Ladies and gentlemen, good afternoon and welcome. I am Lily, your webcast operator for today, and I would like to thank you for joining the NLB Group's live webcast, where we will present and discuss our performance in the third quarter of 2026. Before we begin, I would like to quickly explain how our voice question system works. Instead of calling in by phone, you can ask your questions directly in the Zoom. We will not be able to see you, only hear your voice. If you wish to ask a question in person, simply type the word "call" in the chat, and we will place your call in the queue. When it is your turn to speak, I will announce your name, and you will receive a prompt on your screen asking you to unmute your microphone.
If you prefer to ask your question in writing, you can type it directly into the chat. You can use the chat either to type "call" or to submit your question in the text form. Please have a look at the disclaimer on the screen. At this point, I would like to hand over the conference to Blaž Brodnjak, CEO, Archibald Kremser, CFO, and Andreas Burkhardt, CRO. Mr. Brodnjak, the floor is yours.
Thank you very much. Well, welcome everyone. Good afternoon. Let me begin by reflecting on two things. First, I am wearing the mustache today, which I usually don't, right? This is a kind encouragement to all male participants of the call, please do test your blood for PSA twice a year. It costs you EUR 10 and removes any risk. The second thing I wear today proudly is the heart of Sarajevo, which is reflecting upon or pointing to a historical window of opportunity to the leaders of the nations of Western Balkans and the European Commission to finally do what is right and what is necessary for fully embracing Western Balkans countries into the European Union membership.
When you talk about our business, I can proudly reflect to the Q3 results and our general story, which is with immediate reaction of the, we didn't succeed with one acquisition, actually been able to sign 55% stakes SPAs with what is to be a further strengthening leadership position in Slovenia, which is a home base. Then working heavily on the client experience, introducing new services to our clients region-wide. Finally, story about consistency. We have rebranded our business in Serbia, so all our banks are now called NLB Banka, bank, and actually have head office, which are predominantly capitals of the region. Stability, the management board has now had more or less a overall comprehensive midterm mandate ahead of us, and a story of, I would say, good European citizenship, because we have been part of the, what is a sovereignty project of Europe, digital euro.
All of this backed up by a very solid capital base. I am really happy that we managed to pull off an issuance of the strongly performing issuance of the Tier 2 instrument, and we have potentially been amidst of identifying opportunities to further strengthen the base with potentially AT1 issuance in the upcoming days or weeks. In this respect, this is simply following also the organic evolution, which has been very strong, so in sense of what are the opportunities available to us. There has been total asset growth, but more importantly, what is the core business growth, the loan growth of 10%, which is, from my point of view, a very solid and a bit ahead of what we have been guiding for at high single digits.
We are looking at around 10% growth, and that is a very firm base of stabilizing the revenue, which I am coming to shortly. We have been able to fund this, obviously, with our own deposit base, further optimizing our loan-to-deposit ratios to, let us say, targeted 80% levels, just shy of it. It is really a well-steered and well-developing towards the targeted structure business. In this respect, I can really sign and really be proud of pretty much stabilized net operating income, and it is coming from growing net interest income, finally, right? It is coming from a very solid fee, especially fee income, coming from more or less all geographies. There have been some one-off effects Archibald is going to explain, but more or less offsetting the one-offs of Q3, which is more or less stabilizing the picture.
From recurring point of view, it has been a story of a solid growth of organic solid growth of revenue. I am also happy about the efficiency improvements. When you talk about the cost-to-income ratios, we are driving them below 45%. We are, as we discussed with our strategic aspirations framework, targeting, of course, lower 40s, but being already below 45% is encouraging. This talks about a contained growth of cost while still heavily investing into the user experience improvement. Result after tax consider consequently when it comes to, of course, quarterly performance is very good. On an annual basis, it is more or less stable compared to last year. This is, of course, also partly due to the difference in cost of risk Andreas is going to talk about, and some, of course, additional provisioning on the Swiss franc loans-related matters.
We are going to talk about a bit later, but there are some one-off effects that has been some stress, of course, in the industrial part of the Slovenian economy, highly diversified economy, highly industrialized economy, and with high energy prices and clearly, of course, some market imbalances in Europe. This has been reflected in our portfolio. This is couple of known businesses we have been restructuring, and really depending on this or other, going this or other direction, the year might end with some additional cost of risk, but Andreas will be more specific from this point of view, but of course, still within the original guidance we have been communicating to you. In terms of the Swiss francs, obviously, there have been some developments in front of Slovenian courts, which have not been, of course, in the interest of the bank.
