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 1H 2020. Today's presenters are Blaž Brodnjak, CEO; Archibald Kremser, CFO; Andreas Burkhardt, CRO; and Petr Brunclík, COO. [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, everyone, to the semiannual webcast of NLB Group. Unfortunately, it is still audio since we have been respecting distancing. And of course, by that, this was a reasonable way to continue, and we really hope sincerely that next presentation is going to be possible also in video format. All of us are present, so for the first time, I'm really gladly announcing also our COO, Petr Brunclík, he's going to introduce himself later on while he's taking his part of the presentation. But let me please start with this presentation with actually a very positive spirit. The Management Board and the Supervisory Board of the NLB Group assessed the first -- the semi-annual results of this year actually has a very good outcome given significant uncertainties. And of course, the turmoil all over not only the region, but globally, and it is very important to highlight that we have actually managed to defend the core results at very stable levels. So when we are talking about net interest income and fee and commission income levels, they are practically comparable to last year's. And if you look at the pre-provision outcome, it's as well very, very solid. There have been some one-offs, but also in previous years. So we're very -- pretty much comparable results. Let me begin maybe shortly with the situation of how the whole epidemic. And of course, then the follow-up waves have been handled within our region. And of course, there have been governmental measures taken in various jurisdictions, not fully comparable, but especially in Slovenia, very, very solid, having very solid impact in positive terms. We've seen businesses actually with very solid liquidity. Various packages and measures introduced, be it sponsoring employment, be it actually guaranteeing lending, have been in place. But I can confident to state that they have been not used to the significant extent. So indeed, there have been moratoria, but we've seen companies and private individuals getting out of moratoria. We've seen very, very robust liquidity of corporate sector, also some automotive suppliers announcing they are getting out of any of the measures from the government support. And by that, clearly, this has been evidenced also especially in retail sector, but again, really, really strong influx of deposits. The consumption has been picking up. So after the first -- after the second half of March and April and first half of May, of course, it was significantly depressed. But second half of May and June were very solid pickup. We have been really seeing very solid pickup since then. And if you look at the volume of car transactions in June, for example, this has been practically at the level of December '19. If you look at the first half of retail FMCG growth in this country, you will see actually a positive growth of 0.7%. And energy trade has been, of course, a bit down, but FMCG regular retail has been really up even in the first half of the year. So in core elements of our results, our recurring core revenues, I can really be happy about that have been stable. We have seen clearly some pressure in origination capacity in Slovenia, in retail lending especially, which is directly linked to the restrictions of the Bank of Slovenia. Otherwise, there have been a strong demand. Again, we've seen consumption pick up, we've seen consumer confidence picking up. A bit different situation we've seen in the countries in terms of how the situation has been handled from the health perspective. So in Slovenia, a very robust picture. Number of infections is -- have been between, let's say, up to 30 a day. But what is more important, actual number of hospitalized people in Slovenia has been between 20 and 25, altogether, the absolute numbers. And intensive care patients, more or less in the ballpark of up to 5 with very limited use of ventilators. The situation has been a bit different in the countries, but the health systems seem to be coping. And when it comes to economic activity, it has been really picking up. And so we see solid origination of retail lending in the countries, and we see more or less stable performances of corporates. Of course, it is early days because many moratoria are in place in the countries, especially in the subsidiary landscape, and Andreas will give a bit more flair to how he feels, as the CRO, about the situation. But generally, I must report at this point of time that we are much more optimistic than it seems a couple of months ago. And we see now really a significant pickup in confidence. In the meantime, we have been, of course, also working on the stabilization of operations, which was more or less done in April. So we see that then -- since then, absolute smooth operation, seamless operations of the bank on the group level in all the countries. Furthermore, we have actually significantly accelerated client experience focus of our bank. And we have introduced new services. So now you can open digitally fully online on your accounts. So we have digital onboarding. On the other hand, upon once-only physical authentication, and we are working on the legislation front, that of course, this also would be enabled without physical one-off authentication. We now offer actually also online cash loan, overdraft credit card underwriting, which means that you don't have to come to the branch for any of those products at all. And we offer also remote digital signing practically of any document that the bank will be offering. It's in the pilot stage, but we will be soon in full production, and Petr will give you a bit more here on where we have this way. And this is really something we are very proud of. So practically 80% of transactional standardized services the client can get in NLB d.d. in Slovenia practically online. And this all is supported by 24/7 video chat functionality, which means that we are actually available 24/7 from anywhere at any point of time. And this is a real, real progress. And I would say even a revolution in terms of client experience, and we've seen strong pickup in our mobile -- usage of mobile app, usage of e-banks. So in principle, we see actually numbers of N users already exceeding e users after 20 years. And of course, we have been strongly promoting this further on. What is very important to mention at this point of time is that we have successfully closed, at the end of May, the divestment of Vita, which was the last milestone in our state aid process with European Commission. In the meantime, also the monitoring trustee have been decommissioned, which means that we have practically concluded with the process of the state aid successfully by meeting all and matching all expectations. And by that, we can really be confident about our group, being as a free business, able to compete at arm's length with, of course, other businesses in our home region and also internationally. Activities regarding closing of Komercijalna Banka has been continuing according to the plan. We still envisage the closing in the Q4. So no big deviations from these respects at this point of time. When we're talking later in the presentation, colleagues will give you a bit more flair on Serbia and eventually, Komercijalna Banka. At this point of time, we feel confident that, of course, the contractual conditions will be met. And by that, we can close the transaction. It's very important to mention that we have been working continuously on strengthening on one side. And on the other side, on optimizing our capital structure and base, and Archibald would give you details on that, but the group has been very, very solidly capitalized as per end of H1. And this only caters for the Komercijalna Banka acquisition, but this also caters for the dividend, significant dividend flow, once, of course, the banks that have been in place will be listed. And in this respect, this really supports our story of still, of course, the growth. But on the other hand, the dividend stock. We have been working on various measures and Archibald will give you more flair on them. And some regulatory changes have clearly impacted our capacity and ability to pay out dividends. Of course, there have been full bans when it comes to bonus payments in place in Slovenia, and this has been, as it seem so until April next year. The same is true for the dividends so far. And the restrictions of the Bank of Slovenia with regards to the retail and lending have still been in place as well. And these have been clearly impacting our origination in Slovenia. But overall, as a mixed picture of the whole group, we can confidently state that this has been actually a solid -- very solid performance within given circumstances, and I would just reiterate that in terms of the core recurring business, we have been practically at the same level as last year. And that's a very, very solid outcome of the first half of the year. So let me move shortly to the situation overall. I'd already somehow briefly touched it. So it's a bit of a mixed bag from country to country. Besides Slovenia, where we see really strong, strong pickup, very solid situation can be seen in Serbia. Serbia is generally and the least impacted in terms of dependency on European Union, automotive and tourism and some other exposed industries. And here, the lowest drop is expected, but also very, very quick pickup. And we are happy all that since this has been clearly our strategic market, and we have been working on the pending acquisition. And by that, this just reaffirms the story. In other countries, as I mentioned, various sets of measures in place, but we have not seen significant fallout so far. Andreas will give you a bit more details on the picture, how he feels as the CRO. But so far, the situation has been solidly contained. Of course, there have been many moratoria in place, and the real picture will be shown after expiration of this moratoria. But we have been very, very closely working on the key exposures. We have been talking to our clients daily and have been very close to them. It is important maybe to mention that we have provided, as a precautionary measure, significant liquidity lines to some automotive suppliers and some more exposed companies. In March, I'm happy to report that practically all of these lines have been repaid in -- already some in May but made predominantly in June, which shows a robust liquidity. If you look at the level of corporate deposits, they are very solid. And this means that the corporates are in solid shape. Also the ones from more exposed industries, especially tourism, has been beneficiary of the governmental measures, and there have been this tourist voucher key, for example, and Slovenians have been really using this opportunity and have been vacating at home. And there has been a very high occupancy in -- at the coast, in spas and some farm estates and so on. So this is -- this shows very solid picture also that -- also for this sector, it's going to be significantly less painful, as we've seen before. Of course, city hotels that are depending on business inflow and air travel and congress events, they suffer. And this is going to be, so I guess, for a longer period of time. But generally, the situation in Slovenia has been significantly better than we hoped for 2 months ago. Macro. Just shortly, you have seen more or less forecast various institutions. It seems that we have been seeing in Q3, of course, recoveries all over the place. Of course, we are not yet at the levels of last year. But if you look -- if we -- we are closely monitoring a specialty development in Germany, and German production output is at 90% of pre-crisis. We see the IFO's somehow forecast of 3 consecutive months and so on of consumer confidence picking up. And of course, this is directly then reflecting in our economy. Of course, the largest export market is Germany and then Italy and others in European Union. But also then Serbia, the largest non-EU market for Slovenia. And in this respect, a very solid situation there is boosting our optimism and confidence now that the situation has been not that bad as it seemed clearly some time ago. So coming then to key performance indicators. Of course, it is here difficult to be very exact. But from today's point of view, in case of no further total lockdowns, so selective has been happening here and there in the region and we can clearly expect them until there is a vaccine in place and until there is full confidence in health systems. But generally, it seems we should be able in midterm delivering the ROE targets, especially if you look at an optimized core Tier 1 levels. And on the other hand, we are quite confident that we will be meeting capital ratios. And also cost income ratios is actually a very solid outcome in the first half of the year. So Archibald will talk about cost containment, is going to talk about also core revenue structures. But in principle, cost income ratio has, for such turmoil, been at a very solid level. Margin is, of course, the question in such a situation, but it has to be seen holistically also from the perspective of account charges in combinations. On one side, we see very high deposit inflow -- influx, and this is impacting also net interest margin. On the other hand, clearly, the financial markets book is seeing shrinking margins. And of course, for the last corporate investments pressure on good risk. So good risk profile clients. But generally, we are introducing leasing as we speak. We've got all the licenses. So the bank has launched this service now. We expect also cross-border activities will resume once stabilization is achieved. So by that, we will be addressing the margin from this angle as well. But as said, margin needs to be seen in combination with account packages and other charges related to the account balances as well. And in this respect, we believe that we should be also in midterm and coming close to that. The NPE situation has been pretty much very, very solid. Andreas will be talking about this more in detail. But of course, it's target to be contributed to moratoria. But generally, as I said, we are very closely talking to our and monitoring our clients, and we feel relatively confident that there should not be too big of a damage, especially in Slovenia. And the other countries, of course, we hope for the same. By that, I would pass the word to Archibald to guide you through the financial parts of our performance. And then, of course, also Petr and -- Andreas and Petr will have their portion of presentation. Thank you very much.

