Ladies and gentlemen, thank you for standing by. I'm Poppy, your course call operator. Welcome, and thank you for joining the Banca Transilvania conference call to present and discuss the third quarter 2022 financial results. All participants will be in a listen-only mode, and the conference is being recorded. The presentation will be followed by a question-and-answer session. Should anyone need assistance during the conference call, you may signal an operator by pressing star and zero on your telephone. At this time, I would like to turn the conference over to Mr. Ömer Tetik, CEO, Mr. George Călinescu, Deputy CEO, CFO, Ms. Luminița Runcan, Deputy CEO, CRO, and Ms. Diana Mazurchievici, Deputy Director, Head of ESG and Investor Relations. Mr. Tetik, you may now proceed.
Hello. Thank you very much for joining us. This is Ömer Tetik from Banca Transilvania. I hope you hear us well. In case you don't, please make sure, please warn us. Interesting times continue, and interesting news volatility prevail in the market. We would like to give you a brief update about the Romanian macroeconomic situation as we see and as it's been reported. Some few things about banking system, and then we will give some insight about the numbers that we have already announced. By the way, our presentation is uploaded at the website of the bank at the Investor Relations menu.
You can access it, but as we always say, in case you have other questions which we cannot address or manage to answer during the Q&A today, please do not hesitate to contact Diana, Vlad, our Investor Relations address, and we will try to improve information feedback on them. First thing, third quarter numbers came slightly stronger than expected. This, I guess, also pushed European Commission to update the GDP forecast for Romania over 5%, which I would say that it was quite an update that we have read over the weekend. In the first, let's say six months of the year, GDP has grown 5.1%. Now European Commission's expectation is over 5.5% for the whole year.
Definitely IT&C, agriculture, manufacturing contribute a lot to this growth. Confidence of the companies, although it's been slightly decreasing still at good levels, that also shows itself in the, I'll say, European Union funds or European funds absorption rates, new projects stepping into the market. We see that also in the banking sector. The loan demand had been quite strong in the third quarter as well, even beyond our, let's say, forecasts and expectations. This is almost 28 months of continuous growth in lending in Romania. If you would take out actually couple of months of shock from...
Due to the pandemic, I guess we have a very long ride that, after the previous financial crisis, loan books since 2012, 2013 had been growing on a constant basis. The growth was mainly at the retail side until recently, but since the pandemic, together with the state schemes and European funds, we see growth coming, being supported by corporate demand, by demand from companies. Still very much balanced in favor of lei lending, so that both the economy and the banking sector is continuing its nature of hedge. The corporate loans this year grew 20% to RON 192 billion lei.
We think that this will continue, although it might not be at 20% level, still double-digit growth also throughout next year or years. Household loans increased by 5.2% in the first nine months. Plus it's very much supported by the mortgage lending as well. It showed also kind of Romanian households' resilience to increasing interest rates. But with the last in the last couple of months, we see the demand is being subdued because there are expectations about market, too many news. I guess retail customers would like to make their acquisitions, their purchases at a more stable market. For Romania in general, the macroeconomic situation is also well supported by the literally, well, I'll say zero unemployment.
It's a very low unemployment environment. This supports the labor market, although it pushes upward pressure on the wage-related inflation, on wage inflation. Still, it assures that both consumption, bank payments, due payments are being respected. These are also keeping, let's say, the engine of the economy on the run further. The loan-deposit ratio of the banking sector was climbing to 74%, because as we have already mentioned, the loan growth was above deposit growth this year and liquidity becoming more and more scarce. Still, we see in the last couple of weeks or maybe beginning of September, retail customers, households started saving again, and the household savings started slightly increasing again.
