Ladies and gentlemen, thank you for standing by. I'm Constantinos, your conference call operator. Welcome, and thank you for joining the NLB Group conference call and live webcast to present and discuss the third quarter 2023 results. 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. 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. Blaž Brodnjak, CEO, Mr. Andreas Burkhardt, CRO, and Mr. Archibald Kremser, CFO. Mr. Brodnjak, you may now proceed.
Thank you very much, Constantinos, and warm welcome. Good afternoon, everyone, to the regular quarterly webcast. Let me draw your attention to the regular disclaimer, and as usually, I would start with a short introduction of, general developments. So we're looking back to another very, very strong quarter, very solid recurring performance, both in terms of revenues, continued cost discipline, and especially in terms of asset quality. We have not seen any deterioration, any meaningful deterioration, despite, pretty high uncertainty in the international environment, of course, and the outbreaks of last security crisis as well. So, so far, so good, I would say, for our region. We're specifically happy, and this time around, I'm actually, reporting in from Belgrade, about the results, in Serbia.
And this evening, there is going to be a special occasion, and that's why I'm also here, because we are opening officially with the partners, one of the largest congress centers in Europe, and, you know, one of the biggest ones actually in the around 1,000 kilometer circle, that is going to position Belgrade again among top congress locations in the world, even ahead of the 2027 Expo that is coming. So in this respect, a very solid development of the town, of the city, of the country, and of our business as well. So Serbia, this year, already contributing in the first three months, NLB Komercijalna Banka, close to EUR 150 million, which was on the annual basis, expected not before 2025.
Which is, of course, something that we like a lot. And of course, it's just reaffirming how good a decision this has been throughout these last years. We have seen, as we have been guiding for a, let's say, mid-single-digit growth in terms of loans, very good evolution, especially given the fact that this is happening, of course, now in rates that are a bit more attractive. We have seen no deterioration in deposit portfolios in terms of outflows. We have indeed actually reacted finally in September with a bit of an uptick in Slovenia. That was, of course, as a Euro country, is still lagging behind in terms of term deposit pricing.
So we have started paying up to 2.5%, and there has been a gradual shift towards term deposits, but all within what was, what has been expected. And this all is guiding towards a direction that, you know, we are raising questions to ourselves and, of course, legitimately and logically also coming from your, from your end. Have we seen the peak of the interest margins, right? The ECB seems to have paused, at least, if not stopped, when it comes to the hikes. And now, of course, the real question is what the further margin evolution will be and what the further actual base rates of the ECB are going to be, and by that determine, of course, the total margin in terms of interest and, of course, operational for the NLB Group.
So far, it has still been opening. So of course, this is very positively contributing to the results. Strengthening further, of course, our capital position. We are sitting on a very strong base, and we are further strengthening it. And, the region has been actually still, of course, growing ahead of what has been the European Union average, and these expectations remain the same for the upcoming periods. I'm specifically happy and proud of the completion of the integration that we announced with the of two banks in Slovenia, so NLB d.d. and N Banka, a successful former Sberbank Banka in Slovenia. It was a smooth and flawless process.
Regular challenges at the end with clients, but in principle, nothing that is, you know, causing too high of an inconvenience or, you know, would cause any instabilities. So we are really happy about the outcome. We are now two months, almost, or, yeah, full two and a half months after the go live and everything works fine, and we are resuming now to a development mode, accelerated development mode, focusing on processes, focusing on obviously also on, you know, the main priorities when it comes to client experience and so on. There have been, of course, very good news also in terms of the dividend payout. As we have been announcing, the second tranche of this year's dividend is coming in December.
We are suggesting it to the General Assembly to be held in December, and by that, continuing on, first, the promise, and second, on the trajectory of holding two AGMs a year, which we believe is worthwhile and valuable in terms of, being able to discuss, strategic matters with our, our shareholder base. We will, of course, I would be talking about that in the outlook. Be thinking of, you know, what the dimensions would be, of these dividend flows, but, in the future, but so far it is still, It is, of course, solid. It is within what we have been announcing, and indeed, within a very strong performance, something that in relative terms, has been, of course, less ambitious in terms of relative, of course, payouts, but still high in absolute payouts.
There have been some challenges that are besides the unexpected, difficult to, of course, assess the further decisions of the ECB impacting potential profitability. There have been some regulatory potential changes. We have no clarity yet what will be happening with the obligatory reserves. The ECB has. There have been some changes in various geographies. Here in our region, there have been some announcements of taxation, specifically in Slovenia, a balance sheet tax, which you have been able to see. For sure, there has been a public discussion now and might come in place in 2024. And there have been some pricing constraints and regulations with caps and so on, but some others have expired.
So there are some uncertainties, some questions around, you know, what would be actually the bottom line capacity for the upcoming years. But we stay very firm and confident with our guidance, and I will touch that later on. Cost of risk is totally under control, and Andreas will be talking about the evolution. So despite volatility in the international environment, our performance of our books is extremely solid. By that, I would pass the word to Archibald to guide you a bit through more detail in financial terms. Andreas will add, of course, the asset quality main points, and I will come back with the outlook. Thank you.
Thanks, Blaž. I'll step you fairly quickly through the quarter, which, as Blaž indicated, was fairly regular, actually. Of course, with still rising rate revenues from the latest ECB activities, and a fairly normal cost of risk, still muted development on the back of a stable cost base. So overall, of course, a very solid, regular quarter. The macro backdrop is what appears for our region to come down to a more or less soft landing. Of course, the jury is still out, and then we all follow the news in, you know, the various macro environments that are relevant for us, specifically, of course, the neighboring countries, including Germany, Italy, etc.
But so far, this region has shown and continues to show resilience and optimism, translating into above Eurozone average growth rates. Inflation still a little bit higher, contributing to a bit of cost pressure on our side, obviously, especially on the labor cost side. We have to simply adjust to realities, but we will come to that on the cost equation. Other than that, the macro environment is still supportive to growth, which is what matters most to us. So we see real growth, obviously supporting then loan growth. So, and, we have heard about healthy loan growth dynamics year to date, actually, totally in line to what we have been indicating. So we see a single digit figure for this year.
