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

Ladies and gentlemen, thank you for standing by. I'm Constantinos, 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 2023 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, Constantinos, and warm welcome. Good afternoon, everyone, to the regular quarterly webcast. Let me draw your attention to the regular disclaimer. And as usually, I will start with a short introduction of general developments. So we're looking back to another very, very strong quarter, very solid recurring performance, both in terms of revenues, continued cost discipline and especially in terms of asset quality. We have not seen any deterioration, any meaningful deterioration despite pretty high uncertainty in the international environment, of course, and the outbreaks of plus security crisis as well. So, so far, so good. I would say, for our region, we're specifically happy. And this time around, I'm actually reporting in from Belgrade about the results, in Serbia. And if you see me dressed, there is going to be a special occasion. And that's why I'm also here because we are opening officially with the partners, one of the largest Congress centers in Europe and one of the biggest ones actually in around 1,000 kilometer circle that is going to position Belgrade again among top Congress locations in the world, even ahead of the 2027 expo that is coming. So in this respect, very solid development of the town, of the city, of the country and of our business as well. So Serbia this year already contributing in the first 3 months and will be Komercijalna Banka, close to EUR 150 million, which was on the annual basis, expected not before 2025, which is, of course, something that we like a lot. And of course, it's just reaffirming how good a decision this has been throughout these last years. We have seen, as we have been guiding for, let's say, mid-single-digit growth in terms of loans, very good evolution, especially given the fact that this is happening, of course, now in a rates that are a bit more attractive. We have seen no deterioration in deposit portfolios in terms of outflows. We have indeed actually reacted finally in September with a bit of an uptick in Slovenia that was, of course, as a Euro country is still lagging behind in terms of term deposit pricing. So we have started paying up to 2.5%, and there has been a gradual shift towards term deposits, but all within what has been expected. And this all is guiding towards a direction that we are raising questions to ourselves and, of course, legitimately and logically also coming from your end, have we seen the peak of the interest margins, right? The ECB seems to have paused at least, if not stopped, when it comes to the hikes. And of course, real question is what the further margin evolution will be? What the further actual base rates of the ECB are going to be? And by that determine, of course, the total margin in terms of interest and of course, operational for the NLB Group. So far, it has still been opening. So of course, this is very positively contributing to the results. strengthening further, of course, our capital position. We are sitting on a very strong base, and we are further strengthening it. And the region has been actually still, of course, growing ahead of what has been the European Union average, and these expectations remain the same for the upcoming periods. I'm specifically happy and proud of the completion of the integration that we announced with -- of 2 banks in Slovenia. So NLB d.d. and N Banka, a successful former [indiscernible] bank in Slovenia. It was a smooth and flawless process, regular challenges at the end with clients. But in principle, nothing that is causing to have an inconvenience or would cause any instability. So we are really happy about the outcome. We are now 2 months almost or we have full 2.5 months after the go-live and everything works fine, and we are resuming now to a development mode, accelerated development mode, focusing on processes, focusing on, obviously, also on the main priorities when it comes to client experience and so on. There have been, of course, very good news also in terms of the dividend payout. So as we have been announcing, the second tranche of this year's dividend is coming in December. We are suggesting it to the general assembly, to be held in December. And by that, continuing on first, the promise and second, on the trajectory of holding 2 AGMs a year, which we believe is worthwhile and valuable in terms of being able to discuss strategic matters with our shareholder base. We will, of course, I would be talking about that in the outlook be thinking of what the dimensions would be of these dividend flows. But in the future, but so far, it is, of course, solid, it is within what we have been announcing. And indeed, within a very strong performance, something that in relative terms has been, of course, less and ambitious in terms of relative, of course, payouts, but still high in absolute payouts. There have been some challenges that are besides the unexpected or difficult to, of course, assess the further decisions of the ECB impacting potential profitability. There have been some regulatory potential changes. We have no clarity yet what will be happening with the obligatory results. The ECB -- have been some changes in various geographies here in our region. There have been some announcements of taxation, specifically in Slovenia, balance sheet tax, which you would have been able to see for sure. There has been a public discussion now and might come in place in 2024. There have been some pricing constraints and regulations with caps and so on but some others have expired. So there are some uncertainties, some questions around what would be actually the bottom line capacity for the upcoming years, but we stay very firm and confident with our guidance, and I will touch that later on. Cost of risk is totally under control. And Andreas will be talking about the evolution. So despite volatility in the international environment, our performance of our books is extremely solid. By that, I would pass the word to Archibald to guide you a bit through more detail in financial terms and as well as, of course, the asset quality main points, and I will come back with the outlook. Thank you.