We try to understand with now refreshed view on it and methodological approach. This has been addressed with certain additional provision in Q3, and there is potentially some more to come. Andreas will give you more flash on this, and then me then wrapping it up at the outlook. Overall, we are looking at a very solid performance in Q3, in year to date, and still the last quarter should be, of course, in recurring terms, a very solid quarter. Capital base is, as I said, further strengthened, preparing by that, of course, also not only for the organic growth and continuous dividend payouts. We have, of course, also communicated in last days that there is a second half of the dividend coming in December, so we simply stick to the promise.
But of course, this leaves room for us potentially transacting further in M&A space. We've been talking about our interest in the geographies, of course, beyond Slovenia. Unfortunately, we have not been able to enter the Croatian market, but we have been now heavily working on identifying opportunities to further enhance our position, especially in Federation of Bosnia and Herzegovina, but of course, we have been also mentioning Albania continuously. We will simply continue being engaged at exploring these opportunities and, of course, also exploiting them if they were to come, of course, realistic for us to assume. Mentioning the dividend, and by that simply sticking to the promise, this is a growth story and it is a dividend stock story. I think we believe it's still firmly appealing to everyone. By that, I would pass the word to Archibald for more details on financials.
Thank you, Blaž. Let me just remind you again why we are so excited about the region more broadly, and you see here the highlights as we keep telling them, a little bit more conveniently presented maybe, but it is all about growth. We are operating, broadly speaking, in one of the strongest growth regions of Europe, and it shows in the numbers. This is to be continued with what is mentioned here as convergence potential. This growth is almost destined to continue, and there's plenty of upside on all dimensions. So, the penetration level, be it the convergence itself, be it the penetration levels, and all of that happening in markets that, broadly speaking, are self-funded. Labor markets are keeping up, so that supports not just future credit growth, but of course, also credit quality.
Broadly speaking, that's a region we are very excited about to operate in. You see that also in the hard numbers, be it in the GDP in absolute terms, and of course, in per capita. These are the numbers I just alluded to. Altogether, this is, of course, a fairly small region, so we talk 16 million, some EUR 230 billion in GDP. But in that fairly small region, with a still quite fragmented market setup, we are aspiring to and aiming to be the leading bank of choice. That focus and dedication, I think, shows in the numbers. Just to remind you that, of course, everything is anchored in Slovenia, with still a majority of our business sitting here. That's a AA-rated country. Serbia, strong investment grade. And the other markets, altogether in BB, B space.
All of this supporting the future growth and to some extent also, of course, with the higher margin environment from the subsidiary space in combination, I think this is feeding the growth story that we have been talking about in our capital markets day. This is who we are, this is where we operate, and that's in itself providing plenty of growth opportunities. You see the growth by country. I'm not going to go country by country, but you see very strong numbers, very strong performance. Here and there's improved outlook also for next year. As I said, all of this happening in a healthy funding environment. We talk about funding later, but it's very important for us that these penetration levels still provide future growth opportunities, and funding is sourced locally. How was Q3?
I think from a balance sheet point of view, you see lots of greens, so strong loan growth, strong deposit growth, and not much more to be said here. This, as we will see, happened across the geographies, across the segments, and still a very strong liquidity position, shy of 80% on a group level. That is, of course, the fuel that provides for future growth, not just in terms of capital, but also in terms of liquidity. The balance sheet remains a simple balance sheet. We are proud to be a simple, transparent business that shows up in every single metric we talk about. This is a mostly retail-funded bank, predominantly deposit-funded bank, and of course, we invest and place loans to the economies we operate, roughly 50/50 with the overhang these days, and emphasis on the growth in retail.
You see that already retail is leading versus corporates. That's deliberate steering. Of course, we sponsor the whole economy, but in terms of deliberate loan growth, we are happy to sponsor retail slightly ahead of corporates. You see that in the numbers by geography, and again, as said, a little bit higher acceleration in growth in retail relative to corporate, and this happening both in Slovenia and in our subsidiary banks. The little bit more modest growth in corporates, of course, reflects a bit the macro context, the demand equation, and also our conscious choice in capital deployment in regards of risk-adjusted pricing. You see loan yields are stable, actually slightly increasing for Slovenia, so that's the column in the middle. You see loan yields actually moving a little bit up.
That is, of course, following the broader trend in rates that we have all observed over the last course of years. It feeds slowly from the so-called front book, so the new origination into the averages. You see that from Q2 to Q3, some 10 basis points uptick. That's healthy, I would say, loan yield development. Not much has changed in regards of the fixed float compositions. Retail very much a fixed rate business, and corporates some 50/50 fix and float. On the deposits, growth was a bit more moderate, and in Slovenia, to some extent, that is seasonal on one side. On the other side, also a bit of a shift, it seems, in customer preferences, some of which we, of course, are happy to facilitate to simply get smarter in investing their personal wealth.
