Good afternoon, ladies and gentlemen. Let me welcome you to the presentation of the results of Komerční banka for nine months and third quarter of 2023. It is 3rd of November, 2023 today. Please note that this call is being recorded. Our speakers today will be Jan Juchelka, Chairman of the Board and Chief Executive Officer of Komerční banka, Jiří Šperl, Chief Financial Officer, and Didier Colin, Chief Risk Officer. Standing by in case you have questions for them are also Jitka Haubová, Chief Operating Officer, Miroslav Hiršl, Head of Retail Banking, David Formánek, Head of Corporate and Investment Banking, and Margus Simson, Chief Digitalization Officer. As usual, we will begin with the presentation of results, which will be followed by questions and answer session. During the presentation part, all participants will be on listen-only mode.
Please kindly keep your microphones muted during that time. Now, let me hand over to the Chief Executive Officer, Jan Juchelka. Thank you.
Thank you, Jakub. Let me welcome you all to the presentation of Komerční banka of the Q3 2023, where I will, together with my colleagues from the executive management, lead you through the presentation, and will be glad to answer your questions at the end of the presentation. We can move to the first page, which is representing the fact that Komerční banka remains one of the main and very solid pillars of Czech economy, when providing the necessary financing for both the households and corporate clients. The overall loans were increased by 2.7% on year-over-year basis. The dynamics between the previous quarter and this quarter were also positive by 1.7%.
We are back in the positive territory for gaining deposits from the market, which are the predominant source of our funding on year-over-year basis, +1.2%, and Q-over-Q, +2.8%. The assets under management outside the bank's balance sheet, which in our case is represented mainly by the solutions of Amundi [crosstalk] or our,
Our private banking, life insurance and, pension schemes, are growing by very sympathetic, almost 15%, quarter-over-quarter, +2.2%. Overall, the loan to deposits ratio is in very safe territory of 79.3%. The liquidity coverage ratio, almost 160%. We are sitting on a more than comfortable pile of capital of 20.2%. You may remember that, almost entirely composed from core tier one, and, which came as a little surprise, probably on this quarter to you. And thanks to very high quality of our assets, we were in the position to release provisions at the level of 16 basis points.
The nine months of 2023 led us to CZK 12.4 billion net income, with the ROE at the level of 13.5%, and the cost to income ratio at 48.2%. Next page, please. You may remember that yesterday, Czech National Bank decided to keep the short-term rate at the existing level of 7%. It means that the board of the CNB is sending the signal that they are very cautious in closing the chapter of fighting against the inflation.
And we do remain together with our macroeconomic team pretty confident that potentially the drop of the rates might come early in 2024, if not at the end of 2023. The GDP was down by 0.3% in Q3 2023, based on recently released results by Statistical Office of Czech Republic. Our popular indicator of Czech economy and one of the main representatives of export, which is car production, grew by almost 12%, 12% on a year-over-year basis. The contribution of exports in general were positive on a year-over-year basis, even though negative in quarter-over-quarter.
Nonetheless, the main weakness of the current performance of Czech economy is stemming from weak households consumption and by delayed or unrealized investment decisions for this period of time. One of the long-term diseases of this economy, which is tight dried-up labor market, remains still the reality unfortunately. The consumer price inflation is at almost 7% on a year-over-year basis. Next point, please. Business performance. Let's have a look on loans. We continued our strong delivery and strong contribution into the needs of Czech economy on both main segments, the retail as well as the corporate clientele. The overall loan book grew by 2.7% year-over-year, and 1.7% quarter-over-quarter.
You may see that, the housing loans and mortgage loans remains pretty lively. Consumer loans grew by 6.9% for commercial, and the businesses and other loans grew by 1.4%. We are happy that the mortgages are bouncing back to some extent, but very we are, we remain very realistic about growing faster, mainly due to the level of interest rates. Group business and corporate and other loans grew pretty nicely by one, by 1.4%. There was pretty good performance of our leasing company as the equipment finance, whereas the corporate loans resulted to 1.1% growth, and the small businesses remained, remained stable.