Thanks, Blaz. I'll step you fairly quickly through the quarter, which, as Blaz indicated, was fairly regular actually, of course, with still rising rate revenues from the latest ECB activities and fairly normal cost of risk still muted development on the back of a stable cost base. So overall, of course, a very solid regular quarter. The macro backdrop is, what appears for our region to come down to -- on a soft landing, of course, the jury is still out, and we all follow the news in the various macro environments that are relevant for us, specifically, of course, the neighboring countries, including Germany, Italy, and et cetera. But so far, this region has shown and continues to show resilience and optimism translating into above eurozone average growth rates. Inflation is still a little bit higher contributing to a bit of cost pressure on our side. Obviously, especially on the labor cost side, we have to simply adjust to realities, but we will come to that on the cost equation. Other than that, the macro environment is still supportive to growth, which is what matters most. So we see real growth, obviously, supporting then loan growth. And we have heard about healthy loan growth dynamics year-to-date are actually totally in line to what we have been indicating. So we see a single digit figure for this year. And of course, the P&L is extremely robust towards [ the end ] in Q3, on the back of factors I mentioned. And you've noticed that net interest income is still moving in line with the rate environment. Of course, there will be a kind of a softening of that trend absolutely because of our repricing of deposits. In the meantime, in Slovenia, half of our deposits are sitting in value-added products, such as savings account and term deposits. So this will show through. And then, of course, we are also actively considering to hedge our variable position to some extent in the coming months. So in terms of NIM margin, and I think you have to factor into the wholesale funding equation that will also kick in next year. We probably have seen, obviously, in Q4, something like a peak. Nevertheless, Q3 was strong and the EUR 144 million bottom line is just exceptional, continues to be exceptional. And we are pretty much, I would say, sailing in sweet spot environment from a bank's profitability point of view. You see the NIM are still expanding, also still on a quarterly basis, and of course, that's -- as I said, attributed this quarter, in particular to simply ECB and Euribor movements. Our variable position is unchanged in the ballpark of combined loans and cash something in the range of EUR 10 billion. So this is a pretty strict work translation to, of course, the NIM result and the margin. And in that sense on the noninterest income side, we are mute. To some extent, we really try to also support our customers by not unnecessarily adding to a fee and charge pressures. So in that sense, we have been shown -- also responsibly towards our customers. And -- but of course, given the environment overall, that's no dilemma whatsoever. On the cost side, you see, of course, the dynamic I mentioned before. So year-on-year, this is a fairly visible cost dynamic. We are working on the cost equation, as you see in 2 markets, as we speak. Slovenia and Serbia in particular, other markets, of course, increasingly, let's say, [ feeling ] comparable pressures. But those [ markets ], which, of course, are materially most important for us, we work fairly actively and have in the past been very, very actively consolidating, let's say, cost base and position or so. We will and continue to invest, which had a very good and productive discussion with the Board. We will then continue to invest in the advancing of the technology agenda, which is, of course, key for our long-term sustainable business. On dynamics, actually, it's really sweet spot. It's pretty much in line with what we have indicated, very strong performance in Slovenia and in our subsidiary markets. So nevertheless, from the rate environment, there is still a healthy demand for both consumer and housing products, and also healthy, also a bit muted demand for corporate. And this is all fully in line, of course, with our risk appetite considering the situation we are in, and also making sure asset quality remains at our highest levels. In that sense, capital, of course, is a function of all of that very, very robust dynamics. We have a bit of up and down on the OCI side from positive valuations coming back, obviously, as our fair value position is running off and a little bit of reverse on the special treatment of the very same position. But overall, of course, a very robust 350 bps, as you see [Technical Difficulty] for some to the -- to our OCR, P2G requirement. In that sense, really plenty of room for growth, both organic and nonorganic. The funding equation, you see here the list of instruments outstanding in the meantime, a quite impressive amount for our bank, at least EUR 1.4 billion, across the range of all instruments. And indeed, you will see us in the market next year again in both the senior and presumably also the [Technical Difficulty]. So that, of course, is becoming now a more frequent exercise. And accordingly, we put a lot of effort and emphasis in the IR dimension, on continuously working on the investor base, expanding it, tapping into new potentials. And I have to say the experience from the senior preferred benchmark issuance was very encouraging already with, as you remember, for [indiscernible] issuance. The funding costs I mentioned, we have now considerable parts of the Slovenian deposit base. You see it in the middle bar chart, so it says 46% in value-added products, which is good, good for customers. And having them a fair share of the rate returns. You see almost 50% is in savings and term deposits. On terms, as mentioned, we paid 2.5 [indiscernible] , we offer also very attractive investment opportunities where we combine cash and funds, they can up to 4 or even more percent on the cash side if you combine it with a saving in a mutual fund product. So in that sense, we really, I think, have now a complete range of retail offerings. And of course, we'll continue to think about possible further extensions. That, of course, moderately, but still visibly raises funding costs on the deposit side. And in that sense, as indicated, margins at some point will peak, but outlook, as Blaz will tell you, remains very, very robust. By that I'll pass on to Andreas on asset quality.

Thank you, Archibald. The distribution between the buckets you are already used to, we are actually growing in all segments. Now in the last period with one exception in corporate, but that's not due to less new business. That's due to a lot of repayments in different sectors. And from the distribution by geographies obviously very stable. Overall, you see the subsidiary banks are growing a little bit faster than we do. And that's why you first time see now really, 51%, so majority of our portfolio, actually outside Slovenia and 49% here in Slovenia. As I mentioned already in the last period, we saw now quite some repayments on corporates. That's still energy that's, for example, also in the real estate, it's finished projects and so on. So in a sense, let's say, more onetime effect. So the trend of the portfolio growth is also impacting corporate overall, and what you see in corporate and what you -- well, saw in the last quarters, there's not too much of a change, is that it's a well-diversified portfolio. And honestly speaking, what is amazing is in times which are not necessarily the easiest ones that this portfolio really, also on the corporate side here is very, very robust and actually no bad surprises whatsoever. Staging, also very, very stable situation. What you see is, again, a little bit of uptick in Stage 2, basically none in Stage 3, but a little bit again in Stage 2 in retail. Well, retail, of course, it is environment in which we are, not everybody necessarily gets a salary increase in line with inflation. And then, of course, there's pressure on the retail loans. On the other side, by the way, who gets these salary increase in line with inflation. This is, of course, reducing the effective value of the loans. So that's then [indiscernible] helps. So we see 2 effects. But you have, of course, here in retail, the -- well, lower end, which is -- yes, which you now see in staging. NPLs, I mean, almost a little bit amazed at one point of time. So NPL percentage still reducing. And as you are used from us, coverage is very, very solid. A good part from the NPL portfolio is even without delays. Also this is a story you know from the past. So cases which are still not fully through the restructuring cycle and still flat NPL, which is you're basically paying fully on time. And distribution between the geographies in the meanwhile, also very, very much in line with expectation, or in line with the shares these geographies have also in our total portfolio. Impairments and provisions so far in 3 quarters, we see actually a quite solid release. What you see actually is a 0, is from the regular portfolio development, and honestly speaking here, retail, we see inflows of provisions. In corporate, we still see outflows. As I told you, I mean, corporate portfolio is behaving still brilliantly. And retail, we see a very expected trend and actually to a more moderate extent then we were actually assuming a while ago. So overall, you see a release, but also that is still strongly driven, or again, strongly driven also by repayments from off-balance sheet items. So our off-balance book, which is still approximately EUR 1 billion is still having here or there some [indiscernible] which, of course, we are extracting as good as we can. Trend in variable versus fixed. You see that in retail, we still are moving a little bit towards fixed interest rates. And on the other side, corporate is slowly turning. So that's the trend slowly going in the other direction. And what you see on the development of the Euribor or actually the Euribor in the house, of course, logically, because it's a 1, 3 or 6 months frequency, it's running a little bit after. But what you can see here is that we still have a little bit of a buffer to current Euribor. So there is a little bit more choose to come. Of course, if you compare it with earlier this year, a good part of the choose is now already in. And of course, you see this in the liquidity of the bank, but it's still a little more to come. Overall, given the very solid development in the NPLs and in provisioning, we again uplifted a little bit also our view on provisioning overall for the entire year as you're used to. Quarter 4 is usually a little bit more provisioning heavy, but again, very, very moderate, but more details then from Blaz. And actually with this, I'm now also handing over back to Blaz. Thank you.

