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

Good afternoon, ladies and gentlemen, and welcome to the conference call of Raiffeisen Bank International. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Johann Strobl, Chief Executive Officer. Please go ahead.

Thank you very much. Good afternoon, ladies and gentlemen. We're happy to have you in this call talking about our half year results. And when you look at the numbers, you immediately see that we have seen 2 very different quarters, so far, with a strong growth in Q1. And the second quarter was very much impacted by the lockdowns in April and May. Good thing is we have seen a pickup in activity in our market since May and we are encouraged to also see this going on, this trend. On a year-on-year basis, net interest income was slightly up, and net fee and commission income was stable, driven by the strong performance of the business coming into 2020. In the fee business, in particular, we are pleased to report that the month of June was close to the pre-COVID levels. Loan growth was slower in Q2, largely due to lower retail lending during the lockdowns and more recently substitute demand on the corporate side. Nevertheless, we are happy to report that retail lending in recent weeks is almost back to its pre-COVID level. The CET1 ratio has improved by 20 basis points in the quarter to 13.2%. And I would again highlight that the CET1 ratio continues the deduction of the dividend, which we want to pay or wanted to pay for 2019. And if we move to our next slide, you can see the net interest margin, a substantial drop to 2.31%. And this is driven by the rate reductions -- the CEE rate drop in the most of the markets. And of course, there's a higher volume in short-term business and repos, and both together, bring it down in the second quarter and therefore, also in the half year. Of course, costs are an issue. And we are continuing to implement cost reduction measures, as we have talked about several times. And of course, we got some more inspiration by the lockdown. So we think that reducing office space is one measure given the rising unemployment rate, of course, the salary pressure, the wage pressure, which we have seen in the last couple of quarters is substantially less, still there is one or the other area in IT, where this is continuing. As I think all competitors and all industries are continuing to invest in IT and broader in digital. Yes, this has an impact, of course, also on the return on equity, which is at 5.9% currently. If we move to the next slide, what you can see here is a couple of graphs, which show what I was speaking about at the beginning, the pickup in activities after they have a lockdown in April. And May, you see that since the end of May, we see across all our markets, this recovery of activities and this is a very good sign as this is very positive for fee and commission income, but also retail lending is back, as I mentioned before, at least in July more than what we have seen in June so far. And of course, one driver for maybe not so optimistic perception of the current development comes from the traveling ban, what we still see in some of the countries, whereas inside the countries, we see quite a lot of activities. I think another good sign for the midterm development. Our region is that EU Recovery Fund is very nicely. And about EUR 80 billion, which is 20% of the allocation goes to our region. And I think this will be another very positive support for the development in our countries. If we move to the next slide, then I think what you are thinking about this, how did this COVID, not only in terms of home office but also in banking services, impact the digital development. And I, again, can confirm this is very positive. And we added a couple of functions to our mobile banking for example, onboarding, which, of course, was nicely appreciated that you can fully do it end-to-end. You do not have to visit branch or other channels, we have been successful there in a couple of countries like Albania, Bosnia, Bulgaria, Croatia, Hungary. In other countries like in Slovakia and Czech Republic, in Russia, we have this functional already for a while. Virtual cards have been introduced in some markets. So that the contactless payment without physical cards is supported very much, like in Russia, in Slovakia, in Belarus, biometrics in many countries. So for the customers, I think it's a very good improvement. And because of this COVID, they are more aware and are using it more often than they used it before. So, as I said, in some of the markets, this functionality was already available. We introduced RaiPay, which is an Android wallet for simple and secure payments, again, a good process and progress and in some countries, also what we call RaiConnect, which offers additional communication means for premium and private customers. So easy video calls, easy exchange of documents, screen sharing when remotely advise customers. Coming to the next slide, which is Slide 8. This is our macro outlook. And we made a couple of adjustments since last time. In essence, what we can say is that it was revised a little bit down in the euro area. We now believe in a minus 8.1% GDP development. But what is, I think, more important than is that the development in our core markets in CE/SEE, but also in Eastern Europe, Germany, which is very important for these markets, is relatively positively. And therefore, we see positive impact here. And we feel fine currently what we have seen or what we show in this macro outlook. With all these developments, which I described briefly, I come to Slide 9, which is our outlook. And here, I can say that we confirm the outlook with the targets which we gave in May, when we talked about the first quarter results. So we expect a modest loan growth in 2020. The provisioning ratio for the fiscal year, for the full year 2020, is expected at around 75 basis points. Of course, here, it depends on our assumptions about the lockdowns, the length and the severity of the disruptions what we're currently experiencing. We have seen -- you have seen it in the first half year, a nice development in the cost-income ratio, but one should be aware that this will be weaker. And so weak in the course of the year. And so what I can still confirm is that we aim to achieve a cost-income ratio of around 55% in the midterm. And yes. It's too early to say what it will be in '21. Profitability, we confirm our medium-term target of 11% consolidated return on equity. And as of today, and based on our best estimates, we expect a consolidated return on equity in the mid-single digits for 2020. We confirm our CET1 ratio target of around 13% for the medium term. And we keep the payout ratio between 20% and 50% of consolidated profit. Of course, in these days, with the guidance, the requirements by the European Central Bank, it's a difficult discussion in these days to think about the dividend payment for 2019 or so, as I said, we still have deducted the full planned dividend payment, so this EUR 1 per share from the capital, which brings me to Slide 11. I think here, its worth, and you for sure have all seen that we did 2 issuance to improve our capital structure to optimize it. Our CET1 ratio now stands at 13.2%. And this issuance is of Tier 2 in June and more recently, the AT1 in July, they now allow us that also the Pillar 2 requirement is optimized and you see this in the numbers. And now this creates an MDA buffer of around 2.4%. And as I said before, we confirm that the CET1 ratio of 13% is important for us. If we move to Slide 12. So what you see is the quarter-on-quarter development of the CET1 ratio, we, for a while, have been discussing up risk, and we have built in a requirement, which comes from the treatment of the Swiss franc litigations, what we have in Poland and in Croatia, and this is around 14 basis points. It's not final, it's still in discussion with the Central Bank with the ECP, and we will see what the outcome is. Yes, and then what was very positive, and you have bullet in here in the credit risk is that the SME support factor, which in our case is around EUR 900 million RWAs, which is about 15 basis points was built in already. And when considering what might support the CET1 ratio as well in the course of the year, then probably the IFRS 9 transitional provision for expected credit losses could be up to 30 basis points. Yes, of course, depending on the conversation, clarification with and ECP. And yes, the software deduction from equity, what we have in these days, given the standards, what we see currently in discussion will only lead to an improvement of 10 to 15 basis points. And yes, there is some sovereign exposure in EU currencies which doesn't have such a big impact on us, but it could also improve by 7 basis points. Yes, I think that's what I should talk about on this slide. Moving to the next, which is 13. Here, I think this brings everything to the surface, what we experienced in the second quarter. As I outlined before, the big rate cuts in many currencies had in combination with a structural change in the new business to the less to retail unsecured, more to corporates broader reduction in the net interest income by minus 6.5% and the net fee and commission income, minus 12.5%. Costs down almost 5%. Of course, there isn't a fixed component, but also, of course, less spending. And I think the impairment's at a similar level what we had in the first quarter. Same applies for the other results. And so this leads to a consolidated profit of a little bit higher than what we had in the first quarter. I think if you're, in a nutshell, what we can say is the low operating result was compensated by bank levels. You know that this is front-loaded to a large extent. And was very supportive to compensate. If we move to the next slide, another one to give a quick overview is, yes, operating income, fairly similar amounts between NII drop, and fees, as I said before, bigger part of the NII drop comes from the lower rates. Of course, also there is, as we experienced, the lower FX rates in some important countries. There is a EUR 70 million FX impact as well. Yes, and OpEx, EUR 41 million from other administrative expenses, whereas the staff expenses, we are more or less on the level of the first quarter. I think I can quickly run through the segments. Yes, what you see is, of course, Czech Republic felt the big drop in Central Bank rates. So with a reduction in NII and NIM, yes. And in Hungary, it's the fee income, which we can -- given the lower activities. If we go to Southeastern Europe, then, of course, Romania is very important for us. And here, we -- important to say is we had low demand in April and May, but loan demand is picking up substantially in in June and July, which is -- which I think is good. And in Eastern Europe, yes, here, we had a big rate cuts, Russia, Ukraine, Belarus, all of them and therefore, the net interest income, as I said before, there is also an FX component in all these 3 markets, is down substantially. We had some hedging measures, which protected the drop in the -- or can protect the drop in the CET1 ratio, as I mentioned before as well. Group markets, here, we saw a good demand in in loan business, and this was supportive also for the net interest income, which is higher than what we have seen in the first quarter, nicely balanced between corporate markets and also the FIs are contributing. In funding, we are on Slide 19. I think what you see here is a strong development in the ratios. The reason for that is at the beginning of the second quarter there was quite a lot of uncertainty how big the demand of corporate customers using their committed lines would be. So we strengthened our deposits and later in the quarter, we had the issues, which I already described, spoke about. And we are also going into the TLTRO 3. Of course, here, we have some expectation that we can benefit from this 50 basis point support because we are confident that we can reach the required targets. And with that, I would like to hand over to Hannes.