Again, loans to deposits at 79.3%. Liquidity coverage ratio at 157.7%. The consumer lending is growing very fast in the field of end-to-end digital sales. Mainly thanks to the presentation and the launch of our new digital bank back in April. We will come back to it at the end of our presentation. Next page, please. Deposits +1.2%. Assets under management outside the bank 14.7% year-over-year. Let's focus on this category for one minute more.
The mutual funds, i.e., Amundi plus private banking, in our case, grew by 32.5% on, whereas the life insurance reserves were slightly down by 1.2%. The pension scheme grew by 2% almost, and partly impacted by the debates, which were held at the level of political decisions in the context or in the frame of so-called stabilization package, which was adopted by Czech government and Czech parliament recently. When we focus a little bit on the group deposits, they are growing in the field of business clients by almost 4%. They are slightly down on individual deposits, the same on building saving.
Building savings is also going through pretty transformative time after the cabinet and the parliament adopted a new law on building savings companies. When we see the composition of growth and drops inside the composition of accounts, the current accounts are down by 11.7%, whereas the term deposits and savings accounts are growing by more than 25%, which is not a surprising tendency, obviously. Next page, please. Next page is the page of our Chief Financial Officer, Jiří Šperl, and I am handing over to you, Jiří. Thank you.
Thank you, Jan. Good afternoon, everyone. Indeed, on a year-to-date basis, now I'm commenting the left upper chart, waterfall chart. There are two categories deducting from the bottom line. It is visualized in red. It is NII and OpEx. On the positive side, cost of risk is changing the picture completely, and Jiří will comment on that later on. All in all, the net income after tax is at the level of CZK 12.4 billion, i.e., roughly 5% lower year-over-year.
From the quarterly perspective, that's right, upper chart, we are also reporting a bit lower results by roughly CZK 250 million, mainly due to lower result of the financial operations category, and I will comment on that a bit in more detail later. This still leads to very sound profitability indicators as shown on the left bottom part of the slide. For example, ROE is at the level of 15.5%. I'm using IFRS adjusted figures. Let's move to the balance sheet, please. In terms of balance sheet, there is a visible and a very dynamic growth on year-to-date basis, almost 16%.
On more comparable perspective, i.e., year-over-year, the growth is lower. It is slightly above 1%. For the first time, after some time, and Jan was touching that, deposits were contributing slightly positive. But still, the main driver is a senior non-preferred debt or loan growing year-on-year by almost CZK 33 billion That's visualized by the brown color in the liabilities part of the slide. On the asset side, the growth is driven solely by the client loans, while both repo and Czech govies are staying more or less flattish on a year-over-year perspective. Let's move to the capital, please, which is next slide. Yes.
It remains very strong at 20.2%, and it even further increased quarter-over-quarter by roughly almost 20 basis points. Not surprisingly, mainly influenced by the profit generated in Q3, while the consumption of the capital via increase of risk-weighted assets was limited. On top of that, the capital requirements decreased by 50 basis points as of October the first this year. As CNB decreased the countercyclical buffer, it was already announced roughly one year ago, so no surprise for us. Which means that as of now, as of October first and later, the capital adequacy is above the regulatory minimum by a very strong 280 basis points.
In terms of SNP senior non-preferred loans, we didn't conclude any during Q3 this year, but going to do that in Q4 to be fully compliant with the regulation. Let's move to revenues, and let's start with net interest income. It went significantly down in nine months 2023 by roughly 10%. The main reason here is clearly on deposit side, declining by 14% year-on-year. As mentioned, I think already three months ago, last year, we were still benefiting from the rising of the interest rate cycle and also delaying our pricing of the deposits. Now, we do not benefit from that anymore.
The rates and mainly short-term are stable already more than one year, and long-term are already in a declining trend. On top of that, currently, we are already fully competitive in terms of pricing of deposits, at least versus tier one banks. And having said this, this on one hand side stopped the trend of declining of the deposits, as commented by Jan, but at the same time, increased slightly our cost of funds. So this was a year-on-year perspective. Anyway, more important for me is the quarterly evolution. And here, it's positive to see that Q3 NII is growing the second quarter in a row. Not significantly, but the direction is clear.