Thank you, Andreas. The outlook, if you can free the slide, please. Yes. This year, obviously, is going to be an enormous performance historically looked at as well. So this is really ROEs normalized exceeding 20%. On one side, on the other side, of course, also showing very, very strong performance from the cost of risk and growth of revenues, obviously, above what was expected, even months ago still. And finally, also efficiency measures in terms of process improvements, on one side, further continuous focus on costs. But at the end, of course, also now much more, much improved into the environment have delivered now the cost income ratio of well below 50%, which was one of the most challenged questions in previous years. And despite all of the uncertainties regarding the rate environments, regarding eventual regulatory or sovereign charges coming, regarding the eventual shift of portfolios, the term deposits and so on. We still anticipate that we will maintain this level of performance also throughout the upcoming midterm period. So we do -- we are still talking about normalized ROE of 20%. We are talking about cost-to-income ratios below 50%. We are talking about profits. Here, we see exceeding EUR 400 million. We are pretty confident about these numbers. And in this respect, obviously, this is something that we can be very positive about. There has been a cost tension. So this is evident. We are now slightly revising the outlook for this year and slightly revising the outlook for costs for the midterm. Since we have been consciously assessing the situation as the right moment to invest into further push for digitization on one side, and on the other side, we have still been living in an environment with significant wage inflation and still significant higher levels of inflation, frankly, than in the core of European Union as of today. So this is still causing significant pressure. But as said, we have always been reacting by optimizing the processes, adjusting the channels, right? Also physical footprint and so on. The real question, of course, with such results is what's happening with the dividend. So we still here show the old cumulative EUR 500 million payout promise, which means that, of course, the upcoming 2 years, there would be an increasing -- a meaningful increase in dividend every year. On the other hand, clearly, if you're delivering EUR 0.5 billion almost of profits, right? It is paying out [indiscernible] and then a bit slightly growing, of course, the dividends enough from the eyes of the investors. It's a legitimate and valid question. We have announced and now we can formally, of course, also confirm that as of December, we will officially kick off the strategizing process within which we will really try to understand the revenue push for organic and/or M&A evolution in the upcoming midterm period. And the result of which will have to be communicated at the Investor Day and will be communicated, obviously, at the upcoming Investor Day in [indiscernible] on the 9th of May next year. And depending on actually the outcome of this process, we will then, of course, also be potentially addressing the shareholder base with, of course, a set of the planned activities to actually accrete value through, of course, growth and/or potentially revised dividend assumptions in this respect. So for this general assembly in December, obviously, we're still following the flow of what's been discussed so far and disclosed so far. The upcoming regular general assembly in June next year will already be a result of completed strategizing process and, of course, defined ambition levels also in terms of capital consumption, so which opportunities we will look at actively and with a certain level of predictability when it comes to actionability, and what portions of capital could be, of course, allocated for these accretive opportunities and what would actually be distributed in reform to the shareholder base. So the news is good. We would not be paying less. We would eventually be paying more, but this, of course, depends on whether we will be able to find really meaningful value-accretive alternative deployments of capital. We hope that we have and we believe that this has been the case that in the last 3 to 5 years, we have gained your trust that we have been able to transact in terms of M&A. That we have been able to meaningfully not only acquire, but also integrate. And we might be, as we speak already amidst some of the potential additional news that might come. I can't disclose more than what has been publicly disclosed by now, but which means that we have been working, of course, on productive engagement with capital, serving, of course, delivering your shareholder value. We have been also suggesting to the AGM, collectively with our Supervisory Board of the governing body, an upgrade, an enhancement of the remuneration policy, which is also going in this direction, actually benchmarking our performance with the relevant peers in terms of total shareholder return and of course, also ESG-related targets and so on. So we believe this is all serving actually the interest of our key stakeholders. And by that, showing these numbers and with more information to come immediately after we complete the strategizing process towards the 9th of May. And we will be -- we will keep delivering the good news. That much from our side. And of course, now we will open the floor for any questions, comments you might have. And then I will wrap up at the end. Thank you.

