told you we didn't see any big movements yet. But obviously, given moratoriums, that was also not to be expected. That's something which if we see it obviously in the upcoming quarter. That would be for the beginning from my side. And with this, actually, I will hand over to the business performance to Archibald. Thank you.

All right. Thanks, Andreas. Very warm welcome also from my side. As Blaz said, we would have loved to have an Investor Day. But instead, we'll do this webcast. And of course, we are planning a series of one on ones, some of which are scheduled already. So very much looking forward to also discuss our results in more detail. I'll keep the presentation brief to leave sufficient room for questions as well. Many relevant topics have been mentioned already. On Slide 14, the revenue cost dynamics overview, you see some pressure on interest income, but in reality, that's, to a good extent, the incremental costs from the front loading of capital instruments that we have implemented and also as was mentioned, there's somewhat softer demand on retail, particularly in Slovenia. On the noninterest income, you actually see an underlying pretty strong performance on net fee and commission income year-on-year. However, again, a little bit of softening on payment revenues in second half of March. And of course, that is expected to be continued, to some extent, also in as long as the lockdown is or has been implemented, varying by country a little bit. But on the other side, especially for Slovenia, we're actually looking forward already to lifting of lockdown measures. On the cost side, here, we have on quarterly level, obviously, a quite good dynamic. Year-on-year, you see in the Q1, of course, the repricing of senior management positions to some extent; on the other side, of course, our continued investment activities in digital projects that materialized in elevated costs on IT. For the transition period, that's something we have indicated. Cost of risk was mentioned. And by that, we do now a little bit of deep dive. On balance sheet, we saw in Slovenia, on the retail side, basically, the effects of the measures imposed by the regulator, especially on consumer lending. And I think that was extensively discussed already. Obviously, for retail demand, throughout the lockdown period, we have seen and will continue to see softer demand also going forward, especially on the consumer side. And of course, this highly depends ultimately for subsequent months on consumer confidence going up again and of course, to a good extent also in what ultimately will happen in regards to employment numbers. Corporate was a little bit the other way around because, obviously, in Q1, some corporates also draw on liquidity lines, but nothing that would be otherwise remarkable or give reason for concern. That was a normal reaction. Partially, it was already reversed in Q2. And of course, there is now a mixture of some underlying regular business activity, which is, of course, muted because investment activities have been scaled back. And in this sense, we rather expect here a relatively flat further evolution. In foreign markets, Q1 was very strong. But of course, on retail, going forward, we would expect the same dynamics to the extent that lockdowns are in place and of course, until people are getting more comfortable again with the post-COVID situation in regards of the employment prospects and salary levels, we would continue to see softer demand. However, of course, situations can reverse very quickly. And this really will ultimately depend on how the COVID situation is perceived ultimately. I think it's worthwhile mentioning that in our retail portfolio, a significant share of our retail customers is the regular salary recipient to a very material extent, especially in our subsidiaries also related to public sectors. So the quality of our portfolio is solid. And I think that that has been also indicated by Andreas in his cost of risk outlook. Income statement is, well, ultimately a result of what has been mentioned. I think that the quarter was clearly marked by this cost of risk predominantly. And as was mentioned Andreas, this is for now only pool provisions. And of course, from now it's anyone's guess what -- how this will play out in terms of portfolio migration. The facts have been presented in terms of higher exposed segments of our portfolio, especially in corporate. So in this sense, I guess we still are, to some extent, in a wait and see position. On the liability side, I think we continue to see, well, a very strong liquidity situation. Actually, indeed, we need to further continue to focus on making money out of the desire of people to place money with us. Especially in COVID, we have seen actually continued inflows of deposits in some geographies, especially Slovenia. Macedonia stood out, but all the other markets didn't, in essence, lose any liquidity. So here, I think the challenge is to migrate