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 full year 2022 unaudited financial 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 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. Good afternoon, everyone. Let me first refer to the standard disclaimer and move on to the presentation of what we believe has been the strongest performance of any Slovenian business in history, at least Slovenian headquarters business. I'm really proudly introducing and presenting these results this time around. Following extremely uncertain year, high volatility of expectations, at the end of the day, we have delivered a very robust outcome in terms of financials, but above all, demonstrating a systemic role of NLB Group throughout the entire region. There have been couple of significant milestones again appearing, we have really jumped from practically high balance fees and negative rates to the 3.2% arrivals in half a year. Besides that, of course, there was the war outbreak.
There was total uncertainty regarding the energy supplies, the pricing of this energy, and Slovenian economy and regional economy, together with the financial system, have overcome all of this turmoil in a very good shape. Looking back, there have been really some strong achievements, not only talking about the interest income and fee income, so not only coming from recurring business origination, strong growth in terms of volumes, but above all also our capacity on one side, then also delivery actually of a very significant acquisition in the first half of the year.
NLB was in a shape mentally and in terms of capital and liquidity to jump in in a very specific, peculiar situation, and by that stabilize a bank in the country which has now been amidst of a very intensive integration and finishing presumably until September. On the other hand, we have been continuing actually improving the asset quality. Despite the couple of really significant crisis and supposed to be crisis evolutions, after Corona, now of course, this war outbreak and energy shortage and pricing challenge already before the war outbreak, we have seen further improvement actually of asset quality, which is for us, a very, very strong indication of a very, very solid underwriting criteria being put in place practically 10 years ago.
We are now benefiting from a very prudent, but of course, at the same time, to the balanced extent, ambitious loan growth throughout the region, practically in all client segments. We have seen growth in corporate banking, significant in SME Slovenia, almost 30% growth. We've seen very strong retail growth, especially in housing lending. NLB has managed to grow the market share in housing loans in Slovenia alone by four percentage points in two years, which is amazing achievement. This is actually growth for the size of the stock of the mid-sized bank in the country when it comes to housing loan portfolio. On the other hand, there have been, of course, significant measures we undertook, not only of course, jumping into this un-unexpected recovery and resolution of the bank.
We at the same time successfully managed to raise capital. Through various insurances, we have been pioneering as NLB in the international financial markets in AT1 placements. We are really happy about managing the private placement of AT1 in the amount of EUR 82 million. At the same time, we, towards the end of the year, pulled off the Tier 2 after quite some time, after a couple of years in a very uncertain environment, after 18 months practically trying to and was not possible. We delivered, we pulled it off and already in the middle of the year came back to the senior bond market, and by that made sure that we are very, very confident at fulfilling and complying with the MREL requirements.
One basically tactical senior preferred position to be closed this year, we are done for the 2024 hurdle. I mentioned before, integration with N Banka has been well on the go, basically now. We are in well advanced in the process, presumably full closing of integration at the end of August, beginning of September this year. In financial terms, this has been a historic result. EUR 447 million is the highest posted profit of any Slovenian headquarters business in the region. You will not find, our home region, obviously, you will not find many such performances throughout last decades.
In this respect, this is on one side providing a foundation, a very solid basis for future growth, but at the same time demonstrating really, you know, us benefiting from structural elements of the balance sheet, from positioning of the balance sheet, in terms of client segmentation and of course, calibrated and well-focused sales activities, including communication. Overall, revenue development, very strong, very responsible, treatment of the entire cost universe. We continued with our optimization efforts, continued to optimize brick and mortar network while focusing on digitization. We've seen significant progress in penetration of digitized services through M&D, in across the board. Especially solid trends in more developed markets.
We have, as I mentioned before, of course, been able to jump into the N Banka integration, today's N Banka acquisition, while completing the integration of Komercijalna Banka in Serbia. This was a very successful integration pulled off in April last year, radically seamless, providing services continuously to our clients. Immediately after that, organizing a very successful investor day in Belgrade, simply proving our commitment to the Serbian market, but at the same time, of course, also delivering the results. Very strong already performance coming from Serbia last year, with high hopes to deliver the expected, anticipated, and guided for EUR 100 million profits early and potentially even envisaged at the beginning of the process.
We are very happy about the upgrade of the rating that was coming just in time for the investor day from the S&P. At the same time, we have been then continuing our efforts to procure the first ever ESG rating. NLB has committed to significant scope of activities and deliverables when it comes to the entire environmental carbon footprint-related activities. We have procured the ESG rating that is for the first initiation, very solid, and we will be building on this. While of course, we have been focusing on other pillars of the sustainability very diligently and with genuine ambition and interest, by that positioning the bank really amongst pioneers of the ESG movement in the entire region. We've seen the growth of the GDP.
Slovenia's last information was around 5.7% last year, real growth in normalized terms, deseasonalized, which means that Slovenia has been following the strong growth of 2021, of 8% continuing at 5.7%. Forecast for this year has been around 1%. We feel very strong vibe in the economy, so it might be even more than that. Of course, the entire region has been growing quicker than the average of European Union, simply demonstrating that this is a good place to be for regional specialists, especially. You know, we will be definitely building on this base. 2022, very strong foundation is there to deliver more in the future. By that, I pass the word to Archibald to give you more details.
Thank you, Blaž . I will not dwell too much on our region. You're familiar. In the meantime, presumably, two strong pillars, Serbia, Slovenia, equally sized, with some EUR 60 billion GDP, the rest in smaller markets. All of which are relevant, and of course, all of which we service from an increasingly unified platform logic, and all of which in healthy stages despite the volatilities we've all experienced and that were mentioned. We still see this region to be growing above trend relative to Eurozone. This is still growth territory, and we're very happy to also see that the macro volatilities have been managed well throughout the region, starting from Slovenia, which of course is Eurozone ECB territory, but also in the other markets.
We've seen relatively stable evolution given the circumstances. You see the fundamentals following pretty solid trend rates from unemployment to fiscal prudence. Of course, for us, this is important foundation as much as the currencies which you see here, which are well managed. Of course, rates are rising in line with international trends throughout our region. Frankly speaking, for banks, that's broadly speaking a good environment to be in. Given all that, combined with a region that still offers a lot of fundamental growth potential in terms of loan penetrations, both private households and corporates, this is an equation for a lot of growth that we have seen.
