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

Good afternoon, ladies and gentlemen, and welcome to the Q2 2023 Results Conference Call of Raiffeisen Bank International. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Johann Strobl, Chief Executive Officer. Please go ahead, sir.

Thank you very much. Ladies and gentlemen, welcome to our Q2 2023 update. Thank you for taking the time today. I am pleased to report stable operating trends, stable deposit volumes and stable capital ratios. Asset quality trends remain excellent, and Hannes will talk about all the details in a few minutes. As expected, loan growth continues to be very subdued, while the high level of provisions in Poland are the unusual and disappointing development in the quarter. We will go through each of these points in the following slides. But let me first address a few of the other topics, which I'm sure you are interested in. Regarding our options in Russia, first of all, we continue to engage in the many -- with the many regulatory authorities as we seek to either sell or spin off the Russian business, and we are as committed as ever before to reaching a solution. In our last call, we mentioned 30th September as the earliest possible date for the spin-off and as of today, this appears unlikely. We will continue to work on this option now aiming for the end of December as a spin-off date. The sales process is equally still on the table, of course, and there is a little more I can add today. Remaining in Russia, but on an unrelated note, the intragroup subordinated instruments, which were issued by our Russian subsidiary and placed in Vienna were repaid in full. The Central Bank of Russia approved the early call and repayment of these instruments based on the very high CET1 ratio of our subsidiary there. Regarding the OFAC request for information, I can confirm that we have produced all the information requested, and we have already started to answer some of the clarification requests based on what we have submitted and of course, on the many reviews of our compliance setup in recent years. I'm convinced that our systems are robust, and we will fully satisfy the request from OFAC. When looking at the results, including Russia and Belarus, we have earned EUR 1.2 billion in the first half of the year with a very high headline contribution for these 2 countries. I believe it is worth taking look, however. Due to the weakening of the ruble FX rate, Russia's total contribution to group equity is actually negative this year. The large negative FX move, which goes through OCI more than offset the headline profit reported in Russia. Excluding Russia and Belarus, we can report a consolidated profit of about EUR 500 million and the return on equity of 7.6%. This ROE below, is below our full year guidance of 10%, and it includes the bulk of the governmental measures and contributions, which are booked in Q1 as well as the much higher-than-expected provisions for litigations in Poland. The high provisions in Poland followed a negative European Court of Justice decision in June, which has led to a surge in new cases in our model, both observed and expected. The capital ratio for the group, excluding Russia improved to 13.9%, which I will discuss in a few minutes. Moving to my next slide. Loans to customers are flat year-to-date, which will not come as a surprise, I guess. If you recall that the loan growth in Q1 was largely driven by short-term business and repos, which was largely reversed in Q2. Core revenues, on the other hand, continue to be very resilient, and we have slightly increased our guidance for NII and fee income. OpEx are up in Q2, largely reflecting a combination of wage increases and vacation allowance bookings. Moving to Slide 6 and taking a closer look at NII and fees. Excluding Russia and Belarus, NII improved 4% in the quarter with increases in group capital end markets in our key CE and SEE markets. Generally, what I can say is that we're still seeing some benefits from higher euro rates, not least in the countries outside the euro zone where we have very stable deposits. In the CEE currencies, we do see some deposit repricing in Hungary and in Romania. And in Czechia, our net interest margin has stabilized. We can now guide for 2023 NII, excluding Russia and Belarus of somewhere between EUR 3.8 billion and EUR 4 billion. Fees and commission income are down slightly in the quarter. Again, looking at the ex Russia, Belarus view and this is largely driven by a drop in group corporates and markets. And here, we see a reduction in Russia related business such as payments, clearing and FX and is also having an impact on the head office in extraordinary fee businesses, that we earned in Russia over the past 5 quarters or so was also somehow benefiting in Vienna here, and this is now reverting to the pre-war trend. While the business here in Vienna was down, we continue to see a decent NFCI growth in our key CE and SCE markets. In Russia, we continue to see a drop in fee income, which is both a reflection of our efforts to reduce specific activities there and a sharply lower euro ruble rate. Full year guidance for NFCI, excluding Russia and Belarus is slightly increased to EUR 1.8 billion. Moving to the next slide, balance sheet development. I'm now in Slide 7. We look at loans and deposits. And as I mentioned before, loan growth very muted again, very much as expected. You will recall that Q1 loan growth was largely driven by short-term and repo business in head office, and this was reversed in Q2. Retail lending has slowed noticeably in particular, mortgages and corporate volumes are pretty flat. On the deposit side, we've seen increase in CE and SEE, where is in head office, we saw further reductions in the very short-term price-sensitive deposits. These deposits have no value to us from a liquidity perspective. And considering our very comfortable liquidity position, we prefer not to pay up for this. And this brings me to my next slide where we take a closer look at liquidity, which is Slide 8. And here, I'm very happy to report that liquidity is very good. Our coverage ratio and the NSFR are excellent as always. And each of our individual units are solid. Head office, as