We assume that with the precaution and discussion about the ongoing or upcoming crisis, this precaution will also prevail. If you come to BT, in the first nine months, more or less, along with the markets, our loan growth came mainly from corporate lending, SME and mid-corporate lending. We played very active role in government related programs or state programs. We see that in 2022 also, the new IMM INVEST, SME INVEST program is, I'll say, quite impactful in the markets. Almost half of the new demand is coming as investment loans. This is a very healthy growth in the market. We didn't see for a very long time such a balanced, let's say, approach, such a balanced demand on the investment loans.
This is on the medium and long run, a good thing. On the other hand, definitely working capital needs also increased, at least, by the inflation itself. Companies have been well prepared as we have seen. We had been also traveling around Romania. All our business units have been visiting customers and branches. The feedback is that as compared to 2008, 2009, this time, customers, both retail and SME, they did their homework. They prepared in terms of liquidity, indebtedness ratio, and their exposures. Still, challenges are definitely quite big. I'll say this year, one of the important matters in the third quarter was also the public moratorium, which was legislated towards the end of second quarter and active in the third quarter.
On the other hand, we have seen a very low rate of demand by the customers. It's not even significant. The total moratorium requesting customers are below RON 50 million. That shows that also customers prefer on all segments, they want to pay their dues while as long as the interest rates are relatively lower. We see also the inflation in Romania as well, kind of peaking out. Although we don't have expectations of a sudden fall in the inflation, still, month-to-month, inflation rates are coming lower than previous months. I guess, throughout the next year, we will see, let's say normalization and maybe decrease in the inflation rate, which will help us also on the OpEx side.
We are adapting our operating model since the beginning of the pandemic with very big focus on digital banking, with on consultancy advisory for our customers on the normal, let's say, traditional commercial banking businesses. We still maintain one of the highest Net Promoter Score in Romania, especially in the banking system. When we look at the financial results itself, we see both due to, thanks to increase in the loan book, but also higher interest rates, our net interest income has grown to RON 2.6 billion by 30%. Our net fee and commission income, this is something that we are proud and, let's say, encouraged to present, has grown more than 21%.
We see some upside here as we continuously increase our active customers with open accounts. We increase, let's say, the wallet of interaction with our customers on all segments. The most, let's say, painful part this year had been most probably for us, especially operating expenses, which grew also over 30% and ate up partially our increase in profitability. We managed to offer RON 1.45 billion net profit with a cost of risk below 40 basis points. This assured us to deliver over 23% return on equity. We are very careful in the months to come on our cost income ratio and on the cost of risk.
Due to our, let's say, customer portfolio, we are very also prudent in terms of our provisioning approach. Maybe it's not very fair to compare to last year, nine months, when we had been reversals of provisions. That's why even 40 basis points of cost of risk had an important impact. What we see is that our net banking income, I mean, before provisions, is actually growing very strongly. This is something that we can comfortably say that it will keep up, without, let's say, any necessity of shocking the provisioning numbers or other cost items. As I said, in 2023 we will have a more frugal approach to costs, and we don't expect.
Actually, we will ensure that our personnel expenses and operational expenses will decrease below inflation numbers. With 20%, over 20% Tier 1 capital ratio without the profits, and if you include the profits, it takes it to 23%. We have also a good base to continue our growth in lending to the customers. Our, as you know, our balance sheet and numbers, our loan structure is quite well balanced. Almost half of our portfolio is retail. The other half is SMEs, mid corporates and large corporates. In a very good, let's say, nature of hedge between foreign currency and local currency. We are funding ourselves from local customers in lei, and most of our lending is also in lei.
For the ones who are following Romanian markets more closely, you may know that the benchmark rate for retail customers, IRCC, is moving with a six-month gap. ROBOR is over 8%, whereas IRCC is slightly above 4%. In January, we will have the repricing of IRCC. It will go towards 6%, still below ROBOR, but all retail loans will be repriced at that new IRCC rate. We have been, I wouldn't say necessarily a pioneer, but we were the first large bank increasing funding rates, deposit rates. We knew what may follow. We are very attentive on our liquidity position, although we always enjoyed high liquidity.
