Ladies and gentlemen, thank you for standing by. I'm Poppy, your course call operator. Welcome, and thank you for joining the NLB Group conference call and live webcast to present and discuss the first half 2022 financial results. All participants will be in a listen-only mode, and the conference is being recorded. The presentation will be followed by a question-and-answer session. Should anyone need assistance during the conference call, you may signal an operator by pressing star and one and zero on your telephone. At this time, I would like to turn the conference over to Mr. Blaž Brodnjak, CEO, and Mr. Andreas Burkhardt, CRO. Mr. Brodnjak, you may now proceed.
Thank you very much. Warm welcome, everyone. Good afternoon. Let me first draw your attention to the standard disclaimer and then continue with what we believe has been a very strong first half of this year. Couple of very important milestones achieved again. One has been really stabilization of the Slovenian banking system via acquisition of Sberbank subsidiary, today's N Banka, which we have, I believe, performed in a very responsible and decisive way. The other very important one has been really successful completion of integration, by which it is really fully completed, of Komercijalna Banka and NLB Banka Belgrade into today's NLB Komercijalna Banka with already very, very solid performance in line with expectations and even north of it for the so far stage.
In the midst of this process, practically, we have been also awarded by a rating upgrade, which is a solid confirmation of a shape of the bank on one side and solid performance on the other. On top of that, obviously we have committed within this period to even more ambitious ESG convergence towards net-zero emissions targets agenda of NLB Group by signing Net-Zero Banking Alliance commitment and initiative. By that, of course, given the current uncertain and turmoil circumstances, we remain fully committed, and we remain not only fully committed but really ambitiously moving towards the net zero targets.
On the other hand, when it comes to real performance, this has been a very, very solid half of the year, both in terms of growth of volumes, so we are really happy that we have been growing the business in practically all segments and geographies. Specifically strong trends in retail housing production, which is for us very important anchor product obviously, and pick up in corporate demand, especially so also in the second quarter, which is of course, despite the current conflict situation, for this part of the world, very meaningful. The insourcing, nearshoring effects still happening, order books still pretty robust, dependence on Russian gas, Andreas will be talking about this later on, in the subsidiary countries, a bit less pronounced than in developed Europe, whereby in Slovenia seems manageable.
Above all, we have had continued performance of our quality in terms of, you know, asset structure and performance of these assets. We have seen further decrease of NPLs. We have seen very solid output in terms of negative cost of risk still in the first half of the year. On the other hand, clearly, we have seen also further strengthening of capital. This acquisition of course N Banka has been positively recognized and acknowledged already through the negative goodwill recognition on one side. On the other side, clearly, we have also strengthened our foundations in terms of the MREL requirements and funding.
Besides, of course, booking already and acknowledging fully the negative goodwill, we have immediately after the first half also successfully issued the MREL instrument senior preferred bond, EUR 300 million size, by which we have fully secured, of course, MREL requirements for this year as well. We have been in pretty advanced debate with Supranational on AT1 issuance, which will further beef up capital. We believe, of course, that in these times it is important to, you know, further work on the solid capital base. To on one side, of course, provide for a very, very significant and swift organic growth, which we like the most, because this is obviously within the defined risk appetite and underwriting criteria perimeter.
This is growth we really fully control, very sound growth, strong housing, especially in loan production with historically proven very low delinquencies, and by that, of course, also very, very solid, cross-sell capacity attached to it. We have, of course, been closely monitoring the exposure towards Russia, Ukraine and adjacent countries of the bank itself, the group itself, and above all, our clients, and we believe this is absolutely within the manageable territory and framework. On the other hand, clearly, as I mentioned before, our region is still foreseen to be growing in the upcoming period, significantly growing on one side, and secondly, showing also a bit less dependency or significantly less dependency, depending on the country we look at, on natural gas as one of the main energy sources.
Key developments in terms of numbers, I was mentioning in gross loans growth, and that's really something that is extremely encouraging. We are talking about especially strong, robust growth in housing loans and now in last period also corporates, and this is true for Slovenia especially, which is, you know, encouraging even more. Year-on-year growth in housing loans was even above 20%. If you look at year-to-date numbers, excluding N Banka's acquisition, obviously this is, you know, in half a year to date, practically almost double-digit growth. And of course, that's very significant. We've seen a very, very solid result in terms of net fees and commissions. If you look at net non-interest income evolution, of course, you have to understand one-offs from last year.