What you see here in moderation of deposit growth shows actually a much stronger growth in assets under management in our wealth and private banking franchise. Here and there, of course, in our subsidiaries, we have to fund nominally higher growth rates with also higher growth rates in deposits. You will see that here and there, as we kept talking about, this shows a little bit in cost of funding. As you see, it is stabilizing in our subsidiary markets. We are not seeing further increase. That is a good sign. in Slovenia, you actually see now the recent rate hikes also shining a little bit through in the deposit funding rates in Slovenia. That is simply passing on the rate environment also to our customers, which, of course, is the fair and right thing to do.
In regards of P&L, very strong quarter, and on a recurring basis, I mean, the result pre-provision, 9% year-on-year, I think is excellent performance. This is really the path to strategy delivery, as we talked about it on our capital markets day. This year so far was delivering spot on. You see NII growing 7%, fee commission income growing even 10%, cost quite moderate, and it grows where we want to spend. That is in the right people setup as much as in the technology. As was mentioned by Blaž, we now really have significant, I think, shows of strengths in our much improved user experience, both in key markets.
On the results further down, you will hear that, of course, on one side, we talk about normalization of cost of risk in Q3, and in that sense, bottom line was stable, but that, of course, on a much more benign cost of risk environment last year around. Returns normalized in excess of 20%, so that is firmly in the range of our strategy delivery. Also from a recurring point of view, I think we are now almost operating at a sweet spot of business performance, and more importantly, in an environment, as I mentioned earlier, that continues to provide these growth opportunities. We talked about NII, 7% year-on-year. On a quarterly basis, even better, 6% performance.
That is a little bit sponsored also by slightly improved wholesale funding mix on one side on the nominal level, but of course, we keep funding our balance sheet at increasingly competitive rates on the wholesale environment, and you now see margins picking up at group level, 321 at Q2, improving to 336. So that is quite visible and quite significant. Of course, we are looking forward to further improve on the back of what I said earlier, slightly higher rate environment, and of course, discipline in capital allocation and loan production. On the non-interest income, you see, on the interest income, you see that basically business is contributing very strongly, so both loans, corporates, as well as loans to individuals, pretty strong growth.
The slightly higher cost of funding I mentioned earlier here and there is actually covered entirely by also the ability to place higher yield assets on the securities side. You see EUR 25 million better result from securities covering the slightly higher cost on the deposit funding. All in all, strong contribution from core business, which is loans, lending to corporates and individuals. Similar story, of course, with a little bit more visible funding mix change on the quarterly evolution, 6% is super remarkable. Of course, even if you normalize for the funding mix, something like 3% quarter-on-quarter performance improvement is, I think, a very, very good performance. We kept talking about our outlook on rates and how we position in a good way for further changes in rate environments. As you see here, we are fairly neutral positioned.
If anything, we might benefit from a moderate rate hike still to come. But broadly speaking, we are now on a fairly neutral position in regarding to NII sensitivity, which is at this rate environment exactly where you want to be. On the non-interest income, again, I think standout is this very solid year-on-year performance, 10% on net fee and commission. It's fortunately the performance on all dimensions contributing strongly from basic banking services, and let's not forget, a lot of our investments geared to improving daily life of our customers. So that is, of course, reflected then also in extracting the revenues from this daily banking, as we call it. This is the payment transaction basic account revenue. Of course, the other standout is our continued success in asset management and all services around this space.
Demand here is continuing to be very strong, and as we keep saying, we are just getting started in markets outside Slovenia, namely Serbia and North Macedonia. But also here, we start to see visible elements of contribution from a low basis. In other words, this is future growth in years to come. We had a bit of non-recurring positives. That is, of course, our laser focus in regards of legacy asset resolution, and they somewhat offset also, of course, some of the negatives we have on covering for legal cases that Blaž mentioned. All in all, fairly neutral contribution from the positives and negatives, one-offs, and very strong recurring performance. Cost is our, I would say, continued discipline on headcounts. You see that numbers are stable. Broadly speaking, we invest where we want to invest.
