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

Good afternoon, ladies and gentlemen, and welcome to the Preliminary Results 2022 Conference Call of Raiffeisen Bank International. [Operator Instructions] At this time, I'd like to turn the conference over to Mr. Johann Strobl, Chief Executive Officer.

Thank you very much for the kind introduction. Ladies and gentlemen, welcome to our call. It's about the preliminary 2022 results. Thank you for taking the time out of your busy schedule today. The results, as you have seen, are very good. This includes, of course, an unusually high contribution from Russia with many distortions caused by the war. I believe, however, that the underlying trends and the performance of the rest of the bank is also very good. The overall consolidated profit is around EUR 3.6 billion for an ROI of nearly 27%. The underlying profit, if you adjust for Russia/Belarus and the one-time gain on the sale of Bulgaria is around EUR 982 million and an ROE of 8.7%. Please keep in mind that this includes EUR 448 million of provisions for litigation in Poland and EUR 253 million of risk costs. This gives you an idea of the very good earning capacity of our core businesses. As we will discuss in a minute, our CET1 ratio improved to 16% consolidated and 14% if we assume a full write-off of our Russian business. If we move to the next slide, then you'll see that our loan book has grown nicely in Central and Southeastern Europe, while we had reduced significantly in local currency terms in Russia and Belarus. Core revenues have improved nicely as well, in particular for the business, excluding Russia and Belarus. Our adjusted cost-to-income ratio of 50% is also very satisfactory. Let me move to the next slide. Let's first discuss the dividend. On the one hand, the very good results across the group in 2022 and the strength of our balance sheet mean that we are able to pay a dividend. The proposed EUR 0.80 per share or roughly 26% of our normalized earnings. On the other hand, considering the uncertainty ahead, we need to be prudent and we'll wait for more visibility. We have made a lot of progress on the CET1 ratio. And as we stabilize around the current levels, we will be in a better position to distribute. Until the decision to distribute is made, we will deduct the EUR 0.80 per share from our capital ratio as this amount is earmarked for our shareholders. As mentioned, our ability to propose a dividend is also a reflection of our very strong balance sheet. Net of the proposed EUR 0.80 per share, we have strengthened our CET1 ratio to 16%, and more importantly, improved our CET1 ratio, excluding Russia, to 14%. At the same time, we have grown the loan book in our key markets, digested the RWA inflation from rating downgrades and other inorganic effects and provisioned conservatively. We have also improved our MREL buffer over the course of the year. I would like to take a minute to highlight the remarkable job our colleagues in Ukraine have done and the excellent performance of our bank there. First, they're ensuring business continuity in the early days of the war and again when the country's energy infrastructure came under attach. There was extensive preparation done before the invasion, including for blackout infrastructure such as generators, diesel, power banks. Within weeks, all data and critical systems were successfully moved to the cloud. Most importantly, we experienced no downtime of any consequence. Raiffeisen Bank Ukraine is a major contributor to the banking infrastructure in Ukraine and one of the best performers under these extreme circumstances. The feedback from both customers and authorities alike has been anonymous. Second, Raiffeisen Bank Ukraine has strengthened its capital position, while also taking a very conservative approach to risk costs. The revenue potential of the bank is also intact with a stable customer base and market shares. In fact, amongst the privately-owned banks in Ukraine, we have seen the smallest loan book reduction and we have the highest share of customer assets relative to the balance sheet. In critical industries, we have maintained our lending exposures or even written some new business. Operating income benefited from the high interest rate environment as well as excellent fee business and trading results. This has allowed us to absorb the significant risk cost without showing a loss for the year. More importantly, Raiffeisen Bank Ukraine demonstrated very strict cost discipline, which largely offset the unexpected OpEx pressure caused by the war, such as cloud migration and relocation costs, financial assistance and donations. All in all, I'm very proud of the job done by our management and colleagues at Raiffeisen Bank Ukraine. Let's move to the next slide. As mentioned already on the second slide, we have seen very good growth in core revenues this year, and you can see this on Slide 7. We have had seen both NII and fee income growth for 8 consecutive quarters. In the most recent quarter, we have again seen excellent growth in the core group, excluding Russia and Belarus. We continue to see benefit of higher rates through resilient liability margins, both in euros and domestic currencies. In the Czech Republic, you will have noticed the EUR 38 million drop quarter-on-quarter. Now to a large extent, this is coming from a line shift in revenue recognition on FX derivatives. If we focus on the underlying business trends, we see a small drop in the quarter, around EUR 8 million, which is coming from the deposit mix. We have seen some of the current account volumes moved to savings accounts and term deposits, which of course, have