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

Ladies and gentlemen, thank you for standing by. I'm Constantino, your Chorus Call operator. Welcome, and thank you for joining the NLB Group conference call and live webcast to present and discuss the full year 2022 unaudited financial results. [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. Good afternoon, everyone. Let me first refer to the standard disclaimer and move on to the presentation of what we believe has been the strongest performance of any Slovenian business in history, at least in headquarters business, and I really proudly introducing and presenting these results this time around, following extremely uncertain year, high volatility of expectations. At the end of the day, we have delivered a very robust outcome in terms of financials, but above all, demonstrating a systemic role of NLB Group throughout the entire region, having couple of significant milestones again appearing. So we have really jumped from practically high balance fees and negative rates to the 3.2% EURIBORs in half a year. But besides that, of course, there was the war outbreak, there was total uncertainty regarding the energy supplies, pricing of this energy. And Slovenian economy and regional economy together with the financial system have overcome all of this turmoil with -- in a very good shape. So looking back, there have been really some strong, strong achievements, not only talking about the interest income and fee income. So not only coming from recurring business origination, strong growth in terms of volumes, but above all, also our capacity on 1 side, but then also delivery actually of a very significant acquisition in the first half of the year. So NLB was in a shape mentally and in terms of capital and liquidity to jump in, in a very specific, peculiar situation, and by that stabilize a bank in the country, which has now been amidst of a very intensive integration and finishing presumably until September. On the other hand, we have been continuing actually, improving the asset quality. So despite couple of really significant crisis -- supposed to be crisis evolutions after Corona and of course, this war break and energy shortage and pricing challenge already before the war outbreak, we have seen further improvement actually of asset quality, which is, for us, a very, very strong indication of very, very solid underwriting criteria being put in place practically 10 years ago. And we are now benefiting from very prudent but, of course, at the same time, to the balanced extent, ambitious loan growth throughout the region, practically, in all client segments. So we have seen growth in corporate banking, significant in SME Slovenia, almost 30% growth. We've seen very strong retail growth, especially in housing lending, NLB has managed to grow the market share in housing loans in Slovenia alone by 4 percentage points in 2 years, which is amazing achievement. This is actually growth for the size of the stock of the mid-size bank in the country when it comes to housing loan portfolio. On the other hand, there have been, of course, significant measures we took -- undertook, not only of course, jumping into this unexpected recovery and resolution of the bank, we, at the same time, successfully managed to raise capital through various issuances. We have been pioneering as NLB in the international financial markets in AT1 placements. So we're really happy about managing the private placement of AT1 in the amount of EUR 82 million. At the same time, we towards the end of the year pulled off the Tier 2 after quite some time -- after a couple of years in a very uncertain environment of or 18 months practically trying to, and it was not possible. We delivered, we pulled it off and already, in the middle of the year, came back to the senior bond market and by that made sure that we are very, very confident at fulfilling and compliant with the MREL requirements. 1 basically tactical senior preferred position to be closed this year and we are done for the 2024 hurdle. And I mentioned before, integration with N Banka has been well on the go basically now. So we are well advanced in the process, presumably full closing of integration at the end of August, beginning, of September this year. So in financial terms, this has been a historic result. EUR 447 million is the highest posted profit of any Slovenian-headquartered business in the region. You will not find -- our home region, obviously, you will not find many such performances throughout last decade. So in this respect, this is on 1 side, providing a foundation, a very solid basis for future growth, but at the same time, demonstrating really us benefiting from structural elements of the balance sheet from positioning of the balance sheet in terms of client segmentation and, of course, calibrated and well-focused sales activities, including communication. So -- overall revenue development, very strong, very responsible treatment of the entire cost universe. So we continue with our optimization efforts, continue to optimize brick-and-mortar network, while focusing on digitization. We've seen significant progress in penetration of digitized services through M&D in -- across the board, especially solid trends in more developed markets. And we have, as I mentioned before, of course, been able to jump into the N Banka integration today -- N Banka's acquisition, while completing the integration of Komercijalna Banka in Serbia, and this was a very successful integration pulled off in April last year, practically seamless, and providing services continuously to our clients. And immediately after that, organizing a very successful Investor Day in Belgrade, simply proving our commitment to the Serbian market, but at the same time, of course, also delivering the results. Very strong already performance coming from Serbia last year, with high hopes to deliver the expected, anticipated, and guided for EUR 100 million profits earlier and potentially even envisaged at the beginning of the process. We are very happy about the upgrade of rating that was coming just in time for the Investor Day from the S&P. And at the same time, we have been then continuing our efforts to procure the first ever ESG rating. NLB has committed to significant scope of activities and deliverables when it comes to the entire environmental carbon footprint related activities. We have procured the ESG rating; that is, for the first initiation, very solid, and we will be building on this, while of course, we have been focusing on other pillars of the sustainability and very diligently and with genuine ambition and interest, by that positioning the bank really amongst pioneers of the DAG movement in the entire region. We've seen the growth of the GDP. Slovenia's last information was around 5.7% last year, real growth in normalized terms, de-seasonalized, which means that Slovenia has been following the strong growth of '21 of 8%, continuing at 5.7%. Forecast for this year has been around 1%, but we feel very strong vibe in the economy, so it might be even more than that. And of course, the entire region has been growing quicker than the average of European Union, simply demonstrating that this is a good place to be for regional specialists especially and we will be definitely building on this base, so '22, very strong foundations there to deliver more in the future. And by that, I pass the word to Archibald to give you more details.

