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

[Audio Gap] 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, sir.

Thank you very much. Ladies and gentlemen, welcome to our second quarter results presentation. Thank you for taking the time to join us today. While we are of course pleased to report record results, I appreciate that there is a lot to digest in our numbers. In the most recent quarter we have seen an unusual high contribution out of Russia and then unprecedented appreciation of the ruble against the euro. But I will do my best to walk you through the moving parts. Nevertheless, there is some positive underlying developments in the quarter which are highlighting. Core revenues continued to improve, and I am satisfied that this is not solely driven by Russia. Excluding Russia and Belarus, NII and NFCI have grown nicely in the past 12 months. Loans to customers are of course distorted by Russia with on the one hand a 22% reduction in local currency of the loan book, but a significantly strong ruble rate which then we will digest later on in details. We have got -- we have again seen good loan growth in many of our core CE markets, including Romania Slovakia, the Czech Republic, Serbia, even before accounting for the recent acquisition. And most importantly, our CET1 ratio is now at 13.4% after deducting 30 basis points for dividend accruals. If we now move to the next slide. You know that we have been focusing on growing in Central Europe for some time now. And despite all that is going on in our Eastern Europe segment, I'm very pleased to report that our core CE markets have continued to grow nicely. In [indiscernible] Slovakia, loans to customers group by 3.5%, in Romania by 9%, in Serbia by around 5%. And we added another EUR 1 billion loans through the acquisition of Crédit Agricole Srbija. Czech Republic grew by around 1.5%. Also, this is closer to 3% in local currency terms. We have executed our M&A plans with the successful closing of Crédit Agricole Srbija acquisition and the disposal for our Bulgarian business. We have made good progress on capital this quarter. The disposal of Bulgaria helps as to the strong retained earnings. We have also accrued 30 basis points for dividends as required by the regulator. It should be clear, however, that we will only decide at the end of the year on any dividends, and that our dividend policy and guidance remains suspended. Our CET1 ratio remains strong under all scenarios in Russia. Even if we are forced to deconsolidate with no consideration for our equity, the impact on the CET1 ratio is very limited. As we derisk the business in Russia while also generating substantial retained earnings there, we are careful not to reallocate the higher Russian CET1 into RWA growth elsewhere in the group. In effect, this means that we ring fence the Russia capital for our planning purposes. This also means that the CET1 of the group excluding Russia will not be materially impacted by whatever happens in Russia. As I just mentioned, we are de-risking in Russia and can report loans to custom in local currencies down 22% in the quarter. At the same time, we're seeing large inflows of deposits, which means that the balance sheet is not shrinking. Moving to the next slide. I think here a couple of points which I could highlight, and this is one of the many moments where I have to stress the strong ruble, which, for example, in the second quarter in NII had a positive impact on EUR 82 million only by this FX impact. We have seen higher liability margins in the Austrian business, in Hungary and Romania, and also in the Ukraine. We have seen higher liability volumes, as I mentioned before, in Russia. Asset margin, we have seen some improvements with, compared to the other numbers, relatively small amount of EUR 9 million Russia, Slovakia, partly compensated in Czech and in Austria. The asset volume effect in Czech, Romania and Slovakia accounts for EUR 7 million. And in the treasury activities we had a EUR 21 million net. Here comes the bigger part of the Russian business. And when we look at the NFCI, here again of course the Russian business with the FX in Russia, you know this environment there, this was of course a strong contributor, and also the mandatory conversion obligation. Also this was somehow loosened in the course of the second quarter, still is part of this strong contribution. Moving to the next slide. And I have touched already the overall development in the NII and then the NFCI. Some of you might be interested what is the results, the impact outside of the Eastern part of Europe. So here we can report the continued loan growth. I have mentioned Czechia, Slovakia, Hungary, Romania, the 5% to 7%. And this all leads to an also, I think, impressive improvement in the year-on-year comparison. If you look at the business without Russia, we have 30% increase in the net interest income, 4% to 12% increase in the NFCI. I think I have mentioned many other topics already and you can read it. What I probably want to address already here is that the recent ECN hike will contribute also to our NII, mainly in Slovakia, whereas in Austria that's probably rather neutral. So that's, the impact from this last hike is about EUR 20 million per annum. Moving to the next slide, the assets and loan growth development. Once again, we have to stress here that in ruble terms we have reduced the loan book by 22%, but in euro terms it's an increase of EUR 3 billion. We have seen loan growth in the southeast region. And here you would also then add the unorganic consolidation of the Crédit Agricole Srbija. And of course there had been some positive impacts, as I mentioned before in Czechia, Slovakia and Hungary. If we move to the next slide. Here it's important again to mention 2 things, mainly Russian-driven. One is that of course the strong ruble overall leads to, on group-wide perspective denominated in euros to a huge increase in deposits from customers. But also in Russia per se we have seen a strong inflow. We had seen some outflows at the beginning of the war. These are to a large extent already compensated. So the deposits are back and therefore also the liquidity ratios improved substantially all over the countries. Moving to the next slide, which is the CET1 ratio development. Here this needs a couple of maybe additional information to the many points which are mentioned here. What my colleagues in preparing this slide for you tried to achieve is to separate the various impacts. So the FX impact, the M&A impact and the net loan growth impact and then also some other factors. Important to mention here is that one strong contribution came from Russia with the buildup of equity in euro terms with an amount of almost EUR 1.5 billion, and a reduction RWAs. So this was overall very positive. I mean, what's also important here to mention is that if we're heading or looking at the further regulatory developments, we see some discussions in markets that the countercyclical buffer might be increased. So we expect that this would lead to a CET1 requirement which is now already at 10.50% to further increase to 10.60% in the course of this year. Uncertain what in Austria we should expect. But if the countercyclical buffer would be increased here, this could add another 7 to 15 basis points in the capital requirement if the countercyclical buffer would be at 50 basis points or 100 basis points respectively. And as I mentioned, that the 30 basis points in the CET1 and the -- as I said before, this is a regulatory requirement. The base for that is that if no policy, then the average of the last 3 years as a payout ratio has to be assumed, which in our case is 17 basis points -- 17% of the consolidated profit, which is EUR 285 million. And if we now move to the next slide which is an