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

Thank you for standing by. I am [indiscernible], your Chorus Call operator. Welcome, and thank you for joining the NLB Group conference call and live webcast to present and discuss the third quarter 2022 financial results. [Operator Instructions] And the conference is being recorded. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Blaz Brodnjak, CEO; Mr. Andreas Burkhardt, CRO; and Mr. Archibald Kremser, CFO. Mr. Brodnjak, you may now proceed.

Thank you very much. Warm welcome, everyone. Allow me to first draw your attention to the standard disclaimer, which is normally used at these occasions. And I'm really feeling very proud today in front of you, given the fact that we are looking back to, very likely, one of the best quarters in history of this banking group in practically all dimensions. Of course, given the uncertainties and turmoil happening around us, this has not yet been actually translated into our daily business to the extent that it will be visible in Q3. So in fact, in all dimensions, as mentioned, we have had a very solid progress, [ with ] in terms of retail lending, corporate lending, still very strong fee generation in year-on-year comparisons especially and still high discipline at cost management. So this overall adds to the really very, very solid output, the total result of EUR [indiscernible] for the 3 quarters. And on the other hand, obviously, very, very solid quarterly performance if you compare quarter-on-quarter as well. We, at the same time, feel confident enough that we have already, in the meantime, suggested to the General Assembly to pay the residual part of the dividend that was promised for this year. So in December, we hope that, of course, the shareholders will support this payout and would be enacted in December still. And by that, providing very strong dividend yield within this year and simply continuing on the path of delivering shareholder value in both dividend payouts and capital gain from, of course, our operations. It has not yet translated fully in the valuation of the share, but we believe that we are in a good way and pull up actually to -- sooner or later, also see this value we create in the share valuation. We have been reinforcing our business also in certain new pillars of revenue streams. I would specifically focus here on leasing. We are very happy about the progress of our leasing operation in Slovenia in the last 1.5 years. And in the meantime, I'm also happy that we have come, thus far, to actually get the approvals to initiate significant leasing business in Serbia. And we have established, in the meantime, also the subsidiary in Macedonia -- North Macedonia, by which we are actually exporting this revenue stream also to other core markets of our business group. And by that, adding really earning capacity on one side, but really having additional focus in terms of supporting our corporate and above all, of course, also retail clients. The economic slowdown that has been signaled recession; a kind of recession forecast that has so far not find its way into our business operations. So we've seen further improvement actually on the asset quality, further reduction of the NPLs on one side, it's very successful collections still. So this has led to the negative cost of risk for the 3 quarters on one side. On the other side, clearly, the forecast for the region, [indiscernible] region for the upcoming period are actually not signaling the downturn in a sense of negative growth. So we still see prospects for positive growth, which is in the 10-plus percent inflation environment. In nominal terms, very solid growth. And by that, of course, we still count on our further incremental add-on to the earning capacity. We, of course, also have been benefiting from finally normalization of the interest environment. People call it hikes. We call it normalization after 7 years of the historical experiment with negative rates. So of course, these are normal times now gradually for the banks. And with our plain vanilla retail focused business model, of course, we are benefiting from these developments being a very solid retail deposit franchise, fully self-funded and self-sufficient. And in this respect, of course, now finally, we are crystallizing the value of our business model, which is really easy to understand, predictable, solid, robust and pretty stable in such environment, even, of course, when the turmoil uncertainties are high. Our region is less marked by dependency on natural gas. Slovenia, a bit more, but we have a very robust sovereign support. So the Republic of Slovenia is able to still incrementally significantly support the economy on one side, clearly, through the European Commission [ White Instrumentarium ], the toolbox that has been, of course, now put in place in terms of regulating the pricing of energy. On the other side, still in case of eventual industry shutdowns, lockdowns, the Republic of Slovenia has had sufficient capacity to assist in corona-like regime more or less the Slovenian corporates. So subsidizing a need or a shorter working time or people put at waiting for work status and so on. So far, it has not been needed. So at the current prices of electricity, obviously, Slovenian industry has still been benefiting from the nearshoring and insourcing back to Central Europe. So very robust output. We are looking at very likely a record year for profits of our corporates in Slovenia. But of course, there have been signals of reducing order books coming from the Central European Industrial Basin, yet we don't see this as a critical signal at this point of time yet. So it looks like we are in a good shape in terms of energy supply and current pricing, it should be actually well absorbed. So also in terms of currency regimes and currency [ actually ] rates, we don't see yet or at this point of time, significant risks coming from this, and Archibald and Andreas will elaborate further on. There have been clearly inflationary pressures, thus there has been attention when it comes to costs. Yet through high discipline and focus, we have been able to contain that. We are amidst, obviously, of completion of the restructuring of Komercijalna Banka and today's NLB Komercijalna Banka in Serbia. Of course, after a successful merger, there are still tails of delivering the efficiencies. And this, of course, still engages us and of course, also is consuming some cost, which was envisaged and planned for. And of course, we are in midst of the integration in Slovenia with N Banka, Archibald will give you details. Where, of course, we will still have, throughout 2023, certain impacts, and we will be talking about this around the outlook. So if I wrap it up, we have been working also on further strengthening the capital base. We have successfully issued the AT1 note at EUR 82 million worth, which is, of course, a significant boost to our capital and proof that we are able to issue capital instruments. We have been exercising ongoing efforts to beef up the capital with additional Tier 2 and, of course, fulfilling the MREL requirements through senior preferred bonds, and these efforts will continue sticking to our midterm funding plan. And by that, simply being in a position to solidly accompany our corporate and retail clients in the upcoming period and still have certain reasonable eventual or inorganic growth capacity. But at this point of time, we have not been engaged in any such projects. By that, I would pass the word to Archibald to guide you through financial report, and then Andreas will talk about the asset quality and Archibald again around N Banka's integration and myself, then completing with the outlook. Thank you. Archi?