Thank you, Blaz. I will not dwell too much on our region. You're familiar in the meantime, presumably, 2 strong pillars Serbia, Slovenia, equally sized with some EUR 60 billion GDP; the rest in smaller markets. All of which are relevant and, of course, all of which we service from an increasingly unified platform logic and all of which in healthy stages despite the volatilities we've all experienced and that were mentioned. We still see this region to be growing above trend, relative to Eurozone. So this is still growth territory, and we are very happy to also see that the macro volatilities have been managed well throughout the region, starting from Slovenia, which of course is Eurozone, ECB territory, but also in the other markets, we've seen relatively stable evolution, given the circumstances. You see the fundamentals following pretty solid trend rates from unemployment to fiscal prudence and, of course, for us, this is important foundation as much as the currencies, which you see here, which are well managed and, of course, rates are rising in line with international trends throughout our region. And frankly speaking for banks that's broadly speaking a good environment to be in. And given all that, combined with a region that still offers a lot of fundamental growth potential in terms of loan penetrations, both private households and corporates, this is an equation for a lot of growth that we have seen. And so, I'm really happy to also report that, first and foremost, loan growth was very, very strong and from the added volumes of some EUR 2.5 billion, more than half actually came from organic growth. So this is -- Blaz was talking Slovenia, very strong housing developments. But we've had equally strong dynamics throughout the region; of course, start to catch up also in Serbia with our platform that we have acquired. And so, in that sense, this in combination of course, with the extraordinary rates evolution, which we've always communicated, gears us to immediate and substantial revenue growth, given a EUR 6 billion EURIBOR long position, of course, produced stellar results, Q4; extraordinary bottom line with some EUR 70 million. That is, in essence, still not yet full factoring in the EURIBOR movements. It's, in essence, factored into some 75%. On the other side, we still have that the cost of Q2 to fully digest. So in Q1, you'll see the full combined equation. But basically we have, of course, shown very, very strong fundamental recurring results development, and this is what matters most for us. So despite N Banka integration or excluding N Banka integration, fundamental growth was really extraordinary. And of course, that's -- this rare combination, if you want, of enormously rising rates, plus strong organic volume growth and, of course, helped by fundamentally healthy businesses and households. So asset quality is firmly in check and of course, you'll hear more about that a bit later here. The rate environment, you'll see it's almost an explosion of the margin on quarterly level. We are already on Group level exceeding our target of 2.5% that we have communicated at IPO and, of course, admittedly helped by the rate explosion, but still basically taking us back to much more normal territory from regular long-term banking point of view. Let's not forget this is more normal than the 7 years behind us. So in that sense, this is really gearing us up strongly also for the future in terms of profit generation capability. And the same story, to some extent, a bit muted on the fee side, muted, because we had been careful also to not overstretch pricings, especially to more vulnerable segments of our customer base. Nonetheless, fee -- and this is really basic bread-and-butter business for us, so growth, very, very strong again, a combination of continued good results in ancillary product sales, and as I mentioned, simple bread and butter. Smart packaging of accounts and services and, of course, this supported by increasingly robust modern infrastructure that we provide to our customers. We've just, as an example, completely renewed our ATM fleet in Serbia with top of the range ATMs throughout the whole country. And of course, this level of excellent service then also has pricing power. And that you see translated in fee growth. On the cost side, you see overall a very, very solid performance, given the first integration efforts that we run now in 2 markets -- that's Serbia and Slovenia, and you see 5% result N Banka, but of course including still restructuring costs of Komercijalna Banka, and not yet finished integration process in terms of rationalizations of Komercijalna Banka in Serbia. So, 5% in an environment that showed really double-digit at times inflation is, in our view, really a stellar performance. Of course, you see on quarterly level, there is, as usual, a bit of Q4 dynamic that is seasonal to some extent on the fundamentals. Of course, we have seen repricings here and there, electricity costs went up visibly. We all of a sudden talk millions of euros electricity charges and, of course, we basically immediately put attention to savings. We save -- we saved last year in terms of consumption in the range of 15% to 20% and we will continue to do that next year. So we, of course, get much more conscious in our efforts. And real estate footprint, which is a big topic still for us, you see number of branches going down, as well as number of headcounts. Of course, headcount here is including the addition of N Banka. So there is still a long way to go on the cost territory. Physical footprint versus digitalization is the equation that we're running. I would claim quite successful and of course, with the right pacing, which ultimately should follow our customer needs. All that results in this extraordinary dynamic, which you see here very nicely on the recurring pre-provision results development and of course, you see here massive upswing, of course from rates fees, in combination with disciplined cost dynamic. And if you look at it, Q4/Q4 '21/'22, it's almost doubling the pre-provision result. You also see -- Blaz mentioned a quite significant improvement already in Serbia. So we are really starting to deliver here and, of course, solid performance throughout the whole universe. Slovenia d.d. is not normalized by the dividend upstreaming, which last year was a bit muted, given the circumstances. But the underlying recurring performance in Slovenia was as good as in the other markets. Loan dynamics, I mentioned pretty much all of that already. So I'm not going to dwell on the various numbers and breakdowns. Capital, we have added both with the acquisition of N Banka, but equally important with our capital market activities, where we issued EUR 300 million of capital -- of capital instruments, combination of Tier 1, Tier 2, 1/3, 2/3, so in a healthy mix. Of course, prices that we would not wanted to see or wanted to pay, but it really puts us in an incredibly good position to seize future growth opportunities, both organic and non-organic, should they occur. So in that sense, we feel very, very comfortable that we have done the right things here and you see capital ratio, very comfortable about -- above all regulatory, of course, and also internal targets, which basically sets the stage for growth. And as we have claimed and we deliver on that, we would like to see and maintain some EUR 1.5 billion to EUR 2 billion risk-weighted asset M&A capacity. And this is pretty much where we are at the moment. Here again, the funding as such, as mentioned, we are now taking comfortably already the 24, January target and of course, are basically adding up to basically fund the full of '24. This is about to come. We are setting up an EMTN program and of course, we'll expect to be in capital markets more frequently. Frankly, that will over time also increase efficiency in that process, pricing secondary market liquidity and by that, we will be pretty much normal in terms of our balance sheet structure with a very strong retail corporate deposit franchise and complementary capital markets funding for both long-term funding and capital purposes. By that, I hand over to Andreas for asset quality.