Of course, the PNL is extremely robust also in Q3 on the back of factors I mentioned. You've noticed that net interest income is still moving in line with the rate environment. Of course, there'll be a kind of a softening of that trend, absolutely, because of our repricing of deposits. In the meantime, in Slovenia, half of our deposits are sitting in value-added products such as savings account and term deposits, so this will show through. Then, of course, we are also actively considering to hedge our variable position to some extent in coming months.
So, in terms of NIM margin, and haven't yet factored into the wholesale funding equation that will also kick in next year, we probably have seen or will see in Q4 something like a peak. Nevertheless, Q3 was strong and the EUR 144 bottom line is just exceptional, continues to be exceptional. And we are pretty much, I would say, sailing in sweet spot environment from a bank's profitability point of view. You see the NIM still expanding, also still on a quarterly basis. And of course, that's, as I said, attributed this quarter in particular to simply ECB and the EURIBOR movements.
Our variable position is unchanged in the ballpark of, you know, combined loans and cash, something in the range of EUR 10 billion. So this is a pretty straightforward translation to, of course, the NIM result and the margin. In that sense, on the non-interest income side, we are mute. To some extent, we really try to always support our customers by not unnecessarily adding to fee and charge pressures. So in that sense, we have been shown also responsibly towards our customers. But of course, given the environment overall, that's no dilemma whatsoever. On the cost side, you see, of course, a dynamic I mentioned before.
So year on year, this is a fairly visible cost dynamic. We are working on the cost equation, as you see, in two markets, as we speak, that Slovenia and Serbia in particular, other markets, of course, are increasingly, let's say, seeing comparable pressures. But those markets, which of course, are materially most important for us, we work fairly actively and have in the past been very, very actively consolidating, let's say, cost base and position or so. We build and continue to invest, and which had a very good and productive discussion with the board. We will and continue to invest in the advancing of the technology agenda, which is of course key for our long-term, sustainably sustainable business. On loan dynamics, actually, it's really a sweet spot.
It's pretty much in line with what we have indicated. Very strong performance in Slovenia and in our subsidiary markets. So nevertheless, from the rate environment, there is still a healthy demand for both consumer and housing products, and also a healthy, also a bit muted, demand for corporate. And this is all fully in line, of course, with our risk appetite, considering the situation we are in, and also making sure asset quality remains at the highest levels. In that sense, capital, of course, as a function of all of that, very, very robust dynamics. We have a bit of up and down on the OCI side from positive valuations coming back, obviously, as our fair value position is running off.
A little bit of reverse on the special treatment of the very same position. But overall, of course, a very robust 350 bps, as you see, from CET1 to our OCR P2G requirement. In that sense, really plenty of room for growth, both organic and non-organic. The funding equation, you see here the list of instruments outstanding. In the meantime, a quite impressive amount for our bank, at least EUR 1.4 billion across the range of all instruments. And indeed, you will see us in the market next year again, in both the senior and presumably also the space.
So, so that, that of course, is becoming now a more frequent exercise, and, accordingly, we put a lot of effort and emphasis in the IR dimension on continuously working on the investor base, expanding it, tapping into new potentials. And, I have to say, the experience from the senior preferred benchmark issuance was very encouraging already with, as you remember, four times oversubscribed issuance. The funding costs I mentioned, we have now considerable parts of the Slovene deposit base. You see it in the middle bar chart, so it says 46% in value-added products, which is good, good for customers. And, having them a fair share of the rate returns, you see almost 50% sits in savings and term deposits.
On terms, as we, as mentioned, we pay 2.5. Note that we offer also very attractive investment opportunities, where we combine cash and funds, where you can up to 4% or even more on the cash side, if you combine it with a saving in a mutual fund product. So in that sense, we really, I think, have now a complete range of retail offerings, and of course, we'll continue to think about possible further extensions. That, of course, moderately, but still visibly, raises funding costs on the deposit side. And in that sense, as indicated, margins at some point will peak, but outlook, as Blaž will tell you, remains very, very robust. By that, I'll pass on to Andreas on asset quality.
Yeah, Archibald, thank you very much. The distribution between the pockets you are already used to, we are actually growing in all segments. Now, in the last period, with one exception in corporate, but that's not due to less new business, that's due to a lot of repayments in different sectors. And from the distribution by geographies, obviously very stable. Overall, you see the subsidiary banks are growing a little bit faster than we do. And that's why you first time see now really 51%, so majority of our portfolio, actually outside Slovenia and 49% here in Slovenia. As I mentioned already, in the last period, we saw now quite some repayments on corporates. That's still energy. That's, for example, also in the real estate, it's finished projects and so on.
So, in a sense, let's say more one-time effects. So the trend of the portfolio growth is also intact in corporate overall. And what you see in corporate and what you, well, saw in the last quarter, there's not too much of a change, is that it's a well-diversified portfolio. And honestly speaking, what is amazing is, in times which are not necessarily the easiest ones, that this portfolio really, also on the corporate side here, is very, very robust and actually no bad surprises whatsoever. Staging, also very, very stable situation. What you see is, again, a little bit of uptick in Stage Two, basically none in Stage Three, but, a little bit again in Stage Two in retail.
Well, retail, of course, in this environment in which we are, not everybody necessarily gets a salary increase in line with inflation. And then, of course, there's pressure on the retail loans. On the other side, by the way, who gets these salary increase in line with inflation, this is of course reducing the effective value of the loans, so that's then rather helps, so we see two effects. But you have, of course, here in retail, the well, lower end, which is which you now see in staging. NPLs, I mean, almost a little bit amazed at one point of time. So, NPL percentage still reducing. And as you're used from us, coverage is very, very solid. A good part from the NPL portfolio is even without delays.
Also, this is a story you know from the past. So cases which are still not fully through the restructuring cycle and still reflect NPL, but which are basically paying fully on time. Distribution between the geographies, in the meanwhile, also very much in line with expectation, or in line with the shares these geographies have also in our total portfolio. Impairments and provisions, so far in three quarters, we see actually a quite solid release. What you see actually as a zero is from the regular portfolio development. And honestly speaking here, retail, we see inflows of provisions, and corporates, we still see outflows.