If you look at the recurring fee and commission income trend, it is absolutely I would say I would call it stellar because, you know, we are looking at practically 14% net of N Banka growth, you know, coming from plain vanilla real banking business and asset management business. This is obviously as a kind of a result of last year's developments by introducing the high balance fees on one side, but really then inflation making people to rethink where to invest money holding on the bank accounts or of course, investing in the asset management products. Despite uncertainty, we still have very sound production of investment funds and unit-linked insurance products. Of course, we have...
Once we sell the housing loan, the average cross-sell, you know, ratio is above 5, which means we sell also 5 other products as well. This is very robust result of actual commercial activities. The bank has been gaining market shares in retail and corporate in Slovenia, and of course also in other key markets. We have had new business production ahead of market average and by that also gaining market shares. We are especially pleased about these trends in Serbia as of course main focus point, after the successful first acquisition and now completion of integration.
Recurring result before impairments and provisions is very strong, 25% uptick before N Banka and, you know, a bit more with Abanka, with N Banka, which shows that the recurring substance of this business is very sound and not only very sound, it has a very solid trend, you know, and pace. Net interest income is moving up, so net of N Banka, 9% increase. Of course, not following in fully the volumes, but if you look at, you know, nevertheless, the numbers, they're very solid. Not yet actually reflecting the hike on the revenue side, because this is first half of the year where Euribors were not yet solidly positive. Now we are looking already at solidly positive Euribors, on one side.
On the other side, clearly, of course, we have had some TLTRO positions still that expired in more or less at, you know, the first half of the year, so there is some volatility in the balance sheet. We have reduced by EUR 750 million by repaying the TLTRO, so you will not see these effects in the second half of the year. Nevertheless, Andreas will show you the NII sensitivity for eventual hikes. You know, definitely this banking group is almost EUR 6 billion long Euribor position would be benefiting for, you know, moderate increases of Euribors, obviously. Of course, we don't count on an increase is really introducing a significant credit risk to our client base. You see this already in net interest margin evolution and operational business margin evolution.
We are seeing the turn, we are seeing the rebound, and the more it is even expected to be seen than in the second half of the year once, of course, the hikes are kicking in fully. High balance fees have been abolished, of course, immediately as ECB has moved out of the negative territory, but negative implication of this is slightly positive, right? We will not be charging for high balances, but of course, we will not be charged from the ECB. In this respect, this is not, you know, being painful for the banking group. Furthermore, with the hikes, we are benefiting. I was mentioning net non-interest income when it comes to, of course, one-off effects.
One needs to understand that last year there were really some, you know, collections happening, some settlements happening that have brought one-off positive effects, especially in Q2. There is a bit of a, of course, Q2 to Q2 significant difference, but if you look at the annualized level, we are really looking at a very robust 14% and together with N Banka, 17% growth of fees and commissions, which is the gist of our business, right? We are really happy about this so far. Costs have become, of course, the tension point. On one side, inflation is of course introducing significant wage inflation expectations.
On the other hand, of course, supplies, you know, be it the energy, be it anything else, security services, physical security, and so on, with the wage and minimum regulated minimum wages in Slovenia and of course, also some other countries, there have been significant growth of wage expectations. Clearly, if the inflation rates are between 8%-15%, you cannot expect that, you know, the wages will be on hold. So part of the increase of costs is coming from the, of course, increased wages on the other hand, from G&A, from the general administration and costs. However, of course, we have been working significantly on further improvement of efficiencies of our processes. We have been working obviously on the branch layout.
We have been now already accelerating certain initiatives within the integration with Sberbank towards the N Banka towards the end of the year. Of course, we have been significantly working on the further headcount reductions. If you look at the numbers here in the slide, you would see that number of employees has been decreasing steadily. Here is a one-off, of course, uptick because of acquisition of N Banka with, you know, originally 350 people. You know, currently we are already at 209 more from the beginning of the year. This is continuing and will continue as we have been, you know, explaining throughout the coming months and years. By that, of course, significantly offsetting the pressure, especially on the employee costs and infrastructure costs.