[Operator Instructions] The first question comes from the line of [indiscernible] with JPMorgan.

My first question is about your midterm cost guidance. You're obviously increasing that to EUR 530 million from flattish on this year level. Could you give us a bit of color on that? Is that largely inflationary? Or are there any projects that you have line of sight on that you know are going to be costing money in the midterm?

Yes. It is actually partly, of course, coming from the wage inflation environment. I mean we've seen announcements in a couple of countries of, for example, increased minimum wage as a simpler legal framework. On the other hand, we've been really trying to accelerate the digitization agenda, which means that we want to accelerate some of the developments, for example, delivering new workflow tools and CRM tools across the board, improving client experience of our M&D in order to be able to migrate more decisively from traditional format. And this is indeed is perceived now as a significant hike in cost, but if you look combined, it's actually not that high, right, [indiscernible] so far. So we are actually investing in people and systems. We are bringing on additional stuff, especially for data stream, especially obviously for development of platforms as well. And we also are beefing up a bit our M&A capacity, frankly. So and this all cost a bit of the money. We can't be concrete on what M&A we are talking about, but we have been actually engaged and it is difficult to empower and deliver integration and work on M&A, right? So we are on one side, of course, the holding company. But at the same time, we are the largest operating bank in the country. And in this respect, across the board, we are investing in cybersecurity. We are investing, obviously, as I said, in the [ operating ] platforms, and we are investing above all in people. and part of it is simply unavoidable because of legal changes, significant increases in minimum wages, for example, in upcoming, in Serbia and some other countries, automatically bring, of course, such expectations across the board. We still stay, of course, fully committed to the efficiency agenda. And there are plans, of course, for further reductions of traditional format. But these couple of years coming are somehow not really transitionary in the sense that now we really need to invest a bit more. And if you benchmark our investment in IT, generally with peers, we are not overspending at all, but to [indiscernible] to that, for sure, some [indiscernible] , some [indiscernible].

Not really much to add other than we are very, very cost conscious. On the other side, we have to accommodate to some extent, to realities. I also should admit that in Serbia, we are not as fast as we wanted to be in terms of reaping synergies. So that is a year, if you want, time lag on that agenda. But the agenda remains unchanged. And broadly speaking, the whole digitization agenda is ultimately the trade-off of, I call it, intangible assets, in other words, IP, technology spend and of course, mostly human capital and talent versus physical footprint efficiencies, and not necessarily reducing branches, but the way we operate them, the way we use them more for sales and advisory rather than operating very high fixed cost cash handling operations. So -- but this transition is simply -- it's a midterm effort, and it requires predominantly this pre-investment, upfront investment in tech and talent. So we believe the future is in tech powered finance with this premium element of the advisory capacity in locations that are reachable to our customers, and we invest in this transition. But we do this very, very cost conscious. And I mean I'm CFO and also oversee the IT business. So believe me that this is done in a very diligent and thorough way.

Okay. Thank you very much. And perhaps the next question is more on to Andreas on the risk outlook. Andreas, when you think about the migration of certain retail portfolios [indiscernible] to Stage 2, what is your view that they do deteriorate further? And so in the next 12 months, we could indeed see an increase in your NPL ratio? And what sort of expensive cost of risk burden might that -- might that mean?

So I mean the [Technical Difficulties] I mean if you see the overall figures, what is migrating to Stage 2, this is -- if you see it on the bank level still minimal, and of course, we might see some of these cases to migrate to NPL and they will. On the other side, we are still very, very successfully actually working on the NPLs. So you have the effect on 2 sides. I would expect next year, for sure, a little bit further trend in this direction, which actually we see already now since a year. On the other side, on the corporate side, we don't really see any clouds on the sky, which is impressive enough in these circumstances. But if you ask me, this is also depending a little bit, especially here in Slovenia, how the companies were positioning themselves. Some of them are rather underleveraged than overleveraged, which in a different economic environment might be a disadvantage, but now it's an advantage. So overall, because you asked cost of risk, at the end of the day, I would expect that slowly we are migrating to what we're expecting midterm, sort of 30 bps to 50 bps is midterm. I would see us next year rather still below that, but probably not anymore at 0.

And where you are seeing little bits of pressure within retail. Is that in any particular market? So are there jurisdictions where the pressure on the consumer is slightly more intense than elsewhere?

No. Actually, I mean, of course, in -- if you look on 3 months buckets, of course, you see here and there, a little more or a little less. I mean one of our banks, which is feeling very good is our bank in Skopje. Of course, then you now and then also see a little bit more migrations here. Feeling the space good is, meaning they really do the business, they should. We are sometimes as a group still a little bit too conservative, which triggers you very low cost of risk, but which leaves a little bit money on the street. And so that's one geography, which I saw. But if you ask me, that's not a trend, that's just a short-term item. And then the big geographies, of course, are always, of course, more the attention in Slovenia and Serbia, but also here a very, very controlled, very moderate. So overall, if you ask me, I don't see strategically here now any big outliers. The -- luckily, I have to say the very strong tendency here in these markets is people, really, private individuals want to repay their loans. We are supporting that a lot, of course, also on restructuring side in case of need. But that's a little bit also a question of the culture on retail. And here, we are in the very lucky situation that actually this is maybe a little bit counterintuitively. if you look on salaries in some geographies, but that's actually rather a strength in this region that people here are really committed to repay their loans. And I don't see any strong trends. What we see a little bit is, of course, that the lower-end salaries where we are anyhow, under average, exposed for many reasons. Of course, we see a little bit more cases incoming, but that's from the portfolio, of course, then the smallest part, both in volumes per case and in overall volume.