The main driver of the growth here from this quarterly perspective is coming from the deposits that are growing by almost CZK 300 million quarter-over-quarter, sorry, positively influenced mainly by the volumes. Loans trend in net interest income from loans remains the same, basically, i.e., slightly down. That's the blue part of the chart. The main reason is the continuing slight erosion on spreads with one exception, and the exception is related to mortgage loans where we are reporting kind of flattish, flattish margins on mortgage loans already third quarter in a row. Net interest margin, that's left upper chart, reported a slight decline quarter-over-quarter.
It is by three basis points. And here the main reason is due to the loans spread. That's about net interest income. Let's continue with the fees and commissions. They were growing, I would say, nicely. So year-on-year, it is plus 3.4% or 3.5%. And again, it is the growth third quarter in a row. The main driver are traditionally the fees coming from cross-sell growing by 7% and following the dynamic new sales of the non-bank assets under management mainly mutual funds, as already commented by Jan.
For Q4, we are expecting seasonally higher result, and as a consequence, we are sticking basically to our full year guidance at mid-single digit. The last chapter on the top line are the financial markets. So they are down quarter-over-quarter, relatively significantly to the level of CZK 775 million. Let's look at the upper chart, and that's mainly due to the weak capital markets results, reflecting slower real economy, weak confidence levels, and also lower volatility, both of FX and interest rates. As always, we are reminding here at this slide, that this is kind of by definition, one of the most volatile income category.
To say this is the kind of confirmation of this statement, after two super successful quarters, as could be seen on the bottom right chart, when we generated more than CZK 1 billion, there is kind of a correction. On the positive side here, this correction was partially offset by the net FX gains from the structural book, reflecting mainly the seasonality of the traveling transaction activity, and also partially adjusted spreads. Next slide is covering OpEx. So growing by 7.7% on year-to-date basis, mainly driven by the staff costs +9%.
Just to say, this is clearly influenced by the fact that, due to the super high inflation last year, the bank increased extraordinarily the salaries roughly one year ago, as of November the first. So this is kind of the base effect. In terms of G&A, it's growing by 7%, and here it basically goes across the board, naturally, and without any surprise influence, influenced mainly by the high inflation, Resolution Fund . But the year has been done in first half of the year, so no changes here. And depreciation is going also up relatively significantly, so it's like a double digit, 11%. But here the reason is different than to G&A, and it's reflecting the activation of the investments in digital transformation.
In terms of cost-income ratio, and I'm commenting if it linearize, because it makes more sense for me. So it is on year-to-date basis at the level of 47.7%. So it is above the one year ago, above last year. On the other hand, just to remind, last year was really extraordinary, extraordinarily successful and the record year. If you compare, for example, to a year ago, I mean, 2021, cost income ratio is even better. At that time, we are fluctuating around 50%. So this is GOI, and now it's my pleasure to pass over to Didier.
Thank you, Jiří. Good afternoon, everyone. So, I will give you a brief overview of the evolution of our asset quality and credit risk profile during the third quarter. And in fact, what we've seen is the same key features, two key features, as the one we already commented during the first two quarters of 2023. Namely, the first one relates to non-defaulted exposure and is about a continued low migration between the S1 and S2 asset classes. This low migration dynamic, having a net zero impact on the quality structure of our loan book.
To be a little bit more precise, in fact, the level of migration flows was, again, below CZK 10 billion, both ways, from S1 to S2 and from S2 to S1, which compares to a total of CZK 800 billion, which is the total exposure, S1 and S2. This low migration dynamics was mostly recorded on, as expected on our retail segment. The second key feature, also not new, is the low default intensity, with a migration from S2 to S3 or NPL at net zero impact on the quality structure of our loan portfolio, and with very low volumes of flows between those two asset classes, defaulted and non-defaulted.
Translated into a default rate, this second feature gave us the following picture. The decreasing trend for the corporate segment since the first quarter of 2022 was further confirmed, which means that our default rate for the corporate portfolio continued to be at a historically low level. At the same time, we recorded some moderate increases on the retail side, but still below the pre-COVID levels for the small business and mortgage loan portfolios. While for the consumer finance portfolio, we reached levels that are slightly above the pre-COVID level. So these two key trends translated, as you can see on this slide, into a very stable S2 ratios and S3 ratios, NPL ratios, respectively, at 13% and 2%.