a better yield. Fees and commission income is largely driven by Russia this quarter and elsewhere growth was lower. Looking at the core part of the group, FX business saw lower volumes. And of course, the loan and guarantee line usually tracks the lending volumes, which were also muted in the quarter. Let's move to the next slide. And what you see here is what I have mentioned earlier in the business areas, excluding Russia and Belarus, you saw a nice loan growth by 6% year-on-year. And I think also the deposit growth is very good within the group. I'll leave you with this slide and move to the next one, which is the waterfall of the CET1 ratio development for Q4. And what you see is a significant improvement by more than 130 basis points to 16%. Coming from various areas, a reduction in the loan book, some other credit risk reduced and the market and operational risk. So overall, it's important to have to retain the earnings to be considered negative. We have seen, of course, the FX rate, which happened rather at the year end. And of course, I should mention here, as it stated, the earmark dividend is excluded from the 16%, and you should be also aware that these are numbers from the traditional application of IFRS 9, where the benefit is about 44 basis points. If we now look at the outlook on capital for 2023, so you see our assumptions on organic impact from retained earnings and the RWA increase on the other hand mainly from loan growth, some FX elements in terms of some other regulatory elements what you have also as part of this development, but it should be above 15%. Moving to Slide 11, which is one element to inform you about our double steering approach, dual steering approach. And what you see here is the impact of a deconsolidation scenario in Russia, of course, redress expectedly on the 31st of December '22, we would have landed at 14%. And if we look forward, we will steer the group in a way that for sure we should be above 13.5%, if this would happen. The core numbers, the EUR 4.2 billion of CET1, which would be the consolidated without compensation in this calculation and in RWA deconsolidation of EUR 15.8 billion. Be aware that the subordinated instruments which are held by the group are not deducted in these numbers. So if we wouldn't get any compensation for this as well, this number of 14% would be lower by 30 basis points. On slide -- on the next slide, 12, you see an overview for your convenience for the core numbers on group level and the various MDA triggers, MDA buffer and the available distributable items. I think the numbers speak for themselves. You see the increases in some of the buffers on the right-hand side of this slide. Moving to the next, you see a good improvement. So this 13 -- what you see is a good improvement over the year on our MREL and funding. And you might have also seen that in addition to what we report to year end, we had another MREL eligible issuance at around EUR 1 billion at the beginning just recently in January. If we then move to the next, you see a few information on liquidity and MREL resolution groups. We have this multiple entry point concept. The LCR, very well improved. NSFR, very good. So I think we have in all these aspects very good numbers. And for your information, you see also the upcoming funding needs to meet also in the other resolution groups, the respective requirements. Moving to the next slide, this is the second part of the Russia update. What you have seen is a huge decrease in RWAs, EUR 6.3 billion. Half of it was the FX development and the other elements are reductions in the credit RWAs, but also in the liquidity and the RWAs required for liquidity. And yes, I think what one might also mention here, to give the total view, we have net cross-border risk to Russia of slightly more than EUR 200 million. And as we also reported, our trade finance guarantees to Raiffeisen Bank Russia, which are about EUR 80 million. Of course, with these very good results, the Russian entity is more than well capitalized with the CET1 ratio on local standards by more than 27%, which is an enormous buffer. And also, if you look at the liquidity ratios, the numbers are very strong. Coming to the next slide, which is 16, an updated macro outlook from our own sources, Raiffeisen Research. The basic assumption is that the beginning of the year sees, of course, the slowdown, maybe a shallow recession, but then also some recovery in the course of the year, so that overall, in Central Europe, we expect that the year brings a small growth of about 1%, slightly more as the structure is different, the industry structure is different in Southeastern Europe within on average around 2%. And Austria, 0.5% after the strong 5% growth in 2022. We see a stabilization in Ukraine after the huge drop because of the war by 1/3 in '22, and we see a further decline in Russia by around 4%. Next slide gives you our view on interest rate development and also some flavor on where we expect the inflation will be. It seems if you look here that in some markets, we already have seen the peak of this rate cycle. And in the second half of the year, we already expect the rate decreases like in the Czech Republic and in Hungary, stable development in Romania, Serbia, and the Europe, of course, we see some further increases. Coming to my last slide before I hand over to Hannes. I think here, it's -- I would abstain from a reading exercise. This slide is full of numbers. The best what we can share with you what we expect within this year as this probably might also answer most of your questions already what you usually had. But with this, to Hannes. Hannes, please.