Of course, we want to work with the best teams across the region, and we continue to invest in these talents. So we are not blindly cutting costs, but we are very deliberate in how we spend, on what to spend. Of course, a big driver these days is spending on everything technology-related, and importantly, this shows now really visible results in much improved customer experience across geographies and customer segments. In terms of capital, this is clearly the situation pre-issuance of our very successful Tier 2 transaction we had in October. So starting from a strong basis, we add up, and that's, of course, deliberate. To some extent, pre-financing expiries that are expected next year. So in the Tier 2 space in particular, we have a call date coming up next year of EUR 225 million, so we refinanced that with a EUR 400 million issuance.
We are also looking at the AT1 space. We have one instrument that is becoming callable next year, and we are strongly considering to, if and when, to refinance that. Of course, also in light of our pretty solid M&A pipeline that Blaž alluded to. All in all, very strong capital position, which, of course, is the foundation for both sponsoring dividends as well as funding future growth. By that, I pass on to Andreas.
Archibald, thank you. On asset quality, the third quarter is pretty benign, so much of the same. You will see a little bit of more movement in the last quarter. Blaž was already indicating it. For the three quarters so far, strong growth basically in all areas, also already mentioned. Of course, geographical distribution basically unchanged, because we are growing in all the markets. If you look on the provisioning and asset quality dynamics, you see here a very stable picture. This will now change a little bit, driven by corporate Slovenia, actually primarily in the last quarter. So there will be a certain movement from Stage 2 to Stage 3, but obviously no dramas at all. But you will see that a little bit, otherwise stable. The portfolio is very well diversified, I think, especially in these days.
Right now, we see this especially as a strength. If you look it backwards, the portfolio became in the last few years actually considerably more diversified in a sense also that simply, for example, top 50 are today a much smaller percentage than still a few years ago. On coverage ratios of all kinds, I think very solid, obviously above EU average. Absolute numbers basically unchanged to the quarter before. Also, again, as a reminder, a good part of these NPLs, so 45% almost, are without any delays. So also this one very stable. If you look a little bit more in details for the first three quarters so far, model changes net basically zero impact. This is actually driven a little bit by charges in Slovenia and by releases in the other countries. Slovenia here, if you want, like that is a little bit underperforming.
Portfolio development is, if you ask me, at least for what we were used to, not brilliant, but for sure okay, and still strong with repayments, I think Archibald mentioned it before, from off-balance items. As a blend that is so far short of guidance a little bit, so 28 basis points annualized. What we see now in the last quarter is pretty vivid movements up and down a little bit, honestly speaking. We have one bigger, one smaller case materializing. That is why I told you the Stage 3 will a little bit increase in corporate. What further will happen needs to be seen. I mean, what I am very firm about that we will stay within guidance. I am not very optimistic anymore that that would be to the lower end. Doesn't look like.
But whether it is rather in the mid-range or a little bit more up really is at that point hard to say. We saw now this one case, which I mentioned, the bigger one actually was developing quite positive in the first half of the year, and now took a turn. So that one is done already. The rest really to be seen. And again, what we see also is still positive surprises. Also, we might see eventually even already resolving of one previous case. So we will see. It is really hard to say, except that I can for sure strongly confirm that we will stay within the guidance. Where exactly we will end up here, let us see. And because Blaž mentioned that, I would briefly also touch that one on Swiss franc. Obviously, that is a different topic.
You saw that in, well, summer of this year, there were some court rulings which were not in favor of banks, as Blaž already said. So that has triggered actually a change in our logic. So we saw to the very low end of a double-digit impact in the third quarter, and we will probably see something similar in the last quarter. And that is more or less it. So we are here pretty on the conservative side. Of course, what you do not really know what additionally might happen next year, so we might see still a little bit in next year, but honestly speaking, should be much more moderate by our current understanding than what the change in the legal logic, court logic triggered this year. So obviously no dramas at all, but also something which is simply visible.
With this, thank you very much, and I am handing back over to Blaž.
Yes, thank you. So recurring results are, I would say, even great. And in Q4, we would expect them to continue. Now, there is also rate environment expectations associated with it, but generally, there is demand for loans. There is, of course, also now stable margin environment. So we believe that the recurring pre-provision result is going to remain very strong, and that is why we also improved the guidance on the revenue. So we now believe it is going to exceed EUR 1.35 billion. And in this respect, that is a solid, of course, further evidence of growth. On the other hand, in the cost of risk space, Andreas was mentioning, there is some volatility, and it is really down to how one or two cases will develop, and you can see then a couple of EUR 10 million here or there.