Okay. That's very clear. Perhaps my last one back to Blaz. I appreciate you said you can't be too specific on M&A. But obviously, over the course of this year, you have increased your targeted RWA absorption from EUR 2.5 billion to EUR 4 billion. You've done a couple of large acquisitions, but you have also spoken in the past about smaller bolt-on type deals. So how should we think about the use of sort of EUR 4 billion total between perhaps a larger transaction and several smaller?

Yes. Look, there might be, of course, various things happening, right? There might be a leasing deal potentially in the market in Slovenia, Potentially, there might be something smaller of this deal in Croatia. There might be, of course, some other deals potentially happening as -- nothing is necessarily happening as of today but might become actionable. We will really know in a structured way, together with our Supervisory Board, so the entire governing body go through our strategic aspirations and define really the target revenue pulls and then we try to figure out what would be the most meaningful allocation of capital and to apply as per these potential opportunities. So in case until end of April, mid of May, when we communicate a new strategy on the 9th of May, right? We didn't have anything meaningful on the horizon in terms of really concrete sizable acquisitions. This might, I'd say, might well lead to a conclusion that we significantly -- to size up the dividend, right? We might think of share buybacks, but that's all hypothetical because this is all has to enter, of course, now the pipeline of discussions with our Board. The capital absorption is very high. The total capital adequacy is very high. The organic growth does not show such a potential to be able to consume this EUR 4-plus billion of risk-weighted assets, right? So in this respect, if there is no really meaningful further acquisition potential in terms of really actionable assets in the upcoming, let's say, 12 months or 18 months, then this might rather mean we really revise the dividend sales. But it's a bit too early. So we kindly ask you for a bit of patience, patience and trust. We will now look into the room, really look at the alternatives, consider is this region the only region? Is this the only possibility, banking only and leasing only? Is there something else potentially? So we don't have yet an upfront, immediate response to what you're asking, but there might be some smaller tactical things in the asset management space, but immaterial for the banking group as of today. There might be some digital online platforms immaterial for the business size of today. And nothing really big has been pending as of right now. But as I said, until April, May, April, let's say, latest, we should have pretty much clearer picture of what potentially we can really count on in terms of capital consumption, and then really at the convocation of the AGM in June '24, actually discuss this in a very meaningful way with the shareholders.

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

Could you say a few words about the regulatory environment? I mean, I think on the -- you've already mentioned this Serbian mortgage rate cap. You've got the Slovenian windfall profit tax. Has that actually been formally enacted? And is there anything else that's kind of pending? That would be the -- my main question for you.

Yes. Thanks. These 2 have been the most material. Serbian is actually enacted. So this is in place. There is a ceiling on the housing loans rates. On the other side, there was also a freeze of certain fee evolution for 12 months, which has expired. So this is to a significant extent, somehow also offsetting the effect of the first one, the [indiscernible]. So the Serbian is not that material. It will cause one of, of course, adjustments in our results, but it's not a killer. Slovenian is publicly communicated as a draft version so far. So it is in the debate, in a public discussion. Of course, Bank Association has a view. ECB has just written -- published a written opinion, that warrants, Republic of Slovenia, of course, when it comes to the stability and the bank capacity to land and win [ the land it's on ]. So let's see for this -- potentially impacts the discussion. It is at 0.2% of the balance sheet as per the end of the year, which means if you look at our Q3, you can assume just short of EUR 32 million for 2024. And then depending on the growth rates supply, of course, it would gradually increase. But this is, of course, at the end of the day, not that high if you look at the total profit as well, right? So it is in the range of EUR 30 million, a bit EUR 30-plus million. which is compared to the effective tax rate that this group has been paying also somehow still a combined rate, not -- also not a killer. There is a cap on it when it comes to the annual profits, but of course, this charge is well below 30% of existing NLB's profits. We see, as we discussed so far here and there, a bit of a minimum reserve somehow, which we see as a kind of a hidden attempt to somehow also extract some value from the banking system adjustments. We see still, for example, in some of the markets, very low rates paid by the central banks in Federation of [indiscernible], practically almost still 0, right, and so on. But this is all low single-digit millions, which is not that material. We haven't seen other really heavy attempts. There is some 3 electoral 3 elections, of course. Atmosphere here and there, there is some -- of course, Slovenia, a bit of a populistic element of these floods. But generally, the banks are willing and, of course, happy to contribute when it comes to the good of the society and benefit of the people from the region. We just count on that this, of course, is not then being somehow constrained on specific one-off weather phenomenons, when it comes to, of course, taxation of banks. And when it comes to, of course, regulatory control over the conditions, terms and conditions of the banking system as well. It seems that we have seen the peak in terms of interest environment, at least this is perceived by the environment as such as well because we see already players, international competitors moving down by some prices or at least not increasing anymore for quite some time already. So for on longer end, it seems that everyone is expecting a significant reduction of rates. Where this is going to be, of course, no one has a crystal ball. So I would expect that also, of course, by normalization, gradual normalization of profit there will be less pressure. But indeed, we're still talking about 20% ROEs normalized, and we operate with the assumption that this would be the case despite all of these happenings.

And just on the margin front. I mean if euro rates stay where they are for that in the next 2, 3 quarters, where do you think your margin will go? I mean, is there still further upside going forward? Or is it just kind of -- are we at peak margin now? Where do you think it will peak under that scenario?