Johann, thank you very much. Good afternoon, ladies and gentlemen. I hope you have had a good start to the year, and thank you for joining us for our first update of 2023. Before we discuss the coming year, however, I would like to spend a minute on where we stand after a challenging year. Johann has mentioned the positive development of our balance sheet, and there is a little for me to add. We finished the year with a non-performing exposure ratio of 1.6%, stable on the year, and again, a very good Stage 3 coverage ratio of 59%. In most of our countries, we saw a few incidences, which allowed us to build up our overlays and post model adjustments. Please bear in mind, we have EUR 729 million of overlays available to us for any risk costs beyond what is already budgeted for the next year. There have been a number of RWA headwinds this year, and I believe we have managed them well. We have been proactive all year in reviewing our exposure in our internal ratings, initially with the war in Eastern Europe, followed by inflation spikes and energy crisis. This has been definitely a very busy year for risk manager. I shared with you some of these portfolio analysis performed during the year. And I'm otherwise satisfied that our portfolio is fully reviewed and up-to-date. Not to forget the bank's liquidity situation, which is excellent, both on the group level and each of our individual countries. While there was some initial volatility in March, this did not last and we have seen consistent liquidity inflow since then. And of course, you're aware of, since I'm not getting tired in repeating, our rating has been confirmed by Moody's and S&P already in March. Focusing on Eastern Europe, I would also like to highlight the very good performance of our -- of Ukrainian colleagues. The cost of risk, unfortunately, reached our initial guidance to year. And yet despite this, the capital situation of our bank in Ukraine is sound. In local currency terms, we have maintained our loan book roughly flat with any luxury attributable to the increase in provisions. We wrote new business during the year, supporting the agriculture sector and related industries. In Russia, we have reduced the loan book for 30% in local currency terms. We will continue to selectively replace corporate exposure with retail exposure. Russia is an example of our active RWA management. And you will recall, of course, the rating downgrades in the liquidity inflows, which led to substantial RWA inflation in the first and second quarter. On the provisioning side, we also came to the upper end of our initial guidance. Here, however, this is largely driven by Stage 1 and Stage 2 bookings. Again, the revenues have more than made up for the risk costs and the capital situation of the Russian bank is well above the regulatory requirements. Now as we look ahead to 2023, we see some relief in otherwise challenging environment for our corporate customers. Many of the post-pandemic tailwinds are now over. The very positive momentum that we saw in 2021 and the first half of the year 2022 is behind us. We were talking about deteriorating consumer confidence. And this usually, of course, comes after certain lagging with economic consequences, which is now anyway, the accepted new reality, but we have a complete new rate environment. What is also important for me to say is that on the other hand, the [ doomsday ] energy scenario have not materialized. Let me move on to the next page, please. What we understood from all your feedbacks that you would appreciate a little bit more color in splitting up our risk cost guidance to the different segments. While on Group Corporates & Markets, CE and SEE, I think the headline would go stagnation or possible slight recession in a combination with higher rates and persistent inflation. As I said, we have now already a stock of overlays of EUR 729 million. And so 2023 might more be focused on Stage 3 bookings. We believe that we could see up to EUR 440 million in the segment mentioned. You may consider this on the upper end. And I would dare to agree, at the same time, please bear in mind the sudden defaults what I'm also usually flagging and this you would most probably find in this segment. The other 2 segments I picked out are more difficult when it comes to risk cost guidance. For Russia/Belarus, of course, it becomes now evident that the sanctions are making the impact. Ongoing recession, especially if commodity prices drop on global growth deceleration. So here, we would believe that risk costs could sum up to somewhere around between EUR 250 million to EUR 270 million. In Ukraine, it goes without saying that this is more than challenging to come up here with any well founded and sound numbers. So we again came up with this EUR 200 million, EUR 220 million. But please bear in mind, if you look at the risk costs from Ukraine, that also here, we have an overlay for extraordinary situations of around about EUR 50 million. Having said this, let me move on to the next page when talking about IFRS 9 provisions. As I said in my summary, total EUR 949 million and big part of it was anyway not in the Stage 3. So mainly in Stage 1 and Stage 2. You can see here all the details, the moves between Stage 1 and 2, adding a little bit on the macro side, on the other hand side, having the capacity to release the one out overlay. And the quarter 4 has been mainly driven by Stage 3 bookings. Having said all this, I'm sure you also have recognized our strong drop on RWAs. If you look at this drop of EUR 10.8 billion, I think you have 3 main buckets. The one is the credit risk RWAs. And here, you have 2 effects. The one that short-term exposure has been reduced. And on the other hand side, also local liquidity placements in Russia have been reduced. And on the other hand side, we have conducted in the quarter 4 some new securitizations and guarantees. The second big part, if you try to explain the EUR 10.8 billion drop in RWAs, comes of course from the FX, which is summing up to EUR 4.4 billion. Op risk, and I will talk about this in a page. We have switched back to the standardized approach. And market risk RWA also have been reduced because we have reduced our USD hedging. Let me move on to one of our big blocks what we also have allocated in our 2022 numbers, and this is about Poland. As you can see on the right-hand side, we have now increased our stock of provisions for litigation to EUR 803 million. And we have added another EUR 262 million for new provisions for litigation in quarter 4. What is important for me is, as I said beforehand, we hand back our advanced measurement approach on the op risk, and therefore, being capable to report reduced volatility when it comes to op risk RWAs. I any way was talking about the NPA and the coverage ratio on my introduction. And so I would stop here my presentation, and we are eager to take your questions.