The same applies to our provision coverage, recorded at 0.6% for non-defaulted exposure and 50% for the defaulted exposure, so very much in line with the levels of the previous quarters. Now, going to the cost of risk overview. As Jan mentioned earlier, in the third quarter, we booked a level of net releases that was lower than in the previous two quarters for CZK 138 million, or 16 basis point on a year-to-date basis. This level of net releases is, as I just said, substantially lower than the one booked in the first semester at roughly CZK 500 million per quarter.
Overall, this net release pattern since the beginning of the year is mainly driven by first, strong level of recovery performance recorded on our defaulted corporate exposures. And second, as I just mentioned, by the exceptionally low level of default rates for both our mortgage and corporate exposures. You have in front of you the view by segment, and I will start with the corporate segment. So we booked roughly CZK 200 million in net releases on the corporate portfolio, and here there are two components. In fact, the first one is CZK 270 million in net releases from the defaulted portfolio, concentrated on 6 client situations, so, as in the past.
This was partially offset by CZK 70 million in net creation from the non-defaulted corporate portfolio, and this amount was recorded on three client situations. So again, not a sign of portfolio deterioration. Then this was also partially or residually offset by some very small releases coming from our IFRS 9 reserves. The retail segment generated a level of CZK 150 or near CZK 150 million crown in net provision creations. And this is the simple reflection of the marginal increase in default rate, which as I just mentioned earlier. There are two additional side notes or comments to be made.
One is this near CZK 80 million, which was recorded as a one-off recovery on a legacy situation, which was finally closed after more than 20 years of legal proceedings and successfully closed. The last point to be mentioned is that we decided to freeze our inflation reserves, both for the corporate and the retail segment, until the end of 2024. This as a simple measure of precaution due to the uncertainty of the macroeconomic environment. Now I will finish before handing back to Jiří, with the adjustment of our year-end guidance for the cost of risk. We issued back at the beginning of August a level of zero to 10 basis points +10 basis points gross creation, net creation.
We have adjusted this down to a level at around zero, and for the full year, obviously. This zero level is, in fact, being driven by three main elements. The first one is that we still expect a few net recoveries coming from our corporate defaulted portfolio.... This trend of net recoveries that we booked in the recent quarters, being expected to come to an end in 2023, so at the end of this year. The second element is, as I mentioned before, some continued lower than expected level of our default rate, especially for the mortgage and the corporate portfolios. These two portfolios covering roughly or approximately 75% of our total loan book.
A third element is just some reserve for possible isolated jumbo default situations that could come from our corporate loan portfolios. On this, I will now hand over back to Jiří Šperl, who will complete the outlook overview for 2023. Thank you.
Yeah, sure. Thanks, Didier. Generally, we are confirming the three months old outlook with a couple of adjustments. In macro, it's a slight downgrade of the GDP growth this year, I mean, from +0.1% to -0.3%. In terms of rates, repo rate stays at 7% per annum, so no change, no changes. Banking market growth, there are no changes neither. What I mean is the loans mid-single digit, and the deposits mid to high single digit.
In terms of KB business outlook, we are slightly downgrading the growth of the loans from mid-single to low to mid-single digit, mainly the due and mainly in the area of the CIB corporate loans. And there are no changes in deposits, i.e., growing by mid-single digit on a full year basis. Now, KB financial outlook. So here, we have to downgrade a bit as well from low to mid single digit to mid single digit drop or down compared to 2022 levels.
And basically, there are two main reasons behind the first one, and I was mentioning already during NII chapter, is kind of slowdown of the corporate loans. And the other one, even more material, is related to the changes or canceling of the elimination of mandatory minimum reserves that are deducting or cutting or having impact in our NII at the level of CZK 120 million per month. It is not small impact. We even issued the regulatory information at that time. So that's the main two reasons why we are downgrading the revenue guidance.
In terms of OpEx, it is gonna remain under tight control, so here we are confirming the guidance, i.e., high single digit. And cost of risk was already commented by Didier. So last sentence, in terms of potential risks to the outlook, we are not changing at all. So, that's probably for this slide. So, all from me, returning it back to Jan.