answer to the potential question, what could be the CET1 ratio by the end of the year. Here of course there are a couple of drivers like when you look then at our outlook and then ROE of 15%, this could add another 30 basis points CET1 equivalent till year end. Loan growth, we will explain, could be overall group-wide rather flattish. And then the question is what would be the ruble rate and what can we achieved by using different ways of liquidity management in Russia, which simply means can we reallocate some of the liquidity, which is now with the Russian Central Bank which has under IFRS requirements 170% risk weight if we can manage this more capital efficient. We also are regularly approached by one question, what would it mean. So the worst-case scenario is we would have to deconsolidate the Russian activity without any contribution. You are aware that we overall currently have -- and when I say altogether, then I mean the IFRS equity which is around EUR 3.9 billion plus 10 subordinate instruments, which if I round it up is about EUR 4.3 billion, which might be lost in the worst case. On the other hand then of course with such a big loss we won't pay the group dividend. So this EUR 0.3 billion. And we then would have some further corrections like reduction of the IRP shortfall and an increased effectiveness in the IRP transactional arrangements. So if we net this all, we would end up at EUR 3.6 billion capital impact. And if we then look at the EUR 27 billion of RWAs, this would have slightly minus 5 basis points impact on the CET1 ratio. So in essence, we are -- the Russian activities are to a large extent ring-fenced. I think the next slide, the regulatory requirements, I touched already with also the countercyclical buffer developments. So I would like to move them to the next page which is the MREL and our issuance plans. What you can easily see from this Page Number 13 is that the current bottleneck is the MREL. Here, of course, issuances in the second half of this year would help to create a little bit -- a bigger buffer than what we have now and what we would like to achieve. So, we could be up to 2 issues in the course of this year, and then of course there will be some activities. You know that we have this multi-point of entry concept which then also requires MREL issuance in the Czech Republic, Slovakia, Hungary, Croatia and Romania. And these requirements are split between '22 and '23. And in this table you see the requirements what we have and the split over the time. Moving to the next slide. Some information on Russia. I shared with you last time, we're focused building up the capital and liquidity buffers and selectively reducing the lending portfolio, and on all these 3 levels the bank has performed very well in the quarter. We have seen large and persistent inflows of deposits in ruble and in foreign currency from corporate and retail accounts which has further improved our liquidity ratios. I mentioned it already the loans to customers in local currency terms are down 22%. [indiscernible] loan book, a very good bottom line, the CET1 ratio on the local standards has improved significantly. We are derisking the bank, ensuring that it is as resilient as it can be. But of course under IFRS terms in euro terms it looks slightly different. So the strong ruble development in the quarter from RUB 93 to RUB 56 per euro means that our equity now is almost at EUR 4 billion. The FX impact is also visible in the RWAs, so the -- only the FX development increased in euro terms, they RWAs by EUR 7 billion. And mentioned the high volume deposit inflow required another almost EUR 4 billion of RWAs in the second quarter. This is in this in this chart the yellow part. So also we had this substantial reduction in the loan book. Overall the RWAs increased from EUR 20 billion up to EUR 27 billion. And update also on the net cross-border exposure which is EUR 330 million, down from EUR 600 million what we reported in March. And our trade finance guarantees to Raiffeisen Bank Russia are around the EUR 140 million. It has to be mentioned as well that we had been very successful with the capital hedging but now this market is very dry and has a significant runoff in our hedge position which is currently at the level of EUR 300 million. As we announced in March and discussed on our Q1 results call, we are looking at the range of different strategic options for our Russia subsidiary. This may include the sale as well as other possibilities. Just for example giving up control and deconsolidating Russia from the group while still retaining a financial interest. In the meantime, we continue to focus on derisking the business. There is no change since my last communication. No news I can give you today. And no decision has been made yet made. Please understand that I will not go into each option and possibility and that I cannot make any statements today on the timeline. I want to reiterate that there is a lot of internal effort on this project. We are working hard on it. We are committed to finding a timely solution. But at the same time, we need to be extremely diligent. I will not make any statement today on the timelines. But as soon as we have clarity, we will share this information with you. Coming to the outlook on Page 15. You have seen a strong first quarter in GDP development before the war started. I think this spin is beneficial till year end in the overall numbers. Of course the GDP forecasts compared to end of last year had been adjusted downwards, maybe what we see and read from the various indicators. Probably there is some risk to the downside. But still we don't see recession as of today, in Central Europe, in South Eastern Europe, in Austria or in the euro area in '22 and also reduced numbers also in '23. It's different in Eastern Europe. War and sanctions have a big impact on the countries, with Ukraine down 1/3, Russia 8%, Belarus 4%. Of course with such a big drop this year, we expect that Ukraine somehow will recover next year. Whereas in Russia there's a high probability that there will be also a recession in '23. Moving to the next slide. We have -- I gave you our view on 5 core markets for us. All of them, you can see it in the verbal explanation. Have slight differences, industry structure, depending on energy, FX reserves, structure of the economy, imbalances like fiscal deficits, current account deficits. This all leads to the loan growth potential in the market in corporate and retail as it outlined in the box below. And with this, I come to my last page before I hand over to Hannes. And this is the guidance. So we don't have an updated outlook for '23 for obvious reasons given the big uncertainty is what we face. In our footprint and the guidance for '22 is based on the assumption that the footprint is not changed, which means Russia and Belarus are included in these numbers as long as there is no change visible. We expect a net interest income in the range of EUR 4.3 billion to EUR 4.7 billion and net fee and commission income of at least EUR 2.7 billion. We expect an improvement year-on-year in NII and NFCI if we exclude Russia and Belarus by around 20% for NII and 10% for NFCI in 2022. We expect a stable loan volume in the second half of the year with selected growth in some of the CE and SE markets. We expect an OpEx in the range of EUR 3.3 billion to EUR 3.5 billion in these numbers. The M&A integration costs are included. And this will lead to a cost income ratio of around 45%. Hannes will talk about the risk development. Let me here just mention that we assume a provisioning ratio of around 100 basis points. If we take all these numbers together, the consolidated return on equity is expected to be at least 15% in 2022. And the CET1 ratio should remain at plus 13%. Hannes, please?