In this respect, this is really something that could be mid-30s or mid-40s, but within the range, absolutely. When it comes to the Swiss franc loans, we have to firmly claim, we believe that the developments in Slovenian courts are outrageous. We believe that they are against the basic principles of rule of law, so we will fight against that. But of course, we need to acknowledge reality that we have been losing in front of the courts in the abrupt way. So we have addressed this with methodological approach, obviously, and of course, we are going to be discussing this further with the auditors and with the ECB at the end of the day. So we believe there is going to be some further, of course, measures in this direction, but not really to the material end of the equation.
That is why we believe that, of course, this guidance, when it comes to the final returns, absolutely holds. And the next year, we are more or less guiding again around normal principles, right? Basic principles of growth. When it comes to revenue evolution, our controlled focus on cost evolution, more or less being an investment into client experience, right, and the talent. And then cost of risk is always a function a bit of, is the environment going to improve or not? The energy prices are raising some concerns, clearly, especially for the strongly industrialized economy as Slovenia is. Less concerns, interestingly, when it comes to subsidiary space, it is less industrialized environment, but also production of own energy at much more favorable terms. So if you look at the Bosnian prices of energy, it is much lower than Slovenian, for example, right?
So the access to energy at lower price, of course, is playing a role these days. But overall, this is still a very solid set of guidance metric, right? In this respect, what is important to mention is the continuation, and we are retaining and, of course, keeping the capacity to grow also through the M&A. We have been working hard. I mentioned at the beginning, right, you sometimes in your life make one step backwards in order to be able to do two forwards. And us not succeeding in one acquisition actually basically resulted in us, in a matter of weeks, not even months, moving towards other opportunity. We have been telling for years, we are not dependent on one single opportunity, and we are agnostic when it comes to understanding what potentially might become actionable.
Strengthening the leading position in Slovenia is for us absolutely a statement, but not only a statement, it is simply reaffirming us as a business here. On the other hand, we have been working hard to identify other eventual opportunities, not limited to banking. So I was specifically mentioning, of course, some geographies when it comes to banking, which is Federation, which is of Bosnia and Herzegovina, which is Albania, which is, at certain point, if there was an agreement between both countries on the second reactor of the nuclear power plant, also Croatia still, but this, I guess, now has become the only possibility for us. So both countries striking a deal on this joint venture project. On the other hand, you might see us moving back into the captive insurance space. So we, of course, have been interested.
It's part of our strategy to, of course, also assume ownership positions potentially in life insurance, which then would serve as another vertical of our business. We're happy with the evolution of the leasing stream, which is now a four-country game. We are, of course, trying to understand whether it can become additional countries game. On the other hand, the asset management has been really producing fabulous results in Slovenia, but now finally, getting momentum in Serbia and North Macedonia. Then insurance comes on top. We have been absolute champion in distribution of insurance, life insurance policies through the banking channel in Slovenia, and we want to replicate this know-how and, of course, set of activities to other geographies as well. We believe there is value in potentially obtaining also a captive position in equity terms in this space.
You might see us moving in this direction. We can't communicate as we speak anything of concrete nature, but within this framework, we have been highly active. That's why, of course, we have been also engaged in exploring an interest, and of course, market conditions have to fit. We are by no means in a desperate position, so we are simply here strengthening the capital base consciously to fuel the growth, to back up the growth, and maintaining solid dividend payout. You might see us testing the market with the AT1 also to further back up what is also partly expiring or being able to be called in the upcoming year, but incrementally also assisting the growth.
We are all excited about what we have been managing to achieve, and I would just reiterate, I'm sure there will be questions how we feel about current situation in Serbia and other countries. We see them as an enormous historical opportunity, frankly. We see the situation pretty stable, so we don't see massive outflows, so the situation is stable. It is above all the message to the leaders of not only regional countries, but also to the European Commission, please don't waste this historical window of opportunity.
Western Balkans deserves prospect, deserves delight at the end of the tunnel, and now it's time, of course, for the leaders of the region to do the reforms, but of course, also to the leaders of the European Commission to acknowledge that there is no unified Europe, and I'm wearing the heart of Sarajevo not only as a symbol of peace and resilience, but to me at least, unified and united Europe. Thank you very much. Opening floors for the questions.
Thank you, gentlemen. Yes, dear viewers, now we will open the floor to your questions. If you would like to ask a question in person, simply type the word "call" in the chat, and we will place your call in the queue. When it is your turn to speak, I will announce your name, and you will receive a prompt on your screen asking you to unmute your microphone. If you prefer to ask your question in writing, just type it directly into the chat. Usually, we take callers first, but today is one of those days, so we do not have any callers as yet. The first question is from Mr. Antun Horvatić, AZ Pension Funds, and it is about the Deželna banka Slovenije. Let me read it. "Congratulations on the results.