All right. So let's spend last couple of minutes on the strategy and its implementation. Here at page number 24, you see the initial purpose, vision, purpose and vision statements, as well as the main pillars around which we are building our story, including the main company objectives. We can move to next page. Here, we have the first set of the company objectives and key results. I will just pick up the main ones, which I feel are probably the most important. We have launched our new retail bank under the name of KB +, and started migration of clients together with the onboarding of new clients.
Currently, we are growing above 70,000 users, learning and improving the pace and composition of migrations, and working hard on adding new products into this solution. Let me remind that the design and logic of the architecture is the same for mobile application, internet banking, as well as our working environment for our bankers in branches. We are fully on T24 new core banking system provided by Temenos. We have on new TSYS Prime payment and card platform, which is fully operational. Next objective I would like to mention here is the digitization of our service and sales.
We are growing, we are growing pretty nicely by 11 percentage points in total digital sales ratio, and the KB+ plays a positive role in it as, as well. Let me also from this particular page pick up the One Mortgage Factory. As you may remember, we are moving all our customer journey related to housing, which in our case next to the mortgages, is represented also by housing loans and housing savings of Modrá pyramida building savings company under one roof. And we want to achieve a certain level of synergy, certain level of optimizations, et c. We are almost done on the technological part.
It became live a week ago, and we are preparing a large migration exercise for the first quarter of or second quarter of next year. Next page. Let me say that we are making pretty, pretty large steps forward in everything what is related to ESG, Scope 1, Scope 2, and Scope 3. In Scope 1, we are down by 44, 44% in with our own emissions. Oh, sorry, Scope 1 and 2. Compared to 2019, we are increasing and improving our level of data collection and reporting on the side of Pillar 3.
We started to monitor the loans which are ESG compliant, and they are pretty dynamically growing by almost 33%, and the portion in our loan book is currently exceeding CZK 53 billion. We are making our steps up also in all the measured international ratings by MSCI, by SNP Global, or FTSE, FTSE4Good. We have finalized the existing stage of electrifying our car fleet. So currently we are running 211 battery electric vehicles, which is probably the largest in the country. Let me remind that it's not only for job services, but also for private usage of our employees.
As far as the operational efficiency is concerned, we are constantly and very systematically working on lowering the number of people working in the bank, targeting to 5,500 people in 2025. We are also very successfully implementing the program of reducing number of branches, so they are down by 130%, almost 40% compared with 2019 to approximately 212, if I remember well, and focusing the number of 200 in 2025. In the field of operational efficiency, let me remind, we have signed contracts with other banks who are sharing the ATM infrastructure network.
So, we have created the largest fleet of ATMs, exceeding 2,000 machines in the country. We also continue working on the so-called One Group project, where the subsidiaries are outsourcing their support functions to Komerční banka. We are finished with factoring KB, almost done with KB, Penzijní pension society, and in very, like, developed stage with Modrá pyramida building saving company. We can go to next page. And I would like just to bring your attention to the targeted NPS external, so clients, NPS internal, so people, where we are on good development in the field of individual clients.
Let's say pretty unchanged, or, or slightly improved in the field of small businesses, and still waiting for the relevant data as far as mid-sized corporations and large corporates are concerned. Looking forward to next stages where we believe that we will be, we will be growing to the targeted 50 positive points. The bank clients, 2 million targeted clients, on standalone for the bank. Here we are growing nicely, but not fast enough. Let me remind that part of our story is that we would like to grow the portfolio also by inorganic way, which is, which has not been happening yet.
We are not currently working on any transaction which would create the good expectation here that we will be quickly at 2 million. So we are doing our best in the job of onboarding new clients to KB+, and believing that we will be as close as it gets to 2 million in 2025. I have already commented bank branches, I have already commented employees. You can see the tendency or the development here, which is going the right direction. Employees' engagement, we are in the middle of gathering data from a large, I would say, worldwide SG employees barometer. The last, which was made locally, is at 78 positive points.
Let's see where we will be landed with the existing one. ESG assessment, I have already mentioned, are slowly but steadily growing up to the targeted numbers. Last page related to the implementation of strategy plan, I would like to ask Jiří Šperl for his comments here.
