Erste Group Bank AG (OTC:EBKDY) (EBS.VI) showcased robust financial results in the first quarter of 2024, underpinned by high net interest income, growing fees, and positive valuation effects.
The bank reported year-on-year and quarter-on-quarter increases in both operating and net profit, with a notable return on tangible equity of 17.2%. Despite muted loan growth due to weak demand, the bank anticipates a pickup later in the year.
With a pro forma CET 1 ratio of 15.5% and plans for a second share buyback of EUR500 million by year-end, Erste Group remains optimistic about the economic recovery in its core markets.
Key Takeaways
- Erste Group reported increased operating profit and net profit in the first quarter of 2024.
- Net interest income (NII) and fees reached new quarterly records, with NII up by 69% for Erste Bank Osterreich and 55% for Austrian savings banks in 2023.
- The return on tangible equity stood at 17.2%, with a pro forma CET 1 ratio of 15.5%.
- Loan growth was muted, with expectations of a pickup later in the year. Customer deposit volumes grew by 1.1%.
- The bank plans a second share buyback of EUR500 million and expects to maintain a cost-to-income ratio of around 50%.
- Economic outlook in core markets is projected to improve, with moderate recovery and potential interest rate cuts.
Company Outlook
- Erste Group expects a moderate economic recovery in its core markets with lower inflation and potential interest rate cuts in 2024.
- The bank anticipates loan growth to occur mainly in the second half of the year, aiming for an overall book growth of about 5%.
- Cost-to-income ratio is expected to remain at about 50%, with risk costs under 25 basis points.
- A return on tangible equity of about 15% is targeted, alongside plans for dividends or share buybacks.
Bearish Highlights
- Loan demand has been weak, resulting in muted loan growth.
- A decline in net interest income of approximately 3% is anticipated for the year 2024.
- There may be some deterioration in asset quality, though risk costs are expected to stay moderate.
Bullish Highlights
- The bank maintains a strong balance sheet with stable loan-to-deposit ratios and satisfactory asset quality.
- Customer deposit volumes increased, and fee and commission income reached a new quarterly record.
- Strong performance is expected to continue in the corporate and markets business, with increased activity in the corporate deposit business.
Misses
- Despite the overall positive performance, the bank noted areas of potential concern, including the gradual decline in Hungarian NII and the competitive pressures in digital banking.
Q&A Highlights
- Stefan Dorfler and Alexandra Habeler-Drabek discussed topics such as the funding liquidity indicator, energy overlays, and the tax rate applied for Q1.
- The resilience of Czech NII was a positive note, with benefits from the rate cut cycle and good balance sheet management.
- The bank is focused on operational improvements and efficiency measures to counteract wage inflation in Austria, including the use of AI technology.
- The next quarterly presentation will be hosted by Peter Bosek, succeeding Willi Cernko.
Erste Group remains confident in its long-term growth profile and its position as a leader in digital solutions, with a strong brand and network to support its ambitions. The bank's digital platform, George, continues to be a significant asset, with over 10 million customers.
While there are challenges ahead, including potential rate cuts and wage inflation, Erste Group's strategic initiatives and strong performance in the first quarter set a positive tone for the remainder of 2024.
InvestingPro Insights
Erste Group Bank AG (EBS.VI) enters the second quarter of 2024 with a solid foundation reflected in its financial metrics and market performance. As investors consider the bank's prospects, the following insights from InvestingPro provide additional context to its current valuation and market sentiment:
InvestingPro Data:
- Erste Group Bank AG currently holds a market capitalization of $19.34 billion, indicating its significant presence in the financial sector.
- With a P/E ratio of 6.17 and an adjusted P/E ratio for the last twelve months as of Q1 2024 at 5.65, the bank is trading at a low earnings multiple, suggesting potential undervaluation relative to its earnings capacity.
- The bank's revenue growth for the last twelve months as of Q1 2024 stands at 19.01%, demonstrating a strong upward trajectory in its financial performance.
InvestingPro Tips:
- Erste Group Bank AG has consistently raised its dividend for 4 consecutive years, showcasing its commitment to returning value to shareholders.
- Analysts predict the company will be profitable this year, with the bank already profitable over the last twelve months, reinforcing its financial stability and growth prospects.
For investors seeking to delve deeper into Erste Group Bank AG's financial analysis and market potential, there are additional InvestingPro Tips available at https://www.investing.com/pro/EBKOF. These tips provide valuable insights that could help inform investment decisions. Moreover, by using the coupon code PRONEWS24, users can receive an additional 10% off a yearly or biyearly Pro and Pro+ subscription, gaining access to a comprehensive suite of investment tools and data. With a total of 9 additional InvestingPro Tips listed, investors can gain a more nuanced understanding of Erste Group Bank AG's market position and future outlook.
Full transcript - Erste Group Bank Ord (EBKOF) Q1 2024:
Operator: [Starts Abruptly] First Quarter 2024 Results Conference Call of Erste Group. My name is Caroline and I'll be your coordinator for today's event. Please note this call is being recorded and for the duration of the call, your lines will be on listen-only mode. However, you will have an opportunity to ask questions at the end of the call. [Operator Instructions] I will now hand over the call to your host, Thomas Sommerauer, to begin today's conference. Thank you.
Thomas Sommerauer: Thank you very much, Caroline, and also a very warm welcome to everybody who is listening in on behalf of Erste Group. We follow our usual conference call routine this time, so the call will be hosted by Willi Cernko, our Chief Executive Officer; Stefan Dorfler, our Chief Financial Officer; and Alexandra Habeler-Drabek, our Chief Risk Officer. They will lead you through a brief presentation highlighting the achievements of the first quarter of 2024. And after that, they are ready to take your questions. Before I hand over to really my customary remark on forward-looking statements. As usual in this call, management will make forward-looking statements, and accordingly, the disclaimer on Page 2 of the presentation fully applies to those statements. And with this, I hand over to Willi.