I have a few questions regarding the Deželna banka Slovenije. NLB is moving to become digital institution, and at the same time, you are acquiring rather old-school brick-and-mortar bank with a lot of branches. Since I presume their clients are used to having a bank with physical presence, how do you plan to adapt these clients to your digital products and your digital philosophy? Also, with the bank comes their very large ATM network. What do you plan to do with surplus ATMs? Can they be sent to more cash-focused countries like North Macedonia or Kosovo? Is there a market for used ATMs?
Couple of quite specific questions. Deželna banka Slovenije is a symbol of what Slovenia stands for, countryside, farming society, but above all, a very solid, rock-solid sticky deposit base of EUR 1.2 billion of sight deposits almost. This is not just to be trivialized. It is a very well-performing, stably performing, soundly performing, and safely performing institution. We have been committed, of course, to provide access to the banking services throughout the network, but approximately half of this network is simply combined. There are, by that, natural synergies, because you do not need two branches in the next street. In this respect, there are, of course, physical synergies at hand. All of what I am saying is subject to us obtaining approval.
We have just signed the SPAs for 55%, of course, are aspiring to sign 100%, and of course, through the public offer, obtain 100% and then be able to pull off the integration. It is not that abundant ATM network you have been signaling to. By no means, NLB is currently running a massive network, which is supplying 70% of country's cash to the ATM networks and also branches of banks. As much as some of the markets have synergized by outsourcing the service, Slovenian market has been pooling around couple of players, and NLB has been actually a pooler of 70% of cash business in the country.
We believe we can manage this meaningfully in order not to impair the access of Slovenian citizens to cash, which is also one of the aspirations, obviously, of the central bank, given the digital euro project, and of the local government that is also trying to make sure that there is not going to be too strong of an impairment of the ATM service. Moving an ATM is quite a cost, right? The used ATM in Slovenia would be used ATM also in other countries. We want to actually offer comparable terms of service and client experience to all our clients. We do not want to look down to some other country just because it is different geography deserves inferior level of service. By no means.
We have been renewing the network of the ATMs group-wide, and especially in Serbia, actually, couple of years ago, we renewed the entire fleet, and we had the most modern fleet, actually, in Serbia at that point of time. We, by no means, would think of simply shipping this somewhere else just for the sake of saving money. By no means. This is simply an ongoing process. The footprint optimization is an ongoing process, whereby we believe that, of course, also retaining certain physical access is necessary for the advisory capacity of the bank. What we do is homework in terms of course, online end-to-end digitally available services, more or less replicating the best neobanks of this world and fintechs. On the other hand, maintaining physical access of our clients to us, right, to be able to perform the advisory part of the service.
This does not mean, of course, that we will retain the equally sized branches or equally formatted branches. This is something we have been working on also intensively. The Deželna banka Slovenije is highly synergetic, of course, opportunity. It is bringing a lot of deposits, so this is also a funding platform for us. It is bringing additionally, of course, tens of thousands of clients, new clients to the bank, which are very traditional indeed in terms of how they maybe communicate, but they are, of course, also very savvy in sense of course, making their life easier. I mean, I have a family case of a farmer who, of course, is also interested not to have to leave the vineyard to perform banking services, right? They also prefer doing this via mobile phone, if possible, via mobile first solutions or with video chat interactions.
We simply are going to improve that access, and I believe they will cherish and value it, not, of course, be unhappy because of it.
Thank you. Now we do have a caller, our first live question today from Mr. Jovan Sikimić from ODDO. Mr. Sikimić, can you hear us? Sir?
Yes.
Can you hear us? Please go ahead. Yes.
Great. Hi. Congrats for the results from my side as well. Short on Serbia, after this latest events, any unusual deposit outflows observed in the last couple of days? In terms of, I think we touched this topic once, on the public sector exposure of, it is around EUR 400 million. Maybe if you can share with us which industries or which projects and how collateralized are such loans, and do you feel comfortable at this stage about the quality?
When it comes to the deposit outflows, they are within the merit of normal. There has been some shift from dinar to euro, and some, of course, withdrawals, which is usually seen in such situations, but nothing extraordinary. Nothing that raises concerns at this point of time. We are absolutely happy about the developments these days. When it comes to the concrete financing towards the public sector, of course, I cannot discuss concrete tickets. I can only reflect on the structure of this, which is predominantly direct sovereign risk for the buildup of the productive infrastructure of the country.