Archibald, thank you. Yes as a CRO, I have to say that in such vivid times, I'm extremely happy that actually there are no big surprises in risk and in risk management. My main messages are, we still have a very nicely diversified and nicely growing portfolio. We have, as Blaz mentioned already at the beginning, a very good asset quality and actually still very low cost of risk. And, of course, the net interest income is helped by the EURIBOR developments of the last period considerably. On this slide, you see once again the diversification. So on the corporate side, between SME and corporate and then also mortgage loans and consumer loans on the retail side, all of them are nicely growing. And if you see it, through the geography it's not very surprisingly, Slovenia approximately 50% with a certain hike in March. That's of course the N Banka effect. What you see is that despite everybody is growing, including Slovenia, the banks outside Slovenia are even growing faster, and that's why you see, of course, slowly, slowly from a trend, of course, the percentage of the portfolio in Slovenia going back. We are well diversified. You see this again here with the industries. Of course, in these days, we are looking on every client more closely. We are getting a little bit more, picky, a little bit more selective. But what is also important to say is we of course, still very actively drive the development of our business and of our clients' business. And in this year, of course so in 2022, of course, we had in the energy sector some counterparties where we were considerably growing exposure, however, mostly with state backing to the different laws from this -- result of the energy turbulences actually. So from a risk side, for sure, very solidly covered. But here of course, we were growing volumes. And if you see the breakout of the 2 strongest growing areas, then again, of course, here you see a good diversification. What is maybe worth mentioning is Q4. You can see that in the corporate portfolio side, we are flat and actually in these breakout industries, we are even shrinking the portfolio. That's actually not very unusual for a last quarter. So we had a lot of repayments of revolving facilities -- that's actually in the last quarter. From the side of the company is also a little bit of balance sheet management and again, in that sense nothing usual. What is important to stress is that the new business is still developing very, very nicely. Just in the last quarter here in the corporate side, we had well, basically over coverage from regular repayments. If you see NPL ratios, we are now having actually EUR 328 million non-performing loans on the balance sheet, of which almost half is zero delays, so mostly cases which are restructured. They're not yet through the curing period. We have very solid coverage ratios, of course, clearly above the EU leverage. In the meanwhile, also have, as you see on the pie chart on the right bottom, a normal diversification between the geographies. So you would expect EU country like Slovenia to have under average part of that NPL portfolio and logically than the others, a little bit over average, and that's exactly how the slide -- how the cake in the meanwhile looks like. The last quarter was actually a little bit vivid. So you remember, Q3, we were still negative on cost of risk. At that time already I told you that I'm expecting this year definitely positive cost of risk at the end of the year and that's also, of course what materialized. So, final for the entire year is EUR 17.5 million or 14 bps, which for these times, actually is a great news. And we again had a year where we had excellent repayments of -- written-off receivables of EUR 33.3 million. But what you can see actually also in the last quarter that we had quite a clear impact; on the 1 side, changed macros contributed with EUR 7.2 million and on the other side, approximately 40% coming from retail and then of course the remaining 60% from corporate. We had EUR 23 million impact on NPL charge, yes, for this quarter. That's in reality, on the retail side, a little bit the winter effect and also, usual December effect, which I have to say. On the corporate side, 3-quarters of these are 10 tickets. So that's mostly one-time effects, which I'm actually not expecting to repeat now in the next quarter; and so far in this quarter, actually also doesn't. So I don't see this as a trend. But the last quarter definitely hit higher charge than an average quarter. Yes, and last but not least, what I mentioned at the beginning, net interest income. Here, you see on the 1 side, from our EURIBOR based loan portfolio. We have 60% in 6 months EURIBOR, and you see the percentages for the rest. The effect from this is because only at the due date in most cases and just in 1 of our smaller banks with certain defined deadlines. The EURIBOR then is really kicking in, so repricing, and what you see on the right upper part now is the applied EURIBORs for end of the year and -- what the EURIBOR was at the end of the year. And this tells you at the end of the day that the part of the good news, which is coming from the net interest income, we will only see in '23, because when you have rising interest rates, of course, this increase of the net interest income is running a little bit after due to the effect, which I mentioned and that's why actually we expect even stronger impact, obviously, still to come. That's briefly from my side for risk. And with this, I'm handing actually back over to Archibald.

Thanks, I'll keep this brief. Not much has changed since last time we talked about this. The integration is commencing with full force and all hands on deck on business and IT elements of the integration. Maybe I'll remind you that the big benefit of this process is to somewhat a pre-tax trial run on our core system back-end integration process that we anyway have to run in Slovenia to -- in essence, get rid of our mainframe infrastructure. And so, this is all going according to plan. On the numbers, not much has changed. The plan is still last -- same as last time; of course, now more advanced on many elements. We are in discussion with the regulator. Of course, we have successfully overcome all the hurdles with our compliance elements of this integration process. So in that sense, I would pass back to Blaz to conclude.