Thank you. Also warm welcome from my side. Before I jump into the different slides, let me start with a slow -- sort of a reflection on the first half year. Please bear in mind that January and February, we have been capable to conduct a very good and normal business. But when looking at the financial numbers, the first half year on the risk cost side, summed up to EUR 312 million. Here it's important to notice that Stage 3 is summing up only to 36% out of the EUR 312 million, meaning EUR 113 million Stage 1 and Stage 2 is summing up to EUR 199 million. NPE ratio is at 1.9%. Coverage ratio is at 63.5%, means we have a very solid portfolio as going in into this demanding situation. I have shared with you already in March our way of thinking and this way of thinking guided us quite well when it comes to the industry approach. And of course, besides the industry classification, it is important, how does the respective company do within the industry cluster. And having said all this late the confirmation of our current risk outlook, which we're having around 75 basis points. Now I would like to proceed with the slides. I'm jumping to Page 21, where you can see that we were capable to demonstrate still a decent growth. Please bear in mind that also part of this growth is coming from secured repo transactions making use of the received liquidity inflow from many of our customers. I move on to Page 22 to giving some further insights when it comes to the RWA developments. So you see that risk-weighted assets increased from EUR 78.2 billion to EUR 80.5 billion. And we have provided quite some details, so where this increase is coming from. So part of it is being attributed to new business. We see the first part of the rating migrations. We have included the SME supporting factor. FX is also adding, or in this case even diminishing because we have seen a depreciation. I will not talk about this EUR 200 million and EUR 400 million, but maybe noteworthy still on this page is the EUR 800 million increase. This is including the op risk out of our Polish legal cases, and adding another EUR 400 million as RWA increase out of the market risk. This is easily attributed to higher hedge ratio and some high volatility. I move on to Page 23. We understood from the feedback and the intense talk we had with you that you would appreciate having a little bit more insight when it comes to the moratoria. Please bear in mind that we have different ways of how this moratoria being structured. So you have public moratoria and you have private moratoria. For instance, in Croatia, a private moratoria was being established, and all the other countries, it is a public moratorium. Even further deep billing, we have 2 basic regimes, meaning it could have an opt-in and opt-out. So in Hungary, Serbia and Cassava, we have experienced an opt-out. So meaning by this moratoria, how the moratoria is being styled, customers are being subject to the moratoria and they even head to voluntary opt-out. Why is this important? Because it gives the appropriate context, if you look at the total numbers of the EUR 7.2 billion. And the EUR 7.2 billion are more or less equally spreaded between retail clients, private individual segment and also the corporate part of the presentation. What you can see further on, if you go with the column of the residual duration, if none of the current moratoria would be postponed, in 6 months' time, only 7% of the current portfolio would be subject to the moratoria. The third thing, which is, at least for me, noteworthy and I'm more than willing to indicate and share with you is, if you look, for instance, on the bucket on the corporate side is that you can see that a substantial part is on a collateralized basis. And even more so that those who are being put into moratorium or have asked for being that they can make use of a moratorium, already 63% out of this exposure is being attributed and allocated to the Stage 2. I move on with Page 24. And here, I was sharing with you already in March our way of thinking when it comes to the industries. And I know it's a crowded slide, but let me give a trial to guide you through this Page 24 to 25 because it gives quite a good insight on our way of thinking. As said, we will have different industries where you see this V-shaped recovery, U-shaped recurring, L-shaped recovery. So this is also what is painted on the x-axis. And on the y-axis, you can see -- you could have industries which have a neutral, maybe even a positive impact out of the COVID, and then you have our industries and part of the industries which, of course, are highly impacted. Let me give -- sort of a reading example that you see our way of thinking. I think it's pretty straightforward that the companies acting in the food beverage industry, they have been either neutral or positively impacted by this pandemia. And of course, their shape of recovery is, if at all needed, a V-shaped one. On the other end of the spectrum, if you look, for instance, what we have labeled here the 3c, I think it's also pretty straightforward that this is an industry which is heavily impacted, and the recovery may take quite some time. So typical industries we have allocated to this but of the metrics is airlines and airports, leisure facilities and hotels. So that's the one thing talking about the industry classification. But this is only halfway through. So we have thought also that we were willing to share with you what is the financial status of the different companies in the different industries. And what we have done is that we have as a sub cohort shown then what are the customers currently being rated with a substandard and below. If you look for a mapping due to external rating agencies, this would be somewhere around a single B, single B plus. And what you can see here is we have chosen the net exposure, meaning we have also deducted the collaterals received that, of course, in total, it's summing up to some EUR 1.7 billion. But meaning that our exposure to the most vulnerable industries and having clients which are heavily impacted because of their current financial standings, is summing up to EUR 1.7 billion. And in addition, duly Stage 2 bookings on this portfolio is EUR 76 million. But in addition, you could add our holistic Stage 2 bookings we have done. And also, of course, partly what we have reserved for our macro impact. And I'm sure that there will be the one or other questions relating to the Page 25. Let's move on to the Page 26. Well, it's EUR 158 million in terms of total risk provisions in the second quarter. EUR 85 million must be attributed to the Stage 3. IFRS 9 macro is, again, consuming some EUR 41 million, and we still made use of the post model adjustment also still in the second quarter year-to-date, we also made use of some EUR 90 million when it purely comes to this post model adjustment. Coming to my final slide. As I said, we have a strong portfolio. We have a strong starting point we have an NPE ratio of 1.9%, and we have a coverage ratio of 63.3% belonging to the best banks in Europe when it comes to coverage ratio on the Stage 3. This was my contribution. This was my insight. And now we are more than happy to take your questions.