you know, is wholesale funded and does not accept retail deposits. The ratios here are equally strong. And as I mentioned to you last time, we run a very conservation runoff scenario when we stress our liquidity. If you assume 100% outflow on all liabilities, including, of course, all deposits over the next 12 months, we will still be very liquid. Last quarter, we reported over EUR 1 billion of excess liquidity after 12 months in this extreme simulation and in this quarter, the result has increased to around EUR 2 billion. Yes. As I said last time, I don't think that you can have a more conservative approach to manage your liquidity position. I'm coming now to Slide 9. What you see here is a stable CET1 ratio. We had a couple of -- to some extent, FX related negative impact, and these were compensated by the retained earnings of 58 basis points. To remind you on the lower part of this slide, the earmarked EUR 0.80 per share CET1, which are 27 basis points in CET1 are deducted, of course, from this regulatory capital. And what I also have to mention is this is a transitional number, we benefit from the IFRS 9 by some basis points. Coming to the next slide, which is the outlook. So here, we say on total group, we expect to be above 16%. And you see the drivers which are retained earnings, which are on the negative side, some RWA increases. We expect a small loan growth, but also we expect higher market and operational risk-driven RWAs. We have a positive impact from the FX, which is based on our rate forecast. And then we have some inorganic effects, which net should be positive. Since while we share very harsh simulation, which is a price book zero deconsolidation of our Russian entity. And we have set a target to be above 13.5%, which actually is -- at the end of June, it would have been at 13.9%. The basic assumptions are EUR 4 billion of IFRS equity and EUR 14.5 billion of RWAs, which are for clarification, are not only the RWAs in Russia, but also on head office level, some RWAs for the market risk for the structural position. What is not included in the 13.9% is a potential upside from the operational risk. Currently, we have a 40 bps impact from the operational risk because of the good income situation in Russia. And here, in the case of deconsolidation, it would be in the hand of the ECB if they would [ align ] an immediate impact on that or the standard phased out approach. Yes. I think the next Slide 12 is more for your documentation, as you are all aware of the various requirements, what we have and the forecast of additional requirements until end of the years to be used by early next year. I would move to the next Slide 13, which is some information on the MREL requirements and the funding plan, in RBI AG, we currently have a solid 14.6% MREL ratio, before the details, what you see here. And what I can say is that this of course, is a result of the fundings, what we did earlier this year. We consider in the course of this year, senior non-preferred issuance to maintain the loss absorbing capacity and support credit ratings. When looking at other members of the group, what you see is that most of the countries, Czech, Slovakia, Hungary and Croatia are above the requirements for this year and Romania still has a little while to go there. One update on Russia. Here, I have to make you aware that, of course, as we throw out the report in euros, you see a further reduction on loans to customers year-to-date. But the large part of this minus 21% comes, of course, from the ruble devaluation against the euro. The net cross-border exposure was reduced further. You might remember, we had on 1st of March last year, EUR 600 million, we are now down to EUR 170 million. And what I explained from the loans to customers, what you see here as well when we discuss the RWA impact in Russia under IFRS. Here, you see a bigger part comes from the FX impact from the reduction. When looking at the bank in Russia, you see a very, very strong bank with CET1 ratio of 13% pro forma and a significant buffer which in absolute terms would be EUR 3 billion above the minimum requirement and also the liquidity ratio with an LCR close to 400% is very strong, which is not a surprise when you look at the loan deposit ratio, which is down to 42%. We have seen -- coming now to the outlook. We have seen a slowdown in Europe in the first half of the year with Hungary and Czechia entering into recession. Recovery will come in the second half of the year. We see mainly the manufacturing industries, which suffer especially those countries which have close relationships to the German partners whereas in the southern part, where tourism is significantly more important, we see a relatively positive development. Inflation and high interest rates have an impact on household demand. So we see a slowdown. But on the other hand, what we can also report and which is a very good information is that the unemployment numbers are still very low. And this is, I think, overall, very good for consumption but also for our risk costs. And in Russia, we see an L-shaped stagnation scenario with a rebound in '23 driven by some fiscal measures. Yes, on 16, you see our inflation report on these countries and also what we expect in the key rate developments, it's easy to say that with the exception of Serbia, we expect that we have seen the peak already. And those countries, which started earlier have very high key rates we expect already this year a reduction, what you can see here. This brings me to Slide 17. The guidance for this year. I have mentioned it in the introduction net interest income, somewhere between EUR 3.8 billion and EUR 4 billion, fee and commission on EUR 1.8 billion. This is the group excluding Russia and Belarus. On total group, this would be EUR 5.3 billion to EUR 5.4 billion and fee and commission income EUR 3.2 billion to EUR 3.4 billion. Small loan growth in the non-Russian Belarus area. OpEx around EUR 3.1 billion or EUR 4 million, respectively. Low risk costs. Profitability at around 10% on the let's call it, the core group and then the total group, rather 17% and the CET1 ratio, I have mentioned already, above 13.5% and 16%, respectively. And with this, I hand over to Hannes.