Yes, so all of what we said here has led us to revise our guidance and ambitions for the upcoming period. Of course, no one 6 months ago could count with such significant hikes. This is totally different environment, much more of course normal environment for banking universe, and we -- what we expect then with the inflation coming down a bit of course, also some moderation of the interest environment, but still normal banking environment with soundly positive rates. And this is for banks, of course, bringing totally different expectations when it comes to revenues. Deposit pricing, of course, will be significantly challenging in this upcoming period in a sense of introducing measures that will be a balancing act, especially if we then expect after the significant hike and quick hikes, certain moderation. But generally, this is good news for our revenue side. And by that, we have significantly revised expectations, both in terms of regular income, of course, also profitability both in absolute and consequent in relative terms. We see us now really ready to be talking about further growth in organic and M&A universe. Archibald mentioned up to EUR 2 billion of risk-weighted asset M&A capacity in place by the capital measures and internally generated capital. We will seek for further possibilities eventually for some private placements of AT1. We have not exhausted this territory yet. We have been publicly talking about that for some time. We will be further talking about, of course, senior preferred issuances within Q2, let's say, as we also announced in public. But generally, NLB is moving the bar in 2025 to EUR 400 million in 5 to 6 years from now; with a bit of luck, potentially even EUR 0.5 billion. We are sticking to the dividend promise. We have consciously not yet been increasing dividends, because we believe there will be opportunities coming our way in the upcoming 12 to 18 months. That's why we have beefed up capital as well on 1 side to be, of course, on the safe side, given the uncertainties and turmoil in the environment, but now when this is settling in, in a much more controlled way, energy pricing is -- reasonable energy is available. So there is predictability of supplies. The winter was helping out, obviously. The mild winter helped significantly out and for the next winter, there are high hopes. We will of course, be sitting on significant storage of gas and with normal production mix also electricity. In this respect, we look forward very confident and we feel very strong. That's why we felt confident enough to actually start talking about 14% ROEs normalized for this year and 17% -- more than 17% actually for 2025. Serbia is in a good track. We specifically highlight Serbia, because this is for us first major acquisition, after of course, the restructuring of the banking group. And there is a very strong performance in Serbia, actually a bit ahead of time, potentially delivering EUR 100 million. So we feel confident about that as well. And we will not shy away from analyzing and engaging at actionable M&A opportunities. So there might be a leasing opportunity in Slovenia potentially in the market in couple of weeks. There might be opportunities towards the second half of the year in other countries. We are specifically interested in Serbia. And we firmly believe that the time has come that Slovenia and Croatia, put history aside and reach an agreement and settle on the past legacy issues when it comes to former Ljubljanska Banka and by that, NLB is acknowledged as a welcome contributor to improvement of the business environment and welfare of the households in Croatia by entering the market as well. So we have capital, we have liquidity to be able to start, initiate operations in Croatia across border once allowed. If there were actionable assets, of course, we would analyze them. But currently, of course, we have not yet been engaged in any way in this respect, because we have still bans -- the straight bans to enter the market. So, overall, good prospects and high hopes for this year and the upcoming mid-term period, building this Group -- moving this Group to the different ballpark of total assets of absolute profitability, also relative profitability, finally getting back to something we believe is appealing and attractive to the investors, especially if inflation is moving down to something much more reasonable. We see forecasts, expectations -- market expectations of 2.5% maybe already in the next year. Delivering 14%, 17% ROEs in a normal inflation environment is, of course, we believe, something very attractive if you look at it dynamically from today's perspective. Thank you for being with us, trusting us, and building this success story together. And now, of course we will be gladly responding to any questions. You know the contact of our Investor Relation team. But of course, now we are all yours for the eventual dilemmas raised or questions. Thank you.

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

Yes, I guess, my first question would be on the cost guidance for 2025. It seems quite ambitious to keep costs at the 2023 level, which is now guided at EUR 490 million so, unchanged versus your last update. Can you just walk through how you get there and what kind of employee numbers you're factoring in and what kind of employee cost growth you're looking at? Because it looked like, this year, you had something like 16% growth in labor cost per employee? So I'm just wondering how you keep costs flat in outer years, what are you factoring and that will be my first question. And second question is, really about funding. Can you give us an indication of what kind of deposit growth you're expecting and what you're seeing in terms of deposit pricing and deposit beta? Those would be my 2 main questions, but yes, well done on the results, quite impressive?

Thank you, Simon. I'll begin and then Archibald will, for sure, add some thoughts. So when it comes to costs, we are still amidst of 2 integrations. There is still a tail to be delivered from Serbia we told everyone that the targeted headcount in Serbia is actually around 2,000, 2,100. We still have a couple of hundred to go there. And on the other hand, N Banka of course we'll will end up with significantly lower account, we just got 385 people -- in March last year, we are already below 200 around 200 there as well. So this is coming from the successful integrations finally delivering synergies. The other of course, as I mentioned is the digitization. I mean, we are really having very ambitious targets in place the KPIs are in all subsidiaries and of course also Slovenia for mobile and digital penetration of the client base, which is driving of course down the general cost of the branch network we have been reducing significantly in Slovenia. We continuing by some additional branches closed this year some potentially in the upcoming couple of years, but in Serbia is still some to come and you know this is general trend. So, we believe we will be able to offset inflationary pressures, especially if we see inflation normalizing by completing simply couple of integration still pending. When it comes to deposits, of course, we do see cooling down of demand for especially housing, housing loans interest hike has delivered this restriction, at least mentally. So psychologically people of course are now looking at 5% rates versus 1.5% rates for a 30-year housing loan, right. So they have crunched a bit. So there is a bit slower demand we nevertheless expect that this year we will see mid-single-digit growth. If we have a real growth of 1.5% in the economy, with 6% inflation or 7% inflation, this is still 8% nominal growth and coming from a very low base of 14% to 15% household debt, housing loan debt to GDP. There is still a significant potential once people stand at 5% for a 30-year loan is still not totally ridiculous right in historical perspective. So let's see, there will be of course by that naturally given the increasing salaries, let's say, on average, we expect some 5% increase of wages in the country. I would expect, we would expect a nominally of course influx of deposits we see still strong consumer confidence. So people are still spending money there is solid demand for -- consumer loans a bit lower for housing loan. So, we will see here a bit more balanced evolution. But of course these days, deposits are no longer a drag because of course, now actually they have become again a treasure. We are a strong retail franchise, we see it on 60%, a bit more loan to deposit ratio and of course this is mainly site deposits we pay still practically zero rates to the site deposits and of course the day you can place liquidity reserves either govies, either central bank bonuses of course new loan origination at normal rates, no longer at totally discounted rates or normal rates. So this is the principal good news. So even if you would have still solid development of deposits, you would see very incrementally -- actually, positive contribution. We will see a bit lag in repricing of deposit base, because we are sitting on very low loan to deposit ratio. So, we are not forced by any means actually, via MREL, we are rather de-stimulated to reprice deposits, because we have to take on expensive -- still expensive MREL funding, which is, of course, requiring for every single incremental risk-weighted asset euro buildup, EUR 0.35, of this very expensive means. And this is, of course, discouraging us to reprice significantly deposits. But of course, there will be certain movement. We see in other banks in the market, smaller banks with significantly higher LTDs already offering for more than a year deposit 2%, even 3% rate. But of course, they condition then salaries, movements, and this is limited to certain amounts of deposits and so on. So it is difficult to say where this will end. It's going to be a bit of a balancing -- an art, how to price these deposits, but generally, the hike is still coming. I mean, you'll see another 50 bps of ECB coming in March. This is announced basically. So this is not yet, by any means, not yet fully factored in, in the assets. You saw EUR 6 billion still coming to be fully repriced and in this respect, I wouldn't -- I would see this very solid year of performance. And this 14% that we are signaling, we believe, is achievable. Archi, you would add anything?