Thanks, Blaz. I'll start with a quick reminder of where we are in terms of macro. I'm obviously not going to run through all the numbers, but we found it useful to remind you of anchors of reference. Blaz mentioned the most important messages, which is we still look at the growth environment in our region actually still exceeding Eurozone averages. So this is -- these are still growing economies, no surprise here, no change. Of course, the pace has slowed. Our expectations have lowered for next year, but even that might improve once the [indiscernible], which eventually will happen. Inflation is, of course, also high in our region. And to some extent, it bites a bit more because we are in lower-income territories and food inflation is high. So we are watching very careful how this might affect, at some point, specifically consumer lending. Andreas will talk about that. Also at this point, there are no indications of any such things happening. Fiscal positions are still solid, as you see, and actually consolidating post-COVID. And moreover, we still are in territories where we see relatively high unemployment rates, which these days is, to some extent, good news because inflationary pressures on labor, in particular, will be muted. Also in Slovenia, the situation is different. We practically see here full employment. And for sure, some pressure on labor cost can be expected specifically here. I think it's very important to remind us that also the currencies in countries we operate in are solid, of course, helped by responsible Central Bank actions in the various markets. As you see here, rates are rising, specifically Serbia, of course, Blaz was mentioning. And so overall, this region is still relatively low leveraged. So that also makes us a bit sleep better should things or circumstances worsen. And again, just to remind us that also, we are in very unusual times. We believe this region is relatively well positioned for those times. Also in regards of energy mix and energy dependencies, what used to be a weakness, relatively high dependence on fossil, of course, these days helps mitigate the effects on gas and wholesale electricity markets. So in that sense, also here, our region is relatively robust. We have, of course, supported here and there on as-need basis, where we have been called to support, be it Serbia, be it Slovenia. And we have the balance sheet and strength to do that. But so far, this has been limited, and for us, frankly, also been an opportunity. In terms of financial situation as such, this was, as Blaz said, a very, very robust quarter. You see EUR 90 million pre-provision and negative cost of risk. So it doesn't get much better. Very robust revenue drivers, not just rates. Actually, still our revenue expansion is driven by volume growth more than rates. Also, of course, as you know, the rate movements in the last quarter have been very, very material. Euribor is up by -- in the range of 150 bps and more. So this, of course, doesn't yet show through and indicates to you that there is still more to come in terms of revenue upside. We've always talked about our [ long Euribor ] position. Now it's, of course, showing through. So I mean all indicators heavily in green. Cost still very much in check. Really, I highlight these days, but of course, I have to mention that -- and you'll see it in the outlook, times are getting tough in terms of maintaining costs stable. We have labor cost inflation here and there. We have energy repricings, of course. We are working on measures to mitigate that. But for the time being, there will be cost pressures going forward. On the other side, we have still substantial revenue improvement potentials even on the back of the current balance sheet position without still yet on any new business, which, of course, comes in at visibly higher rates already. So interest income, as you see, very visible. NIM expansion in the last quarter on the back of, as I said, still deposit down pricings, especially in our subsidiary markets, volume growth across all regions, not yet really showing the effects of Euribor. And so it indicates that there is still quite some potential in NIM, a good guess for next year is we might be in excess of [indiscernible] or in the range of [indiscernible]. And of course, what we watch the operational business margin, as you see, showing similar trends, also there is a bit of an offset from NIM revenue and fee revenue as, of course, the high balance fees have been abolished and are gone for good. That also shows in noninterest income also even without N Banka, they have very, very healthy trends. This is a combination of very robust performance across a range of products. In Slovenia, very solid. Our sales of ancillary products continuing in Serbia. We, of course, have been repricing. And -- so you see a really, really robust numbers. On costs, I mentioned, Q3 more or less benign. And I think it's worthwhile looking at our discipline in executing on our integration projects, especially in Serbia, upcoming now in Slovenia. You see quite visible reductions in staff and branch headcounts -- branch counts. And of course, this is still work in progress. So to some extent, we will mitigate some of the cost pressures with, of course, remaining and becoming more efficient on what we call the physical footprint. Loan dynamics, I mentioned very robust growth. And of course, we are having more intense debates here and there on loan and risk appetite. But so far, there is no deterioration really visible, neither in fundamentals, as I said on macro, nor in corporate or household balance sheet. So we feel very comfortable with feeding or accommodating to that growth and demand. And -- so our capital remains to be very robust. You see us -- we have stocked up on AT1. That is still to be shown. And of course, we are still very much interested to top up on Tier 2. We've been very [ hopeful ] about that markets, so far had been more or less shut in this extreme volatility. Now we see signs of that to come back to more normal circumstances also, of course, on elevated or higher cost levels. So in this sense, our SREP to be published soon is not going to show much of a change, a little bit of easing as anticipated. I talked about the wholesale funding, of course, all eyes on MREL across the industry, not different from us. Here you see, I think, a very clear status quo. We have been issuing successful last year, also not just Tier 1, but also senior preferred. Of course, the price levels, we don't like to see, but to some extent, have to acknowledge market circumstances. You see here how the mechanics work. And of course, there is a step-up logic until targets become final in beginning of '24. And so we, of course, are continuing to run our funding plan, which still envisages some EUR 600 million in course of this and next year as a combination of Tier 2 and seniors. And by that, I'll pass on to Andreas on asset quality.

