Raiffeisen Bank International AG (RBI) Earnings Call Transcript & Summary

Good afternoon, or good morning in your case still. Thank you very much for joining this session. My name is Benjamin Goy. I'm very happy to host Johann Strobl, Chief Executive Officer of Raiffeisen Bank International today. So thank you for joining us, Johann.

Thank you for having me. Thank you.

Perfect. Yes, I mean, the audience might be familiar by now. We have this as a fireside chat. So please feel free also to enter some questions via the webcast and we'll get to your questions as well. But in the meantime, I would kick off and -- with some questions. And maybe, in particular, on competition, starting off with that one because in the last crisis, a number of banks withdrew from your region. So maybe you can share some thoughts around how do you expect competition to develop this time going forward? And do you see this crisis as a midterm opportunity for RBI?

Yes. I think this pattern will be repeated. Of course, the -- one of several reasons why our markets are attractive for international investors is that the rate levels had been substantially higher. We have seen in a couple of countries that rates are going -- had been coming down substantially. And yes, in this environment where we are, probably in several countries, so Central Europe, have clearly decided in that direction that rate should be low. So this low rate environment, even beyond the immediate corona lockdown, will have a negative impact also on the earnings of banks. So I would assume that some will withdraw from these areas. And this would give an opportunity to consolidate one or the other bank, or at least in the process of withdrawing, gives those who want to stay opportunity to gain some market share. So this will happen in many countries. And I think the other element is the digitization. So I think that for smaller banks, it gets more complex. So maybe we might have these 2 elements that the one or the other of a bigger size, but a couple of smaller want to withdraw with the next coming years. And so yes, this is an opportunity for Raiffeisen because we want to stay.

And Central Europe is certainly core for you. Maybe also moving then to a broader question because this crisis feels quite different to the last one. So banks are part of the solution rather than the cause of any crisis. So maybe in that context, you can share some light on how you assist customers in these times. In particular, where do you see demand for the various government guarantee schemes? And what's really the trade-off for clients between drawing down credit lines and maybe new guaranteed loans?

So I think it was important, and not all bankers like it. It was important that governments came with moratorias, which is painful for banks because, okay, you lose the closeness to the customer. If they do not have to pay, it takes longer to figure out which of the customers have real problems and which not. So moratorium is -- I'm rather positive, I have to say, because my concern is that uncertainty is big with this negative impact on the real economy with the rising unemployment rate, also with [Foreign Language], which is a better form of unemployment and which gives more -- let's say, more hope that people will soon return to full employment or close to full employment. So yes, it's important to cross this time of uncertainty and keep the population, let's say, optimistic or not to cause too much pessimism. So therefore, I'm rather supportive for these moratorias. We have seen this in different ways from 3 months till year-end. But overall, I think it's positive. And we've seen a pickup rate of -- different from country to country at around 13% for private individuals. It's a little bit higher in the unsecured part, it's a little bit less in the secured part. It's a little bit higher in the small, macro, medium-sized business, of course, because they have even more uncertainty how to get the funding. So this was the one element which worked immediately. The second is guarantee schemes, and some countries are rather generous on that or announcing big programs. We haven't seen in all these -- or in many of the countries, most of the details, but again, it's good to have this available. It's also not bad for banks. It's -- I think in most of the countries, the state guarantees are somewhere between 80%, 90%, and very rare occasions, up to 100%. So this reduces the risk of the bank considerably, and it's very supportive to the risk weights as well. So these are the elements. And as I said, it's a little bit too early to see how the take-up is. The Austrians have been relatively fast. What we saw is that the small companies -- it's not exactly our market segment in Austria, but what we see from -- and talking to other banks and to some of our shareholders, so the smaller companies make use of it. The bigger companies, which is our core segment, they rarely use it. They have enough financing. For them, it's too early. What is not so -- what is different from country to country is how their support mechanism, like payments, which not in a loan, but it's a sort of subsidy support money, this is different from country to country. This is, of course, where all companies are interested in. So overall, it seems in all the countries, the packages are good or big, with the exception of the Eastern ones. And as of today, it seems -- they seem also rightly designed. For us as banks, we support the customers by helping them to come with the application and, of course, by providing the money. As I said before, we had been very busy in the first couple of weeks when customers started to think about it. Now we are back to normal. What we also see is that the immediate need of loans is done already. So we had more than usual demand on loans in the corporate area in March and in April. And it -- May is already lower. So whatever they needed was covered already in March and April. And we will see how it further develops. In the private individual area, it's mainly the moratorias. The demand for new loans is substantially lower. We have seen, on average, a drop by 70% in the unsecured part and by 40 -- 60%, 50% in the mortgage area. Mortgage area always takes a little bit longer, so I think it's important to see how the demand comes back. But it seems that the companies are well financed now with all these programs. So from that angle, it should work. As I said, it's different in Russia and in Ukraine, where the programs are less. So there, we have also seen moratoriums in Russia for 6 months, but no additional rescue packages or, let's say, small ones, which -- compared to those -- what other countries are offering, relatively small. In Ukraine, I think they now agreed with IMF and also the EU might come up with additional supports, but they have something. Very little is in Belarus. But this is also for us a small market. Yes, in the other countries, I would say, the starting point was good. We'll see midterm if you -- if some of you wonder, is there a big difference between opt in and opt out, what we see is in the terms of acceptance, yes, it's a significant difference if the moratorium is opt in or opt out. But we made a survey and have asking customers in Hungary and Serbia where we have opt out programs. And when asking the customers why they are making use of it and if they face problems, then the result is similar to what we see in other countries. So it seems that -- also that the acceptance rate is substantially different. It's -- the underlying economic problem is similar. So at the moment, we are not concerned about these higher acceptance rates in moratorias, yes.