Johann, thank you. Good afternoon, ladies and gentlemen. Thank you for joining us today. Following this call, and maybe after a few other earnings calls, I hope you enjoy your summer holidays. I will be brief this afternoon with relatively straightforward developments in the second quarter. I'm sure you have seen it, asset quality remains very good, and we are still not seeing any pickup in instruments and defaults. Accordingly, the risk costs in the quarter are very low. For the core of the group, 4 basis points or EUR 50 million, driven by small incremental overlay bookings, while for the group, including Russia and Belarus, we actually saw net releases. This is the result of overlays being released in Russia in line with exposure reduction in the country. Regarding overlays, we now have a level of EUR 865 million. As mentioned, we released some in Russia and booked a small amount in the core of the group. You recall from our Q1 call, we conducted an internal stress test on our commercial real estate portfolio. This exercise confirmed that our provisions in Austria and group corporate markets are adequate, and we took a few extra provisions in Czech Republic and Hungary. Also in the first half of the year, we participated in the EBA stress test for which the results are announced on Friday. This process is always a very demanding one, and I'm very proud of the way my colleagues have delivered all the calculation in data on short notice. A big thank you to my colleagues who have executed on this EBA stress test. The outcome for RBI is very satisfactory. Our capital depletion in the adverse scenario is 360 basis points below the average of the European banks and more importantly, the outcome, if you exclude Russia, is broadly unchanged using similar assumptions. You also will have noticed that both Moody's and S&P affirmed our ratings this quarter, in fact, Moody's even upgraded RBI Group. Putting together the stress test and the rating information confirm that our business model and balance sheets are extremely strong. Finally, as just mentioned by Johann, we have updated parts of our guidance for 2023, and this includes some changes for the risk cost expectations. For the group, including Russia and Belarus, we can now guide by around 60 basis points. While for the core, excluding those 2 countries, we expect up to 45 basis points. Keep in mind that, of course, the core includes Ukrainian focusing solely on group capital markets Central Europe and Southeastern Europe, we expect around 30 basis points of risk costs this year. As I promised to be brief, I have tried my best. Let's now run through the slides and more interestingly we'll move on to the Q&A. I would now move on to the Page 20, where you can see the details of changes in the due course of IFRS 9 provisions in the second quarter. So Stage 1, Stage 2 increase mainly comes from Ukraine and Czech Republic, a little bit also from group corporate and markets then we have seen some small releases, you see in the section on overlays as I have announced that there was a strong reduction of EUR 45 million, maybe as a background information, usually, we try to deploy the concept of overlays in a manner that whenever we see exposure reduction that we have to and that we can release on a pro rata basis also the allocated provisions, which leads then finally to a release of provisions of EUR 42 million in the second quarter. I'm on Page 21. And if you look at the RWA development, we have finished year-end quarter end, 31st of March with EUR 98.6 billion. And the first half year, we have finished with EUR 99.2 billion. What are the biggest changes? The one is the inorganic effect we have updated our rating models on the FI side and specialized lending. And at the same time, we also have seen a pronounced FX impact of EUR 1.7 billion, leading then finally to RWAs of EUR 99.2 billion. I'm already on Page 22, and I want to give you an update on the Poland Swiss franc situation. So we have currently cumulative stock of provisions when it comes to litigation provisions of almost EUR 1.2 billion. So you can see that in the first half year, we have increased this provision level by another EUR 400 million. If you also consider, what is our capital consumption from credit risk RWAs and impairments, we would have a current CET1 equivalent coverage of EUR 1.5 billion. This EUR 1.2 billion of level of litigation provisions is around about 63% of the outstanding gross exposure. Well, Page 23, I would just highlight the NPE ratios per segment and with the respective coverage. But as I said, I'm aiming for being very brief and being more curious about your questions.

[Operator Instructions]. Our first question comes from Mehmet Sevim with JPMorgan.