Yes. Archibald, thank you very much. Actually, the colleagues have now mentioned already quite a bit. I mean, first of all, we are continuing to solidly grow, and solidly growing means also very well diversified. Secondly, the first 3 quarters on cost of risk were again very good, actually a negative cost of risk, and we are further decreasing NPLs. And thirdly, of course, in this situation, very turbulent times. We are very careful. We're doing stress testing. We are becoming more selective. We're adjusting parameters where needed. So very prudently, of course, in this situation going forward. If you look the growth in the different segments, [ so both ] corporate and retail corporate, bigger corporates and SME and also retail, consumer and mortgages, growth everywhere, very well dispersed through these categories. And of course, what you can see also that we continue to have this geographical dispersion which you are used from us. So Serbia obviously here got considerably bigger with the acquisition of Komercijalna Banka. But otherwise, very stable simply because we are solidly growing more or less everywhere with a similar speed. On NPL ratios, as I said, again, improving in this year. Again, reducing also in net terms, even after the acquisition of N Banka, so EUR 352 million by end of September, of which EUR 160 million actually have 0 delays. So these are mostly restructured clients, which are not yet healed. So in net terms, if you also deduct that, we come to, I would say, really very small numbers. Coverage. You are used to that. That's very, very solid. So cash coverage plus collateral in the 150% range. That's for sure, very solid. And what you see in the dispersion of the NPLs is that also this has normalized. It's normal that in Slovenia, which is still the biggest bank in the system, obviously, we are underrepresented at European Union. And of course, in the other countries, a little bit more rich, but that's also what is expected. So in that sense, normal. If you would have seen that a few years in the past, then Slovenia would be much stronger represented, especially the bank 10, 12 years ago did cross-border, which was not healthy. This is what you still saw. This is now gone to the biggest extent. So here also a normal picture. If you see a little bit more detailed cost of risk that's minus 13 bps. Obviously not so negative than it was in the same period last year, but still negative. This picture is a little bit complicated. So don't get confused. We have EUR 8.9 million one-time effect from the acquisition of N Banka. But in the cost of risk, you annualize that. So in 9 months, obviously you take 3 quarters out of that. That's why the calculation of these figures to come together is not that easy. And what you see, if you go a little bit more in detail, and this you don't see on this slide, is on the retail side, we have actually provisioning increase. That's coming on the one side, simply from volume effects. So we are increasing our volumes. That's why pool provision is going up. On the other side, we have, of course, deteriorating macros. This, you see in the pool provisioning logic. And then on the other side, we also have sharpened our early warning logic. So you have here now more parameters, which indicate an early warning. All of that led to some inflow in retail, nothing dramatic, but visible. And on the other side, on corporate, we had a couple of very successful resolutions also of already written-off items. So this is actually so far overcompensating the retail impact that with 9 months, you see EUR 7.5 million release. What needs to be mentioned on interest rate sensitivity, that's, of course, at the moment, also an interesting one, 100 bps change in interest rate bring us approximately EUR 61 million. So obviously, we are profiting from this situation. Of course, in the current situation, many effects are coming together. If you see more sharp rises in interest rates, that's surprisedly multiplying that figure on the other side. It's supposed to increase cost of risk, of course, for a fraction of that, but nevertheless. But honestly speaking, in the current situation, the little bit unusual situation is that the much bigger discussion is obviously the inflation and the interest rate increase in that sense not really the key topic. And as soon as salaries have followed the inflation, of course, to a certain extent, you could even see a decrease of cost of risk because the loan obviously is devaluating compared to the income. So there are a lot of ups and downs. You see here the pure NEE calculation. But if you want to understand, of course, our balance sheet and the development in risk, there are multiple factors coming in. With this, I'm handing back over actually to Archibald. Thank you.