Thank you, Johann. Good afternoon, ladies and gentlemen. Thank you for your interest today. And I do hope following this call and reporting cycle that you'll manage to take some time off and enjoy the summer. The second quarter has been marked by the further materialization of some of the [indiscernible] wildcards, which we have previously discussed here, namely inflation, concerns around energy supply and supply chains and of course ongoing geopolitical tensions. First and foremost, the war in Ukraine. Together, this will continue to weigh on the outlook, and we cannot exclude a weakening of the credit cycle in the quarters to come. Let me briefly summarize for you the second quarter. We have taken EUR 242 million of risk costs leading to a total risk cost of EUR 561 million year-to-date. This includes EUR 204 million of overlays and EUR 127 million of stage 3 provisions. This now brings our stock of overlays, you can see this in the middle of the page, to EUR 665 million. To put this into perspective, this is more than a 1 year through the cycle risk costs, which we have gone through P&L and capital ratios. Half of these overlays are booked outside of Eastern Europe and are available to us under all scenarios. As we discussed last quarter, we have largely digested the RWA increase related to these wildcards. In the second quarter, we have reviewed over 13,000 customer ratings. The heavy inflow of deposits in Russia has added another EUR 4.4 billion of risk-weighted assets. From a risk perspective, we are, of course, happy to take ruble liquidity and place it with the Central Bank or in a reverse repo. At the same time, this is affecting our IFRS ratios, and we are managing this closely. At the end of the second quarter, we also had around EUR 900 million of stage 1 and stage 2 impairments available in addition to the overlays that I have just mentioned. In Eastern Europe as well, we have been actively building up our provisions. Let's start with Ukraine. We have now taken around EUR 200 million of risk costs for 2022. And for obvious reasons, I cannot tell you today that we are done for the year. But I'm confident, however, that this represents the biggest part and in the coming quarters we can adjust as required. In our last call I mentioned that our exposure to dispute occupied regions is around EUR 300 million, and this has not increased in the second quarter. In the Donbas specifically, we had already reduced our exposure down to near 0 since 2014. Let me also talk about Russia. We have taken EUR 266 million of risk provisions so far this year. In March, we guided for risk cost of up to EUR 450 million, which I would claim today seems to be rather unlikely. High commodity prices have probably pushed up some of the expected costs into the next year. And also worth reiterating that our Russian business is ring-fenced and that earning capacity of the bank is more than sufficient to cover the risk-costs and to absorb the RWA increases. As Johann mentioned, our Russian subsidiary has further increased its capital buffers with very good earnings and by reducing its lending activities. Away from Eastern Europe, and despite all that is happening there, we have seen good loan demand and very low risk costs [indiscernible] from a very strong 2021, still noticeable in the first half of the year. We are a bit more cautious about the second half, but we expect growth to slow. And at the same time, inflation may affect disposable income and put pressure on some of the corporate margins. High interest rates are also weighting on our customers, but I'm not yet particularly concerned at this moment that this will have a significant impact on the asset quality. In retail, persistent wage inflation and savings from the pandemic are helping to soften the blow. And we have been offering fixed rate terms to our customers for several years now. On the corporate side, many of the customers have locked in fixed rates. And in many cases, they have locked in for longer tenures than usual. Furthermore, the increase in interest rate expenses [indiscernible] to EBITDA margin progression we have seen in the past quarters. Many of our customers have taken advantage of the strengths of the pandemic recovery to shore up their balance sheets. Later on, I will also talk about some thoughts when it comes to the gas supply from Russia and it's increasingly a concern, and I will share with you our scenario analysis on the following slides. We have started building specific provisions for this as well as the RWA impact is manageable. Here all, despite the more cautious outlook, I believe that RBI is in a very good shape and the same goes for our customers. Despite significant RWA inflation and higher risk costs our CET1 ratio is back around 13.3%. Our rating has been affirmed by both rating agencies. We have built up substantial risk cost provisions for future defaults. And on the existing NPE portfolio, we are, as always, one of the best-covered banks in Europe. Furthermore, we have securitized around EUR 10 billion of exposure, which also provides some buffers and cushion when it comes to further RWA inflation and risk costs. Therefore, looking ahead, I can confirm our risk cost guidance for 2022 of up to 100 basis points. In all likelihood, we will see a bit less in Eastern Europe offset by a little bit more of risk costs made in the rest of the group. Let me move on to the next page. Here I'm happy to share with you our thoughts and how we tried to approach the entire topic of gas supply shock. You will realize that the approach we have chosen is very much comparable to what we have done in the due course of the pandemia. So what are the major assumptions? We do assume a full and abrupt gas stop. And of course, then we were looking at the industries which are being most affected by an immediate stop of gas. At the same time, we also assumed this was the best, which was available to us, that the gas available will still be equally distributed. We all know by now which are the countries who are most exposed to the Russian gas import. And therefore we were also concluding which are the industries most impacted by this current energy-intensive sectors. So you can see on the left side, the countries and their gas dependencies from Russia, then going with the energy-intensive industries, how much this would mean. And then we tried also to simulate the effective ratings. We have done so. And on the underlying portfolio of EUR 16.1 billion of RWA in this very, very, very extreme scenario, this could mean an RWA uplift of up to EUR 2.7 billion. Let me move on to the next page, please. And here you can see how we have worked on our exposure list when it comes to asset freeze. What is important for you to know is that the team is always using the actual sanctioned regime now being in the seventh sanctioned package and calculating back what this would have meant at the inception and of the beginning of the war. So you can see that we have continuously worked on reducing this exposure now also being capable to run it down by another 15%. Let me move on to the next page. And many things have been said by Johann when it comes to RWA development. The part which is yellow-flagged is very much about the credit risk. So we have reduced our exposure on fixed FX rates. We were talking about the updrift and inflation of RWA when it comes to liquidity placement because of the high risk weights. And we were also talking about securitizations. Please bear in mind that a big part of the impact in the second quarter must be attributed to the cross-rates. I'm coming to my last 2 pages, IFRS 9 provisioning in the second quarter. I shared at least from my point of view, the most important things already, let me just reiterate it or the spillover of energy inflation risk, we have also increased the overlays by EUR 196 million, which is quite a pronounced coverage already for this topic. Last page from my side, when talking about NPE ratio and NPE coverage ratio, 1.6% NPE ratio, 60.7% coverage ratio. And what you also can see is that of course NPEs are going up on the rising trend in Eastern Europe. All these were the couple of slides from the risk management point of view. Thanks for listening. And we are now eager to listen to your question.