I'll have 3 questions. Hopefully, they should all be easy. First one on Polish CHF provisions. The coverage has reached a significant level now, as you also mentioned during the presentation. So how would you see the provisions evolve from here over the coming quarters and years any color would be helpful. And secondly, just on your cost momentum, I'd like to, if possible, understand the quarterly moves better so what's driving the 10% growth quarter-on-quarter at the group level? And if I look at the cost growth, excluding Russia and Belarus, it's 12.5%, but I can't seem to reconcile it from the individual subsidiaries. So any color would be helpful maybe also with regards to your upgraded or higher cost guidance for the full year as well. And finally, just on the capital bridge on Page 10. Where you show the target for the full year. Just for me to fully understand the retained earnings impact of 110 basis points. This is for the second half of the year? Or is this for the full year as it says on the slide because obviously, the first half impact already, that would be helpful.

Mehmet, thanks for your questions. When it comes to the Swiss franc provisions for our Polish branch. Well, I think at this stage, we would not expect material further provisions in 2023 to be expected. We have currently coverage of 63%. While, of course, depending on the inflow, we may see here and there a slight higher provisions. And this -- I think this is what is really important to observe. So if in Q3, we would see another pronounced inflow. Of course, we would adjust accordingly. But basically, we believe that we have a good coverage achieved up to now. As said, maybe a bit higher still to be expected in Q3, Q4.

Thank you, Hannes. I'll take the other questions. I think what is most important, if you look at the comparison Q1 to Q2, what you have to be aware is that especially in head office, there came additional so that the core wage increases, which came based on the inflation, what we had in the year before came in, in the beginning of the second quarter, which is impact there, it's a little bit above EUR 30 million. And then what we have in the other administrative expenses of course, there, we also have seen partly some inflation adjustments on the services we buy, but then there are significant costs which are related on our activities around finding a solution for Russia. And when we look at the coming quarters, as I said, in some countries, these legs of the inflation in 2022 of the 2022 inflation will now materialize. And yes, I do not exclude that here and there are some more and it's difficult to say, depending on the development of our Russian activities, so not the activities in Russia, but finding a solution for the Russian entity might add additional costs where I cannot give at this point in time, a guidance. And yes, for the year-end, as we said on group level, we expect EUR 3.9 billion to EUR 4 billion of costs. When talking about the capital bridge, some additional information. Yes, I think the one part is relatively clear, which is we add the profit, what we have in the outlook, we have this payout ratio, which we use as we have not set a specific dividend policy, which is around 17%, which, of course, is deducted already in half year and will be deducted also for the full year. And then we have, as I said, a small loan growth assumed, which is 2% or so, which translate then in a small amount of organic RWAs. What is more important is that some additional RWAs will come from the market and op risk RWAs, which might be around EUR 3 billion on group level and without Russia EUR 1 billion and of course, the OCI impact from especially the ruble exposure, the FX development. Here, we have a forecast that we assume and non-appreciation compared to the low levels what we have, which should bring plus maybe EUR 300 million something and then there are some further, let's call it, opportunities in the inorganic RWA. So the one is the famous Article 500, which is sovereign bonds in foreign currency, which had been during the pandemia relatively 0 then reversed and I understand that there are now discussion to reverse the reverse. And then we are working since long for increasing the scope for retail loans, especially here in Austria, our building society, which we hope will get the approval in the second half of the year, which will also be positive. So these are the -- under the other reported inorganic elements. Thank you for your question.

Our next question comes from Gabor Kemeny with Autonomous.

A few questions from me, please. Firstly, on Russia. Yes. I assume that pushing out the possible timing of the divestment is related to the issues, complexities around the regulatory approvals. What is your level of confidence that you will be able to secure these regulatory approvals by the end of this year. And to your mind, how do the sale and the spin-off compare from a perspective of operational complexity. That's the first issue. The second one would be if you could please remind us about your sensitivities to interest rate cuts in various markets. Yes, I will leave there. Thank you.

Yes, very, very difficult question. And the phase where we are in is currently an informal exploration of a potential approval. Here, I say we are more advanced in the sale than in the spin-off part. Also, when we now ask how confident I am then, I can say that this informal phase takes a little bit longer than I originally or at the beginning, I would have expected and usually, this simply for me is -- I take this as an indication that it might be a little bit more difficult and complex than we would like to see. Without giving you -- or I cannot -- it would be pure speculation, why? It can also be that Russian authorities have so many other topics that it's still delayed. But of course, this is the one who we expect an information, it rather -- I'd rather tend to that it's not a straightforward process anymore and I think still we would get more information in the course of the next couple of weeks. At least this is what we expect from -- and from that perspective, I would say in the -- at this point in time, it seems that the spinoff there are the one or the other additional question which makes it even more complex than the direct sales. Coming to your second question, which is the sensitivity of the NII to interest rate cuts. Yes, I think in Czechia that's a very low double-digit impact, if we assume a 50 basis point. Yes, in Hungary, mid-single digits and in Romania, maybe also a higher single-digit impact what we have -- what we could expect from the 50 basis point sensitivity calculus. Thank you.

