Ladies and gentlemen, thank you for standing by. I am Getty, your Chorus Call operator. Welcome, and thank you for joining the NLB Group Conference Call and Live Webcast to present and discuss the third quarter 2022 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 and zero on your telephone. At this time, I would like to turn the conference over to Mr. Blaž Brodnjak, Chief Executive Officer, Mr. Andreas Burkhardt, Chief Revenue Officer, and Mr. Archibald Kremser, Chief Financial Officer. Mr. Brodnjak, you may now proceed.
Thank you very much. Warm welcome, everyone. Allow me to first draw your attention to the standard disclaimer, which is normally used at these occasions. I'm really feeling very proud today in front of you, given the fact that we are looking back to very likely one of the best quarters in history of this banking group in practically all dimensions. Of course, given the uncertainties and turmoil happening around us, this has not yet been actually translated into our daily business to the extent that it will be visible in Q3. In practically all dimensions, as mentioned, we have had a very solid progress, be it in terms of retail lending, corporate lending, still very strong fee generation in year-on-year comparisons especially, and still high discipline at cost management. This overall adds to the really very, very solid output.
The total result of almost EUR 378 million for the three quarters. On the other hand, obviously very, very solid quarterly performance if you compare quarter-on-quarter as well. We at the same time feel confident enough that we have already in the meantime suggested to the general assembly to pay the residual part of the dividend that was promised for this year. In December, we hope that, of course, the shareholders will support this payout and would be enacted in December still, and by that, providing very strong dividend yield within this year, and simply continuing on the path of delivering shareholder value in both dividend payouts and capital gain from, of course, our operations.
It has not yet translated fully in the valuation of the share, but we believe that we are on a good way and path actually to sooner or later, you know, also see this value we create in the share valuation. We have been reinforcing our business also in certain new pillars of revenue streams. I would specifically focus here on leasing. We are very happy about the progress of our leasing operation in Slovenia in the last year and a half. In the meantime, I'm also happy that we have come thus far to actually get the approvals to initiate significant leasing business in Serbia.
We have established in the meantime also the subsidiary in Macedonia, North Macedonia, by which we are actually exporting this revenue stream also to other core markets of our business group, and by that, adding really earning capacity on one side, but really having some additional focus in terms of supporting our corporate, and above all, of course, also retail clients. The economic slowdown that has been signaled, the recession, a kind of recession forecasted, has so far not found its way into our business operations. We've seen further improvement actually of the asset quality, further reduction of the NPLs on one side, very successful collections still. This has led to the negative cost of risk for the three quarters on one side.
On the other side, clearly, the forecasts for the region, for our core region for the upcoming period, are actually not signaling the downturn in a sense of negative growth. We still see prospects for positive growth, which is in the 10%+ inflation environment in nominal terms, very solid growth. By that, of course, we still count on our further, you know, incremental add-on to the earning capacity. We, of course, also have been benefiting from final normalization of the interest environment. People call it hikes. We call it normalization after 7 years of the historical experiment with negative rates.
Of course, these are normal times now gradually for the banks and, with our plain vanilla retail-focused business model, of course, we are benefiting from these developments, being a very solid retail deposit franchise, fully self-funded and self-sufficient. In this respect, of course, now finally we are crystallizing the value, of our business model, you know, which is really easy to understand, predictable, solid, robust and, you know, pretty stable in such environment, even of course when the turmoil and uncertainties are higher. Our region is less marked by dependency on natural gas. Slovenia a bit more, but we have very robust, sovereign support. The Republic of Slovenia is able to still incrementally, significantly support the economy.
On one side, clearly, through the European Commission-wide instrumentarium, the toolbox that has been of course now put in place in terms of regulating the pricing of energy. On the other side, still, in case of eventual industry shutdowns, lockdowns, the Republic of Slovenia has had sufficient capacity to assist in corona-like regime, more or less, the Slovenian corporates. You know, subsidizing a need where shorter working time or, you know, people put at waiting for work status and so on. So far it has not been needed. At the current prices of electricity, obviously Slovenian industry has still been benefiting from the nearshoring and insourcing back to Central Europe. Very robust output. We are looking at very likely record year for profits of our corporates in Slovenia.
Of course, there have been signals of reducing order books coming from the Central European industrial basin. Yet we don't see this as a critical signal at this point of time yet. It looks that we are in a good shape in terms of energy supply and current pricing, it should be actually well absorbed. Also in terms of currency regimes and currency actually rates, we don't see yet or at this point of time, significant risks coming from this, and Archibald and Andreas will elaborate further on. There have been clearly inflationary pressures, thus there has been a tension when it comes to costs, yet through high discipline and, you know, focus, we have been able to contain that.
We are amidst, obviously, the completion of the restructuring of Komercijalna banka and today's NLB Komercijalna banka in Serbia. Of course, after successful merger, there are still tails of delivering the efficiencies, and this of course still engages us and of course also is consuming some cost, which was envisaged and planned for. Of course, we are amidst the integration in Slovenia with [audio distortion] . Archibald will give you details, where of course we will still have throughout 2023 certain impacts, and we will be talking about this around the outlook. If I wrap it up, we have been working also on further strengthening the capital base.