Willi Cernko: Thank you, Thomas. Ladies and gentlemen, good morning, and once again welcome to our first quarter 2024 conference call. Last year, we have raised the bar as far as financial performance is concerned and accordingly, I'm proud to report to you that in the first quarter 2024, we continued where we have left off in 2023. I'm on Page 4 of the presentation. Both operating profit and net profit are up year-on-year as well as quarter-on-quarter. This was in no small measure due to NII consolidating close to record levels, fees continuing on their growth path and net trading and fair value result benefiting from positive valuation effects. Cost inflation was also less pronounced as deposit insurance contributions were significantly lower than in 2023. Risk costs remained moderate. Overall, we boasted a return on tangible equity of 17.2%. I think an excellent level for this time of the year, bearing in mind the upfront booking of various regulatory costs and banking tax. To sum it up, we made a strong start to 2024, and accordingly, we are optimistic on delivering the financial goals we have set ourselves at the start of the year. Our excellent P&L performance and I am on Slide 5 in the meantime, is fully reflected in the P&L dashboard. Net interest margin continued to consolidate around the level of 2.5%, fully in line with our expectations. The cost to income ratio is already well in line with the guidance we provided for the full year as the risk-cost ratio is at 18 basis points, notably without any release of FLI provisions or overlays. And with all of this, we printed a return on tangible equity in the very healthy double-digits in the first quarter of 2024 as already mentioned. When it comes to the development of the balance sheet, I'm on Page 6 already, volume trends were muted in the first quarter. In addition to being negatively affected by FX translation, especially in the Czech Republic, in Hungary, a weak loan demand was not unexpected as you always assume that loan growth will be back end loaded in 2024 supported by low-interest rates. And, as far as Austria is concerned, also underpinned by a relaxation of macro prudential measures and the government support scheme for the construction industry that was passed by parliament just a week ago. Both should lead to higher mortgage demand in the rest of the year. Consequently, we stick to our full-year growth target of 5%. Customer deposit volumes increased by 1.1% year to date, with our core retail and SME deposits being broadly stable, once again underscoring the strength of our deposit franchise. Moving to our key balance sheet indicators on Slide 7, all readings remained in the optimal range. Our loan-to-deposit ratio declined slightly, reflecting muted loan development and healthy deposit growth. As already mentioned, asset quality continued to be satisfactory with the NPL ratio staying flat at 2.3%. In Austria, we saw a mild increase in defaults, primarily at the minority-owned savings banks, while CEE continued to perform very well. At the same time, NPL coverage, excluding collateral remained almost flat at 84%. Our capital generation also remained strong in the first quarter. On a pro forma basis, we boasted a CET 1 ratio of 15.5%. The slight quarter-on-quarter decline was driven by somewhat higher risk-weighted asset inflation. In terms of share buybacks, there are no changes to what we already said. We have already applied for a second share buyback in the amount of EUR500 million to the ECB and hope to complete it successfully by year-end 2024. And with this, let's now have a look at the operating environment. I'm on Slide 9 now. For 2024, our economies are projecting a moderate economic recovery in our core markets. Importantly, all markets are expected to do better than in 2023. Inflation should moderate further, providing room for central banks to cut interest rates. When exactly and how much is still a matter of debate, but our expectations certainly is that the downward rate cycle is fully underway and the Czech Republic in Hungary and will also start in the eurozone in 2024. Other economic metrics such as unemployment, fiscal and external balances are expected to remain in good shape across our region in 2024. And all of this should brighten volume growth perspectives as we progress through 2024. Talking about volume growth and then on Page 10, in the meantime, let's have a look at the latest trends in our retail business. Housing loan stock remained broadly stable in currency-adjusted terms as the slow recovery in new business volumes continued, with health increases seen particularly in the Czech Republic and Hungary. Demand in Austria, on the other hand, remained weak as many customers were holding back to take advantage of a government support package for the construction industry, which includes an abolition of the stamp duty for the first-time home buyers until a value threshold of EUR500,000. This package in the meantime has been implemented by the parliament, and consequently, we expect to have a positive volume effect in the rest of 2024. On the other hand, consumer loan demand was satisfactory, with strong demand seen particularly in Romania in the past quarter. On the liability side, our retail deposit base was broadly stable year to date. As regards deposit pass-through, retail pass-through rates continued moving up in Austria but still at a moderate speed. And customers, while continuing to shift some overnight deposits into term and savings accounts and to investments, of course, still maintain more than 50% of their deposits in current accounts. This notwithstanding, we continue to see strong growth in the stock of securities savings plans, confirming the positive trend that started in the second half of 2022. Moving to corporates and markets business on Page 11, underlying corporate loan growth was actually somewhat better than reported figures, implied on the upper right-hand chart. This was due to the FX depreciation shaving off approximately EUR400 million from the euro total and the minor resegmentation from SME to the retail segment in the amount of EUR600 million. If we take this into account, we actually saw a reasonable start to the year. What is even more reassuring is that the deal pipeline started to build up, budding well for volume development in the remainder of the year. Within the corporate deposit business, we saw some increased activity with public sector entities, but other than that a pretty uneventful quarter with deposit volumes increasing somewhat year to date. The markets business continued its strong performance. We were involved in the issuance of EUR52 billion worth of bonds and generated healthy income in the securities business. Asset management also enjoyed a good start to the year with assets under management growing by 4% to EUR81 billion with good net sales in Czech Republic, Hungary, and Austria. This supported our strong fee performance. On the digital front, not to forget, the corporate business also made good progress. In the meantime, we have, as you know, onboarded almost 40,000 customers to George business in Austria and the first 600 in Romania. Now, I hand over to Stefan for the presentation of the quarterly operating trends. Stefan, please.