Yes, sure. Well, the financial ambition of KB remains generally intact. Anyway, due to some unexpected circumstances, we have to adjust slightly the ROE and the cost-income ratio targets. Now, I'm referring to the table at the very bottom of this slide. Originally, we were communicating cost-income ratio below 40%, and ROE above 15% in 2025. Newly, what we are saying is that the targeted cost-income ratio is only around 40, and ROE around 15, right? The main reasons are relatively the recent ones, and I would say you know them. So first, let me list at least the most important out of them. So first one, it's cancelling of the obligatory reserves remuneration.
We already touched during the NII, but the impact is really significant. Of course, it is converging or it is dependent on the level of the market interest rates. But for illustration, the impact in 2024 is expected at the level of CZK 1.2 billion. That's first. The second, it's impact of the austerity package approved by the parliament recently. It is still going through the Senate, but it is expected that it's going to be approved, definitely. And here, there are main two impacts.
First one, and already communicated three months ago, corporate income tax increase by 2 percentage points, and generating a negative impact to the bottom line at the level of CZK 400 million. And also, the taxation of the employee benefits, which is kind of adding into the cost side another CZK 100 million. And third to mention is the fact that that savings from decommissioning of some components of the legacy banking infrastructure will be delayed by one year. Originally, it was expected to complete by the end of 2025, and but it will happen still as as late as in 2026.
So that's in a nutshell about the update of financial targets, and now let me pass word to you back. Thank you.
So probably this is the end of the presentation. Jakub, you can ask our guests.
Indeed. Yes, yes. Thank you very much, ladies and gentlemen. So this has concluded the presentation part of this meeting. Let me remind you that this meeting is being recorded. We will be happy to answer your questions now. If you have a question, please click on the icon with raised hand at the upper part of your screen, and then please wait to be called. If you are connected via telephone, then I will invite you to ask your questions later. Thank you. So we will now wait for your questions. All right, so our first question comes from the line of Mehmet Sevim from J.P. Morgan. Mehmet, please go ahead.
Good afternoon. Thanks so much for the presentation. I'd like to understand whether there is anything you can do on the NII front to maybe get back some of the negative impact that will come from the reserve requirement or minimum reserve remuneration cancellation in 2024. And some of the other banks are talking about some potential efforts there. Anything that you can highlight on this front, that would be very helpful. And maybe just more general, how should we think about full year 2024 NII now? And I mean, obviously, you mentioned the CZK 1.2 billion impact coming from that, but I'm thinking about loan growth and maybe also potential rate normalization in 2024, what would be your views for that? And then secondly, one question on cost of risk.
So the zero basis points guidance would now imply about 50 basis points of quarterly cost of risk in the fourth quarter. And Didier mentioned some of the drivers there, which make total sense. But what I'd like to understand is whether some of those could spill into the new year and essentially, you know, basically, for example, the isolated corporate defaults, et cetera, and whether then we could see some higher cost of risk in the new year as well, or you would expect a more normalized level there. And finally, on dividends, if I may. Obviously, you're accruing your normal dividend payout ratio level so far, but capital is quite strong, and we've seen some decrease in the countercyclical buffers recently as well.
So do you think there is any room to maybe surprise the market at some point with a higher capital payout, or how do you think in general about this? I mean, you'll remember last year, you had announced that, COVID- very excited about it, so I'm just trying to understand what-
Okay.
How you're thinking about and distribution in general? Thank you very much.
Yes. So there is, like, four or five questions, so, I will go one by one, then pass over probably to Didier. First question was about, about the impacts, of, minimum obligatory reserves and, how to mitigate the impact as, best as possible. Of course, that's something, what, we are doing. We are trying to do, our, best, because it is actually a, a cost directly allocated to the, to the deposits, eh? So, we already started to, charge at least, internally, internally, the, the, the deposits. And, in upcoming weeks, this is gonna be, kind of transposed also to the, client rates. Of course, we are going to start, mainly with the, with the corporate, corporate clients, and retail will come, later.
But, it is important to say that, you know, it very much depends, how also the competition will, behave. Because, if you do that just, just ourself, simply we will not be, competitive, in terms of the, of the pricing. This is one point, and the other point is, you know, the impact is, calculated on the- in a simplified way, on a, a full deposit base, eh? But, from the presentation, you can see that, that more than half of our, deposits are current accounts. And, to, allocate these costs to the rates, which are already at zero, simply it is not possible, eh? So, so the space for maneuver is, is relatively limited. So that's, that's minimal obligatory reserves.