I'm really happy to also report that first and foremost, loan growth was very, very strong. From the added volumes of EUR 2.5 billion, more than half actually came from organic growth. This is Blaž was talking Slovenia, very strong housing developments. We've had equally strong dynamics throughout the region, of course, start to catch up also in Serbia with our platform that we have acquired. In that sense, this in combination of course, with the extraordinary rates evolution, which we've always communicated, gears us to immediate and substantial revenue growth, given a EUR 6 billion long position, of course, produced stellar results.
Q4 extraordinary bottom line with some EUR 70 million, that is, in essence still not yet full factoring in the EUR movement. It's, it's, in essence factored into some 75%. On the other side, we still have the cost of Q2 to fully digest. In Q1, you'll see the full combined equation. Basically, we, we have, of course, shown very, very strong fundamental recurring results development. This is what matters most for us. This despite the N Banka integration or excluding N Banka integration, fundamental growth was really extraordinary. Of course, that's this rare combination, if you want, of enormously rising rates plus strong organic volume growth.
Of course, helped by fundamentally healthy businesses and households, so asset quality is firmly in check, and of course, you'll hear more about that a bit later here. The rate environment, you'll see it's almost an explosion of the margin on quarterly level. We are already on group level, exceeding our target of 2.5% that we have communicated at IPO. Of course, admittedly helped by the rate explosion. Still, basically taking us back to much more normal territory from, you know, regular long-term banking point of view. Let's not forget this is more normal than the seven years behind us.
In that sense, this is really gearing us up strongly also for the future in terms of profit generation capability. The same story, to some extent, a bit muted on the fee side, muted because we had been careful also to not overstretch pricings, especially to more vulnerable segments of our customer base. Nonetheless, fee, and this is really basic bread and butter business for us, grows very, very strong. Again, a combination of continued good results in ancillary product sales, and as I mentioned, simple bread and butter, smart packaging of accounts and services, and, of course, this supported by increasingly robust modern infrastructure that we provide to our customers.
We've just, as an example, completely renewed our ATM fleet in Serbia with top-of-the-range ATMs throughout the whole country. Of course, this level of excellent service then also has pricing power and that you see translated in fee growth. On the cost side, you see overall a very, very solid performance given the first integration efforts that we run 9-2 markets, that's Serbia and Slovenia. You see 5% without N Banka, but of course, including still restructuring costs of Komercijalna Banka and not yet finished integration process in terms of rationalizations of Komercijalna Banka in Serbia. 5% in an environment that showed really double-digit at times inflation is in our view, really stellar performance.
Of course, you see on quarterly level, there is, as usual, a bit of Q4 dynamic, that is, seasonal, to some extent, on the fundamentals. Of course, we have seen repricings here and there. Electricity costs went up visibly. We all of a sudden talk millions of EUR electricity charges. Of course, we basically immediately put attention to savings. We save, we saved last year in terms of consumption in the range of 15%-20%, and we will continue to do that next year. We of course get much more conscious in our efforts, and real estate footprint, which is a big topic still for us. You see number of branches going down as well as number of headcounts.
Of course, headcount here is including the addition of N Banka. There is still a long way to go on the cost territory. Physical footprint versus digitalization is the equation that we are running. I would claim quite successful and of course, with the right pacing, which ultimately should follow our customer needs. All that results in this extraordinary dynamic, which you see here very nicely on the recurring pre-provision results development. Of course, you see here the massive upswing, of course, from rates, fees in combination with a disciplined cost dynamic. If you look at it Q4, 2021, 2022, it's almost doubling the pre-provision result. You also see Blaž mentioned a quite significant improvement already in Serbia. We are really starting to deliver here.
Of course, solid performant performance throughout the whole universe. Slovenia DD is not normalized by the dividend upstreaming, which last year was a bit muted given the circumstances. The underlying recurring performance in Slovenia was as good as in the other markets. Loan dynamics, I mentioned pretty much all of that already, so I'm not gonna dwell on the various numbers and breakdowns. Capital, we have added both with the acquisition of N Banka, but equally important with our capital market activities, where we issued EUR 300 million of capital instruments, combination of Tier 1, Tier 2, one-third, two-thirds, so in a healthy mix.
Of course, prices that we would not wanted to see or wanted to pay, but it really puts us in an incredibly good position to seize future growth opportunities, both organic and non-organic should they occur. In that sense, we feel very, very comfortable that we have done the right things here, and you see capital ratio very comfortable about above all regulatory, of course, and also internal targets, which basically sets the stage for growth. As we have claimed and we deliver on that, we would like to see and maintain some EUR 1.5 billion-2 billion risk-weighted asset M&A capacity. This is pretty much where we are at the moment. Here again, the funding as such.
As mentioned, we are now ticking comfortably already the 2024 January target, and of course, are basically adding up to basically fund the full of 2024. This is about to come. We are setting up an EMTN program and, of course, we'll expect to be in capital markets more frequently. Frankly, that will over time also increase efficiency in that process, pricing, secondary market liquidity. By that, we will be pretty much normal in terms of our balance sheet structure with a very strong retail corporate deposit franchise, and complementary capital markets funding for both long-term funding and capital purposes. I hand over to Andreas for asset quality.
Archibald, thank you. Yeah, as a COO, I have to say that in such vivid times, I'm extremely happy that actually there are no big surprises in risk and in risk management. My main messages are we still have very nicely diversified and nicely growing portfolio. We have, as Blaž mentioned already at the beginning, a very good asset quality, and actually still very low cost of risk. Of course, the net interest income is helped by the Euro developments of the last period considerably. On this slide, you see once again the diversification. On the corporate side, between SME and corporate, and then also mortgage loans and consumer loans on the retail side, all of them nicely growing.
