Earnings Call: Q3 2018

Nov 27, 2018

Ladies and gentlemen, thank you for standing by. I am Gail, your Chorus Call operator. Welcome and thank you for joining the Bank of Cyprus conference call to present and discuss the Group's financial results for the 9 months ended 30th September 2018. All participants will be in listen only mode and the conference is being recorded. The presentation will be followed by a question and answer session. At this time, I would like to turn the conference over to Mr. John Patrick Hurrican, Group Chief Executive Officer Mr. Lisa Liva Vioto, Group Finance Director Mr. Nick Smith, Director, Restructuring and Recoveries Mr. Michalis Afanasio, Group Chief Risk Officer and Ms. Anita Pablo, Manager, Investor Relations. Mr. Hurricane, you may now proceed. Thank you very much, operator, and good morning, everyone. I'm sorry it's so early, but we have a whole schedule of Board meetings and things today. So before we get this call out before the opening of market and ensure it's recorded for those of your colleagues who haven't managed to get up to listen to it. So let's just start. Our results for this quarter reflect our continuing delivery against our core objectives of balance sheet repair. This was accelerated through the agreement for the sale of nonperforming loans in Project Helix, which we announced in August. Slide 2 summarizes the key highlights for the 9 months ended 30 September 2018, and I'll briefly reference these. In the Q3, we announced 3 corporate actions. First, the agreement for the sale of €2,800,000,000 of gross loans, of which €2,700,000,000 were NPEs. Helix is an important step forward in repairing our balance sheet and stabilizing our capital position. We expect to complete the transaction during the Q1 of next year upon receipt of regulatory approvals from the ECB. Second, the sale of the U. K. Subsidiary, which was completed last week following the receipt of regulatory approvals from the PRA and the ECB And third, the pricing of €220,000,000 of an 8Q1 capital security to further strengthen our capital base. We expect these securities to be issued before the year end. We have continued making progress on balance sheet repair. This was the 14th consecutive quarter of meaningful deductions in NPEs. We reduced the stock of NPEs organically by $224,000,000 excluding Helix, which is in line with what we guided in the market. The stock of NPEs is now €5,000,000,000 pro form a for Helix. The provision coverage on the residual non performing portfolio remains adequate at 49%. Our capital levels remain adequate at the quarter end above the share of minimum requirements and are expected to be further strengthened once Helix is completed and the issuance of AT1 is also completed. As at the end of September, the CET1 ratio was 11.9% and total capital was 13.4%. Pro form a for Helix and AT1 capital ratios will improve to 13.2% and 16.2%, respectively. During the Q3, the realized capital gain of 60 basis points from the UK sale partially offsets a 70 basis point prudential capital deduction relating to specific credits. We'll come back to this issue later in the presentation. During the Q3, deposits in Cyprus remained broadly stable, and we remain in full compliance with our liquidity requirements. The bank has significant service liquidity of €1,900,000,000 at the balance sheet base. Our loan to deposit ratio stood at 72% at the quarter end and 65% pro form a for Helix. We remain focused on further reducing the cost of deposits and ensuring our deposit base has the appropriate shape to maintain compliance with liquidity requirements. Our performance in the Q3 generated total income of €179,000,000 and a positive operating result of €86,000,000 whilst the net profit for the quarter was €17,000,000 The underlying positive result in Q3 was €37,000,000 The cost of risk for the 9 months was 100 basis points and 70 basis points for the 3rd quarter. Slide 3 sets out the corporate actions. Helix, in August, we announced the sale, as I mentioned, of €2,800,000,000 gross loans for a consideration of €1,400,000,000 and this translates to €0.24 on contractual balances and €0.48 on gross book value. Overall, the transaction is capital accretive by 50 basis points to both the Q1 and total capital. We are awaiting the ECB significant risk transfer approval and we expect to complete the transaction in the Q1 of next year. This accounting the accounting loss from the transaction recorded in the 9 months amounts to €150,000,000 which is expected to decline to €105,000,000 by completion as the time value of money of €45,000,000 unwinds. And Alisa can elaborate on the accounting of that later on if you wish to discuss it. As previously announced, the bank intends to participate in a portion of the senior funding of Helix subject to regulatory approval. This initially amounted to €450,000,000 and we are pleased to say that the bank's participation has been syndicated down to €350,000,000 to date. Efforts to further sell down are continuing and this further validates the commercial validity of the risk reduction trade. The last Friday, we completed the sale of our U. K. Bank for €120,000,000 The sale had a positive capital impact of 70 basis points, 60 basis points of which is in the Q3 of 2018 and is neutral to the income statement. The third item is the 220,000,000 AT1 Securities, which we announced and priced in August. We expect the relevant condition precedent and