Not much to add, other than -- I mean, don't forget, this last year was a bit burdened with restructuring charges so kind of costs of one-off nature. And then of course, the other thing I would add is, we are very -- getting very focused on real estate footprint, as I mentioned, and getting efficiencies there. The whole energy crisis has made us very focused on energy consumption, electricity. So kind of on our things, if you want. But this will give us the savings will -- and the synergies mentioned will also give us capacity to keep investing in matters that we believe are important. That is, of course, the whole brand customer experience and the whole internal digitalization process. So it's not going to be easy. So inflation is, to some extent, still a bit unpredictable how it's going to play out, but for now, that's the ambition. And we want to remain ambitious.

Just on the deposit, it sounds like deposit growth might be a bit lower than loan growth, but is that the assumption or?

Actually, it's hard to say. It might be the other way around. I mean, people are full of money. Public sector is repricing salaries like hell, right? So -- now, private sector is following. So there will be a lot of household money. What I said, it might be -- the growth of deposits might actually be higher than the growth of loans. But these days, deposits are no longer a problem, right? So that's the message. Incrementally, you actually benefit.

Okay. And maybe one more on me, because you said that you've got EUR 2 billion RWA M&A potential, if you don't see targets when -- would you consider using the dividends payouts, like the kind of your IPO target of around, what was it subject to kind, I think?

Well, we consciously moved away from percentages in terms of payouts and we moved back to the -- we moved basically to absolute amounts. We at this point of time do believe that within 12 to 18 months, there will be a potential to acquire potentially up to EUR 2 billion of risk-weighted assets. That's why we stick to the guidance for dividend plan. So if we in 12 months see there was nothing that crystallized, of course, then it would be a different debate. But from today's perspective, we do believe there will be an M&A opportunity.

The next question is from the line of Jovan with RBI.

Also have a -- actually, congrats on the numbers well, maybe better to stay on the guidance. I would also follow-up on M&A. I mean, if you combine -- if you consider it together with the guidance -- I mean, guidance was, of course, high, profit was high. Dividend assumptions I mean, cumulative dividend assumptions was kept at EUR 500 million, right? So M&A capacity, I think you mentioned that you are already there in terms of your capitalization. So can you maybe just explain how to calculate M&A capacity and maybe what's behind the capital targets that you imply? Because maybe it looks at first sight to me a bit, let's say, being cautious on the capital side going forward?

I mean, the -- maybe to qualify this, this EUR 2 billion is not measured by linear. This is kind of a range. It just indicates that we upped the game a bit. We believe growth is important, scale is important in banking. Banking gets more complex regulated, the whole rate hike has also told us that, as a relatively small player, funding is expensive. So in this sense, I guess, the signal is we want to be scaling more than what we do organically and the numbers are not to be taken literal and religiously. It's an indication that our appetite is rather growing a bit, and it kind of relates to the previous question. We keep the dividend promise and we add a bit of M&A capacity.

And we really believe that there is value, of course. Not only value, we believe it's a necessity to grow. And it's not only from regulatory, from all other dimensions -- it's also to weather the crisis in a more confident shape. So we believe we could be quickly moving towards EUR 30 billion and then in mid to long-term, EUR 50 billion balance sheet, which is then potentially even sufficient in this highly strictly regulated territory, having a critical mass. And this is possible only with, of course, strong growth organically and through eventual M&A, maybe even tactically at certain point asking for -- stakeholders, shareholders for a trust and going for the recap, hopefully, finally gaining enough trust and ambition also for the Republic of Slovenia to play along in this respect and pro rata provide a capital, so if this was a sizable opportunity in terms of EUR 5 billion to EUR 6 billion balance sheet in Croatia, Serbia, you name it, right. This will require some EUR 400 million, EUR 500 million of capital from our side. We will go for it, hopefully, being able to count on the support of the Republic of Slovenia as well. So, we think, in terms of ambition, how to position this business in, let's say, 10 years from now to EUR 50 billion total asset base, hopefully, delivering then EUR 700 million to EUR 1 billion of profits. This is not from today's perspective, totally in the clouds, but if you don't think Olympic, you will never enter Olympics, right?

Okay, of course, yes.

There was no change from our side on capital targets. You mentioned -- you asked, but bear in mind, that's a regulated business. So regulators could have ideas here and there. So in this sense, you always have to keep it realistic.

But [indiscernible] anything, right?

No.

So far, not.

Okay. Well, okay, okay, okay, okay, okay, fair enough. And I mean, second question on provisioning. I think if I'm understood the numbers correct, I mean, you set aside a bit of provisioning on Stage 1 and Stage 3, right, and on Stage 2, despite going up in nominal terms quarter-to-quarter and in both segments, retail and corporates, I mean, the coverage declined a bit, right? Is it -- did I understand it correctly?

But you know -- I mean, this is, of course, pretty much of mechanics. I mean, this is depending on the concrete cases, which are flowing in a doubt. I mean, generally speaking, I have to say we are pretty happy with the percentages of Stage 2. Regulator sometimes is asking us whether we are here too low. I strongly believe we are not. So I think the staging here shouldn't be some kind of building buffers, but it should reflect reality. And here, I have to say that our portfolio simply reacts very, very solidly, I have to say, where it will boost. And generally speaking, our coverage ratios are more than solid and clearly over EU average. So I think we are here, for sure, on the safe side.