Our next question comes from Benoit Petrarque with Kepler.

So the first question is on the exit scenario. Do you think this year also a scenario where nothing will happen? Do you see any body language or tone of voice indicating that the recent counterparts wants to do nothing eventually. And I also wanted to check if there's any read across from the Carlsberg, Danone nationalization case. I guess know, but just wanted to check with you. Second question is on the net interest income. I think for the rest of the year, you indicate a bit of a softer trend but I was trying to also understand kind of the trend for 2024. I guess it's a bit more complex to estimate, but I just wanted to have your view on that. And also what you think about rate cut for 2024 on your forecast, how much impact that could have on net interest income? And the third question is actually more on the dividend side. When do you expect the approval for the EUR 0.80? And then also, I assume that you accrued EUR 0.50, which could suggest that you will go for euro per share dividend on full year 2023, which will imply roughly speaking, 30% payout ratio. So is this kind of level a good level to think about, say, the future payout ratio for the core business. Thank you.

Yes. Thank you for your questions. I think I tried in my answer before to outline that currently, it's in the hand of the many authorities where we need an approval and it's -- we're still in this informal phase, and it's difficult to add here, however, what we said is that -- and we mentioned that we are in a readjustment of the business in Russia. So these adjustments are on the way. And you have seen it already in the numbers and of course, this will continue for a while. I have to say all the information I have on the 2 cases, what you have mentioned is only what is available in public media, I don't have any additional insight. So it would be very much a guessing which would not add any contribution to the current situation. And to your knowledge, I think when the -- I think in the -- when coming to your second question, the guidance on the net interest income. I think it's from the numbers, from the range what we gave, I think it's in combination with the half year results, it's easy to see the softer trend what we expect as -- maybe I should say it. Of course, it comes from the -- the loan low demand is that we cannot add something significantly to the loan book, which would support the NII. Second, what we see and the explanation simply is that in the current situation, we see significantly reduced new business in corporates, mainly in the mid to long-term investment loans and in the retail sector for many reasons, high rates, uncertainty many other topics why we see significantly reduced demand in all the markets or in almost all the markets in the mortgage area. So this -- these are the main 2 reasons on the liability side, it's the restructuring. We see more and more customers moving money from their current account to higher rated -- higher rate products like savings accounts and term deposits. This is an ongoing trend. I think it's too early to see when this trend stops and when from the perspective of the customer that the balance is reached on how they want to structure their own assets. So maybe for '24, it's a little bit too early to give further guidance. And to your third question, indeed, your assumptions are correct. What we have so far -- but this is, as I said, the 2023 is not the dividend policy per se, but it's rather the methodology, which we use which is given by the European Central Bank. And here again, it -- as you are aware, the current situation is, for us still, let's say, with a couple of uncertainties. So technically, of course, we would need an extraordinary shareholder meeting for any dividend payment and we would take more weeks to come to a final decision on that. Thank you.

Our next question comes from Máté Nemes with UBS.

I had 2 questions, please. The first one is on risk or risk overlays to be specific. I was wondering if you could talk about your approach to these risk overlays and usage of these or reversal of them in the second half of the year and next year. I currently notice that ex Russian, Belarus, those overlays still went up in the second quarter, notwithstanding of the releases in individual countries. So I'm just wondering in light of the 45 bps cost of risk guidance this year, how would you approach those overlays? And the second question is just going back to a potential exit deconsolidation in Russia. I was wondering if you could give us a sense of your talks, the ECB and regulator but there's such a process would have any issues with regards to the timing, i.e., the deconsolidation on the equity side and RWAs, i.e., would this have to be wrapped up within the same quarter or fairly close to each other. Or you sense that there could be some, let's say, leniency from the regulators part.

If I may start with the risk cost questions and Máté thanks for raising this question. When we talk about risk overlays, compared to some competitors, we really talk about overlays. So this is not macro, this is not anything else. This is really risk overlays. And just to remind ourselves, the total of EUR 865 million is decomposed of EUR 364 million allocated to the core of the group, then we have another EUR 439 million when it comes to Russia and Belarus. And as I said in my introduction, of course, Ukraine belongs to the core just because the amount is a little bit bigger. Ukraine separately shown here with EUR 62 million. Well, when it comes to the usage, I think for Russia and Belarus we would make use of them when the -- out of the geopolitical situation, there is the need that suddenly these loans would default. And what was always important, that's the way on how we have utilized this approach on the post model adjustment and the specific risk factors is that whenever the exposure is being reduced, we would also automatically on a pro rata basis decreased the PMA. That's the first thing. On the group, the EUR 364 million they would mainly cover inflation, as also last time I talked to you regarding interest rate sensitive industries like commercial real estate. So whenever we would see that a loan is being rebate, we would reduce pro rata. On the other hand side, if the loan is being moved into Stage 3, we would, of course, also make use of the stage of this post model adjustment and release accordingly. So that's our way of thinking when it comes to the entire topic of PMAs.