regulatory approvals to be put in place enabling the issuance of these securities before the year end. One of the issues with delayed regulatory approvals is that you have to take the capital hit in execution of the trades, but you have to wait for the recognition of the corresponding capital relief. Our capital levels will be significantly enhanced following the completion of HELIX and the issuance of the AT1. We estimate the pro form a CET1 ratio to be 13.2% and the pro form a total capital ratio to be 16.2%. We just move on to Slide 4. Slide 4 presents the impact of the corporate actions on the key metrics. Post the delivery of Helix, NPEs will be reduced by €10,000,000,000 since the peak in 2014. To put this in context, this amounts to 55% of the country's GDP. Provision coverage on the residual nonperforming book, as I said, is consistent with 49%. The NPE ratio pro form a for Helix is 26 percentage points below where it was in 2014 at 37%. The 10 percentage point improvement from Helix is sadly offset by a 5 percentage point increase arising from the U. K. Sale as the U. K. Bank was predominantly performed loans. Our capital level remains above regulatory requirements. As of the 30th September, the CET1 ratio, as I said, was 11.9, including the 60 basis points positive impact from the UK bank sale and 70 basis points capital impact relating to specific credit that was recorded in the quarter. Pro form a for Helix and the CET1, CET1 ratio will be at 13.2 percent. And that's again total capital at 16.2%. I'll ask Nick now to take us through the asset quality trends. Thank you, John, and good morning to everybody. I'm going to start in my usual place on Slide 6. So the 1st 9 months of 2018, we've seen the bank continuing to deliver strong organic NPE reduction, with NPEs reducing by €1,200,000,000 or 13%. Since 2014, the organic NPE reduction was €7,400,000,000 or 50%. Pro form a for Helix, NPEs reduced further by €2,600,000,000 leading to a total reduction of €10,000,000,000 since 2014. The NPA rate NPE ratio improved further to 37%. As mentioned earlier, Helix reduces the NPE ratio by 10 percentage points, whereas the UK sale increased it by 5 percentage points due to the reduction of performing loans. Write offs were a more substantial component of NPE declines in the year to date period, representing half of NPE outflows achieved. We continue to expect that a proportion of write offs in a given quarter will be volatile, driven by firstly, the volume of heavily delinquent terminated cases resolved in that quarter and secondly, the level of natural curing of NPEs achieved. Turning now very briefly to Slide 7. The pace of NPE outflows presented in the top chart remains reasonable and in line with our guidance. Inflows in the 3rd quarter amounted to €110,000,000 On Slide 8, we present the bank's view on what we describe as core and non core NPEs using a consistent approach in line with previous results presentations. As a brief recap, non core NPEs relate to restructured cases that have no arrears and based on them continuing to meet all relevant exit criteria, should exit NPE status over time. Core NPEs relate to delinquent borrowers that await consensual and nonconsensual solutions to deliver NPE exit. These two pools have materially different characteristics in terms of cash generation and risk, and therefore, we continue to believe it is worth considering them separately. Non core NPEs totaled €1,300,000,000 at the 30th September, representing 8% of gross loans and 18% of total NPE stock. Coverage on these loans is relatively modest at 15 percent, reflecting the lower risk associated with this stock of NPEs. Pro form a for Helix non core NPEs totaled SEK 1,000,000,000 Around 60% of these are available for NPE exit by the end of 2019, subject to continuing to meet all relevant exit criteria. Core NPEs totaled €6,300,000,000 at the 30th September, representing 39% of gross loans and with a 59% NPE coverage ratio. Coverage on these loans has improved substantially. Pro form a for Helix and non core NPEs reduced to €4,000,000,000 with a coverage of 57%. Turning now to Slide 9. Tackling the bank's loan portfolio is of utmost importance for the group and our stakeholders. The group has been successful in engineering restructuring solutions across the spectrum of its loan portfolio and expect this to continue in the coming quarters at a pace of around €200,000,000 per quarter. As portfolio size and business line mix have changed radically after Helix. At the same time, the bank will continue to explore other structured solutions to accelerate balance sheet derisking. In addition to the non core NPEs exits expected in the forthcoming period, we intend to take specific actions to tackle core NPEs of €4,000,000,000 Firstly, the ASEA scheme proposed by the government in July that aims to help address NPEs collateralized by lower value primary residences. The scheme is expected to address up to €900,000,000 of stickier retail core NPEs subject to eligibility criteria and participation rates. Eligibility criteria relate primarily to the open market value of the residents, total income and net wealth of households. These will act as a clear definition for socially protected borrowers, acting as an enabler against strategic defaults. Secondly, retail non SCA eligible loans of around €1,400,000,000 There will be additional focus of management on retail normal SCO eligible loans powered by