Stefan Dorfler: Thank you very much. Good morning everyone. Since Willi already made the most important comments on retail and corporate loan volumes, I would just like to add a couple of points on country performance. Croatia is maintaining the growth pattern that has started after the country joined the euro at the start of 2023, and we believe there is more good growth to come in this country. Other countries showed a mixed performance with some being impacted by FX movements such as the Czech Republic and Hungary. In Austria, the demand backdrop remained fairly weak amid expectations of political support measures and the relaxation of regulatory rules related to the mortgage business, both of which were recently implemented. Actually, nothing special to say about Romania, Slovakia, and Serbia for the first quarter. Overall, this resulted in a flat loan development in euro terms quarter-on-quarter. For the full year of 2024, we remain optimistic on loan growth as lower rates, the expected moderate economic recovery and some tailwinds in Austria should help us achieve our target growth rate of about 5%. As Willi already mentioned, there is very little to say about deposit volumes since our last reporting end of February. You see the updated numbers on Page 14. Loan-to-deposit ratios remain in the high 80s with end of Q1 number being 88.4% to be precise, and customer deposits have grown by 1.1% year to date. Hence, let's turn to Page 15 and let's focus on NII. We are posting a strong first quarter with NII greater than EUR1.85 billion. With this and clean of all effects in Q4, we are trading -- we are trending sideways compared to second half of 2023, which is a very positive development, confirming our picture of a plateauing NII fully. Q1 NII was a story of two tales though. CEE on the one and Austria on the other hand. With the very strong CE NII, I'm particularly happy with the performance of Czech Republic, which proves our resilience in the face of significant rate cuts and validates our balance sheet management strategy. The same is true for Hungary, where rate cuts have been even more pronounced. On the flip side, the Austrian segments performed weaker as deposit pass-through rates have increased for the seventh quarter in a row and have now reached approximately 31%, still very much in line with our expectations for 2024. And please do not forget that Austrian NII has been increasing by 69% for Erste Bank Osterreich and 55% in savings banks in 2023, so that this consolidation now was clearly anticipated. What can we expect for the further outlook? Short term, i.e., for Q2, I would expect a confirmation of current trends for most countries as the ECB will most likely take its first step in June with limited Q2 effect. And I'm more than happy to address all your questions specifically on certain countries later on in the Q&A. For the full year 2024, we keep our guidance unchanged based on our assumptions for interest rate developments, volumes both on loan and deposit side and regulatory environment. Certainly, we'll revisit this forecast based on all facts available when we report half-year one figures on August the 2nd. Let's come to fee and commission income on Page 16. Fees continued the strong performance, hitting a new quarterly record in Q1 2024. Year-on-year we posted growth of 10.8% and this was attributable to our three core growth drivers: payment services, securities business, and insurance brokerage. Clearly, we had some tailwind from inflation driven repricing, but we also had a healthy contribution from increasing volumes. Quarter-on-quarter fees were up 1.5% and here it was mostly securities business that drove growth. Consequently, this performance is mostly visible in the other Austria segment. What is remarkable, and I really want to mention that from a strategic standpoint, is the growth of asset management volumes in retail in Czech Republic and Hungary. Hence, with this excellent start to 2024, it makes us optimistic that we will comfortably deliver our guidance for the year of mid-single-digit fee growth. If anything, we believe that this P&L item has again good potential for outperformance in 2024. Turning to operating expenses on Slide 17, now we can report that the first quarter costs grew by a moderate 3.3% year-on-year. This was mainly due to significantly lower deposit insurance contributions, especially in Austria. Quarter-on-quarter, we saw an absolute decline of costs, which was attributable to the seasonally higher spend that we usually observe in the fourth quarter. As far as our outlook for 2024 is concerned, we still expect an increase of costs of about 5%, mainly due to the continued inflation-related wage drift in all of our markets. We've been talking about the Austrian effect starting from Q2 a couple of times, while the lower deposit insurance costs should help also for the full-year cost development. Summing it all up for the operating performance, what were the key operating result drivers in Q1? Page 18. Revenue momentum reaccelerated with NII consolidating near record highs, fees setting another quarterly record, and trading and fair value results also making an exceptionally strong positive contribution. Expenses, as just mentioned, were seasonally lower quarter-on-quarter on decreased personnel and other administrative expenses. This combination leads us to reiterate our cost-to-income ratio expectations of around about 50% for the full year 2024 and an overall very solid operating performance for the year. And with this over to Alexandra for details on credit risk.
Alexandra Habeler-Drabek: Thank you, Stefan and good morning once again from Vienna. I'm continuing now on Page 19. As Willi has already mentioned, risk costs came in at 18 basis points for the quarter without any releases of FLI provisions or industry overlays. With this, we remained comfortably within our guidance. On the left-hand chart, it is clearly visible that the minority-owned savings banks, as in Q4, accounted for the majority of the bookings, but even with this, the savings banks maintained a historically strong level of profitability. Overall, the trend of slight increases in new defaults continued at a slower pace in the first quarter of 2024, pretty much in line with what we expected and also communicated a quarter ago. Looking at Central and Eastern Europe, the risk performance there continues to be excellent. In Croatia, we again posted net releases, thanks to rating upgrades and improved collections. In terms of overlays and FLI provisions, as shown on this slide and also mentioned, we still have approximately EUR750 million on the books and hence we are fully confirming our 2024 guidance of lower than 25 basis points of risk costs. Let's now turn to asset quality on Page 20. The NPL ratio and the NPL coverage ratio stayed at comfortable levels. While we continue to see some further NPL inflows, especially again as mentioned at the minority-owned savings banks in Austria but also at the Erste Bank Osterreich, the situation in Central and Eastern Europe remained exceptionally strong with NPL ratios even improving year to date in several countries such as Croatia, Romania or Hungary. This is really very reassuring. NPL coverage was broadly stable year to date. Going forward, given the high collateral of the new NPL inflows, we expect coverage to remain around current levels for 2024. And with this, I hand already back to Stefan.