We have successfully issued the AT1 note at EUR 82 million worth, which is of course significant boost to our capital and proof that we are able to issue capital instruments. We have been exercising ongoing efforts to beef up the capital with additional Tier 2 and of course fulfilling the MREL requirements through senior preferred bonds. These efforts will continue sticking to our midterm funding plan, and by that simply, you know, being in a position to solidly accompany our corporate and retail clients in the upcoming period and still have certain reasonable eventual or inorganic growth capacity. At this point of time, we have not been engaged in any such projects.
By that I would pass the word to Archibald to guide you through financial part, and then Andreas will talk about the asset quality and Archibald around N Banka's integration and myself then completing with the outlook. Thank you. Archie.
Thanks, Blaž. I'll start with a quick reminder of where we are in terms of macro. I'm obviously not gonna run through all the numbers, but we found it useful to remind you of anchors of reference. Blaž mentioned the most important messages, which is we still look at the growth environment in our region, actually still exceeding Eurozone averages. These are still growing economies, no surprise here, no change. Of course, the pace has lowered. Our expectations have lowered for next year, but even that might improve once the bad news flow recedes, which eventually will happen. Inflation is, of course, also high in our region, and to some extent it bites a bit more because we are in lower income territories and food inflation is high.
We are watching very careful on how this might affect at some point, specifically consumer lending. Andreas will talk about that. Also, at this point, there are no indications of any such things happening. Fiscal positions are still solid, as you see and actually consolidating post-COVID. Moreover, we still are in territories where we see relatively high unemployment rates, which these days is to some extent good news because inflationary pressures on labor in particular will be muted. Also in Slovenia, the situation is different. We practically see here full employment and for sure, some pressure on labor costs can be expected, specifically here.
I think it's very important to remind us that also the currencies in countries we operate in are solid, of course, helped by responsible central bank actions in the various markets. As you see here, rates are rising, specifically Serbia, of course, well worth mentioning. Overall, this region is still relatively low leverage. That also makes us a bit sleep better should things or circumstances worsen. Again, just to remind us that also we are in very unusual times. We believe this region is relatively well-positioned for those times.
Also in regard to energy mix and energy dependencies, what used to be a weakness, relatively high dependence on fossil, of course, these days helps mitigate the effects on gas and wholesale electricity markets. In that sense also, here our region is relatively robust. We have, of course, supported here and there on as-needed basis, where we have been called to support, be it Serbia, be it Slovenia. We have the balance sheet and strengths to do that. So far this has been limited and for us, frankly, also been an opportunity. In terms of financial situation as such, this was, as Blaž said, a very robust quarter.
You see EUR 90 million pre-provision and negative cost of risk, so it doesn't get much better. Very robust revenue drivers, not just rates. Actually, still our revenue expansion is driven by volume growth more than rates. Also, of course, as you know, the rate movements in the last quarter have been very material. The EURIBOR is up by in the range of 150 basis points and more. This, of course, doesn't yet show through and indicates to you that there is still more to come in terms of revenue upside. We've always talked about our long EURIBOR position. Now it's of course showing through. I mean, all indicators heavily in green. Cost still very much in check, really a highlight these days.
Of course, I have to mention that, and you'll see it in the outlook, times are getting tough in terms of maintaining costs stable. We have labor cost inflation here and there. We have energy repricings, of course. We are working on measures to mitigate that, but for the time being, there will be cost pressures going forward. On the other side, we have still substantial revenue improvement potentials, even on the back of the current balance sheet position without still yet any new business, which of course comes in at visibly higher rates already.
Interest income, as you see, very visible NIM expansion in the last quarter on the back of, as I said, still deposit down pricing, so especially in our subsidiary markets, volume growth across all regions, not yet really showing the effects of EURIBOR. It indicates that there is still quite some potential in NIM. A good guess for next year is we might be in excess of 2.5% or in the range of 2.5%. Of course, what we watch the operational business margin, as you see, showing similar trends. Also, there is a bit of an offset from NIM revenue and fee revenue as, of course, the high balance fees have been abolished and are gone for good.
That also shows in non-interest income also even without N Banka the very healthy trends. This is a combination of very robust performance across a range of products. In Slovenia very solid sales of ancillary products continuing in Serbia. We of course have been repricing and so you see here really robust numbers. On costs I mentioned Q3 more or less benign. I think it's worthwhile looking at our discipline in executing on integration projects especially in Serbia upcoming now in Slovenia. You see quite visible reductions in staff and branch head counts branch counts. Of course this is still work in progress.
To some extent, we will mitigate some of the cost pressures with, of course, remaining and becoming more efficient on what we call the physical footprint. Loan dynamics, I mentioned, very robust growth. Of course, we are having more intense debates here and there on loan and risk appetite. So far, there is no deterioration really visible, neither in fundamentals, as I said, on macro, nor in corporate or household balance sheets. We feel very comfortable with feeding or accommodating to that growth and demand. Capital remains to be very robust. You see us, we have stocked up on AT1, that is still to be shown.
Of course, we are still very much interested to top up on Tier 2. We've been very vocal about that. Markets so far had been more or less shut in this extreme volatility. Now we see signs of that to come back to more normal circumstances or so, of course, on elevated or higher cost levels. In this sense, our repo to be published soon is not gonna show much of a change, a little bit of easing as anticipated. I talked about the wholesale funding, of course, all eyes on MREL across the industry, not different from us. Here you see, I think, a very clear status quo. We have been issuing successfully last year, also not just Tier 1, but also senior preferred.