Now, I will touch the point related to the so mainly growth from perspective of 2025 can be changed. So, and... Yeah, so, it is still growing strategy, yeah? So, our expectation in terms of, for example, loan growth, is that the market is gonna, is gonna, grow by, let's say, mid-single digit in 2024 and 2025. And, we would like to gain at this market a bit market share in a bit different way, because so far, we are gaining mainly in the, in the corporate, corporate loans, starting from 2024, and partially already in 2023.
We are going to allocate really more equity to the retail loan production, mortgage loans, consumer loans, et cetera, and thus, to benefit from the completed retail transformation. So, mid-single digit, we should normally, or it is our ambition to grow a bit more. In terms of while business loans are basically gonna follow the market, so of course, we are not targeting a decline of the market shares, but not gain significantly, as was the case last, I don't know, two, three years. In terms of deposits, it's a bit similar story. So for 2024 and 2025, again, expecting mid-single digit of the market growth.
We grow again a bit faster. Again, here it should be covered more by individual deposits around the same reasons, like in the loans area. On top of that, the individual deposits are, of course, bringing higher margins than then for corporate corporate ones. Your question was also related to our expectation of the market interest rates. As one of rather exceptions on the market, we were guiding repo rate at 7%, as late or down for first cuts, as late as Q1 for next year, which was confirmed also yesterday by the decision of Central Bank.
So our guidance here is that next year the CNB is gonna cut the rates relatively quickly. And our expectation is that at the end of 2024 we will be already at 4%, and getting to the standard kind of through the cycle, normalized interest rate of CNB at 3%, starting from 2025 and beyond. So this is our assumption. But it also means that in 2024 we are still expecting that the yield curve will be declining. So that's probably all from first set of questions.
The other one was probably back to the year, and Jan or myself are going to comment put in the dividends and capital management in more general way. Thank you. Didier, please.
So the, your question on the, on the cost of risk. In fact, I, I will probably start with just reminding ourselves with this, through the cycle cost of risk forecast, which we have, which you could call the, normalized cost of risk, which is in the range of 20 to 25 basis point. And this is a through the cycle measure, so it's not really something that you could directly consider and apply for 2024, for which I, I'm not going to volunteer with the guidance at this point in time. Now, what is sure when we look at 2024, there are a few points to keep in mind.
The first one is more in form of a question: Are we going to continue to see this exceptionally low default rate, especially for the mortgage and the corporate portfolios? So that's a question, and that's an important variable for this normalization of cost of risk next year. The second one, which is also important to keep in mind, is that our estimate today is that our potential for net reversals of provision on the defaulted corporate exposure as this potential has come to an end or is in 2024, is going to be near zero. And maybe now going back to 2023 and the fourth quarter of 2023, yes, we've built or we have put a bit of reserve aside for some possible default.
Here, in fact, the comment I would be making is that you probably remember that we spent the last to to two years in proactive monitoring. Two years ago, we had probably described to you what we used to call our Russia portfolio. Then we had a second portfolio under specific monitoring, which was focused on the energy sector. And this is, you know, the simple outcome of this proactive management. I would not comment in terms of possible spillover of this into 2024. In fact, this reserve that we have put aside is precisely targeted, in fact. And when looking at 2024, I would again go back to the question: What is going to be the evolution of default rate?
Is it going to continue to be abnormally low or not? Is ... This is the question, and this is not an easy one, and this is why I refer to this, you know, through-the-cycle forecasted cost of risk, which we have anywhere between 20 and 25 basis points. And I will stop here and hand over to Jiří.
Yes. Even though we see together with you the pile of capital which is appearing in our balance sheet, we don't have any new guidance related to dividend payments. So we continue our dialogue with the Czech National Bank on their requirements. We do have pretty lively dialogue as Czech Banking Association, also with the Czech National Bank, on their decision related to topic which you mentioned in the first part of your questions, which is the cancellation of remuneration on the mandatory reserves. So should we have any news, we will come back to the market. So for the time being, it is the previous guidance on distribution of profit, which remains in place. Thank you.