[Operator Instructions] Our first question comes from and Anna Marshall from Goldman Sachs.

Two questions, please. Firstly, on dividends. Could you please clarify what is the plan going forward with regards to both 2019 and 2020 earnings-related dividend? For example, you still have your AGM scheduled for the autumn. But if you're not allowed to pay 2019 dividend, would it be assumed that, that payment could be made in 2021, say, together with potential payments from 2020 earnings? And on the topic of dividends from 2020 earnings, could you please confirm what was the allocation for -- if any, for dividends interim earnings in capital this quarter? So this was my first topic and my second topic on cost of risk. So you've reiterated your guidance for this year. May I ask if you have any initial thoughts on the trajectory into 2021 and into later years for cost of risk?

So starting with the dividend question. As you rightfully said, we have scheduled our shareholder meeting we planned for the 20th of October. Finally, the shareholder meeting, we have to deal with that. I have to say that we will discuss this topic with our supervisory Board. They're still analyzing if there is a way at all, frankly speaking, it gets more and more difficult. The recent meetings, what we have with [ JSD ], so our supervisors from the ECP. It doesn't make me optimistic on that. But the important thing is that we believe that the 13% CET1 ratio is the right one for us. So this EUR 1 per share and the accrual, what we did -- yes, the accrual as a sort of interim dividend was about EUR 82 million, EUR 0.25 per share. So this in a nutshell would be 51 basis points CET1. But as I said, without this dividend, we -- from all what we know as of today, we can meet this, the 13%. And yes, so it's an ongoing discussion with the ECP with more and more or less likely outcome that we will be successful.

I'm happy to take the question on the risk cost side. And if I understood you properly, you're also asking how we think about 2021 and even beyond this. Well, I think 2021, we will still see, of course, an impact to the industry and to the different corporates. And I have one shared with the community, what is our through the cycle risk costs, which we, at this time, flavored some around the 60 basis points. And I think it's, for me at least the safe bet that 2021, we will still see also elevated risk cost compared to long-term average. So I think 2021 could also be somewhere around the 75 plus/minus. Each and every month would give us an additional insight, but this is our current way of thinking when talking about 2021. As also outlined in the first couple of slides, we must not forget that there is a huge amount of funds being made available. It could be spent for further infrastructure for ESG, it may also work for many of our countries. Also, for instance, on some nearshoring issues, and therefore, maybe 2022, we could also be, again, back on either on the through-the-cycle risk costs or even could benefit and corporates could benefit from this huge amount of money being made available. That's the best what I can do as of today.

Our next question comes from Hai Le Phuong from Concorde.

Just 3 questions from my side. So first of all, it's about Russian NIM. So it held up pretty well despite the rate cuts. So I was wondering if in the second half of the year, we should expect any impact from that. My second question would be on wage growth because apparently, there were some ease, obviously. But I was wondering if you expect this to return maybe next year. And my third question would be on net fees. You said that activity bounced back lately. So I was wondering if this would imply a level similar to what we observed in the first quarter then.

Thank you for your questions. When starting with the Russian NIM, I think if we just look at the numbers, so it's about 4.9%, close to 5%. And our Russian colleagues, they built some hedges and I think these hedges for this year and partly also for next year are supportive. So I would say, just out of the rate cuts, what we have seen this year. The direct impact on net interest income and also on the NIM is relatively small. So I think we once said there might be a EUR 10 million negative impact on that. But please be aware when modeling and comparing with 2019. And I think you got the flavor of the impact of the rate cuts of '19. This is already somehow built in, in the first quarter. So this was about an impact of EUR 40 million. So this year, from the rate cuts in Russia, a little impact because of hedges. Next year, a little bit more because the hedges are running off. When talking about wage pressure, this has reduced substantially so what we see compared to last year and also the first quarter of this year. So I would say that there is this small fraction of relatively small fraction of IT people, where we still see demand and some pressure, but for the big part, it's very little now. There might be wage increases in some banks, not at all in some banks by very low single-digit number. And I think everywhere, we have big hopes that by efficiency gains, this can be compensated. When talking about the fee income, our expectation is that in some areas, we are back at the level of -- in talking now more about July, let's say, 90% of what we have seen in a normal month, and also depending on the activities throughout the year until the end of the year. I think this could be somehow an indicator of what we would expect.