Mm-hmm. Okay. Thanks. On the NIM, I think NIM kind of soared a lot in Slovenia in Q3. I think you mentioned that a certain effect came from this early redemption of MREL notes. Can you quantify maybe what shall we expect going forward?
I mean, you've seen, I quantified it in the call just earlier. I mean, if you look at the quarterly bridge, basically, let's say, simplified half of that quarterly bridge is the funding result. You see it explicit in the bridge. That remains a quarterly improvement of still around 3%, so that's still fairly solid. Broadly speaking, on NII, we are really, knock on wood, but happy. It's, as I call it, a sweet spot at the moment. Of course, as we alluded to in our capital markets day, broadly speaking, better funding levels are part of our strategic ambition, and we fund now at totally different levels, new issuances than we used to fund. Look, for example, at our Tier 2 issuance was at 175. We used to fund at twice the level, and so on and so forth.
It's in that sense technically this quarter, but the strategic backdrop is really we fund more competitively, and that will continue to pulse the NII growth in our 2030 frame.
Okay, perfect. Thank you, gentlemen. Thanks.
Thank you, Mr. Sikimić. Our next question is from the chat, and it is from Mr. Aleš Jeraj. He says, "The bank is becoming too big for the market it is currently focused on. I am curious if you can tell us when we can expect a strategy update, and especially which markets would be added. I am thinking along the lines that in the future, the bank could focus on markets between the Adriatic and Black Sea, where the greatest potential in Europe seems to be for the coming decade.
Slovenia, I guess that is it when it comes to banking. With the acquisition of Deželna banka, that is it when it comes to M&A, and we will simply be focusing on organic distribution of universal financial services. There is still a lot of room for growth in asset management, bancassurance, and of course, also further deepening of the financial system. Because if you look at the household debt to GDP and total debt to GDP, it is still at only a half of the Western European levels. There is a lot of growth potential in Slovenia alone. We have by no means exploited the potential in the former Yugoslav territory. Croatia is on tap basically.
We have a EUR 235 million business there, but if that was an opportunity for both countries to finally get to an agreement regarding the old deposits of Croatian citizens, former Nova Ljubljanska Banka branch, this would potentially open up doors for us for a couple of billion growth in a pretty short timeframe. We have zero exposure towards Croatian sovereign, towards Croatian municipalities, key accounts, SMEs, zero. There is immediate cross-border opportunity if we were allowed simply to enter the market, even without buying anything. Just doing EU passporting-based corporate lending, for example. This is bringing billions of opportunities for us. There is a lot of energy efficiency improvement projects, a lot of infrastructure buildup, energy production, renewables, batteries projects, data centers projects that are going to be developed in Croatia in the upcoming years.
On top, there is entirely new geography of Western Balkans, which we have not yet tackled, and that is the Albanian market, obviously. If we were successful to enter Albanian market, this could be again, up to EUR 5 billion long-term EUR 10 billion opportunity. In this respect, that is something that within our capital constraints, it is still a massive opportunity. Then still, further strengthening and deepening our position in all of the other countries where our highest market shares in terms of total assets are not exceeding 19% in any of the markets. There is a lot of opportunity for growth there as well. Talking about the adjacent concentric circle, which is then Bulgaria, Romania, and further, these are the bigger shops and bigger countries. It would either have to be niches, or we would, of course, have difficulties funding it capital-wise.
In this respect, this would be possible if there was a point in time where the ownership structure of NLB as a group could potentially be addressed in a sense that it is possible to issue new shares or swap shares through new issuance. But this would require, of course, the current position of the Republic of Slovenia of 25% plus one share to be either transformed into a kind of a preferred stock with golden vote, whatever, for the statute, or some other form of shape of course, reducing this position, which currently is not envisaged since this is, of course, an important asset of the Republic of Slovenia. In this respect, the hindrance is the capital. We are organically originating it. We have bigger difficulties in issuing simply new shares.
We are beefing it up with AT1s and Tier 2s, right, and retained profits, but we cannot issue new capital in a common share terms. And the Core Tier 1 obviously is something you have to build, right? This is not coming on its own, unless you are able to issue shares. So there are some physical constraints in numerical terms which we cannot overcome on our own, right? If that was an opportunity, of course, to open up the model, then you could be thinking big, right? Then you could be talking about South European, Southern European platforms ranging from what is even on the other side of the Black Sea towards, of course, Adriatic. But that is something else. That is a visionary aspect that would require totally different look at the capital structure of the bank.
Thank you. We have another caller, Mr. Mladen Dodig with Erste. Mr. Dodig, can you hear me?
Yes, hello. Can you hear me?
Yes, please go ahead. Very well. Thank you.