Of course, the price levels we don't like to see, but to some extent have to acknowledge market circumstances. You see here how the mechanics work. Of course, there's a step-up logic until targets become final in beginning of 2024. We of course are continuing to run our funding plan, which still envisages some EUR 600 million in course of this and next year, as a combination of Tier 2 and seniors. With that, I pass on to Andreas on asset quality.
Yeah. Archibald, thank you very much. Actually, the colleagues have now mentioned already quite a bit. I mean, first of all, we are continuing to solidly grow, and solidly growing means also very well diversified.
Secondly, the first three quarters on cost of risk were again very good. Actually, negative cost of risk, and we are further decreasing NPLs. Certainly, of course, in this situation, very turbulent times, we are very careful. We're doing stress testing. We are becoming more selective. We are adjusting parameters where needed, so very prudently, of course, in this situation going forward. If you look at the growth in the different segments of both corporate and retail corporate, bigger corporates and SME and also retail consumer and mortgages, growth everywhere very well dispersed through these categories. Of course, what you can see also that we continue to have this geographical dispersion which you're used to from us.
Serbia obviously here got considerably bigger with the acquisition of Komercijalna banka, but otherwise very stable simply because we are solidly growing more or less everywhere with a similar speed. On NPL ratios, as I said, again, improving in this year. Again, reducing also in net terms even after the acquisition of N Banka, so EUR 352 million by end of September, of which EUR 160 million actually have zero delays. These are mostly restructured clients which are not yet healed. In net terms, if you also deduct that, we come to, I would say, really very small numbers. Coverage, you're used to that's very, very solid. Cash coverage plus collateral in the 150% range, that's for sure very solid.
What you see in the dispersion of the NPLs is that also this has normalized. It's normal that in Slovenia, which is still the biggest bank in the system, obviously we are underrepresented in the European Union. Of course, in the other countries, a little bit more rich, but that's also what is expected. In that sense, normal. If you would have seen that a few years in the past, then Slovenia would be much stronger represented, especially the bank 10, 12 years ago did cross-border, which was not healthy. This is what you still saw. This is now gone to the biggest extent. Here also normal picture.
If you see a little bit more detail cost of risk, that's minus 13 bps, obviously not so negative than it was in the same period last year, but still negative. This picture is a little bit complicated, so don't get confused. We have EUR 8.9 million one-time effect from the acquisition of N Banka. In the cost of risk, you annualize that. In nine months, obviously, you take three quarters out of that. That's why the calculation of these figures to come together is not that easy. What you see, if you go a little bit more in detail, and this you don't see on this slide, is on the retail side, we have actually provisioning increase, that's coming on the one side simply from volume effects.
We are increasing our volumes. That's why pool provision is going up. On the other side, we have, of course, deteriorating macros. This you see in the pool provisioning logic. We also have sharpened our early warning logic. You have here now more parameters which indicate an early warning. All of that led to some inflow in retail. Nothing dramatic, but visible. On the other side, on corporate, we had a couple of very successful resolutions also of already written off items. This is actually so far overcompensating the retail impact that with nine months, you see EUR 7.5 million release.
Needs to be mentioned on interest rate sensitivity, that's of course at the moment also an interesting one. 100 basis points change in interest rate bring us approximately EUR 61 million. Obviously we are profiting from this situation. Of course, in the current situation, you know, many effects are coming together. If you see more sharp rises in interest rates, that's surprisingly multiplying that figure. On the other side, it's supposed to increase cost of risk. Of course, for a fraction of that, but nevertheless. Honestly speaking, in the current situation, the little bit unusual situation is that the much bigger discussion is obviously the inflation and the interest rate increase in that sense, not really the key topic.
As soon as salaries have followed the inflation, of course, to a certain extent, you could even see a decrease of cost of risk because the loan obviously is devaluing compared to the income. There are a lot of ups and downs. You see here the pure NII calculation. But if you want to understand, of course, our balance sheet and the
Development in risk, there are multiple factors coming in. With this, I'm handing back over actually to Archibald. Thank you.
Thanks. Now a few words about N Banka integration. That's now a quite tedious technical process that is playing out. The bank itself runs very stable. We are happy with a pretty solid financial performance. Client numbers have stabilized. We've seen a bit of outflow early, but this is now stabilized. The business is well integrated in the group. We have physically embedded the retail branches in our network. Of course, they still operate as independent branches. Governance, of course, in control. Our colleagues sitting in the board. We are very happy with, let's say, the business as usual in N Banka. Sorry.
Here, in regards of the integration as such, of course, the positives and negatives, there is a cost to that. This cost is well planned, established. There is no magic to it. I think it's a healthy proportion to the run rate cost of the entity. Of course, once we are done with integration, there is also quite some, let's say, financial upside from synergies. At the moment, to be honest, we are much more interested and focused on the first part, stabilize the operation, stabilize HR. We want colleagues in N Banka to remain focused on their job. For many of them, we'll have very good opportunities in both front, mid, back office, and IT.
Really the focus is on getting this integration done smoothly. Of course, there is plenty of conversations happening also with the regulator. Here you see the various streams as they play out. Again, all of a well-established playbook in the group in the meantime. I have to really thank all the colleagues that run these efforts across the various streams. As said, it's a lot of tedious hard work. At this point, really thanks to colleagues in N Banka and NLB to helping us get this done stable and predictably without any disruption. That's the main ambition. We have actually shifted a bit merger timing from April to September to give more time for a more, what we call, sustainable integration process.