an incremental servicing engine with Peppa and enhanced with a new product range. Thirdly, SMEs and corporate loans are around EUR 1,700,000,000. The plan is to focus on write offs and realizing collateral via consensual and nonconsensual foreclosures. This will be facilitated by onboarding assets into revenue at conservative 25% to 30% discounts to open market value. In parallel, the bank will continue to actively explore alternative avenues to further accelerate this reduction by structured solutions. And lastly, foreclosures. Foreclosures are being used as a means of tackling strategic defaults. The bank has and will continue to strengthen the foreclosure team and proceed with the foreclosures on all relevant cases. Turning now to Slide 10. On this slide, we provide some additional information on the ASEA scheme. According to the scheme, eligible borrowers are to be restructured to the lower of contractual balance and open market value. And once restructured, we'll exit at NPE definitions in accordance with the NPE exit criteria. The government will subsidize 1 third of the installments, providing certain criteria are met. The terms of the scheme are subject to finalization and the scheme is expected to go live in early 2019. We have undertaken certain actions in order to assess eligibility and build a book prior to the launch of the scheme. We have identified the Astea perimeter based on the information available to the bank, and we have set up a dedicated specialized team able to handle large volumes of contact strategy to ensure high participation. Introductory letters were sent to customers that could potentially be eligible so as to create awareness. At this stage, the response rate is very encouraging. As I mentioned earlier, Astea is expected to facilitate a decrease of the stickier component of Entes and is expected to act as an enabler against non ASEA eligible borrowers. Moving to Slide 11, foreclosures. Foreclosures are becoming an important tool in the NPE reduction post Helix. The changes in the foreclosure law that were approved in the summer have strengthened the framework, supporting the realization and disposal of collateral. Overall, since January 2016, foreclosures have commenced for 2,449 properties with a value of around €800,000,000 Around 60% of these borrowers have engaged in active negotiations with the bank following the commencement of the process. 589 assets have been resolved and an additional 500 properties are in the pipeline for repossession. We expect to increase the volume of the closures in the coming quarters, specifically on retail delinquent borrowers that are non Astea eligible. Turning to Slide 12. The bank's NPE coverage ratio remains at 52% at quarter end, in line with our previously disclosed expectations and 49% based on pro form a results for Helix. The bank stands today above the European average coverage ratio of 44%, and total coverage, including tangible collateral, is at 122% or 118% on pro form a results. Going forward, whilst we expect there may be some volatility in coverage ratios depending on the mix of NPE resolution delivered in the quarter, we continue to expect the provision coverage to remain around 50%. Our cost of risk for the 3rd quarter stands at 0.7%, and our full year guidance remains for cost of risk to be below 1%. Turning to Slide 13, revenue sales. Revenue sold or signed SPAs for properties of value of €410,000,000 in the year to date period, including an agreement for the disposal of Cyreak. Revenue organic sales in the period amounted to €250,000,000 resulting in €32,000,000 of revenue profits. Prices remained good with sales on average, achieving 99% of independent ESS Open market value and 122 percent of book value. Revenue sold or signed SBAs in relation to 430 properties during the period, this represents 14% of the volume of properties held by the bank today. As we have seen in previous quarters, land sales continue to be the largest proportion of sales achieved, representing around 50% of sales value year to date. Market statistics remain encouraging. Residential property prices rose by 1.7% year on year and sales contracts deposited at the land registry, excluding those related to bank foreclosure activity, increased by 19% year on year by volume. Finally, for me turning to Slide 14, new lending. New lending reached SEK 1,500,000,000 in the 1st 9 months of the year, exceeding new lending compared to the corresponding period in 2017. Corporate continues to be a strong component of new lending, representing 63% of our overall loan originations, with SME 12% and retail 25%. New lending continues to be carefully considered against robust assessment criteria. Default rates on new lending provided in Cyprus since the beginning of 2016 continued to be low at 3%. And with that, I will hand over to Elisa. Thank you, Mick, and good morning from me, too. So I'll start with capital on Slide 16. During the Q3 of 2018, we have generated 50 basis points of organic capital in operating profit, and this was partly offset by around 30 basis points on provisions and other impairments. In addition, during the quarter, our CET1 ratio was reduced by around 90 basis points due to regulatory adjustments, 70 basis points of which related to specific credit. This is a prudential filter referring to a small number of specific NPEs, reflecting the regulator's view of these credits. We remain confident in our provisioning assumptions