that safety that we provide as a bank to our customers also to further increase in fee and commission income. And that's, of course, a continued topic and one of our prospects for increases in fee and commission income. The cost side is something that, of course, we are now very focused on. We have put, if I may call it, cost stabilizers in place that will start to show effect as of Q2. And in cumulative effect, we expect costs year-on-year to remain flat. Given this cost stabilizes, we talk reduction of even fixed remunerations, the Management Board has voluntarily reduced fixed remuneration at least up until December in amount of 15%. In amount of 10%, a larger number of senior managers in the group have actually voluntarily accepted reduction in fixed salaries. Obviously, we don't expect to pay some variable elements of remuneration that had been paid last year. So overall, these stabilizers would keep costs flat year-on-year. And in this sense, I think we show a strong immediate reaction also for 2020. And of course, we are very, very focused on basically emphasizing everything that will help us save costs in the future. So we are, as we speak, also reviewing branch networks and, to some extent, expect further reduction in physical footprint even this year still. That's an exercise we will run on a group level. And all the headcount are something that, of course, as a result of a somewhat accelerated implementation of digitalization efforts. And as we've all learned that remote work is not just a possibility but can be a very effective and efficient reality. We expect both reduction in physical footprint costs, in other words, real estate and ultimately, also will accelerate headcount reductions as such. So that might result in temporary elevated costs even in 2020, rather to be seen as sort of a restructuring charge but, of course, expected to have effect in subsequent years in material numbers. The capital situation, I think, is very, very comfortable entering into this unusual situation. And of course, we account for all the Tier 2 instruments that we have issued and show a capital adequacy of 18.5%. We are working, as we speak, on inclusion of minorities. That's expected to happen actually already in H1. That will add another EUR 30 million to capital, most of it is CET1. And of course, we also work on final implementation steps of risk-weighted asset measures that were going on for quite some time with the [ co-MIGA ] program. So overall, we expect 100 bps roughly to be added in capital adequacy with those already anticipated measures. And that, of course, leaves us with a very solid balance sheet also in capital adequacy also for the pending discussion with regards to the KB acquisition. So we feel ourselves well prepared for that exercise in terms of capital adequacy, also considering the COVID situation. In terms of other topics in relation to capital, I think it's worthwhile mentioning that the recent measures by the regulator are on some -- to some extent, helpful because they took some adjustments in regards to composition of Pillar 2 requirement that was communicated. So that basically adds up a little bit of potential in regards of further Tier 2 measures and, of course, reduces actually visibly the requirements on CET1. That's a bit of a technical thing. I think it's also worthwhile reminding us that we took effect and benefit of the equivalent regime that was implemented in Serbia. That took some EUR 100 million risk-weighted assets off. EUR 0.20 risk-weighted asset evolution was flattish. And as I said, we, of course, continue to work on all pending capital measures. So the 81 topic is, given market circumstances, for now on hold. But of course, it is in full swing in terms of getting technically ready. And as soon the market opens, we will, of course, continue to pursue that activity. It's nothing we want to be pushing or rushing because that would just result in elevated price of such an instrument. But -- and it's not necessarily likely that this will happen in 2020. But for '21, I'm pretty confident that market circumstances will normalize possibly on a somewhat higher level than we envisaged, but still, it will be a worthwhile exercise. In this sense, I think just to complete the picture on capital, it's -- Bank of Slovenia has basically imposed a break on dividends now until early next year, subject to revisit towards end of this year. So for the time being, we also, of course, can't propose dividends. But as we always said, of course, any '19 dividend discussion is subject to the full understanding of KB implications. Of course, we are hearing close interaction with the regulator with ECB in understanding both portfolio dynamics in the existing group as much as, of course, the potential effects of the acquisition. But so far, we are, as I said, very confident that we are very well prepared for this exercise. By that, I would leave it to Blaz to conclude on outlook.