[Operator Instructions] Our first question comes from Gabor Kemeny with Autonomous Research.

I have a few questions. Firstly, on NII, and particularly, your guidance, your 2023 guidance, excluding Russia and Belarus. I think it implies a pretty significant drop from the Q4 level -- from the Q4 annualized level around 15%, 20%. Would you be able to comment on the outlook here, why you are so cautious or downbeat on NII going into 2023? And a related question to that. If you could elaborate on the Czech NII dynamics, please? Because, yes, it looks like the trend you have been flagging here, increasing share of savings accounts, term deposits, probably sounds like -- more like a trend rather than a one-off. So what are your thoughts about the Czech NII into 2023? And my final question is going to be on Russia and the impact of the sanctions. Not so much against Russia, but I'm asking this on the back of the sanction, the recent sanction, which directly impacted Raiffeisen. So it would be useful to hear your thoughts about Raiffeisen's ability to keep the Russian business in light of the likelihood of potential further sanctions?

I think in a nutshell, as I tried to explain, we -- in some countries, we already assumed that the peak of the rate cycle is now and in the second half of the year we see a declining rate. So this will have some impact on the NII. The second is that we tried to explain that in some countries, the adjustments, so the reallocation of funds on current accounts to term deposits and savings account is still ongoing. So this together explains why we are not so enthusiastic anymore of a further increase in NII. To your question on the Czech development and on this reallocation to the trading result, yes, in the FX derivatives business, I understand there is no one practice in the market, it can be allocated to the NII. So the interest component can be allocated to NII or to the trading risk, trading line. We have chosen the second one. So there was a reallocation to that. And as I said in the speech, so it's -- the net impact is around EUR 8 million, which comes from this shift to other deposit from a current account to the deposits. And so the basic assumption to support you is that at least for now an NII income of around EUR 50 million per month in the Czech Republic. So I hope this covers that. And to your final -- to your third question, the Russian sanctions, on that. Let's look at it from 2 perspectives. So the one is the financial impact. I think here, it's very, very simple. We have a leasing business in Russia, which is outstanding at year end, EUR 360 million around. A bigger part of that is vehicle leasing. But nevertheless, we assume that our customers are not using these vehicles in the territory of Ukraine. And therefore, I think the direct risk of reprocessing or confiscation of these assets, I will assume is very small. In the mid-to-long-term [Technical Difficulty] additional consequences. These sanctions mean, because of course, for the first time an RBI entity is sanctioned and one has to observe and analyze what it could mean. Currently, I can only say, we watch out, we will monitor, we will analyze. As of now, I could not add anything or give you any indication what this would mean. I don't expect that this would cause sanctions by western government entities whatsoever.

Next question is by Mehmet Sevim with JPMorgan.

Maybe if I may follow-up on Gabor's question on the sanctions risk, not necessarily on this one sanction that we saw the day yesterday, the day before. It feels like it's becoming sort of a -- there is a momentum that we're seeing several risks and headlines coming related to your operations in Russia and some of the liabilities that you have there and that you have to follow the rules in Russia, et cetera. Can I ask, is this becoming sort of a liability now? And given the options are quite limited, seemingly is the urgency of finding a solution increasing in your eyes as we enter 2023? So I know it may be a difficult question to answer, but I would appreciate any color that you can give us here. And maybe my second question is on the dividends. When I look at the capital ratios, now we're at 14%, excluding Russia, 16% including it. You recently increased your management target. It seems like you're above all these requirements. So what kind of developments would you expect to see from here to make that decision or at least propose it to EGM at some point later or is it simply just to wait and see how the Russia situation pans out later? And maybe finally on the Polish provisions, you reached quite a good coverage level now with the top-up that you've done in the fourth quarter. How should we think about provisioning from here in Poland in 2023?

Indeed, I can only give a color based on what we observe and expect. So indeed, what we see is some changes. I think the Ukrainians and also the authorities had at the beginning of the war been very vocal that western banks should leave Russia. And what we saw recently is that it seems that some of these they pick up again for whatever reason, I think it's political warrants. As I said before, it's not the financial impact as of now. And I think, yes, the concerns earlier had always been what -- if you just talk about the Ukrainian part of this overall development, then of course, the question is, will there be at some point in time also an impact on the Ukrainian entities or IFRS in Ukraine. Yes, we have to see. I think it's well understood, and we tried to share with you that the bank is -- also we know that there is a huge sector of state-owned banks in Ukraine. I still believe that foreign banks are important for the development of the country. And of course, we hope that this is considered, and I shared with you the positive contributions that the bank delivered to the country. And I hope this is considered when talking about whatever sanctions they might have in mind. But of course, it's a change in the sense that now an entity was sanctioned and not only threatened to be sanctioned. I think in the other part, I think there are spillovers. So there is also here up and downs, but yes, we carefully monitor the, let's say, the social media, exchanges of use on our activities in Russia. And of course, it -- some events make it -- bring it to a further attention. We have had this when moratorias for conscripted soldiers had been discussed in the public. I mean, that's a very small amount in the portfolio. So also in absolute terms, it's very little. But of course, we understand that within Ukraine, this is also a big emotional topic. From the Western part, I think here the governments have a clear view that they want to define in which scope and in which frequency they add sanctions. So I think this is a clear political instrument. And here, we have I think a very good compliance framework and we adhere to. And as Hannes said, also, we are proactively trying to understand what consequences could be. And you see from the numbers that we to a large extent avoided that. So we have this, of course, this emotional political part and what western governments need and want. So I can only assure you that we are working on the assessment of the options what we have. And leaving Russia is one of the options. I am sure you have carefully monitored the recent publications of what we call the Protocol, which states the requirements for a sale of a bank and also the -- what for potential buyers might be of interest is also potential dividends. And I mean, the good thing is it's very clear now. The not so good thing is that, of course, the range is still wide. So the minimum discount what you have is 50%, but it can be substantially higher as well. So it's -- and still, you need -- this is just a frame for a decision, but you also need an improvement. So -- but I can assure you, we are working with quite a lot of manpower and also external advice on that, but we permanently have to adjust. When it comes to the dividend, and you also made the link to Russia, yes, I think it's important to see the development. And as Hannes and I shared with you, we want to keep this high level of CET1 ratio and the good other ratios. I think there might be an option of leaving Russia, which would require for a short period of time, more capital. So what I mean is between the period of IFRS deconsolidation when we would incur a loss and the final regulatory deconsolidation of the RWA. So there might be a period where the impact might be even bigger than deconsolidation with zero rate. So at that point in the zero amount. So at that point, one might be below this 14%. And so this would slightly help as well. And to the dividends, then this simply means that there is a high probability that you shouldn't expect that we have the annual shareholder meeting end of March. You should not expect that we would propose it for that, depending also on some developments, but rather that we would have an extraordinary shareholder meeting in the course of the year. Nevertheless, we wanted to state with that that we want at the right point in time to distribute the dividend to the shareholders.

Yes, I can take the question on the Swiss franc. You raised payment, the 2023 guidance. We would think about that most probably we would need maybe another up to EUR 200 million for the year to come. And I may anyway assume that you're closely following all the different legal steps easy to [indiscernible] and easy [ chair ] rolling to be expected in the end. But this is what we have currently considered in our numbers, the EUR 200 million are being added to the litigation provisions.