Thank you, Blaž. And I will start with a quick overview of Q1 financial performance. You have, as usual, of course, much more detailed disclosures already published on the website. And we also look forward to a series of investor relation events planned and scheduled for the upcoming weeks. Not to reiterate everything that Blaž already mentioned, but overall, that was a very robust H1 and then also Q2. Bear in mind, we had some nonrecurring elements of the results. Blaž mentioned Vita. That was closed. We also actively managed the securities portfolio, and by that, took some profit. And you see that reflected and disclosed. So we divested in the range of EUR 300 million of securities and are now basically tactically very much positioned in cash. But given the turmoil is more or less done, of course, this is supposed to be substantially reinvested in the upcoming weeks and months, and we have already taken steps towards that. So in other words, H1 and then in particular, the Q2 in terms of net interest income was, to some extent, affected by tactically repositioning of the balance sheet in terms of interest income. And -- but this is more or less temporary. The other thing that, of course, affected net interest income was the -- compared to last year is that we are now substantially loaded with capital instruments, namely the Tier 2 program is finished. And all of that, of course, in anticipation of the KB integration. So in this sense, net interest income also year-on-year is not necessarily comparable full with last year as this more or less reflects balance sheet measures in anticipation of KB integration. And to some extent, tactically repositioning from securities into cash, and by that also taking out some profit. The core revenues on interest income, but we'll come to that are, as Blaž indicated, very stable. And we'll see details in the next slides. Fee commission income, also very robust, seen in comparison to previous year. And we see very, very actually positive trends on the basic fees and fee structures are stable. Of course, there were some temporary -- basically declines in the COVID situation on payment-related charges. But from what we've seen in the last months, May, June and also July, this has all been pretty back to normal. So fee commission income on a monthly basis, June this year, where the June last year is pretty much on same level. Then, of course, we had impermanent provision effects that which Andreas will tell you more. Clearly, this was anticipation of macro developments, largely. So not yet too much specific provisions. And finally, the income tax is showing better performance compared to last year. And we also expect for the full year to be in the single-digit effective tax rate. So this is, of course, somewhat related to nonrecurring transactions, which have their own particular taxation logic. So overall, just to repeat, very robust performance of the first half year. And as mentioned before, net interest income, although showing a decline and pressure on margin, I reiterate this is largely linked to the Tier 2 program. And of course, also to the substantial increased cash position we took on the balance sheet, which, of course, carries a negative margin to the extent that it sits with ECB. But this was a deliberate action we took. We are managing our securities portfolio on a conservative basis. And given the turmoil that we've seen in Q2, we basically just took some risk out. On the other side, realized profits, which you see as nonrecurring trading results. Interest margin on loan books were, broadly speaking, under pressure, both in d.d. and also in our subsidiaries. Although that the revenues, as such, in absolute terms, are very stable. And this, I think, is really largely to our very strong position in the markets, in all markets we are operating. And of course, is also attributable to volume growth we see, especially in subsidiaries. But also in Slovenia, we've seen volume growth in corporates. We see a very robust housing market development also in Slovenia. So demand for housing loans retains strong. Production here has been largely stable even throughout the crisis. And is now pretty much back now to normal levels. And as we've said previously here, we deliberately also want in the future to go for more volume as this, for sure, is one of the strong hearts of the group. It's a key product for us, and it's less volatile than consumer lending. So this will remain a focus going forward. In our foreign entities, you see basically pretty solid volume dynamics. We have year-to-date volume growth of 5% on our loan books. And we still see revenue growth coming from loan growth as well. So here, we really haven't -- I wouldn't say we haven't noticed the crisis, but actually, throughout the region, loan demand remained pretty robust. And from what we've seen as well in the last months, May, June and July is somewhat lower than what would otherwise have been expected, but it's still showing pretty robust growth and then -- thus also driving interest revenues. So by and large, core interest revenues, just to emphasize, from what we've seen so far and also going forward, we expect actually solid performance and especially from our subsidiaries also, the revenue growth going forward. On noninterest income, I've mentioned the nonrecurring effects, which just to briefly repeat, was linked to closing of Vita, showing with EUR 11 million and divestment of some EUR 330 million securities showing with some EUR 17 million in nonrecurring results. The rest of fee and commission income, as said, was very, very stable. And again, to emphasize that June was already pretty back to normal. And Blaž mentioned that we have somewhat seen some shifts from fee income and what we lost in COVID-related circumstances in payments and ATM charges. We actually made up with increase in basic account charges. So in this sense, we have pricing power, and we use it to the extent possible. And generally speaking, of course, fee commission income growth will remain a key topic going forward in interest rate environment as we're observing it. This, of course, is absolute key to future revenue growth. And all the measures we are taking will support that. Our costs, of course, hugely relevant in terms of maintaining discipline. I think we have shown, especially also in Q2, but overall speaking that we are able to do that. Petr will speak a bit more on the upside key dimension of that. But broadly speaking, we keep highest and strictest cost discipline in running this operation and running this -- guiding this loop throughout this crisis. That goes without saying. You've seen that branch numbers have come down visibly both in Slovenia, but throughout the group. Numbers of employees are stable or slightly declining. Also we are hiring in critical and crucial areas and we have put some cost stabilizers, as I call that, in place, which are COVID-related. So they're, by nature, a temporary. Management has taken a voluntary pay cut, and that is not just top management, that is the management -- that is all senior management of the group. And so by that, we also contribute to -- symbolically, but also actually in real numbers, to this flat cost dynamic. And of course, we are, by far, not done in this sense. There is plenty of more to come. We have plenty of optimization potential on several dimensions. A key topic is real estate. Of course, we have now all learned to work on a remote basis. So there is very significant cost savings potential in the whole real estate dimension on group level. There is cost savings potential in how we run and operate the whole business that's more strategic and tied to how much we facilitate online transactions. And by that, simply making branch infrastructure leaner and less expensive. So these are all upcoming topics that we will be very focused on. Blaž mentioned and Petr will tell a bit more that we have just introduced full digital underwriting of more products in Slovenia. So you can now, from the mobile app, underwrite business that so far would have taken you to the branch. And of course, the acceptance of these kind of services is very high and rising and expect it to increase further. So there is a big optimization potential still on group level on costs, and this will remain a key topic going forward. So in terms of underlying loan or revenue dynamics, specifically the loan growth. I've mentioned Slovenia is more or less flat with mix dynamics in retail. Retail, very -- pretty strong in housing. But of course, suffering in consumer lending, which is a bit of a combination of COVID-related effects, plus more importantly, the restrictions Blaž mentioned. Corporate lending was up, but that's also, to some extent, COVID-related, also most COVID lines have actually been repaid. So in this sense, this is also speaking to, I think, the robustness of the Slovenia economy in particular, and then still solid demand expected going forward. We haven't seen much of the so-called cross-border initiative and, of course, have put a bit of a brake on this in COVID circumstances. But already now, we are starting to relaunch these efforts and/or to see first transactions in the pipeline. Foreign markets have, as said before, been growing robust and then roughly 5% year-to-date. And with still double-digit growth year-on-year. And from what we've seen, and Blaž mentioned, the COVID circumstances also infection rates are up there visibly. We wouldn't expect such severe lockdown measures as we've seen in the first wave. So in this sense, we remain pretty confident and bullish, especially in our foreign subsidiary. On the liability sides, there wasn't too much happening other than we substantially keep growing our deposit base. So this is for us, to some extent, a burden because it is a pressure on NIM. And to some extent, is a straight cash cost. On the other side, we can pretty much recover this cost increment with what we mentioned before, basically count charges. So far, we are not yet discussing very much the direct account-related fees. Also, as you know, we charge already, both in Slovenia and other markets, for corporate balances. For retail balances, this is still work in progress. But of course, at some point, might be on the table. So the liability dynamic is really very much deposit-driven. And of course, you have noticed that our cost of funds has gone up and that is, of course, tied to the Tier 2 program that we finished with some EUR 285 million in Tier 2 funding that we have brought in, of course, largely in anticipation of the Komercijalna Banka transaction. Speaking about the capital. You see that we have -- other than the Tier 2 notes, decided also to include half 2019 profits line to the capital base. And this is more or less -- well, a reflection of regulatory action. But on the other side, in substance, it is the preparation for a smooth KB integration into the balance sheet. And I'll talk about that in a minute still. More importantly, we have -- although it's a relatively modest amount with EUR 30 million. We have now included minorities into our capital base. And the important part here is that we have basically also done this for Serbia, also with a very tiny amount, but that means we are technically prepared also to include minorities for Komercijalna Banka if and when we close. And this is, of course, relevant. On the risk-weighted asset side, basically, you see moderate risk-weighted asset growth. We haven't yet shown, and this is to come, some -- up to EUR 500 million risk-weighted asset relief coming from MIGA and the so-called SME support factor that kicks in, thanks to accelerated ECB measures. So some EUR 500 million risk-weighted asset release are about to come in Q3 based on those 2 measures. And talking about our capital situation now going forward and how well we are prepared for KB. As we write, KB is a risk-weighted asset burden of some EUR 3.5 billion. And with measures I mentioned, we will end the year if KB closes with something like EUR 12 billion risk-weighted assets. On the capital side, our starting point is now something in the range of 1,900 -- or thousand -- EUR 1.9 billion. And let's say, if KB minorities kick in, we will be something EUR 1,950 million in terms of capital. So a very solid capital base, also assuming KB integration because if you run the numbers, we will be above 16% capital adequacy on these circumstances. And this doesn't take into account any results from 2020, which then obviously, would also be available for dividend in -- to be paid in '21. By that, I would conclude my part and hand over to Andreas.