Thanks. Now a few words about N Banka integration. So that's now quite tedious technical process that is playing out. The bank itself runs very stable. We are happy with a pretty solid financial performance. Client numbers have stabilized. We've seen a bit of outflow early, but this is now stabilized. The business is well integrated in the group. We have physically embedded the retail branches in our network. Of course, they still operate as independent branches. And governance, of course, in control. Our colleagues sitting in the Board. So we are very happy with, let's say, the business as usual in N Banka. And here, in regards of the integration as such, of course, the positives and negatives, there is a cost to that. This cost is well planned, established. There is no magic to it. I think it's a healthy proportion to the run rate cost of the entity. And of course, once we are done with integration, there is some -- also quite some, let's say, financial upside from synergies. At the moment, to be honest, we are much more interested and focused on the first part, stabilize the operation, stabilize HR. We want colleagues in N Banka to remain focused on their job. And for many of them, we'll have very good opportunities in both front-, mid-, back-office and IT. So really, the focus is on getting this integration done smoothly. And of course, there is plenty of conversations happening also with the regulator. Here, you see the various streams as they play out. Again, all are well-established playbook in the group in the meantime. I have to really thank all the colleagues that run these efforts across the various streams. As I said, it's a lot of tedious hard work. So at this point, really thanks to colleagues in N Banka and NLB to helping us get this done, stable and predictably, without any disruption. That's the main ambition. We have actually shifted a bit the merger timing from April to September to give more time for a more, what we call, sustainable integration process. We, by that, avoid investment into our mainframe environment and can focus on the future courses then. So we have allowed for that flexibility in order to reap that benefit. And I think there is a very good case for doing that because that gives us a good pilot in reality for our core banking consolidation that we anyway have to run in Slovenia. Remember, we have 2 core systems, 1 for retail, 1 for corporate. So the N Banka clients will now be mostly ending up already on the new target system, which is the one for corporate, a system called Temenos. And by that, we think we have also a little bit accelerated our IT agenda. That's in regards to timing. So as I said, there is -- so far, it works well. But of course, there's still lots of ground to cover, and the next months will be, let's say, full of work, and I hope not too many surprises.

Thank you. I mentioned at the beginning already that we have been really now focusing on enhancing and boosting the leasing business as an upcoming important revenue stream. And I already mentioned that NLB Slovenia [indiscernible] in Slovenia as [indiscernible] has been fully operational, has been introducing novelties in terms of end-to-end digital solutions to our clients and distributors and so on. So this is something that we are really now heavily investing in, in terms of time and attention. On the other hand, clearly, we have, as said already more or less been ready to launch operations in North Macedonia and Serbia. So the 3 most meaningful markets would by then be covered. And of course, we will be then analyzing further opportunities in other markets. So this has been clearly 100% sponsored business by the parent bank and sister institutes then in the subsidiaries. And in this respect, we believe we can really leverage on the channels we've got, on the information capital we've got, established relationships we've got as a bank, right? And by that, really use lease capacity as more or less, as we call it, a product factory, providing really applicable solutions to our clients, right? And especially addressing then a contemporary mobility paradigm, which has been in front of us is something that's coming pretty quickly. In this respect, clearly, our ambition is to actually exceed [ 1 billion ] of assets by organic push clearly to the revenue stream, whereby we will not shy away from eventually analyzing and exploring also some M&A opportunities that might come our way in the upcoming years. But clearly, also organically, there is a very strong evolution path in front of us, designed, defined and there is full commitment of our teams to deliver on that. And by that, of course, meaningfully add the revenue capacity. And of course, we believe also the earning power in terms of the bottom line. Outlook. We have modified a bit the outlook. So we are actually now talking about higher level of revenue. So for the next upcoming year, also this year, especially '23, there is a revenue hike coming from the interest rate normalization on one side, but really solid, solid performance in terms of volume growth in retail and corporate. I'm specifically happy that Slovenia has finally rebounded really as a strong robust economy from European monetary zone, partly because of before mentioned nearshoring and insourcing back to Central Europe, partly because of the robustness of Slovenian economy as such, being one of the most diversified industrial economies in Europe. So this is something that, of course, on one side, is carrying certain risks given the electricity and gas supply and pricing. But on the other hand, of course, we are really close to Vienna, close to Munich, Milan, Switzerland, right, this really powerful industrial basin of Central Europe, where we can be really a Tier 1 supplier benefiting from this. And automotive industry in Slovenia is talking about EUR 3.5 billion revenue in the upcoming couple of years and so on. So this is really a significant boost. As you know, Slovenia is exporting EUR 40 billion, which is 80% of Slovenian GDP practically. And we are really counting on that to continue. Other countries are -- especially if you look at the Bosnia and Herzegovina exporting electricity, corporates in Bosnia paying actually EUR 50 for electricity. The same for households is true, right? So the situation is really a [indiscernible]. But this region is used -- is really -- has been more or less in a pretty instable environment for decades and also inflation, as perceived by people in this region, is maybe a less [ evil ] phenomenon as perceived maybe from someone from Western Europe that was used for 40 years of stability. So this region is, more or less, used to instability and imperfections. And of course, there is always value for -- imperfection for someone that is a specialist and understands that well, right? And this is what we believe we are, [ regional ] specialist that can understand the risks and can address this risk properly in sense of managing them, not avoiding them but managing them reasonably, right? So we are signaling more revenue. We are, as Archibald also said before, seeing, of course, tensions in terms of cost pressures. There has been a 10-plus percent inflation. This is driving, of course, wage expectations of -- this is indirectly or directly, given the regulatory and legal increases of salaries of minimum wages, for example, such as in Slovenia and so on, right, is actually introducing immediate supply side repricings. And of course, we have to simply balance this with focus on processes, with focus on efficiencies, with focus on energy consumption, with focus on really project portfolio prioritization. And that's why we see -- we would say, still really, really moderate mid-single-digit percentage growth in costs, which is, of course, more than offset by the significant growth of revenue. On the other hand, we see still a solid output in terms of the ROE, so real shareholder value creation. So we are talking about around 12% so far. Now we are talking about exceeding 12% ROE, right? And of course, we continue -- we plan to continue with a very solid dividend payout. So we were talking about EUR 500 million cumulatively until the end of 2025, including [ '22 ] payments, which is very, very solid dividend payout. And we believe that this business is actually on a good trajectory to become even more propulsive, and in this region, especially positioning itself as not only the systemic company, but responsible and very successful systemic company. Archibald was talking about us, supporting stabilization of the energy pillars in the region. This means that we provide practically 35% of funding. And we were the ones leading the syndicates arranging these facilities. So NLB is again back in the seat of the responsible strategically important systemic financial institution in the whole region. By that, I would wrap up the presentation part, and I would invite for any questions or dilemmas you might have. Thank you very much.