Loan dynamics, I mentioned, very encouraging. In all the segments and geographies, we have very solid growth. Here you see total margins. This is not necessarily net interest margins, right? I mentioned that they are already rebounding. Of course, there was still some lack in subsidiary landscape when it comes to the deposit pricing. Generally, we are really happy about the developments in practically, as I said, all the segments and geographies, growing business significantly and gaining market share.
We are growing relatively quicker than the competition, and we firmly believe that, you know, since majority of retail production is within the housing loan origination perimeter, and this is happening, you know, for in Slovenia, for example, at the average loan to value of 62%. You know, and significant cross-sell ratios that this is really a very sound business, and we really count on this to be really sustainable. We have, in the meantime, significantly increased fixed rates, so the new production is happening at higher rates. It's not yet seen in the stock of the, well, entire portfolio, but it is absolutely happening as we speak and will be kicking in into the revenue side.
With the high cost of Euribors, we believe, of course, also the floating production will be, of course, improving total economics of the business. Capital structure has been very solid, so beyond the N Banka's acknowledgment of negative goodwill, I mentioned, we have had a very strong recurring result, so part of it was already acknowledged within the Q1 result. On the other hand, we have a very solid recurring result. As I said, we are working on further AT1 issuance before the end of the year in the amount of around 80 million EUR. We are still working on the Tier 2 issuance, so this is still something which we are basically trigger ready at.
As soon as markets become susceptible for issuances of you know our quality, we will definitely pursue this opportunity as well. By that really we provide a capital base for eventual further growth. For organic growth, we are well equipped with capital for organic growth and announced dividend payouts. For eventual M&A, obviously, we need a beef up. We are really happy about you know such strong organic growth. This is of course creating risk-weighted assets. This is of course consuming capital. As said, this is within the parameters we absolutely manage because this is you know clearly within our risk appetite and underwriting criteria. That's really something we actually at this point of time pretty much appreciate.
By that, I would pass the word to Andreas for the asset quality piece and then come back for the outlook.
Yeah. Blaž, thank you very much. From this section, I would like to take you away three main messages. First, Blaž mentioned it already, a very solid loan growth in all customer segments. Secondly, a very sustainable growth, so asset quality remains very high and, NPLs remain low. Thirdly, given circumstances, of course, there are also some sensitivities, so towards the end of my part, we will talk about two of them. Yeah. SME corporate on the one side and retail business on the other side, we are growing in all segments. Obviously, on top of that is also added the stock of N Banka now, but, without that, we are growing solidly, as you can see here.
We have, and that was, I think, briefly mentioned already before from Blaž, one special effect. If you look on state exposures, including also placements with central banks. As Blaž mentioned, we have been repaying EUR 750 million TLTRO, so that's of course reducing that position. On geographical distribution, not very surprisingly, you can see a little bit more than half of Slovenia, focus of course on Serbia. Here, we were buying Komercijalna Banka, and then the rest distributed throughout our other geographies and a little bit cross-border, which you see here mostly under other. Asset quality, as I mentioned, remains very high, so more than 94% Stage 1, 3.4% Stage 2, and Stage 3 with only 2.2%. Maybe two details about Stage 2.
First of all, you see no changes in Stage 2, with the acquisition of N Banka. That's actually not surprising. Same then for Komercijalna Banka. Initial recognition is at fair value. This means you have either Stage 1 or Stage 3. That's why this position here is not changing. You see in Q2, that's the other detail in retail in a little jump. Actually, if you see it in absolute numbers, it's not that big. It's EUR 23 million. This has two effects. There's a model adjustment. That's one part. And on the other side, macro assumptions obviously have been changing, and that is first of all affecting here retail. NPL, you see of course also in absolute numbers, still slowly decreasing.
You of course on the other side see EUR 20 million coming in, end of March from N Banka. That's also a very moderate number. Overall, we stay with 2.2%. Actually, let's say 40% of that doesn't have any delay, so these are primarily clients which are or were in restructuring and are not yet cured. On top of that, we have a very solid coverage ratio, and this obviously, compared to last December, stayed more or less unchanged. As Blaž also mentioned already, we still stayed slightly negative with cost of risk, very low cost of risk. As I explained already last time, a little bit counterintuitively, we are building EUR 3.3 million, and we are talking negative cost of risk.