We thereby avoid investment into our mainframe environment and can focus on the future core system. We have allowed for that flexibility in order to reap that benefit. I think there is a very good case for doing that because that gives us a good pilot in reality for our core banking consolidation that we anyway have to run in Slovenia. Remember, we have two core systems, one for retail, one for corporate. The N Banka clients will now be mostly ending up already on the new target system, which is the one for corporate, so a system called Temenos. Thereby, we think we have also a little bit accelerated our IT agenda. That's in regards to timing. As said, so far it works well.
Of course, there's still lots of ground to cover, and the next months will be, let's say, full of work, and I hope not too many surprises.
Thank you. I mentioned at the beginning already that we have been really now focusing on enhancing and boosting the leasing business as an upcoming important revenue stream. I already mentioned that NLB Slovenia, NLB Lease&Go in Slovenia, as we call our subsidiary, has been fully operational, has been introducing novelties in terms of end-to-end digital solutions to our clients and distributors and so on. This is something that we are really now heavily investing in in terms of time and attention. On the other hand, clearly, we have, as said, already more or less been ready to launch operations in North Macedonia and Serbia. The three most meaningful markets would by that be covered, and of course, we will be then analyzing further opportunities in other markets.
This has been clearly 100% sponsored business by the parent bank and sister institutes then in the subsidiaries. In this respect, we believe we can really leverage on the channels we've got, on the information capital we've got, established relationships we've got as a bank, right? By that really use lease capacity as a more or less, as we call it, a product factory, providing really applicable solutions to our clients, right? Especially addressing then a contemporary mobility paradigm, which has been in front of us as something that's coming pretty quickly.
In this respect, really, our ambition is to actually exceed EUR 1 billion of assets via organic push clearly to the revenue stream, whereby we will not shy away from eventually analyzing and exploring also some M&A opportunities that might come our way in the upcoming years. But clearly also organically, there is a very strong revolution and evolution path in front of us, designed defined, and there is full commitment of our teams to deliver on that. By that, of course, meaningfully add the revenue capacity and of course, we believe also the earning power in terms of the bottom line. Outlook, we have modified a bit the outlook, so we are actually now talking about higher level of revenue.
For the next upcoming year, also this year, especially 2023, there is a revenue hike coming from the interest rate normalization on one side, but really solid performance in terms of volume growth in retail and corporate. I'm specifically happy that Slovenia has finally rebounded really as a strong, robust economy of the eurozone. Partly because of aforementioned nearshoring and insourcing back to Central Europe, partly because of the robustness of Slovenian economy as such, being one of the most diversified industrial economies in Europe. This is something that, of course, on one side is carrying certain risks given the electricity and gas supply and pricing. But on the other hand, of course, we are really close to Vienna, close to Munich, Milan, Switzerland, right?
This really powerful industrial base of Central Europe, where we can be really a tier one supplier, you know, benefiting from this. Automotive industry in Slovenia is talking about EUR 3.5 billion revenue in upcoming couple of years and so on. This is really, you know, a significant boost. As you know, Slovenia is exporting EUR 40 billion, which is 80% of Slovenian GDP, practically. We are really counting on that to continue. Other countries are, you know, especially if you look at the Bosnia and Herzegovina, exporting electricity, corporates in Bosnia are paying actually EUR 50 for electricity. The same for households, it's true, right? The situation is really a mixed bag, but this region is used. It really, you know, has been more or less in a pretty unstable environment for decades.
You know, also inflation as perceived by people in this region is maybe a less evil phenomenon as perceived maybe from someone from Western Europe that was used for, you know, 40 years of stability. This region is more or less used to instability and imperfections, and of course, there is always value for imperfection for someone that is a specialist and understands that well, right? This is what we believe we are. Regional specialists that can understand the risks and can address these risks properly in the sense of managing them, not avoiding them, but managing them reasonably, right? We are signaling more revenue. We are, as Archibald also said before, seeing, of course, tensions in terms of cost pressures. There has been 10+% inflation.
This is driving, of course, wage expectations. This is indirectly or directly, given the regulatory and legal increases of salaries of minimum wages, for example, such as in Slovenia and so on, right? This is actually introducing immediate supply side repricings. Of course, we have to simply, you know, balance this with focus on processes, with focus on efficiencies, with focus on energy consumption, with focus on really, you know, project portfolio prioritization. That's why we see we would say still a really moderate mid-single digit percentage growth in costs, which is of course more than offset by the significant growth of revenue. On the other hand, we see still a solid output in terms of the ROE, so real shareholder value creation. We are talking about around 12% so far.
Now we are talking about exceeding 12% ROE, right? Of course, we plan to continue with very solid dividend payout. We were talking about EUR 500 million cumulatively until the end of 2025, including 22 payments, which is, you know, very, very solid dividend payout. We believe that this business is actually on a good trajectory, you know, to become even more propulsive. In this region especially, positioning itself as not only the systemic company, but responsible and very successful systemic company. Archibald was talking about us supporting stabilization of the energy pillars in the region. This means that we provided practically 35% of funding, you know, and we were the ones leading the syndicates arranging these facilities.
NLB is again back in the seat of the responsible strategically important systemic financial institution in the whole region. By that, I would wrap up the presentation part, and I would invite for any questions or dilemmas you might have. Thank you very much.
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 question-and-answer session, please use your handset when you're 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. The first question is from the line of Ronak with EFG Hermes. Please go ahead.