As I told you, I mean, corporate portfolio is behaving still brilliantly, and retail, we see a very expected trend, and actually to a more moderate extent than we were actually assuming a while ago. So overall, you see a release, but also that is still strongly driven, or again, strongly driven, also by repayments from off-balance sheet items. So our off-balance book, which is still approximately EUR 1 billion, is still, you know, having here or there some juice, which of course, we are extracting as good as we can. Trend in variable versus fixed. You see that, in retail, we still are moving a little bit towards fixed interest rates.
On the other side, corporate is slowly turning, so that's the trend slowly going in the other direction. And what you see on the development of the EURIBOR, or actually the EURIBOR in the house, of course, logically, because it's a 1, 3 or 6 months frequency, it's running a little bit after. But what you can see here is that we still have a little bit of a buffer to current EURIBORs, so there is a little bit more juice to come. Of course, if you compare it with earlier this year, a good part of the juice is now already in. And of course, you see this in the of the bank, but it's still a little more to come.
Overall, given the very solid development in the NPLs and in provisioning, we again uplifted a little bit also our view on provisioning overall for the entire year. As you're used to, quarter four is usually a little bit more provisioning heavy, but again, very, very moderate, but more details then from Blaž. And actually with this, I'm now also handing over back to Blaž. Thank you.
Thank you, Andreas. The outlook, if you can flip the slide, please, yes. This year obviously is going to be an enormous performance, historically looked at as well. So this is really, you know, ROEs normalized, exceeding 20% on one side. On the other side, of course, also, showing very, very strong performance from the cost of risk, and growth of revenues, obviously above what was expected, you know, even months ago still. And, finally, also efficiency measures, in terms of, of course, process improvements, on one side, further continuous focus on costs, but at the end, of course, also now much more, much improved interest environment, have delivered now the cost-to-income ratios of well below 50%, which was one of the, the most challenged questions, in previous years.
Despite all of the uncertainties regarding the rate environment, regarding eventual regulatory or, you know, sovereign charges coming, and regarding the eventual shifts of portfolios to term deposits, and so on, we still anticipate that we will maintain this level of performance also throughout the upcoming midterm period. So we are still talking about normalized ROEs of 20%. We are talking about cost-income ratios below 50%. We are talking about profits here we say exceeding EUR 400 million. We are pretty confident about these numbers. And in this respect, obviously, this is something that we can be very positive about. There has been a cost tension, so this is evident.
We are now slightly revising the outlook for this year and slightly revising the outlook for costs for the midterm. Since we have been consciously assessing the situation as the right moment to invest into further push for digitization on one side. And on the other side, we have still been living in an environment with significant wage inflation and still significant higher levels of inflation, frankly, than in the core of European Union as of today. So this is still causing significant pressure, but as said, we have always been reacting by optimizing the processes, adjusting the channels, right? Also physical footprint and so on. The real question, of course, with such results is what's happening with the dividend.
So we still here show the old cumulative EUR 500 million payout promise, which means that, of course, in the upcoming two years, there will be an increasing a meaningfully increasing dividend every year. On the other hand, clearly, if you're delivering almost EUR 500 million of profits, right? Is paying out EUR 110 million and then a bit slightly growing, of course, the dividends enough from the eyes of the investors, that's a legitimate and valid question.
We have announced, and now we can formally, of course, also confirm that as of December, we will officially kick off the strategizing process, within which we will really try to understand the revenue pools for organic and/or M&A evolution in the upcoming mid-term period, and the result of which will have to be communicated at the Investor Day and will be communicated, obviously, at the upcoming Investor Day in Ljubljana on the ninth of May next year. And depending on actually the outcome of this process, we will then, of course, also be potentially addressing the shareholder base with, of course, a set of the planned activities to actually accrete value through, of course, growth and/or potentially revised dividend assumptions in this respect.
So for the, for this general assembly in December, obviously, we're still following the flow of what's been discussed so far and disclosed so far. The upcoming regular general assembly in June next year will only be already be a result of completed strategizing process and, of course, defined ambition levels, also in terms of capital consumption. So, which opportunities we will look at actively and, you know, with certain level of predictability when it comes to actionability, and you know, what portions of capital could be, of course, allocated for these accretive opportunities and what could actually be distributed, and which form to the shareholder base. So the news is good. We would not be paying less.
We would eventually be paying more, but this, of course, depends on whether we will be able to find really meaningful and value accretive alternative deployments of capital. We hope that we have, and we believe that this has been the case, that in the last 3-5 years, we have gained your trust, that we have been able to transact in terms of, in terms of M&A, that we have been able to meaningfully not only acquire, but also integrate. You know, there we might be, as we speak already, amidst some of the potential and additional, you know, news that might come.
I can't disclose more than, you know, what has been publicly disclosed by now, but which means that we have been working, of course, on productive engagement of capital, serving, of course, delivering your shareholder value. We have been also suggesting to the AGM collectively with our supervisory board as the governing body an upgrade and enhancement of the remuneration policy, which is also going in this direction, actually benchmarking our performance with the relevant peers in terms of total shareholder return and, of course, also ESG rating and related targets and so on.
We believe this is all serving actually the interest of our key stakeholders, and by that, showing these numbers, and with more information to come, immediately after we complete the strategizing process, towards the ninth of May, we will keep delivering the good news. That much from our side, and of course, now the floor is open for any questions, comments you might have, and then I will wrap up at the end. Thank you.
Ladies and gentlemen, at this time, we will begin the question and answer session. Anyone who wishes to ask a question may press star followed by one on their telephone. If you wish to remove yourself from the question queue, then you may press star and two. Those participating via the webcast, you may type your question via the live feedback box below the presentation. For those participating in the questions and answer session, please use your handset when asking your question for better quality.
Anyone who has a question may press star and one at this time. One moment for the first question, please. As a reminder, if you would like to ask a question, please press star and one on your telephone or type your question in the box. The first question comes from the line of Goodacre Sam with JP Morgan. Please go ahead.