This is the special effect from N Banka because EUR 8.9 million were billed initially, and that's of course annualized. If you deduct half of that, then you come exactly to this -6 b ps cost of risk. You also see that we have almost EUR 20 million in half a year repayments from written-off receivables. Our workout is still doing a very, very good job. This tells you that of course our overall cost of risk situation is solid, very solid actually without that. Of course, it's still helped a little bit like in the last two, three years already by this excellent result also from the workout team. Coming to the two sensitivities. One very obviously now is energy sensitivity, so gas usage mostly.
Blaž mentioned already income, but clearly under European average still in Slovenia. In our other countries, even much less. We were doing some stress testing on the one side coming from stress scenarios, which actually we had developed already before. This gives us a certain output. We were, let's say, validating, double-checking this on the other side with the mostly affected industries, what result we would see there. Not very surprisingly, these two things are coming closely together. One key message here is that we are below EUR 500 million with the total exposure towards these industries.
The second key message is that even in a well, quite sharp stress, we stay within our maximum cost of risk, which we ever want to see. That's 90 bps, so we stay below that. On the other side, NPL by EBA definition, we would stay below 4% NPL. Currently, we are at 2.9%, so just that you have a comparison on the impact here. Of course, that's the current situation in that respect is not fun. Also here, our portfolio is very robust and actually not to a too big extent connected to these troubles, which, if you ask me, is also a good message. On the other side, and this Blaž mentioned already, we are considerably long with our Euribor position.
That means, when we are talking about net interest income sensitivity, increase in Euribor, of course, helps us, supports us to a 100 pips change is here, EUR 65 million P&L impact, of course, on an annual basis. What I have to say, of course, as a COO, this is assuming that these shifts don't happen too radically and too fast, because on the other side, we of course would then see impact on our NPLs. I have to say what is currently predicted and currently foreseen, I'm not expecting any impact on NPLs, so the increases here are much too moderate, and that means that we would really see this positive impact from such a rise. With this, I'm handing actually back over to Blaž. Thank you.
Thank you, Andreas. Of course, everyone is interested how we are progressing with the integration efforts of N Banka. Firstly, I would like to highlight that of course we have pretty fresh experience with integrations in a couple of markets. This is not something as, you know, we would not be able to manage. We have been pretty advanced in understanding the whole process and project. We have onboarded, of course, also external support. Our teams are fully working on this as a top priority. We aim to legally and operationally integrate both banks in Q2 next year, which is pretty soon, obviously. We are already, you know, almost in the fourth quarter of this year.
We are fully confident we will be able to pull it off within the reasonable time and, of course, also envisaged material consequences. We have been working obviously on a really detailed understanding of first the integration costs that might be in the ballpark of, let's say, EUR 15 million-EUR 16 million. On the other hand, on the synergies, fully annualized, let's say, in the ballpark of around EUR 12 million. This is something that we are now, you know, providing detailed view, but pretty confident so far already. As said, top priority, we've known how to do it. We have the toolbox, we have the teams, we have the attitude to successfully pull it off within the, you know, envisaged upcoming timeframe and within the money that was foreseen.
In this respect, we are, you know, very, very positive about this. On the other hand, clearly then coming back to the outlook and wrapping up the intro part, leaving room for questions. Very robust first half. Very happy about it. Clearly tension on cost side. We are of course addressing this on one side with further optimization measures, right-sizing of course the talent pool on one side, the physical footprint on the other side, digitization efforts. But at the same time, we expect this to be paralleled finally with certain hikes in interest environment. You know, it is not about ECB's moves only.
Effective Euribors, six-month and three-month Euribors, are obviously soundly positive, which means that at rollovers of our books, and this is practically close to EUR 6 billion, as I mentioned. The repricing is happening, right? In the second half, we will have gradual pickup of revenues, and you saw the sensitivities. You know, this would have to, we expect, more than offset, significantly more than offset the, you know, pressure on costs. We are guiding here, in terms of cost of risk to still, you know, staying below 30 basis points this year. Even in case of eventual full gas embargo, the gas terminal. The gas terminals, relevant gas terminals are full to the extent that, of course, this year we would not expect shortages of gas supply. The gas will be coming.