[Operator Instructions] The first question is from the line of Ronak with EFG Hermes.

Thanks for the presentation and congratulations on the numbers. Just a quick maybe clarification from Archibald. He mentioned that the bank is in the process of raising up to EUR 600 million of longer-term funding this year and next with regards to the MREL requirements. Is that in addition to what the bank has raised already? Or is that figure of EUR 600 million includes what you already raised in 2Q and 3Q?

That's incremental. That's incremental. That's the short answer. And it's going to be a mix of seniors and Tier 2s. We'll be looking at both routes because there is value in Tier 2. Blaz mentioned some possible M&A options, specifically leasing is on our radar, but also other tactical opportunities. We would like to be prefunded because that simply puts you in a much better footing for M&A. So we will, of course, be paying more than we would want to in market circumstances as we are confronted with. But first of all, MREL is regulation. So there is no way around it. And second, I mean, it will be more than offset from the earnings opportunities we see ahead of us. So...

And it will further strengthen capital base for dividend payout. So this is something that we believe is accretive, too, for shareholders.

Okay. If you could -- just as a follow-up, could you maybe just tell us what's the indicative rates you're seeing right now when you try or when you [indiscernible]?

So seniors are in the 7-ish territory these days, but that's subject to supply and demand, and Tier 2s are a little bit higher. Too early to tell, but because it really -- situation change is very volatile. Rates have gone up substantially. Swaps have stabilized. So we see lots of transactions coming to the market at quite reasonable rates. And you've seen us raise AT1s at, I think, a very reasonable rates given circumstances. So we'll see how it goes, but we are quite confident.

Okay. Isn't there a small risk there that the longer [ you wait ], maybe if inflation continues to surprise and if ECB is forced into raising much more [ aggressively given ] the market is currently expanding, and it just becomes more and more expensive?

Well, I wouldn't disagree necessarily. So that's why we are pretty much on the matter as we speak.

[Operator Instructions] The next question is from the line of Simon with Citibank.

Yes, I guess the question would be just on the long-term dividend guidance. So I think you're still saying you're going to pay out the 100 -- EUR 500 million, I guess, from the -- out of 2021 to 2024 earnings. But if you have higher capital because of the AT1 issuance, better results and if you can't find acquisition opportunities, would you revert to kind of the 70% payout that you had been guiding during your IPO? Can you just kind of walk through your thinking there?

Well, this is a very specific period of time, right? And the opportunities might come your way overnight practically. So, and in such situations, you want to be ready. So it's actually a mix of aspects to apply. On one side, regulators potentially signal certain increases of buffers of these or other nature, signaling a recession and so on, which is always good to be that actually in capital rather than in no-chasing capital. On the other hand, having a real a bit stable EUR 500 million payout secured is also value, right? -- but we believe there would be and might be opportunities coming our way soon. So talking about them suggesting hard dividend next June and then in July, getting an opportunity, it's not necessarily the most productive we are thinking. So we believe paying out EUR 110 million next year, given today's price, is a very solid dividend payout, right, very solid. And at the same time, then having a capacity to grow while we are able to grow at a significant pace and sense still keeping certain incremental, not high. And this is not -- we are not talking about billions. We're talking about a couple of hundred million or less than EUR 1 billion actually incremental M&A potential is, I don't think a luxury, it's actually a good position to be in, frankly. So at the end of the day, it's shareholders' call. They can always suggest something else, but we believe that we are running this business in a balanced way, securing solid dividend payouts, securing accretion of value through the organic evolution, but keeping some moderate cushion actually for eventual M&A. This is not really being in luxurious position. It is really, I believe and we believe being in a balanced position to address the opportunities and threats and risks properly.

Okay. That's pretty clear. Actually, I would have a question on the capital walk. So come fourth quarter, the dividend that you're paying out, the $50 million, that's already excluded from the capital base, the regulatory capital base, the CET1 today, correct? And then I guess, you'd add in the retained earnings that you haven't recognized yet, but then you deduct the $410 million that you're planning to pay next year from the regulatory capital. Is that right?

Yes. So that's happens usually at year-end, yes.

Yes. And then just one last one, if you can give an update on the Swiss franc mortgage law, the Supreme Court case? Is there any new developments there that you can update us on?

No. There is no new development to report.

[Operator Instructions] And the first question is from Jovan with RBI. And I quote, do you expect a hike in capital requirements? Some of your peers reckon with circa 100 basis points uptick till the start of 2024. If yes, how does this affect your dividend plans? And what would be the level of CET1 you may feel comfortable with?