and methodology and expect a significant part of these prudential deductions to reverse in the subsequent quarters. The UK sale added 60 basis points to the CET1 ratio, whereas the extension of completion of the completion date of Helix to Q1 from December previously had a negative 10 basis points impact to capital, and I will explain the accounting later. So the pro form a ratios for Helix do assume that we will receive significant risk transfer approval by ECB, which is required in order to realize the Helix capital benefit. Our overall risk weighted asset intensity decreased from 73% to 71% during the quarter and to 65% pro form a for Helix, reflecting the further decline in NPEs. Now turning to funding and liquidity on Slide 17. Local deposits grew by 10% in the first line months of the year, offsetting the 8% year to date reduction in international deposits. Of the deposits in Cyprus, approximately 2 thirds represent deposits whose ultimate beneficial owners are CFIOS, whilst only 5% of these are Russian depositors. For liquidity ratio compliance, as you're aware, the previous local liquidity requirements were replaced by another requirement on the LCR effective from 1st January 2018, with which we are compliant. On the 1st July this year, there was a 50% relaxation of this LCR add on, increasing the surplus liquidity of the bank to €1,900,000,000 The elevated deposits and the increased liquidity, however, are expected to continue to put pressure on NIM as the excess liquidity is placed with ACB at negative rate. Now moving to the income statement slide, starting from Page 19. Let me start by noting that in the income statement analysis slides that follow, we have rebased this slide to exclude Banco Sector UK, which was sold last week. The UK bank was deconsolidated as of 30 September following the accounting loss of control, so we have removed it to make all numbers comparable. So starting on Slide 19, as explained in previous quarters, the continuing balance sheet risking is resulting in a smaller but lower risk loan book. Overall, net loans have reduced by 29% since the end of 2015, driven by the legacy book deleveraging and the sale of the UK bank. It's encouraging to note that the performing book in Cyprus continues to grow for the 1st consecutive quarter on the back of increased new lending. We expect this trend to continue into the coming quarters. The interest income on loans was reduced to BRL21 1,000,000 in the 1st quarter and amounted to BRL143 1,000,000 due to the disposal of the U. K. Subsidiary. So it was reduced by BRL 21,000,000 in the quarter. Excluding Helix, the interest income on loans was flat Q on Q at BRL 1,000,000 to 3,000,000. Legacy book interest income, excluding Helix, was at 36,000,000 in the quarter, down by 1,000,000 on a Q on Q basis. And whilst the interest income of the legacy book is inherently volatile, it is affected by the timing of cash collection. While the accelerated de risking of the legacy book will result in further pressure on interest income, this should have little impact to the bottom line as most of this interest income on the legacy book is provided for. This secular accounting is something we have explained in the past in detail. The performing book interest income, excluding Helix, continues to be on a modest upward trend, €1,000,000 up in the quarter, but remains under modest competitive pressure due to a sustained low interest rate environment. Now moving to Slide 20. This should be a familiar slide from previous quarters and it provides a breakdown of the components of interest income on loan between the performing and legacy portfolio, illustrating the interplay between interest income, provisions and risk weighted assets. So starting with legacy sales, as I mentioned, you can see that the interest recognized in this book has led to the bottom line profitability compared to the performing book due to higher provisions. The risk adjusted yield of this book year to date is at 2.75% compared to 3.57% for the performing book. The key point is that as the performing loan book increases as a percentage of the total, the overall NII and net interest margin will be negatively impacted despite this being an entirely positive development and one which confirms the health of our customer franchise. Our impairment charge, however, is expected to be positively impacted and our risk intensity to decline as the delinquent book shrinks. Now moving to Slide 21 on net interest margin. As explained on previous results call, NIM has come under pressure as a result of a number of actions we have taken, which have had which had a positive impact on capital and liquidity. However, we remain confident given the strength of the underlying customer franchise, but this is not reflected in margin as the accounting NIM is volatile for a banking recovery. The NIM dropped by 7 basis points in the quarter, reflecting a change in the mix of interest earning assets. The year on year drop in NIM of 76 basis points reflect the lower volume of loans, pressure on lending rates and the cost of liquidity compliance. Now NIM is a multidimensional KPI and is affected by the dynamics of its constituent parts, and I'll take this in turn. Firstly, there is the obvious impact of the liquidity buildup in this interest rate environment. Liquid assets continue to increase and now account 31% of total interest bearing assets. These are very low yielding at around 6 basis points on which we make a negative spread considering our funding costs. We intend to actively deploy our liquid assets subject to market conditions. 