And our next question comes from Gabor Kemeny, Autonomous Research.

My first question is on net interest income. Would you be able to quantify roughly how much income you derive from the structural hedging overall? And given that the rate cut impact is still coming through, share remodel -- I mean, for the group, perhaps some more NII erosion in the second half. And my other question is on risks. Thank you for providing the sensitivity, the provision sensitivities to the macro scenarios. What I realized is that there is a relatively little difference between the different scenarios in terms of provisioning. I think between the base case and the upside scenario, it's less than 10 basis points in terms of Stage 1 and Stage 2 provisioning. Could you provide some color on where -- why is there such a low difference between the various scenarios?

Can I come back to the question which I answered before I -- when thinking about it, I might have been a little bit too short and misleading. So this 10%, which I mentioned is not to all the elements, but only to the sensitive one. So when looking at the broader picture, some fee incomes had been rather stable also in the same part of the fee income and others less. And this minus 10% is related to those FX areas, which are traveling and similar like this. And also credit card spending, again, related to traveling, and to a lesser extent, also to the loan-related business as we -- there, as I said, we are close to being back on the levels what we have seen before. Now coming to Gabor's question. Well, I don't have it in mind what -- and you're talking structural on the net interest income. This was your question. I rather would prefer to come back via our Investors Relations team before I make a guess out of my head to get it better. You get it right? I mean, what we see, of course, is that in the second quarter, and you are right that we see an overall negative impact out of the rate cuts for 2020 of about EUR 100 million and the current estimate for '21 is about EUR 170 million. And I think this gives you somehow an indication what do we expect in the second quarter -- in the second half of the year, sorry.

Gabor, just to be sure that I catched your question right, are you referring to the Page 92 on our interim consolidated financial statement or referring to a specific page in the due course of the presentation?

Yes, page 92.

Well, I think the net -- yes. So this, I think, is the reason why we have made also use of the -- of all this post model adjustment because what we have experienced now and what we had to experience now is unprecedented when it comes to the models. And of course, on such a strong impact, then we are using a lot normal distribution when it comes to the scaling of our scenarios. The models become rather insensitive, if now the drop is minus 7% or minus 8%. But of course, we realize that there will be a big impact. And we also, of course, have put down many of the industry like 3G and so forth into the Stage 2 bucket. That is the reason why we are doing this, and for instance, are modeling up to now what were the main ingredients. It was the GDP. It was the unemployment rate, it was the inflation rate, and it was the sovereign bond spread. In this model, you will not find up the now, but of course, we are adjusting enhancing in the industry classification. So that's the main reason why you see, even there is a difference -- that the difference is maybe some EUR 100 million between the different segments. Secondly, what is also important to know is that the duration of our asset side is some around 2, 2.5 years, meaning it takes so the portfolio virtually is running off swifter, then you could see the impact of the different macro scenarios. This is my answer to your question by the impact purely mathematically is not as pronounced as you would have maybe assumed missing of the industries, but the missing of the industry is in the model we have countered by including some holistic flags. And secondly, please bear in mind that our -- the nature of our loan portfolio is a rather short one. And it's also the second reason why the difference is not as pronounced as you might have assumed.

We can now take our next question from Alan Webborn from Societe Generale.

Looking at the corporates and markets business, it seems that in the second quarter, you had quite low provisions. Are you expecting that as sort of government support schemes come to an end and you see the second quarter corporate balance sheets and so on? Is it reasonable to expect that there will be a further deterioration in that portfolio as we go through the rest of the year? Because clearly, it was a very good performance in Q1. So that was one question, I mean, relating to the corporates and markets. Secondly, in terms of the short term business, which is presumably where a lot of the expansion of the book has happened there. I mean, when should we expect that to start to contract. I mean, I think in your guidance, you're talking about a modest growth in loans to customers, but on a bold basis, you're up sort of 6.4%, sorry -- you're up 6.1% year-on-year, which is obviously quite strong. So could you just sort of try and give us some idea between what you've experienced in the first half and the guidance for the full year, that would also be helpful. Could you talk a little bit about, I mean, Russia, I think the CEO of your Russian business was talking maybe a week or so ago about being -- achieving a stable result this year. I think your comments this morning is that the result will be good in 2020, but lower could you just sort of clarify that a little bit for us? And then finally, on from the last question on the margin impact of lower rates. Can I just clarify when -- what you're saying is that from the rate cuts that we've seen so far, you expect EUR 100 million of net interest income for the full year. And you think that will be EUR 170 million in 2021. I just wondered, is that pre any mitigation? And do you think there is mitigation that you can do? Or is that just a simple mathematical calculation of the rate impact?

I can start. Alan, you gave us quite a bunch of questions here. Well, I may start with the Group Corporate & Markets and the rather low-risk costs in the second quarter. Please bear in mind that already in the first quarter, and there was one question, why have you leveled so many of the different clients into Stage 2 pre-COVID leveling. So we already, in the first quarter, have allocated to this segment, some EUR 25 million in total when it comes to the risk costs. And as usual, usually, our inflow in January and February to this segment is anyway very low so what we did in the first quarter in March is that we then have leveled different bits and pieces of the portfolio with this pre-COVID flag, which led us to this EUR 25 million increase. And yes, you are right, currently, we see little inflow of trades, 3 bookings when it comes to this portfolio. But it's also the reason why we kept the 75 up on this around, 75 because also, of course, in this part of the portfolio, we have the one other client being exposed to this one. This is the one side of the coin. The other side of the corn is what we also currently see is that some of our clients where you could think that they are more challenged. We also see quite some repayments of these more challenged clients. And I have these detailed slides on Page 25 and one big client out of this have completely repaid the outstanding. So we have effects in both directions and I think that's important to bear in mind. So we see also quite some fluctuations between Stage 1 and Stage 2 repayment. And therefore, you could say, it feels like a write-back but in fact, we have been repaid by decline. And of course, we do our downgradings putting those clients and these exposures into the Stage 2. But at the same time, here and there, we also experienced the early repayment. Hopefully, this helps.

Yes. Yes.