Yes, Archibald. Thank you. One big topic these days apparently is the moratoriums. In the recent weeks, honestly speaking, there was not too much news anymore. So we have stabilized something like around EUR 1.7 billion or some 15%, 16% of our portfolio on moratoriums taken. This is by-and-largely differing country-by-country on the way how it's done. And on the periods here, the outlier in the period is Slovenia with 12 months moratoriums. Other countries usually went for a couple of weeks to 3, 6 months. And the first moratoriums here have already again expired. That's approximately 240 -- EUR 246 million, actually per end of June. This is, first of all Montenegro, where simply there was no prolongation for most of them. And then also a little bit Sarajevo and Pristina. Generally speaking in Slovenia and in Bosnia, the percentage of the moratoriums were from the beginning very small. And for the other countries, primarily percentages were much higher because in some legislations, it was simply the standard approach. So basically, whoever doesn't opt out gets the moratorium, because then you see much higher percentages. So far, I mean, for the moratoriums, which are ongoing, we are very closely monitoring. We didn't see yet any major impact. But I mean this is, of course, one of the interesting questions for the next months because this might change then the staging wherever we see such effects. For the expired moratoriums, we didn't yet see any adverse effects. But honestly speaking, that's also still very early, right, because that's now some 5, 6 weeks. But I would say, so far, so good. If we look on the segmentation of our portfolio, I mean, we were already before primarily showing 3 subcategories specifically, that's accommodation and food. That's 2.6% of our total portfolios are very moderate. And then manufacturing, as far as it's related to automotive, which is just 3.5%, also very moderate. And last but not least, transportation, which is nominally speaking, higher. But here, you have to say that the big, big part of it is actually one exposure with a state guarantee behind. So the remaining part is also around 3%. If you go through these categories, I mean, accommodation, Blaž mentioned it already before, I mean, we see actually a mixed picture. So the Slovene cost is full. And at the end of the day, we were expecting here really throughout the portfolio that they would see a very bad season. So a mixed season or mixed feedback here is actually already a good news. On automotive, I have to say that, I mean, this is, to a very good part here, in Slovenia. And the feedback which we get from our corporate clients here is surprisingly positive. So for the time being, looks, well, better than we were hoping for. And transportation is also actually a mixed picture. Widely, passenger transportation, and that's in our case no airlines, we are not in any airline, but passenger widely is very mixed picture. Whereas, for example, freight, to a big part, is actually pretty solid, maybe also a little bit surprisingly. But from this perspective here, at least no negative surprises. When we look on the provisioning, obviously, that's now a different year than the previous years. We have in the first half of the year a EUR 32.8 million loan loss provision, out of which EUR 20 million is actually pull provisions. So honestly speaking, given circumstances, the remaining EUR 12.8 million, of which only 4.6% are in the second quarter, that's actually very moderate, given circumstances. And that reflects in our annualized cost of risk of 85 bps. But obviously here, the interesting part will come obviously in Q3 and Q4. So we are, for sure, expecting that to pick up. And we were guiding up to 150 bps cost of risk so far. This guidance, I guess, at that point of time stays unchanged. But what I have to say is that the big part of our portfolio is more than half, is still in Slovenia. And Slovenia actually is surprisingly robust and surprisingly positive and also moderate is the COVID development. So if this continues to develop in this direction, then we might not need this 150 bps. It's a little too early to tell you how much below we could be, if we are below. But given the strong development here in Slovenia and that in Slovenia is clearly the majority of our business, honestly speaking, also from that perspective, getting more optimistic compared to what we originally thought. When we look on absolute figures, so NPL volumes. You -- basically in the first 6 months, almost nothing. So we ended up EUR 375 million end of last year, and we are currently at -- end of June, we had EUR 401 million. So very moderate development. And you have to say that approximately 1/3 of that is with 0 delays. So to almost a majority, that's actually one big client, which is the strategic client and which, for historic reasons, is still marked as an NPL. But where we even considering eventually to increase exposure because that is a solid and a strategic client. So if you take that out, then you see how low our numbers in reality are in the meanwhile or at the moment. And this also is a very solid coverage ratio. So that you can also conclude that even the potential downside, if something goes wrong here on that portfolio, is obviously very limited. And obviously, this also reflects in staging. What is a little bit confusing if you look on that slide is the billion jump in Stage 1. That's actually a very technical effect. So the nonobligatory reserves to central banks, which are included here, have jumped to double basically and this is the majority of the effect. Because as both Blaž and Archibald mentioned already, otherwise, portfolio was very stable, slightly increasing, but obviously not EUR 4 billion. That's a special effect. But the interesting part here is really the other pockets in the last 6 months. And obviously here, the movements are very, very moderate. And the big majority of our portfolio stays in Stage 1. And that's obviously also a comforting message. Again, as I mentioned before, on staging, we will obviously see more movements now in Q3 and Q4. And that's why we gave you this guidance up to 150 bps. But again, at that point of time, I'm rather getting a little more optimistic, I have to say. So in the next 2, 3 months, this is something which, hopefully, we confirms. Yes. That would be from my side for now, for the risk part. And with this, I am happy to hand over to our newest Board member, to Petr. Thank you.