Good afternoon, Blaž, Andreas, and Archibald . Thanks very much for the call. My first question is about your midterm cost guidance. You're obviously increasing that to EUR 530 million, from flattish on this year levels. Could you give us a bit of color on that? Is that largely inflationary, or are there any projects that you have line of sight on, that you know are going to be costing money in the midterm? Thank you.
Yeah, it is, it is actually partly, of course, coming from the wage inflation environment. I mean, we've seen announcements in a couple of countries of, you know, for example, increased minimum wage, as, you know, as a simple legal framework. On the other hand, we've been really trying to accelerate the digitization agenda, which means that, you know, we want to accelerate some of the developments. For example, delivering, you know, new workflow tools and CRM tools, you know, across the board. You know, improving client experience of our M&E in order to be able to migrate more decisively, you know, from traditional format. And this is indeed perceived now as a significant hike in cost, but if you look combined, it's actually not that high, right? And we have so far.
So we are actually investing in people and systems. We are bringing on additional staff, especially, for data stream, especially, obviously for development of platforms as well. And, we also are beefing up a bit, our, our, you know, M&A capacity, frankly. So and this all costs a bit of the money. We can't be concrete on what M&A we are talking about, but, you know, we have been actually engaged, and it is difficult to empower and deliver integration and work on M&A, right?
So we are on one side, of course, a holding company, but at the same time, we are the largest operating bank in the country. And in this respect, across the board, we are investing in cybersecurity, we are investing, obviously, as I said, in, in the upgrade of platforms, and we are investing above all in people.
And part of it is simply, you know, unavoidable because of legal changes, you know, significant increases in minimum wages, for example, in upcoming in Serbia and some other countries, automatically bring, of course, such expectations across the board. We still stay, of course, fully committed to the efficiency agenda. And, you know, there are plans, of course, for further reductions of traditional format. But, you know, these couple of years coming are somehow now really transitionary in the sense that now we really need to invest a bit more. And if you benchmark our investment, you know, in IT, generally with peers, we are not overspending at all. But Archibald would add for sure, some tones to it, some flesh to it.
Not really much to add, other than we are very, very cost-conscious. On the other side, we have to accommodate to some extent, to reality. So I also should admit that, in Serbia, we are not as fast as we wanted to be in terms of, reaping synergies. So that, that is a year, if you want, time lag on that agenda. But the agenda remains unchanged, and broadly speaking, the whole digitization agenda is ultimately the trade-off, of, you know, I call it intangible assets. In other words, IP, technology spend, and of course, mostly human capital, and talents, versus physical footprint, efficiencies in, in not necessarily reducing branches, but the way we operate them, the way we use them more for sales and advisory rather than operating very high fixed cost cash, handling, operation.
This transition is simply it’s a midterm effort, and it requires predominantly this pre-investment, upfront investment in tech and talents. So we believe the future is in tech-powered finance with this premium element of the advisory capacity in locations that are reachable to our customers, and we invest in this transition. But we do this very, very cost-conscious, and I mean, I’m CFO and also oversee the IT business, so believe me that this is done in a very diligent and thorough way.
Okay, thank you very much. And perhaps the next question is more on to Andreas on the risk outlook. Andreas, when you think about the migration of certain retail portfolios or files to Stage Two, what is your view that they do deteriorate further, and so in the next 12 months, we could indeed see an increase in your NPL ratio? And what sort of extent of cost of risk burden might that, might that mean?
So, I mean, I mean, if you see the overall figures, what is migrating to Stage Two, this is, if you see it on the bank level, still minimal. And of course, we might see some of these cases to migrate to NPL, and they will. On the other side, we are still very, very, successfully actually working on the NPLs, so you have the effect on two sides. I would expect next year, for sure, a little bit further trend in this direction, which actually we see already now since a year. On the other side, on the corporate side, we don't really see any clouds on the sky, which is impressive enough in these circumstances.
But if you ask me, this is also depending a little bit, especially here on Slovenia, how the companies were positioning themselves. Some of them are actually rather under leveraged than over leveraged, which in a different economic environment might be a disadvantage, but now it's an advantage. So overall, because you ask cost of risk, at the end of the day, I would expect that slowly we are migrating to what we're expecting midterm. So 30-50 basis points is midterm. I would see us next year rather still below that, but probably not anymore at zero.
Okay, thanks, Andreas. And where you are seeing small bits of pressure within retail, is that in any particular market? So are there jurisdictions where the pressure on the consumer is slightly more intense than elsewhere?
No, actually, I mean, of course, you know, in, in, if you look on three months buckets, of course, you see here and there, a little more or a little less. I mean, one of our banks, which is filling very good, is, our bank in Skopje. Of course, then you now and then also see a little bit more, migrations here. Filling the space good is, meaning they really do the business they should. We are sometimes, as a group, still a little bit too conservative, which triggers you very low cost of risk, but which leaves a little bit money on the street. And, so, that's, one geography, which I saw. But if you ask me, that's not a trend, that's just a short-term item.
And then, you know, the big geographies, of course, are always, of course, more the attention, Slovenia and Serbia, but also here, very, very controlled, very moderate. So overall, if you ask me, I don't see strategically here now any big outliers. Luckily, I have to say, the very strong tendency here in these markets is people, really, private individuals, want to repay their loans. We are supporting that a lot, of course, also on the structuring side, in case of need.
But that's, you know, a little bit also a question of the culture in on retail, and here we are in a very lucky situation that actually this is maybe a little bit counterintuitively, if you look on salaries in some geographies, but that's actually rather a strength in this region, that people here are really committed to repay their loans. And I don't see any strong trends, you know. What we see a little bit is, of course, that the lower-end salaries, where we are anyhow under average exposed for many reasons, of course, we see a little bit more cases incoming, but that's from the portfolio, of course, than the smallest part, both in volumes per case and in overall volume.
Okay, that's very clear. Thank you. And perhaps my last one, back to you, Blaž. I appreciate you said you can't be too specific on M&A, but obviously, over the course of this year, you have increased your targeted RWA absorption from EUR 2.5 billion to EUR 4 billion. You've done a couple of larger acquisitions, but you have also spoken in the past about smaller bolt-on type deals. So how should we think about the use of a, you know, sort of EUR 4 billion total, you know, between perhaps a larger transaction and several smaller?