Well, if you apply the assumption that they will not move for 2 to 3 quarters. Of course, then it's a bit easier calculation and you can do your math. It is then depending on, of course, how -- to what extent we would -- we might move some of our deposits to the term deposit bucket, which is paying 2.4%, up to 2.5% in Slovenia. In other markets, actually, we have been already more or less adjusting these levels already before. There's been some competition for deposits in specific currencies already before. So I wouldn't see there such a movement. And then, of course, it all depends on where will you see, of course, the yields of the instruments in the market as well. So at the end, we, of course, also will be issuing, as Archibald mentioned, further senior bonds and subordinated bonds in significant amounts, which were also slightly impact that as well. So overall, I believe we can be talking about that we have been around peaking, very likely, around peaking. So where this moment exactly is happening, it's very difficult to say. And then maybe gradual reduction if they keeps -- the rates keep stable then for 2 to 3 periods, but it's really definitely I can't be specific more than that. But Archie, you might add something here.

Nothing to add really. You might see that up a bit in Q4 given behavioral dynamics, et cetera. But then latest with funding steps. And as I said, we will, at some point, also consider hedging to some extent. So in other words, swap a bit short-term result against stabilized midterm results. So all of that will eat into margin a little bit. But everything north of 3% is very, very good and supportive to the case we're presenting here.

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

Just a couple of questions on the guidance that you provided. I was wondering if it's being a bit too conservative because, for example, if I look at the regular income guidance above EUR 1 billion, seems pretty conservative given that we were already -- I think is around EUR 820 or so, by the 3Q. So just wondering if -- or EUR 840 million by 3Q. So just wondering if management are being conservative there? And likewise, maybe just trying to understand the guidance around Serbia contribution of more than EUR 100 million by 2025. Again, if you could just clarify what that is referring to? Because if I look at the financials provided by the bank, it seems like Serbia was already contributing more than EUR 100 million of profits by 9 months '23. So again, is that just being conservative? Or am I looking at the wrong figure here?

Ronak, maybe starting with Serbia. That's why we are removing actually from the midterm guidance because originally it was in, as you know, it would be a success story if we delivered EUR 100 million in 2025. But since we have been delivering more than 20 -- more than EUR 100 million already, Q3 of 2023, we can just establish that this was a marvelous transaction. And by that, we stop actually specifically highlighting it. We will obviously deliver more than EUR 100 million this year already. So this is for us, not a topic anymore. When it comes to the general guidance on revenue, indeed, it can be perceived conservative. We have continuously been a bit conservative when guiding. We have met on various occasions that we rather positively surprise than disappoint. And this is simply an attribute of ours, could we be a bit less. And this is something that we can also discuss, of course, with our Board within the strategizing process. We believe we are showing here a very ambitious picture. But I would add an attribute of confidence. So we are confident that we would deliver this.

Understood. And just a final one. Maybe a follow-up on Simon's questions. On the windfall tax, as you mentioned, the draft has been submitted. The timing remains uncertain. But if it is approved this year, then should we see some of that being booked in the current financial year or the EUR 30 million or so, will start coming through from next year?

The way we...

Archie?

The way we understand it is as it's not enacted, it will be affecting the financial '24 onwards.

Ladies and gentlemen, we will now move on to our webcast questions. The first webcast question comes from [ Jovan ] with [indiscernible]. And I quote, "Do you plan, and if yes, when, to skip guiding nominal dividends and instead to align your dividend outlook with earnings development?"

This is what I said before, right? We are really now taking a bit of time off to sit with the Board and understand what is actually in front of us potentially in terms of meaningful acquisition targets. If we didn't find anything, we might well return to something that was originally used by us and was basically a dividend payout ratio. So in this respect, it is unclear yet -- from what we can see from today's perspective is that will be significantly growing dividend flow. And it can -- there is only an upside potential in principle if we didn't find appropriate targets to consume capital productively. So -- and you know what's left when it comes to what was not paid out from the EUR 500 million pot. So you know there is going to be 2 significant increases of the dividend in the upcoming 2 years, in any case, and then, of course, given such a capital buffer that we will be holding for eventual acquisitions, this might only improve. We have not yet consciously returned to the dividend payout ratio positioning of our guidance, but might be the case actually after we conduct the strategizing process.

The next webcast question is a follow-up question from [ Jovan ] with [indiscernible]. And I quote, "Excess CET1 to TCR above the minimum is more -- is greater than EUR 500 million even without 2023 earnings. Do you have any concrete plans as regards to capital deployment? Some of peers keep surprising on that front in the third quarter??

No surprise plans and actually nothing to add from what Blaz has mentioned. This is the same equation. Ultimately, we are looking at for this year, the dividend equation is concluded. And for subsequent years, we will communicate in May.

The third webcast question is again a follow-up from [ Jovan ]. And I quote, "As a result of Serbian bank continue soaring, do you see risks of any additional state interventions apart from interest rate caps given the relatively tight budget situation and upcoming elections? Congratulations to good results and thank you."

And I guess you would be better judged to assess that, frankly. You would know the market even better than us. We don't know, frankly, what has been introduced, has been introduced. The minimum reserve intervention was there and the interest cap intervention was there. Is there more to come? We frankly don't expect it, but no, I wouldn't call it impossible.

The next webcast question comes from [ Antoinette ] from Allianz. And I quote, "4% of your total NPLs come from Croatia. This is rather high considering you do not have a physical presence in Croatia. Kosovo with its EUR 1.2 billion assets, has a 6% share in total NPL. So how come Croatia has that high percentage?"

Well, this is all legacy book. This is 15-plus years old book, and this is more or less, a one and done. It is now down to a fraction of what it was -- and it is -- this just means that we have practical no NPLs in other geographies because such a symbolic Croatia exposure still has such an important share. It just preaches and speaks about the quality of our books, but Andreas might add something here.