Thank you, Archibald and Andreas. So at this point of time, we actually have been quite comfortable that -- not quite. Actually, we have been confident that we have been monitoring the situation. So operationally, the bank is running absolutely smoothly. We are rolling back to normal mode of operations. As per the end of the month, epidemic will officially be declared finished by the Slovenian government in Slovenia, and we expect this to follow in the countries, which will lead to, of course, opening up of the economy. We are bound to opening up in other countries as well, clearly that are our major export markets. But listening to our key exporters, the most effective ones are the automotive, where we clearly expect some subsidy scheme on European level to boost the industry back. On the other hand, there are some uncertainties regarding tourism, and this season is going to be, of course, very likely a survival season, but then we expect normalization. So in this respect, we see this year now maybe a bit more optimistically than a month ago. After 2 months of lockdown, we are opening up. And there is a positive spirit psychologically as well. And the region has been not affected that heavily also health wise, so health systems have been sustaining this solidly. Today's information on last year's -- last days' infection just 1, no death casualties and only 7 people are in intensive care in Slovenia, for example. This is very, very solid information, so we, of course, hope that this is now bringing a result. We hope for no further lockdowns. And by that, the year might wrap up a bit more optimistic than it was seen a month ago. We have tried to provide a guidance that is based on today's information on cost of risk, around 150 basis points, to see how this evolves. On the other hand, the situation is bringing opportunities to the table and table that we are now exploiting, which means accelerating certain measures in terms of further digitization, and on the other hand, really moving into the more sustainable working mode, which will -- might, of course, also drive the cost down. So it's not only remote work. It is then clearly linked to the capacity you need in head offices and so on. So this is on one side going to bring midterm savings. On the other hand, we see much more pronounced shift to digital. We have been, for years, trying to persuade clients to move to some digital channels and digital services. We see now a strong uptick, and we see that this is now a significant opportunity for our business model to transform quicker and by that, deliver results in sense of further efficiencies on one side but then bringing client experience to the level of challenger banks as well much earlier than we, of course, believe so far. Certainly, we can move much faster than we were able to -- we have been able to move so far also internally. So overnight, practically, the bank has been producing solutions that otherwise would take weeks or months. And this is somehow showing us in a different light. We are able to change quicker, and of course, we are going to accelerate these things. Archibald mentioned also that, of course, in terms of the branch formatting and physical footprint, we might accelerate certain things, doing certain things quickly and this year instead of maybe waiting for next year. So overall, the outlook is, in our understanding, relatively solid. Of course, we are not talking about the ROEs of the previous years. For this year, clearly, this is a strategy stressed year. But in midterm, we still hope to and believe we can deliver actually the midterm targets. They might be challenged a bit by a year when you achieve that, but we are sticking to them actually. So we believe we can still achieve that. We still see merit and, of course, Serbian market growth significantly, given, of course, higher margins and given growth opportunities. And combined, we believe that we can still deliver on the midterm target set. And this is something that at this point of time is, for us, very, very relevant. So we move on to build the position of the clear regional specialists in all the markets of our presence, coming to a leading position. And it's still a very challenging period, but we feel as an institution that we have been monitoring this very confidently and solidly, and we believe we can overcome, and we will overcome this period in a very, very solid shape at the end of the year. In terms of capital liquidity, very, very solid, has been such throughout last year. So we're self-funded, fully independent from international financial markets in this respect, fully focusing on clients and the situation. So now we are really now intensively working with key corporate clients and the international clients on overcoming the liquidity situation. We have been very diligent in that we have accelerated also our approval processes and, of course, also our stress test processes and other things to understand much better clients' individual positions. Yet, we have been very responsible, and we believe that together with the corporates that have been significantly deleveraged throughout last year. We all know that the total stock of corporate loans in Slovenia has been practically significantly below the total stock of retail loans, whereby also the total stock of retail loans has been, in terms of comparison to GDP, at a very low level in European terms. So this is a solid, solid begin position. And we will overcome, I'm sure, the situation in a better shape than we believed a month ago. That much from our side for this introduction and presentation. And of course, now we are opening up the Q&A session, and we'll be gladly responding to questions. Thank you.