[Operator Instructions] Our first question comes from Izabel Dobreva of Morgan Stanley.

I have 3. My first question is on your new guidance with the group NII up 30% to 40%, but also even excluding Russia guided to be up 20%. And this is a very high level, both in absolute but also relative to the prior guidance. So I was hoping you could comment on the developments which have surprised you and essentially unfolded better than your expectations at the start of the year, leading you to this big guidance upgrade. But also equally, do you think this level of NII is sustainable into next year? Then my second question is on the potential exit from Russia. And I fully appreciate that you cannot give us a lot of specifics at this stage. There has been some local news reports that the government may be looking to block the sale of foreign banks' assets. So I was wondering whether you have any comment on this? Is a sale still a possibility in your mind? Or does this mean that you're leaning more towards a deconsolidation now? And then finally, I wanted to ask you about your geographical footprint? And are you considering an exit from any additional countries in order to streamline the geographical presence? And how are you going about assessing these candidates? Because for example, Albania, Bosnia, Kosovo, these are smaller countries, but you're #1 or #2. Whereas, on the other hand, in Czech and Hungary, which are the bigger markets, the ranking is lower. So what is more important in your mind, is it the size of the addressable market or is it a competitive position?

Well, if I may start with the first part of your question regarding the NII guidance and the NII dynamic. I think we have seen central banks acting extremely pronounced when you think about the Czech National Bank, the Hungarian Czech National Bank. And we have seen interest rate increases, at least within my career, I have never experienced before. So we have seen central banks acting pronounced, delivering interest rate increases of over 100 or sometimes even 185 basis points when talking about the Hungarian Central Bank, for instance. And if you recall, we are coming out of a long-lasting period of very super-low interest rates where we of course, very classical, not surprising, but we may have forgotten it. Usually, a bank is earning also quite some money on the liability side, also out of the payments they're conducting asset side, which was very much in the focus in the last couple of years. And hopefully also a little bit out of term structure. So therefore, these 2 or 3 countries, also Poland is not so important anymore for us, but also the way how the Polish Central Bank was acting was quite pronounced. Or do I believe that still something could be seen? Well, maybe finally also ECB is delivering even a little bit more than what we have seen as of today. And I would not be surprised if also in Romania we could see still the one other increase when it comes to interest rate moves. So I think this would be what is my current thinking when it comes to the NII and why we are guiding so strong on NII.

Thank you, Hannes. Moving to the next question, which is about our strategic options in Russia. And let me assure you that I completely understand why you ask, I understand how important the strategic options for Russian subsidiaries are, for our investors and for our investment case. And let me be clear, we are committed to finding a solution. We are working hard on the project. No decision has yet been made, and we will brief the market as soon as we are able and in a position to do so. The choices that we are working on are those that we set out the Q1 results. And this includes the sale of the business, but also other possibilities as giving up control and deconsolidating Russia from the group, while retaining an interest. It's a not straightforward environment. Here, I agree with you. And there are constraints. Most important, the regulatory authorities in Russia, regulatory authorities elsewhere, the sanction framework of the EU and of course the government position of Russia. And so it takes time to elaborate. And as soon as we are there, we will let you know. I mean, at this point in time, I cannot comment further. And the nature of our timing is one which I cannot comment on at this point in time. And I can only -- what I can commit is and reiterate is our commitment to reaching a solution, and once again, to brief the market as soon as we are there. And for me, personally, it would be important that you do not interpret anything from my inability to comment. This is a live dynamic situation, and there's little I can say. So please do not draw any conclusions from my lack of comment. You had a third question, which is the geographic footprint. And I mean from what we say, I think one can feel also it's not a cast-in-stone principle. But yes, what you see is the market size and the situation in the market probably is slightly more important as you see, also the potential which offers such a larger market than to the smaller countries. But at this point in time, I would not like to comment on any potential transactions on the on the Western Balkans. Thank you.

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

I have 3 of them. Firstly, on loan growth and loan volumes. I think you mentioned that you would expect stable loan volumes in the second half of the year and still some select forthcoming from Central Europe and Southeastern Europe. I was wondering if you could perhaps clarify whether this statement explicitly includes development in Russia, i.e., further decline there and whether this could be offset by continued good momentum in some of the countries. As I think it has been quite clear, you saw a very good development in a number of countries in the first half. Second question is on provisioning. The up to 100 basis point cost of risk for this year, could you help us understand to what extent that's been driven or that will be driven by continued provisioning in Ukraine and Eastern Europe, generally versus the rest of the group, i.e., what would be the envisaged cost of risk run rate in the group ex-Eastern Europe? And the third question is perhaps a technical one. I noticed that in the Czech Republic you saw NII declining in the second quarter on a sequential basis. Could you perhaps give us some color on what drove that? That's it.

Thank you for your questions. If I may start with your first question, the loan volumes. We have -- when talking about derisking, we have achieved quite a lot already in Russia. I mean, I still can confirm that at this point in time, we're not -- given the circumstances, we are not seeking for new business in Russia. So with the runoff -- also the short-term runoff to a larger extent has happened, but there will be further runoffs as well. So yes, there will be weaker loan books, lower loan books in Eastern Europe. And of course everything is then also depending on the -- and we are talking now in local currencies, of course, and FX development makes it more difficult. But there are -- in the other markets, we would be ready to look at it. Two elements one has to consider. Of course, the rate hikes which have happened has brought the interest now at really a level where people are thinking twice. So to what extent they take additional loans. I think it's fair to say that many customers have frontloaded their loan demand with the expectation of higher rates. This we saw in the housing, this we saw also with corporates. I think working capital -- of course, customers built up to be less dependent on the supply chain weaknesses. So overall, I think the high inflation and the rate tax, yes, well, they somehow take off the heat and the speed of loan growth. But right, as you indicated, it's in the Eastern Europe where we expect further drops in the loan portfolio. I can also take your third question, the Q2 EUR 7 million. This is an accounting thing. This is rather attributing to last year and the first quarter. So the EUR 7 million rather would better fit to the Q4. It was booked in Q1. And therefore, if you compare Q1 with Q2, so it's a drop of EUR 7 million. But if you take out, then it's exactly a stable number what you had in check in Q1 and in Q2. And I hand over to Hannes.