That's why, in the first quarters of this year or first three quarters of this year, the impact on the deposits interest rate change has also put pressure on our net interest income, although still, as I said, we managed to deliver 30% more net interest income as compared to last year, with net interest margin of 290 basis points. The loan quality also is quite good continuously. It shows it's an indication that also Romanian customers they show resilience, and they want to maintain a good, let's say, relationship with their banks, their financing partners. Our NPL ratio is possibly below 2%. It's actually close to 1.5%.
NPL coverage ratio, if you include also related collaterals, it's close to 130%. Well above, let's say, even Western European averages. The non-performing loan ratio per EBA indicator is at 2.55%. It's on a downward trend. How to say, as I said a bit earlier, we still stress test our portfolio. That's why we have been provisioning, and we want to see numbers really improving before we change before we make any change in our provisioning policy.
I would like to also briefly thank our shareholders for their trust, because we had our GSM, general shareholders assembly, where we have obtained the approval of our medium-term notes program, MTN Program, although I mean, the amount RON 1 billion looks big. We didn't want to. We never aimed to do a single transaction of that size. Also the current market conditions and high volatility doesn't necessarily encourage us to tap the markets now. We will be looking to going to markets during the first half of next year. Whenever we have favorable conditions. We don't want to borrow excessive liquidity at excessive costs for us. That's why we will be, let's say, following markets very carefully.
Also, since we have our ESG approval, the interest from different investors, institutional investors and investment banks shows that, if we manage to tap the market at the right time, there will be a good interest on the transaction. You have been hearing also very recently the sustainability and climate, social, sustainable banking, social banking had been talk of the markets also with COP 27 happening in Egypt. We are trying to keep up. We are trying to learn our, let's say, homework. We have obtained good ratings recently. Also, reputable position that among, let's say, at 47th position among 1,100 global banks. We are also trying to develop this further.
We look at their, let's say, remarks, observations and improve ourselves. We are looking what we should continue doing and what we should improve so that we will have not only better rating but also better deeds for the community, for the world that we are living in. Diana and her team have been very active. Also they are guiding us throughout this. If you have any question as regards our ESG stance and activity, you can definitely ask us or Diana directly. We have also opened Stup, the hive that we were mentioning. The hive brought a big vibe better than we expected. There are already over 3,000 entrepreneurs who joined program with Stup.
There is a community that we built, helping entrepreneurs to from scratch, either to establish their business, to integrate their business, or to develop, improve, their businesses to differentiate their sales channels through our partnerships. It had been receiving quite good feedback. Also, BT Asset Management, another subsidiary that we are, let's say proud of presenting, has become the largest asset manager in Romania. Now they are managing over RON 4.4 billion. Despite the volatility, they maintained their core customer base. Hopefully when the trust will return to the market, as it is somehow maybe happening these days, as we are expecting BT Asset Management also to increase its asset size quite significantly.
I would like to leave the conversation here on our side and start the Q&A. We will try to answer as many questions as possible in the next 20-25 minutes. If anything is left out, as I said, please do not hesitate to contact us. Thank you very much. We can start the Q&A.
The first question comes from the line of Petre Cristian with NN Pensii. Please go ahead.
Hello. Congratulations for the results. Just a question related to the reclassification of the government securities. How do you plan to classify from now on? I see there is a large movement in the Available-for-Sale securities and to the amortized instruments. Thank you.
Hello. Thank you. Thank you for your encouraging message. As regard to the reclassification, as we were discussing also, I guess in the last call, this is quite a complex matter that we are documenting together with our also auditors. We are working on the, let's say, finalization of that registration. On the other hand, from now on, we will be having a more active management of the portfolio for the new established portfolio. We have been also learning our lessons, I would say. Romanian markets are getting more mature and deeper in order to assure such movements.
We do not have a public policy now how we will classify fixed income instruments that we will buy from now on, but it will be depending on the, let's say, our liquidity position, our risk appetite then, and our hedging needs. From now on, there will be a mix of it. We are also about to finalize our management structures, both system-wise and organizationally. We will be making some changes so that we will manage the portfolios accordingly.