All right. Thank you very much, Andreas. Good morning from my side. As it was said, I'm the newest, so let me spend a couple of words of introducing myself. My name is Petr Brunclík. I am in the banking/consumer finance industry for roughly 20 years. I used to work for GE Money Bank in Czech Republic, which later on got renamed and IPO-ed and renamed as MONETA Money Bank. And then I worked for Home Credit in Philippines. Also next to the Czech Republic and Philippines, I worked at the beginning of my career in United States. I'm happy now to be in Slovenia with Service NLB. I got very warm welcome, which I would like to thank to my Board member colleagues and also for support base onboarding because I could imagine better conditions to start my job than with the corona pandemic crisis. But I must say that we have managed very well to support the bank and support our colleagues to work remotely, and we are ready in terms of any -- in case the situation worsens to provide such a technology that people can work remotely and have a social distancing and so on. So let me just briefly talk about IT and digital. The slide you see on your screen is the slide from our current IT and digital strategy. As I mentioned, I am with the team for 6 months. We are working on a new IT strategy, which should be prepared and introduced on the next call. So far, we have made some changes in the IT leadership. So that's why the people will be working on the new strategy. However, I can announce already that the basic cornerstones, which you see on the screens, will be also in the new IT strategy because they definitely make sense. If I touch on those cornerstones, basically data project that we are running, we see the first fruits of the implementation, and the project is running according to the plan. The second cornerstone, which is the most important right now is basically the digital channels in the midterm. The plan is to replace our digital channels, which are highly evaluated, but our ambition is even higher with a new platform, new technology. At the same time, we are working on some very short quick wins. So basically, roughly in 3 months, we were able to introduce the digital onboarding, basically for people without entering the branch, they can open a current account. And for our existing customers, we provide in our mobile banking solution, basically onboarding to a credit card overdraft and any other product of NLB because we are basically a provider of a digital certificate that is accepted by the government, is the qualified certificate. So basically, our customers can sign whatever document. Together with investing into digital, we invest in changing the culture in IT. We invest in agile principles or the app changing our, let's say, approaches towards -- to agile. And we also structurally are changing the IT team plus the biggest goal is to motivate and recognize the people for the fast time to market development. As Archibald mentioned, the cost dimension is very important. And this is basically, mainly touching the IT currently. We run 2 core banking systems. So we are working on the core banking system strategy where we would like to basically come to one core banking system. The second thing is that there is quite a big proportion of legacy systems and also some duplications. So this is something that we are working on, and the simplification of our IT and basically, the decommissioning of some of the systems will be the future of our effort. Also, going to the cloud and cutting down the costs, make it more efficient. For the group synergies, currently or in the last years, basically, we were not very much utilizing the group synergies, and we were approaching the areas as 7 different banks. This is changing. What we are working on is basically unifying the infrastructure. Currently, all the banks are basically buying the same hardware and also the same licenses. So this way, we get economy of scale. And there is also chance we can actually share the licenses as needed. For the approaches, we are setting up these similar IT security approaches to all the banks. So we have one security control center. And also, currently, we are implementing one network for all the banks. This has been a bit delayed due to COVID, but once the situation in the countries improves, we will continue with that. There are also some regional activities. Currently, we are working on a project of implementation of unified approvals -- a loan approval system. This has been already piloted successfully, and we are going through the implementation phase. Also, we are gaining synergies from the unified procurement for all of the banks. And we are renegotiating contracts with some major vendors. Last but not least, what I would like to mention is that we are expanding our competence center in Belgrade. This competence center should work as a development and IT infrastructure support center for the group, and also later on, when the acquisition is closed for Komercijalna Banka. So we have approved enlargement of this center, and we are currently hiring those resources. And with this, I would conclude and pass the word to Blaž.