So when coming to your next questions, it's about Russia. I mean, I think when Sergey Monin was talking about the business, used a general term, which is stable. And if you compare half year '19 with half year '20, then I think we all can be proud to have just a minus 4% of this development. And even if we just look at the Q2 result with EUR 100 million profit after tax, I think this is a nice result. As I said, the net interest impact in this year because of the hedges is not that big and commission income, new loan business in the private -- for private individuals are coming back again. So here, I think it will be lower than it was in euro terms last year, but still a very good result. When talking about the lower rates, the EUR 100 million, this is a like-for-like just somehow simulating the impact of the base rate cuts of the various central banks. So this is the main issue. What is open, of course, is how the margin will develop. And here, the picture is in a broad variety. I mean yes, one concern is that many banks are over liquidated with all these measures by the Central Bank. So here and there, we might see also some pressure on some of the margins but overall, I would say that the net interest margin overall should not be bit lower than what we have seen in the second quarter. So maybe here and there even slightly better because the over liquidity, what we have built up in the second quarter will, in the course of the year, be reduced.

And in terms of your sort of loan growth guidance?

Yes. Here to give you a flavor. I mean, this is volatile. So we have seen in -- so if we take an average and compare it, we had in second half of March. And then also in early April, we had loan growth, which was 200% or up to 200% of what we usually see. April was then at the end of April, back to the 100%. And in May and June, we saw less demand. So overall, this gives a clear picture. And then in July, a pick up again. And I think August is usually a holiday month. But I think in September, at least when I look at the pipeline, September, the year-end could be good again.

And you -- would you expect that some of the short-term lending that we've seen in the corporates and markets will -- is that a temporary phenomenon that will dissipate. Because modest, I guess, gives you an idea of 1% to 2% yet, you'd have to have -- if you even saw stable in corporates and markets in the second half, you probably do better than that?

Absolutely, yes. So I think the -- it comes from both sides. Of course, we have more assets because of this high inflow of deposits and the other measures. So this will be reduced. And some, as I said before, we saw this positive pickup in the retail unsecured loan area and some expectations also in the corporate.

We can now take our question from Olga Veselova from Bank of America.

Yes, I have 2 questions. My first question is about Stage 2 loans again. Did I understand you correctly that the reason for the high share of Stage 2 loans is the way how you classify industries? So it's a matter of your personal approach of the group's approach to classification of loans. And that's why your Stage 2 ratio is so high relative to CE peers. And if so, are you comfortable with the coverage of the Stage 2 loans? Or you don't really look at this coverage, you prefer to look at NPE coverage. So this is my first question. My second question is about Belarus. Given there is a political unrest temporary or un-temporary do you have a feel about a need at provisions at this stage? Or it's premature and you would be in wait-and-see mode?

Well, on your first question, the Stage 2 has different clusters, what you can make use of. So the Stage 2, the warning is coming purely from a rating migration and that you have to shift gears from an expected loss of 1 year into an expected loss of a lifetime. This is what we consider as the usual Stage 2 bookings, but also what you could do within this Stage 2 is that you have your collective or your forward-looking approach being conducted and considered. When talking about the different industries, what we usually level as post model adjustment, this also makes it into this Stage 2 bucketing. This is the point, what I would like to share with you at this point in time. And we gave also details on the Page 91 on our half year presentation, where you can see how we have done this with this Stage 2. So for me, it's important. I was just highlighting our Stage 3 coverage because in these days, where you see these strong economic deterioration, you could have -- you could be challenged from many sides. And one of them is if you're being behind the curve already on your defaulted portfolio, and here, I tried to rest you assured that this portfolio is well curved, which is already being leveled to Stage 3. So this was my motivation for flagging good coverage on the Stage 3 side. But also, of course, we're looking at our Stage 1 and Stage 2. And on Stage 2, we make the one you have out of the downgrading and the higher implicit credit risk, changing from a 1-year expected loss into a lifetime expected loss and also having the post model adjustment being covered. And yes, we have, depending on the different portfolios, we have different coverages within the Stage 2. And we made use of this classification to have an appropriate provision level available. When it comes to the Belarus, I think what we must have in mind is -- the one is that the political discussion was anyway already ongoing. And our rating model is considering also the country rating. So you will not find any corporate rating at the map rating of a single A or of a double A because we consider, of course, the country rating as a cap. In total, we have some -- almost EUR 1 billion of corporate exposure outstanding in the country and only some EUR 60 million are related to [indiscernible] and corporates. So therefore, currently, we see no need to allocate any provisions. And as I said, please bear in mind, having our rating approach that we have a country cap on our corporate rating models there is anyway also quite some implicit Stage 1 provisions available.

We can now take our next question from Andrea Vercellone from Exane.

Quite a few questions. The first one is, I want to go back to your comments on the NII decline connected to rate cuts, as I didn't fully understand it. And you said EUR 100 million this year, EUR 170 million next year. Now first question is, is EUR 70 million incremental? Or is EUR 170 million incremental for next year? Second point is out of this EUR 100 million on an annualized basis, how much is already baked in Q2. And third, are the hedges mainly in Russia or there's other countries where you have substantial hedges, and therefore, we won't see much until they expire. And fourth, also related to this question, you said you still have partial hedging in 2021. So that would imply everything else being equal, that there is a further drop in 2022, correct? Then on 2 separate questions on interest income. If you can -- if you have an idea of how much the contribution to the deposit guarantee scheme in Austria will increase by next year. And last, is there anything to flag in terms of procyclicality and regulatory headwinds going forward? You had some already this quarter, which you had flagged. I'm just wondering if there's more for the remainder of the year or next year.

Yes. As I said, the assumption of the EUR 100 million impact is based on just the key rate cuts by the various central banks. And as we have the impact only, one might say, in the second half of the year as there is some lagging when repricing assets the EUR 170 million then for '21 is on a full year base.

So EUR 170 million, it's still to come, all of it?

That's compared to what we had before the rate. So if you say we have EUR 100 million this year, then the next year, it's another EUR 70 million, so somehow incremental.

So it's EUR 70 million incremental but you said that of the EUR 100 million for 2020, basically, none of it has happened yet or not a significant amount. So it's all coming still in H2. That's what you're telling us, right?