If you see it through the geographies, not very surprisingly, Slovenia, approximately 50%, is a certain hike in March. That's of course the N Banka effect. What you see is that despite everybody is growing, including Slovenia, the banks outside Slovenia are even growing faster. That's why you see, of course, slowly from a trend, of course, the percentage of the portfolio in Slovenia going back. We are well-diversified. You see this again here with the industries. Of course, you know, in these days, we are looking on every client more closely. We're getting a little bit more picky, a little bit more selective. What is also important to say is we, of course, still very actively drive the development of our business and of our clients' business.
In this year, of course, so in 2022, of course, we had in the energy sector, some counterparties where we were considerably growing exposure. However, mostly, with state backing to the different laws from this, well, result of the energy turbulences, actually. From a risk side, for sure, very solidly covered. Here, of course, we were growing volumes. If you see the breakout of the two strongest growing areas, then again, of course, here you see a good diversification. What is maybe worth mentioning is Q4. You can see that in the corporate portfolio side, we are flat. Actually, in these breakout industries, we are even shrinking the portfolio. That's actually not very unusual for our last quarter.
We had a lot of repayments of revolving facilities. That's actually in the last quarter. From the side of the companies, also a little bit of balance sheet management. Again, in that sense, nothing usual. What is important to stress is that the new business is still developing very, very nicely. Just in the last quarter here in the corporate side, we had, well, basically overcoverage from regular repayments. If you see NPL ratios, we are now having actually EUR 328 million non-performing loans on the balance sheet, of which almost half has zero delays. Mostly cases which are restructured and not yet through the curing period. We have very solid coverage ratios, of course, clearly above EU leverage.
We, in the meanwhile, also have, as you see on the pie chart on the right bottom, a normal diversification between the geographies. You would expect a EU country like Slovenia to have under average part of that NPL portfolio, and logically, then the others a little bit over average. That's exactly how the slide, how the cake in the meanwhile looks like. The last quarter was actually a little bit vivid. You remember Q3, we were still negative on cost of risk. At that time already, I told you that I'm expecting this year definitely positive cost of risk at the end of the year, that's also, of course, what materialized.
Final for the entire year is EUR 17.5 million, or 14 BIPS, which for these times actually is a great news. We again had a year where we had excellent repayments of write-off receivables, so EUR 33.3 million. What you can see actually also in the last quarter that we had, quite clear impact. On the one side, changed macros contributed with EUR 7.2 million. On the other side, approximately 40% coming from retail, and then, of course, the remaining 60 from corporate. We had EUR 23 million impact on NPL charge for this quarter. That's in reality on the retail side, a little bit the winter effect and also usual December effect, which I have to say.
On the corporate side, three quarters of this are 10 tickets, so that's mostly one-time effects which I'm actually not expecting to repeat now in the next quarter. So far in this quarter actually also doesn't, so I don't see this as a trend. The last quarter definitely had a higher charge than an average quarter. Yeah. Last but not least, what I mentioned at the beginning, net interest income. You see on the one side from our Euribor base loan portfolio, we have 60% in six months Euribor, and you see the percentages for the rest.
The effect from this is because only at the due date in most cases, and just in one of our smaller banks with certain defined deadlines, the Euribor then is really kicking in, so repricing. What you see on the right upper part now is the applied Euribors per end of the year and what the Euribor was at the end of the year. This tells you at the end of the day that a part of the good news which is coming from the net interest income, we will only see in 2023. When you have rising interest rates, of course, this increase of the net interest income is running a little bit after due to the effect which I mentioned.
That's why actually we expect even a stronger impact obviously still to come. That's briefly from my side for risk. With this, I'm handing actually back over to Archibald.
Thanks. I'll keep this brief. Not much has changed since last time we talked about this. The integration is commencing with full force and all hands on deck on business and IT elements of the integration. Maybe I remind you that the big benefit of this process is to some of the, a pretext or a trial run on our core system backend integration process that we anyway have to run in Slovenia to, in essence, get rid of our mainframe infrastructure. This is all going according to plan. On the numbers, not much has changed. The plan is still same as last time. Of course, now more advanced on many elements. We are in discussion with the regulator, of course.
We have successfully overcome all the hurdles with our compliance elements of this integration process. In that sense, I would pass back to Blaž to conclude.
Yes. All of what we said has led us to revise our guidance and ambitions for the upcoming period. Of course, no one six months ago could count with such significant hikes. This is totally different environment. Much more, of course, normal environment for banking universe. What we expect then with the inflation coming down a bit, of course, also some moderation of the interest environment, but still normal banking environment with soundly positive rates. This is for banks, of course, bringing totally different expectations when it comes to revenues. Deposits pricing, of course, will be significantly challenging in this upcoming period in the sense of introducing measures that will be a balancing act, especially if we then expect after the significant hike and quick hikes, you know, certain moderation.
Generally, this is good news for our revenue side. By that, we have significantly revised expectations, both in terms of regular income, of course, also profitability, both in absolute and consequent in relative terms. We see us now really ready to be talking about further growth in organic and M&A universe. Archibald mentioned up to EUR 2 billion of risk-weighted asset M&A capacity in place by the capital measures and internal generated capital. We will seek for further possibilities eventually for some private placements of AT1. We have not exhausted this territory yet. We have been publicly talking about that for some time. We will be further talking about, of course, senior preferred issuances within Q2, let's say, as we also announced in public. Generally, NLB is moving the bar
Moving the bar in 2025 to EUR 400 million in 5-6 years from now, with a bit of luck, potentially even half a billion. We are sticking to the dividend promise. We have consciously not yet been increasing dividends because we believe there will be opportunities coming our way in the upcoming 12-18 months. That's why we have beefed up capital as well, on one side to be, of course, on the safe side, given the uncertainties and turmoil in the environment. Now when this is settling in a much more controlled way, energy pricing is reasonable, energy is available, so there is predictability of supplies. The winter was helping out, obviously, the mild winter helped significantly out.