2nd, the higher yielding, higher risk legacy loans are reducing as we successfully exit NPEs and will do so even more visibly post Helix. 3rd, the yields on the performing book are more resilient at around 4% despite modest market pressure. Our customer franchise is in good shape and is leading a spread of 3.38%. Finally, the cost of funding is decreasing and the impact will be visible over time. We continue to aggressively reprice our deposit book down. The cost of our deposits in Cyprus declined by 10 basis points this quarter and by over 25 basis points year to date. The overall cost of funding is down by 9 basis points. More funding cost reductions are currently underway. The combination of the above factors is expected to continue into the coming quarters post Helix. Now continuing to Slide 22 with non interest income. During the Q3, this reached €66,000,000 and was impacted by the sale of this hybrid, as we discussed earlier. The Syrilite was sold at a blended price of 85% of open market value of the property, generating a year to date loss in the P and L of BRL 7,000,000. Due to accounting convention, the loss in the 3rd quarter amounted to BRL 14,000,000, but in the previous quarters, we had a profit impact from the filing. The recurring income was at BRL 56,000,000 in the quarter, 2% up on a Q on Q basis, and it does include commission income relating to the Helix servicing. Net fee and commission income for the quarter stood at 24% of total income. Turning to cost on Slide 23. Our cost to income ratio, excluding the regulatory levies, stood at 47% year to date compared to 46% in the 6 months and 42% last year. Our 3rd quarter costs were lower than those of the 2nd quarter, mainly due to seasonality of lumpy costs relating to stress test and compliance. The modest deterioration in costincome ratio in the quarter reflects the lower nonrecurring income. Our operating expenses are monitored closely. We are in early stage implementation of a multiyear digital transformation program aimed at re platforming our product distribution channels and reducing over time our operating costs. As regards SaaS cost, this remained flat at €53,000,000 in the 3rd quarter. The renewal of the collective agreement for 2018 is still under discussion. The cost of regulatory levies was at €6,000,000 compared to BRL 5,000,000 in the previous quarter. Now turning to the profit and loss account on Slide 24. Starting from the Q3 of 'eighteen column, net interest income amounted to €113,000,000 and total income at €179,000,000 Costs are €8,000,000 lower on a Q on Q basis, and provisions amounted to €43,000,000 leading to a cost of risk of 70 basis points. Provision for litigator in the quarter amounted to EUR 15,000,000 primarily relating to securities issued by the bank between 2,007 2011. Operating results from organic operations was a profit of EUR 37,000,000 corresponding to quarterly earnings per share of €0.08 There was an additional €15,000,000 P and L charge for Helix in the quarter, and this resulted or was the result of the extension of the expected time to completion of the transaction to the Q1 of 2019. Overall, the loss of BRL 150,000,000 arising from Helix reported in the 9 months will reduce to BRL 105,000,000 by completion at time value of money unwind. To help you better understand the shape of the group after Helix, Slide 3031 in the appendix give indicative numbers of key balance sheet and P and L items. As regards forward guidance, we expect this to be issued with the year end results. So this concludes our presentation for this morning. We are now ready to take any questions you might have. Ladies and gentlemen, at this time, we will begin the question and answer session. The first question comes from the line of Nowakik Andres with HSBC. Please go ahead. Thank you for the call. First, I wanted to ask about the reasons for the extension in the expected ECB approval to Q1 from what I think was before year end before. Yes, Alain, it's Neil. Yes, I'll just take that question. Look, I think the timetable was always going to be aggressive to December. We took the view co signing the SPA at the end of August that we would engage with an independent consulting firm to provide an independent assessment of SRT in advance of submitting to the regulator, and that was from OVA1. And we purposely did that to give an independent assessment. They have not been involved in the trade in any aspects up to this point. And that they provided a positive recommendation for SRT. And that process took 3 to 4 weeks. So we ended up submitting rather than at the end of August, the end of September. Under normal guidance from the regulator, we would expect the process to last around 3 months, which takes us with the Christmas period through to the early part of January. With other aspects of the execution being reliant on the regulatory view being clear, We would therefore expect actual execution possibly as early as February, but let's call it at the end by the end of Q1. Thank you. Also, could you give more color on new lending? I can see the sector breakdown, but what are the typical terms of these loans, spreads, cost of risk, capital commitment? In general, can you quantify the ROEs on the new business? And also, how does this compare to the overall