Thank you, Petr. Talking about outlooks in such environment is always a challenge, but I believe you have sensed a positive skew in the sentiment when it comes to the management board. We feel really significantly more confident than 2 months ago. I would specifically highlight at this point of time that NLB has really, throughout this crisis, played the role of a systemic institution. And this is not only true for Slovenia. I claim that we have been a role model on communication when it comes to an internal communication to the employees, but also external communication to clients. We've seen our practices being copied by also competition, but predominantly also from other industries and the government. We have been through this time, difficult time, really focusing on the entire ESG territory, be it from, of course, direct social responsibility supporting hospitals and health systems on one side, but mainly focusing on clients and employees as well. So on clients, as I mentioned, we have been really providing digital services online. Practice continues to evolve for practically all standardized transactional services when it comes to Slovenia, Macedonia and other market -- North Macedonia, other markets are following. So we can also underwrite cash loan through mobile app in North Macedonia, for example. And the other countries will follow with this kind of approach. But especially into our societal framework of the ESG, I'm specifically proud of initiatives we undertook to support, actually, local businesses. And this goes in 2 dimensions. The first is that we have been very, very close to our corporate clients, providing liquidity lines, providing expert support and focusing on liquidity and so on. But there has been campaign, that is a group-wide campaign called Frame of Help through which we have identified small businesses that have been dealing with sustainability and health and healthy life and sustainable life. And by that, really providing advertising space to them throughout the whole region. So not advertising bank products and cheap loans, but really showing them, their faces, their premises, their programs, their local products. And by that, really promoting their businesses and helping them out through this crisis. We believe this is a really new paradigm of communication, at least in our region, and we are specifically proud of this achievement. Well, and this is something that we will continue. So into our ESG constellation has been gaining on importance. But I would add one very important feature of this crisis and this is supply chain challenges and risks. And Balkans -- Western Balkans and the entire Southeastern Europe is actually 4-, 5-hour drive from Vienna and 7-, 8-hour drive from Munich. So this is in the heart of Europe. We believe that some supply chains will be moving from Pacific or other parts of the world into Central Europe again, to simply derisk certain epidemic situations. And this region, while working on the infrastructure, building roads, the railways, energy and communication, will be a beneficiary -- can be and should be a beneficiary of this development. That's why our bets on the region are high. And that's why we believe that this year might play out at the end of the day, better than it was perceived 2 months ago. It is difficult to give concrete guidance, but you could sense that during our presentation where it might be, we feel strong confidence picking up, especially in retail and also in corporate. In this respect, with orders picking up and getting back also in the exposed industries. And the situation in terms of managing the health situation, imagine the health status here in Slovenia have been very, very robust. We've seen people quite disciplined. We've seen people respecting the rules. On the other hand, as said, practically only a couple of -- 10 people in the hospitals, couple of -- only a couple of people in an intensive care. And we believe that this is a very, very solid situation. And looking forward to, of course, vaccines and other needed aspects that will stabilize things in longer term. We, at this point of time, feel pretty confident. By that, I would pass the word actually to you, near and dear guests of this presentation. It's a Q&A, of course, in front of us, and we will gladly respond to the questions you will raise and put. Thank you very much.