Thank you. Thanks for the presentation and congratulations on the numbers. Just a quick maybe clarification from Archibald. He mentioned that the bank is in the process of raising up to EUR 600 million of longer term funding this year and next with regards to the MREL requirements. Is that in addition to what the bank has raised already or this is that figure of EUR 600 million includes what you've already raised in 2Q and 3Q? Thank you.
That's incremental is the short answer.
Okay.
It's gonna be a mix of seniors and Tier 2s. We'll be looking at both routes, because there is value in Tier 2. Blaž mentioned some possible M&A options, specifically leasing is on our radar. Those are other tactical opportunities. We would like to be pre-funded, because that simply puts you in a much better footing for M&A. We will of course be paying more than we would want to in market circumstances as we are confronted with. First of all, MREL is regulation, so there is no way around it. Second, I mean, it'll be more than offset from the earnings opportunities we see ahead of us.
It will further strengthen capital base for dividend builds. This is something that we believe is accretive to for shareholders.
Okay. If you could, just as a follow-up, could you maybe just tell us what's the indicative rates you're seeing right now when you try, you know, when you speak to your bankers?
Seniors are in the seven-ish territory these days, but that's, you know, subject to supply and demand. Tier twos are a little bit higher. Too early to tell, but because the situation change is very volatile. Rates have gone up substantially, swaps have stabilized. We see lots of transactions coming to the market at quite reasonable rates. You've seen us raise AT1s at, I think, a very reasonable rates given circumstances. We'll see how it goes, but we are quite confident.
Okay. Isn't there a small risk here that, you know, the longer you wait, maybe if inflation continues to surprise and if ECB is forced into raising much more aggressively than the market is currently expecting, then it just becomes more and more expensive?
Well, I wouldn't disagree necessarily, so that's why we are pretty much on the matter as we speak.
Okay. Understood.
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. Once again, for our audio participants, to register for a question, please press star and one on your telephone. The next question is from the line of Simon with Citi. Please go ahead.
Oh, hi. Thanks for the opportunity. Yeah, I guess the question would be just on the long-term dividend guidance. I think you're still saying you're gonna pay out the EUR 500 million, I guess, out of 2021-2024 earnings. You know, if you have higher capital because of the AT1 issuance, better results, and if you can't find acquisition opportunities, would you revert to kind of the 70% payout that you had been guiding during your IPO? Can you just kind of walk through your thinking there?
Well, you know, this is a very specific period of time, right? The opportunities might come your way overnight, practically. You know, in such situations, you want to be ready. It's actually a, you know, a mix of aspects to apply. On one side, regulators, you know, potentially signal certain, you know, increases of buffers of this or other nature, signaling recession and so on, which is, you know, always good to be that actually in capital rather than, you know, chasing capital. On the other hand, having real stable EUR 500 million payout secured is also value, right? We believe there would be and might be opportunities coming our way soon. You know, talking about then suggesting hard dividend next June and then in July getting an opportunity is not necessarily the most productive way of thinking.
We believe paying out EUR 110 million next year, you know, given today's price, is a very solid dividend payout, right? Very solid. At the same time, then having a capacity to grow while we are able to grow at significant pace and since, still keeping certain incremental, you know, not high. We are not talking about billions. We're talking about, you know, a couple of hundred million or, you know, less than a billion, actually, incremental M&A potential, is, I don't think, a luxury. It's actually, you know, a good position to be in, frankly. At the end of the day, it's shareholder's call.
They can always suggest something else, but we believe that we are running this business in a balanced way, securing solid dividend payout, securing accretion of value through the organic evolution, but keeping some moderate cushion, actually, for, you know, eventual M&A. This is not really being in luxurious positions. It is really, I believe, and we believe, being in a balanced position to address the opportunities and threats and risks properly.
That's pretty clear. Actually, I would have a question on the capital walk. Come fourth quarter, the dividend that you're paying out, the EUR 50 million, that's already excluded from the capital base, the regulatory capital base, the CET1 today, correct?
Yes.
Correct.
I guess you'd add in the retained earnings that you haven't recognized yet, but then you deduct the full EUR 110 million that you're planning to pay next year from the regulatory capital. Is that right?
Yes. That happens usually year-end, yeah.
Yeah. Just one last one. If you can give an update on the Swiss franc mortgage law, the Supreme Court case. Is there any new developments there that you can update us on?
No, there is no new development to report.
Okay. That's all for me. Thank you.
Thank you, Sam.
Once again, for our audio participants, if you wish to register for a question, please press star and one on your telephone. There are no audio questions at this time. We will now proceed with any written questions from our webcast participants. The first question is from Jovan with RBI, and I quote, "Do you expect a hike in capital requirements as some of your peers reckon with circa 100 basis points uptick till the start of 2024? If yes, how does this affect your dividend plans, and what would be the level of CET1 you may feel comfortable with? Thank you.
Well, that's a speculation. We don't expect it, but there have been rumors that there might be some systemic buffers introduced. We've heard these rumors in Slovenia, but, you know, this is a common public secret. There is nothing concrete on the table. On the other hand, exactly what Simon asked before, right? That's why we are also beefing up capital in order to secure the dividends even in case, obviously, of eventual hike, hikes in regulatory requirements, which might impair a bit, of course, then M&A potential, but not necessarily impair our organic evolution while still securing the solid dividend payout. We are observing and, of course, adjusting as per the requirement. So far, Archibald was mentioning actually the SREP, which is actually going positively our way.