Stefan Dorfler: Thank you very much. We are turning to Page 21 and spend a couple of comments on the other result which came in significantly improved both year-on-year and quarter-on-quarter, in both cases around about EUR150 million better. The main year-on-year drivers or as already highlighted in the Q4 call we had the EUR110 million around about lower resolution fund contributions due to no payments in 2024 in the Eurozone countries Austria, Slovakia and Croatia. In addition to that, the banking tax burden affecting other results was also lower as extra profit tax in Hungary was cut in half and this positive development was partly offset by the first time booking of such tax in Romania in the amount of around EUR9 million to EUR10 million for the quarter. Please be aware that the quarterly banking tax in Slovakia of about EUR21 million is actually reflected in the tax line, not in other result. For the quarter-on-quarter comparison, the main differentiators are the Q4 bond sales and some other effects that have, of course, not reoccurred in Q1. Summing it up for the P&L on Page 22, for Q1. The strong quarter-on-quarter and year-on-year operating performance driven by top line growth, continued moderate risk costs and the strongly improved year-on-year and quarter-on-quarter other result, results in a net profit after minorities of EUR783 million. Given all components of our outlook, we confirm our return on tangible equity target for the year 2024 of about 15%. With this let's spend a few minutes on wholesale funding and capital turning to Page 24. Wholesale funding volumes went up in the first quarter on the usual start of the year issuance activity, in our case mostly driven by covered bond issuance and in addition, we were more active in the CD market in euro and US dollars as pricing was advantageous. And this is the reason behind the increase in debt securities. The rise was partly offset by lower volumes of interbank deposits on account of the continued reduction of the TLTRO balance. Overall, of course, our strong funding profile was still primarily built on retail deposits as described earlier. On Page 25, I guess, yes, Page 25, we are showing the latest update of our MREL issuance execution. As you can see from the list of the transactions in Q1 2024, we have done another circa EUR500 million nonpreferred senior and a EUR400 million Erste Croatia preferred senior issuance. Let me use the opportunity to mention that the various capital markets activities of my colleagues across the different resolution groups which are very much supporting the excellent progress in delivering on the Group-wide MREL funding plan. Looking at the Erste Group debt maturity profile on Page 26, we registered total issuance of EUR2.5 billion -- a little bit above EUR2.5 billion in the first quarter. In January 2024, we issued a EUR1 billion covered bond benchmark, seven years maturity at Mid-Swap plus 50 and another EUR1 billion later on then in March just short of 10 years at the levels of Mid-Swap plus 55. With this, we have mostly -- we are mostly done for this asset class with our funding plan. And also for the other bond types, we are well advanced already early in the year. TLTRO redemptions happen as scheduled. And let me remind you that the maturity profile does not include AT1 instruments as we do not implicitly guide for future calls. Reported own funds, and we are already on Page 27, came down slightly quarter-on-quarter. As for CET 1, quarterly profits are not yet included and we called an AT1 tranche in Q1. Risk-weighted assets were up year to date in equal measure, driven by business growth, most of which corporate off-balance sheet business and worth mentioning, increased operational risk on the back of the regular annual severity recalibration. This updrift in operational risk is a nonrecurring effect, of course. Finally, for my part, let's look at the CET 1 waterfall on Page 28. As a result of the capital and risk-weighted asset developments I just presented, our reported fully loaded CET 1 ratio came in at 15.2%. On a pro forma basis, we stand at 15.5%, i.e., just slightly down from year-end due to the FX translation to OCI and before mentioned RWA effects. In terms of capital return, there are no changes to our plans. Subject to approval by the annual general meeting in May, we will pay a regular annual dividend of EUR2.7 for the business year 2023. With the half year 2024 numbers, already together with the new CEO Peter Bosek, we will inform you about the intended dividend for the business year 2024. And as we have already communicated two months ago, we are targeting a buyback in the amount of EUR500 million. To this end, we have already filed an application with the ECB and still hope to conclude the transaction by year end 2024. With this, I hand back to Willi for the outlook.
Willi Cernko: Thank you, Stefan. I'm concluding this presentation with our detailed guidance for 2024 on Page 30 or I should rather say the full confirmation of what we have said a quarter ago. If anything, we are more optimistic today to fully achieve all the targets we have set ourselves two months ago and consequently, I would not be surprised if the guidance will be reviewed at half year. But for now, if we look at the net interest income, numbers are pretty much developing as we expected. For the time being, we see consolidation at the top and expect a minor decline when interest rates are cut in the Eurozone. Hence, we maintain our guidance of approximately 3% decline in 2024. We also believe that the loan book will grow by about 5% this year, but that is growth will mostly happen in the second half of the year. We are confident that the cost to income ratio will remain at the strong level of about 50%. We again expect risk costs to be moderate at less than 25 basis points in 2024 and benefiting from further releases and impacted only by a small deterioration in asset quality. And of course, we are confident that we will achieve a return on tangible equity of about 15%. In terms of capital return, Stefan has already said everything that is to say about the dividends or planned share buyback. Combined with our long-term growth profile, we believe that this represents an attractive proposition to investors. And this, ladies and gentlemen, concludes our presentation remarks. Thanks for your attention. We are now ready to take your questions.
Operator: Sure. Thank you. [Operator Instructions] We will take the first question from line Benoit Petrarque from Kepler. The line is open now. Please go ahead.
Benoit Petrarque: Yes, good morning. It's Benoit Petrarque from Kepler Cheuvreux. Thanks for taking my questions. So yeah, the first one will be on the pass-through rate in Austria. So, you mentioned 31%. I think it's up 5 percentage points quarter-on-quarter. So what do you expect going forward? And I think you mentioned that this is still well embedded into your 2024 guidance, but just wanted to check where you think we might end up in the current interest rate cycle. Actually linked to that question, the number two will be on this new federal savings product, the bonus charts. So what is your expectation in terms of customer flow? I know it's a bit early days. But do you have already seen any customer reaction? And obviously, how do you expect your pricing strategy to potentially move with that new product and new competitor? And then the last question is on the very strong NII in CEE, what are moving parts playing in the Q1? I think loan growth was limited. So I guess, it's mainly deposit margin. But what do you expect in the coming quarters in Southwestern Europe on NII and is strong performance, sustainable? Thank you very much.
Stefan Dorfler: Right. Thanks very much, Benoit. I would take the first and the third question and then leave it to Willi, who is very deeply into this Austrian topic, for commenting on that other question. Yes, the deposit pass-throughs have been accelerating upwards and if you look at the ECB statistics, you will find Austria together. I think if I read it correctly, Portugal or so among those countries that had an acceleration of deposit beta up. I don't expect it to go much, much further from here, but it's very hard to predict. We think that in the Q2, we will have a reconfirmation of the trends, but then it should be stabilizing, especially once the rates come down and the absolute interest expenses will start to go lower. But, I can only confirm your assumption in the question that this is all still exactly in line with what we have been including in our overall guidance. In [INCE] (ph) yes, I definitely think it's sustainable, especially when loan volumes would kick in as expected. I would even expect further towards the end of the year and going into 2025 that we should see some support from the volume side. Obviously, there are always some specific events here and there on one or the other country development which can change that. For example, Hungary, I'm not so extremely optimistic for the second quarter, to be honest, because we have had a substantial rate cut and obviously this will eat a little bit into our over liquidity returns. But all in all, yeah, CEE NII stable, strong, and definitely also for the outlook, a very, very good path forward.