Yes, not much to add to that part. So to speak to the Croatia part. That's fully legacy. I mean, as you are aware, we are not even able to do new business in Croatia and we don't. So there is still a new business. So that's fully legacy. And it will take from EUR 310 million, which is minimal on our group level, 4% that's minimal within that pocket. But yes, that's legacy. And just because you mentioned Kosovo, that's also a good point. I mean, Kosovo, I mean, honestly speaking, when I came to this group, I couldn't believe the figures and -- because they were already very good at that time. So quite some years ago. And honestly speaking, they're on the NPL side, just getting better. So it's amazing that the market, which from outside doesn't look exactly [indiscernible] easily has such good NPL figures. But after all of these years being in this group, I'm very, very confident, and we were checking that values that only -- that's for real. And it's just really -- I mean, they are doing, obviously, here on choosing clients and the right clients, a brilliant job. Risk management here seems to be also very much on top of things, which is great. So yes, Kosovo from the NPL side, actually, a little bit counterintuitively, but that's our [ staff ]. That's true.

The next webcast question is a follow-up question from [ Anton ]. And I quote, "Net noninterest income has basically stagnated for some time now. Which opportunities do you see in the future for its growth?"

Well, it's been stagnating partly also because this year, there is no high balance fees anymore, which were booked here as well. And there is no Croatian [indiscernible] anymore. There was quite some FX coming from Croatia and so on. So in principle, there have been some major shifts in this respect. So if you stabilize for that, you would actually see a pretty solid 4%, 5% growth, which would be not bad at all, right? It's coming, of course, also mainly from the regular traditional revenue streams when it comes to fee income. We will further focus absolutely on payments. We believe payments as -- in general, value proposition to clients has still a lot of potential to enhance the experience and potential for [indiscernible] revenue pool. When it comes to the asset management and insurance business, we are adding definitely the capacity now in Serbia, significantly. We have -- we have bought together with Komercijalna Banka also an asset management company, which we will now shift from Komercijalna Banka to our NLB funds business, and really put strong focus on developing and replicating actually the business model from Slovenia to Serbia as well. We are a market leader in Slovenia, as you know, with almost 40% market share. And we simply have very successfully vertically integrated business model in distributing new services, investment funds and mutual funds and also unit-linked insurance products. So also insurance is another stream. Leasing is showing very good trends, especially in Slovenia, of course, but especially also in Serbia, and we've just started in [ Sardinia ]. So there are quite some ancillary services that you know have just begun actually to in specific markets and become a real opportunity. And the more the wages grow the more they will become meaningful value proposition both for clients and us. And on the other hand, simply, we're focusing on housing lending as soon as you will see a more moderate rate environment this will resume. With every housing loan, basically, you cross-sell 5 to 5.5 for the products. And this is simply boosting your fee income as well. When you always look in, of course, the accounts, so the entire family, you look in long-term saving schemes, insurance and so on. So this is our primary focus, and this is naturally evolving this way. So in midterm -- so this 1% share is actually a bit more if you sterilize for Croatian a euro adoption and as said, abolishment of the high balance fees once we exited the negative territory last July, and of course, this is evident here. And that was also, of course, a cap on fees that was introduced [indiscernible] Republic of Serbia actually. They required return to the original position for 12 months, and this also took quite some millions away. So combine all of that, if you sterilize for that, the fee evolution was actually very good.

The next question comes from the line of Dodig Mladen with Erste Group Bank.

Congratulations, of course, on the great results. Just a short one. Could you please remind us this modification impact in Serbia for the rate cap on mortgage loans, I think you communicated that already earlier, but if you please could remind me?

Yes, you can basically anticipate for Q4 something in the ballpark of EUR 15 million, give or take in accounting. 1-5, for this modification loss. Yes. Yes, indeed. But this of course, is coming back over time as we keep accruing this loan.

Of course, yes. Yes, just for the sake of conversation, because Serbia was mentioning in the sense of potential windfall taxes, and right now, the most recent move by the government was decreasing actually the GDP, public debt -- sorry, budget deficit from 3.3% to 2.8% for this year, also Serbian government looking to get an investment grade for credit rating. So -- and then in the whole electoral narrative right now, banks are fortunately not mentioned any more than this rate cap. So I would say that the budget still is a good shape, yes. So thank you once again, and congratulations once again.

Thank you Mladen for giving us confidence that there's no more to come.

The next question is a webcast question from [ Anton ] with Allianz. And I quote, "What are your thoughts on net interest margin in 2024?"

It's really -- go ahead. Go ahead, Archie.

We mostly answered the question. We are very happy with the margin as it stands. But obviously, we expect this margins to compress with all the things we've mentioned already from wholesale funding, deposit repricing, hedging eventually. So if we stay in the 3% territory, we are more than happy.

The next webcast question comes from [ Jovan ] with [indiscernible]. And I quote, "Zero risk cost guidance for '23 would imply a very high provisioning level in fourth quarter. Again, too conservative. Also 30 bps to 50 bps guidance for 2025 also looks very conservative. What is the realistic picture for 2024? And last one is if you can comment on that, what is the share of legacy corporate loans to exposure, which might be a subject for potential recoveries in the future?"