Total coverage has increased...

The last one -- if I may just add another one on -- there was this recent and different issue. I mean, okay, maybe it's not imminent that much, but experienced by some neighboring markets or CE markets. There was a kind of, I think, unfavorable Supreme Court judgment on one of the cases in Slovenia. And how do you read this? I mean, we had before this constitutional court cancelling this kind of controversial law that was adopted earlier last year. So is the topic kind of going to come back again, or how do you assess it?

We assess it as normal evolution and development, because, of course, there were banks that individual contracts didn't necessarily perform the duty of information -- informing the clients properly and for making sure that the proper document, that has been signed. So this is a normal practice. The court has an individual case, assessed that the bank didn't perform all the duties. So this is not typical specific judgment for NLB. In our cases, we had separate statement signed and so on, right? So this is to be seen as normal individual court practice.

And NLB has won individual court cases so far.

Yes, we have won all of our cases so far.

Okay. So it's kind of rather moderate risk or very low risk from your side, this issue. Okay, okay.

It's a normal legal risk.

That's excellent.

Yes.

Yes, I mean, legal risk, when judges take the control of the sector, then it's not good to, I hope not.

We've seen this in some markets in Slovenia luckily the Constitutional Court was judging on this one soundly so eliminating retroactivity entirely. There was no higher public interest for retroactivity to be applied. So that's it. From now on it's, on individual cases, besides judging whether the bank did performed the duty the client was properly informed property acknowledging the risk taken over by signing a deck of explanation and on.

The next question is from the line of Ronak with EFG Hermes.

Can you hear me?

Yes, yes we can.

50% firstly, congratulations on the good numbers, fantastic set of results. My first question is on NIM. If I listened to Archibald correctly, he was indicating that the increased EURIBOR rates hasn't been fully so has been only about 75% and there is more to come. So with the expected increase in ECB rates, should we expect maybe your NIM to be above your target around 2.5% in the short-term, because we're normalize in the medium term? So that's the first question. And then the second question is that, can you talk a bit about competition OTP recently completed an acquisition in Slovenia, should we expect to see competition within the impact of [indiscernible] on your [indiscernible]?

Maybe I'll first touch the OTP's closing. We, above all, congratulate our esteemed colleagues from Hungary closing the deal. We believe it's good. It really that finally Slovenia has proven that the international capital is welcome, because it was dragging for almost 20 months, the decisions that were needed for vetting this deal. We see OTP Group as a real strategic investor. We have high appreciation and we don't expect them to introduce ridiculous market practices. They will have critical mass. They will introduce, of course, sound approaches in terms of product positioning, in pricing, in collateralization and so on. So we take them actually as extremely credible counterparty. And if you ask me, is this then good for NLB or not good for NLB, well, we were competing until recently with 3, 4 very strong brands. Now, actually, we will have one counterpart our size and, of course, qualified. So if you ask me, that's very good for not only NLB, but the economics of the entire sector. And on the other hand, clearly, still keeping the competitive edge of course, the clients would not be deprived because of eventual some other trends in the industry in terms of antitrust protection and so on. So that's all good news. OTP is all good news. This is how we assess the situation. When it comes to EURIBORs, on this slide, more or less, you see where we were. We cannot be more exact at this point. Then you can talk to our team for more details, what we can disclose. But generally, it's by no means yet fully repriced, right? So you'll see then February coming in 50 bps, you can see March coming in 50 bps. The EURIBORs today, 6-month EURIBOR at 3.2%, right? We are by no means yet there. It's going to be awful 6 months to 9 more months or even the entire year for some of the part of the exposure of the portfolio, where you would see still repricing coming in. So the margin of NIM of 20 of last quarter was already above 2.5%. It would be significantly above in this year. Was that a new normal level? You rightfully somehow try to understand, well, this 2.5% in a normalized mid-term environment, very likely, yes. It's too early to say, but we now feel confident that we will have normal margin for banking business, because years and -- 7 years ahead in a row, basically, this was not a normal banking environment. We're finally back to normal banking environment.

Mr. Ronak, have you finished with your questions?

Yes, Blaz for the response to the question.

Ladies and gentlemen, we will now move on to our webcast questions. The first webcast question comes from Damien from Slovenia. And I quote the first question. Will there be any extra dividend for year 2022? And second question, are there any acquisition taking place, especially in Croatia?

I believe we have more or less explained that. So there will be -- there is not supposed to be an extra dividend. Shareholders can always have counter-proposals and suggestions. We actively will not suggest more than EUR 110 million from the last year's result, because we believe there will be acquisition opportunities that we can address. Whether this will be in Croatia? It's too early. Currently, it is not allowed. So currently, we cannot enter Croatian market yet. This is subject to a political agreement between Slovenia and Croatia. There might be, though, opportunities in Slovenia, leasing territory or in Serbia, potentially in second half of the year or early next year. Also in banking universe, nothing is concretely happening as we speak, but might be evolving pretty soon. We are already almost now in end of Q1 of this year. So towards the second half of this year, which is practically in business terms, tomorrow, there might be concrete movements in this direction, and we are equipped with capital to be able to address this in agile and effective way. Not done, of course, going for capital, because we have paid out too much of a dividend, and this would not be rational, simply.

The next webcast question comes from Robert from Poland. And I quote, what makes you so confident on timing of the Croatian opportunity just now?

We are not confident. We believe the time is right, because Slovenia has just supported fully genuinely entry of Croatia in new adoption territory on one side. So Croatia has become a, EMU member -- European Monetary Union member. Slovenia strongest supported that. And second one was, of course, allowing and supporting actually shift of the Schengen border regime to Bosnia border, by which there has been no border between Slovenia and Croatia anymore, which has eased the life of Croatian businesses, citizens, and Slovenians on the other side significantly. So there is a positive sentiment. We believe there is a positive sentiment right now, as long as people still -- still people feel this as an additional benefit, not something they're used to. Whether of course politicians see the same way, we frankly don't know. We feel the sentiment among population of businesses, and we will hope that the politicians would and will ride this wave of opportunity.