Talking about the risk costs, it's up to 100 basis points. And if we would exclude entirely Eastern Europe, we -- I would still confirm the 30, 40 basis points with the one other overlay. What is maybe important, and I tried to cover this in my introductory words is that we may not meet necessarily the [indiscernible] EUR 450 million, EUR 480 million when it comes to Russia. But please have in mind that also in Russia we have already allocated over EUR 200 million of stage 2 bookings. Thanks for the question.

And our next question now comes from Gabor Kemeny of Autonomous Research.

Few questions from me. First one, can you comment on the ROE outlook for the business, excluding Russia and Belarus? These 2 are a significant part of your profit. You earlier had asked I think an 11% ROE target for the group. But on the other hand, we now have higher interest rates while Russia and Ukraine is under strategic review. So any comments on that will be useful. And a more specific question on the business excluding, again, Russia and Belarus. Actually, the 20% NII growth guidance here I think assumes flattish or perhaps slightly declining NII dynamics in the second half of the year. Could you comment on what your -- what trends you see there? And my final question is on the gas shock scenario. Thank you for this detailed disclosures on the exposure. Would you be able to comment on the provisioning impact of a potential gas cutoff scenario, please?

Thank you, Gabor, for your questions. Let me start with the first one. I mean you have seen throughout our reporting that separating the Russian Belarus business on single information, single reporting lines is complex enough on assuming what is the impact of a deconsolidation and then running it without even more so. So please accept that at this point in time we would not go deeper into a potential ROE analysis. But yes, if we have a change in the geographic footprint, we of course will update you. I mean your assumption to the NII growth is correct. So here we assume that in the second half, probably it will be slightly lower than in the first half. So I don't know, 3%, 4% less than what we had in the first half. I somehow have been a former -- in an earlier answer already addressed this, I think at least I did with maybe some -- what we see is in some business areas the pressure on the margin on the assets reduced demand in some areas, maybe a shift in the deposit structure as central banks now are taking out some liquidity of some of the markets which I would also expect leads to more competition on the liability side with increasing pricing and lower margins. So this is in a nutshell the reasons why we are slightly lower in our forecast in the second half. Hannes, please?

Gabor, the way I understood is that you would be curious about the risk cost impact when it comes to the gas stop scenario. From the starting point, what we must not forget is that we have very strong corporate balance sheets from 2021, but also Q1 and Q2 in 2022 have been really -- if you listen to the corporate announcement for this energy-intensive industry, has been very strong. So what we have done, and just to reiterate this, one is that this is a pure desktop approach at the inception. So I mean you simulate what would happen if you see this gas drop, and still they get some gas allocated within the variable stock. This would lead for some of the companies to an EBITDA impact of some 20% to up to 40%. And of course, this is causing a multiple of downgrades. This was the desktop part. And we assume that the missing turnover would be compensated and would be financed. And then we were talking to the clients on a bottom-up level within those industries and asking what are their mitigation plans, what they could do. And we must not forget that some of these clients are either producing in regions which are not so dependent of the gas delivered from Russia or even delivering or producing [indiscernible] is in Canada or is it U.S. This helped us also to better understand and to get the feeling on the total impact. What is also important before then finally, an increasing retention and excitement. What is also important, the number I mentioned to you is that it does not include any sudden defaults because this is difficult to digest. So pure desktop simulation of ratings, this would be some EUR 50 million to EUR 70 million. And then you can make your choice, you could add another EUR 50 million, if you say well. But the model was not complete, and therefore there was a sudden default a surprise candidate. This would be the best what we can do at this moment. But as said, this means that still certain stock and capacities didn't be made available also for the industry. Hope this helps.

That's very comprehensive. So you are saying EUR 100 million to EUR 120 million potentially?

No, EUR 50 million pure desktop. And if you had another EUR 50 million for a southern default, which we were not capable to catch with the desktop approach, I think this would be as of today a fair assumption.

And our next question now comes from Mehmet Sevim of JPMorgan.

Just 2 questions from me remaining, please. So first of all, on the NII in Hungary, it seems that it's evolving a bit faster on the back of the rate increases so far than the original guidance you provided in the third quarter of last year. Is that a correct assumption? And if so, have there been any structural changes in the balance sheet? And can you provide an update on your current sensitivity, please? And secondly, there have been quite a lot of talk about a potential introduction of Czech bank tax. So do you have any views on that? Has there been any communication to you? And where do you see the probability of that being introduced? And lastly, on the 85 basis points of negative impact, potential negative impact on CET1 by the year-end, which you say is inorganic and other impacts. Can you please provide any color on what that is? And also, can I confirm that all the numbers assume a stable ruble from here onwards?

Well, if I may start with the first part on the NII improving faster than previously Q3 guidance. We must not forget, and I'm now looking at the interest rates we have seen in 2022 -- 2021 when talking about Hungary, this is 2.4%. And we must not forget when we talk about guidance and sensitivity, this is for small changes. But now we are talking an interest rate environment where the key rate is on 10.75. So therefore, you could have seen a dynamic which is a little bit -- which is a little bit more pronounced because, as said, what we usually share with you is some 50, maybe 100 basis point changes. But of course, if you see changes of 8% plus, 8 percentage points plus, this is extremely pronounced. So the balance sheet structure by itself did not yet change. But this is the main reason why Q3 guidance could have been a little bit more cautious than what we can see and experience now.

Yes, when talking about rumors on bank tax, I think in Czechia, I do not want to add additional rumors. So we hope that the constructive environment, what we have seen in the Czech Republic over the many years will continue. And I think there is some chance that this government is focusing on the strength of the historic developments in the market. And this -- if they would look at this, I hope that then they avoid a bank tax. But in these days, if you ask me, can you exclude it at 100%? Probably not, but I still hope that it will not come at all. When talking about the 85.