Mr. Petre, are you done with your question?
One more last question regarding the retail and how do you see the coming quarters? Thank you.
It's very difficult to forecast. This is also the reason that we are in the last couple of weeks actively traveling within the country because we don't want to do our budget without knowing our customers' plans and budgets. What we think is that there will be significant slowdown in mortgage lending and slight decrease in consumer lending. This is mainly, I'll say due to the precaution of the customers or their expectations. They don't want to make a fast move. Also, in some segments, we see that at the higher interest rates, customers might not be eligible anymore for new lending. But on the other hand, the encouraging factor is that both savings rates started picking up and NPL, non-performing loan formation is very low.
That, I guess, as compared to previous experiences of several other emerging markets, Romanian retail customers are buckling up for a tough winter, but they also have the ammunition to position themselves. That's why, as I said during the short presentation, we think that in the next couple of quarters, corporate demand, companies demand, in lending will take over what was happening in consumer lending in the last couple of years.
Thank you. No further questions.
Thank you.
Question comes from the line of Lefong Haitong with Concorde. Please go ahead.
Hi. Thanks for the presentation. Unfortunately, I just joined, so I missed the first part. Maybe my question was already answered, but my question would be on NPL. How do you see your risk outlook in general in the last quarter and maybe in 2023? I see that NPL on the individual level was 1.5%. Do you see it staying below 3% or shall we expect higher figures to come? Also on costs. I was wondering what is your view on personal expenses. What is the pace that we should expect next year? Do you see further pressure still? Thanks.
Sorry, your second question we couldn't hear due to some background noise. Can you repeat please?
It was on OpEx and in OpEx it was on PerEx, personal expenses, whether you still see pressure on that or if you are seeing some ease. That's what it was actually.
Actually, with your two questions you are covering my presentation, so you didn't miss it. Coming back to NPL generation, although the existing signs indicators do not show any change. As I said, our NPL ratio had been decreasing in the last couple of months on a month-to-month basis. Due to the fact that there was a very low demand for the public moratorium. We don't expect a change. We think that our NPL ratio will remain well below 3%. Maybe during winter when the invoices will be higher, energy invoices which are also limited for retail customers actually.
It may show a moderate increase, but for that we have been also updating our macroeconomic models and we have been updating our provisioning policy, which you see the impact also substantially during the third quarter. That's why I would say that we are in the comfortable zone. As regards OpEx, we have been also mentioning in the previous calls this year that there were some dues we had to cover from pandemic. Some of the fidelity bonuses, some of the actions that we had in our collective labor agreement, we had to respect with one or two years delay. That accumulated together with a substantial increase for the inflation adjustment. Next year we will be maintaining our OpEx increase well below inflation.
There are no one-offs that should hit as it was happening. There are no, let's say, delayed payments or postponed expenses that will hit in 2023. That's why, although I mean, we will struggle to bring it to single digit, still we don't, as I said, we are committed as the management to keep the OpEx increase, below inflation level.
Okay. Thank you.
Thank you very much.
The next question comes from the line of Unger Thomas with Erste Group. Please go ahead.
Yes, hello. Thank you very much. Good afternoon. Thank you very much for taking my questions also. I would right away follow up with your last answer on OpEx. Now there was quite a substantial difference in operating costs between Q2 and Q3. Is the Q3 level now the normal level something that we can expect to see in the coming quarters also? That would be my first question. The second one would be on NII. You mentioned it already, the benchmark will increase from on retail loans from January.
You also said that with higher deposit rates, the interest expenses are going up. What do you expect for the coming quarters? Where do you see especially your interest expenses going? The loan deposit ratio has been moving up slightly in the recent quarters. Do you see an urge to raise more deposits and thus increase the interest expenses more? Lastly, on risk costs, I would be interested in how much of the bookings that you had in Q3 were forward-looking and what do you expect to be booking in Q4?