And to your second question, the regulatory approval process and the impact. Yes, we are, of course, very concerned we discussed that any sale of the Russian entity at the given parameters would come with a significant loss and the deconsolidation of the RWAs only. So the loss comes with designing the deconsolidation of the RWAs with the closing. We had a discussion with regulators where they indicated, at least this is my reading that it would be good if it would happen within the same quarter and that's -- yes, that's their thought behind. Of course, given the many signals what we hear, I would assume that European regulators would try to be as fast -- as quick as possible. Otherwise, we would be disappointed. Is it doable in one quarter? We hope so with a good preparation before, but it's unclear. On the other hand, we now have a good capital situation also. So I think what was worrisome last year is at least we built up some buffer for that situation as well. So what you have seen in my part of the presentation. Thank you.

We'll go next to Johannes Thormann with HSBC.

Two questions from my side. First of all, on the muted or typical loan growth, can you quantify how much is really a lack of demand and how much is self-inflicted pain or how you ever want to call it via the tightening of credit standards where you refrained from giving certain loans, as you mentioned as well. And regarding your NPEs, the drop to 1.5% is surely a strong achievement at what is a realistic level and your view of NPEs in the next years. I guess, 5 years ago, nobody expected that RBI could come that low? And then what is a realistic level of through-the-cycle risk costs?

Well, if I may start with the second question where you have built a bridge to the NPE and that NPEs are very low. Thanks for recognizing, yes, this was a lot of work, and I think we have managed well, not immediately selling as many have expected, but really also try to get a good recovery in the interest of our shareholders. Well, I would believe, looking at the current forward-looking indicators, PMAs and so on and so forth and the still higher cost, higher interest rate that we could see interest rates -- sorry, risk cost going up slightly. But at the same time, we must not forget that we have seen the last 2, 3 years, very benign risk costs at all. For me, this would be too early to give you a detailed the arrival on risk costs for the next year. But as I said, we have seen in the last 2, 3 years, very, very, very low risk costs. And you have seen that we usually have also used the situation to build up some of this post model adjustment to be well prepared if the cycle is turning. NPE at 1.5% is maybe difficult to sustain over a very long period but if it would now increase by some 50 basis points or 60 basis points, I would not mind either. So I think this is what comes into my mind when considering -- regarding the NPE dynamic. And as you rightfully said, of course, we would try to avoid by all means that we go back to this NPE level of 5% because it comes quite with a big regulatory effort. Johann?

Talking about loan growth. I think -- of course, it's a mixed situation. Let me start with the demand. And for example, with mortgage business, of course, what we see in addition to higher interest rates, what we see is that also the supply of new flats and whatever has slowed down in a number of markets. And this is also one element, which is the reason why demand is low. Of course, you might say if we compare the -- what we see today new volumes, what we have seen before the pandemia or at least 8 quarters ago, then one have to say that in a couple of markets, you also have refinancing and refinancing happens if rates are low, but refinancing does not happen in a rising rate environment, it's for everyone, more prudent to stay. So difficult to answer. And if you talk about self-restraint, then I would assume you would compare our productivity or our activities to the overall development in the market, and we exclude of course, Eastern Europe in this way of thinking than I would say, at least maybe the numbers are not so good. I can't see many markets where we have lost market share. So I think it's rather what we see also from market participants. And of course, in a rising rate environment. Yes, the asset margin on mortgages had been very, very small -- very little and so this adds, of course, to the self-restrained activity. If this improves because of adjustments, then maybe one might see more. But overall, this is the way I see the picture.

We'll go next to Riccardo Rovere with Mediobanca.

Two or three, if I may. First of all, let -- I just want a clarification on the spin-off. Johann, did you say before that at the moment, this spin-off seems to be more complicated than a straight sale. I'm not sure I got it correctly. I just want to have a confirmation on this. The second question I have is, when I look at the slide where you showed the Russian business at the back of your pack of slides. The loan book is almost as basically halved in a year around EUR 13 billion to kind of EUR 7 billion, certainly, there might eventually be some FX effect too. Is this a speed? Can the speed continue? And you have also reduced the book by roughly EUR 1 billion in a quarter. Is this a speed that can be kept meaning maybe 1 year down the road 1.5 years, 2 years down the road, if nothing happens on the spin-off on the straight sale, you can just wind down the operations without doing anything on top of that as an extraordinary actions. So the question is how long would it take to basically bring up sale to 0? Is what we have seen so far reliable for the future. And the other question I have is on the Czech attack, which I've seen you booked some EUR 16 million just out of curiosity here. And that's all you need to book for the year? And is this going to stay for 2024 to more or less of the -- sorry, maybe I should know the answer, but just what I admitted I lost a little bit of track on that.