When you're talking about the 85 basis points on the others, since many parts are coming from my area of responsibility, let me start with this one. So we have still certain dynamics assumed on the op risk development, which must be considered out of the Polish zloty litigations. That's the first one. Then we have are still some methodological leftovers when it comes to the IRP repair, which would sum up to EUR 1.4 billion, and the one other rating spillover. We're also introducing an updating FI rating model which would be another EUR 0.6 billion of RWAs. And finally, not to forget, since current derivative markets would not give us the capacity to establish ruble hedging, this would also contribute to the eating up of the CET1 capacity.

We can now take our next question from Riccardo Rovere of Mediobanca.

3, 4 questions, if I may. The first one is, I think, Hannes -- Hannes, when you give us or actually reiterate the guidance of roughly 100 basis points risk cost with Russia, or 30 to 40 basis points without Russia, that -- those are the same numbers that you provide, gave us immediately at the time of Q1, so when the gas shortage was not topic as hot as it is today. So I was wondering whether those 2 numbers do include somehow, at least in a scenario probability weighted, whatever, the possibility of gas being halted, the flow of gas being halted from Russia. The second question I have is for -- and again, I think it's for Hannes again. NII in Czech Republic is down a bit, few millions of euros, but it's down. I was wondering what is driving that. And if the run rate that we see today is -- can be considered one that we're going to see over the next few quarters or maybe are we going to see more pressure on deposits and so maybe NII will continue going down in Czech Republic rather that up? And then I have a couple of questions for Johann. Your capital is strong, has gone to roughly 13.2%, 13.3% fully loaded. Before, previously, you mentioned that you're accruing a dividend but the final decisions will be taken only at year-end and so on. What kind of level of capital, given the risk, the uncertainty will live in -- at what level of capital would you be confident to say that the dividend should be something for granted? And then I have another question which is on Russia again. In the previous call you mentioned at the moment the only possible option you have is to progressively wind down the operations over there. If I understand it correctly, the book in ruble in local currency is down kind of 20% on a quarterly basis. And this is the run rate that you mentioned at some point, but I was thinking that was on an annual basis. So can you really reduce the book by roughly 20% in a quarter or in 6 months, meaning that the operations over there could be 0 into 3 years if you are not -- provided you're not able to sell it?

Well, Riccardo, thanks for participating, and thanks for your detailed questions, giving me the opportunity to go a little bit deeper and share our way of thinking. And of course, given the situation, we all know that it was a -- I would claim a very educated guess, but not -- of course, you have to adjust. And this is what I tried to share with you at the beginning. So if we again start with the different contributors to the different risk provisions. So the first guidance on Russia was based on this expected loss of EUR 120 million. I was saying, well, times 4 is EUR 480 million. And some of you picked it up, which I appreciated very much, but I always had in mind that this EUR 480 million would come over a 2-years period. Sanctions do need a certain period of time that they really completely materialize and unfolding the intended things what they should deliver. So the EUR 480 million now we already have booked in the first half year EUR 266 million. And I rather would say given the high commodity prices that the EUR 480 million will not be seen by all what we know as of today for the full year. And I rather would believe that we could finish year-end for Russia with some EUR 350 million. First thing. Second thing, I was talking about Ukraine, where we had an expected loss of some EUR 25 million to EUR 30 million. This is even more difficult. We were assuming a marketable between 8x, maybe even more, but this is the best what we were capable to assume at this period of time. And in cash equivalent, we were talking about EUR 200 million. This EUR 200 million, you can already see that we have [ suggested ] this in our financial in the first half year. And usually, if we have so difficult topics, I always try it from different angles to approach those topics. And I was also sharing with you that local colleagues have used the sort of a traffic light approach with red and green and amber approach. And in total, we have some EUR 350 million, EUR 400 million within the red zone. So we believe that this EUR 300 million, EUR 350 million within this red zone would also say, yes, this EUR 200 million makes a lot of sense. And please bear in mind that in the lately most affected region on the very eastern part of Ukraine, Donetsk, Lugansk, our credit exposure was already more or less at 0 before the heavy war was -- or that this region was exposed to this heavy attack from Russia. So this is what we claimed at this time for Ukraine, and this is what is already being adjusted in our books. And of course, with a sufficient high uncertainty to be still taking into consideration. I was talking when we last time had the opportunity exchange our views, I was talking for another about EUR 200 million for the remaining part of the portfolio. And this would give us, I would claim, more than sufficient space to also be well-prepared within the given guidance of the 100 basis points to cover the one or other more euro more needed when it comes to the gas supply shock. I was sharing with you this pure stylist approach when it comes to the gas shock. But of course, we did not, because if you would go with this EUR 50 million of the impact to customers, you would at the same time believe that macroeconomic assumption must be adjusted end and end. So but my current thinking is that the remaining cash amounts to the 100 basis points could cover quite a strong inflow also out of this gas supply shock. So this is the thinking and hopefully it helps too for making up your own mind. Riccardo, thank you.

Thank you, Riccardo. I will take over your other questions, which are easier, I guess, Czech Republic NII, I have mentioned already that we had this one-off in Q1, which was something which was left over positively, if I may say so, from last year. So this is a flat development. When looking at the further development, my way of thinking in the Czech Republic is that we might expect an increased competition on liabilities. And I would assume this comes in a segmented approach, meaning that some of the deposits might be the target of competition and others less so. And -- I mean, we can only watch the competition, what's going on here, probably -- that means probably. We are not the leader in this development. But of course, like in any other market, if it would happen, we might need to react. And then the margin pressure would come from deposits, and I would expect less so from the current account. Of course, there are some business models with banks, which are built on accounts and deposits. And for them, of course probably this is the first period in their life to really make money, and we will see how they try to capture these opportunities. So this is our thinking on the NII in the Czech Republic. To your third question, CET1. Here I would confirm the 13% as a midterm target. I tried to mention that in these days we want to structure the group in a way that even if the deconsolidation of Russia would happen, then this should go without any significant harm on the CET1 ratio. So if you look at the overall ratio, you have to consider that as well. But 13% is the target where we consider dividend. To be very clear, if we would build up CET1 in Russia, this would then not be used as part of the dividend potential as anyhow there is a dividend ban in Russia. When talking about derisking, I think the 22% quarter-on-quarter was a tremendous positive result. All the other -- I can say or I did say that maybe some -- to a smaller extent, some additional derisking might go on till the end of the year. But I -- as I said, we will explore all the options what we have, and I do not want to pick up one of the potential options and be more explicit at this point in time. Thank you for your understanding.