Next question is by Mate Nemes with UBS.

I have a couple of questions, please. First one is still on NII. I'm just wondering if you could confirm that you're indeed using a 4% ECB rate forecast for your group NII outlook for 2023. And I think that's what you showed on your macro forecast slide. That's the first one. Second question is Hungarian NII. I think in Q4, you recorded a very strong 22% growth. I saw that there has been healthy growth also on the loan side or the asset side, about 7%. I'm just wondering what's been driving this step change in NII? Is there any one-off here? And the last question is on your cost of risk forecast. I think, Hannes, you mentioned 50 basis point cost of risk outlook for GC&M, Central Europe and Southeastern Europe. Do I understand correctly that that guidance is driven mainly by Stage 3 and does not assume any further overlays to be added on Stage 1 or Stage 2?

Well, let me start with the cost of risk question. Yes, you understood me right. I think we really have now heavily increased our overlay bookings. Just to reference it, this is more than the full year of expected loss, the EUR 700 million. I think this concept served us well in 2020 and also in 2022. Well, of course, if some special situations are coming up, we still might be tempted to have another EUR 1 million here or there allocated to the overlay bookings. So the EUR 440 million, if they would materialize, and I'm really cautious here on this EUR 440 million, we would believe it's either out of migration, but mainly out of the Stage 3. And do not forget the loan book. What I'm talking here about is a quite substantial one. So we're talking about a loan portfolio of around about EUR 90 billion. And out of this EUR 90 billion, we're saying, well, we could see up to EUR 440 million. Those like you know me well, that I'm usually also including one or 2 certain defaults when I do the risk cost guidance anyway. So this is -- yes, you're right, it's Stage 3. And please bear in mind on this EUR 440 million, which I have shared that one or 2 certain defaults are also included. Johann?

Thank you, Hannes, as far as to your NII. So if I start with the Hungarian one, which is very precise, since you were asking for Q4. I think the special phenomenon in Hungary is what you would see is that the central bank rates are high, but the allocation from the current account to other deposits is slow. So it's not that huge, what you might expect. And as the margin is always much better on this current accounts, this was supportive very much. And of course, if you keep then this liquidity in the Central Bank at the deposit rate there, then this supports your margin very well. I think what -- maybe if you can compare to other banks, what might also strike you is when talking about the NII that, yes, that there is a cap on some loan rates, which probably in other banks is because of the structure what they offered compared to what we offered. So fixed versus variable rates indexed loans, this is also different. And so in a nutshell, this was also supportive as the, let's say, the negative part of this government measures was relatively less painful for us than for other banks because of the structure of the loan book. When talking about your question do the Euro, do the CP rate, where we -- yes, we at this point in time we assume that it will move in the course of this year to 4%. And this still comes in steps if you look where we are. So it takes some time to feed through. You shouldn't expect too much positive impact on what we have in the head office. This is to a large extent here so that it is within RBI. It's mainly large corporate customers where you always are around the market rate. So the margin is razor sharp and you gain very little from it. But we have in some network banks a share of euro deposits and here we could get something. So maybe I guess could be that it might have a positive impact of EUR 40 million to EUR 60 million in the course of 2023.

Next question comes from Alan Webborn with Societe Generale.

Just a couple of questions if I may. Firstly, Hannes talked about potentially sort of EUR 200 million plus more provisions on Poland. Now they're taken in other income, aren't they? So are they in your forecast for provisions or are they outside of that? Because you did seem to say that they were taken into account. So could you clarify what you mean by no further legal provisions for Poland in relation to what you said about provisioning? That was the first one. Then secondly on Russia, I think there was a pretty -- 30-odd percent depreciation in Q4 and yet you're -- when we see that and what happened to the loan book and what happened to obviously risk weighted assets as well, and yet the reduction in NII was relatively limited and your fee income again was record. Could you just give us a little bit more detail as to what was going on, what was the levers if you like in the Russian business in Q4 and presumably that is not something that's sustainable. I mean, I understand that we've had a number of quarters of very strong numbers that you're forecasting, a recession in Russia and apparently there's not that much hedging. So could you put a little bit of color on what's actually been going on there? So that was another question. On Ukraine, in terms of provisioning, you're talking about sort of again a few EUR 100 million more provisions they put into the pot for 2023. And yet, you took almost no provisions in Q4 against quite a high operating income. And I wonder what's -- again, what's going on there, why if you need to take so many more provisions for Ukraine next year, didn't you use Q4 as an opportunity to bump them up a little bit? That would also be interesting. Then does the dividend that you're proposing needs to be agreed with the regulator? Has it been agreed in principle or does that happen after you properly propose it, would be also interesting. And finally, do you think that the margins, the net interest margin of the group, excluding Russia and Belarus, will actually be up in 2023?

Yes, I'm not the IFRS guy, but the provisions for Poland is in the other, not in the risk provision of Hannes, but in the other. So when talking about the rouble depreciation and you compare it to the NII of 2022. So if I remember correctly, we had this steep drop in the FX rate only in December. So the -- in the income you have the reporting on the -- I'm looking to my colleagues on the average of the month and the compensation for this you have then in the OCI. So the impact on the OCI was huge and partly of course this is the income. So looking forward of course, we start from a different level and therefore NII and also fee income cannot compare to what we had so far. When talking about not so much the FX impact, but the development on its own, the fee income, so you see some seasonality, some also driven by the various developments around the war and the impact on Russian population. And here this is one driver of fee income as well. But of course, it will have an impact also by the -- from the FX and one should not be as -- you should not consider the very good development of Russia that this will continue from any perspective. So neither from the volume, from the amounts what we have, nor from the very positive FX impact. So this is a different year what we have ahead of us. I mean still the underlying business as of today looks good still but at a different rate level.