For the next winter, there are high hopes we will, of course, be sitting on significant storage of gas and with normal production mix, also electricity. In this aspect, we look forward very confident and we feel very strong. That's why we felt confident enough to actually start talking about 14% ROEs normalized for this year and 17%, more than 17% actually for 2025. Serbia is a good track. We specifically highlight Serbia because this was for us, first major acquisition of the, of course, the restructuring of the banking group. There is a very strong performance in Serbia, actually a bit ahead of time, potentially delivering EUR 100 million. We feel confident about that as well.
We will not shy away from analyzing and engaging at actionable M&A opportunities. There might be a leasing opportunity in Slovenia, potentially in the market in a couple of weeks. There might be opportunities towards the second half of the year in other countries. We are specifically interested in Serbia, we firmly believe that the time has come that Slovenia and Croatia put history aside and reach an agreement and settle on the past legacy issues when it comes to former Ljubljanska banka . By that NLB is acknowledged as a welcome contributor to improvement of the business environment and welfare of the households in Croatia by entering the market as well. We have capital, we have liquidity to be able to start initiate operations in Croatia cross-border once allowed.
If there were actionable assets, of course, we would analyze them, but currently, of course, we have not yet been engaged in any way in this respect because we have still bans, the straight bans, to enter the market. Overall, good prospects, high hopes for this year and the upcoming midterm period. Building this group, moving this group to the different ballpark of total assets of absolute profitability, also relative profitability. Finally getting back to, you know, something we believe is appealing and attractive to the investors, especially if inflation is moving down to something much more reasonable. We see forecasts, expectations, market expectations of 2.5% maybe already in the next year.
Delivering 14%, 17% ROEs in a normal inflation environment is of course, we believe something very attractive, if you look at it dynamically from today's perspective. Thank you for being with us, trusting us, and building this success story together. Now of course, we will be gladly responding to any questions, you know the contacts of our investor relation team. Of course, now we are all yours for the eventual dilemmas raised or questions. Thank you.
Ladies and gentlemen, at this time, we'll begin the question and answer session. Anyone who wishes to ask a question may press star followed by 1 on their telephone. If you wish to remove yourself from the question queue, you may press star and 2. 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 1 at this time. One moment for the first question, please. The first question is from the line of Nelly Simon with Citi. Please go ahead.
Hi. Thanks very much for the opportunity. Yeah, I guess my first question would be on the cost guidance for 2025. It seems quite ambitious to keep costs at the 2023 level, which I guess now guided at EUR 490 million, so unchanged versus your last update. Can you just walk through how you get there and what kind of employee numbers you're factoring in and what kind of employee cost growth you're looking at? 'Cause it looked like this year you had something like 16% growth in labor costs per employee. So I'm just wondering how you keep costs flat in the outer years. What are you factoring in? That'd be my first question. Second question is really about funding.
Can you give us an indication of what kind of deposit growth you're expecting? What you're seeing in terms of deposit pricing and deposit beta? Those would be my two main questions. Yeah, well done on the results. Quite impressive.
Thank you, Nelly. I will begin then Archie will for sure add some thoughts. When it comes to costs, we are still in midst of two integrations. There is still a take to be delivered from Serbia. We told everyone that the target headcount in Serbia is actually around 2,000, 2,100. We still have, you know, a couple of hundred to go there. On the other hand, N Banka, of course, will end up with significantly lower count. We just got 385 people in March last year. We are already under, you know, below 200 or around 200 there as well. You know, this is coming from the successful integrations finally delivering synergies. The other, of course, dimension is the digitization.
I mean, we are really having very ambitious targets in place, the KPIs or in all subsidiaries and of course also Slovenia. For mobile and digital penetration of the client base, which is driving, of course, down the general cost of, you know, the branch network. We have been reducing significantly in Slovenia. We are continuing by some additional, you know, branches closed this year, some potentially in the upcoming couple of years, but in Serbia, still some to come. You know, this is a general trend. We believe we will be able to offset inflationary pressures, especially if we, you know, see inflation normalizing by completing simply a couple of integrations still pending. When it comes to deposits, of course, we do see cooling down of demand for especially housing loans.
I mean, interest hike has delivered this restriction, at least mentally. Psychologically, people, of course, are now looking at 5% rates versus 1.5% rates for a third tier housing loan, right? They have crunched a bit, so there is a bit lower demand. We nevertheless expect that this year we will see mid-single digit growth. If we have a real growth of 1.5% in the economy with 6% inflation or 7% inflation, this is still 8% nominal growth. Coming from a very low base of 14%-15% household debt, housing loan debt to GDP, you know, there is still significant potential once people understand that 5% for a third tier loan is still not totally ridiculous, right, in historically perspective. Let's see.
There will be, of course, by that naturally, given the increase in salaries, let's say on average, we expect some 5% increase of wages in the country. I would expect, we would expect nominally, of course, influx of deposits. We see still strong consumer confidence, so people are still spending money. There is solid demand for consumer loans, a bit lower for housing loans. We will see it here, a bit more balanced evolution. Of course, these days, deposits are no longer a drag because of course, now actually they have become again a treasure. We are a strong retail franchise. We see it on 60%, a bit more loan to deposit ratio. Of course, this is mainly side deposits. We pay still practically zero rates to the side deposits.
Today you can place liquidity reserves, either govvies, either, you know, central bank balances, of course, new loan origination at normal rates, right? No longer at totally discounted rates or normal rates. This is in principle good news. Even if you would have still solid development of deposits, you would see very incrementally, actually positive contribution. We will see a bit lack in a repricing of deposit base because we are sitting on very low loan to deposit ratios. You know, we are not forced by any means... Actually, via MREL, we are rather distimulated to reprice deposits because we have to take on expensive, still expensive, you know, MREL funding, which is of course, requiring for every single incremental risk-weighted asset, euro build-up EUR 0.35 of this very expensive, you know, means.
This is of course discouraging us to reprice significantly deposits. Of course, there will be certain movement. We see other banks in the current, in the market, smaller banks with significantly higher LTDs already offering for more than a year deposit, you know, 2%, even 3% rates. Of course, they condition then the, you know, salaries movements and, you know, there's, it's limited to certain amounts of deposits and so on. It is difficult to say where this will end. It is going to be a bit of a balancing and art how to price these deposits. Generally, the hike is still coming. I mean, you'll see another 50 bps of ECB coming in March. This is announced basically.