Okay. No, that's very clear. And good to hear that in the majority of your countries, you have actually very decent support from government schemes. Just wondering when we move to cost of risk and your guidance of around 75 basis points this year, what are the underlying assumptions for that? How do you approach, basically, risk management? And how do you reflect this, basically, unprecedented government packages that surely should support loan losses?

Yes. Let me explain how we handle this and how we come to these numbers. So what we did is we -- rather early when we saw what's going to happen in China and then also in the European countries, we started from 2 angles. The one is what might be the impact on the GDP development? And there, it's a function of the number of days of lockdown and then how broad the scope of the lockdown is. And of course, you build assumptions, and based on that, we then came to 2 approaches. The one is what is the impact on the GDP and other macro elements, which are important for a Stage 2 calculation and -- in the IFRS regime, and the other was a bottom-up approach. So we looked at specific industries like, you name it, tourism, transport and so where we believe the -- or where we thought that the impact is more important, deeper. And then we ask ourselves what is a reasonable assumption on the lockdown? And what does it mean when you then lose for 1 month, 3 months, 6 months, the revenues? So what is the impact the cash flow? On the rating? And based on that, we then made again our assumptions. And we did this already twice. So we now think we have a very good understanding what might happen. Given the current assumptions that we had this lockdown from mid of March until, yes, longer than we at the very beginning believed, so this is why we adjusted in the -- from the -- within the 2 months or so, our outlook. So you might remember, we had a range of 50 to 75 basis points, and we now gave up on the lower band of this range and said now with this 3, 4 weeks more in many countries, we will be rather at the 75 basis points. But in a nutshell, it's industry by industry, what is the lockdown? What is the impact on the revenues loss? And what is the impact on the cash flow? And with this -- with these 2 approaches, one is the GDP impact, and the other is this bottom-up approach for some industries, we came to the 75 basis point. And of course, it's around -- it could be a little bit less, it can be a little bit more. But this is what we know as of today. And as I said, in -- for corporates, it's driven mainly by an assumption of revenue drop impact on cash flow and then impact on rating. And in the private individuals, the main driver is, of course, the GDP development and, to some extent, the unemployment rate.