performing book economics? Right. So as you would expect, we have a model for pricing new loans. And in fact, as you would expect, we're going through our budgeting process as we speak on next year. And we've run the sort of expectations for next year through the pricing models at an aggregate business level to confirm that we're not generating negative EBITDA as we go forward. So we are across the book generating broadly as we believe to be our cost of capital, the lending returns required taking into account cost of risk, cost of administration and indeed all other costs that are natural to lending. So we have disciplined pricing models in place. It is the case that there is significant amount of liquidity in the Cyprus Banking market and there are significant pressures on the asset side of the business. But we are trying to maintain our discipline and you can see that on one of the slides where we show the customer franchise. You will see we've been maintaining on Slide 21 the 3 38 basis points of customer spread between the cost of funding the book and indeed the asset price, you'll see 403 to 404 for a modest uptick indeed in the performing loan book margins quarter on quarter. So that should give you some comfort that we're maintaining discipline, but I can't say the same thing for the entire market. The next question comes from the line of Cunningham Corinne from Autonomous Research. Please go ahead. Good morning. I've got a few related questions to do with capital. Do you expect any change in your Pillar 2? Because I know you show in your presentation what the capital position is versus SREP today. But obviously, on the 1st January, everything increases as the buses become more phased in. And it looks to me as if you're on the borderline of actually breaching this ramp on the 1st January 2019, given that you don't get the benefit of Helix pre year end. So any news on Pillar 2 or how you expect cover this rep on the 1st January? Okay. Alisa will take that. Okay. Two things. First of all, our SREP, we have not been yet informed about our SREP levels into next year. This is a December conversation. SREP levels or SREP any SREP decision will be effective as from 1st March. So there's actually 2 dates you need to have in mind. 1 is the 1st January, which is the natural which will be impacted by the natural phasing in of Basel buffer, different tax assets, IFRS 9. And these are set out on Slide 59, where we show the phasing in of the minimum ratios that are historical. So you need to think about 2 days, the 1st January, which is the phasing in and SREP, any SREP impact, whatever that might be, positive or negative, which will come into effect on the 1st March. And that's very close to our estimated heat completion date as well, which will provide additional comfort and buffer, plus the AT1 will have been issued by then. And as you would expect, we are focused heavily on making sure we understand our capital position and discuss in a very ongoing arrangement with our supervisors to ensure that we are satisfied with those capital levels and are in compliance with required ratios. And in terms of the AT1, the timing is you've said it to complete before the end of the year. Is that set in stone given that the ECB approval has been delayed? Look, our best expectation at the moment is that we will complete this cycle of Christmas. You can never promise that because some of it is dependent on the ECB, but we have a very high level of confidence that we will get it completed this year. If not, it's only a matter of days into the new year, but we do, at the moment, believe firmly that we'll get it through this year. And just one last question. The regulatory deduction this time, can you give us some explanation behind that? I'd say I didn't quite understand why that was coming through in the quarter. Okay. Mikhail, our Chief Risk Officer will take that. Okay. This is basically reflecting the regulatory view on certain specific studies that they have reviewed on-site inspection. The regulator has used some harsher assumptions than our provisioning methodology. We are confident of our provisioning methodology. We believe that a large number of these NPEs are will either be successfully resolved in the coming quarters or they will be coming out of NPs within the first half of twenty nineteen. So we felt that we didn't need to do any changes in our provisioning assumptions, but we did have to do some kind of the numbers. Fundamentally, it reflects an aggressive haircutting of collateral beyond any natural ability to account for us in accounting. And therefore you end up where we have ended up in on-site inspection disagreement and the accounting cannot accommodate, then we have reflected it in a capital deduction from a prudential perspective. And as Michalis said, we expect actually that gap to close reasonably quickly as our assumptions come through. Thank you. Ladies and gentlemen, there are no further questions at this time. I will now turn the conference over to Mr. Hoeghkin for any closing comments. Thank you. So ladies and gentlemen, we're going to let you get back to your task of analyzing the tone we've sent you overnight. And Anita and Alisa and I will be happy to take any questions during the course of the day on a bilateral basis. Thank you very much. Ladies and gentlemen, the conference is now concluded and you may disconnect your time. Thank you for calling and have a pleasant day.