This is not yet by any means, not yet fully factored in in the asset. You saw EUR 6 billion, you know, still coming to be fully repriced. In this respect, I would see this a very strongly solid year of performance. This 14% that we are signaling, we believe is achievable. Would you add anything?
Not much to add other than, I mean, don't forget this last year was a bit burdened with restructuring charges, so kind of costs of one-off nature. Then, of course, the other thing I would add is, we are getting very focused on real estate footprint, as I mentioned, and getting efficiencies there. The, you know, the whole energy crisis has made us very focused on energy consumption, electricity. kind of banal things, if you want, but this will give us, these savings will, and the synergies mentioned, will also give us capacity to keep investing in matters that we believe are important. That is, of course, the whole brand, customer experience, and then the whole internal digitalization process. it's not gonna be easy.
Inflation is to some extent still a bit unpredictable, how it's gonna play out. For now, that's the ambition, and we want to remain ambitious.
Thanks very much. just on the deposit, it sounds like deposit growth might be a bit lower than loan growth. Is that the fair assumption, or?
Actually, it's hard to say. It might be the other way around. I mean, people are full of money. You know, public sector is repricing salaries like hell, right? Now private sector is following. There will be a lot of household money. What I said, it might be that the growth of deposits might actually be higher than the growth of loans, but these days, deposits are no longer a problem, right? That's the message. Incrementally, you actually benefit.
Okay. Just maybe one more on me, cause you said that you've got 2 billion RWA, M&A potential. If you don't see targets, when, you know, when would you consider a puffing dividend payout back to kind of your IPO target of around, what was it, 70%, I think?
Well, we constantly moved away from percentages in terms of payouts, we moved basically to absolute amounts. We, at this point of time, do believe that within 12 to 18 months, there will be a potential, you know, to acquire potentially up to EUR 2 billion of risk rate assets. That's why we stick to the guidance for dividend plan. If we in 12 months see there was nothing that crystallized, of course, then could be a different debate. From today's perspective, we do believe there will be an M&A opportunity.
Understood. Thanks so much.
Thank you.
The next question is from the line of Jovan with RBI. Please go ahead.
Hi, good afternoon. Also I have actually congrats on the numbers or maybe better to say on the guidance. I would have also follow up on M&A. I mean, if you combine it or if you consider it together with the guidance, I mean, guidance was of course high, profit was high. Dividend assumptions, I mean, cumulative dividend assumptions was kept at EUR 500 million, right? And M&A capacity, I think you mentioned that you are already there in terms of your capitalization. Can you maybe just explain how to calculate M&A capacity and maybe what's behind the capital targets that you implied? Maybe it looks at first sight to me a bit, let's say, being cautious on the capital side going forward.
I mean,
Did it-
That maybe to qualify this EUR 2 billion is not, you know, measured by linear. This is kind of a range. It just indicates that we upped the game a bit. We believe growth is important, scale is important in banking. Banking gets more complex, regulated. The whole rate hike has also told us that as a relatively small player, funding is expensive. In this sense, I guess the signal is we want to be scaling more than what we do organically. The numbers are not to be taken literal and religiously. It's an indication that our appetite is rather growing a bit. It kind of relates to the previous question. We keep the dividend promise, and we add a bit of M&A capacity.
We really believe that, you know, there is value of course, not only value, we believe it's a necessity to grow. It's not only from regulatory, it's from all other dimensions, you know, to weather the crisis in a more, more, you know, confident shape. We believe we could be quickly moving towards EUR 30 billion and then in mid to long term, EUR 50 billion balance sheet, which is then potentially even sufficient, you know, in this highly strictly regulated territory, you know, having a critical mass. This is possible only with of course, strong growth organically and through eventual M&A, maybe even tactically at certain point, asking for, you know, stakeholders, shareholders for trust and going for the recap.
Hopefully finally, gaining enough trust and ambition also from the Republic of Slovenia to play along in this respect and pro rata provide capital. You know, if this was a sizable opportunity in terms of EUR 5 billion-EUR 6 billion balance sheet in Croatia, Serbia, you know, you name it, right? This would require some EUR 400 million, EUR 500 million of capital from our side. We would go for it, you know. Hopefully being able to count on the support of the Republic of Slovenia as well. We think in terms of ambition, how to position this business in, let's say, 10 years from now, you know, to EUR 50 billion total asset base, hopefully delivering then, you know, EUR 700 million to EUR 1 billion of profits.
This is not from today's perspective, totally in the clouds, but you know, if you don't think Olympic, you will never enter Olympics, right?
Okay. Of course. Yes. Yes. Yes.
There was no change from our side on capital targets you mentioned, you asked. Bear in mind, that's a regulated business, so regulators could have ideas here and there. In this sense.
Yes.
You always have to keep it.
You don't see anything, right?
No.
Far not.
Okay. Great. Okay. Okay. Okay. Okay. Fair enough. I mean, second question on provisioning. I think if I'm understood the numbers correctly, I mean, you set aside a bit of provisioning on Stage 1 and Stage 3, right? On Stage 2, despite going up in nominal terms quarter-to-quarter, I mean, in both segments, retail and corporate, I mean, the coverage declined a bit, right? Did I understand it correctly?
you know, I mean, this is of course pretty much of mechanics.
Yes.
On the concrete cases, which are flowing in and out. I mean, generally speaking, I have to say we are pretty happy with the percentages of Stage 2. Regulator sometimes is asking us whether we are here too low. I strongly believe we are not. I think the staging here shouldn't be, you know, some kind of building buffers, but it should reflect reality. Here I have to say that our portfolio simply reacts very, very solidly, I have to say, very robust. Generally speaking, our coverage ratios are more than solid and clearly over EU average. I think we are here for sure on the safe side. Total coverage has increased.
The last one, if I.
Yeah.
If I may just add another one on, there was this recent on this Swiss franc issue. I mean, okay, maybe it's not imminent as much, but experienced by some, you know, neighboring markets, or CE markets. There was a kind of, I think, unfavorable Supreme Court judgment on one of cases in Slovenia. How do you read this? I mean, we had before this Constitutional Court canceling this kind of controversial law, which was adopted earlier last year. Is the topic kind of going to come back again? How, how, how do you assess it?