Our first question is, how do you see loan growth developing in July and August?

Well, we have been indirectly mentioning that has been a robust situation. So already in June, as you can see, providing then, of course, stable underwriting and even certain growth in -- especially in the countries. We've seen this continue throughout July and August, and is -- in fact, this is something that gives us this confidence. So I cannot be very specific on concrete numbers, but the trend from June has been continuing, and this is something that gives us hope.

Excellent. Our next question is, last week, we saw NLB Skopje sign a big loan in Macedonia. Looks like this will be where the future loan come from. As we are seeing more big infrastructure projects being started in Serbia and the region. What is NLB's strategy for participating in those? Also, how do you see KB position participating in Serbia state infrastructure projects?

Well, this we have been announcing as one of the core new revenue pools incrementally. So as you saw, yes, indeed, we have signed the East Gate project in North Macedonia in Skopje. We believe this is one of the best-located malls in the entire region, and I'm proud that I can say that NLB has been the lead arranger of this transaction. We have been participating as co-arrangers. Our participants in, for example, wind park transactions in Kosovo and we have been expecting opportunities for sustainable energy projects throughout the region as we speak as well. So be it hydro, be it solar, be it wind parks, this is something that we believe in. That is something that we, within our ESG thinking, are actually actively promoting and would be actually eagerly participate in. And this is, of course, also true for Serbia. So any bigger infrastructure projects directly sponsored by the state or through some PPP structure with sustainable cash flows, you would clearly be interested in exploring and understanding. We have been talking on previous occasions that overall ambition for such cross-land and cross-border activity is in the range of EUR 1 billion in midterm. So yes, it's somehow stalled throughout Q2 because, of course, the uncertainties related to COVID. But Archibald mentioned that the pipelines are again picking up and filling. And we are confident that there will be many projects in this region, especially given the opportunities [indiscernible] announced on supply chain repositioning and redistribution that can accelerate this investment. And this is really something that we are actually awaiting with quite some optimism.

Excellent. Our third question is, how many of the employees at the end of the second quarter were working remotely? How many will be working remotely as a target by the end of the year?

Well, it has been -- during the crisis, it's been practically 70% or 80% then it was -- went down to some 30% or so. So we are now working really on formalization, fully in line with, of course, legal prerequisites of remote work to become actually a regular way of work in our bank here and in the group. So in early autumn, beginning of October, we would -- we plan to actually launch this as our ordinary cost of business. And my hope would be that towards the end of the year, close to 40% of our employees would be actually working this way already. As not only temporary, but really reasonable and sustainable way of work. Towards midterm perspective, I would see 60% of the ambition, and it is possible to do that. And Archibald was already then announcing what this means for both sides, right? Improved quality of life of employees, but on the other hand, significant opportunity for cost reduction on the bank side. And this is something that we will be very, very actively pursuing in the coming year.

Our next question is, you mentioned sustainability and being meaningful. What does this mean? What steps have you taken so far? And what are your plans in this field?

I mentioned in my outlook, address in principle that we have put ESG really to the forefront of our interest, and this has been addressing the society as a whole. And if you read our strategy, the main pillars of this strategy have been really client experience, this region that we call home, clearly and the quality of life. And through introduction of new services to our clients that are really enabling them to use their -- to use our services from them home, or from -- at any point of time. And at the same time, really sponsoring initiatives, projects and our clients that are addressing the conditions for their businesses to thrive on one side and directly impact the quality of life. This is something that really we are addressing, I believe, in one of the most consistent ways in the whole region. Through this ESG effort, we are addressing the meaningful agenda. So we don't want to boast that we want to be the best or the largest necessarily, but what we really aim for is to become one of the most meaningful businesses. This, of course, on one side, automatically sees business success, but this business success is then, of course, used also to benefit our stakeholders. And that means also that we are, of course, actively focusing on the standard on one side, but ability to work for our employees, which is then leading to the second very important ambition of this banking group. We really aim to become one of the most desirable employers as well in this region. And we believe it is possible. And with this whole constellation of activities, we believe we will be there in midterm.