We are being assured of that obviously from Slovenian providers and of course also wholesalers that the gas for sure, at least until the end of the year, should not be an issue. The same is more or less true actually also for Q1 of next year. As long as the gas terminal capacities are being filled up to 80%, as long as there is solidarity within European Union, this is something that, you know, Slovenia definitely counts on as the country without gas terminals, own gas terminals. We should not be seeing any, you know, issues within the production capacity of Slovenian businesses. Even if so, Andreas was talking about 90 bps as really in a worst case stress scenario. We believe, of course, Slovenian corporates are in a very strong shape.
We have had the record level of employed people, so active population is at the historical high. Of course the unemployment is at a historical low, which means that of course, even if there is certain recession scenario, this will be more than manageable, not introducing excessive cost of risk. This is our firm belief as of today. Clearly, you can have your own assumptions, but this is how we see the situation. We also believe that, Slovenia being from the regional countries, obviously the most exposed to the natural gas consumption, is robust as a sovereign as well to the extent that there would be, you know, support schemes available. The housing.
The household pressures have already been managed by the government of the Republic of Slovenia through regulation of oil prices, through regulation of other energy sources pricings for the households. In case of really significant turmoil, we believe there is still some room for the Republic of Slovenia to intervene when it comes to the economy, the production sector. In this respect, we believe that Slovenia will and shall overcome this unpleasant situation in still very robust way. If you look at the total indebtedness of Slovenian corporates and households, and you compare this to other countries in European Monetary Union, you would see that they are very lowly indebted still, and that the banking sector has been strongly capitalized.
I mentioned we are still working on beef up of equity, obviously, of capital and extremely liquid. We will be providing and extending funding working capital lines, and by that release the pressure to Slovenian corporates if needed. Households will historically proven manage this pretty well. Coming to the next year, of course, no one has a crystal ball. We have been for years now guiding to normalization of cost of risk to this territory of 30-50 basis points. Extreme adverse scenarios would be above that, but as said, we don't expect in any reasonable scenario going above 90 bps.
We plan to still continue growing the business significantly and assuming we can of course issue the Tier 2, we would by that open up room for eventual further M&A growth. Organic growth is very strong. We are very happy about it, and we aim to continue and we see still potential to continue. For that, we are well equipped with capital, but of course, given the so strong organic growth, the, you know, previously announced, M&A potential has been slightly impacted, you know. Of course, for a more meaningful M&A, we need more capital. You know, that's why it is not very likely that we would engage in any M&A process, you know, in the upcoming couple of months until we are able to, then of course, meaningfully issue the Tier 2 instrument. The goal is there.
We're working on it. We're able to do it. We believe we are worth, you know, the risk, worthwhile, the investment. Of course, the markets need to become susceptible for the issuers like us. Overall, the dividend promise remains very solid. We see that the residual EUR 50 million to be paid out this year is by no means endangered, so we actually stick firmly behind this promise, and we aim to call the extraordinary general assembly still before the year-end to be paying out EUR 50 million still within this year. By that I would wrap up by claiming we feel strong, we feel confident, and we are gaining market shares in our business in segments and geographies.
We believe we will overcome these uncertainties, you know, among the best actually in this part of the world. By that, I would thank you very much for the attention. You know our team, they are available for any questions. We might not be able to respond immediately, today, but, of course, now we remain open for any of your questions. 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 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 comes from the line of Simon with Citi. Please go ahead.
Oh, hi. Thanks. Thanks for the opportunity. I have a few questions. I guess, firstly, thanks for providing the kind of targeted synergies for the integration. Can you give us maybe a little bit more in terms of timing and how long it would take to incur those restructuring charges and when do you expect the annual synergies to be in place fully? Just on NII sensitivity you provided on page 28. Just to confirm that + 50, that means a 50 basis point increase from the current 0 level, right? Just wanna make sure that that's the case. I just wanted to also ask if I think in previously from - 50 to 0, you suggested there'd be like a EUR 26 million positive impact.
How much of that positive impact has been felt, if any, in the second quarter? When would you expect that to come through earnings? I'll leave it there for now. I have a few others, but yeah.
Thank you. Thank you, Simon. The colleagues will come back to you on the details on, you know, but mainly, you know, this was happening towards the end of June when it comes to the real, you know, changes in the first half. First half was not that heavily impacted yet.