Well, that's a speculation. So we don't expect it, but there have been rumors that there might be some systemic buffers introduced. We've heard these rumors in Slovenia, but this is a common public secret. So there is nothing concrete on the table. On the other hand, exactly what Simon asked before, right? That's why we are also beefing up capital in order to secure the dividends even in case obviously of eventual hikes in regulatory requirements, which might impair a bit, of course, then M&A potential, but not necessarily impair our organic evolution while still securing the solid dividend well. So we are observing and of course, adjusting as per the requirement. So far, Archibald was mentioning actually the SREP, which is actually going positively our way. But then, of course, Bank of Slovenia might be looking at some local macro prudential whatever measures they have continuously in last years traditionally had a totally different view on the environment as the banks. So this, we cannot influence. There have been no dialogue with them in -- based on the arguments. So this is something that simply we don't have any obvious insight in. We are working on fundamentally strengthen the capital base, both from earnings and from the capital markets. And we will simply continue this way in a balanced more or less balanced structures and balanced approach.

Our next question. We have actually 4 more questions from Mr. Jovan from RBI. I will read each one. What is behind the increase in average cost of funding in Q3? Do you experience increases in deposit costs? And if yes, in which markets?

It's not really deposits driven. Also, we have here and there smaller tactical adjustments, but it's the wholesale funding, of course, kicking in. So we have 300 million seniors issued. They start to show. And otherwise, we still sit on a very large site deposit base, which, of course, these days comes in very handy.

Yes. Now our robust retail deposit franchise really shows its value, right? So we have the LTD of 66% group-wide, and as in Slovenia and Serbia, even more favorable into most material markets, and we are simply benefiting from it. So the real hike is coming from the MREL funding, from the core business. We are not forced to reprice deposit base.

And that's given a bit of a handle on what we expect NIM to land given all the ups and downs. So there's still room for upside in our view. And the 2.5 seem pretty well in reach for next year.

Thank you. Mr. Jovan also asks how do you explain the upgrades of regular income for 2023? And to the same time, lowering the loan growth guidance to mix from high single digit and keeping the NII sensitivity unchanged. Has your key rate outlook for Euro area changed over the last quarter? If yes, what would be the sensitivity from sharper rate hikes of 200 basis points?

So our outlook is based on basically 2% Euribor. Now you can speculate if it's going to be higher or lower. We've published the sensitivity of that position. And I think the best handle I can give is to reiterate that, because we also have the funding kicking in with incremental cost. So I think the 2.5% overall NIM is our best guidance we can provide, and that factors in Euribor of some 2%.

Thank you. The next question is, do you have a kind of sensitivity of risk costs in case of weaker-than-expected GDP in the region, especially in Serbia and Slovenia?

Yes, sure. So I mean, we are doing regular stress testing. But of course, now in these times, even more intensively and the most severe scenario, which we are assuming is going considerably below the current GDP growth assumptions for next year. So in negative territory, especially in Slovenia and Serbia, and in this case, so -- which we see really is relatively extreme and conservative. We would stay within our maximum cost of risk, which we want to be through the cycle in any case in. So as you know, that's 90 bps cost of risk. So we would stay within that. In reality, we are expecting much lower figures. You saw it before in the 2023 guideline. We are currently assuming 30 to 50 bps cost of risk, that's, of course, an uptick compared to this year. And I think that's also fair to assume. But yes, of course, we stress beyond that. And the situation is very manageable from these stress test results and as I said, would stay within our maximum cap, we are always talking about it for such situation.

And we will finish up with Mr. Jovan last question with RBI. High risk cost release in Montenegro, any special large case?

Yes. So yes, a large case in 2, 3 midsized cases. Yes, this were a few special effects, which we are accumulating in Q3. On the other side, Montenegro is one of the countries where our sharpening of the early warning system in retail has triggered a little bit of increase in cost of risk. So that's already a blend. But all -- yes, I mean the regular development is very solid. Nothing special, and this -- the main difference is coming from these releases, yes, exactly.

We will now move on to Mr. Thomas from [ Slovenia ]. Question, could you please be so kind and provide some additional info in regards to quick fix, a fair value through other comprehensive income revaluation in amount of EUR 60 million? Have you reclassified Govies recognized under fair value OCI to amortize cost recognition?

So this is the regulatory quick fix. So there is no reclassification underpinning this concept. That's ECP scheme that was put in place actually for COVID and it still is valid. So we opted in for no particular reason other than, of course, taking the obvious benefit.

Next question Anton from Allianz. And I quote, could you quantify the expected contribution from the leasing business in 2022 and 2023?

Well, we cannot be more specific than what we said. So we count on in midterm, EUR 1 billion of assets and significant contribution in terms of also bottom line. And of course, if you look at the end-to-end look through, of course, this will be a meaningful addition to the group's results. And I cannot be more specific at this point of time.

The next question is from [ Divo ] from InterCapital. What was the reasoning behind issuing your latest bond? Did you need the additional Tier 1 now, especially at a rate of almost 10%?

It is as mentioned before, it is one of the possible measures to beef up capital. And of course, we want to do it in a meaningful and balanced way. So of course, we want to be solidly above hurdle rates when it comes to Tier 1 capital and, of course, total capital. That is securing a normal evolution of the business in a balanced way, while, of course, providing stable dividend payout flow and organic and inorganic opportunities to grow business. So there is no other reason than that. We were not in distress. We simply believe it is of value and is benefiting key stakeholders of this banking group if we, these days, work on beefing up capital. And of course, I'm happy that we have access to capital markets, and of course, we can do it in a balanced way. So of course, if you are growing in Tier 2 territory, you do, of course, also what is possible to do within Tier 1. [ Cat ] territory, we all know that we are limited when it comes to actual ordinary issuances of capital given the ownership structure. So the Republic of Slovenia is invested with by 25% and on [ 1 ] share. And any, of course, regular recapitalizations would require participation in the Republic of Slovenia. And of course, we don't want to call for the capital from the Republic of Slovenia at this point, right? So we, of course, use all other instruments within the capital toolbox that are available because NLB has, of course, had a pretty conservative capital structure, and we have not used otherwise totally regular and standardly used instruments. So we are basically stocking up normal toolbox of capitalization, if you want. And we are still halfway there. So we have still more room to do the AT1s. We have still more room to do the Tier 2s, and we are simply following the balanced agenda, nothing else.