Our next question comes from Alan Webborn of Societe General.

Just a quick question on the dynamics in the Group Corporates & Markets division in the second quarter. Could you talk a little bit about the drivers there in terms of activity and in the context of, I think what you're suggesting is that the activity in the second half of the year in some areas is going to be -- in some ways is going to be weaker. And how do you see that business progressing as we go through the second half. So what have the drivers been? And how do you think they will change as we go through the remainder of the year? I also note that there was a, I think a 30 bps provision charge in the second quarter, whereas you had write-backs in the first quarter. Could you just tell me a little bit about that? I think you also suggested that in terms of the ECB rate rise, you wouldn't see any impact in the Group Corporates & Markets area. Was that correct? And would that change if we actually start to see higher and more positive rates further underlying from the ECB?

Well, I would start the answer. So what we do see in the Group Corporate & Markets is that there is still a good flow of credit demand when it comes to working capital financing. And I think this is for obvious reasons because of course on the one hand side all the input materials have increased in pricing, and this was also one of the reasons why we have seen more demand when it comes to working capital financing. The second one is, and I'm sure Alan you're closely following, is that also some of the corporates rather now turn again back to bank financing than for looking whether or not they can adapt the capital markets. So this is what we have seen on the Group Corporates & Markets activities. And of course, we made also still use of the higher credit spreads in deploying our repo portfolio. When thinking about H2, of course, I think this is very much dependent on the current dynamics. But still -- and if you also look to the different surveys, what you can see, credit standards might be a little bit more strict. But if the transaction is well structured and we leave the period of covenant or no covenant structures, we still are more than eager to look at it. So this is the thing what I would see. The other thing is what we also -- and you have it implicitly anyway included in your question that some of the corporates, of course, the ECB hike was more than [indiscernible]. You could even say it was preannounced. But of course, it was just [indiscernible] and not preannounced. So therefore, some of the corporates still we are making use of a little bit longer-term financing and refinancing their current loans outstanding. Well, Johann will maybe talk about the second point in addition. But on the third one, group corporate market, 30 basis points of risk cost versus release in Q1. Well, here you have seen 2 things. The one is that we made use of our overlays -- and secondly, we had in the second quarter one default, and we were adding a little bit of additional overlays in the group corporate markets, but it was mainly was one bigger counterpart where we have seen a default and we allocated individual loan loss provisions. Johann?

Thank you, Hannes. So on your other question, ECB rate hikes, what would be the impact. I think we shared with you that in the past, when we had negative rates, we charged fees on larger deposits. So okay, now this period of charging fees is gone. So this is the reason also why one would not see a positive impact or a substantial positive impact one the Corporates & Markets area on the deposits. Yes, in the short term, I wouldn't see any significant improvement here because of the sensitivity of the deposits, what you have there since -- rate sensitivity of the deposits. Maybe if we are at the peak, then when we are closer to the peak, it could come, but this is for sure not this year.

We can take our next question from [indiscernible] of KBW.

I have a, first a clarification on your comments around the impact of the gas stress scenario on the cost of risk. And then a few questions on NII. But so your comments on the gas scenario, I understood, and please correct me if I'm wrong, that it could imply EUR 50 million of cost of risk based on the desktop analysis and another EUR 50 million for any sudden defaults. If I understood correctly, that strikes me as quite a low number, especially when I compare to the numbers given by Erste yesterday, where they talked about a cost of risk of 90 basis points. I understand the footprint is quite different. But yes, if you could comment on that would be interesting. And then on the NII, can you just -- you used to give sensitivity for -- to rate changes. So if we have further ECB rate hikes, what could be the impact, another 50 basis points, what would be the impact on NII. But also for some of the CE countries, if we have rates going down in Czechia, Hungary, Romania, what could be the impact on NII for the group?

If I may start. Yes, you understood right. The EUR 50 million from the desktop analysis and EUR 50 million for another unforeseen default. But please bear in mind that this is, as said, a desktop analysis based on very strong assumption. And the strong assumption is that this energy-intensive industries would still at least prorate being served with gas. Secondly, this EUR 50 million plus EUR 50 million does not incorporate any second and third round effect because most likely you would see it with a very strong deterioration on the macroeconomic side. And you would then of course increase your macro provisions in the case of need. So the EUR 50 million plus EUR 50 million, what I was sharing with you is isolated on this desktop analysis. But please bear in mind, while others are still forecasting and thinking, we already have booked EUR 243 million when it comes to inflation in energy. So the EUR 50 million plus EUR 50 million in my statement, I would claim that they are already nicely or at least partly covered on this EUR 243 million. But you understood right, but this is just again to share with you our basic and very vital and important assumption on which you base your desktop analysis. At the same time, EUR 243 million of overlays that already have been booked in the second quarter. Thanks for the question.

When talking about NII sensitivity from ECB rate hikes, we have shared with you that also in the presentation that mainly in Slovakia, this is EUR 20 million and the next rate hike. Maybe it's a little bit more as we are moving away from the negative rates and customers might share with us something, let's see, as I outlined before what the competition would react. I think when talking about the other direction now that obviously you think that not only that the Czech National Bank is done, but would soon start in a decreasing cycle. So here, 50 basis points in terms of sensitivity, depending also on repricing to what extent could mean minus 10%, maybe a little bit more. And of course the reason why this is a relatively difficult question is that you are aware that we have model books for deposits and current accounts. And of course, this is the time where receiver positions might be built up and maturities might be a little bit longer. So I think here we might need to update you call by call so that you get a good insight in the development. Thank you.

And our next question comes from Alexei Lougovtsov of Bank of America.

I wanted to ask about your Ukrainian subsidiary. Do you see a risk that maybe you will need to recapitalize it out of the headquarters? Presently you have EUR 2 billion of loans and you already created EUR 200 million of provisions since the first half. And given the capital is in the region of EUR 400 million then loan book can deteriorate further, possibly creating a capital need. And also outside of the loan book, do you see a risk for the assets, for example government bonds of Ukraine presently trade at EUR 0.20 in the euro, do you own government bonds there? And also, is there a risk of some government encouraged or mandated loan moratoria in Ukraine. We're going to see already that one territory is controlled by Russia, the local new administration announced debt forgiveness. So do you see a [indiscernible] do something symmetrical to help businesses to get through the tough times. And as a result, maybe your loan book deteriorates further and create capital needs.