Mm-hmm.
By the interest change. Then remind me the second question was on integration. Yeah.
Synergies.
Yeah.
Yeah.
The synergies will, I mean, we will try to front load as much as possible restructuring charges to this year, but of course, we have to follow meaningfully the actual flow. You would see them this year and let's say within first half of next year and full synergies will kick in with 2024, you know. That's what I can say.
Okay. Just to confirm, the numbers were EUR 15 million - EUR 16 million of integration costs.
Yeah.
EUR 12 million of
Yeah.
Potential synergies. Yeah.
Today's point of view and assessment, this is not yet final numbers, but this is pretty good assessment, you know. Remind me of the first one, please.
Actually, yeah. No, that was all my questions. Actually, I'll just have a follow-up, which would be, you outlined this - 90 basis points impact from kind of a harsh gas scenario. Would you have to cut the dividend, do you think, under that harsh scenario? Or is that-
Well, that's.
Kind of very confident.
First, we really don't believe in this one. Secondly, we will be beefing up the capital further. We'll be definitely working on Tier 2, right? We hope that at least if not this year, that at least in the beginning of next year, we will be able to pull it off. Of course, by that, we would definitely lock in and secure the dividend for the next year as well. This year's dividend is by no means in jeopardy. You know, as we don't envisage as of today, the real stress to crystallize, we don't see, you know, as from today's perspective, you know, not being able to pay out the dividend. You know, if the world collapses, that's a different story. You know, no one has a crystal ball.
Just last, on capital, I see that there is still significant fair value hits through actually both equity and capital. Do you expect that the worst is done? I see you're also accruing some of the earnings now, the first quarter earnings into the capital base. Are you going to continue doing that in the future?
Yeah. I mean, if you follow the spreads in last weeks, right, this has been slightly reversed already. You know, the pressure seems.
Yeah.
To be released a bit. It's actually helping back the capital, right? You know, of course, as I mentioned specifically in the presentation before, we have a very strong running result, right? A significant part of this running result will of course end up in capital at the end of the year, right? Or the beginning of next year. You know, we are beefing up capital also with a great result.
Do you plan to continue to accrue a portion of quarterly earnings into the capital ratio?
Well, we of course have signaled what would be the dividend payout next year and within this frame, right, we will be of course managing our capital. No? We would not try to jeopardize.
Okay.
10 and 10 million dividend. You know, of course, we have significant substance in form of the running results. No?
Yeah. Thank you very much.
Thank you, Simon.
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. At this time, we do not have any further audio questions, so we will proceed with the written questions from the live webcast. The first question comes from Jovan with RBI, and I quote, "Please explain in more details the 90 bps risk cost guidance from the gas supply model assumptions. Is it the worst case scenario? Any government subsidies included?
I think we have discussed this now on a couple of occasions, right? Within the presentation. This is really adverse scenario, and this is not including any, of course, government assistance. Whereby I mentioned that, the government of Slovenia at least, and I believe Serbia as well, is in a position to provide support, right? This is really worst case. Andreas, would you add anything?
I mean, look, worst case is moon is falling on the Earth. Under what we can currently see, I think that's really the worst which we would assume that could happen. I would not see a scenario which would be more severe than that. I mean, you just have to look out now on the other side of the planet, if China would invade next month Taiwan, then maybe things look again different, right? The current stress assumptions of course are assuming the sensitivities which we have on the table. That's already a pretty harsh stress. In that sense, I can answer the question with yes, that's the worst case of what we assume.
It is also true, as Blaž already mentioned, that it's not yet including any government support. Obviously with pain levels increasing, especially here in Slovenia, which is compared to our other markets still more depending on gas, we would of course also expect such effects to kick in at a certain point of time, and this is not included here.
We have another question from Jovan with RBI, and I quote, "What amount of risk costs have you front-loaded in the Q2 or the upcoming energy crisis and higher inflation?
Well, net zero, I have to say. The new macro assumptions, I mean, sometimes we are already forgetting how fast the world is moving. I mean, the last update is from June last year, so we had now a regular update with June this year. Honestly speaking, the situation for corporates rather led us to a small release, whereas the assumptions for private individuals, especially because of inflation, led us to an increase, but net of that is basically zero. In that sense, no front-loading if you want. That's a different situation than in 2020. Here we were really expecting actually a little bit more than what then really happened.