Very clear. And considering the significant uncertainties, I think you try your best to give a very relatively specific number at least. But just wondering that in 2020, now it gets even more difficult to forecast. But could it be that with the government support, financial stress takes a bit longer to evolve freely and to show up and that 2021 could also still be a very elevated year for cost of risk?

Yes, yes. It might be the case that we even might come out at the same level what we have this year. This, we should be aware of. Yes, it could happen. And it could happen that, yes, problems show up a little bit later, and yes, that's the assumption. But in our approach, we cannot front-load it more than what we do. We need to have some signs. But given the level of GDP, so we assume a substantial recovery compared to this year. But in most of the countries, the output will not be on the level of '19. So if you consider that, then it's -- I think it's fair to assume that risk cost could be around the same level of what we have this year.

Okay. And maybe moving on to capital, and you could maybe talk about moving parts for your capital ratio for the rest of the year. And yes, so to say, whether it should remain close to your around 13% CET1 target or any deviations positively or negative, what could drive those?

Yes. So if we start from year-end where we had a 13.9% CET1 ratio, I think we had a few very positive elements, which we outlined at that time already. And this was the favorable ruble development, which, of course, because of the relative size of our ruble participation in the consolidated equity, this was very supportive. We also had -- and I want to stress this once again, we also had some positive valuations in the fourth quarter, which then were negative in the first quarter of this year. So this was also somehow positive, more than usual costs. As you rightfully said, our target ratio is around 13%, and we were ending at 13.9%, so this was exceptionally good. What we faced since then is a little bit because of the corona, but maybe more so because of the oil price, we saw a drop in the ruble. The ruble is important for us, as I mentioned before. But in addition to that, we also saw a depreciation in other countries. We find this was COVID driven. It was Czech Republic, it was in Hungary, and it was in Ukraine, just to name a few. So this was negative for CET1 ratio. We believe that currencies rather will appreciate a little bit than be on the level where it had been at the end of the first quarter. So the 13%, where we have the profit of the first quarter included, should, for that reason, be the lower end. I think we have seen -- or this is why we believe that we could end also at the end of the year. What will be negative are some inorganic impact what we will face throughout the coming months. One is that, as I mentioned it before, we will have rating migrations. This will increase the risk weights of our loan book. This is the one. There will be adjustments in the operational risks. There is the driver of the negative impact from the Swiss franc lawsuits, what we have in Croatia and in Poland. So this is negative. And then, okay, the market risk, which is not huge in RBI, but still, it's there. And as the model is rather sensitive, then you see an increase also in capital requirements for that. I mean the market volatility is substantially down already. So we see it in the daily risk measurement. But as you know, the capital requirement then also have this 60-day moving average, so there, it takes a little bit longer to disappear again. So this is the reason why. So we believe in a modest loan growth. So not much from that side as a requirement, so from the organic business, yes. And it might be even that part of it with the state guarantees will be even better in the RWA requirement. So there, I think it's no additional demand. There is profit, which will support and which could cover or will cover the inorganic impact. So this is the assumption why we still believe that 13% is in reach.

That's very clear. Given you just mentioned Russia with respect to your capital base, maybe you can go specifically to Russia. You mentioned the FX impact, you mentioned oil price, and it's obviously now one of the corona hotspots. Can you share a bit about what you see, the situation on the ground? How concerned are you on that portfolio?