Of course, Bank of Slovenia might be looking at some local macroprudential, whatever measures. They have continuously in last years traditionally had totally different view on the environment as the banks. You know, this we cannot influence. There have been no dialogue with them based on the arguments. This is something that simply we don't have any obvious insight in. We are working on fundamentally strengthening the capital base, both from earnings and from the capital markets. You know, we will simply continue this way in a balanced, more or less balanced structures and, you know, balanced approach.
Thank you. Our next question, we have actually four more questions from Mr. Jovan from RBI. I will read each one. What is behind the increase in average cost of funding in Q3? Do you experience increases in deposit costs? And if yes, in which markets?
It's not really deposit driven. Also we have here and there, you know, smaller tactical adjustments, but it's the wholesale funding, of course, kicking in. We have EUR 300 million seniors issued. They start to show. Otherwise we still sit on a very large sight deposit base, which of course these days comes in very handy.
Yeah. Now our robust retail deposit franchise really shows its value, right? We have the LTD of 66% group wide, you know, and as in Slovenia and Serbia, even more favorable in two most material markets, and we are simply benefiting from it. The real hike is coming from the MREL funding. From the core business, we are not forced to reprice deposit base.
That's given a bit of a handle on what we expect NIM to land, given all the ups and downs. There's still room for upside in our view. The 2.5% seem pretty well in reach for next year.
Thank you. Mr. Jovan also asks, how do you explain the upgrades of regular income for 2023 and at the same time lowering the loan growth guidance to mid-single-digit from high-single-digit and keeping the NII sensitivity unchanged? Has your key rate outlook for euro area changed over the last quarter? If yes, what would be the sensitivity from sharper rate hikes of 200 basis points?
Our outlook is based on basically 2% Euribors. Now you can speculate if it's gonna be higher or lower. We've published the sensitivity of that position. I think the best handle I can give is reiterate that because we also have the funding kicking in with incremental costs. I think the 2.5% overall NIM is our best guidance we can provide, and that factors in Euribor of some 2%.
Thank you. The next question is, do you have a kind of sensitivity of risk costs in case of weaker than expected GDP in the region, especially in Serbia and Slovenia? Thank you.
Yeah, sure. I mean, we are doing regular stress testing, but of course now, in these times even more intensively. The most severe scenario which we are assuming is going considerably below the current GDP growth assumptions for next year, so in negative territory, especially in Slovenia and Serbia. In this case, which we see really as relatively extreme and conservative, we would stay within our maximum cost of risk, which we want to be through the cycle in any case. As you know, that's 90 basis points cost of risk. We would stay within that. In reality, we are expecting much lower figures. You saw it before in the 2023 guideline. We are currently assuming 30-50 basis points cost of risk.
That's of course an uptick compared to this year. I think that's also fair to assume. Yeah, of course, we stress beyond that and situation is very manageable from these stress test results. As I said, would stay within our maximum cap we are always talking about it for such situation.
Thank you. We will finish up with Mr. Jovan, last questions with RBI. High risk cost release in Montenegro, any special large case?
Yes. Yes, a large case and two, three mid-sized cases. Yes. This were a few special effects which were accumulating in Q3. On the other side, Montenegro is one of the countries where our sharpening of the early warning system in retail has triggered a little bit of increase in cost of risk. That, that's already a blend. But all, I mean, the regular development is very solid. Nothing special and the main difference is coming from these releases. Yeah, exactly.
Thank you. We will now move on to Mr. Tomaž from Slovenia. Question: could you please be so kind and provide some additional info in regards to quick fix of fair value through other comprehensive income revaluation in amount of EUR 60 million? Have you reclassified govies recognized under fair value OCI to amortized cost recognition?
This is the regulatory quick fix, so there is no reclassification underpinning this concept. That's, you know, ECB scheme that was put in place actually for COVID, and it still is valid. We opted in for no particular reason other than, of course, taking the obvious benefit.
Thank you. Next question, Anton from Allianz, and I quote, "Could you quantify the expected contribution from the leasing business in 2022 and 2023?
Well, we cannot be more specific than what we said. We count on in mid-term EUR 1 billion of assets and, you know, significant contribution in terms of also bottom line. Of course, if you look at the end-to-end look through, of course, this will be a meaningful addition to the group's results. I cannot be more specific at this point of time.
Thank you. The next question is from Dino Dürrigl from InterCapital. What was the reasoning behind issuing your latest bond? Did you need the additional Tier 1 now, especially at a rate of almost 10%?
No, it is as mentioned before, it is one of the possible measures to beef up capital, and of course, we want to do it in a meaningful and balanced way. Of course, we want to be solidly above hurdle rates when it comes to Tier 1 capital and of course, total capital. That is securing, you know, normal evolution of the business in a balanced way, while of course, providing stable dividend payout flow and, you know, organic and inorganic opportunities to grow business. There is no other reason than that. We were not in distress. We simply believe it is of value and is benefiting key stakeholders of this banking group.
If we these days work, you know, on beefing up capital and of course, I'm happy that we have access to capital markets and that, you know, of course, we can do it in a balanced way. Of course, if you are growing in Tier 2 territory, you do, of course, also what is possible to do within Tier 1 capital territory. We all know that we are limited when it comes to actual, you know, ordinary issuances of capital given the ownership structure. The Republic of Slovenia is invested with by 25% and one share. Any, of course, regular recapitalizations would require participation of the Republic of Slovenia. Of course, we don't want to call for the capital from the Republic of Slovenia at this point, right?