Well, Alex, you raised so many questions. I'll try to cover the part when it comes to the government bond and on risks and assets. What we see is that, unfortunately, many of the schemes which you would need in such a situation already have been tested in 2014, but also in 2020. So the moratoria was also one of the things on a broader scale which we tried to offer. But you of course are talking about a full governmental full moratoria on government debt. And I think here we have to be very careful if we're talking about debt being issued abroad and local currency. So, so far we have we have seen that local bonds are being honored without any big thing. And if we see a restructuring and an adjustment of terms, this would rather go with foreign currency bonds. The other one is on the other risks on the loan book, maybe if we also have the opportunity to share with you that I think we are very proud and also pleased that we were capable also to provide some agri financing and we were also financing the planting season, which now can be harvested. Is it a different kind of [ wheat ], second point. Third point is on recapitalization. Please bear in mind, what you can see is the dividend from last year, we were not allowed that this is being distributed to the head office. The second one is the credit quality, given the country rating anyway had a very, very low credit rating, meaning it has a very higher risk weight and capital consumption and earning capacity, is still available to [ Ukraine ]. But I'm not pretending that in this environment to perform banking services is, by all means, an easy job. In these days, we provide agri financing, we provide daily liquidity management to our corporates and to our retail customers. And at the same time, we see a very high ambition of the retail clients, but also of the corporate clients to honor their obligation.

Thank you, Hannes. So -- go ahead, Alexei, go ahead.

Go ahead. Go ahead. Yes, please, go head.

I just wanted to reiterate. So I think Hannes confirmed that under these circumstances, so far I think first the bank is well capitalized. Having in mind what risk costs already have been booked. Second, I can only reiterate, I think a moratoria on government bonds would be a real issue on the local ones, on the domestic ones for all banks. So here then this would totally change the picture. But I'm really confident that the -- yes, the responsible ones in the national bank, they have a very deep understanding, as Hannes said, how their local banking market works and what banks can afford and what should not be put on their shoulders. And so, I think they would -- and as Hannes said, they have an understanding that banks are needed as we were participating in the agro finance. So I think all the employees of banks are doing a fantastic job in difficult times. And so I would not expect that additional problems are imposed to them. So there is probably a balanced way to how to deal with this situation. I think for many, the discussion of foreign bonds did not come as a surprise as at least people tell me one should not expect that from outside the country money is flowing in from some institution and then just to be used to be -- used to repay other debts. So this is probably the situation, if you like it or not. But I assume they want to keep their local banking system running as it does quite well now in these days.

I see. And then just a quick follow-up. EUR 201 million equivalent of provisions were taken just for the loan book or also for some other assets where you saw deterioration?

For the loan books only, Alexei.

My colleagues told me, sorry, to continue that there is -- or there might be also questions in the chat. And one is thoughts about buybacks. You know that we have the authorization by the shareholders to potentially buy back up to 10%. We have not started the process which would -- one need for such an activity. Sorry, moderator that I interrupted you, please continue with the moderation. Thank you.

We'll take our next question now from Luis Garrido Regalado of Bank of America.

I have 3, please. Number one, you stated on Page 94 of the report there was a temporary shortfall of the combined capital buffer requirement at consolidated level as of the end of May. Can you tell us what the capital ratio was at that point? And what drove that breach? And secondly, can you give us an update on the gross exposure cross-border to each of Russia, Belarus and Ukraine. And apologies if I've missed it. And the final question, can you give us a bit of detail or reassurance on how the dividend upstreaming from Russia might work? Do you assume the profits generated by the Russian business can be upstreamed to the Austrian parent? And what are the consequences if this is not possible.

Yes. So it was a very temporary issue because the requirements of the regular are rather strict. So you have to consider all the negative development. So if you book loan provisions whatsoever, but you cannot use the profit. And this was the reason why there was on this -- in this 1 month a shortfall of course with the many activities what you have seen, this is now something of historical evidence. When talking about the cross-border exposure to Russia, I think we have in the slide deck for Russia, we have it. So this is down to 300-something, let me look at up, 330. And in addition to that, we have 140 or so counter-guarantee for our subsidiary. And I would say the other Ukraine -- maybe Hannes would go for that. He has it already in his…

I have it already in my chat, colleagues are working heavily. So on the -- the other one is the Belarus, the net exposure is EUR 30 million. And when talking about Ukraine, the net exposure is some EUR 70 million.

And to your question of the potential upstreaming of dividends from Russia. It's in these days not possible. And the other consequences of this is that the capital position, the capital ratio of Russia is improving potentially every day. So a very resilient bank. The good thing is that this increase, as we've shown on a consolidated level also supports the RWA growth, which came from Russia. So now they are contributing positively again. So it's -- one can say very good resilient bank on a stand-alone and not the burden at all to the parent. Currently we have no indication that the dividend ban is lifted at all. And then probably one has to consider that we as an owner are located in an unfriendly country. So it's unclear even if the dividend ban would be lifted, if then that amount would be parked on an [ S account ] or if it really could be delivered to us. We do not plan with a dividend in the near future.

And sorry, can I just follow up on 2 of these points. And maybe sorry, it's a very innocent question. Are the profits then in Russia available to service your debt holders at the consolidated group at all as a result of this ban or not? And then just on the cross-border exposures, you give the net numbers, can you give us an indication of the gross figures as well?

I don't know if I fully understood your question, but maybe try to a potential complex question a simple answer. So the Russians -- so the Raiffeisen Russia has till now approvals to honor all their liability requirements with RBI. And this so far included also the AT1 and the Tier 2 what we have. So the coupon so far has been serviced. I hope this was the right understanding of your question and the answer. And Hannes is looking up the gross amount as well.

Johann should follow up with you.

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

Yes. Thank you very much, moderator. It was a pleasure to work with you. Thank you to all participants. As Hannes said at the beginning of his speech, we hope that after the -- we are relatively at the end of this earnings season so that you now can start your holidays. I hope you can enjoy it, but thank you that you spent the afternoon with us. We wish you all the best. Thank you, and goodbye.

You may now disconnect.

Thank you.