So let me start with the first quarter, which was strong. Very strong, good loan growth, good revenues, so a very good performance. This changed in the -- so the loan demand changed substantially in April, and it's gradually improving now in May, but still. So this is a totally different development. But the first quarter was very good. And when you look at the numbers of the country, then you see that, yes, compared to last year, it was really good. Also, we all had been concerned that some of the regulations, like limiting the fee scheme of the payment, it could have a negative impact. But yes, as I said, the first quarter, the operating result was even better in euro terms than in the fourth quarter. Also, we know that also in Russia, we have this seasonality and Christmas is in the -- in January, so the activities are stronger in the fourth quarter and less in the first quarter. So they had been doing very well. We believe that the activities now in the country will come back, so in -- at the lower level. So we will feel it in the fee income, and of course, we will also feel some pressure on the net interest income because, as I mentioned before, the less demand in the unsecured loan in the retail business where the higher margins are, okay, the volume is compensated by more demand on the corporate side, but there -- as the corporate portfolio, the quality of the Russian portfolio is very strong. I mean this is one other thing what we have -- what I should mention. The average BD in Russia is better than the average in the RBI group, so that they have a very good starting point. And yes, so customer -- the structure of the customer is also good. So even as we face now a minus 5% GDP development, we will see a substantial increase in risk costs compared to last year. This is clear. But as I said before, as the portfolio is good, as the earnings capacity is good, we believe it should work out fine. Yes, the -- one has to be aware that if you think about such a negative development in GDP, which is -- it's really big on the one hand. But on the other hand, we should be aware that the nonperforming loan ratio is very low, and the structure of the portfolio is different. So there, only exporters have foreign currency loans. Private individuals don't have it, some reminders from the old days. So overall, we believe that the portfolio is good. And that, yes, consumption will come back. The consumption is -- as I mentioned before, the lack in consumption, we feel in the fee business mainly. So overall, portfolio, very strong at the beginning of this crisis. The real estate part, if some customers, some people are concerned, is small. So it's good. I mean the only thing I have to make you aware is we made a change in the portfolio structure. We now have more mid-market. The mid-market will feel the impact more than others, but starting point is very good, as I said.

Yes. But still -- and I guess your historic track record in the last crisis was also very good in the Russian portfolio. So I think -- and I will move towards one of my last questions, and that's on cost. So yes, maybe you could just give an update on cost management in light of COVID-19?

Yes. I mean the -- with all the negatives from the FX development, of course, you all are aware that for the costs on its own, the depreciation of the currency is somehow supportive. In addition, what we see is that the loan pressure is gone in the countries for the broader part of it. I mean for specialists in IT, it's still -- they're still not cheap, and it will probably not even change because what we sense is, at least at this point in time, there is -- there are some experiences, no? And I think the most important one is that digitization is confirmed and supported by the virus. We have seen this in all countries that customers feel now -- they feel now the need that even those who never considered to move to do a web-based approach or do a mobile approach, customer is more and more intent to use this. We have seen a big number of downloads of our apps. So I think this is the reason why in this segment, there will be some loan pressure, but in the rest, not. On the other hand, probably all the banks, and we also, will not immediately cut deeply into it. So we will rather use the opportunities from, okay, less wage pressure, less hiring, good experience in transformation. We saw that people use more the digital channels. They come less often to the branches. So this gives us room for closing the branches. On the one hand, more than probably we have thought changing the service we offer in the branches and moving more to digital channels. But this, on the other hand, means that we are not immediately reducing investments in the digital channel. So just have to be aware. So we should feel some relief in the cost base. As of today, we -- and you might be aware that we have -- before the crisis, we had established a cost program here in Vienna on the head office, so this will be executed. The benefit comes a little bit this year and more, of course, next year. We have asked some of the network banks to also reduce their cost base, which they build in, in their plans. Midterm, in addition, we -- I mean a reduction in workforce mainly comes from the digitization and the different demand of customers, reduction in, let's say, in square meters, if I put it bluntly, will come maybe already next year because with the experience that people like home office that it's doable, then this would also encourage us -- will encourage to have less people at the same time in the offices, and this will free up office space. So this is a midterm -- more midterm outlook than for this year.

Okay. Perfect. Thank you very much for the insights and for joining us today, yes. And looking forward to next year when you, hopefully, can join us in person in New York. So [Foreign Language], and speak soon. Thank you.

Thank you for the invitation, and thank you for giving this means of communication. Thank you. Have a good day. Stay healthy.