Our fifth question is, how would you expect provisioning needs to evolve in the second half of 2020 if we do not see another second significant COVID wave? Is it reasonable to assume we would be more or less in line with second quarter 2020 level in that case?

So yes. Clearly, I mean, I mentioned before, I don't think so. No. So the current projections, it's not been assuming a second lockdown. I mean now we can discuss what is a second wave and will such wave be there or not. The real essential question here is how is the reaction of the government on such potential second wave. And I think someone mentioned it already before. We do not expect second full lockdowns. And I think the tools which the governments throughout the region using here in case of need has become much more focused and much more precise. And it would be now a very big surprise if that would completely turn again. So given these assumptions, we are, for sure, expecting to stay within what we have been announcing and forecasting. So maximum up to 150 bps cost of risk. But if you calculate that for the rest of the year, that is, for sure, a considerably higher number than we saw in the first 2 quarters, especially when we are talking about individual provisioning. The individual provisioning in the first 2 quarters together has been in the range of EUR 12.8 billion. And that means, obviously, we are expecting considerably higher numbers for the last 2 quarters. On the one side, and that would be probably the bigger effect from the expiring moratoriums, obviously, we will see some effects, but then also from staging otherwise. So clients which are still in moratoriums, but where we see the situation deteriorating. So we will not wait, obviously, till the moratorium and expire, but we would then restage the clients at that point of time. Again, given this understanding, I very welcome believe at that point of time that we will not use that 150 bps cost of risk on an annual basis or maybe even be clearly below that, but it's still a little too early. I mean, in the first half of the year. Obviously, to a certain extent, items were frozen and visibility was limited, and we will now actually see much more in Q3 and Q4. I am becoming optimistic, I have to say, compared to what we forecasted originally, but it's too early here to really change on outlook.

Excellent. Our next question is, net interest margin is falling across the group and not just in Slovenia where the Tier 2 instrument is booked. What explains that?

So I mean, one big element I mentioned before, substantially increased cash position on -- both in Slovenia, but also in other markets because NLB has proven to be a safe haven in times of crisis. So people simply place money with us. And then that, per se, puts pressure on NIM. And as we've said before, the way to turn this, let's say, challenge into an opportunity is through fee income, as was also mentioned couple of times now. So we will translate part of that into increases in fee income. On the other side, I mean not to disguise the fact that this is -- these are -- we are operating in competitive markets. And yes, loan yields are coming down. And so the way to work around that is with a very strict focus on digitalization of the business model. So take costs out and compensate or divert some of that to fee income, as mentioned before. And of course, not to forget, volume growth is -- volume growth versus margin, in other words, pricing, is still some potential to create value. Ultimately, we are not focused only or exclusively on NIM, we are focused on value creation, and we see value in volumes rather than placing cash in central banks, we'd like to place more cash, more money in loans. So to some extent, it's also a trade-off between price and volume, which is value-creating.

Our next question is, will the acquisition of KB have an impact on the number of employees in NLB Group or in KB? Would NLB retain KB's existing management team?

Well, these are very specific questions that we, of course, cannot fully respond to. But generally, you have been observing the trend. We have been focusing on process optimization, on digitization, on really, client experience, which means that we have been transforming as a business from a very traditional brick-and-mortar business into much more data- and IT-driven business. And naturally, this means adjustments. And if you look at our dynamics in this respect, since 2010, when the NLB d.d. in Ljubljana had [ 4,200 ] employees we are down to 2,600, and we have announced we will be down to 2,100, practically in 5 years, which means 50%, right, adjustment. And the same trend is going to be pursued practically throughout the whole group. So this product optimization and digitization will be driving efficiencies and will be, of course, on one side, reducing number of employees. And will be, of course, at the same time, transforming the profiles that will work in the banks, much less teller clerks and much more data scientists and IT developers. So it's a transformational thing generally for the whole industry. And NLB is, of course, not specific. And the same is true for then KB. It's going to be a part of the same story, right? Not specific. It will be treated the same way, the same focus, the same process. Or allocated more or less management attention and client experience and digitization management attention, which will naturally lead to adjustments of such kind. Of course, we cannot, at this point of time, talk about management and comment on them.

And just to complement, remind investors, we have published a piece on KB on our website, which speaks about synergy potential. My personal view is that was rather conservative take on the whole story, and we are refreshing these yields as we speak. And of course, to reiterate again, KB was not necessarily a cost play, KB is a revenue play. So KB is very much about growth. We see Serbia as a growth opportunity. This is a higher-margin environment, and we see a lot of potential in working with that client base that we would acquire with KB because there's a lot of unutilized potential in that client base. Not to mention, of course -- not to forget that Serbia, in particular, is very open to digital business models. So this is something we highly appreciate. And of course, this offers plenty of opportunity to emphasize, again, a much more digital way of doing business. In other words, taking costs out of existing structures.

We mentioned time line as well. So time line of KB, we are somehow announcing, as we are still expecting closing towards the end of the year. So in last quarter, and of course, then full focus on integration within '21 and '22.

Our next question is, any initial thoughts on the cost of risk trajectory in 2021? What is your normalized cost of risk now?

So I mean what we were seeing is normalized cost of risk in the midterm. And this is unchanged. It's just overlapping now by the smoke from COVID. And I think you remember, we said in no point of time, we would like to be above 90 bps. And on average, we would rather see on half of that, roughly speaking, whereas we were originally foreseeing this very moderately approaching this figure. Now obviously, this year, we will be over this target, which we basically set for ourselves. So that's really extraordinary circumstances that we have this 90 bps cost of risk. But next year, we definitely again want to be in there. Whether we can do more, meaning coming below that considerably. This is still, I think, very early days to say. So here, I would be careful. So you have to see that next year, we will still see a considerable fallout from COVID, partly simply due to the fact that also moratoriums will still continue to expire, especially here in Slovenia. On the other side, as we said before, I think more or less all of us, we see Slovenia here also as a pretty positive example actually in this crisis. So I wouldn't see it affected too dramatic. So big picture, definitely, I'm expecting next year again to be within this maximum target, but whether we can go below of that, this is still to be seen and will depend on many factors in the next couple of months.