Willi Cernko: Coming back to your second question, first of all, and I think this is broadly shared within the banking industry in Austria, this is very well perceived. We see this as a positive contribution to competition. And secondly, what is more important is it creates awareness for the securities business. But it's still too early to say to what extent this is really going to impact the deposit business with retail customers. But definitely, we are not worried about that.
Benoit Petrarque: Okay. Thank you very much for that.
Operator: Thank you. We will take the next question from line Mate Nemes from UBS. The line is open now. Please go ahead.
Mate Nemes: Yes, good morning and thank you for the presentation. I have three questions, please. The first one would be on the loan growth outlook. It sounds like the loan growth assumption of 5% increase year-on-year is to a large extent dependent on the pickup in growth in Austria. I was just wondering if you could provide any further color on that beyond perhaps the retail segment. And also I'm wondering to what extent are you confident in hitting the minus 3% NII growth expectation should the loan growth disappoint materially? That's number one. Apologies. The second question would be on [RDV] (ph) inflation. The op risk severity recalibration seems quite material in terms of the increase. Could you provide any further color on this? Anything that we should be aware of? And the third question would be on risk costs and risk cost outlook. I was wondering what led you to change the overlay release assumption for the guidance. I think it used to be one-third release of the FLI and sector overlays. Nice EUR200 million. Any color on that would be appreciated. Thank you.
Willi Cernko: Let me start with the first question you raised when it comes to loan growth guidance of 5%. Two remarks to that. The first one, when we look at corporate business, we see a, well, let's say, developing pipeline, so there is confidence that we can meet our targets. And secondly, when it comes to retail mortgages, again, please bear in mind we have established a very well and broad established support package for private households. So there is the expectation that beginning with the third quarter, this business is going to pick up. So we are pretty confident.
Stefan Dorfler: Yeah. Let me just add to this question, especially the part on NII. The volume growth is, of course, a factor, but it's definitely more forward-looking factor, ranging into 2025 and forth-following. I don't think that whether we will have 3.5% or 5.2% loan growth at the end of the year will change the game so dramatically for 2024. And let's not forget that for CEE NII, we have also the fixed rate assets, maturities, and repricing. We've been talking about the duration a couple of times. So it's not only the loan side, but also the securities portfolio. So hence, yes, volumes play a role. We will need good volume development in the long-term. Short-term for 2024, it's not so much depending on 1 percentage point up or down.
Alexandra Habeler-Drabek: Then I would take over on RWA op risk. As you rightly recall, this was a recalibration. So, first of all, which is very important to state, this is not showing a deterioration of the loss profile. So, this does not mean that recently the losses from op risk have increased. What happened? And you might know from the methodology, there is this 10-year rolling window in op risk in the calculation. And in this 10-year rolling window, some smaller tail losses dropped from the calculation, while larger ones from the past, including, when you recall, it's quite some years ago, the FX conversion that we had in Hungary with EUR300 million and EUR50 million Erste Bank Croatia, they are still in. And by the fact that smaller events dropped. These remaining bigger events gained more weight, and this led to this up drift. But this does not mean that loss rates have increased. Second, on risk cost outlook, there has not been a change to be very open. We always accounted for EUR200 million, EUR250 million of FLI and overlay releases, and this assessment has not changed. So, current expectation is EUR200 million. It can also be, yeah, what we said between EUR200 million and EUR250 million. So no material change in any assumption.
Mate Nemes: That's perfect. Thank you very much.
Operator: Thank you. We will take the next question from line Johannes Thormann from HSBC. The line is open now. Please go ahead.
Johannes Thormann: Good morning, everybody. Johannes Thormann, HSBC. I've got three questions, please. First of all, on the savings plans, it seems that the growth is still accelerating and the numbers of the new savings plans is actually increasing. So any marketing push behind it or what is driving this growth and what are the average investments? Secondly, on the risk cost follow-up on the FLI, the EUR500 million to EUR550 million remaining FLI after this year, will this be a base you always need to have or is there still some amount which could be released in 2025? And what kind of sectors are you borrowing? Any changes to those industries or still the old typical names? And last but not least, just a simple one, on the tax rate for 2024, any changes due to the shift of the Slovakian banking tax into the tax rate? Thank you.
Stefan Dorfler: I would take the savings banks costs question if I got it right, Johannes, you have to help me because the line was a little bit weak. I think it was savings banks costs, right, OpEx?
Johannes Thormann: No, the tax rate.
Stefan Dorfler: No tax rate was the third question. This is easy. Tax rate, I can -- but the very first question you had.
Johannes Thormann: The savings plans.
Stefan Dorfler: Oh, savings plans. Okay.
Willi Cernko: Okay. Johannes, I want to take this. Sorry. Okay, good. This is a well-established initiative. We kicked it off already in 2022. Meanwhile, we have 1,235,000 so-called security savings plans sold. And the good thing is this is well established in all core countries, leaded by Czech Republic with more than 500,000 and so on and so forth. In Austria, we are talking about 110,000 plants. The average amount on a monthly basis, in Austria, we are talking about EUR150 in CEE, on average 90. No special campaign is well established in the network.
Stefan Dorfler: And I put away the tax question very quickly before I hand over to Alexandra. Yes, it is in the tax line. Yes, it has, of course, a certain up-drift effect. We are applying a 20% net tax rate for the first quarter. And we will, of course, update you as we go throughout the year, where we will land for the full year.
Alexandra Habeler-Drabek: On FLI, Johannes, the remaining or the planned remaining 550 by year end 2024, we do not expect that this is the stock. Of course, FLI moves with macro, but we would expect also for 2025 that we could release some 150 to 200. And the remaining part we then would consider an FLI stock. On the typical suspects in terms of industries, we still have some energy overlays left, not so much. Those we expect, we will fully release over this year. Cyclicals, we also regularly review. In chemistry and metals, we currently would not see a big change. And of course, we are, as we started many quarters ago, regularly monitoring all the industries. But as of today, we do not see any other industry which would qualify, let me call it like this, for additional overlays.