Well, Alan, you gave us a lot of question and also about Ukraine, what is our way of thinking when looking at the Q4. Just in Q4 we had in total EUR 73 million of Stage 3. But if you look at the full year, how we have dealt with the war situation in the country, we took the impairment losses early on. As usual, this is our approach, but this is just to reconfirm that we took the impairment through pain and losses early on. And as I said, when talking about the risk cost guidance in Ukraine and when talking about these EUR 200 million which I've flagged, I clearly say, well, this is the most challenging part on the assessment. Bear in mind that we have EUR 50 million of Stage 2 overlay provisions also allocated for a potential blackout scenario. So you see the things what we're discussing here, blackout, non-blackout, I don't know, but the EUR 50 million for the blackout would already be here. And looking at the total portfolio of still EUR 1.6 billion, as I said, we were supporting also the planting season in the Agri business. We still have EUR 1.6 billion of performing loan portfolio available and therefore we thought it's prudent and conservative to have another guidance of EUR 200 million on risk costs. And believe me, every euro we have to spend less in risk costs is a good euro for me as well. Johann?

Thank you, Hannes. To your question of the dividend, of course when we talk about the dividend, we go there, but as you see it, we left it open when it will happen and therefore it then -- when we come to a decision, it would need again a discussion also or an information of the regulator.

Okay, that's great. Just 1 or 2 small follow-up. On -- the overlays in Russia presumably are staying in Russia, so they're not available to do anything else with? That was one. And also on the -- I notice in Russia that you appear to be sort of growing the business. There seem to be about 5% more staff there in Q4 against Q3. I mean, I guess it's being run independently, but I just wondered why you'd be doing that in the current environment?

Well, I will take the first question when it comes to the Russian overlays. Yes, these overlays are being created, booked and built in Russia and they will and shall stay in Russia if they are needed. But at the same time, I think we have been extremely transparent also showing how much of overlays, Alan, have been booked on the remaining RBI Group. And please bear in mind that besides the overlays, we also have heavily increased our Stage 2 bookings when it comes to the macroeconomic adjustment. This was a main driver in the fourth quarter and of course these macroeconomic bookings are available for the entire RBI Group. But yes, you're right, the overlays of the above 300 has been booked and created in Russia and therefore will be available for Russia in the case of need. Johann?

To your question of FTE increase, this is not an increase business growth, it's related to IT. So what you see is that in addition to the sanctions, there are many IT companies are finishing their services to Russian banks. And our bank has to redevelop or develop new systems quite quickly and so this is why we add the additional IT people to -- well, to be fast enough and to be resilient and independent from Western suppliers.

We'll take our next question from Iuliana Golub with Goldman Sachs.

One question on the insurance please. Just regarding your plans for a benchmark Tier 2, is that purely based on the anticipated RWA inflation that you see in 2023, just given that you did a benchmark deal in the fourth quarter of 2022 and you have limited amortization due to few bullet structures near Tier 2 curves, so I was just wondering?

Yes. So we had a pre-funding for -- in October, which for one which is running out now. So I think this should serve us well. I hope I got your question right. But this would answer to the question I understood. Thank you.

The pre-funding in the fourth quarter, so in October, but then you indicate another deal for this year if I understood correctly from the presentation?

So it might be that in the later of the year we will consider one, but not quickly.

We'll take our next -- we'll go next to Andrea Vercellone with BNP Exane.

2 questions and 1 clarification. The first question is on the 7% return on tangible equity target for our guidance for 2023. I understood that that includes EUR 200 million of extra provisions for Swiss farm mortgages in Poland. If it is or not, can you confirm? And also at the denominator…

Yes, Andrea, confirmed.

Okay. At the denominator, what have you used in terms of equity, the current equity of the bank or you have taken out Russia and Belarus given the scenario is without Russia and Belarus? Then can you give us some color on volume growth, the 3% to 5% in 2023, which countries would do better or which geographies would do better? And the clarification is just on the Czech Republic NII, the EUR 30 million. Does that refer to the whole of 2022 or just the quarter, I shall -- is that the new base or the new base is higher because you have taken down EUR 22 million which was for prior quarters?

Yes. Sorry, I interrupted you. The 7% ROE target, the EUR 200 million, as Hannes explained, are included in that. So the denominator is without Russia and Belarus. It's of course, it's always the average of the capital what you have. And then the volume…

Sorry, being the average, you have taken it out at both ends, right?

Yes, on both ends.

Okay, at both ends. Okay.

Yes. Yes, and in Czechia, I understand that this is a great confusion, this reallocation. So that's why we say our base assumption is we start from January with monthly NII in the Czech Republic by EUR 50 million per month. So I hope this clarifies. And the loan development, probably some further shrinking in Eastern Europe. Of course, not at the speed what we had so far because now we are coming more to the longer maturities and then we have in the bigger segment Central Europe, maybe 3% loan growth, something like this 3% to 4%. And in the Southeast Europe, slightly more. So higher single digit.

Next question is by Riccardo Rovere with Mediobanca.