Do you want to be very prudent about 2024 and do more reserving for 2023, I'm sorry, for 2023 or don't you expect anticipate such forward-looking reserves to be booked in Q4? Thank you.
Thank you for joining and asking questions. If I skip any, please hit again. As regards to the, let's say, high increase, there is also one item related with the Țiriac Leasing integration, which impacted both expenses and incomes on both sides. That's why. Actually, it singles itself out, but you see a big increase in the expense side as well. On the other hand, we are seeing that except that, let's say, one related to Țiriac Leasing integration, all other items had been well under control. The increases were not even close to previous quarter's increases. Second question was, I guess, related with the provisions, if I'm not wrong. If I
That was on the third question. Yes, exactly. On risk costs, yes.
Sorry, can you repeat?
Just on the second question was actually on net interest income.
Yes, yes.
As you see the interest expense is rising.
Okay. I noted, right? So net interest income, as I said, we had been one of the first banks, and we have a large deposit base, so it impacted a lot when we started increasing interest rates in order to adapt to the increasing, let's say, ROBOR or interest rate environment. We do not increase that much. I mean, if you think like this, I mean, from the third of January until July, our interest rate on customer deposits increased 2.5 times. From then on, the increases are or will be 25-50 basis points. We don't need, and, as I said, our customer savings are increasing. We don't see the need, because also both the benchmark rate and market ROBOR seem to stabilize.
We don't see the need to exceed. From now on, we should be benefiting only, or mainly from IRCC or other benchmark rate increases. As we were saying, almost two-thirds of those increases, we will see directly reflected in our financial data. Coming back to provisioning, I mean, this year we don't expect to exceed the provisioning budget that we had. Indeed, updating our models to the macroeconomic environment and doing some precautionary moves led us to an acceleration in the third quarter. This, as we said, as I said a couple of times today, is mostly precautionary and we will adapt our policy to the market developments.
I guess next deep dive on that should be beginning of second quarter, so that we will pass through the winter.
How much of the risk costs booked in Q3 were precautionary measures? Can you quantify that?
I'm not sure if I can give a percentage now, but I will say that at least half, I'm sure it's more than half, but at least half is a safe answer.
Okay. Very good. Thank you very much.
Thank you.
The next question comes from the line of Măndru Daniela with Swiss Capital. Please go ahead.
Hi. Hello. Thank you for the presentation. I have one question related to the cash dividends. Given the NBR advice to consolidate capitalization, should we expect that the payout ratio for the cash dividends to decrease?
Daniela, indeed, now we see that European Commission, European Parliament, EBA, SRB, and the National Bank of Romania, there are lots of debates going on as regards to recommendations or even possible limitations. I don't want to tell anything, but as we always said, if we will have excess capital, we don't see the reason not to distribute it partially, at least, to our shareholders. However, it is what I think, I don't want to mislead or create a wrong perception now. But at least based on our feeling, I think, and also even according to the messages circulated in the public space, as long as the banks and us can convince regulators, a small portion, I mean, even this is the wording.
They say as long as you can convince them, us, a small portion of the profits could be distributed as cash dividends. We will see. We will have more clarification on that, as we are building our budgets, also. That's why, just my final and only official answer would be that we are not in a position to declare a percentage or number now.
You are saying that there is also the possibility that no cash dividends to be distributed next year?
Uh, I-
Because I thought in fact the payout will decrease but not will disappear.
As I repeat, I'm not telling you a percentage. I'm not saying that it will disappear, it will increase, or it will remain stable. I said, I'm saying that we want more clarity from the. We will seek more clarity from international and local regulators. If we have this comfort that we can give to them and to our shareholders, definitely, we will continue our cash dividend policy as well. I mean, your knowledge, your insight is not necessarily less than what we know, because there's a lot of public debate going on. We don't want to.