Thank you for the opportunity and congratulations on a very nice quarter. Well, I would not expect an answer, but you mentioned Albania and Bosnia-Herzegovina so many times. Just out of curiosity, how close are you to announce something suddenly, like it was with the Deželna banka? Can we see it sooner or later?
We will communicate when it will be appropriate to communicate, if it will be at all done.
Okay. Thank you. Thank you very much.
Thank you, Mr. Dodig. We have another question in the chat. It is from Mr. Dan Mikhaylov from Vergent. With Alta Banka losing their license, will you be interested in acquiring parts of the Addiko portfolio from Raiffeisen?
We do not see this at all as an option. Raiffeisen has communicated that they are going to simply stick to the promise and buy the entire group. We do not see this being an alternative at all. We have said we have moved on, and we are now rooting our capital towards other opportunities. It is as simple as that. I was mentioning which geographies are of our main interest. I just hope that this situation clarifies as soon as possible because this instability is not in the interest of Addiko Group, its clients, its talents, and anyone else, because financial instability of any of the players is not good for the system as a whole. We just wish good luck everyone to close this transaction as soon as possible.
Thank you. Another question from the chat, from Mr. Daniel David with Autonomous. Could you take us through the timeline on Swiss franc claims for here and what size the financial impact could be in the worst case? Am I right to assume the ROTE target reducing to 14%, slide 63, is due to the cost of risk rise into year end? Is the new Tier 2 in the MREL ratio reported?
Maybe I pick on the easy technical one. There is, of course, not yet reported because it was not printed at the time. We will add to the MREL ratio and, of course, importantly to the capital ratio. Indeed, the outlook basically captures the debate we had around both cost of risk and also to some extent Swiss franc. Let us also not forget, as I alluded to, there are positive one-offs and negative one-offs, and we might also have a bit of similar things happening in Q4. In that sense, maybe we are a bit careful with this guidance because it is volatile times. Broadly speaking, I think you captured the dynamic correctly.
The guidance is on a conservative end, assuming all of this. Assuming whatever is the tails of the Swiss franc loans and whatever is the situation with the cost of risk.
Thank you. The next question from Jure Hostic with KF Finance. "Does the stagnation in retail deposits in Q3 indicate an outflow to neobanks or government bonds, and what pricing or product measures are you planning to defend your deposit franchise?
Well, this has to be looked in combination of what was the net inflows into our asset management products. Our deposit equation namely is driven by what we get into our accounts and how we stimulate our clients, obviously, and as per, of course, their main ambitions to actually use alternative investment opportunities. If you look at the production of asset management this year, net inflows, including, of course, also unit-linked insurance business, has been, of course, on our record levels predominantly. In this respect, the entire equation has to be taken into account. Yes, on one side, of course, we need funding for lending business, but we have barely started really focusing on this because we have been still optimizing our loan-to-deposit ratio towards 80%, which is an optimal use of funding, right?
On the other hand, we have been enormously successful with the asset management and bancassurance services. So, it is by no means saying, we are losing money against the other, of course, providers. There is some, but by no means extraordinary. We have been mainly highly successful at simply allocating the deposit base that is coming into the bank in various pockets of investment opportunities. Not only deposits, obviously, but also asset management and bancassurance service.
And there's always a bit of seasonality in deposit growth, so it's not something. Typically, Q4 tends to be a bit stronger. Indeed, we are still a highly liquid balance sheet with loan-to-deposit less than 80. To some extent, it's also a matter of price. You've seen us paying up on deposits, so we also pass on some of the rate moves to our customers. So, this is an equation, of course, that we watch continuously. We put a lot of emphasis, as I indicated, in terms of tech investments into making us an attractive and reliable partner, at least on par with neobanks. So, we claim our customer experience has to exceed neobank experience if you add the value-added services in contact centers 24/7, if you add the proximity of branch networks.
So, we put a lot of attention on, of course, making us the better choice for customers, and by that also their preferred partner for keeping their accounts and by that sight deposits. So, that's continuous focus and never ends.
Thank you. Ladies and gentlemen, thank you too. As there are no further questions at this point, I will now hand over the conference to the management for closing remarks. Thank you for joining us today, and have a nice day.
Thank you all for being with us. It's been an amazing quarter, actually, but looking forward, there is a bit of volatility. Yet we remain confident, of course, that we are on the right path and track to deliver 2030 strategy. Organic solid trends accompanied by first successes in the M&A space as well, which were always part of the narrative. We are excitingly looking into communicating the results of the whole year. Thank you very much again for being part of our exciting journey.