Couple of -- 2, 3 questions if I may. The first one is on Slide 10 where you mentioned 80 basis points of regulatory and inorganic effect on capital. I suppose this is in 2023. Would you mind elaborating a little bit what this refers to? The other question I have is with regard to the overlays, your guidance is -- before the use of overlay in 2023 is there -- how should we think about the use of overlays? Is it possible to use it in 2023 or is sometime given the outlook is something that is eventually postponed for sure to 2024, just to have an idea when you talk to your own -- with your own personnel what kind of discussions you have on this topic? The other question I have is on fee income, looking at what you have reported in Q4, it is a bit difficult to reconcile fee income at around EUR 2.5 billion next year. Do you expect all the business related to FX to basically evaporate? And if that is the case, why should it be given that that stream of revenues has been there now for 3 quarters in a row kind of situation, not exactly changes unfortunately? And the other question I have is on the general on the leverage and the risk weighted assets reduction. Is that something that we can consider as somehow completed or how should we think about you [Technical Difficulty] you seem to be here and that especially Russia?

Yes, to your question with the to Page #10 with the other impacts. So, a couple of elements which we have to mention. So, one is an impact from the transitional benefits, well, we had so far. So this is phasing out. Others are that there is a phase out of the temporary positive treatment of sovereigns. So they had a risk weight of 0. This has increased to 20%. So this was public debt issues in currency of other member states and here we took out the maximum what one can assume. Then there is this EBA repair program where if you have more need for detail question which then has an impact on Romania and Slovakia. Hannes might have additional questions. And yes, some in the financial institutions rating model, there are also some adjustments. So couple of topics which come from that.

Well, Riccardo talking about the overlays and the use of overlays, I know that you're anywhere of how add ons can be released, but just for the big audience. On the one hand side, we could of course, immediately release them if the underlying risk which is currently not being captured in the different models would no longer exist and therefore, we anyway would be obliged to release. The other one is if the risk factor which we have flagged is being captured within the model and/or if the client has migrated into a Stage 3. Maybe one more thoughts to be added what we also tried to, the way how we have created some of the small adjustments and overlays that they are self-consuming. And I will give you an example, I was always talking about our cross-border exposure. And in the due course, whenever we are able to further reduce, we will also release a certain amount of cost model adjustment because we have allocated a certain park booking to this poster, to this cross-border exposure. And whenever we are capable to reduce, we are also able to reduce part of this post model adjustment. Riccardo, thanks for the question.

And to the fee income question, Riccardo, I mean, if you look on total group level, we explained several times that this specific currency management by the Central Bank of course, will not repeat. So this was a strong contributor to the FX income. But even if you take aside this component, then you do remember that there was also in the Western part of the world for a period of time substantial FX business related to rouble. I think we also had a share in these activities and this will not come back again. And then the usual words I expect on total fee income, some assumptions like in the Eastern part, we will see further devaluation in the currency. And if you compare it to 2022, then this also has in Euro amounts a negative impact. And, of course, what I should also not forget is that Croatia now is in the Euro area and of course, the FX business which is still needed for tourism and other activities is substantially smaller. So this on its own might cost us EUR 20 million or so. Did I miss something, Riccardo?

Maybe on the -- on the leverage and how should we think about the balance, the size of the balance sheet of the Russian, especially the Russian operations?

I'm not sure if I got your question right. You see the balance sheet size in Russia, how this might change? I mean, here this is mainly a question of the deposit inflow and the currency development, I would say. So here it's -- this is not driven by the loan book, but it comes from these other elements and here it is difficult to say, some large corporates, they can place their deposits here and there. And then maybe also when it's about foreign currency deposits, then it might be also in pricing issue. So these are price sensitives deposits as well, which are the driver for the balance sheet.

Next question comes from Hugo Cruz with KBW.

Hugo Cruz from KBW here and I have a few questions. In no particular order, first of all, you're accruing dividends or you will accrue dividends for 2023. What will be the accrual mechanism that you're assuming, is there a payout, is it just ex Russia and Belarus on the whole thing? Second, a question on the Polish -- I thought before these results, you didn't have to increase coverage anymore, because you had so much capital allocated against the Polish and Swiss Franc issue. So what made you change your mind about it to decide to increase provisions again? And you gave the guidance of EUR 200 million, does that mean -- that's on the provisions, but should we expect any change to the RWA's allocated against Poland, will that change in 2023? And then final question. We have the EBA stress test coming up. I don't know if you have any comments about the assumptions that the EBA is using or what kind of impact you expect that for Raiffeisen?

Yes, indeed, there is also a dividend accrued for 2023 and it's around maybe a little bit more than what we what we have this year, for this year, so for 2022. And yes, that's the maximum I can say as of today. And I think from this figure, it easily can be assumed that one does not expect an input, if I may say so, a contribution from Russia or Belarus at this point in time.