Johannes Thormann: Okay, thank you.
Operator: We will take the next question from line Krishnendra from Barclays. The line is open now. Please go ahead.
Krishnendra Dubey: Hi, thanks for taking my question. Actually, I have three questions, actually. First on the NII, actually, could you talk about the others NII, which is at -- which has increased quarter-on-quarter and what are the drivers and what could we typically see going forward and for the year? And also in past you have been kind enough to provide the guidance for the 100 basis point moments on the rates for different geographies. If you could update us on that. Third question is -- second question is on the fee side, I think you talked about you talked about you could have better performance in the fees and you could do better than the 5% guidance. Are you putting it up or you're just talking at about Y-o-Y performance about it? And third, is on the risk cost, primarily. This is for Alexandra. So, if you could just break down the FLIs by geographies or by divisions, that would be helpful.
Stefan Dorfler: Okay. Krishna, I take the two operating performance questions. So really nothing special on other Austria NII, a little bit of an effect in Q4 there. So there's definitely nothing special to mention in terms of overall developments. Everything just business normal. And no, we are not upgrading the CEE overall growth. I think it's 5% -- Sorry. I think the question was about volumes in CEE, right, Krishna?
Thomas Sommerauer: No, fees and commission fees.
Stefan Dorfler: Fees and commission income. Yes, we see potential there. Sorry. Thanks very much, Thomas, for helping me. No, we definitely have a very optimistic outlook there. Obviously, we need to see, get a little bit more evidence in the second quarter whether some of the trends are reconfirmed. Because obviously at the beginning of the year, there are some sales activities, some campaigns, which could maybe dilute a little bit the longer term trend. But if we get a reconfirmation of the trends in the second quarter, we definitely will consider an upgrade of the guidance in this income line. Definitely right.
Alexandra Habeler-Drabek: On your question, let me repeat, if I understood correctly. So you're asking this 200 to 250 release on FLI that we are -- and release of [indiscernible] overlays, we are planning where we would see -- where we would see it. Let me start. So FLI out of this 750, 500 is FLI and the [indiscernible] status is that roughly 220 are booked for Austria and 285 for CEE. And as mentioned, and as you know, the FLI moves with macro. So where we would see the release will strongly depend on the macro development. But as we see that CEE is really doing very well, I would expect as of today a little bit more in the FLI of CEE than in Austria, but we will do the FLI update in second quarter and then we will know more.
Krishnendra Dubey: Yes, thanks a lot. And I think just the 100 basis point rate moment what do you think of the -- on the NII sensitivity actually?
Stefan Dorfler: I think there is not a big change to this and just gives me the opportunity to emphasize that we always should look at currency sensitivities, not so much country sensitivities, reminding you of a significant share of Euro balance sheet in countries the like of Czech Republic and -- Czech Republic and Romania. So, I just can reconfirm around about 300 million NII sensitivity. But for the full year of a 1% move in ECB in euro rates, let's not forget that around about 40% of this would be showing up in the savings banks. And I think the Q1 already has been showing that our sensitivity indications on the Czech currency are quite accurate and that we are benefiting from the rate cut cycle that the Czech National Bank has been kicking off.
Krishnendra Dubey: Thank you. Thanks a lot.
Operator: Thank you. [Operator Instructions] We will take the next question from line Mehmet Sevim from JP Morgan. The line is open now. Please go ahead.
Mehmet Sevim: Good morning. Thanks for your time. I had just two questions, please. Firstly on NII, and I know, Stefan, you actually implied this during your comments. But the full-year guidance does seem to imply that NII will go down a lot in the second half of the year if you take into account the first quarter run rate and also what you said on the second quarter. So, can I ask what's your feeling about the second half NII at this point in the cycle, maybe without even thinking about guidance? But, in terms of the rate expectations, growth, et cetera, what do you think NII will look like in the second half of the year? And maybe one follow up on Czech Republic actually. Could you talk about what's driving the resilience in Czech NII in this declining interest rate environment? I know you said euro rates are still supportive, but in terms of the deposit costs, for example, there, after the 125 basis points cuts, have you started repricing your deposits down? And if yes, what kind of reaction have you seen from your core customers and how do you expect that to continue? Maybe any color on that would be helpful. And finally, on CRE and the savings bank's risk costs, it seems like you've done quite a visible allocation this quarter to CRE there, as you had signaled before. But could you give us more color on the state of business in this segment and what is driving it and how do you expect the next few quarters to look like? Thanks very much.
Willi Cernko: Yes. First, Mehmet, let me remind you, what is our current expectation when it comes to ECB key rates. We assume, which probably is very much the market opinion at the moment. We assume a 25 basis point cut in June. And then one can read from the statements of the ECB council member that members that -- I think their idea is to cut three more times than in September, October and December. I think that's on their minds. However, there is a certain risk to this assumption for two reasons. First, US dollar rates. It seems very much that the Fed is definitely open for what happens in 2024. I mean, you read the market comments as much as I do. So there is definitely a factor which they cannot completely ignore on the ECB side. And the second thing is obviously what will happen to core inflation, but also the energy component later on in the year, in Q3 and so on. So, I think while June is more or less a done deal, at least we read it that way, the further path is very much depending on developments in summer or with, let's say, Q2, Q3 figures. Having said this, everything you hear from us in terms of NII outlook is currently built on the base case of these forecasts. And this would mean that we would see a deterioration in terms of NII -- displayed NII in Austria on the back of that, a little bit of pressure on the other euro countries, but much less so, leading to a Q3, Q4 on the Austrian activities, which is substantially lower than Q2 and Q1. That's on that front. Of course, should this change or should the deposit pass-throughs slow down and stuff like that? It can only or it should only get better from here. NII in Czech Republic, maybe two things. First, Q4 was relatively weak. Q1 was relatively good, but we are overall on the path of this rate cut cycle on the right-hand. And discussing the deposits, the repricing has been starting and we don't see any changes there in terms of, so to say, pressure from the market. We are very well positioned. Our liquidity position gives us the comfort to be market followers. And we are benefiting actually from some of the, let me say, signs of, I wouldn't call it, stress in any form, but some signs of pressure on P&L in other houses. So I'm very optimistic with a combination of good volume development and overall right balance sheet management position to deliver a very good NII in Czech Republic in 2024.