So on 2023, 0 cost of risk. Yes, that might be a little bit conservative. I mean what you just simply see in the last quarter is usually a little bit more going on, on that side. And we have indications on some concrete cases, which are ever not big cases. Overall, it might be still a little bit conservative. I can agree with that. But to say more or more optimistic than 0 cost of risk for me is, given a very vivid environment, still a little bit too much. Where I agree less is on the '25 outlook, the 30 bps to 50 bps seems well, too conservative or conservative. I think we will simply not ever live in a dreamland. I mean 30 bps to 50 bps cost of risk in this region, if you ask me, is a pretty realistic assumption. You also have to see that we're still profiting from quite some recoveries actually from off-balance items, which are also, of course, contributing here. And here, I mean, one special effect which we saw because we have approximately EUR 1 billion off balance and this portfolio is getting older and older and more and more squeezed out. So I would expect here rather looking forward less and less. On the other side, with the acquisition of Komercijalna Banka, I think the one thing which we underestimated a little bit in the due diligence, is that the off-balance portfolio was actually not intensively worked on for whatever reason. So here, we collected already in the past period quite some money back. And by the way, also this year from the EUR 17 million, which you saw in the slide, a solid portion from that is from Serbia. So that is maybe still a little bit more active, but of course, also decreasing. And in the transition, I said it before, from this year around 0, maybe if you want to be optimistic, even a little better, to the 30 bps to 50 bps, I would expect us more or less here on a linear transition path. So I would not expect 0 cost of risk next year, but I would not necessarily see us yet on 50 bps. That's my best estimation for now. And I think what I implicitly answered already a little bit is your last question. I mean we have a still quite a sizable off-balance book, but this is getting older and older and off-balance per definition means that actually, you are not expecting much anymore. We honestly speaking, in the last 3, 4 years, here saw the one or the other little miracle coming up to cases where 25 years, we did not collect a penny. And now suddenly, we collected a few millions. But I would not expect too much from that to come anymore. And from the NPL portfolio on balance per definition, you cannot expect too much because simply that portfolio, as you can see here, yes, actually in front of you. it's simply not big. So yes, I still see something coming back from off balance and hopefully also a little bit from this NPL book. But the magnitude [ overall ] will decrease.

The next webcast question comes from [ Hans Henrik ] from [indiscernible]. And I quote, "Given the share price valuation, is buyback something you consider on top of dividend must be better investment -- must be better investment than any M&A."

This is definitely a valid alternative. We have so far not actually been actively working on it. But within the comprehensive assessment of deployment of capital, i.e., of course, is derivative -- returning value to shareholders, right? This is not excluded. It is just that -- it is, of course, a bit more complex process requiring more tedious regulatory approvals and so on. But I would not, of course, eliminate it is an option, and it will be communicated in the package for the upcoming AGM. Archie, will you add anything?

Nothing to add other than we hear from shareholders 2 different versions. One would like it, the other one would like it less because, obviously, the drawback is to take out liquidity from the stock and in that sense, [indiscernible] . But we understand the question. I think more materially, we are focused on dividends as capital return. But yes, it's something we also try to understand better in whether there's a merit to it.

The next webcast question is a follow-up from [ Hans Henrik ] with [indiscernible]. And I quote, "You guide above EUR 400 million in profit. Given 9-month profit is already at EUR 386 million, isn't it fair to assume profit around or even above EUR 500 million? Or is there anything in fourth quarter that would hinder similar profit as the first quarter to third quarter? So it will be materially lower than the previous quarters."

I mean there are 2 things, right? One is, that we just said that there would be, of course, modification adjustments in Serbia, for example, in the amount of EUR 50 million that you have trend a bit more of a cost evolution in the last quarter, which we also show here with the revised cost guidance. On the other hand, I can just say that exceeding EUR 400 million was meant for 2025. And here, we don't talk about this. So in this respect, we can just state that we are confident about the result of 2025. We can't be more specific than that, but it is going to be significantly above the Q3.

The one thing, just to add in Q4, what is something we are looking at customarily is revaluation of DTA, our deferred tax asset. There is talk and in the draft actually anticipated, envisaged higher corporate income tax. So that might result in a revaluation of the DTA. So there are a few ups and downs for '23. I think Blaz even mentioned that we will be very close, if not exceeding to EUR 500 million, as I said, for '25, nothing to add to what Blaz said.

And our last webcast question comes from Cihan from S&P. And I quote, "Do you have an estimate regarding additional credit losses from the August floods related to damaged properties and more collateral revaluations for full year 2023? Or is it an immaterial amount?"

Yes. Thank you for that question. luckily, the impact on the bank is minimal. We see in retail currently 37 moratoriums. So that's surprisingly a pretty small amount. We see overall on the mortgage side, some EUR 7 million to EUR 8 million of potentially impacted loans in total. But it doesn't mean that the client doesn't pay or that doesn't mean that we would have to do a write-off for these amounts. It's just that these are, of course, all higher tension points. But I mean if you see that in total, that's very, very limited. Of course, we had some damage from clients on the corporate side. But luckily, I have to say primarily clients, which are very solidly ranked. Very good businesses. So they actually very swiftly overcome it, and we didn't see basically any fallout from that. So overall impact is very, very limited. If you ask me what helps are here 2 things. On the one side, hopefully, what is an impact or hopefully, for sure, is an impact. As we see it now is that, of course, when establishing mortgages, we all look on whether that would be in flat area. So we are careful if it is and of not giving the loan then, and so obviously, also avoiding the exposure. And the other element, honestly speaking, is a little bit of a good luck. So some of our competitors are considerably more in these areas, which have been flooded, present than we are. So we are there, under average, present. And that, of course, also contributed to the very, very small impact.

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 [indiscernible] . As said, despite all the volatilities and uncertainties, we are on a very, very good track. We are ahead of an exciting 6-month period within which we will try to understand eventual opportunities in front of us in a way to really productively deploy capital and share success with you. I'm really happy that I can report today from Serbia because this means we are doing business. We are actually having an event, a really prominent event of opening of this was what was once the most prominent Congress facility in actually broader region, and it's been revised in partnership with Delta Group and NLB as a financing party and it's going to really position Belgrade on the map globally and Serbia and also the regional map differently. So next time around, do check out, and we are on a path of success, on a journey of success, and we are gladly sharing it with you, and we are really thanking you for your trust on this journey.

Ladies and gentlemen, the conference has now concluded, and you may disconnect your telephone. Thank you for calling. Have a good afternoon.