The next webcast question comes from Anton from Croatia. And I quote, congratulations on a record result. What are your thoughts about NPLs in 2023? What are your expectations regarding mortgage loans in Slovenia and Serbia in 2023?

Yes, Andreas Burkhardt.

Yes maybe first on NPLs, so I'm expecting moderate development. It might not be as moderate anymore as we saw it in the previous years. As you know, we are guiding to 30 bps to 50 bps cost of risk. I strongly believe that we will not exceed this cost. What is true and what we saw in the last quarters, and I think this year, we'll see a little bit more in 2023, is more movement in the background, if you want. So we are still very successful in resolution of NPLs and also off-balance items. And I'm expecting, to a certain extent, this, of course, to continue also this year. And on the other side, we have more cases seen moving in, no dramas and, especially, no big or critical cases. And that trend will probably, this year, a little bit accelerate. I think I told you already in the last one or 2 webcasts that I'm expecting, of course, that on the retail side. Some people will simply feel prices going up and salaries maybe not always following suit or fast enough. So we will see some impact here. And we might see with single corporate clients also some impact, whereas I have to say, so far, the only thing what we see is what is very natural. So the less good managed companies, of course, have the problems first and here anyhow pretty strict from our side in the loan approval process. So I'm not expecting any dramas here in 2023, and I'm very firm that we will stay within this guidance, for sure, not exceeding it. But of course, these days, for risk management, a little bit more vivid times than in fully regular times. But we are on very strong feet. We have very high quality portfolio, and that's why I'm also expecting for 2023 not really surprises.

We are getting back to normal so this is fact, right? We've been writing back, having negative cost of risk for years. And in some point of time, you exhaust the NPL book from which you can actually be reaping the benefits, that is provisioned to liquidation values. In highly liquid markets, you have market values, not liquidation. And that's why you're, of course, benefiting in terms of cost of risk, positive contribution to the P&L. Now, this has more or less been exhausted. There might be some pockets still in Serbia, there might be still pockets here and there, but not many are left. That's why we are talking about 30 bps to 50 bps, which is more or less normalization of the cost of risk when you have a broad consumer loan book, when you have regular underwriting capacity fully in place. So if you have margin of 2.5% to 3%, of course, having 50 basis points of cost of risk is something absolutely acceptable. This is in terms of business progress, something you do. Banking is risk management, not risk avoidance, right? So that's good for us as well. So it's going to be 50 bps or 30 bps, the time will tell. The year has begun well, so we don't see significant movements into migrations in the portfolios. Let's see. The other question was housing loan development. So we see, of course, cooling down -- significant cooling down in the last period of last weeks. And as I mentioned within the presentation, right, the people are bit in a shock, because we've come actually from 1.5% fixed mortgage of -- for 30 years in June to 5% plus practically in now February. So people now are deciding more for floating rates and are not yet sure whether inflation and where the floaters will be moving in the upcoming midterm. So they are now on a wait a bit. That's why the demand is lower. But at the end of the day, there will be accommodation periods at which people will understand they still want an apartment, they still can afford a 4.5%, 5% rate and they will start -- they will resume, actually, purchasing. And this might be then, of course, significantly lower level. That's why we said this year we are not talking about double-digit growth rates. We are talking about mid-single digit rates. Is then going to be 4% or 6%? The time will tell. But overall, retail growth would be somewhere there, I believe -- we believe. Consumer loan book is developing, now finally moving a bit, because it's a stagnating for years. Now, we see this one moving and housing going a bit down. So overall, on average, it could be this mid-single digit growth within -- in nominal terms, still 7% to 8% growing economy with very low base. So if you look at the housing loans to GDP or total retail loans to GDP or corporate debt to GDP, we are at very low levels. So, certain convergence here still will be happening as soon as a bit of confidence is back, both for consumers and businesses. We believe the roles will resume, but not to the last year's level. If you look at the mid-term, we believe is going to come back, because from below base, we have quickly reach significant growth rates now. Slovenian economy and regional economy is, in relative terms, lowly indebted, lowly leveraged. We are at 1/2 or even 1/3 of developed markets, right, which speaks about our incremental opportunities and potential, but also about the quality of our loan books, because the businesses are deleveraged significantly, right? So overall, lower rates -- lower growth rates, but in principle, sound production at much higher rates at the point of origination. So even if we now grow with 3% to 4% -- by 3% to 4%, we would be growing by at least 2.5% to 3% or even more percent margins, right, which is totally different to growing by 12% at 1.3% margin.

The next webcast question is from Bailey, USA. And I quote, what's the assumption on interest rate environment behind your 2025 targets?

I mean, that's anyone's guess. It's already brave to talk about 2025. But from what we see, that's a zone we can reasonably estimate beyond '25. I wouldn't dare to give predictions. So the ideal case would be that inflation will have normalized, rates will settle at some normal level, quantitative easing programs will have largely diminished. And we are back to a halfway normal situation, both on monetary policy rate environment and by that also, for banks, actually a good environment where you can earn good money in an environment that we described. But this is for '25 beyond. This is speculation, but that would be, let's say, a base case.

The next webcast question is a follow-up question from Bailey, USA. And I quote, could you describe the depositor behavior so far? How fast are depositors moving to time deposits and what's the marginal time deposit rate you are offering?