We assess it as normal evolution and development because of course there were banks that in individual contracts didn't necessarily perform the duty of, you know, information, informing the clients properly and, you know, making sure that the proper document set is being signed. This is a normal practice.
Yeah.
The court has an individual case assessed that, you know, the bank didn't perform all the duties. This is not typical specific judgment for NLB. In our cases, we had separate statements signed and so on, right? This is to be seen as normal individual court practice.
NLB has won individual court cases so far, so.
Yeah, we have won all of our cases so far. Yeah.
Okay. It's kind of rather moderate risk or very low risk from your side, at least. Okay.
It's a normal legal risk.
Okay. No, that. I thought.
Yeah.
Yeah.
Yeah.
I mean, legal risk, you know, when judges take the control of the sector, then it's not good. I hope not.
We've seen this in some markets in Slovenia. Luckily, the constitutional court was judging on this one soundly. Eliminating retroactivity entirely, there was no higher public interest for retroactivity to be applied. That's it.
Yes. Yes.
From now on, it's on individual cases, deciding, you know, judging whether the bank did perform the duty, the client, you know, was properly informed, properly acknowledging the risk taken over by signing, you know, a deck of explanation and so on.
Okay, perfect. Thank you. Thank you.
Thank you.
I'm done.
Thank you.
The next question is from the line of Ronak with ICG . Please go ahead.
Hi. Can you hear me?
Yes.
Hello.
Yes, we can, Ronak. Go on.
Just two questions. Firstly, well, congratulations on the good moment. Fantastic set of results. My first question is on NIM. If I understood Art Athbone correctly, you were indicating that the increase in your IBOR rate hadn't been fully priced in, only about 75% priced in. There's more to come. With the expected increase in ECB rates, should we expect maybe your NIM to be above your target of around 2.5 in the short term before they normalize in the medium term? That's really the first question. The second question is, can you talk a bit about competition, OTP recently completed their acquisition in Slovenia. Should we expect increased competition within the package system and what's the eventual impact of that on your savings? Thank you.
Maybe I first touch OTP's closing. We above all congratulate our esteemed colleagues from Hungary closing the deal. We believe it's good. We believe that finally Slovenia has proven that, you know, the international capital is welcome because it was dragging for almost 20 months, the decisions that were needed for, you know, vetting this deal. We see OTP Group as a real strategic investor. We have high appreciation, and we don't expect them to, you know, introduce ridiculous market practices. They will have critical mass. They will introduce, of course, sound approaches in terms of product positioning, in pricing, in collateralization and so on. We take them actually as a extremely credible counterparty. If you ask me, is this then good for NLB or not good for NLB?
Well, we were competing until recently with 3, 4 very strong brands. Actually, we will have 1 counterpart our size, you know, and of course, qualified. If you ask me, that's very good for not only NLB, but the economics of the entire sector. On the other hand, clearly still keeping the competitive edge, of course, that the clients would not, you know, be deprived because of eventually, you know, some other trends in the industry in terms of antitrust protection and so on. That's all good news. OTP is all good news. This is how we assess the situation. When it comes to arrivals on this slide, more or less, you see where we were. We cannot be more exact at this point. You can talk to our team for more details, what we can disclose.
Generally, it's by no means yet fully repriced, right? You see February coming in, 50 bps. You can see March coming in, 50 bps. Euribor today, 6 months arrival, we're at 3.2%, right? We are by no means yet there. It's going to be, you know, for 6-9 more months or even the entire year for some of the part of the exposure of the portfolio where you would see still repricing coming in. The margin of NIM of last quarter was already above 2.5%. You know, it would be significantly above in this year. What's a new normal level, you rightfully somehow, you know, try to understand, well, this is 2.5% in a normalized midterm environment. Very likely, yes.
You know, it's too early to say, but we now feel confident that we will have normal margin for banking business because, you know, years and seven years ahead, you know, in a row, basically, it was not a normal banking environment. We're finally back to normal banking environment.
Mr. Ronak, have you finished with your questions?
Yes, that's fine. Thank you. Thanks very much. I'm very responsive questions.
Ladies and gentlemen, we will now move on to our webcast questions. The first webcast question comes from Damian from Slovenia. I quote. First question: Will there be any extra dividend for year 2022? Second question: Are there any acquisitions taking place, especially in Croatia? Thank you.
I believe we have more or less explained that. There is not supposed to be an extra dividend. Shareholders can always have counter proposals and suggestions. We actively will not suggest more than EUR 110 million from the last year's result because we believe there will be acquisition opportunities that we can address. Whether this will be in Croatia, it's too early. Currently, it is not allowed. Currently, we cannot enter Croatian market yet. This is subject to a political agreement between Slovenia and Croatia. There might be, though, opportunities in Slovenia, leasing territory or in Serbia, potentially in second half of the year or early next year, also in banking universe. Nothing is concretely happening as we speak, but might be evolving pretty soon.
You know, we are already almost now in the end of Q1 of this year, so towards the second half of this year, which is practically in business terms, tomorrow, there might be concrete movements in this direction, and we are equipped with capital to be able to address this in agile and effective way. Not then, of course, going for capital because we have paid out too much of a dividend. This would not be rational, simply.
The next webcast question comes from Robert from Poland, and I quote, "What makes you so confident on timing of the Croatian opportunity just now?
We are not confident. We believe the time is right because Slovenia has just supported fully, genuinely, entry of Croatia in euro adoption, territory on one side. Croatia has become a EMU member, European Monetary Union member. Slovenia strongly supported that. Second one was, of course, allowing and supporting actually shift of the Schengen border regime to Bosnian border, by which there has been no border between Slovenia and Croatia anymore, which has eased the life of Croatian businesses, citizens and Slovenians on the other side significantly. There is a positive sentiment. We believe there is a positive sentiment right now, as long as people still feel this as an, you know, additional benefit, not something they're used to. Whether, of course, politicians see the same way, we frankly don't know.