Well, thank you for your questions Hugo on the Polish zloty. The minor change of the approach are from the [ AMA ] to the standardized approach. I think this is pretty straightforward and we have shared with you how dynamic and how strong the dynamic of the op risk RWA has been, because of each and every league. In provisional bookings, we had to add more and more op risk related RWAs. And the AMA was not capable to serve this and to cover this topic appropriately. The second one the way I understood your question on their increase of provisions, but at the same time having a lower capital RWA coverage. Please bear in mind a couple of thoughts on this one. Whenever we add more of the legal provisions, this of course, is also increasing our coverage when it comes to the legal claim of our counterpart. And the locally deployed risk weight of this 150% when it comes to Swiss Franc financing, of course, keeps on existing. But the op risk RWAs what we have seen out of the AMA have been many -- most of the time are mainly being motivated by this very, very strong dynamic we have seen out of these legal provisions. And because now we have moved back to the standardized approach, the allocation of op risk RWAs towards the specific segment goes across along the cross-income allocation. So this is the main reason why you now would see a lower RWA coverage when talking about Poland. The second or the third question you raised is EBA stress test and our comments on the assumptions what we do have on this one. Yes, we had next to all the many discussions we had in the last couple of days, we deeply looked at the scenarios provided. Well, I think within our guidance and way of thinking and talking to you, I dare to claim that on the FX scenarios and on the energy prices, we would say that they are milder converted what we have considered when talking about our integrated stress test and when sharing our way of thinking with you. But at the same time, when looking at the GDP, unemployment rate, this looks a little bit more pronounced than what we had in top of our mind. And as you're well aware that last time what is the motivation or the narrative has been argued is, well, let's assume the virus would be back and then we would see 2 years of slump in GDP and only the third year would maybe then see a certain recovery. But having said this, this is important. Hugo, at the same time, we have the EUR 729 million of risk overlays, first thing. And not yet having conducted yet the calculation, but I would at least assume that the impact is comparable or higher than with our last test with our last EBA stress test exercise. This would be out of my first talk with my colleagues when looking at the macroeconomic assumptions. For me, it was interesting to see how certain countries have been considered when it comes to valuation drops in terms of real estate. So this is interesting how the country's spirit is looking like. So this would be my first assessment and not to spoil conference call, I would stop here. Thank you, Hugo, for your question.

We'll go next to Robert Brzoza with PKO BP Securities.

I know, I mean, it's getting quite late. So quickly, looking at the changes of the equity and regulatory capital quarter to quarter, has there been anything else except for the FX impact behind? And second, there has been already a couple of questions on the fee line development going forward, like lesser demand for hedging, et cetera. But looking at Russia, specifically, are you aware perhaps of any coming legislation that could affect profitability of the sector in general there? I'm referring here to the, for example, budgetary situation, funding for war in Ukraine, which might require some spatial sort of war economy with negative impacts spilling over, for example, on to the banking sector. To your knowledge, has any such potential plans or drafts been already taken or thought about on the ground there?

Let's start with the second one. It's a short answer, which is no, I'm not aware of any developments till now. I'm not the real insight in Russia. But given the history, what they have, I would not expect that they go for such things. And the first question was the FX impact on the -- in Q4, I think here we have -- I think the answer should be on Page 9, I guess it's 78 basis points, which was negative. So the last of these elements in the waterfall. It's Page 9, 78 basis points.

Next question is by Tobias Lukesch with Kepler Cheuvreux.

I would like to touch back on the NII. With regards to the deposit beta, could you maybe share with us what you're currently seeing in the individual countries and also what your forecast is, your expectation for a deposit beta, we know, it's all often kind of 20% to 30%, with many European banks? And secondly, again, touching on the question and the first question actually from Gabor with regards to the 15% to 20% decline of NII if we kind of extrapolate the Q4 result. Could you maybe give an indication that makes you explain well with the Czech Republic and so on, but how much of that potential EUR 600 million to EUR 800 million decline -- could be transferred actually to the trading line? Is it EUR 100 million to EUR 200 million you see basically on the other line? And I think that's it.

Beta is a difficult one. I spent some time with my people. And at the end of the day, they told me please tell me what is the beta and I was somehow struggling. So we rather -- the intention is to give you and we tried here and there to give you some sensitivity on the -- driven by the key rate developments. And yes, as I said before, there may be Czechia flat of -- flat development, maybe slightly negative with the minus EUR 8 million, what you have seen in Q4 is some indicator of what might go on when you have the structural shift in the liabilities. In the NII, if the Czech is irritating you, that's why we try to say simply take the EUR 50 million as a starting point. The EUR 38 million, this was only a Czech issue and the [ third ] million built up in the first 3 quarters. And we changed it in the fourth quarter. So it's not the quarterly jump or whatsoever. So it's reallocation of that. And I would need to figure out a little bit more on your annualized Q4 that there are some factors in. So maybe the team could come back after the call and give you a break up on what we have. If this is okay for you, Tobias.

It would be great.

Next question is by Ellie Dann with Morgan Stanley.

Sorry, if I've missed this already, but I haven't heard any plans for AT1 issuance in your presentation [Technical Difficulty] AT1 bucket sales, but do you have plans to call the AT1 in June? And would the regulator let you call without prefinancing?

Yes, indeed Ellie, we might come -- no, I'm sorry, I was still, because you -- I was a little bit distracted by your question if it was already answered. The question before was the Tier 2, where I said we will come in later of the year. But you were talking about the AT1. So sorry for creating this confusion. I think what you shall say here is you know that the rate has been adjusted in the coupon has been adjusted. So what we can say is, we cannot comment on upcoming call decisions at this point in time, but you should be aware that we are committed to replacing the non-call bond with a new bond, subject to the economics and spreads of the refinancing and here, this was my -- where I said, yes. We have seen some coupon adjustments which you're anyhow aware. Thank you for your question.

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

Thank you for participating. Wish you a good afternoon. Bye-bye.

Goodbye, colleagues. Bye.

You may now disconnect.