We have quite a few questions lined up. The first question is how have the fundamentals of KB changed since the start of COVID, provisioning loan growth, margins and impacts of moratorium?

Thank you for the question. From what we see also from published information, Q1 has been relatively normal also in KB. We haven't shown yet elevated provisions. And I guess, to some extent, that's still a matter of how things play out in Serbia, in particular. As we've seen ourselves, and as was mentioned, Serbia's response to COVID is robust in itself from a public finance point of view. The country has the means to support its constituents with measures. And so it's early to say, I guess, to see how the portfolio of quality plays out. But the fundamentals of the country, as such, are relatively solid. And as was mentioned, the reaction to COVID pandemic is -- the resilience to COVID pandemic is, relatively speaking, stronger compared to other markets.

Next question. ECB gave banks recommendation to refrain from dividend payments until October. On the other hand, Bank of Slovenia has restricted banks from paying out dividends for the year 2019 and 2020, measure that BofS expects to be in place for 1 year. Do you have any indication that this restriction could be lifted sooner as the world tries to normalize?

So far, information has been that the Bank of Slovenia would revisit the situation at the end of the year, so at the end of 2020. We, of course, have no better knowledge of how Bank of Slovenia is assessing the situation. We understand that Bank of Slovenia has been more restrictive in couple of areas than ECB's framework has been providing so far. So there is a full ban on dividends. There is a full ban on any variable pay to managerial staff. And there is also clearly a much more restrictive retail lending regime. And in this respect, this is something that is over proportional, that is -- that we don't see in other peer markets. But we have not been successful at addressing these issues since there has been no qualified dialogue on that.

I think it's also fair to add that we have said the 2019 dividend is anyway something we would synchronize with the KB process. And we would finally take a view on that once KB is digested one way or the other.

Next question, you have already reduced the remuneration of employees on individual contracts. Do layoffs follow? The number 300 by the end of the year is mentioned. Is there really no reason for new negotiations on the price of KB given that the economic circumstances have changed significantly due to the epidemic?

As we said previously, so far, we, of course, are obligated to follow obligations -- mutual obligations of the SBA, and that's the process we will pursue. And if any of that circumstance change, that's the moment when we will revisit.

Next question, transactional part of fees and commissions should be under certain pressure because of the lockdown and less financial activity from your clients. But the fees from customer accounts should be quite stable. What can we expect in terms of fee and commission revenues in 2020?

It is early days to, of course, be talking about, and we cannot give very specific guidance in this respect. We are opening up, as we speak. So from Monday on, all commercial centers will be open and all the stores. So we expect people moving back. Also restaurants will be opened from inside, not only the terraces, so some consumption will be happening again. On the other hand, there has been, of course, clearly, still the uncertainty on the -- in spite of the population and unemployment has been increasing. Yet talking to some governmental officials and some other's projections on the expected unemployment rate, we currently don't see a situation close to the 2008, which was then leading to 143,000 unemployed versus just shy of 90,000 today. So we would rather not see such high pressure on the unemployment, which means that there might be not such a reduction of consumption as we saw in the years from 2009 to 2015. But to be more specific, we need a couple of weeks to understand what's happening after the full opening up of the -- consumption capacity is there. This is one aspect. Of course, the access to credit has been limited on the other hand. And usually people, once uncertain, they usually crunch a bit in terms of consumption. And so if you look at the period from to 2009 to 2015, there has been a continuous decline in cash loans, in consumer loans, for almost 6 years. And consumer confidence in Slovenia was, at that point in time, very, very low. We don't know yet at this point of time to what extent this has been affected this time around, so -- and that's why we believe that we need to work on removing certain hurdles when it comes to, of course, lending restrictions and so on, since there will be many, many retired people, public sector employees, also industries that have actually been benefiting from the situation, where indeed, people have been paid at lower level, but they had secure jobs and secure paychecks and so on. So this limitation should, in our understanding, now be moved directly to countercyclically. The other element is the volatility of financial markets. So a significant part of our fee income is coming from asset management, so unit-linked insurance products and mutual funds and investment fund sales. At the high volatility of the market, usually people crunch for a certain period. It is too early to say for what period we are talking about right now in this situation, but we see some interest because valuation generally have reduced in the meantime in the market. And people have been already asking whether this has been a reinvestment opportunity or an investment opportunity as well, but it's early days.

Next question, given the sharp NIM pressure, what can we expect for the remainder of the year? What was the level of consumer loan sales in Slovenia after the restriction?