The bigger part comes in the second half. Absolutely. Yes. We have seen -- as I said before, we have seen something in the -- if you compare the first quarter with the second quarter, you have this drop already in -- partly in the second quarter. And then here, you have to be aware that you have FX impact as well in the first quarter. And when talking about the EUR 100 million, this is the pure net interest impact.

Yes, but these are big numbers. So it does make a difference. If everything equal, we knock EUR 100 million for H2 or we knock less than EUR 100 million. So if the guidance for the year is EUR 100 million, it comes to EUR 100 million [indiscernible] public [indiscernible] before.

Yes. The cuts what we see in 2020. So recently, the overall impact is EUR 100 million. We have, in Russia, as I said, before, it's only about EUR 10 million in '20 and more to come about EUR 40 million in '21. And as I said before, you have to be careful because, there is a lagging effect also from the '19 cut, which, on the full year base in 2020 in Russia is estimated at about EUR 40 million. So this is -- of course, this is now a little bit difficult as we split the various rate cuts and their impact. When talking about other countries, you mentioned the Czech Republic. Here, the impact is, of course, the biggest one and also the drop in the net interest margin is bigger than everywhere else. And it's a huge job. We had -- in Czech Republic, we had a 2.4% net interest margin in '19. In the first half, we have 2.2%. And in the second half, it will go down to 2.0%. So this gives the explanation why we have such a substantial drop. And others with also negative impact is Romania, with minus EUR 10 million expected for 2020. The reason for that is the ruble is more the important one than the Central Bank rate here. And of course, there is some delay in adjustment. So if you compare 2020 with '21 that you would have a substantial impact of EUR 25 million for '21 out of this, assume 100 basis points. In another one with a big negative impact is -- they're the rate cut, sorry, and the impact is about EUR 13 million in 2020 and about EUR 15 million in '21. And the biggest, as I said, is in the Czech Republic, I think here, we already had in the second quarter, a EUR 20 million negative impact. And this you can multiply, I would say, by 2 or so for the rest of the year. So then you have additional -- something like EUR 40 million. And for next year, this then might be even higher, about EUR 80 million or so maybe plenty more. And this is what we said, to make it clear, this is a sort of simulation under the assumption that all the other elements are stable, meaning the balance sheet structure and the margins in -- especially in the loan area as in the deposit area in some countries, there is no margin anymore. So this was the -- I think the NII explanation, I hope I got it. Of course, one might find some cost of balancing impact if we will be able to change a little bit the structure. We have mentioned in the answer before, a reduced short term, no risk repo business and more in the private individual sector, for example. Deposit insurance yes. I think it's too early to say what we expect. You were referring to this case in Austria, this will have an impact over the next 5 years. We have to fill it up. We had 2 problem cases with probably little recovery. So it's too early to say, but let's assume it's a couple of millions, EUR 4 million, EUR 5 million. It depends on the recovery, what we can expect over time. In addition, so we had EUR 7 million, and this may be up to double. I still hope for less.

And on capital?

Here, I didn't fully get your -- the regulatory increase on OpEx or what? Maybe you can repeat?

No. It's a broad question. So you had flagged more or less what then happened in Q2 in terms of factor in the FX risk in operational risk. I'm just wondering if you already know that additional negative headwinds such as this one are still coming. I don't think so, but just checking.

On the credit, no, Andrea. On the credit risk side and on the market risk side, we are currently not aware of any other things, which are noteworthy to be shared. We have shared on the first page, like also this deduction of the software items. But I think we have seen in the first half year, the biggest impact with the SME supporting factors and also the op risk, what we have clearly and transparently shared with the market. But we are currently not aware, as of August, that there are any other procyclical increases or decreases to be expected in the magnitude, which are decent to be flagged right now. But Johann is now raising his hand.

I think, Andrea, what I understand from your question is that I made a remark that the operational risk impact, which was 14 basis points in the in the second quarter. I mean this is our best modeling efforts to build in the Swiss francs. But it needs the approval of the Central Bank and the European Central Bank. So there might be some risk that at the end, they do not fully improve our approach but requires something more. But I would expect that it because also, we like the final approval, there had been some discussions already about that.

We can now take our next question from Tobias Lukesch from Kepler Cheuvreux.

Yes. Thanks for this presentation. A quick follow-up on my side as well. Firstly, I have to dig on NII again. And thanks for the details around the rate cuts. But to get the full picture, could you please give us the net TLTRO 3 take up that you have? And if I understood you correctly, you said that you will try to earn more than the 50 bps carry. Is that fair to say? Is there a kind of calculation you made for the next 12 months? So will that go up into the 100 bps here eventually? Secondly, with regards to the rating migration again. So I fully appreciate that you have basically the highest coverage ratio of the Stage 3 loans. However, you put a lot of your nominal exposure from Stage 1 to Stage 2, especially in Q1. Now we continued with a high number in Q2. The only thing I realized was that compared to the European average, which basically increased the coverage ratio of Stage 2 by 20% from Q1 to Q2. You basically went the opposite direction. Here again, is that just the difference between, let's say, double B plus loans versus eventually B minus or triple C loans that we see potentially in competitors' book? Or what is your general idea behind the total coverage here? Sorry, if you have to reiterate what you already said on that point. And finally, lastly, with regards to the various countries and your real estate exposure, which you nicely built down on Page 24, you categorize that as a kind of 3b category, it was EUR 7.6 billion. I was just wondering if you could give a bit more flavor to either the product mix between office and yield development and retail, which you see at risk and/or geographies where you see the highest risk regards to real estate. And as a last one, it would be interesting to know if you rather see just some valuation pressures on your real estate book? Or if you really expect here customers to actually default?