We feel this sentiment among population and businesses. We would hope that the politicians would and will ride this wave of opportunity.
The next webcast question comes from Antun from Croatia, and I quote, "Congratulations on a record result. What are your thoughts about NPLs in 2023? What are your expectations regarding mortgage loans in Slovenia and Serbia in 2023? Thank you.
Yeah. You can go about that.
Maybe first on NPLs. I'm expecting a moderate development. It might not be as moderate anymore as we saw it in the previous years. As you know, we are guiding to 30-50 bps cost of risk. I strongly believe that we will not exceed this cost. What is true and what we saw in the last quarters, and I think this year we'll see a little bit more in 2023, is more movements in the background, if you want. We are still very successful in resolution of NPLs and also off-balance items. I'm expecting, to a certain extent, this, of course, to continue also this year.
On the other side, we have, you know, more cases seeing moving in, no dramas, and especially no big or critical cases. That trend will probably this year a little bit accelerate. I think I told you already in the last 1 or 2 webcasts that I'm expecting, of course, that on the retail side, some people will simply feel prices going up and salaries maybe not always following suit or fast enough. We will see some impact here. We might see with single corporate clients also some impact, whereas I have to say so far, the only thing what we see is what is very natural. The less good managed companies, of course, have the problems first.
Here we are anyhow, pretty strict from our side, in the loan approval process. I'm not expecting any dramas here in 2023. I'm very firm that we will stay within this guidance, for sure not exceeding it. Of course, you know, these days are for risk management a little bit more vivid times than in fully regular times. We are on very strong feet. We have a very high quality portfolio, and that's why I'm also expecting for 2023, not really surprises.
We are getting back to normal also in this respect, right? We've been writing back, you know, having negative cost of risk for years. At certain point of time, you exhaust the NPL book, you know, from which you can actually be reaping these benefits, you know. That is provision to liquidation values. In highly liquid markets, you have market values, not liquidation values. That's where you're of course benefiting in terms of cost of risk, positive contribution to the P&L. Now, this has more or less been exhausted. There might be some pockets still in Serbia. There might be some pockets here and there, but not many are left. That's why we are talking about 30 to 50 bps, which is more or less normalization of the cost of risk.
When you have, you know, a broad consumer loan book, when you have, you know, regular underwriting capacity, you know, fully in place. If you have margin of 2.5%-3%, of course, having 50 basis points of cost of risk is something absolutely acceptable. This is in terms of business progress, you know, something you do. Banking is risk management, not risk avoidance, right? That's good for us as well. It's going to be 50 or 30. The time will tell. The year has begun well, we don't see significant, no movements into migrations in the portfolios. Let's see. The other question was the housing loan development. We see, of course, cooling down, significant cooling down in the last period of last weeks.
As I mentioned within the presentation, right, the people are a bit in a shock because we've come actually from 1.5% fixed mortgage of for 30 years in June to, you know, 5%+ practically in now February. People now are deciding more for floating rates, and are not yet sure whether, you know, inflation and where the floaters will be moving in the upcoming midterm. They are now on a wait a bit. At the end of the day, there will be a accommodation, you know, periods at which people will understand they still want an apartment, you know, they still can afford, you know, 4.5%, 5% rate, and they will start. You know, they will resume actually purchasing.
You know, this might be then, of course, significantly lower level. That's why we said this year, we are not talking about double-digit growth rates. We are talking about mid-single digit rates. Is then going to be, 4 or 6, the time will tell. Overall, retail growth would be somewhere there, I believe, we believe. Consumer loan book is developing now, finally moving, you know, a bit because it was stagnating for years. Now we see this one moving and housing going a bit down. Overall, on average, it could be this mid-single digit growth, within in nominal terms, still 7%-8% grow with growing, economy, you know, with very low base.
If you look at the housing loans to GDP or total retail loans to GDP, you know, or corporate debt to GDP, we are at very low levels. You know, certain convergence here still will be happening as soon as a bit of confidence is back, both for consumers and businesses. We believe the growth will resume, but not to the last year's level. If you look at the midterm, we believe it's going to come back because from the low base, you know, you quickly reach significant growth rates. No? Slovenian economy and regional economy is in relative terms, a lowly indebted, lowly leveraged. We are at one half or even one-third of developed markets, right? Which speaks about our incremental opportunities and potential, but also about the quality of our loan books because the businesses are deleveraged significantly, right?
Overall, lower rates, lower growth rates, but in principle, sound production, we believe, at much higher rates, you know, at the point of origination. Even if you now grow with 3%-4%, by 3%-4%, we would be growing by, you know, this 2.5%-3% or even more percent margins, right? Which is totally different to growing by 12% at, you know, a 1.3% margin.
The next webcast question is from Daly USA, and I quote, "What's the assumption on interest rate environment behind your 2025 targets?
I mean, that's anyone's guess. It's already brave to talk about 2025, from what we see that's a zone we can reasonably estimate beyond 25, I wouldn't dare to give predictions. The ideal case would be that inflation will have normalized, rates will settle at some normal level. Quantitative easing programs will have largely diminished, we are back to a halfway normal situation, both on monetary policy, rates, environment, and by that also for banks. Actually a good environment where you can earn good money in an environment that we describe. This is, you know, for 25 beyond, this is speculation, that would be, let's say, a base case.
The next webcast question is a follow-up question from Daly USA. I quote, "Could you describe the depositor behavior so far? How far are depositors moving to time deposit, and what's the marginal time deposit rates you are offering? Thank you.
Well, there is not yet really, you know, a huge shift. We have been offering some certain saving account schemes that are a kind of hybrids between, you know, the sites and the classical transactional account and a deposit, which is, you know, linked a bit to arrivals and so on. They can use such products. People are not yet inclined to now deposit money for 2-5 years in massive terms, because there is still significant uncertainty and they're waiting what will be happening. We don't see yet massive demand. We see pickup in public, of course, also by media. You know, you are not benefiting from the, you know, rate hikes in assets. When will deposits follow? Of course, we have to explain our LTDs and cost of MREL and everything else, right?
