Erste Group Bank AG
Q4 2021 Earnings Call Transcript

Published: 28 Feb 2022

Operator:

Good day, and welcome to the Erste Group Bank AG Preliminary Results 2021 Conference Call. Today's conference is being recorded. Now, I would like to turn the conference over to Mr. Thomas Sommerauer. Please go ahead, sir.
Thomas Sommerauer:

Thank you very much, operator, and good morning to everybody from Vienna. Today's call will be hosted by Bernhard Spalt, Chief Executive Officer of Erste Group; Stefan Dorfler, Chief Financial Officer of Erste Group; and Alexandra Habeler-Drabek, Chief Risk Officer of Erste Group. As is customary, they will lead you through a brief presentation highlighting the achievements of the past year, and in particular, also of the fourth quarter of 2021. And after they have done so, they will be ready to take your questions. Before handing over to Bernhard Spalt, let me highlight, as is also customary, the disclaimer on Page 2 of the presentation. And with this, I hand over to Bernhard Spalt, CEO.
Bernhard Spalt:

Good morning, ladies and gentlemen. Disclaimers become more customary in these days. And I would not have anticipated that I would start today's presentation of very, very good results with a special topic on the Russian-Ukraine situation. But I think we should tackle that head-on and address the situation in terms of the impacts on our own business model and then our own balance sheet position. Let me start by saying that you do know that we do not have any direct subsidiaries in Russia, Ukraine or Belarus, and our credit risk exposure is not significant in any of these countries. So we do not revise what we talk about later when it comes to our assessment of our credit risk situation and our risk provisioning dynamics to put it at that. Also, our market exposures will not pose a significant threat to our balance sheet and our P&L. It is very natural that we are on top of all the sanctions and monitoring that and we will, of course, comply to whatever the regulators and the authorities will impose on us. And we're screening the portfolios and we're screening the levels of impacts daily on that. And so far, we do not see business model-wise as well as when it comes to the impacts on our own corporate customers, any material kind of impact. Let me take you to Slide #5, which is the core of today's presentation. And I think this should also be the core of our discussion today. And this is the underlying development of our business and the economic dynamics. I do think what we have seen in 2021 was a very good business environment in all of our countries. And one of the elements was that in the countries which are not euro-denominated economies, we've seen a very substantial and robust response of the national banks when it comes to addressing inflation fields and hiking interest rates, most notably in the Czech Republic, and of course, this does help our business model. So we ended up with a quite strong operating result of plus 17%. And this is a function of NII growth on the back of loan growth because demand is picking up. It's also backed up by a very strong fee and commission income line in the context of investments -- regular investments for longer term sort of purposes, is picking up throughout the region. So this is a model which does work hard. We have announced this in our Capital Markets Day in 2019 that this would be a strategic priority and emphasis and it does play out really well in all of them -- our major markets. So we have acquired robust and strong top line development, which we see for 2021 and which we will also think will shape the fate for 2022. And I also do think that we have put in quite some effort into managing our costs. So overall, what we have promised so far that we will show a positive jaws has materialized and will continue to materialized. And the target which we set ourselves in 2019 much before corona heat the world of achieving 55% cost/income ratio by 2024 will be certainly achieved in this year. So I think when it comes to credit risk, is the very benign. We're sitting on a record loan -- nonperforming loan ratio ever since we're publicly traded. We never had an as low NPL ratio as that. Not to speak of our coverage ratio, which is now exceeding 90%. And the risk costs, which we allocate are still showing an environment, which can really withstand the shocks which have come upon the region really, really robustly and weigh. So I think strong top line, good cost management and credit risk completely under control. And that is shaping our business model, that is shaping our balance sheet, and it will help us to navigate through whatever comes now, which is hard to anticipate. Hopefully, better than sort of one would think. Now when it comes to guidance for 2022, we have a good guidance, but of course, volatility is rising, and the uncertainties are more than we have anticipated until now. So we still think that GDP growth will continue to support our business model. Yes, we also think that inflation in the context of this political and economic development in the region. Inflation will still play a major role and energy prices will not come down quickly rather to the opposite. So yes, inflation will be a challenge. But I do think loan growth will support a mid-single-digit NII growth. We do think after a record year 2021, we will see in the fee and commission income, a low- to mid-single-digit growth rate. And we reiterate positive jaws. And of course, we want to reiterate that we will be below 55% cost/income ratio at the end of this year. And risk costs show no indication that we should not sort of be very positive on that territory. So all in all, we are targeting a solid double-digit return on tangible equity for this year. And the resulting capital buffer, which we have, which you all perfectly well know, above our management target of 13.5% Common Equity Tier 1 will be, and we get to that a little later, predominantly used for supporting our organic growth, our opportunities to invest into inorganic opportunities in our market, so bolt-on acquisitions and then sort of possibly we will debate about different kind of payout policies in the future. So I think this wraps up pretty much the situation. I will be quite quick on the next couple of slides because I think that was the most important topic or the most important frame, which I wanted to shape. Now what is new to you, and I really want to spend 1 or 2 minutes on it. In the whole context of ESG, where everybody speaks about the environment and everybody's speaks about green, I think the S part and the G part is equally important in that kind of equation. And on the G part, what we have done and what we started for now, and this will be a recurring event, is an employee share program where we want to turn all of our 44,000, 45,000 employees into shareholders. And we want to give them shares and we want to incentivize them to buy shares. And we would top up investments, which our employees will make in the future. So I think that is something which I believe is creating or is building a cornerstone when it comes to corporate governance, it's building a corporate -- a cornerstone when it comes to sort of engaging employees and letting them participate in the success of the company. So this will be a perpetual program. The profit participation will be for this year, €350 net for all of the employees, and we will top up single investments in a staged way. So this is a long-term program, and we want to consolidate these shares in an employee share foundation. And this is something which will in itself, grow over time. The cost, which we put down here is the profit participation €20 million. And for the annual cost of the subsidy for own investments is an additional €13 million. And this, you should expect as long as we are in a position that we are profitable, as long as we're in a position to pay dividends. This is not something which will go away, but this will constitute a regular program. Now, let me take you to Slide #7, the group income statement performance. You see that the Q4 net result is slightly down because of the cost side. But from an operating result line, from an underlying performance, it's still very strong. The NII growth is strong. The record fee income is still there. And I do think we've got good reasons to say that the business model has worked throughout this year. And remember, we're still in a corona time, has worked out really well. So the quarter-on-quarter net profit reconciliation and even more so the year-on-year net profit reconciliation, which is very much supported, of course, by a completely different risk line, is showing a very decent result, I would say. Now I will be very quick on the key income statement data. Net interest income and net interest margin, we should expect to develop strongly in the context of interest rate hikes happening in the Czech Republic, happening in Hungary and Romania, and also loan growth further developing. And I said cost of risk will remain at a little bit more normalized, but still very low levels. So I think on the earnings per share and on the return on tangible equity, we should expect good results going forward. Balance sheet development on Page #9 shows that we are growing our assets predominantly on the net customer loan side. This is happening on the corporate side, this is happening on the mortgage loan side and this is happening now for the first time after a long time also on the consumer loan. What I frankly did not expect is that the deposit side is still growing so much. I would have thought that the recovery and the sort of phasing out of the corona crisis would change the savings behavior of our customers significantly; has not happened so far. So we still see an inflow of deposits. So our loan-to-deposit ratio is still developing in a way, which is sort of different than we would have anticipated, let's put it that way, despite interest rates being where they are. I think I said everything on the key balance sheet data. Maybe just one more thing on the risk side, the NPL coverage ratio now at 90.9%, as usual, does not include collateral. So this is a very, very important sign of strength of our balance sheet, I would say. And the capital ratios, we're now at a Common Equity Tier 1 ratio of 14.5%, which is very significantly above our internal management target of 13.5%. Quickly on the macro economy, Page #12. The recovery continues -- has continued in 2021. I do not expect that we will see a major change in the dynamics in 2022, so we will see GDP growth still. And yes, we will also, of course, see inflation dominating the macroeconomic environment. And interest rates are depicted here. I think the major steps have been taken. I would not rule out that the one or other steps it comes, but this will shape the balance sheet position of our bank in 2022. So as I said, the economic rebound is set to continued. We will not as dynamic as for 2021. Now on Page #14, what is happening on the ground? Retail, we still, still, see a very strong demand and overhang of demand over supply when it comes to housing loans. This will be featuring also a lot of discussions when it comes to how can younger families afford living, how can younger families afford a house or an apartment in a context of ever-rising real estate prices. We see demand for consumer loans, of course, coming back. On the confidence that unemployment rates will stay very low, and there is a significant scarcity of skilled or even unskilled labor force throughout the region. And what is helping our strategy really much is a strong demand for securities products, which will continue to feature customer behaviors, specifically in a context where longer term protection issues are more and more understood by a mass population, and that's also true for the insurance product. And on the digital side, we're now on George with almost 8 million customers onboarded in 6 markets. And we now continue to roll out George to the corporate customers and extend our offerings there. And we believe this is a system and a platform, which is basically technologically the same platform throughout the 6 markets, which is working well throughout a long time. And I think, and I mentioned that in our last earnings call, we don't talk about it much, but if you look at the developments of the savings banks at the minorities line, Austrian savings banks have done really, really well. We shouldn't small talk them in the year 2021. On the corporate side, loan demand continues to grow, and that is very good, both on the working capital as well as on the investment loans. Now I still don't know to what extent all of these EU next-generation fund programs will support further loan growth or will cannibalize further loan growth because they will provide also liquidity and also other instruments to the market. But I still would say overall, this will be net positive and will support further loan growth in the corporate area. Capital markets have been doing fantastically, I would say, over the year 2021 with an operating income of more than €600 million. And our issuance activity has been stellar, I would say. And growth in asset management, we're still dominating the space with €77 billion assets under management. And with that, I would like to hand over to our Group CFO, Stefan Dorfler.
Stefan Dorfler:

Thank you very much, and good morning, everybody. Let's turn to Page 18 and the net loan development. We have registered a total of €14.2 billion net loan growth in 2021, which translates into 8.6% growth; something, which we regard as a very strong growth representation in our countries, and then we will go into details later on when it comes to NII. The growth has throughout the year been mostly well diversified across the countries. You see it in the details and client segments as well, with the housing loans and the double-digit growth on that product standing out. As Bernhard Spalt already mentioned, there has been an even stronger, both absolute and relative, growth on the deposit side. So €19.4 billion year-on-year in absolute numbers, which translates into a growth of 10%-plus on our deposit base. All of that has led to a slight drop of the loan-to-deposit ratio year-on-year from 86.9% to 85.6%. An important remark here is, of course, that the deposits in the -- to our P&L have lately been much more beneficial in those countries where we have seen rate increases. And then I want to mention, since this has been an element of our discussions in past calls, that in Austria and Slovakia, the consequent charging of non-retail deposits for the negative interest rate has significantly reflected positively in the P&L. When it comes to NII and NIM, we turn to Page 20. The NII in the full year-on-year has been up by €200 million or 4.2%. Please have a look at the quarter 4 2021 over fourth quarter 2020 in comparison, and there you see that this comparison ends up in a 10% increase, which shows the strong dynamics from the rate increases, especially, of course, in the Czech Republic. All-in-all, the NII year-on-year development has been driven by the strong loan growth; the rate hikes, this is particularly true for the second half of the year; and not to ignore the TLTRO effect in the euro countries. Maybe some words around the rate sensitivities. The rate sensitivities that we have been guiding in CEE for Czech Republic, in particular, but also for Romania and Hungary, have exactly played out as expected. Nowadays, with investments, FX hedges and other balance sheet management measures, we have been substantially adjusting those sensitivities so that you should consider those sensitivities to have come down significantly. Happy to address more details in the Q&A. Very importantly is how we look at the rate sensitivities in euro area. Should the ECB, of course, this is given latest developments, maybe in a different light, still should the ECB move rates, the first 50 basis points up to a 0 level, we would have as positive, however, limited effect on our P&L. Once we go -- we cross the 0 line and further hikes might happen, this would certainly have a very supportive element to our profitability in the euro countries. Turning to Page 21. I would repeat what Bernhard Spalt already said that the biggest dynamics in 2021 certainly has been around our fee income, 16.5% year-on-year, but also 16% fourth quarter 2021 over fourth quarter 2020, which was an extremely strong quarter already prove that we have been setting the right measures and that our colleagues on the business side are executing excellently on this absolute top management priority. Trading and fair value result worth a brief comment. Overall for the year with 230 -- sorry, for the -- with for the year, I would say inside the corridor that we usually guide for. It's worth mentioning that the fourth quarter due to the fair value accounting of the baby loan in Hungary has been a little bit worse, and therefore, we have overall a relatively weak fourth quarter trading and fair value result. Still, in general, 2021 has been a satisfying year on trading and fair value side. All-in-all, the operating income has increased by more than 8% year-on-year and 7.4% fourth quarter 2021 over fourth quarter 2020. Couple of words around the operating expenses, where you find the details on Page 2022 -- sorry, on Page 22. The higher fourth quarter costs are -- and this is important to mention, not mainly or at least not yet to a relevant extent, related to significant inflation increases in all our markets. But much more to higher PEREX on the back of the mentioned employee share program, higher bonus provisions and significant FX effects, especially in the Czech Republic. And I want to bring across 2 key messages when it comes to cost beyond what Bernhard Spalt also already said about the very disciplined execution. Number one is that if you look at the overall operating expenses in 2021, what we have been guiding for, meaning it's basically 2019 as a benchmark, we have been delivering exactly in that corridor by 2021, having overall OpEx of 2019 plus the employee share program. For 2022, let's be clear, the cost uplift from the external factors will be relevant and we will guide for more details once the current, I would call it, task is maybe and hopefully, settling a little bit. Turning to Page 23. We sum up that the operating result of €3,435.5 million is a very satisfactory result and reflects not only a 17.1% growth over the result 2020, but -- and I think that's noteworthy, reflects a compounded annual growth rate if we compare it to 2019 of 7.5%. And we all remember that 2019 has been -- before the pandemic has been an excellent result. And I think it shows that 2021, we have been fully reembarking on the long-term strong growth story of Erste. And with that, I hand over to Alexandra for the risk matters.
Alexandra Habeler-Drabek:

Thank you, Stefan, and good morning, ladies and gentlemen. I continue on Page 24, and I can be reasonably sure as many important points have already been mentioned. Q4 was a further confirmation of the positive development we have been observing over the first 3 quarters in terms of risk. Risk costs for the full year amounted to 9 basis points, mainly due to the continuous absence of material new defaults in an overall favorable risk environment, and this despite the latest Omicron wave. Net allocation of risk costs in Q4 amounted to 24 basis points, €107 million and were driven by some defaults in Austria and Hungary and method effects in Romania. The FLI remained stable in Q4. The more optimistic macro-outlook was compensated by the materialized risk of new virus variance and increased inflation. Overall, this prudent approach that we took means that we kept the full FLI impact that we booked in 2020 over the year-end '21. Regarding SICAV overlays, manual overlays, the heat map update that we performed in Q4 led to some release. For the full year, we released roughly 1/4 of the manual overlays. The rest of more than €180 million have been kept and are put forward to 2020. Now to Page 25. Here, you can see the development of our NPL ratio. And as already been mentioned, given the low number in new defaults and the growth of our loan book, the NPL ratio improved to a record low of 2.4%, which is still very high coverage of more than 90%. Altogether, the big reserves that we are bringing forward, the low default environment makes us confident that also in the upcoming year, the risk charge will remain benign. Our outlook being below 20 basis points of risk costs. However, also, I have to state that the current situation and state of war, of course, is a risk to the outlook, which is explicitly mentioned. And with this, I hand back to Stefan Dorfler.
Stefan Dorfler:

Thank you very much. Since there is really nothing worth mentioning around other operating result. And the net profit of €1.923 billion for the year 2021 has been explained in nearly all components. Let me invite you to turn to the Pages 29 to 31 where we update you on wholesale funding and MREL. The increased MREL-related issuance has been leading to a rise in stock of senior unsecured bonds, left-hand side, Page 29. And this is going to be a longer-term effect while whereas the temporary increases in certificates of deposits are reflecting the activities of the business colleagues to optimize P&L during the year in treasury operations. We have been registering a year-on-year increase, increase in interbank deposits, predominantly driven by the increased TLTRO III balance, which I will turn to again when we look at the overall capital and liquidity position. With regards to the maturity profile that you find on Page 30 and the latest funding activities, let me mention that the 2027 maturity peak is very much attributable to the MREL issuances. TLTRO III, just mentioned, the outstanding amount currently or by the end of 2021 and still the same today is €21.2 billion. Let me remark that should there be no extension of the program, we will plan for significant redemption in the course of the second quarter, more details once the ECB has taken an official decision on the future of that program. And last but not least, let me mention that we are very happy that we could execute a very successful transaction early in the year, a dual tranche of 6.5 and 15-year covered bond transaction, something which, of course, we still could execute under very favorable circumstances. The overall 2022 funding volume needs of Erste are very much comparable to the 2021 levels. When it comes to MREL, I'm really happy and proud that all our resolution groups have successfully completed their inaugural MREL issuances in 2021, respectively, at the beginning of 2022. And we can -- we are excellently positioned to execute further plans during the year 2022. We are certainly well ahead of our general schedule today, and we'll see how the market will develop and select the right timing for our upcoming transactions. On Page 32, let's, last but not at all least, talk about capital. The waterfall on Page 32 and as well in more detail, the breakdown on Page 33, do not contain any surprises or particular new things from the fourth quarter as we have been informing you and the whole market throughout the year about RWA developments, dividend accruals, the application of the exemption for software deduction and, last but not least, also worth mentioning, the call of our €500 million AT1 transaction in the year 2021. One information that you cannot find in the slides as it relates to the year 2022, I'd like to flag. The EBA guideline on the treatment of structural FX risks under the CRR came into force with January 2022. And for Erste, this will result in about 30 basis points CET1 impact due to the market risk RWA's updrift. This will become visible in the course of the first quarter. Last, but not least, Page 34, very much in line with what Bernhard Spalt already mentioned in his introductory statements. We've outlined once more and very clearly our primary -- of our priorities when it comes to the use of our overcapitalization. Under normal circumstances, we reserve up to 50% of gross capital generated in any given year for distribution to our shareholders and the other 50% for funding organic growth. This is a slight upward revision of our so far dividend policy. And we believe that, of course, subject to the latest developments, we are strong enough to generate the capital in the form to deliver on that target. We want to be and want to participate in a leading role in the sector consolidation across our region. I think first, very interesting, and as we strongly believe, very good transactions have been brought on way. And we think that in the next couple of months, there might be additional opportunities opening up. And with that, I hand back to Bernhard Spalt for the conclusions.
Bernhard Spalt:

Thanks very, Stefan. I will be reasonably quick on that, and I will focus on the outlook and not on the key takeaways because I think they have been amply described in our statements so far. So outlook for 2022, we do expect that the economic growth will continue, maybe a little less dynamic but still. We do expect a mid-single-digit loan growth in our region. And we do also expect a mid-single-digit NII growth on the back of securities investments insurance business growing. Positive jaws is still very firmly on our agenda. So we will overachieve our target for 2024. When it comes to cost/income ratio and risk costs firmly under control, I would say. With that, our dividend policy has been described by Stefan and also a clear expectation of a double-digit return on tangible equity would be our statement for 2022. Now of course, macro uncertainties have increased in the context of this political and humanitarian escalation. But I would say the bottom line is -- we've delivered very solid results, and I do think the bottom line is we're exactly in the right region and in a position of a business model which works long-term. And I think we're relatively disciplined when it comes to delivering on our targets. So I will conclude our statements here, and we're very much looking forward to take your questions. Thank you.
Operator:

Our first question comes from Izabel Dobreva from Morgan Stanley.
Izabel Dobreva:

So I'm sorry that this is my first question, given your results, but I have to ask about Russia and Ukraine, and I know that you don't have any direct exposure. But could you talk about the broader channels through which you may be affected? So the indirect links, like deposit insurance, maybe select pockets of credit risk. For example, the ECB made a statement this morning that 1 significant bank is seeing deposit outflows and is failing or likely to fail. So how will that impact Erste indirectly? And how are you thinking about where the risks may come from in the broader CEE business? And then I have another question on M&A and buybacks, but I will leave it for after your answer.
Bernhard Spalt:

Yes. Thanks, Izabel. And let me take that question. And I'm not sure if I will answer all the questions to your satisfaction because some of the aspects are in relatively early stages. But it is important to reiterate that we do not have any kind of bank holdings in Russia, in the Ukraine or in Belarus, first statement. Second statement, we do not have a significant credit risk exposure to this region. And I do think that even our customers and we're doing stress testing and analysis every single day. I think our customers will be able to navigate through this as much as we can see. So I do not expect any kind of direct significant impacts from our business model. When it comes to the singular case of this individual bank, which is now subject to authorities intervention, let me get a couple of things very clear Sberbank Europe is a bank, which is active cross-border in Europe. It's owned by Sberbank Russia. What the European authorities, and they are the authorities in charge, and this is the single resolution board and the ECB has found. And I think this is a -- how should I say, smart intervention that in order to protect against massive liquidity outflows that they have imposed a moratorium with a duration of basically 48 hours until when sort of a decision will be taken again by the European authorities on what kind of strategy will deploy -- will be deployed in order to minimize damages. So it's too early to speculate whether this will end up in a sort of going concern in a resolution case, in insolvency case, it's much too early to tell. What I can tell you, this is a relatively small bank in the context of our markets, it will not shake the financial markets, the banking markets in our region in any of the countries and the markets will be able to digest that. It would be completely not serious to talk now to speculate now about sort of the cost implications or P&L implications of that. What I can tell you is it's good that stability is now created by the European authorities that an orderly process is in place, and we will be able to respond to a potential assessment of the situation over the next couple of days. This is as much as I can say. Other than that, I do not see any kind of repercussions on our business model.
Alexandra Habeler-Drabek:

Let me add one more sentence and underline what Bernhard Spalt has said on potential indirect impacts on our client portfolio. So we are closely monitoring and analyzing our corporate client portfolio, not only in the last days, but for many, many weeks. And so far, this analysis did not show any material indirect risk to our portfolio.
Izabel Dobreva:

And my second question was on M&A and your buyback buffer. And I understand from the comments that M&A is your preferred option. So could you give us an update here and specifically how you think the current environment will affect the M&A pipeline? And then on the buyback, over what time frame would you make the decision to pay out part or all of the buffer as a buyback? And is it possible we get it already this year?
Bernhard Spalt:

Well, on the M&A, I think let me start like this. I don't think that we said M&A is our sort of first order of priority. Our first order of priority is, of course, that we invest our excess capital into any kind of growth opportunities in our existing operations. The second priority is that we watch out for M&A opportunities, again, in our markets. And we have not talked about it much, but we have acquired, or we are now sort of in the process of acquiring the Commerzbank subsidiary in Hungary, which I think is a perfect fit to our business model, and it ticks off all of the boxes, which we have mentioned last time in the last earnings call. When it comes to, is it a strategic fit? Yes. Is it earnings-accretive? Yes. Is it capital-accretive? Yes. And is it sort of also generally digestible when it comes to our ability to integrate? So I think this has been a very good example of what we want to do and what we think we will see over this year. So I think, yes, M&A, bolt-on acquisitions in our regions will still feature 2022 and we are looking into a long, how should I say, pipeline. But of course, M&A is a tedious business, where you look at 100 different things and only some of them will materialize. So overall, I think you should expect that we want to concentrate on capturing growth opportunities and organic growth opportunities throughout 2022. If our -- if nothing materializes throughout the year and if our capital sort of position continues to grow, we might reconsider that. But I think firmly, it's our intention to make use of our excess capital to buy strategic fits.
Izabel Dobreva:

Just on the buyback, if you could tell us how you're thinking about the timing?
Bernhard Spalt:

It's a function of what I said before. I don't want to give out any firm guiding now, no firm time line. Have some patients. We're still looking into opportunities which we see, and we will keep you posted. There is no firm timeline here.
Operator:

Gabor Kemeny, Autonomous Research.
Gabor Kemeny:

I have a couple of questions. Firstly, on net interest income. Can you please give us an update on your rate sensitivities and possibly by country? And if you could comment on how you think about the pass-through of the higher interest rates to deposits from here? And then secondly, on the NII guidance, which is mid-single digits. I think you've said the negative one-off in the fourth quarter in Hungary. But if I exclude that, actually, your NII is -- the annualized Q4 NII is already pointing to a 6% growth. So I would be interested to hear what makes you relatively cautious on the outlook? And the final question on Ukraine risks. I mean you mentioned that you carried forward the full FLI provision to 2022. Can you confirm what the amount and what is your scope to use these provisions for potential unexpected Ukraine-related fall outs?
Stefan Dorfler:

Gabor, let me take the NII questions first. So your second point was regarding one-off, also this is not precisely correct. I was talking about in the context of the fair value and trading result. I was talking about the impacts of the baby loan in Hungary, which is for known reasons in the whole market, accounted for in fair value. And there, due to the increase in interest rates, there was a negative P&L accounted in the Hungarian entity round about €30 million or so. So this is not in any form an NII topic. I would call it unfortunately because from my personal point of view, it's much more a loan product, but for accounting reasons that are -- in the whole Hungarian market, these days applied it is a fair value product. So that's number one. Second point, when it comes to sensitivities. Let me reiterate, I think the main focus point, both in our analysis and in the market talk, has been in euro recently. And that's why we did a very thorough analysis on the impact of potential rate increases of the ECB. And let me repeat and be more precise on what I said. We would have a positive, however, limited effect should the ECB turn away from its minus 50 basis points or negative rate area up to 0 line. Reasons for that is that we have a significant share of floored loans in our loan book, and those would, of course, not be triggering any positive effects on that side. Deposit side, you are aware how it functions. Once we would go significantly into positive territory, we expect a very positive P&L effect. So you can be sure that, let's say, if the ECB should in a very sharp move, go from minus 50 basis points, say, to plus 50 basis points or plus 75 basis points, then the annual overall -- annualized overall impact would be in a very solid 3-digit million euro positive impact on our NII. So that's on the euro terms. When it comes to the CEE currencies, generally speaking, you have to significantly scale down your former assumptions. I mentioned in the presentation that we have -- and we are quite happy about that. We have realized, in terms of what we see now in the monthly incomes, it's pretty much exactly what we expected on the rate increases so far. However, now with slowing down production to a certain extent in profitable products on the loan side, of course, some reactions on the deposit side, there have been some adjustments in the Czech market, obviously on the back of the significant rate increases. This -- and the third point is that we have been taking active investments and balance sheet measures. If you apply something like a cut to half, if not more, to the original assumptions, you will be pretty much right. And we are also expecting that throughout the year, we will see the end of this hiking cycle. So if you followed, and I'm sure you did, very closely, the wording of the Czech National Bank, there might be still one, maybe two steps ahead. Until then, they think they get a good grip on the inflation and then they are rather talking about normalization, if not potentially even cuts towards the end of the year and that is something which we are pretty much share. Of course, that was a little bit, of course, before the latest developments, but subject to the Ukrainian-Russian conflict and potential impacts, this is also our view and therefore, be reflected in our positioning. So that's basically it. And overall, of course, for the year 2022, just to mentioned that we will see a significant positive impact from the rate hikes that happened in the year 2021 and still in the beginning of the year 2022. And I think the third question was very much towards Alexandra.
Alexandra Habeler-Drabek:

Yes. So on your question on FLI and on the amount of the reserves. So overall, 95% of the reserves we booked in 2020 will be put or have been put forward to '22, which is roughly more than €600 million -- €620 million. And in our current guidance of staying below 20 basis points of risk costs, we assume that we would release from these reserves roughly a little bit more than 50%. So this would give us still some room for our guidance, even given the current situation in Russia and Ukraine. How much of the releases we will then need to use to cover or to compensate impacts from the current war crisis is hard to be said, but there are -- of course, there is still some room to our guidance.
Operator:

Next question, Máté Nemes, UBS.
Máté Nemes:

I have 3 questions, please. Firstly, on Czech. You mentioned, I think, on the slides that you saw some negative other results in the country from higher impairments on buildings and software. If you could provide some additional color on this? What nature of these charges, if you could explain? Secondly, on operating expenses, I think you guided for sub-55% cost/income ratio for 2022. It seems like your NII guidance is perhaps more on the conservative side. So I'm just wondering if you could help us just narrow down your expectations on operating expenses? Is it fair to perhaps expect not higher than 3% OpEx growth in '22? And then finally, a question on RWAs and capital. You mentioned the 30 basis point negative impact on CET1 from structured effects. Do you have any other RWA impact on the horizon, be it regulatory-driven or other that we should expect?
Stefan Dorfler:

Okay. Yes, let me start it off with the Q4 in Czech Republic. I think -- and I just double checked the major impact on the costs in the fourth quarter in Czech Republic were actually higher per employee share program. And not to forget, and I think I mentioned it briefly in the presentation, there was a significant FX effect with the strengthening Czech Koruna. So I think that's basically -- let's be fair, we have a significant inflationary updrift in Czech Republic, which is, on the one hand, very supportive on the top line, but certainly puts quite some pressure on our cost line, and it remains to be seen how much of impact in the operating expenses this will have in the course of the year 2022. There wasn't anything spectacular with regards to IT expenses or write-downs or something like that. So this I can guarantee. Bernhard, do you want to talk about the cost/income ratio or I say a couple of words on this, as you like? I think it's completely right what you said, Máté, with regards to NII. When we were post-budgeting, guiding last time, meeting you after Q3, we had a positive perception of the rate hikes in CEE. However, they generated an additional dynamic thereafter. Therefore, we are today also a little bit more optimistic on the NII front, which is a major factor. But other than that, Bernhard, please.
Bernhard Spalt:

Yes. Maybe just to reiterate our assumption. Stefan has talked about the top line, but let's also talk about the cost line in the context of
Alexandra Habeler-Drabek:

On the RWA, on the development of credit risk RWA is expected to increase roughly by 5% on a yearly level, but predominantly driven by business growth. So partially offset -- so partially we expect an offset, the gradual improvements in the corporate portfolio quality. But overall, a purely driven, business-driven increase. No negative method effects or regulatory changes are expected for credit risk RWA and from, as you know, the €6 billion add-ons that we are having, we are currently working on a release, and we expect a release of roughly 50% of these add-ons over the next 2 years, but the focus being in '23. And op risk is -- and also on the op risk side, no regulatory or method effects are expected.
Operator:

We will now move to our next question from Johannes Thormann from HSBC.
Johannes Thormann:

Johannes Thormann, HSBC. Some questions from my side. So first of all, a follow-up on the personnel costs. Could you elaborate a bit more on what kind of general salary inflations you're budgeting for this year? And to understand the dynamics in Austria, how strong is it in Austria? How strong it is in Czech Republic? Do you think you need to catch up with other industries? Or can you still manage to get to a gap like some years ago when we can distribute higher rate or salary hikes than we did in that environment? Secondly, on M&A and probably asset management, you said you wanted to buy some asset manager several times. But looking at the scale of your business, it either it's in a reverse takeover or it's just a small bolt-on? Wouldn't it make more sense to really sell your asset management and then -- or find a cooperation agreement like you do in bancassurance? What is the benefit of owning a bancassurance asset manager? Why do you need that? And the last question from my side would be just on the interest rate scenario, just what is the impact in Hungary, just as it to be complete as you elaborated on the Czech and the Europe scenario already?
Stefan Dorfler:

Yes. Johannes, let me take the PEREX and the interest rate questions. And I think you got it pretty right in your question already that there is -- it's time for differentiation from market-to-market. So let's start with the Austrian side. Just to give you a feeling, the last 2 years, we have been finalizing the so-called collective agreement negotiations around 1.6%, 1.7% year-on-year wage inflation. This year, the average inflation of the year 2021 ended up at 2.8%, which is from a formal definition anchoring the, let me say, the start of the negotiating branch. However, when we look at the headlines these days in newspapers, they are talking about, of course, the 5% inflation headline number that we have put both Austria and pretty much also for Europe. So in other words, this is setting the frame. We think that there will be something like a 3.x result for the collective agreement in Austria. We saw from other sectors that something between 3% and 3.5% is realistic. Negotiations have just been starting. Of course, the latest developments might, if you want so, unfortunately, help us a little bit on the -- as the employer side. But this is about the levels that you should be thinking of. Completely different situation as Bernhard Spalt already mentioned in some of our countries. I would rank in terms of the immediate current pressure that we feel by Romania being pretty much first and then a crowd around in our Czech Republic, Hungary coming later on and Romania for various reasons, we don't have the time to go into all the details. But there everything single-digit for across the board increases, I think, is already kind of a success in some fields, IT, in particular, data and so on. You certainly see in the markets across the sectors wage increases way above 10%. Of course, there are other functions in the bank where this doesn't hit us so significantly. But definitely high-single-digit is very realistic, and we talk to our colleagues there on a weekly basis and that's definitely a relatively hot topic in Romania. Now in Czech Republic, we have managed extremely well in the last 2, 3 years, so that we have not only a very -- a super attractive employer position, but also have a very good overall relationship with the unions and so on. Nonetheless, we have to react. So it will certainly be an elevated level of wage inflation. Still, given the dynamics on the top line, we are very little worried about this market. And last, but not least, the other countries are somewhere in between that. Let me just conclude that we are very confident that the top line performance, in particular, also NII in those countries where we see higher inflation should be outperforming the cost increases. The other topic with regards to interest rate sensitivity in Hungary. Well, we see it as a low-single-digit around 25 basis points depending on the pass-through. You know the Hungarian system is very tricky because there is actually 2 interest rates guiding the market. So on an overall group level, less significant than the Czech and the euro field, but definitely positive and supportive for our Hungarian results.
Bernhard Spalt:

Yes, Johannes, let me take the question asset management strategy because I'm quite passionate about it, if I may say so. We have 0 intention to sell our asset management operation. We're the #1 player in asset management in the region, which puts us in a perfect position to do bolt-on acquisition and increasing value. I don't think that anybody else could do that. I think it fits perfectly well when it comes to creating a value chain also connected to our core customer business, both in the retail as well as on the corporate side. So I think this makes perfect sense when it comes to a value proposition -- a holistic value position. And it's an entirely different sort of thing when you compare it to the insurance business, where I do believe that we understand a lot about the distribution and the sales, and our insurance partners tell us a lot about the product management part. So I think on asset management, you should expect us to buy and not to sell.
Operator:

Mehmet Sevim, JP Morgan.
Mehmet Sevim:

Congratulations once again on your results. Just coming back to the interest rate sensitivity. Can you please talk about your interest rate expectations for the remainder of the year? Particularly in the Czech Republic, do you expect a reversal in the right cycle at some point in 2022? And are you seeing any pressure areas in your NII? I'm just trying to understand if there's anything specific that makes you conservative -- arguably conservative in your NII guidance?
Stefan Dorfler:

So first, Mehmet, I think one can discuss what is conservative, not so conservative. I think we have been making good experiences in the last 2 to 3 years, especially given the environment that we have been setting certain floors and caps on certain matters. And if you -- and I'm sure you did thorough studied our statements, we say at least simply for reasons that are lying in the dynamics. And I get back to your question on Czech opinion in a second. So I think, of course, if certain things play out positively, meaning that the loan growth, and that's one thing, of course, I would like to flag. It is to be expected that loan growth development is also a function of interest rate environment. So should we encounter a comparable loan growth as in 2021 over 2020, then I fully agree with you, then any guidance that we have been talking about would be called conservative. However, realistically speaking, there is, of course, a certain impact to be expected on at least the growth of the production on housing loans and so on in our region. It has been such a supportive driver in the year 2021. When it comes to our view, and please bear in mind that any comment I make is a little bit subject to what happens around us these days, where some of the interdependencies we might not yet fully understand all of us together. But apart from that, we think that the Czech National Bank with its guidance overall with this kind of plateau level, somewhere another 1 or 2 rate hikes from here and then getting a grip on the inflation and at a certain later point this year or beginning of next year, they might be in the position to scale back a little bit their levels. This is something that our top economies, both in the region and locally in Czech Republic, are very much joining. So that's a scenario that we think is realistic. Obviously, there is a tail risk that things go in a different direction and that certain prices in the market and the inflation we'll get additional dynamics. But our base case scenario is exactly comparable to what the Czech Nation Bank has been communicating in recent statements in January and also in February, if I'm following everything closely. So that's where we stand. And we regard this as the most likely scenario subject, of course, to the latest turbulences.
Operator:

Alan Webborn, Societe Generale.
Alan Webborn:

A few questions, please. Firstly, in terms of your fee growth guidance, sort of low- to mid-single digit, is there caution in there? Is it related to what you reflected was the benefits of charging for deposits last year? Is that a notable drag? Or are you concerned that sort of market volatility may crimp slightly the impact from asset management fees? Just give us a little bit of a view as where your guidance was formed on that basis, that would useful. The second question was compared to where you were in Q3 when you were sort of quite strongly promising clarity on buybacks, which you've now given, it would appear that there seems to be more enthusiasm if anything for M&A than it was there? I mean is it the case that you're seeing more opportunities perhaps than you saw at the end of Q3? That was the second question. Thirdly, on Hungary, I mean, are you impacted and is there any impact in Q4 from the moratorium on interest rates for mortgages in Hungary? And that was the third question. And fourthly, a point of detail, there seems to be a sort of slightly lower than €30 million negative in other income in the Czech Republic in Q4. What was that, please?
Bernhard Spalt:

Yes. Alan, let me take the first 2 questions. On the fee income guidance, it's a little bit of a blend of 3 elements. One is what we've seen last year was a record development, solidly double-digit growth in a context where markets have been really benign, and how should I say, the yields, which could be achieved very spectacular throughout the entire year. . Secondly, we are seeing now interest rate hikes in the countries, which offer alternatives. And thirdly, of course, in the context of the latest turbulences, we would expect that volatilities on the financial markets will have somewhat of a dampening effect when it comes to and not yet very well-educated investors market in our region. So I don't think that what we guide here is a relatively fair and not sort of unbalanced guidance. So I think that would be a combination of the 3, which features this guidance. Secondly, on the balance between our level of enthusiasm between share buybacks and M&A. I think what you perceive is correct. We do believe that this year will be a year where we will see really further M&A opportunities. And if we're wrong, then we will, of course, revert to share buyback considerations, but we are possibly more optimistic on the M&A opportunities than we have been last time around.
Stefan Dorfler:

Yes. And let me take up your question on the -- I think it was on the one hand, Hungarian impact of the moratorium. On that one, let me refer you to Page 20, where we make a comment on that. Overall, the impact of the latest measures by the Hungarian government at the end of the day, overall, within all components has been around about €17 million to €18 million in the year 2021. It is a very fully incorporated in the results. And I think there was another part on Czech Republic. And on Czech Republic, and that also refers back to the question that Máté had earlier on, there was a higher -- a certain impairment on buildings and software in the fourth quarter, nothing spectacular, definitely not repeating. As you know, we are planning for a Czech -- a new Czech headquarter in Prague, which is in the, I would say, planning phase. And on the back of that, we have been also looking into the existing properties owned and there was a small effect in some adjustments, nothing spectacular and definitely not repeating.
Operator:

Krishnendra Dubey from Barclays.
Krishnendra Dubey:

Sure. I just have 1 follow-up from the previous question on the Hungarian, like 2 other questions. On the Hungarian part, I think you've highlighted in the presentation that you have mortgage interest rate cap and the moratoria-related debt overlap thing. So I just wanted to check how much of this is recurring in nature and how much of this is one-off? . And second question, on the second-round effect, you mentioned 4 factors on your second slide -- second or third slide. So if you could give us the priority order in terms of what you think are most meaningful and what would be the least on the priority? And the third one is a specific related to the same question. What is your interbank exposure to RBI?
Thomas Sommerauer:

Krishnendra, it's Thomas here. Can you just maybe repeat your questions in a very concise way because we had -- we had a very bad line, basically didn't get the punch of your questions here.
Krishnendra Dubey:

Yes, yes. Sure, on the NII from the Hungary part, I was just trying to check what is the recurring and what's the nonrecurring. That's the first question.
Thomas Sommerauer:

Recurring and nonrecurring. I think just for me to make sure that we got the question right. You were asking whether in Hungary the effects were recurring or nonrecurring?
Stefan Dorfler:

So I can take it right away. And then please let us know whether we got your, let me see, area of questions, right. There's 2 elements that were relevant in Hungary in the second quarter -- second half of the year 2021. The first one, as I mentioned before, was on the back of the very successful and was a very profitable product of baby loan on the -- in the fair value and trading and fair value line. That's the one part. The other part is due to the newly -- so to say, newly introduced moratorium and the caps on the respective interest rates that are charged to our clients. Both of those, of course, subject to any kind of extension, new measures of the Hungarian government and so on, are not repeating. On the fair value part, it's even some a position that where we, of course, expect a significant positive P&L until the respective moratorium -- sorry, until the respective loan book expire. So that's on those 2. I hope we got it right what you were asking for.
Krishnendra Dubey:

Yes. Yes, yes. Second question it is just the -- just on the fourth slide you mentioned, what is the impact. So if you can give us the clarity out of the 4 factors that you've mentioned? And related to this, what is the interbank exposure to FX?
Thomas Sommerauer:

Okay. Krishnendra, I think we will follow up after this call because your line is so bad, we didn't get the gist of your questions. So if you're just in contact with Peter or myself, we will sort this out afterwards. Sorry for that.
Operator:

We'll now move to our next question from Riccardo Rovere from Mediobanca.
Riccardo Rovere:

Two questions, if I may. The first one is on your risk cost guidance of, say, kind of 20 basis points. How did you incorporate or to what extent did you incorporate the energy prices over the past 5, less than 7 days have gone up by kind of 50%? The gas was €70 per megawatt hour, now it's about €115. To what extent did you take that into account? This is the first -- so this is the first question. And then the other question I had is, you clearly stated that your exposure to Russia is immaterial. I may have actually lost it right at the beginning of the call, I joined a little few seconds delay. But what does immaterial mean? Literally, a few tens million euros, a few hundred or 0? Will you be in the position to give us a better understanding of what immaterial means?
Alexandra Habeler-Drabek:

Let me take both your questions. First, immaterial, few tens of millions. And the second, on the risk cost guidance for '22, we took into account impacts of high -- of the development of the energy prices, and we already performed by the end of last year, a very thorough analysis of all our clients, which are strongly connected to this topic are dependent on the rise of energy prices. And to be very concrete, we screened the portfolio of roughly €6 billion, roughly 400 clients, and we were screening them individually and this analysis did not show any negative material impact on our portfolio. So in fact, we took it into account in our guidance. But there is no signs to be considerably varied on this front.
Riccardo Rovere:

Sorry, Alexandra, to interrupt. You stated that this analysis was performed on €6 billion portfolio, give or take?
Alexandra Habeler-Drabek:

Yes.
Riccardo Rovere:

Okay. But the energy prices, they affect the everything, food, everything, transportation, travel, leisure, everything.
Alexandra Habeler-Drabek:

Yes, exactly. Yes. Yes. This is why we did this individual screening of all these clients. And we did not only do it by the end of the year, but we do it regularly.
Thomas Sommerauer:

Okay. Good. Ladies and gentlemen, I think at this time, we have no further questions. I thank the operator for his help in conducting this call. And before we finish, as usual, I hand over to Bernhard Spalt.
Bernhard Spalt:

Yes. Thanks very much, ladies and gentlemen, for taking the time and taking the interest. I would like to conclude today's earnings call, and I would like to invite you for our results for the first quarter 2022, which we will present on April 29. So looking forward to talking to you then and stay safe. Thank you.
Stefan Dorfler:

Bye, bye.
Alexandra Habeler-Drabek:

Thank you. Bye, bye.
Operator:

This concludes today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.

Erste Group Bank AG Q4 2021 Earnings Call Transcript

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Q4 2021 Earnings Call Transcript