Well, thanks for all your questions. I already was asked today regarding our risk costs in the second quarter. I think we were already in the first quarter, making use of the IFRS framework quite nicely and already making us some of this post model adjustment and putting some of the different corporates and industry into the Stage 2, and therefore, Stage 2 provisioning in the second quarter might be less pronounced, then convert to some of our competitors. I think that's the one important thing when looking at the different dynamics. What we also have to bear in mind is that, of course, because of the rating migration, you get a release on the Stage 1 because then you have to book up Stage 2 if you do the rerating? And what is maybe also interesting for you to see is in total, we have, of course, based on the different industry approaches, we have done quite deep credit risk work. And what you can see that those which we have leveled on this 3b, 3c categories, you would see already as of today, on average, a rating down notch of EUR 1.6 billion. So meaning, that's the reason why we also have a substantial share of Stage 2 bookings respected to these industries. And even further on, which I have shown on Page 25 all that we have shown on Page 25, all these exposures are being subject to a Stage 2 coverage, so to say. So this was the first question when it comes to Stage 1, Stage 2 and the dynamics in the first quarter in the second quarter. As I said, we have been early mover when it comes to this making use of the framework. The second one, when it comes to the real estate. There are a couple of things to be considered. When we talk about real estate, and colleagues will now look up the numbers, maybe we have to revert back to you with the exact figures. But end of the day, what we're talking about is institutional real estate, meaning we're talking about offices, we're talking about hotels, we're talking about warehouses. I think this would be the most important ones, what to be considered in also giving the respective guidance. Well, on hotel, I can tell you out of my mind because this question is not coming in the first time. We have about an exposure of EUR 1 billion. But our underwriting standard, when it comes to the financing of hotels, rather strict or I would even say very strict, and we have an LTV and down on the exact number on this portfolio, some around 50%. And with some of the others, we even go down further when it comes to the -- with the LTV. So rather, you could even call it a rather robust and a prudent risk approach when it comes to the funding. And some of these exposures, they are really in the super city center, now talking about this EUR 1 billion. And they are prudently financed with a low LTV. And we could just easily also do a sort of modification of the terms and condition because these are really best-in-class spots where you can find these exposures. So yes, we would see a deterioration. We might see the one or at a downgrade even in this portfolio. Let's see how the day curve comes back. But from a pure NPL Stage 3 bookings, I'm currently not super heavily secured. What is also may be important when we talk about the entire real estate part, what you can see here of the EUR 7.6 billion, having a net exposure of EUR 5.2 billion. That we also have conducted in 2018 and 2019 a securitization exactly covering this portfolio. And if my memory serves me right, the current outstanding of the securitization still sums up to some EUR 1.2 billion, EUR 1.3 billion. So meaning that we have acted appropriately already in 2018, 2019, mitigating part of the potential migration risk. Coming back to your question when it comes to real estate, I was talking about the hotel part. And then, of course, you still have also offices and warehouses. Well, on offices, this is very interesting discussion depends with whom you discuss. There are some saying, well, don't worry offices in the city center will still be needed and even more space is needed because you need to have the social distancing. That's the one part of the arguments being used. The other one is, of course, well, there will be an adjustment because now industry was proven that we also can do some home offices. So I belong rather to the second camp. But this is too early that you already see these adjustments that their offices are being put back here. And again, here, if you have a very good location, well, then it might be refurbished and used for something different. Then coming to the last category, its warehouses. And of course, you could also talk about residential real estate, this would be the fourth category. But when talking about warehouses, you could have 2 or 3 beliefs. The one is, if we believe in this nearshoring. So now Europe was demonstrated that big part of the value chain of production is not anymore in Europe. And this just-in-time delivery also was proven that is maybe sometimes being on the edge. So this could mean that in this part of the portfolio, meaning warehouses that some of the corporates feel the need of have a little bit more stock available could be even supportive for this part of the portfolio. And then last but not least, coming with the residential real estate. Here would be the counter-argument for the office building. Because you could see even additional need for some square meters because people would also have maybe a small room allocated to home office activities. And so flats could be -- could have a good experience and demand for more square meters. Well, having said all this, meaning the securitization, I think as of today, the most challenged part of the portfolio is the hotel portfolio. And yes, here, we will see further downgrades. But from a Stage 3 bookings, as I said, we have many of these exposures in really very, very good locations. Sorry for the long answer.

Thank you, Hannes. I think there is one question left for me, which is the EUR 4 billion RPI in head office and EUR 500 million in Tatra Bank. And as you rightfully said, there are some conditions. The one is that if we show a decent growth of 1.15% for the period April '19 to end of March '21, then there is a modification of about 50 basis points. And if we keep it, but is it stable from the period of what is it, the period is the COVID is of March '20 to March '21. If we keep it stable there, then we get another 50 basis points, which is the so-called COVID-19 support.

And you're confident that you will reach that growth level, I guess, right, and book in at least 100 bps then in COVID?

Yes, we are confident, yes.

We can now take our next question from Simon Nellis from Citibank.

Just a really quick question from me. I think I may have missed this one. Can you just tell me what the dividend accrual was out of the first half profit that's not in the capital?

EUR 82 million.

EUR 82 million. Okay. Very clear. And if I understood correctly, your intention is to pay out the EUR 1 per share dividend plus whatever you're accruing this year if you're allowed, right?

If we are allowed, right.

Got it. And then just last on risk costs for next year. I mean, relative to, I don't know, end of the first quarter, are you feeling more comfortable that risk costs could be lower than this year? Or as you're thinking what change? So I think at one point, you said that the outlook is still uncertain. Next year could be another elevated year if not higher fiscal than this year.

Well, Simon, as the question was raised in the beginning by Anna, where she asked regarding the guidance. I was referring back when last time being in the city where I said, the through-the-cycle is somewhere around 60 basis points. 2020, for sure, will be above this long-term average with around 75. And I think given the current development, I think defaults by itself, shall peak or will be some around Q4, Q1? Hopefully, not touching into the Q2, but still so. And therefore, as of today, our strong belief is that 2021 would still be above the long-term average or the through-the-cycle of the 60 basis points and I also gave my arguments why I believe that 2022 could also be supported because some of the Stage 2 bookings, we might not need, we could see some reratings and also the big amount of money could start to be employed. So I'm much more constructive on 2022 than on 2021, because, of course, all these projects needs to kick off. And for this part of the industries where these packages are coming too late. This is where I believe that also till 2021 could be slightly above long-term average. As I said, this would be my best guess as of today.

That's very helpful.

And what we have seen -- maybe last word on this one, Simon is, for instance, when we look back on the SaaS infection, it took almost 4 years that the room price and also the occupancies on hotels was back 4 years. So it took 4 years that really, the hotels have seen the same amount of money earned per room and the good occupancies. And that's the reason why I believe that it may take maybe more than just this single year and also reaching into 2021.

And now we take our next question from Johannes Thormann from HSBC.