Well, that's a very good question because restricting consumer loans moved part of the production to housing loans. And these naturally carry a bit lower margin than the consumer loans. On the other hand, we have had a bit of a shift in pricing power when it comes to corporate lending. So we expect a bit more normal risk-adjusted pricing in terms of corporate lending, which might partly offset lower production in retail and the shift of production in retail from cash to housing. Generally, NIM should be effect from both ends. We really hope for a bit more normal return to cash loan production, which carries higher yield. We have been gladly reporting now that we have been allowed to introduce leasing services. So we are now accelerating return to leasing services, which is also -- which should also provide higher margins, but of course, we hope for recovery in car sales and some other durable goods sales that are a leasing relevant basis. So it's a mix of production. In the corporate terms, we see more solid margins happening, not yet in public sector. We still see banks now moving to, from their perspective, better risk profile, public sector financings, where the pricings have been extremely low. We believe too low, given the pricing the sovereign has been paying at this point of time. On the other hand, as said, in classical corporates, we see a bit of a margin uptick, which is good, which is of course also reflecting high risk to a certain extent. And for retail, we hope for consumer confidence to pick up. And we hope to remove our restrictions, and then we would be moving NIM up. It is also here a bit too early to be guiding relevantly on NIM. But with the introduction -- with the mix of the measures, we believe we can stabilize it.

I mean clearly, 2020 is, NIM-wise, under pressure. And clearly, that's, I think, understandable. We have several objective factors. We have the capital front loading that is a burden that burdens the NIM with some EUR 10 million per annum. We have -- we are deliberately de-risking our bond positions to some extent given the market volatilities. We see softening in retail demand. So all of this will take its follow-on on NIM. That's out of question. I guess we can somewhat mitigate, as Blaz said, on the corporate side, but clearly, that's something to be very cautious with in COVID circumstances. And the big question is really when retail confidence will come back. And that's a question for the whole world, not just for our region.

Next question, what is the main risk to your conservative cost of risk guidance of 150 bps, both up and downside for the financial year 2020?

Well, to start with, at the moment, of course, we were developing in a couple of weeks our understanding of the situation, which I think it's very hard to find a comparable situation ever. So apparently all the risk systems in the way how we are looking on it, they are not tuned on that. So that's now all a little bit more handmade. And I mean, one thing which we can probably say is that our expectations at that point of time are wrong. We just don't know are they positive or negatively wrong. But to hit at this point of time, for 100% reality, how it will be at the end of the year would be a miracle. And for a risk person like I am, that's not a very comfortable statement to say. Having said that, I have to say that, as I mentioned earlier, at the moment, we rather see a few, well, surprisingly positive signs given circumstance is a negative one. If that is continuing, then we have a really fair chance to be below our current expectation. On the other side, the major risk here, and I think this was mentioned both by Blaz and Archibald also, is obviously if we would face new lockdowns, if we would see coming back of what we saw in the last 2 months, then obviously things would turn more to a negative side. And here, you have to say that, obviously, many companies compared to the last crisis is largely deleveraged, which in this circumstance is a good news. Households were able to build up savings, which is a good news. But of course, that has a certain breaking point. And at the moment, I think given the development and how the lockdown is supposed to end, for many of them, they still have sufficient buffer of even government measures in different jurisdictions to sustain that. And that would just come back again, then we might actually see an over-proportionate change in that. So that's clearly a risk. But for the time being, as I've said, we are rather, in reality, a little bit more on the positive mood compared to as we are actually at the moment projecting, but it's still a very fragile picture. And the reality is we will have to learn in the next months more.

Next question, what is the price of MIGA guarantees?

Well, that's a business secret, I'd say. But it's, effectively speaking, a very cheap support. It's cheaper than a Tier 2 bond. That's all I can say.

Next question. Thank you for this call. Regarding expected 1.5% cost of risk, would you attribute it to V-shape or U-shape recovery pattern? Also, if I understood correctly, no significant ramp-up of provisions are expected in 2Q '20.