Yeah. Look, there might be, of course, various things happening, right? There might be a leasing deal potentially in the market in Slovenia. Potentially, there might be something smaller of this deal in Croatia. There might be, of course, some, you know, other deals potentially happening, as nothing is necessarily happening as of today, but might become actionable.
We will really know in a structured way, together with our supervisory board, so the, the entire governing body, go through our strategic, you know, aspirations and define really the target revenue pools, and then really try to figure out what would be the most meaningful allocation of capital, you know, and to apply as per these potential opportunities. So, yeah, in case on that, until end of April, mid of May, when we communicate the new strategy on the ninth of May, right?
We didn't have anything meaningful, you know, on the horizon in terms of, you know, really concrete, sizable acquisitions. This might, I'd say, might well lead to a conclusion that, you know, we significantly size up the dividend, right? We might think of, share buybacks, but that's all hypothetical because this is all has to enter, of course, now the pipeline of discussions with our board. Now, the capital, absorption is very high. You know, the total capital adequacy is very high. The organic growth does not show such a potential to be able to consume this EUR 4+ billion of risk-weighted assets, right?
So in this respect, if there is no really meaningful further acquisition potential in terms of really actionable assets in the upcoming, let's say, 12 months or 18 months, then, you know, this might well rather mean, you know, we really revise the dividend payouts. But it's a bit too early, so we kindly ask you for a bit of patience, patience and trust.
We will now look into the room, really look at the alternatives, consider, you know, is this region the only region? Is this, you know, the only possibility? Is, you know, banking only and leasing only, is there something else potentially? So we don't have yet an upfront, immediate response to what you're asking, but there might be some smaller tactical things in the asset management space, you know, but immaterial for the banking group as of today.
There might be some, you know, digital online platforms, immaterial for the business size of today. You know, nothing really big has been pending as of right now, but, you know, as said, until April, May. April, let's say latest, we should have pretty much clearer picture of what the, you know, potentially we can really count on in terms of capital as consumption, and then really at the convocation of the AGM in June 2024, actually, you know, discuss this in a very meaningful way with the shareholders, no?
Okay, thank you very much, all, and congratulations on the great result. Cheers.
Thank you, Sam, for everything.
Once again, to register for a question, please press star and one on your telephone or type your question in the box . The next question comes from the line of Nellis Simon with Citibank. Please go ahead.
Oh, hi. Thanks, thanks for the opportunity. Could you say a few words about the regulatory environment? I mean, I think on the... You've already mentioned this, Serbian mortgage rate cap, and you've got the Slovenian windfall profit tax. Has that actually been formally enacted?
Mm-hmm.
And is there anything else that's kind of pending? That would be my main question.
Yep.
for you. Yeah.
Yeah, thanks. These two have been the most material. But Serbian is actually enacted, so this is in place. There is a ceiling on the housing loan rates. On the other side, you know, there was also a freeze of certain fee evolution for 12 months, which has expired. So, you know, this is, to a significant extent, somehow also offsetting the effect of the first one, you know. So the Serbian is not that material. It will cause one of, of course, adjustments in our results, but it's not a killer. Slovenian is publicly communicated as a draft version so far, so it is in the debate, in a public discussion.
Of course, the Bank Association has a view. ECB has just written a... published a written opinion, warned, Republic of Slovenia, of course, when it comes to the stability and bank capacity to lend and willingness to lend and so on. So let's see how this potentially impacts the discussion. It is at 0.2% of the, balance sheet as per the end of the year, which means, if you look at our Q3, you can assume, just short of EUR 32 million for 2024, and then depending on the growth rate supplied, of course, it would gradually increase. But this is, of course, at the end of the day, not that high, if you look at the total profit as well, right?
So it is in the range of 30, a bit 30+ million, which is compared to the effective tax rate that this group has been paying, also somehow still combined, right? Not, not also not a killer. There is a cap on it when it comes to the annual profits, but of course, this charge is well below 30% of Nova's, you know, existing NLB's profits. We see, as we discussed so far, here and there, a bit of a minimum reserve, you know, somehow, which we see as a kind of a hidden attempt to, to, you know, to somehow also extract some value from the banking system.
Adjustments we see still, for example, in some of the markets, very low rates paid by the central banks, in, you know, Federation of Bosnia, practically almost still zero, right? And so on. But this is all low single-digit EUR millions, which is not that material. We haven't seen other really heavy attempts. There is some pre-electoral pre-elections, of course, atmosphere here and there. There is some, of course, since Slovenia, a bit of a populistic element of these floods, but generally, the banks are willing and, of course, happy to contribute, when it comes to the good of the society and benefit of the people from the region.
We just count on that this, of course, is not then being somehow constrained on specific, one-off weather phenomena when it comes to, of course, taxation of banks and when it comes to, of course, regulatory control over the conditions, terms and conditions of the banking system as well. It seems that we have seen the peak in terms of interest environment. At least this is perceived by the environment as such as well, because we see already players, international competitors, moving down by some prices, or at least not increasing anymore for quite some time already. So for on longer end, it seems that everyone is expecting significant reduction of rates. Where this is going to be, of course, no one has a crystal ball.
I would expect that also, of course, by normalization, gradual normalization of profits, there will be less pressure. But indeed, you know, we are still, we are still talking about 20% ROE is normalized, and we, we operate with the assumption that this would be the case, despite all of these happenings.
Super. Thanks. And just, just on the margin front, I mean, if Euro rates stay where they are, where—for the, you know, the next two, three quarters, where do you think your margin will go? I mean, is there still further upside going forward, or is it just kind of—are we at peak margin now? Where do you think it would peak under that scenario?
Well, if you apply the assumption that they will not move for 2-3 quarters, of course, then it's a bit easier calculation, and you can do your math. It is then depending on, of course, how to what extent we would, we might move some of our deposits to the term deposit bucket, which is paying 2.5%, up to 2.5% in Slovenia. In other markets, actually, we have been already more or less adjusting these levels already before. There's been some competition for deposits in specific currencies already before, so I wouldn't see there such movements. And then, of course, all depends on where would you see, of course, the yields of the instruments in the market as well, you know?