We of course use all other, you know, instruments within the capital toolbox that are available because NLB has, of course, had pretty conservative capital structure, and we have not used otherwise totally regular and standardly used instruments. We are basically stocking up normal toolbox of capital, of capitalization, if you want. We are still halfway there. We have still more room to do the AT1s. We have still more room to do the Tier 2s, and we are simply following the balanced agenda, nothing else.
I mean, to be fair, the 10% is well below the cost of equity. This is still positive leverage for shareholder equity, but it clearly creating value for shareholders. The Tier 1 bond is a near equity instrument.
Yeah.
Just to remind everybody, this is not a regular bond. This is a near equity instrument.
Absolutely.
Thank you. The next question is a follow-up question from Anton, from Allianz. What are your NPL ratio expectations for Q4?
Well, look, we expect to have at the end of the year, slightly positive cost of risk. As you see in our guidance, we in any case want to stay below 30 basis points. That tells you that of course, the NPL ratio will stay at a very, very similar level. If the 30 basis points would materialize, and I'm optimistic that we will stay clearly below, that might of course mean that we might go a few million up in NPLs.
This still remains to be seen. Obviously, situation at the moment is very volatile. For sure, we will not see any dramas or serious upticks, and we will for sure stay within the guidance probably very, very solidly.
Thank you. The next question is from Radan with IPOPEMA. From which categories do you see higher cost pressure in, fourth quarter 2022? Thank you.
It's coming from usual, you know, Q4 more or less hikes, which is partly specific rewards, partly of course, you end up and activate certain projects and so on. There is nothing really peculiar or specific for this year. There might be some still provisionings, of course, related to restructuring when it comes to, of course, severance, and such, you know, structures for both banks still. Nothing, you know, that would be out of what we have been communicated, communicating so far, more or less. Archibald, would you add anything?
No. The usual seasonality, because I mean, frankly, some energy hikes have come back a bit. Other than that, it's Q4 is traditionally a bit cost heavy. If you look at our previous Q4, pattern shouldn't be too different.
Thank you. The next question is from James from Raiffeisen with large exposure to Serbia now. What is your take on Kosovo situation, which appears to be heating up?
Well, what depends how you look at heating up, right? It has been heating up bit by bit for 20 years, right? Or 30 years even. We count on, of course, you know, at the end of the day, smartness and wisdom of leaders of the region that of course, this would not end up in a kind of a bigger conflict. We believe that there is significant value, and finally we at least perceive certain messages and signals from the European Commission that there might be nevertheless a acceleration of the accession process of Western Balkans towards European Union, and that's, you know, the name of the game. As soon as there is real perspective offered, and of course, in turn, something is delivered by the leaders of the region, I believe that, you know, this situation will stabilize entirely.
It is of course, on both ends. It's not just looking at Serbia, it's also looking at Brussels. You know, Western Balkans needs authentic perspective and finally also acting upon by the European Commission. We are, of course, promoters, big promoters and advocates of accession of the entire Western Balkans into European Union as soon as possible.
Thank you. The next question is from Madan with Erste Bank. Please go ahead.
Hello, gentlemen. Thank you for the call. Thank you for the opportunity, and once again, congratulations on the great quarter and great nine months. Just one question regarding the macro outlook for the region. We have seen recently that supranationals and institutions active in the region are significantly cutting down on the 2023 growth and reiterating uncertainties. Maybe if you can just give your, I mean, you already talked about it, but maybe just in the light of those revisions, which are quite substantial. For example, from IMF, from Serbia in particular, how do you see development of, for example, more provisions and risk in whole? Thank you.
Andreas Burkhardt, did you want the risk trajectory?
Um-
Maybe I start with the growth. I mean, if you look at the growth indications, we are not looking at forecasts that are showing, you know, real decline. You know, if even in case of a 0.5% growth indication, this is in nominal terms, very high growth still. The nominal output is still very, very high, right? It is neutralized by high inflation, but it is still positive evolution in terms of value, right? In this respect, we also see significant potential for further still healthy growth. If you look at the housing loan production in last couple of years, 2/3 of apartments were bought by cash and what NLB financed, so this 1/3 that, you know, was covered by bank lending was, you know, within the LTVs on average of 62%.
This is very solid production, very healthy production, you know. Also when it comes to consumer lending, all of this is based on cash flow principles. You know, as long as the unemployment is still, you know, stable and in Slovenia, Archibald was mentioning full employment, you know, businesses are still seeking for people. You know, in industrial outlets, in facilities, you know, factories might of course have the electricity prices exceeding EUR 300 and be forced to shut down, but that would be you know, subsidized through the governmental support, especially in Slovenia, and we believe Serbia still has capacity. Other markets are much, much less dependent on gas on one side, but on the other hand, are used, you know, to improvise a bit more even. This is something that we believe is still containable.
Andreas was mentioning inflation, but no, there are two sides of this coin, right? On one side, inflation of course also devalues the, you know, real value of debt. You know, in growing inflation environment, the debt also, you know, somehow devalued. It has both sides, you know? There is, of course, interest rate pressure, but of course, on the other side of the balance sheet of the household, it also has effects. Andreas, you might add certain thoughts on that.
Yeah. I guess not too much to add what we have said already previously, now today. I mean, again, we have made a stress test scenarios up to relatively extreme ends. The current assumption of 30-50 basis points cost of risk for next year is already coming from much more shy views on macro outlook than we would have, well, a year ago, I guess, expected. Yes, obviously this is changing. Even the extreme scenario, as I said already before, I mean, it keeps us well within this maximum level of 90 basis points.