So I mean the majority of the analysis, which we see, it's either on a V-shape or on the U-shape, obviously not on an L. So if you could see the L development, then I think we are not conservative enough yet. At the moment, there's no such indication. Our current projections are, obviously, assuming, if you ask me -- but if you wanted V or U-shape something in between that, but definitely, I mean, the expectation is that, by next year, there will be a rebound, so a strong recovery. And now, obviously, you can always discuss to which extent this is happening and how fast. If you ask me for the 2020 development, that has a minor impact. The question is more how from 2021 onwards the situation will develop. I mean you know our midterm targets. And at the moment, we are convinced that we will come back to that rather swiftly, so eventually already '21. But that will obviously depend a little bit on this question V or U. For the second quarter 2020, as I think was already mentioned before by Archibald, I mean, we are expecting a relatively, well, stable development on this high level. So we are not expecting any huge jumps. But of course, what you will start seeing in Q2 is clients to be defaulting or we see them at default even if currently they don't have to repay. And of course, we will start booking that. So I think this you will now see during the entire year. My expectation would be on a relatively comparable base quarter by quarter, but that remains to be seen. If anything, then we would see maybe a little more in Q3 and Q4 than in Q2. But obviously, we are trying to understand our clients' situation as soon as possible. So in an [ e-tail ] case, we would see it rather proportionate.

Next question, what are the underlying macro assumptions with respect to the cost of risk estimate? What percentage of Q1 provisioning is Stage 3?

I think hardly anything, hardly nothing is Stage 3 provisioning. Vast majority of Q1 provision is Stage 1 and 2. And the GDP scenarios are basically following what we published, adding a little bit of conservatism, actually, so in this sense, conservative.

Next question, what are your expectations regarding the outlook for the average loan rate, corpo and retail in the strategic foreign market for 2Q and the remainder of the year? In addition to rates cut impact, is there increasing competition too?

Sorry, the increase in competition has been happening in the least risky part of the market. This is, as I was mentioning, a price sector financing. We're at rates, which we don't necessarily even want to follow because it's not responsible to capital. In main client segments, we see a reasonable pricing evolution. So in terms of corporate lending and consumer lending, the pricing is less under pressure. Housing loans might be a bit more under pressure given the limited production, and this might be evolving throughout the year this way. But more precise indications, we cannot provide. It is, first, too early. And secondly, we see mixed behavior from banks. Some banks have been crunching a bit and trying to analyze, understand the situation and focusing on the least risky segments, but at the pricings, which are not necessarily risk adjusted if compared to sovereign pricing. Whereby at the normal business, we don't see such a pressure, and we believe the margins would be kept stable. And with a bit of a more adjusted pricing for regular corporate, the total mix of production should be in a bit of a stable leak. But Archibald was mentioning before the -- specific to 2020, I mean, this is not a normal year. And throughout the year -- quarters, we'll be moving differently. And depending on the behavior of individual banking players and their commitment and devotion to these markets, we might see different tactical moves. But I would rather see this now at this, of course, [ building ] price levels stable for this year. And then we would be working on the uptick actually because, of course, new normal is going to be, we believe, at a higher spread, maybe for sovereigns but as well also for other clients as well. So this is not necessarily a bad news. On the other hand, we will be dealing clearly with eventual migration to NPLs. It is -- Andreas was talking a bit more elaborately on the expected levels. And here, the interest is suspended as well. And this brings other risks. But in terms of classical NIM, also depending on eventual introduction of further capital measures such as 81 at certain point of time, this year would be, of course, impacted by one-offs, which are difficult to project in midterm.

Next question, can you comment on financial year 2020 group loan growth prospects? Will there be any growth? And if yes, what level is realistic?

So it's -- I mean it's always resolving around the same dilemma, which is how fast will retail demand recover and how willing are we to take incremental corporate risk. And that's a question we'll answer practically on a day-by-day basis because it's nothing we can give firm guidance on. Simply, this situation is unknown. Nobody knows how the crisis will play out in the various markets. For now, I think, at least, for Slovenia but I think also for other markets, we are reasonably confident that recoveries will be fast. Also, EBRD came out with research yesterday that was relatively positive. So there are many indications that we see a V-shaped recovery. And we all hope that this is what we will see and observe. Even in a V-shaped recovery, I think loan growth, as such, will be rather flattish throughout the region, and that would already be a good case but because we simply lost now practically 1/4 of retail loan production to a large extent, and this will not be easy to be recovered. But I guess our main message is this year is, for sure, extraordinary in all circumstances. We use this year -- the positives of this year is that the pressure on rate decline probably will have been mitigated or reversed. And of course, we see a big opportunity to get focused on structural cost measures. And of course, we entered this whole situation with a very strong capital situation. So that provides caution for both risks that we haven't yet foreseen. Plus, of course, crucially for the pending discussion with KB, and with the emphasis that Serbia, for us, is still a very attractive market, especially or even on the COVID circumstance, given its relative higher resilience, in our perception, to the situation. So 2020 difficult prospects, stable and good. And that led us also to uphold our midterm targets as a guidance.