We were really expecting more sharp impacts, and that's why you saw first in 2020 quite some buildup and then subsequently because the world was not that dramatic, release. So far, that's not the situation which we see right now.
I mean, we need to remember the times before COVID, right? Where ECB was crying for 2% growth. I mean, we still see forecasts of 3%-4% growth for the region, which is, you know, three years ago, we would say, "Are we overheating?" Right? In an environment with 2+% growth, you don't expect delinquencies. You will have single issues with production facilities, you know, that might have shortage of gas supply. But I signaled that, you know, for example, Serbia has procured at very good terms gas for three years. Slovenia is in principle, you know, according to the people that are running the system, the energy system and the grid, you know, in a pretty good shape as long as there is solidarity in Europe, as I mentioned, right? So the
As long as the gas terminals are at 80% full and Slovenia is getting, you know, through the pipeline from Austria, the allocations, you know, we should be in safe hands until April next year for sure. You know, in a growth environment, you don't expect fallouts.
Another question from Jovan with RBI. Why release of risk costs at the level of N Banka?
I hope I understood the question correctly. Release of cost of risk in N Banka.
Mm-hmm.
That's very simple. I mean, in the second quarter, they simply had some unexpected good resolutions of cases, and that simply released cost of risk. I think the initial setup where we built extraordinary EUR 8.9 million was very rational and logical, but we then saw actually in the second quarter some more positive developments and repayments actually, and that's where the releases are coming from.
A final question from Jovan with RBI. The raised recurring income guidance from EUR 690 million to EUR 730 million, what effect from N Banka is included here?
Well, that's more or less a running revenue rate of N Banka and, you know, this is in the ballpark of which is public. You can see what is, you know, N Banka's annual revenue share and what then you can of course make your math. On the other hand, clearly we have envisaged pretty moderate hikes still and, you know, let's see where it ends up. We are pretty confident that these revenue rates are, you know, on a, you know, on a reasonably guiding and the N Banka's allocation and portion is just more or less within their pro rata share of revenue. Not more.
The next question comes from Anton from Allianz, and I quote, "Congrats on great results again. Could you please provide an outlook regarding the employee costs and the number of employees for the rest of 2022? Do you expect any additional salary increase in Q3 or Q4?
Well, I mentioned the continuous tension, right? There have been, of course, pressures in this direction. That's why we have been on a cautious side, and we have, you know, guided now for below EUR 460 million, which is of course envisaging and covering what we expect for, you know, further increases of employee costs on one side and further pressures from the vendor landscape. We believe we should be, you know, within these margins. We don't, you know, plan more. Then for the next year, we plan to keep this on the same level, which seems ambitious, but you know, should be actually coming from further decrease of talent pool and, you know, adjustment of the physical footprint.
Of course, digitization and further, you know, improvements of processes and by that cost reduction. This is a direct response. I mentioned within the presentation that we have, of course, bought the bank with 350 employees, but the actual increase until end of H1 was 209, so net 150 was already reduced. We also publicly mentioned that, you know, we aim to end up 2023 with 2,200, maybe even a bit less now people in Serbia, which was, you know, down from 3,300 at the beginning of 2021. You know, this continues. We are halfway done, and we are continuing with this. Of course, we also continue in Slovenia.
We will be offsetting then further wage inflation pressures by adjusting, of course, the talent pool.
We have a follow-up question from Simon with Citi. Please go ahead.
Oh, thank you. Yeah, just on the new cost guidance. I just wanted to check that that includes the expected restructuring charge, charges from N Banka?
Yes. Yes, Simon.
It does.
Yes.
Okay, cool. Thank you.
Thank you.
The next question comes from Rollo from Schroders. I quote, "Guidance for 2023 cost is for similar amount to 2022. Were there not some one-offs in 2022 and opportunities for saving into 2023 from N Banka to potentially bring costs lower? Or is inflation proving to be higher than expected, hence costs likely will be flat?