Yes. To your first question, Riccardo the -- sorry, if I was unprecise. I -- what I wanted to express is that in this informal, I can't say application, informal or exchange of ideas with authorities, I wanted to say, my perception is that, we are a little bit more advanced with the sale than with the spin-off. This is what I want to say and does not necessarily mean that it's indeed more complex, but it's more advanced in the one than in the other. So this is to your first question. To the second the loan book, I think what we have to be aware is that the reduction this year came from the ruble development. So what we reported now is minus 20%. The biggest part came from the FX development as it was reported in euro. Recently, the reduction was relatively small. So I think the bigger part of this -- so the short term, which simply run-off happened already last year. Of course, we will have further runoffs and this will reduce the business. I think also that recently increased Central Bank rate will slow down a little bit the process, because refinancing at a higher rate is difficult. And I have no idea how much incentives this would need. So I think your linearization or you -- of course, you use more complex models than linear models, but I would not do, but we will work on and find out what more we can achieve, as this is the fallback version to -- and this is what I understand, what many, many other international banks are doing not considering a sale or a spin-off, but rather reducing the business, and this is also one, let's say, the third option what we explore currently. And your third question was about the tax. In the windfall tax in the Czech Republic, yes, indeed, we -- there are a couple of developments, which are -- which we believe significantly reduces the tax base for the special tax, and we have booked already, I think, EUR 7 million. So probably in the second half of the year, there should not be a big impact. As yes, there had been many developments like also the significantly increased risk -- sorry, interest expenses, which were -- had a negative impact on the development of the bank, but therefore, also a positive impact on the again, negative impact -- potential negative impact of the windfall tax. Thank you, Riccardo.

Our next question comes from Krishnendra Dubey with Barclays.

I have 3. The first one is on the fees. I look at Slide #6, which is -- in which you clearly lay out the top 3 businesses for your fee. From that, I just wanted to understand, if I look at the 3 components that you have given in the slide, I see a considerable slowdown in the run rate for the future, for the group ex the Russia, Belarus CE business. Could you help us understand the drivers for your guidance of EUR 1.8 billion? Second question is on the cost of risk. For the group ex Russia, Belarus, I see a EUR 65 million of provisions till now. And on the slide, Hannes has guided to a EUR 420 million -- up to EUR 420 million of risk guidance for the year, which is pretty similar to the last year. So are there any overlays assumption built-in for Ukraine or is there something that I'm missing on? And lastly, a simple question on the dividend, I guess. You are expecting the spin-off process to end by end of December. So should we expect the dividend that was -- that could have been supposed to be paid in this year could be delayed?

Starting with your first question, if I -- so at the beginning, the -- I think the quality was not so good. But with the support of my colleagues, I assume now that your first question was about the slowdown in NFCI and your question, what to expect in the second half of the year? So yes, the numbers were stated EUR 1.8 billion for full year without the Russia and Belarus and the reasons -- and the slowdown, of course, on the total group level. Yes, one element you are aware that if you look through the various components of the NFCI that lending always contribute and with this assumption that we have significantly reduced the loan growth, this is negative for the NFCI. Of course, I think I have mentioned that with the adjustment of the foreign currency payments -- sorry, the foreign trade payments reduced. This is a significant element we see coming with this also reduced FX business in Russia and of course, also that the securities business is significantly lower. So on the total group level, it's the reduced activities in Russia. I mean, on the other hand, one might expect that inflation supports fee volumes to some extent, this is the case probably not everywhere we can pass on this. And we should not forget that the Croatia joined the euro. And of course, in this tourism season, significantly lower amount simply come from that. Concerning your third question, which what I understood, you linked the question to spin-off by the end of the year. Yes, technically, it's still possible. I think finance definitely would prefer for reducing complexity to have a spin-off rather at the end of November. So this means if you look at the full process, we have another 2 months to clarify all the requirements, what we have before we officially start and bring it to an end. Yes, I think not from our numbers from the overall perception our activities in Russia are perceived as risky, and this is one element of the limitations, what we have with dividend payouts. And of course, if there is anything positive when talking about the slightly delayed spin-off then this would be a good opportunity. And here, you have right to not only decide on a spin-off, but also on a dividend in the same extraordinary shareholder meeting. Thank you for your questions.