And I mean, to be fair, the 10% is well below the cost of equity. So this is still positive leverage for shareholder equity and -- but it clearly creating value for shareholders. Tier 1 bond is a near equity instrument. Just to remind everybody, this is not a regular bond. This is a near equity instrument.

Absolutely.

The next question is a follow-up question from Anton from Allianz. What are your NPL ratio expectations for Q4?

Well, look, we expect to have, at the end of the year, slightly positive cost of risk. As you see in our guidance, we, in any case, want to stay below 30 bps. And that tells you that, of course, the NPL ratio will stay at a very, very similar level. If the 30 bps would materialize, and I'm optimistic that we will stay clearly below, that might, of course, mean that we might go a few million up in NPLs, but this still remains to be seen. But the situation at the moment is very volatile. But for sure, we will not see any dramas or serious upticks, and we will, for sure, stay within the guidance probably very, very solidly.

The next question is from [ Vlada ] with [ Ipopema ]. From which categories do you see higher cost pressure in fourth quarter '22?

What's coming from usual? Well, Q4, more or less hikes, which is partly specific rewards; partly, of course, you end up and activate certain projects and so on. So there is nothing really peculiar or specifical for this year. So there might be some still provisioning, of course, related to restructuring when it comes to, of course, severance and such structures for both banks still, but nothing that would be out of what we have been communicating so far, more or less. Archi, would you add anything?

No. The usual seasonality because, I mean, frankly, some energy hikes have come back a bit. And other than that, it's key for us traditionally a bit cost heavy. So if you look at our previous Q4, [ patent ] shouldn't be too different.

The next question is from James from Raffles. With large exposure to Serbia now, what is your take on close situation, which appears to be heating up?

Well, what depends on how you look at heating up, right? It has been heated up by -- for 20 years, right, 30 years even. So we count on, of course, at the end of the day, smartness and wisdom of leaders of the region that, of course, this would not end up in a kind of a bigger conflict. We believe that there is significant value. And finally, we, at least, we perceive certain messages and signals from the European Commission that there might be, nevertheless, an acceleration of the exception process of Western Balkans towards European Union, and that's the name of the game. So as soon as there is real perspective offered, and of course, in turn, something is delivered by the leaders of the region, I believe that this situation will stabilize entirely. But it is, of course, on both ends. It's not just looking at Serbia, it's also looking at Brussels. Western Balkans needs authentic perspective and finally, also acting upon by the European Commission. We are, of course, promoters, big promoters and advocates of accession of the intra-Western Balkans into European Union as soon as possible.

The next question is from Mladen with Erste Bank.

And once again, congratulations on the great quarter and great 9 months. Just one question regarding the macro outlook for the region. We have seen recently that super nationals and institutions active in the region are significantly cutting down on the 2023 growth and reiterating uncertainties. Maybe if you can just give [indiscernible] or I mean you already talked about it, but maybe just in the lights of those revisions, which are quite substantial, for example, from IMF and Serbia, in particular, how do you see development of, for example, pool provisions and risk in a whole.

Andreas, do you want to risk [ privately ]?

Maybe I'll start with the growth. But I mean if you look at the growth indications, we are not looking at forecasts that are showing a real decline. So even in case of a 0.5% growth indication, this is, in nominal terms, very high growth still. So the nominal output is still very, very high, right? It is neutralized by high inflation, but it is still positive evolution in terms of value. So in this respect, we also see significant potential for further still healthy growth. So if you look at the housing loan production in the last couple of years, 2/3 of apartments were bought by cash and what NLB financed, so this 1/3 that was covered by the bank lending was within the LTVs on average of 62%. So this is very solid production, very healthy production. And also when it comes to consumer lending, all of this is based on cash flow principles. So as long as the unemployment is still stable, and in Slovenia, Archibald was mentioning full employment. If businesses are still seeking for people, industrial outlets facilities, factories might, of course, the electricity prices exceeding EUR 300 before to shut down, but then would be subsidized through the governmental support especially in Slovenia. And we believe Serbia still has capacity. Other markets are much, much less dependent on gas on one side, but on the other hand, are used to improvise a bit more even. So this is something that we believe is still containable. Andreas was mentioning inflation, but this -- now there are two sides of this work, right? So on one side, inflation, of course, also devalues the real value of that. So in growing inflation environment, that also is somewhat devalued. So it has both ends. There is, of course, first introduced pressure. But of course, on the other side of the balance sheet, of the household, it also has effects. But Andreas, you might add certain thoughts on that.