So at the end, we of course also will be issuing, as Archibald mentioned, further senior bonds and subordinate bonds in significant amounts, which will also, you know, slightly impact that as well. So overall, you know, I believe we can be talking about that, you know, we have been around peaking, very likely, you know, around peaking. Where this moment exactly is happening is very difficult to say. And then maybe gradual reduction if the rates keep stable then for two to three, or two to three periods. But, you know, it's really definitely, I can't be specific more than that. But Arch, you might add something here.
Nothing to add, really. You might see that drop a bit in Q4, you know, given behavioral dynamics, et cetera. But, ... Then, latest with funding steps, and as I said, we will at some point also consider hedging to some extent. So in other words, we swap a bit short-term result against stabilized midterm results. So all of that will eat into margin a little bit, but everything north of 3% is very, very good and supportive to the case we are presenting here.
Understood. Thanks so much.
Thank you.
The next question comes from the line of Gadhia Ronak with EFG Hermes. Please go ahead.
Good afternoon. Just a couple of questions on the guidance that you provided. I was wondering if it's being a bit too conservative, because, for example, if I look at the regular income guidance above EUR 1 billion, it seems pretty conservative, given that you are already, I think, at around 820 or so by 3Q. So just wondering if or 840 by 3Q. So just wondering if management are being conservative there. And likewise, maybe just trying to understand the guidance around Serbia contribution of more than EUR 100 million by 2025. Again, if you could just clarify, you know, what that is referring to?
Because if I look at the financials provided by the bank, it seems like Serbia was already, you know, contributing more than EUR 100 million of profit by nine months 2023. So again, is that just being conservative or am I looking at the wrong figure here? Thank you.
Yeah, Ronak, maybe starting with Serbia. That's why we are removing actually from the midterm guidance, because originally it was in. As you know, it would be a success story if we delivered EUR 100 million in 2025. But since we have been delivering more than EUR 100 million already Q3 of 2023, we can just establish that this was a marvelous transaction. And, you know, by that, we stop, we stop actually specifically highlighting it. We will obviously deliver more than EUR 100 million this year already. So, you know, this is, for us, no topic anymore. And when it comes to the general guidance and revenue, indeed, it can be perceived conservative. We have continuously been a bit conservative when guiding.
We have mentioned on various occasions that we're rather positively surprised than disappointed, and this is simply, you know, an attribute of ours. And, you know, could we be a bit less? This is something that we can also discuss, of course, with our board within the strategizing process. We believe we are showing here a very ambitious picture. But I would add an attribute of confidence. So we are confident that we would deliver this.
Understood. And, just a final one, maybe, a follow-up on, Simon's questions. On the windfall tax, as you mentioned, the, the draft has been, submitted, the timing remains uncertain. But if it is approved this year, then should we see some of that being booked, in the current financial year, or, you know, the EUR 30 million or so will start coming through from next year?
The way we understand it-
Archi?
The way we understand it, it's as it's not enacted, it'll be affecting the financials 2024 onwards.
Okay. Thank you.
You're welcome.
Ladies and gentlemen, we will now move on to our webcast questions. The first webcast question comes from Jovan with Raiffeisen, and I quote: "Do you plan, and if yes, when, to skip guiding nominal dividends and instead to align your dividend outlook with earnings development?
This is what I said before, right? We are really now taking a bit of time off to sit with the board and understand what, you know, is actually in front of us, potentially in terms of meaningful acquisition targets. If we didn't find anything, we might well return to something that is, you know, was originally used by us and was, basically, a dividend payout ratio. So in this respect, it is unclear yet. From what we say, we can say from today's perspective is there will be significantly growing dividend flow, and it can, there is only an upside potential in principle if we didn't find appropriate targets, to consume capital productively. So, you know. And you, you know what's left when it comes to what was not paid out from the EUR 500 million pot.
So you know, there is going to be two significant increases of a dividend in the upcoming two years in any case, and then, of course, given such a, capital buffer that we will be holding for eventual acquisitions, this might only improve. We have not yet consciously returned to the dividend payout ratio, you know, positioning of our guidance, but might, might be the case actually after we conduct the strategizing process.
The next webcast question is a follow-up question from Jovan, with Raiffeisen, and I quote: "Excess CET1 to TCR above the minimum is more, is greater than EUR 500 million, even without 2023 earnings. Do you have any concrete plans as regards capital deployment? Some of peers keep surprising on that front in third quarter." Thank you.
So no surprise planned, and actually nothing to add from what Blaž has mentioned. This is the same equation ultimately we are looking at. For this year, the dividend equation is concluded, and for subsequent years, we will communicate in May.
The third webcast question is again a follow-up from Jovan, and I quote, "As results of Serbian banks continue soaring, do you see risks of any additional state interventions apart from interest rate caps, given the relatively tight budget situation and upcoming elections? Congratulations to good results, and thank you.
Thank you, Jovan. I guess you would be better judge to assess that, frankly. You would know the markets even better than us. We don't know, frankly. I mean, what has been introduced has been introduced. The minimum reserve intervention was there and the interest cap intervention was there. Is there more to come? We frankly don't expect it, but no, I wouldn't call it impossible.
The next webcast question comes from Anton, from Allianz, and I quote: "4% of your total NPLs come from Croatia. This is rather high, considering you do not have a physical presence in Croatia. Kosovo, with its EUR 1.2 billion assets, has 6% share in total NPL. So how come Croatia has that high percentage? Thank you.
Well, this is all legacy book. This is, you know, 15 plus years old book, and this is more or less a wind down. It is now down to a fraction of what it was, and, you know, it is. This just means that we have practically no NPLs in other geographies because it, you know, such a symbolic Croatian exposure still has such an important share. It just preaches and speaks about the quality of our books, but Andreas might add something here.