Two questions left from my side. First of all, on Page 24 with the cluster analysis. Just to help me understand, where would you put your 75 bps risk cost guidance in that chart? Where would you position that? And secondly, just as we've seen some volatility on the tax rate in the first 2 quarters. What is the full year outlook and probably outlook also for the next year?

Thanks for the question, Johannes. The 75 basis points, as I once was sharing, and I come back, then, of course, immediate your question, so I'm not hiding away. So how did we do this 75 basis points? Starting point was the through-the-cycle of the 60 basis points -- 55 to 60 basis points. Then we have conducted in Q4 a stress test, leaving to some 100, 120 basis points, but this would be a pure passive approach, no government support, no, nothing. So we believe that our risk costs shall be between the 60 and the 100. The other one is we looked at our rating. The other thing what we have done is we looked -- we have conducted stressed single ratings on the different corporates. Those who are being subject to the L-shaped recovery, industry classification, we assume the complete fallout of up to 6 monthly revenue numbers. And on the U shaped, we believe that there is a fallout of 3 months of monthly revenues and on the B shaped just 1 or 2 months. Having said all this, this is more or less always confirming the 75 basis points, and we must not forget the 75 -- around 75, comprising retail and non-retail. And last, what we also did on the non-retail side is that we have then included these -- the way of looking at our industries. And now I'm coming back to the Page 24, but this is also the reason why we have added Page 25. Because if you look on the Page 25. Page 25 is summing up that this is substandard and below rated customers. I gave you a feeling that this is somewhere around on a single B, single B plus level of the subcomponent or sub portfolio. The implicitly of this EUR 1.7 billion is summing up to 10%. So now the calculation goes like this. We have EUR 1.7 billion. Current EBD on this one, having experienced already quite some downgrades would be 10% LGD 50%. You would come up 1.7x 10%, 170x 0.5. This is somewhere around EUR 80 million, EUR 85 million, okay? Currently, we already have booked some EUR 7 million to EUR 6 million as Stage 2 risk costs. But Stage 2 risk cost you only can consume for those who have defaulted. And even you would now stress me and say, well, unless you're way too shy on stressing this portfolio, well then double the numbers. Double the numbers and go with EBD of 20%. Go with a EBD of 20% of this portfolio, this would lead us to some EUR 340 million. So what we do is we really try to look at the portfolio, is it retail, is it non-retail, but look from different ways of challenging the portfolio. This is another way of challenging the portfolio. And now coming back to the Page 24 on the classification, what we have leveled here with one. Well, if you have fraud, you always -- you could be caught wrong footed. But in this big area, what we have covered with one, I would not expect as of any default coming from. So it's really this 3a, 3b, 3c area, where we believe that this is the clusters where it is most likely that we see some need for Stage 3 bookings? Hopefully, this helped.

Yes.

To your other question about the tax rate guidance. We assume 24% for this year and midterm 22%.

We can now take our next question from Máté Nemes from UBS.

Yes. I have 2 quick follow-up questions. The first one is on cost. You mentioned that we should expect, obviously, the cost-to-income ratio to deteriorate in the second half. Could you give us a sense, actually, how sustainable these lower admin costs are and what -- in which area should we expect perhaps some inflation in the second half? And the second question is on the op risk charge related to the Swiss franc mortgage litigation in Poland. Could you give us some color what are the underlying assumptions on this charge? What is it based on, perhaps in terms of the current exposure or outstanding amounts or in ratio of cases? Any color on that would be very helpful.

Well, let me start with the second question on the op risk. You might have in mind that we are having a current outstanding in Poland with our Swiss franc exposure summing up to some EUR 2.3 billion. Colleagues will confirm. No, I have already now the confirmation with me. So it's EUR 2.20 million, what is currently in Swiss franc outstanding when we talk about Poland. First thing. Second thing is that the KNF at this time was introducing for mortgage, secured lending and extremely elevated risk weight, meaning that we have a risk weight for this portfolio of 150%. And in the argumentation, what they have used, they also included -- or as a reasoning for this elevated risk weight is that they have assumed that there might be the one other legal case. This amendment to the CRR or the interpretation and the reference being made goes with the credit risk weighting. Our belief up to this moment before we had to -- included this, well, this elevated risk cost, as also stated by the KNF is partly also covering to be assumed litigation cases or out of the contract risk. ECB has forced us to say, no, these are pure op risk cases. These are contact risk cases. And as you're aware of, that we also have to provide some legal provisions for this portfolio. Currently, we have some EUR 60 million of legal provisions being added to this portfolio. And as our CEO said, also including our modeling and assume further inflow. This is then in the end of the day, turning itself into an op risk need of capital of EUR 800 million. That's the -- of RWA, sorry, that's the background of these dynamics.

When coming to your cost-income ratio question, the pressure, which I was referring of the second half of the year mainly comes from the revenues. We assume -- and now this is a broader view. We assume that the OpEx should be stable this year, next year, I think here, as I mentioned before, the wage pressure is, to a large extent, gone. If there are areas where we have to increase wages then probably the overall efficiency gains, what we can expect from. And there are several areas. The one is, of course, the less space, what we need, home office is coming well ahead and all this stuff. And midterm, it's also the impact from digitization, where we can reduce our operations -- cost for operations. And of course, we execute further the -- what we labeled as the target operating model project in head office here. It's according to the plan with just a few months of delay during the shutdown. So the measures are designed and executed. So there will be, of course, some fluctuation quarter-by-quarter. This is FX driven here and there, there might be marketing spend more than what we had in the second quarter. But if you look on a year-on-year comparison, OpEx should stay flat for a while.

[Operator Instructions] We can now take questions from Thomas Unger from Erste Group.

I'd like to come back to your -- the answer you gave to the very first question, Q&A on dividends. And when you said that you're growing more and more pessimistic about the approval. Are you talking about the approval of the dividend as such for 2019 and 2020? Or is it just a matter of timing? And then when it did might be paid out?

Yes. I was talking about the '19 dividends to be paid out in '20. This is where I think the opportunity is diminishing day by day, at least what we see in our talks with the ECB. On the other hand, it's the final responsibility of the annual shareholder meeting, which will happen in our case, on the 20th of October.

I think next year is still -- next year is still open. I hope at least.

As there are no further questions at this time, we will now conclude today's conference call. Thank you for your participation.

Thank you very much for all your questions and your participation. Have a good day, stay healthy.

Bye.

You may now disconnect.