We are not, you know, really interested in or. There is no real possibility to move quick. There will be a balancing act, so it's hard to tell. We will have to move up gradually. Of course, the revenue side. I mean, the asset side is still moving up as well. We had, you know, 10 years ago or, you know, prior to the financial crisis of 2007, 2008, there was a normal structure of the balance sheet. You know, we had 50% term deposits. Now we have 90% sites. There will be definitely, you know, a process, a development towards something that is in terms of long-term perspective, normal banking business. How quickly this will be happening, it would be, you know, a crystal ball. We'll be.
This year is going to be really balancing act. We will be, you know, moving on the go. I guess towards the end of the year, once we have more clarity on target inflation rates, I mean upcoming inflation rates then for the year to come and the year after, if this is then starting moderating, of course, there will be less pressure on significant heights in deposit side. It's too early. It's too early to tell.
The next webcast question is from Antun from Croatia, and I quote, "Everyone is talking about ChatGPT nowadays. Could you ChatGPT and similar artificial intelligence tools be used in banking? Thank you.
That's a philosophical question. Of course, they can be used the other way, as long as regulation is not prohibiting them. Because, you know, the copyright, the authorship, you know, how this is going to work out in the entire educational system, this is going to be a big challenge, you know, at the end of the day. Of course, it's not ChatGPT, it's artificial intelligence. It's mastering your data. It's actually in simplified terms, how we look at it is capturing your data from your clients on transactional level, transforming this data into information and then productively feed the sales process with this information, right? In this respect, this is to me a CRM universe, right? Of course, we have to get more literate.
We have to, you know, become much more modeling skilled, to be using these artificial intelligence-based decisions in the future. I would not refer now to a concrete app or a concrete solution. This is one of the focus points. Arči will give you more details. The entire data management universe is for us, really one of the hot topics besides introducing common platforms when it comes to client interfacing and client directions. Of course, the entire internal literacy on how to conduct business in a profitable and calibrated way is, you know, the entire pillar of our activities. Arči, maybe you had some thoughts here.
Sure. Actually, we have signed yesterday, an agreement with Microsoft to start using ChatGPT. I'm very happy to say that we look forward to using all these different means. Of course, there'll be a gradual process of picking up on these technologies, but absolutely, we are using them. We have a competence center in Serbia with natural language experts that, you know, will help us, for example, go through contact center email language patterns and then help us understand whether or not our customers are broadly more or less happy. Absolutely, we are going in this direction. As I said before, we will release funds and keep investing in new technologies from data to AI.
We use that already in underwriting to some extent, and this technology is here for us to be used. As was Blaž mentioned, this is regulated territory, so use of AI is regulated by EU directives and so banks are here, of course, as usual, in a bit of a tight spot. We will use these technologies responsibly, but to the benefit of our customers, ultimately. Yes.
The next question, the next webcast question comes from Victor from U.K., and I quote, "Congratulations on fantastic numbers and sharing your detailed outlook. Could you please elaborate on where we stand with regards to the Slovenian SZ-1 mortgage law? Constitutional Court threw it out. Where do we stand today? Thank you.
Well, it was annulled. The law was annulled by the Constitutional Court, meaning it's not in force. It was first suspended, as you know, and then annulled, so It has never come to life. What we are left with is now individual cases, court process, which means that, of course, clients that have sued have to wait for the outcome in, you know, by the relevant courts. There was 1 Supreme Court ruling going in favor of the client. NLB so far has not lost a 1 case in the court. You know, there are different banks have conducted different practices going more or less in the period of 2004-2010, right?
You know, the ones that have totally respected, you know, the duty of explanation and, you know, by that, simply, you know, familiarizing clients with the associated and underlying risks, clients acknowledging this risk by signing relevant pack of papers. In principle, you know, this is a normal arm's length relationship between the lender and the borrower, and, you know, you cannot totally, you know, waive any liability as a borrower as well. The Constitutional Court has ruled clearly there is no high public interest to allow retroactivity. That's the most important, actually, outcome of the decision, which means that, you know, any potential settlements would be first talking about, of course, significantly lower volume because this will be only live contracts, right? Secondly, this is actually for the NLB immaterial.
In total terms, we don't see Swiss franc issue any longer a systemic issue for, you know, for the banking system, Nor for the NLB Group.
The next webcast question comes from Jan from Czech Republic, and I quote, "What is the situation on the wholesale funding? More interest, better rates than end of last year or still the same or even more deteriorating? There is still EUR 375 million to be issued, if I'm correct, by end of this year. Thank you.
Rate environment has somewhat normalized. Of course, we are following this very closely. Spreads have tightened for banks in particular. Situation is good. Q1 is actually quite busy season for banks. A lot of banks are issuing, we are, as we speak, preparing our own program, as mentioned before. Indeed, we are looking forward to some EUR 300 million senior preferred issuance, and that would fully accommodate for all of 2024 needs, actually create some buffers already. If needed, we might technically size up. The idea is also to go green for the first time, so to issue a green bond instrument.
We see the environment much more accommodating for a BBB-rated name like ourselves. I have to say in the meantime, of course, the name is a bit more public. Ratings are solid. Of course, we hit the road. Indeed next week, we'll be spending time with fixed income investors. We also will make our ways to an equity conference in Dubai, where we will also talk about fixed income opportunities. For us it's important to be in the market and speak to investors on a continuous basis, and that's what we do.
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. Relevant questions. Thank you for the interest. Thank you for being with us on this exciting journey. As said, we feel stronger and more confident than ever, in history of this banking group. We believe in a sound future, not only for this banking group, but the entire region. That's why we believe, it is worthwhile further investing both in organic growth and M&A growth. We are equipped with capital and liquidity to be able to afford that, we might add tactically additional capacity and firepower. We believe there will be actionable opportunities in a 12 to 8-month window, while we stick to a very solid dividend payouts. By that, of course, sharing our success with you.
Thank you very much for being with us also today, afternoon, and until further occasion, which is coming in mid-May, I think, right? In mid-May. Stay safe, stay positive and, you know, let's do a lot of good business in this region. Thank you.