Yes. I guess not too much to add what we have said already previously now today. So I mean, again, we have made a stress test scenarios up to relatively extreme ends. The current assumption of 30 to 50 bps cost of risk for next year is already coming from much more shy views on macro outlook than we would have, well, a year ago, I guess, expected. So yes, obviously, this is changing. Even the extreme scenario, as I said already before, I mean, it keeps us well within this maximum level of 90 bps. But again, that's also with the changes which we see now every day, nothing which we expect. So we still see this as an extreme scenario. What is true, and that you heard this in different callers today already, but of course, at the moment, the unusual thing is that there are many, many open parameters, of which one is also inflation, of which one is also energy. I mean if you see expectations which we saw a few weeks ago and where we are today, this was reverting a lot now. Well, the question is where we will be in 4 weeks? Where we will be in 8 weeks? Where we will be through the winter? And will we see somewhere shortages because that would be the more sensitive item than just the price as such. So there are many, many open parameters. But I mean, on the retail side, I think in the current situation, I see pressure on the short run. But again, as Blaz just mentioned before, again, also, of course, on the [ mid-1 ], also some reliefs. As soon as salaries have catched up with the situation, you have basically a situation where the debt has devalued to a certain extent. And on corporate, I mean, what we simply saw in COVID times and what also now seems to confirm in these days is the companies in this region are used to relatively many troubles. They are flexible. They are just fast. And honestly speaking, I mean, the big clients, of course, we are going through one by one really frequently now. And the way how they are reacting on the situation and how they cope with the situation is all most surprisingly sometimes positive. So here, also, in some cases, I mean, we have very few clients which are directly related with business to Russia, [ BLO ] Russia or Ukraine. But of course, we have a few. But also here, the situation is really very, very stable. Maybe for these kinds, a little bit counterintuitive, but that's the fact. So there are many points. I mean about this. I could talk now a long while. But overall situation seems very, very solid and very controllable. And honestly speaking, for such a situation, also cost of risk for next year, as we see them pretty moderate and actually, that's another confirmation that we are rather a little bit conservative bank and that we have a quite robust portfolio. Of course, as a COO, that's always a higher tension point, such a situation. And now after 2 years, COVID again for a different reason. So I'm watching this very closely. But so far, I have to say so good.

Yes. If you look at this slide now -- I apologize there. If you look at this slide, there is still a lot of room, so conservative structure of household and corporate finance.

No, I agree with you on all points. I was just -- I think I noticed in your guidance slide, the 2023 loan growth was slightly tuned down with the mid-single digit is still a significant growth. I hope I didn't make a mistake. So I thought that was the reason why. Your reaction may be to this forecast for 2023.

No, no. It is actually based on our expectation, and we have to wait to see whether it would crystallize that given the rising rates, housing loan demand will simply reduce. It is unrealistic to expect that we would see the same housing loan growth as we've had year-on-year so far, which was exceeding 20%, right? And we feel already now in the last month, especially last weeks, actually, that housing loan demand is simply taming. It is being reduced region-wide a bit. And of course, now is it going to end up in mid-single digits or it's going to be high single digits, no one is holding a crystal ball. But in a nominally growing world, this is what you want to say, right? If you have inflation rate on average in the region of 12%, it is not really realistic to expect that there will be no growth of lending, right? So maybe it's slower than GDP in terms of nominal, but it will still be meaningful growth. And all of these new incrementally originated growth is happening, of course, at different rates than the stock. And then on top, the stock gets repriced on the loan Euribor position, right, throughout the rollovers. So all over, this is all good for the, of course, P&L of the bank. So even if new production is a bit lower in terms of volume, it is happening at a significantly higher rates than the stock on average. And on top, the stock is repricing through the Euribor repricing. So this is, of course, for the bank profitability, very good trend in any case. Now of course, can we have the luxury position of carrying double-digit growth in total uncertain environment in practically amidst the third world war and incrementally accreting so much value, it might be maybe too optimistic. So we want to be conservative while communicating to you and not overpromising and rather positively surprised than the other way around. It's simply, I believe we have demonstrated so far this is the appropriate way of positioning our business. It's maybe not beefing up the valuation as we believe would be deserved one, but it's, we believe, more prudent and more responsible way of communicating to you.

Thank you very much for answer. Just one short thing. I think Mr. Krenzer mentioned on M&A, some more leasing companies. Did I hear that correctly?

There is nothing concrete on the table, but there might be opportunities. And of course, if there were opportunities, we would look at them. And that's all we can say.

Ladies and gentlemen, there are no further questions at this time. I will now turn the conference over to Mr. Brodnjak for any closing comments. Thank you.

Thank you very much. It was a rich debate. So we are happy and there is significant interest of analysts, investors into our business. We feel very confident, frankly, very, very confident at this point of time. We believe that NLB is in the best shape ever. We have demonstrated our responsibility and our strength to cope with existing uncertainty and on the go, still create significant value to the stakeholders, which are not limited to shareholders. So we are, of course, also a significant pillar of the society in the countries we work in, and we will continue with also the very ambitious ESG agenda. So we are now really even more ambitiously looking into energy efficiency projects into, of course, new renewable production facilities and projects. And we'll simply continue on this path of being a pioneer of this movement, at least in our part of the world and in this respect, contribute, of course, to the global benefit and welfare. On the go, keep monitoring us, keep accompanying us and keep investing in us. Thank you very much.

Ladies and gentlemen, the conference has now concluded, and you may disconnect your telephones. Thank you for calling, and have a pleasant evening.