Alexandra Habeler-Drabek: Then I would take over on your question on commercial real estate. Let me start that commercial real estate in the classical sense, so meaning shopping centers, office, logistics and hotels is all doing very, very well across the board also in Austria. What we are seeing in Austria is residential real estate. And this mainly residential real estate developments in Vienna undertaken by smaller and medium-sized developers. These are developers where Erste Bank Osterreich did not do so much business with some Sparkassen did. And we see exactly the same pattern that we have seen in Q4 2023. We have seen the NPL inflow has a little bit slowed down in Q1. I would not rule out that it will now stop immediately, but I'm quite confident that in the second half of this year, those weaker market participants, yeah, we have seen them all, to be very blunt. But this is really focused on a small segment, residential real estate in Vienna. Of course not the non-profit housing association. They are doing excellently and are also a big share in our portfolio, as you know. And I would expect a slowdown in the second half. And yes, you are right, we have booked risk costs. But when you look at the absolute amounts of 90 million and take into account that we have not yet released any of these 200, 250, the overall picture is not so dark.
Mehmet Sevim: That's Very clear. Thanks very much.
Operator: Thank you. We will take the next question from line Gabor Kemeny from Autonomous Research. The line is open now. Please go ahead.
Gabor Kemeny: Hi, just two quick questions from me please. On Hungary NII, firstly, you seem to be indicating that we should expect a gradual decline with falling rates. Any color you can give us on the Hungary NII evolution, please? And the other one is on what Alexandra, just discussed on some of the savings banks being exposed to real estate developers, the problematic real estate developer, are any of them exposed to the extent that they might require support from the current guarantee system, in your view? What is the likelihood of that? Thank you.
Alexandra Habeler-Drabek: I can start with this one with a clear no. Yeah. So really high collateral levels throughout all these financings. So absolutely, no reason of concern in that respect that you indicated.
Gabor Kemeny: Got it, thank you.
Stefan Dorfler: Yes. And on the Hungarian question, Gabor, well, we are expecting like probably the whole market further for the rate cuts, and hence the income from placement of excess liquidity will be lower, as mentioned before. In addition, I think you're aware that the rate cut for corporate deposits has ended with the end of Q1. And therefore, in my short term outlook, I was mentioning Hungary to be a little bit of a risk on the NII performance we have. We had a positive effect in the first quarter of around about 9 million in euro terms on the -- of that factor. So let's see how this further develops. So we are not negative on Hungarian NII by any means, but this excellent performance we saw in the first quarter might not repeat in the same way.
Gabor Kemeny: Very clear, thanks.
Operator: We will take the next question from line Riccardo Rovere from Mediobanca (OTC:MDIBY) Group. The line is open now. Please go ahead.
Riccardo Rovere: Thanks. Thanks for taking my question. Two or three if I may. The first one is a sort of curiosity on how you think about FLIs when it comes to decide your capital distribution plans. Because you are now at 15.5%, including the profits of the period, which is 150 basis point above the -- your return -- your very high return of targeted [15%] (ph) and you have not used a single penny of the 750. So technically the capital -- one could claim that the capital is at 16%. So, just asking, any update on the guidance, nothing like that. Just curious to know if you consider that 750 as part of your capital or not? The second question I have is on -- is again on NII, if I may. When you look at the past experiences of 2009 -- 2008-2009, maybe a bit of 2010, because of the deposits in Austria, when the rates plateaued, kept going up for a while, which is what is happening now. Then when the rates started falling, the cost of deposits in 2009 started falling almost immediately. I was wondering whether the lesson for the -- from the past you think can be an indication also for the future. And somehow related to that, when you look at, see, it looks like that given the rates are so high or were so high in Czech Republic, in Romania, in Hungary it was easy, at least at the beginning to transfer on the cost of the deposits of the rate cuts because we were starting from 7% -- well, above 7% in Hungary. To what extent, to what level of rights do you think you can keep doing this in Eastern Europe? So if Czech Republic do go to 3%, would you still be able to pass most of the rate cuts on the cost of the deposits? Thanks.
Stefan Dorfler: Let me very generally, Riccardo, take the last question because listening to you, I was going through all the impressions I've had from my business colleagues, from the countries and so on. So it very much obviously depends on the business mix that you have in the deposits. And here I can definitely confirm to you that we have very fast adjusting portfolio there. We have been providing to our customers quite attractive deposit rates as you know, from the years 2022 and especially also 2023. We were also suffering in terms of NII in Czech Republic but we are now also able to reprice very quickly downwards. The market is doing that. Therefore, both in terms of the competitive situation as well as product mix we are able to reprice quite quickly. How this will exactly play out in the Austrian scenario, I can't tell you yet, obviously, because we might only be starting in June with the rate cut cycle. But given the maturity profile of our, so to say, of the term deposits, especially on the retail front, I would be quite optimistic that the delay from central bank and key rate cuts to actually really also having a relief on our interest expenses will be relatively short. So, that would be my comments on that. And well, I don't know Alexandra, do you want to talk about the FLI as part of capital? Should I, should really?
Alexandra Habeler-Drabek: May be let me start only by recalling, yeah, you said we did not -- we did not use yet, so FLI and stage overlay was higher even in the past. Yeah, we had 900 plus. We used part of it to counterbalance real default inflows already in 2023. For this year, we plan the release of the already mentioned 200, 250 which also means that we are using what we provisioned for in previous periods for a deteriorating environment. Some basis is also already mentioned today, will remain. Yeah, so there will be a base of FLI. But other than that, I will pass it on to Stefan for the capital distribution.
Stefan Dorfler: Look, as a general comment, not any kind of risk technicalities on my end. Let's not forget that there are very, very, very different expectations between, so to say, the regulatory view on those discussion points and the investors view on the discussion points. And we have to sail and we have to manage, so to say, between those very different expectations, of course, also always fully complying with all the audit and accounting rules. So I would simply say to be very fair here, Riccardo, we have in any case, plenty of excess capital. That's absolutely clear. Even if we do not account a substantial part of FLIs to it, we have substantial excess capital. We are very much talking about this. That this level of 15.5 plus minus is a new level to us. We know, and we have already -- Willi has already discussed this also with his successor very openly, that this will be a point for discussion with you latest, then also in summer. We have a clear path forward for distributing via the share buyback, and in particular, our regular dividend. What we always have been communicating, should that -- should that leave us still with substantial excess capital, communication about how to deploy this excess capital, we will definitely have to follow. That's my general comment, independent from 100 million up or down on FLIs here or there.