Krishnendra, if I may take the question on the risk cost guidance. Yes, indeed, you're right. We have EUR 65 million allocated to risk costs while giving a guidance of EUR 420 million, including, of course, Ukraine. Well, on Ukraine, our current our current reading of the situation would be that we would not plan additional overlays, but we might need here and there the one-order Stage 3 bookings. So that's the way when we share our thinking when it comes to the risk cost dynamics in Ukraine, that's the one. And for the remaining means group capital markets, Southeastern Europe and Central Eastern Europe, we give a guidance -- a risk cost guidance of around about EUR 300 million. Here, you could see the one-order Stage 3 bookings. And as usually, when I do the [ derival ] of risk cost guidance, I always include one or two surprise cases when thinking about risk cost guidance, and we still may need the one other basis points for additional overlay bookings. Thank you for the questions.

We'll move next to Hugo Cruz with KBW.

Just wanted to ask again about the solution for Russia. Do you have the sales solution? Do you have a potential buyer lined up? Or you're still just talking about potential transaction scenarios with the authorities? And then when you're looking at the sale versus spinoff option and you're looking at what you want to do, do you want to have a solution that provides you with full deconsolidation no future exposure to Russia? Or are you looking at a solution that keeps you with some exposure to potentially capture some future potential optionality from a potential end of the war. What would you like to do, is it cut off all ties with Russia forever? Or are you looking to keep some future optionality?

Indeed, it's not that we are only working here. Indeed, there is interest out of Russia on acquiring the bank. So this I can confirm. Second, yes, deconsolidation is the main route, what we're going. This is why we look at sale and spin-off. And within that, and what I understood is you also asked is there -- might there be something in between at least this is the way I understood your question, where I would say, could it be that you will not end up with a full sale, but being I don't know let's say forced to keep a minority share, we have but this can also be the case. So I don't know, we'll see. And the point is, which I want to stress again, we are working with all our efforts, but the outcome is not in our hands because of the many approvals in this geopolitically difficult situation. This is -- so we do not -- we cannot choose.

[Operator Instructions].

Yes. Maybe operator, there, what I learned from my colleagues. There was a question in the chat, which was an update on the OFAC request for information, and yes, I can confirm that we have produced. So we had an agreement, which type of information are requested. We had an understanding. We have produced, we have submitted that. We have -- we are in a process of a clarification of some of the information we provide and we feel -- we are confident what we always have said that also after these questions that our systems are robust and that I assume that OFAC will be satisfied with what we have delivered so far. But I can't give you any time line on -- I mean it's an intensive process and quite a lot of questions. So I have no idea when this exercise might come to an end.

Our next question comes from Iuliana Golub with Goldman Sachs.

I have 2 questions, please. First, could I ask about the ruble hedge. Given the value of the hedge has reduced materially, you effectively now have the Russian equity unhedged apart from the EUR 175 million of notional vested [ development of ] your subsidiary, if I'm not mistaken. So can I just ask -- or could you please help us understand what will the impact on the group equity be from the unhedged position in the Russian equity assuming delay in the deconsolidation of the subsidiary? And my second question would be on the Swiss franc loans outstanding. What proportion of those are expected to be subject to litigation? And could you please talk a little bit about the developments that you have seen since negative ECJ ruling in June?

Well, I would maybe start Iuliana, because your questions come in always [Audio Gap] indicated when talking about the Swiss franc loan, many clients also being motivated and inspired by marketing campaigns by [indiscernible] firms that they would like to see us. Currently, we have -- usually, we have an inflow of around about 200 to 250 new cases per month. And in June, we have seen a more pronounced inflow of clients litigating us. So this was around about 450. And that was the reason why I said, well, there was a peak, and there was a spike but we would assume that in Q3, we would also have been a slowdown. So the main impact of the European Court of Justice ruling was that we have seen a more pronounced inflow of new legal cases, and I also gave you the numbers, when it comes to this one. At the same time, I believe this information is now being well digested and consumed in the market, and this would give -- is the basis for my assumption that you would now see a reduction of this from this elevated level to a more, through the cycle level. Johann?

Yes. Thank you, Hannes. To the first question, Ruble euro hedge, the market is what it is. So it's impossible from the head office perspective to build up hedges. So the -- I can confirm the number, but this is within the Russian entity and not here. The second part of your question, the sensitivity of FX development. I mean I take a simple one, and I hope you accept if I say a 5% devaluation, which is given what we have seen this year, a very modest one, but it's a sensitivity, of course, would have a CET1 impact by 12 basis points. So we lose, of course, easy if we have EUR 4 billion of IFRS equity, we lose EUR 200 million. On the other hand, the RWA reduction would be some EUR 500 million. So this is this 12 basis points. That the hedge is so small that it would take off just 1 basis point. So net then you would have 11 basis points. Thank you for your question.

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

Thank you very much to all of you. As Hannes said, we wish you hopefully soon a start of a very good holiday season after the earnings season, and we hope to that you're soon back for further news. Thank you.

Thank you. Good bye.

Ladies and gentlemen, you may now disconnect.