Again, that's also with the changes which we see now every day, nothing which we expect, so we still see this as an extreme scenario. What is true, you heard this in different colors today already, but of course, at the moment, the unusual thing is that there are many open parameters, of which one is also inflation, of which one is also energy. I mean, if you see expectations, which we saw a few weeks ago and where we are today, this was reverting a lot.
Now, well, the question is where we will be in four weeks, where we will be in eight weeks, where we will be through the winter, and will we see somewhere shortages because that would be the more sensitive item than just the price as such. There are many open parameters, but I mean, on the retail side, I see pressure on the short one. But again, as Blaž just mentioned before, again also of course, on the mid one, also some reliefs. As soon as salaries have caught up with the situation, you have basically a situation where the debt has devalued to a certain extent.
On corporates, I mean, what we simply saw in COVID times, and what also now seems to confirm in these days, is that companies in this region are used to relatively many troubles. They are flexible, they adjust fast. Honestly speaking, I mean, the big clients, of course, we are going through one by one, really frequently now. The way how they are reacting on the situation and how they cope with the situation is almost surprisingly sometimes positive. Here, also in some cases, I mean, we have very few clients which are directly related with business to Russia or Belarus or Ukraine. Of course we have a few, but also here, the situation is really very, very stable.
Maybe for these clients, a little bit counterintuitive, but that's the fact. There are many points, I mean, about this I could talk now a long while. Overall situation seems very, very solid and very controllable. Honestly speaking, for such a situation, also cost of risk for next year, as we see them pretty moderate, and actually that's another confirmation that we are rather a little bit conservative bank and that we have a quite robust portfolio. Of course, as a CRO, that's always a high attention point, such a situation. Now after two years COVID, again, for a different reason. I'm watching this very closely, but so far I have to say, so good.
Yeah, if you look at this slide now.
Yes.
I apologize, yeah. If you look at this slide, there is still a lot of room. Conservative structure of household and corporate finance.
No, I agree with you on all points. I would just think I noticed in your guidance slide that the 2023 loan growth was slightly tuned down with the mid-single digits, still significant growth. I hope I didn't make a mistake. I thought that was the reason why your reaction maybe to this forecast for 2023.
No, no, it is actually based on our expectation, and we have to wait to see whether it would crystallize that, you know, given the rising rates, housing loan demand will simply, you know, reduce. It is unrealistic to expect that we would see the same housing loan growth as we've had year-on-year so far, which was exceeding 20%, right? We feel already now in the last month, the last weeks actually, that housing loan demand is, you know, simply taming. It is, you know, being reduced, you know, region-wide a bit. Of course now, is it going to end up in mid-single-digit%, you know, or is it going to be high single-digit%? No one's holding a crystal ball. In a nominally growing world, this is what you want to say, right?
If you have inflation rate on average in the region of 12%, you know, it is not really realistic to expect that, you know, there will be no growth of lending, right? You know, maybe it's slower than GDP in terms of nominal, but it will still be meaningful growth. You know, all of this new incrementally originated growth is happening, of course, at different rates than the stock. On top, the stock gets repriced on the long variable position, right? Throughout the rollovers. All over, this is all good for the, of course, P&L of the bank. Even if the new production is a bit lower in terms of volume, it is happening at a significantly higher rates, you know, than the stock on average. On top, the stock is repricing through the variable repricing.
This is, of course, for the bank profitability, very good trend in any case. Now, of course, can we have the luxury position of having double-digit growth in a, you know, total uncertain environment, you know, in practically in the midst of the Third World War, you know, and incrementally accreting so much value, you know, it's might be maybe too optimistic. We want to be conservative while communicating to you and not over-promising and rather positively surprised than the other way around. It's simply, I believe we have demonstrated so far this is the appropriate way of positioning our business. It's maybe, you know, not beefing up the valuation as we believe would be deserved one, but it's, you know, we believe more prudent and more responsible way of communicating to you.
Thank you. Thank you very much for answering. Just one short thing. I think Mr. Kremser, you mentioned when on M&A, you, some more leasing companies. Did I heard that correctly?
There is nothing concrete on the table, but there might be opportunities. Of course, if there were opportunities, we would look at them. That's all we can say.
Okay, thank you very much.
Thank you.
Thank you.
Ladies and gentlemen, there are no further questions at this time. I will now turn the conference over to Mr. Brodnjak for any closing comments. Thank you.
Thank you very much. It was a rich debate, so we are happy and there is significant interest of analysts, investors, into our business. We feel very confident, frankly, very, very confident at this point of time. We believe that NLB is in the best shape ever. We have demonstrated our responsibility and our strength to cope with existing uncertainty, and on the go, still create significant value to the stakeholders, which are not limited to shareholders. We are, of course, also significant pillar of the society in the countries we work in, and we will continue with also the very ambitious ESG agenda.
We are now really, even more ambitiously looking into energy efficiency projects, into, of course, new renewable production, facilities and projects, and we'll simply continue on this path of being a pioneer of this movement, you know, at least in our part of the world, and in this respect, contribute, of course, to the global benefit and welfare. On the go, keep monitoring us, keep accompanying us, and keep investing in us. Thank you very much.
Ladies and gentlemen, the conference is now concluded and you may disconnect your telephone. Thank you for calling and have a pleasant evening.