Our next question is, if you are not allowed to pay 2019 dividend, would it be assumed that it will be paid out in 2021 together with 2020 dividend?

So there is no issue per se. I mean once the bans are lifted and once we have clarity on KB closing, which is, of course, the big unknown for us, although we expected, but it's not a given, and we are talking to the regulator as we speak. But once this is done and once, as anticipated, at some point, dividend plans will be lifted. I gave before a pretty specific KB, let's say, scenario on capital adequacy. We, of course, would resume with normal dividend payment. Because, as we said, I mean, we are very aware and conscious that we are meant to be a dividend-paying stock. KB is the incremental growth opportunity that we put in play. And with the retention of '19 results, I think we are more than well prepared to absorb this now. As I said before, we will be roughly EUR 12 billion risk-weighted assets. And given current capital levels, we are already well above target. So that there is room to pay dividend for -- especially then for the 2020 results. And I haven't mentioned yet that none of this includes consideration of so-called negative goodwill. And none of what I said before considers the possibility to still do more on the capital side. ECB has actually now opened room that we might or might not use, but we could add something in the range of EUR 100 million in Tier 2, which, of course, would come in much cheaper than AT1, as we've mentioned previously. So this is an incremental space on the capital side, of course, ultimately available also to shareholders.

Question 10 is, can you tell us how did the moratorium on interest payments affect current interest income results?

Basically, that was neutral as the so-called modification results has turned out to be immaterial. And in this sense, the effects are neutral.

Our next question is, do you experience any changes in clients' behaviors after lockdown? Did the usage of the digital channels stay at previous levels? Was there any impact on cost?

We see various, actually positive, signals. I was mentioning at the beginning of the presentation that some people are actually getting out of moratoria on their own initiative. And this is true for private individuals and some businesses. I was mentioning that the use of mobile apps and digital services went up significantly in annualized levels of 14% and so on. But the uses of mobile apps are now in higher numbers than e-bank. And the new users, for example, we see are N Bank-exclusive users, so they don't even want to have e-bank. So this is really an entire new generation of our digital-savvy clients. And what is a phenomenon that we and that I was a bit surprised it is that cash is back to the significant expense. So we expected that there would be significant shift to card payments, which happened to certain extent because the volume of card payments in June was at 30 December last year's level. But you know if I'm observing no cash developments and cash usage, it's also back up significant. So there's no really significant -- significantly lower level of cash usage. So this speaks that this region is still cash -- more or less cash society, and is especially true for other countries than Slovenia. But in the private individual retail, consumption, for example, segments, the use of cash is still very high. So we are enabling our clients to be able to play digitally. So we are actually, of course, offering digital wallets, offering electronic rates of payments. But -- and there is a pickup, but it's going to be still some time, I guess, before there is going to be a much more significant shift. But the progress is there, and we are happy about it.

Our next question is, how is the KB regulatory approval process progressing? Please elaborate on the comment that capital adequacy ratio, including KB, would be or exceed 16%? In particular, what bargain gain from buying the bank below book value is assumed in this indication?

So we mentioned already that we are in continuous talks with ECB. This is pending and ongoing. It's an advanced conversation. A final application has been submitted, as has been done with other relevant regulators, so specifically, of course, the one in Serbia. So these are advanced. This is an advanced stage of conversation. And of course, with regards to the KB scenario, I mean, already in the previous call, when we discussed the KB acquisition, we have disclosed that KB adds something like EUR 3.5 billion in risk-weighted assets. So this is a known and disclosed fact. You have seen the H1 capital space. That's something in the range of EUR 1.9 billion. And so it's basically a simple calculation to arrive at the capital adequacy of something in the range of 16%, which is exceeding our risk appetite of 15.75% and not including our 2020 results, which, by definition, is then available for payout. So -- and as I said before, clearly, this doesn't include the so-called negative goodwill.

Our final question is, will you take any measures to channel rapidly growing customer deposits into fee-generating wealth management projects?

There have been many initiatives. So the combination of products, deposits, asset management-related. And of course, we have seen very strong production even throughout the COVID crisis in the asset management products, actually. And unit-linked bancassurance products as well. Now lately, again, picking up. But the influx of deposit is so strong, given governmental measures, given employment protection measures of the government, given some other more or less [ chopper ] money like interventions. That at this point of time, it is overwhelming. We said that we are reacting to that practically with the pricing generally of account services, be it packages, be it other direct account services and payment fees. And by that, partly offsetting that, but we cannot do it. We do it fully and entirely, right? The real shift in paradigm would be starting charging, of course, and fees for the assets -- for the retail deposits, and this would be, of course, a novelty in the market and has its own sensitivities. On -- while at the same time, this sticky retail deposits are really essential value of our franchise for future growth as well. And at certain point of time, we hope for some normalization of monetary policies also in a direction that there would be no such, at least burden of these deposits placed with the central banks, and then this is going to become enormous value of the business. So there are 2 sides of the model always. I understood this has been the final question. So allow me to thank you very much for your attention. You -- I believe you have sensed the positive sentiments of the management board when it comes to latest development. I just got fresh numbers from Slovenia on the health situation. So only 18 people in hospital, only 3 at intensive care and despite a bit higher infection rates, but these are [ primarily ] almost all asymptomatic. So the situation is under control throughout this point of time from this angle. In terms of business developments, stable, consumer confidence picking up, core business revenue is stable and even growing as we speak. So this is a very good trend. We are accelerating our efforts in terms of client experience and, of course, in power efficiencies and the banking group when it comes to the IT universe and the channels. And the entire ESG constellation, we believe we have proven through this crisis to be one of the most meaningful companies already, but our aim is to clearly further position our banking group at this level. So one of the most meaningful businesses in the region and one of the most desirable employers. And we firmly believe this is reachable, and this is going to be the case in the midterm. We are looking forward to the Q3 publication. We hope this time, video. We hope the situation will further stabilize. And we are, at this point, quite confident and looking forward to the full year and hopeful closing also of Komercijalna Banka. Thank you very much, and until next opportunity. Take care.