Riccardo Rovere: Right. Thank you. Thank you very much. And maybe a quick follow up on operations. This is an update that happens right at the beginning of the year, so tech and operations, should stay more or less at this level for the rest of 2024?
Stefan Dorfler: Yes.
Riccardo Rovere: Yes. Thank you.
Operator: Thank you. We will take the next question from line Robert Brzoza from Pko BP (NYSE:BP) Securities. The line is open now. Please go ahead.
Robert Brzoza: Good morning, everyone. I have three quick questions partially covered in the discussion -- in the earlier discussion. First of all, on the residential exposure, as I understand, mostly concentrated in Vienna. Could you share how much of the provisioning has been targeted to cover that exposure? And then from previous calls, I recall we were always referring to the residential exposure as relatively well collateralized. So I'm just wondering what happened that it didn't work out as originally planned, and whether that could have any negative implications on the timing of the overlays releases in the coming quarters? So that's first question. And the second question is more generic. How do you see the competition in digital banking? I'm here referring to George and Revolut. As we can see, Revolut is having a major marketing push across the region. How does it impact the fee schedule? Do you plan to offer, like, flat fee plans for customers? Do you plan any changes? How do you see the state of the competition across the region? It's not just Revolut, but a new, for example, digital bank from Transylvania in Romania, new mid-sized banks being set up in the Czech Republic. What's the impact on your core business there? Thank you.
Alexandra Habeler-Drabek: Yes, let me start. So we do not expect from the fact that one or the other small and medium sized developer being active in Vienna is trying any impact on the timing of the release of overlays. So, no, a clear no on this. A clear yes on your statement on the high level of collateral. Yes, this is true. And when you look at the EUR95 million overall, which is not only coming from Vienna residential real estate, so it's run business as usual in retail. We did not have any bigger counter effects in this first quarter, but basically, this EUR95 million is not so huge. And when you dedicate, let's say, very roughly half of it to some residential real estate projects, you can see that the collateral level is really high because EUR45 million, let's say, for 10 real estate projects, is not so huge.
Willi Cernko: Okay. Let me take the retail question. I think you are fully aware that it is our intention when it comes to retail as well as to corporate. We want to be among the top three in all our core countries. And this is not just achieved. We're heading to beat top -- on top of the competition in each of our core countries. With George, and this is one of the key arguments, George -- and with George being present in all our core countries, this gives us access to scalability, firstly. Secondly, it is meanwhile, used by more than 10 million customers. And we should not forget that today, more than every second retail product is bought digitally. So this is a tremendous development we've seen over the last few years, and this is an ongoing process seen also by further alignment across the board. We should not forget. Besides that, we have a well-established brand in all our core countries. This supports a lot. This helps a lot to get access to new customers, to attract new, especially young customers. And thirdly, not to forget, we have a well-established branch network, a franchise with well-trained and motivated people. And we're seeing this throughout the crisis when we talk about COVID when competitors who were just present digitally were not able, let's say, to meet customers’ expectations, we were able to do that. So all in all, I have to say I think we are well established, we are leading the bank when it comes to digital solutions. We have a network that is well established. We have motivated people and we have a brand that is seen as young, innovative and prepared for the future. So I'm [Technical Difficulty] very optimistic when I look ahead.
Robert Brzoza: Thank you.
Operator: Thank you. [Operator Instructions] We will take the next question from Benoit Petrarque from Kepler. The line is open now. Please go ahead.
Benoit Petrarque: Yes, sir, it's Benoit from Kepler Cheuvreux. Just two follow-up questions quickly. Now, just speaking about rate cuts potentially, so could you remind us how do you edge your variable loan book in Austria? Seems that your balance management has been very strong in CEE looking at the Q1 results. But just wanted to know a bit more on your edge on the variable loan book. UK banks are doing the structural edge. I was wondering if you try to anticipate also a bit of rate cuts potentially impacting the yield on the loan book. And the second one is obviously we have this wage inflation coming in in Austria. I was just wondering here what plans you have to address the wage inflation, i.e., is that something you consider as well to optimize also the cost base going forward and maybe reduce FTEs? Thank you very much.
Stefan Dorfler: I'll try to address, Benoit, the points as accurately as I can. So firstly, we are, as I mentioned before in a detailed answer, we are actually exactly basing our assumptions currently along the expectations on ECB rate path forward. And this has at least short-term 2024, a certain impact on NII. This was the one part. In terms of overall repricing, I think I gave you already a couple of insights what we expect on the Austrian side. When it comes to costs, well, it's very clear that we will have an up-drift starting from the second quarter. We have mentioned that very often in the light of the collective bargaining, which was resulting in this around about 8% increase. As you can read from the overall coverage also communication and press, we are definitely expecting overall operative -- sorry, operational improvements and efficiency measures. And your question on AI, we have a lot of activities, mainly targeted, to be honest, on the customer front, but also on process optimization, which are kicking off. To be fair, we are users. We believe that we can benefit from the new technology very much. We have a lot of young people, especially, taking care of pushing us ahead there. Willi just mentioned that also in the context of the customer services. That's the plan going forward. Short-term, to be honest, I would not dare to say, it will have an effect on managing the costs in 2024. I would not dare to say that, Benoit, to be honest.
Benoit Petrarque: Thank you very much for that.
Operator: Thank you. It appears no further question at this time. I'll hand it back over to your host, Mr. Willi Cernko, for closing remarks. Thank you.
Willi Cernko: Ladies and gentlemen, as there is no further question at this time, and this is my last quarterly presentation to you, the half year presentation on the 2nd of August 2024 will already be hosted by my successor, Peter Bosek. I would like to thank you for the many insightful conversations we had over the past two years and your continued commitment towards Erste Group. It was a pleasure to work with you over the past two years. Thank you very much and bye-bye.
Operator: Thank you for joining today's call. You may now disconnect.
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