Yeah, not much to add to that part. So the, to the Croatian part, that's fully legacy. I mean, as you are aware, we are not even able to do new business in Croatia, and we don't. So there's still new business, so that's fully legacy. And, you know, if you take from EUR 310 million, which is minimal on our group level, 4%, well, that's minimal within that pocket. But yes, that's legacy. And just because you mentioned Kosovo, that's of course also a good point. I mean, Kosovo, I mean, honestly speaking, when I came to this group, I couldn't believe the figures, and because they were already very good at that time, so quite some years ago.
Honestly speaking, they are on the NPL side, just getting better. So, it's amazing that a market which, from outside doesn't look exactly easily, has such good NPL figures. But after all of these years being in this group, I'm, I'm very, very confident, and we were checking that very thoroughly, that that's for real. It's just, really, I mean, they are doing wisely here on choosing clients, and the right clients, a brilliant job. Risk management here seems to be also very much on top of things, which is great. So, yeah, Kosovo from the NPL side, actually, a little bit counterintuitively, but that's our star. That's true.
The next webcast question is a follow-up question from Anton, and I quote: "Net non-interest income has basically stagnated for some time now. Which opportunities do you see in the future for its growth? Thank you.
Well, it's been stagnating partly also because, you know, this year there is no high balance fees anymore, which were booked here as well. And there was, you know, there's no Croatian Kuna anymore. There was quite some, you know, FX coming from Croatia and so on. So in principle, there have been some, of course, major shifts in this respect. So if you sterilize for that, you would actually see a pretty solid 4 or 5% growth, which would not be that bad at all. Right? It's coming, of course, also from, from mainly from the regular traditional revenue streams when it comes to fee income. We will further focus absolutely on payments.
We believe payments as a, as in general, the value proposition to clients has still a lot of potential to, you know, enhance the experience and potentially, of course, also revenue pool. When it comes to the asset management and insurance business, you know, we are adding definitely the capacity now in Serbia significantly. We have bought together with Komercijalna Banka, also an asset management company, which we will now shift from Komercijalna Banka to our NLB Funds business and, you know, really put strong focus on developing and replicating actually the business model from Slovenia to Serbia as well.
We are a market leader in Slovenia, as you know, with almost 40% market share, and we simply have very successfully vertically integrated business model in distributing these services, investment funds and mutual funds and also unit link insurance products. So also insurance is another stream. Leasing is showing very good trends, especially now in Slovenia, of course, but especially also in Serbia, and we've just started in Macedonia. So there are quite some ancillary services that, you know, have just begun actually to, in specific markets, become a real opportunity, and the more the wages grow, the more they will become meaningful value proposition, you know, both for clients and us.
And on the other hand, simply, you know, with focusing on housing lending, as soon as you will see a more moderate rate environment, it will resume. With every housing loan, basically, you cross-sell 5-5.5 other products, you know, and this is simply boosting your fee income as well. Now, and you always lock in the accounts, so the entire family, you lock in, of course, also long-term savings schemes, insurance, and so on. So this is, this is our primary focus, and this is the naturally evolving this way. So in midterm, you know, so this 1% here is actually a bit more if you sterilize for Croatian euro adoption and asset abolishment of the high balance fees... once we exited the negative territory last July.
Of course, this is evident here. That was also, of course, a cap on fees that was introduced, or, you know, in the Republic of Serbia actually required return to the original position for 12 months, and this also took quite some millions away. So combined all of that, if you sterilize for that, the fee evolution was actually very good.
The next question comes from the line of Dodig Mladen with Erste Group Bank. Please go ahead.
Yes. Good afternoon, gentlemen. Thank you for the call and, congratulations, of course, on the great results. Just a short one. Could you please remind us, this modification impact in Serbia for the rate cap on mortgage loans? I think you communicate that already earlier, but if you please could remind me.
Yeah, you kind of, you can basically anticipate for Q4 something in the ballpark of, you know, EUR 15 million, give or take, in accounting-
Fifteen.
15 for this modification loss. Yes.
Yeah. Yeah, sure.
Yes, indeed. But,
Okay. Thank you.
This of course is coming back over time as we, you know, keep accruing these loans.
Of course, yeah. Yeah. And, yes, just for the sake of conversation, because Serbia was mentioned in the sense of potential windfall taxes and, right now, the most recent move by the government was decreasing actually the GDP public debt, sorry, budget deficit from 3.3% to 2.8% for this year. Also, Serbian government looking to get an investment grade for credit rating. So, and in the whole electoral narrative right now, banks are fortunately not mentioned any more than this rate cap. So I would say that the budget still is a good shape. Yeah. So thank you. Thank you once again, and, congratulations once again.
Thank you, Mladen, for giving us confidence that there's no, there's no more to come.
The next question is a webcast question from, from Anton with Allianz, and I quote: "What are your thoughts on net interest margin in 2024?
I-
It's really... Yeah, go ahead. Go ahead, Arch.
I think we mostly answered the question. We are very happy with the margin as it stands, but obviously we expect these margins to compress with all the things we've mentioned already from wholesale funding, deposit repricing, hedging eventually. So if we stay in this 3% territory, we are more than happy.
The next webcast question comes from Jovan with Raiffeisen, and I quote: "Zero risk cost guidance for 2023 would imply very high provisioning leverage level in fourth quarter. Again, too conservative. Also, 30-50 BPS guidance for 2025 also looks very conservative, conservative. What is the realistic picture for 2024? And last one, is if you can comment on that, what is the share of legacy corporate loans to exposure, which might be a subject for potential recoveries in the future? Thank you.
So, on 2023, zero cost of risk. Yeah, that might be a little bit conservative. I mean, what you just simply see in the last quarter is usually a little bit more going on, on that side. And you know, we have indications on some concrete cases, which are ever not big cases. Overall, it might be still a little bit conservative. I can agree with that. But to say more or more optimistic than zero cost of risk for me is, given a very vivid environment, still a little bit too much. Where I agree less is on the 25 outlook that 30-50 basis points seems well too conservative or conservative. I think we will simply not ever live in a dreamland.