Look, we are currently looking at 8%-15% inflation environment in our part of the world, right? It is not fully realistic to expect, you know, you can offset more than the such high inflation, you know, even if you are highly rational in cost management, right? If you are able to keep it flat, we believe this is pretty good achievement in such a high inflation environment. Of course, will be a result of really diligent and decisive adjustment, as I mentioned, of the talent pool and physical footprint. You know, if, on the other hand, inflation keeps at these rates, we would expect hikes, you know, and sensitivity was at 100 bps, right? At 200 b ps, you can calculate what this means on revenue.
You know, of course the cost is one dimension, but there is a net-revenue dimension. If, you know, the cost pressure keeps being strong because of high inflation, we would expect that ECB moved nevertheless even more ambitiously. You know, at 200 b ps, you know, we are looking at EUR 100+ million of revenues. Keeping that cost flat is bringing significant improvement of results now.
The next question is from Alex from Wood & Company. I quote, "Do you assume any rate hike assumptions in the outlook of 2023 besides the 50 bps hike?
Well, we are more or less at this level. You know, if this is much more ambitious, this should be helping. This is not envisaged, no.
The next question comes from Peter from Slovenia. I quote, "Margins have finally started to increase. Do you expect such momentum to continue, or do you expect growth in NNI based on higher rates to moderate?
Of course, this is a function of the ECB's approach, right? The resulting Euribors in the market. Currently, if you're looking at 50-70 b ps Euribors, depending on six-month universe, right? This is already a significant hike, right? If the ECB now moves in September by at least 25 or 50 b ps, you know, and then if the markets end up at 100 bps you know, this will of course further help margins. We have been increasing significantly, and it's public. You know, we have just increased fixed rates, you know, by more than 30-40 b ps in Slovenia alone for their own long-term mortgages, right?
In this respect, you know, new production is coming in at significantly higher rates, while of course deposits are not repriced and will not be repriced for quite some time, you know, given our LTDs of, you know, low 60s. In this respect, you know, there is significant room for, of course, improvement of the margin. And you know, by that, as I mentioned before, of course, improving the economics of the business. Hopefully not being then eaten by the cost of risk, but you know, this is a function of the crystal ball and debate from before.
Ladies and gentlemen, there are no further questions at this time. I will now turn the conference over to management for any closing comments. Thank you.
Thank you very much everyone for constructive questions. As I mentioned at the end of the presentation, we feel very confident. We feel strong. We believe we have what it takes. We have the toolbox and the experience to deal even with recession scenarios within a manageable, you know, framework when it comes to the economics of the business. We stick to the promise of paying out residual EUR 50 million. I don't see any grounds not to this year, you know, this is good news. We are further working on beefing up capital because this is on one side enabling in a further very strong organic growth, which we like very much because as I said, this is within the risk appetite and underwriting criteria parameter which we manage, you know, very proactively and actively.
On the other hand, we will be further trying to improve capital to be able to grow also through the M&A. We don't see any real actionable opportunities at this point of time. We don't plan to engage in the coming months, but we will prepare grounds to be able to be really active in the upcoming years. Thank you very much again, and until further occasion and opportunity, stay healthy and stay, of course, positively tuned.
We have an audio participant, a Mr. Mladen from Erste Bank that would like to ask a question. Please go ahead.
Go, Mladen.
Oh, okay. Okay. I thought it was over. Sorry, I had a problem with the phone, so this option was working. Just if you want. First of all, thank you for the opportunity and congratulations on the results and all the developments, especially here in Serbia. Thank you for adding the Serbia number for this call. One question regarding the loans with variable rates. I think you mentioned in the first quarter the size. Could you give us an update what is the current amount of loans with variable rates?
It's almost EUR 6 billion. The long position is almost EUR 6 billion on the group level. This is what I can give you. The rest, please talk to the IR guys for details.
Six?
Close to EUR 6 billion. You see from the NII sensitivities, right?
Yeah, yeah. 6. EUR 6 billion, right?
Yes, yes.
I thought it was that, but miscalculated. The second thing, rather local. Today, central bank in Serbia freed the price increases for fees and commissions in the banking sector. Does this affect your plans in any way regarding the Komercijalna Banka performance or something like that?
The effect would be single-digit million EUR, and by that not material for the group. We don't expect, you know, this to significantly challenge the results.
Okay, thank you very much, and sorry once again.
Don't worry. Take care, everyone.
Thank you.
Cheers.