Well, there is not yet really a huge shift. We have an offering some certain saving account schemes that are kind of, hybrids between the sites and the classical transactional account and a deposit, which is linked a bit to the drivers and so on. So they can use of such products. People are not yet inclined to now deposit money for 2 to 5 years in massive terms, because there is still significant uncertainty and they are waiting what will be happening. So we don't see a massive demand. We see pickup in public, of course, also by media. You are not benefiting from the rate hikes in assets, when will, deposits follow. And then of course, we have to explain our LTDs and cost of MREL and everything else, right? We not really interested in -- or there is no real possibility to move quick. But there will be a balancing act. So it's hard to tell. We will have to move up gradually, but of course, the revenue side. I mean, the asset side is still moving up as well. We had 10 years ago or prior to the financial crisis of 2007-2008, that was a normal structure of the balance sheet. We had 50% term deposits, but now we have 90% slight. So there will be definitely a process development towards something that is in terms of a long-term perspective, normal banking business. How quickly this will be happening? It is -- it would be a crystal ball. So we -- this year is going to be really balancing act. We will be moving on the go. And I guess, towards the end of the year, once we have more clarity on target inflation rates, I mean, upcoming -- of inflation rates then for the year to come and the year after, this is then starting moderating, of course, there would be less pressure on significant hikes in deposit side. But it's too early. It's too early to tell.

The next webcast question is from Anton from Croatia. And I quote everyone is talking about ChatGPT nowadays. Could you -- ChatGPT and similar artificial intelligence tools be used in banking?

That's a philosophical question. Of course, they can be this or other way, as long as regulation is not prohibiting, because the copyrights, the authorship, how this how this is going to work out the entire educational system. This is going to be a big challenge now at the end of the day. Well, of course, it's not ChatGPTs. It's artificial intelligence it's mastering your data. It's actually simply -- in simplified terms. How we look at it is capturing your data from your clients on transactional level, transforming this data into information and then product -- to the feed the sales process with this information, right? And in this respect, this is to me a CRM universe, right? Of course, we have to get more literate. We have to become much more modeling skilled to be using, this artificial intelligence-based decisions in the future. I would not refer now to a concrete app or a concrete solution. So this is one focus of the points. Archibald will give you more details. So the entire data management universe is, for us, really one of the hot topics. Besides introducing common platforms when it comes to client interfacing and planned directions, of course, the entire our internal literacy on how to conduct a business in a profitable and calibrated way is the entire pillar of our activities. But Archibald, maybe you add some thoughts here?

Sure, actually, we have signed yesterday an agreement with Microsoft to start using ChatGPT, and I'm very happy to say that we look forward to using all these different means. Of course there'll be a gradual process of picking up on these technologies. But absolutely, we are using them. We have a competence center in Serbia with natural language experts that will help us, for example, go through contact center, email language patterns and then help us understand whether or not our customers are broadly more or less happy. So absolutely, we are going in this direction. And as I said before, we will release funds and keep investing in new technologies, from data to AI. We use that already in underwriting to some extent and this technology is here for us to be used. But as Blaz mentioned, this is regulated territory. So use of AI is regulated by EU directives. And so, banks are here, of course, as usual, in a bit of a tight spot. So, we will use these technologies responsibly, but to the benefit of our customers ultimately, yes.

The next question -- the next webcast question comes from Victor from U.K. And I quote congratulations on fantastic numbers and sharing your detailed outlook. Could you please elaborate on where we stand with regards to the Slovenian CHM mortgage law? Constitutional Court threw it out, but where do we stand today?

Well, it was an art. The law was annulled by the Constitutional Court, meaning it's not in force. It was first suspended, as you know, and then annulled. So it has never come to life. What we are left with is now individual cases, court process, which means that, of course, clients that have suit have to wait for the outcome by the relevant courts. And that was one Supreme Court ruling going in favor of the client. NLB so far has not lost a single case in the court. So different banks have conducted different practices, but more or less in the period of 2004 to 2009/2010, right? And the ones that have the totally respected the duty of explanation and by that, simply familiarizing clients with the associated and underlying risks, clients acknowledging this risk by signing relevant pack of papers. In principle, this is a normal arm's length relationship between the lender and the borrower and you cannot totally waive any liability as a borrower as well. So the Constitutional Court has ruled clearly there is no high public interest to allow retroactivity. That's the most important, actually, outcome of the decision, which means that any potential settlements would be first talking about, of course, significantly lower volume, because this will be on the live contracts, right? And secondly, this is actually, for the NLB, immaterial. So in total terms, we don't see Swiss franc issue any longer a systemic issue for the banking system, not -- nor for the NLB Group.

The next webcast question comes from Yan from Czech Republic. And I quote, what is the situation on the wholesale funding? More interest, better rates than end of last year, or still the same, or even more deteriorating? There is still EUR 375 million to be issued, if I'm correct, by end of this year?

So rate environment has somewhat normalized. Of course, we are following this very closely. Spreads have tightened for banks, in particular. So situation is good. Q1 is actually quite busy season for banks. Lot of banks are issuing and so we are, as we speak, preparing our own program, as mentioned before. And indeed, we are looking forward to some EUR 300 million senior preferred issuance, and that would fully accommodate for all of '24 needs, actually create some buffers already. And if needed, we might tactically size up. The idea is also to go green for the first time -- so to issue a green bond instrument. So we see the environment much more accommodating for a BBB-rated name like ourselves. So -- and I have to say, in the meantime, of course, the name is a bit more public, ratings are solid. And of course, we hit the road; indeed, next week, we'll be spending time with Swiss fixed income investors. We also will make our ways to a equity conference in Dubai, where we will also talk about fixed income opportunities. So for us, it's important to be in the market and speak to investors on a continuous basis, and that's what we do.

Ladies and gentlemen, there are no further questions at this time. I'll now turn the conference over to Mr. Blaz, for any closing comments.

Thank you very much. Relevant questions, thank you for the interest. Thank you for being with us on this exciting journey. As such, we feel stronger and more confident than ever in history of this banking group. We believe in a sound future, not only for this banking group, but the entire region. That's why we believe, it is worthwhile further investing, investing both inorganic growth and M&A growth. We are equipped with capital and liquidity to be able to afford that and we might add technically additional capacity and firepower. We believe there will be actionable opportunities in a 12 to 8-months window, while we stick to a very solid dividend payout and by that, of course, sharing our success with you. Thank you very much for being with us also today afternoon. And until further occasion, which is coming in mid-May, I think, right -- in mid-May, stay safe, stay positive, and let's do a lot of good business in this region. Thank you.