I mean, 30-50 bps cost of risk in this region, if you ask me, is a pretty realistic assumption. You also have to see that we are still profiting from quite some recoveries, actually from off-balance items, which are also, of course, contributing here. And here, I mean, one special effect, which we saw, because, you know, we have approximately EUR 1 billion off-balance, and this portfolio is getting older and older and more and more squeezed out. So, I would expect here rather looking forward, less and less. On the other side, with the acquisition of Komercijalna Banka, I think the one thing which we underestimated a little bit in the due diligence is that the off-balance portfolio was actually not intensively worked on for whatever reason.
So here we collected already in the past period, quite some money back. And, by the way, also this year from these EUR 17 million, which you saw in the slide, a solid portion from that is from Serbia. So that is maybe still a little bit more active, but of course, also decreasing. In the transition, I said it before, from this year around zero, or maybe if you want to be optimistic, even a little better, to this 30-50 basis points, I would expect us more or less here on a linear transition path. So I would not expect zero cost of risk next year, but I would not necessarily see us yet on 50 basis points. That's my best estimation for now.
I think what I implicitly answered already a little bit is your last question. I mean, we have a still quite a sizable off-balance book, but this is getting older and older. Off-balance, per definition, means that actually you are not expecting much anymore. We, honestly speaking, in the last 3, 4 years, here, saw the one or the other little miracle coming up to cases where 25 years we did not collect a penny, and now suddenly we collected a few million EUR. But I would not expect too much from that to come anymore. From the NPL portfolio, on balance, per definition, you cannot expect too much because simply that portfolio, as you can see here, yeah, actually in front of you, it's simply not big, you know? So yeah.
I still see something coming back from off-balance and hopefully also a little bit from this NPL book, but the magnitude over while will decrease.
The next webcast question comes from Hans Henrik from Coeli, and I quote: "Given the share price valuation, is buyback something you consider on top of dividend? Must be better investment than any M&A. Thank you.
This is definitely a valid alternative. We have so far not actually been actively working on it, but within the comprehensive assessment of deployment of capital, i.e., of course, as a derivative, returning value to shareholders, right? This is not excluded. It is just that it is, of course, a bit more complex process requiring, you know, a bit more tedious regulatory approvals and so on. But I would not, of course, you know, eliminate it as an option, and it would be communicated in the package, you know, for the upcoming AGM. Archie, would you add anything?
Nothing to add other than we hear from shareholders two different versions. One would like it, the other one would like it less, because obviously the drawback is that you take out liquidity from the stock, and in that sense, it's a two-edged sword. But we understand the question, and I think more materially, we are focused on dividends and as capital return. But yes, it's something we also try to understand better in whether there's a merit to it.
The next webcast question is a follow-up from Hans Henrik with Coeli, and I quote: "You guide above EUR 400 million in profit. Given nine-month profit is already at EUR 386 million, isn't it fair to assume profit around or even above EUR 500 million? Or is there anything in fourth quarter that would hinder similar profit as the first quarter to third quarter, so it will be materially lower than the previous quarters? Thank you.
I mean, there are two things, right? One is that we just said that there would be, of course, a modification adjustment, you know, in Serbia, for example, in the amount of EUR 50 million, that you have a, you know, trendy, a bit more of a cost evolution in the last quarter, which we also show here with the revised cost guidance. On the other hand, I can just say that the exceeding, you know, EUR 400 million was meant for 2025, and here we don't talk about this. So in this respect, we can just say, state that we are confident about the result of 2025. We can't be more specific than that, but, you know, it is going to be significantly above the Q3.
The one thing, just to add in Q4, is something we are looking at, customarily is revaluation of DTA, our Deferred Tax Asset. There is a talk and in the draft, actually, anticipated or envisaged higher corporate income tax, so that might result or is in a revaluation of the DTA. So there are a few ups and downs. For 2023, I think Blaž even mentioned that, you know, we will be very close, if not exceeding EUR 500, as was said, for 2025, nothing to add to what Blaž said.
Our last webcast question comes from Tihan from S&P, and I quote: "Do you have an estimate regarding additional credit losses from the August floods related to damaged properties and more collateral revaluations for full year 2023, or is it an immaterial amount? Thank you.
Yeah. Thank you for that question. Luckily, the impact on the bank is minimal. We see in retail currently 37 moratoriums, so that's surprisingly a pretty small amount. We see overall, on the mortgage side, some EUR 7-8 million of potentially impacted loans in total. But that doesn't mean that the client doesn't pay, or that doesn't mean that we would have to do a write-off for these amounts. It's just that these are, of course, all high attention points. But, I mean, I mean, if you see that in total, that's very, very limited. Of course, we had some damage from clients on the corporate side.
But luckily, I have to say primarily, clients which are very solidly ranked, very good businesses, so they, they actually very swiftly overcome it, and we didn't see basically any fallout from that. So overall, impact is very, very limited. If you ask me what helps, are here two things. On the one side, hopefully, what is an impact or hopefully for sure it's an impact, as we see it now, is that, of course, when establishing, mortgages, we also look on whether that would be in flood areas. So we are careful, if it is, and, and often not giving the loan then. And so obviously also avoiding the exposure. And the other element, honestly speaking, is a little bit of a good luck.
So some of our competitors are considerably more in these areas which have been flooded present than we are. So we are there under average present, and that, of course, also contributed to the very, very small impact.
Ladies and gentlemen, there are no further questions at this time. I will now turn the conference over to Mr. Blaž Brodnjak for any closing comments. Thank you.
Thank you very much, Jan. As said, despite all the volatilities and uncertainties, we are on a very, very good track. We are ahead of an exciting six-month period within which we will try to understand, you know, eventual opportunities in front of us in a way to really productively deploy capital and share success with you. I'm really happy that I can report today from Serbia, because this means we are doing business. We are actually having an event, a really prominent event of opening of this, what was, what was once the most prominent congress facility in actually broader region, and it's been revived, in partnership with Delta Group and NLB as a financing party. And, you know, it's going to really position Belgrade on the map globally and Serbia and also the region on the map differently.
Next time around, do check out. We are on a path of success, on a journey of success, and we are gladly sharing it with you, and we are really thanking you for your trust on this journey.
Ladies and gentlemen, the conference is now concluded, and you may disconnect your telephone. Thank you for calling and have a good afternoon.