We don't have the comfort of last year or the previous year when we were saying, "Okay, with this percentage, we think that we can distribute." We are just in the middle of our budget exercise. On the other hand, the growth, as I said, is coming from corporate loans, company loans, which are more capital intensive. If internally we will also be convinced that this is a trend that will continue and we want to be an active, taking active part of it as we did for the last couple of years, we should be more careful with our capital planning.
Well, okay. Thank you. I don't know, just a grasp of it regarding the cost of capital, the cost of risk, for 2023. Can you give us a range? I don't know, it should be at least, I don't know, from a precautionary point of view, where it should be. I don't know, around 200 at a normalized level, much above the current level, double the current level. I don't know, something, a guideline.
I mean, this is something we could even, let's say, put it on a recorded message almost. Because where it should be, I guess in front of our shareholders, we should say that it should be zero. Although, considering that, our customer profile, markets, and products that we are active, the returns that we have, we think that with 120-140 basis points is a normal, affordable level. We are well below that. It seems that we are maybe either more pessimistic or prudent about our own portfolio. We will continue proposing to the shareholders a budget which will see cost of risk around 100 basis points at least. Repeat, we don't have the budget exercise done.
We didn't get our board of directors' approval, and we didn't propose it to shareholders yet. That's why, take it as my personal opinion.
Okay, thank you. For example, by comparison with BRD, given the strong corporate lending, should we expect next year, for example, and the corporate performance in general next year to see some provision reversals for this segment? I don't know. Something that I noted that BRD pointed out for next year. I'm wondering if it's the same for Banca Transilvania.
I mean, provisions are being built up, not only in 2022, they are coming with history. I don't have all the insight of their numbers, and what type of reversals they may think of, that. I know that they are, let's say very prudent, very stable institution with very, let's say, strong culture in risk management. I would take it for their word and respect what they want to do. We cannot compare necessarily, provision waterfall, just from one year to another. We had been also having some exceptional years or quarters when some banks were provisioning, we were having reversals. It is also related with recovery. If a bank has a big recovery during a quarter, it may impact strongly the financial results.
We don't have big tickets, let's say provisions necessarily, that we would be reversing. If macroeconomic situation will improve that quick and that significantly, yes, we will adapt our models and then, as I was saying, half of what we have been provisioning this year, we might be partially reversing. We need to see not only one month or two, a couple of quarters of very strong macroeconomic data, and we should stop speaking about public crisis. That's why I would say that we will continue our other incomes. You see we have recoveries as well. Next year again, we will be budgeting, although we don't aim to deliver that, but we will be budgeting over 100 basis points cost of risk.
Okay. Thank you. Regarding the lending activity next year, yes, retail lending probably will decrease. Corporate lending for sure will increase. I don't know, do you have a view at this moment on the total lending activity increasing next year for the bank?
This is very much hitting to the budget. As I said, I don't have
Mm-hmm. Okay.
The first draft approved by the board. I don't expect the loan growth to be double digits next year.
Mm-hmm.
Once we have the final numbers, we will very immediately and publicly come to the shareholders approval. I'll say, it will be at, let's say, decelerated growth.
Yeah. Okay. Thank you very much. This is all from my part. Thank you.
Yeah. I would say that if we could make it the last question and then, take the rest of the questions through the investor relations, we will appreciate.
Ladies and gentlemen, there are no further questions at this time. I will now turn the conference over to management for any closing comments. Thank you.
Thank you very much for joining us, for listening and helping us to clarify a few things. Again, in case there is any missing item, please come back to us. Hope that in case with some of you we will not be able to speak again until the end of the year, we wish you a peaceful, healthy and prosperous 2023. I hope that the ones who will spend the holidays with the beloved ones will enjoy or everybody will enjoy the holiday period. Our colleagues will be active in couple of conferences in the next couple of weeks. If you will be able to join those conferences, you can continue the conversation with Diana and her team. Thank you again. Take care of yourselves. Bye-bye.