Final question, will closing of the sale transaction of NLB Vita in 2020 lead to a reduction of assets under management of NLB Skladi, which has been managing assets on behalf of NLB Vita? If yes, what will the amount of reduction of assets under management be?

So first of all, we are very much looking forward to the closing. We have good reasons to believe that it will happen soon, possibly already in Q2. And that's the most important aspect we are focused on. That for sure is, and has been, a very good transaction for both parties. And we very much look forward to deepen the cooperation with the prospective buyer. And that should ultimately lead to increased business. The tactical aspect of assets under management by Skladi is something that we have, of course, considered and is subject to certain regulations, which certainly I can't disclose in detail, but it has been considered. And I think a good outcome has been achieved for both sides.

And that is all the questions. I'll now hand back to Blaz.

Thank you all very much for listening to the presentation and raising quality questions. So I would just maybe start with the last topic. So we are eagerly awaiting for the final closing of Vita, by which we would then finally fulfill the last commitment from the state aid process to the European Commission. And at the same time, we have received, in the meantime, the approval for -- to start leasing business. And of course, we have been pretty much and pretty well managing this very unusual and unexpected situation of the COVID. So in terms of operations and in terms of our daily business, we are running fully smoothly, reliably and securely on one side. On the other side, we are now in a Stage 2 of managing the crisis, which is really focusing on clients. And there are many challenges. And Q2, Q3 and practically the whole year will be dedicated to, on one side, containing the damage, of course, for clients and the bank consequently; and on the other hand, preparing solid grounds for the years to come, where we expect that the rebound would be happening. So if we were quite concerned or reasonably concerned a month ago where this might end up, today's mood is a bit better and more optimistic. So it looks rather a V or at least a narrow U than something converging to an L scenarios. We've had experience from the previous crisis, which in Slovenia actually took place since 2008 to 2016, almost. So we are used to manage the environment in crisis mode. But it seems that we will be out of this one significantly earlier and that the entire economy, so the corporate clients, the retail clients and especially the bank, have been in a much better shape this time around. So our solid liquidity position, our very solid capital position in the meantime, which has been further enhancing as we speak, are a solid, very solid basis to overcome this crisis situation. On the other hand, we have been continuing also with the implementation of the new strategy, including strengthening our position in the most important strategic markets. We still see, of course, challenges on the regulatory framework, especially in Slovenia. We see more restrictive approach from the local regulator than the European Central Bank has been introducing. And this is something that we, as bankers, not only as an NLB, in the Slovenian market need to understand better and need to, of course, get arguments for. On the other hand, we are confident that our team, with a really solid spirit and now proven ability to change very quickly in crisis situation, will be able to deliver certain progress, much more accelerated progress in digitalization, offering services to clients that we believe to hope to offer actually next year already earlier, so already mid of this year; and accelerate certain efficiency measures such as eventual adjustment of the physical footprint and further cost measures, which have been proven now to be able to be delivered through either remote work, more efficient ways of communication and so on. That's leading us more or less all together to the belief that we can stick to midterm targets. It might be more challenging. It might be, in terms of a year of delivery, maybe a bit deferred, but we stick to the midterm projections of the main categories. And we continue the process of closing of Komercijalna Banka at this point of time. And we will, of course, have much more clarity and visibility in the actual situation in a month or 2 to come. But generally, today, Slovenia has, as said, declared that the epidemic will stop at the end of May, which is a very strong psychological message to the entire society and will also boost the spirit of the companies and general population. And by that, we believe that also consumer confidence might be this time earlier back than in previous crisis. And we expect the assistance of the government and the regulators to boost the consumption. And by that, we might see '21 very, very strong but 2020, clearly still strongly impacted but '21 then bringing us back to the trajectory to deliver the midterm target. Thank you very much again, and see you hopefully soon physically in Ljubljana in the Investor Day, then organized as we plan for this time around. Thank you very much.