Thank you very much. That's all very helpful. Thank you.
Thank you. And now I would like to ask Máté Nemes from UBS to ask his question. Máté, please.
Yes, thank you very much for the presentation and taking my questions. I have three questions, please. The first one, I wanted to go back on NII. If I heard you correctly, Jiří, you were saying that the market is expected to grow mid-single digits in retail, and we'll see on corporate. But in retail, clearly, you have the ambition to do better. But that suggests perhaps at least a mid- to high single-digit loan growth in 2024. And if I've put that together with the expected MRR headwinds, that suggests very little or any gearing into the rate cuts. I think you said you expect about 300 basis point next year. Could you give us a sense whether this thinking is correct?
If so, what did you do on the treasury side, on your swap portfolio, to mitigate the impact from lower rates to such a large extent? Have you seen a significant increase in duration? Anything you can share on that would be helpful. The second question is on the 2025 cost income ratio target of around 40%. In order to get there, and taking into account you're guiding for roughly flat costs in 2025 versus 2023, I think you would need to have about CZK 7 billion higher revenues, which would suggest 9% to 10% annual revenue growth. To what extent do you expect that coming from inorganic growth, i.e., from acquisitions?
What is the organic component there? Lastly, on KB+, I think Jan mentioned 78,000 clients now on KB+. I was just wondering if you could share, you know, perhaps the most significant positive surprises. What have you witnessed in terms of behavior of those clients? Can you share anything in terms of client activity levels or how your staff interacts with clients through KB+? Thank you.
Okay, so let me start. First question was basically about NII sensitivity in the expected decline of the market interest rates, mainly in the short short end. Generally, Our structural position, hedged structural position didn't change compared to the earnings call three months ago. Having said it, I'm confirming that KB is not exposed to the moves of the market rates anymore. We benefited from the significant increase during the last last two years. At that time, the sensitivity was positive in front of of the increase of the market rates, which which happened.
Currently, we are more or less neutral, which, on one hand side, is a bit, a bit hitting our current, current net interest income, because we are concluding receive longer receive fixed swaps than we are, we are paying. But at the same time, this is, let's say, somehow immunizing us from the expected decrease of the market interest rates. In terms of 2025, cost income ratio, as mentioned, we are guiding around 40%, and, you know, the impact or contribution of potential M&A is not a part of this simulation.
2025 is coming, so we are not saying M&A is not coming in upcoming 12 months, but end of 2025 is a year relatively very, very soon. So to answer your question, there are no revenues related to M&A in our plan now. And the third question was related to KB+. I didn't get it exactly, but that's-
I think it will be Miroslav , Miroslav Hiršl answering here, the head of retail. Thank you.
Yes, thank you, and with pleasure. The question went to a few elements, the first one being what we like about it, and what are the reactions of clients, and what are the first lessons learned. So I'll start on those positive points. The first one, the onboarding process seems to work quite well. This is the first thing that we wanted to be sure about, and I'm pleased to say that almost one half of the clients is being onboarded through online customer journey, coming to the bank, being acquired through mobile without any human assistance, which I believe is an excellent achievement.
The second thing we needed to get was migration. As you remember, we are building a new bank parallel to the old one, and our intention is to move the business, the whole client portfolio, from the old platforms to the new solution. And this is running. The technical reliability of the migration is 99% plus, which is, again, quite an achievement. And we started on very small numbers per day. Now we are in units of thousands, yeah, in units of thousands per day, and we aim to be at around 5,000 clients per night, which is the target speed, and it seems to be very much achievable, which was proven just a day or two ago. So this is the second lesson learned. The third one, new clients like it a lot.
When somebody becomes a client and on, is onboarded directly to KB +, so the satisfaction score is very, very high. What is less positive is that when you migrate the old client to the new platform, the first reactions is, but probably expected one, "Okay, so there's a change. I have to adjust myself, get used to the new things." But we see that this perception is improving in time, so if you take a vintage of clients migrated in particular months, and you keep monitoring their satisfaction over for another 3-6 months, you see the positive trend, and this is the evidence that the job is done quite well. When you have said above 70,000 clients, since this morning, it's by 2,000 more, so it's really moving forward.
We believe that the original ambition to get to 100,000 users by Christmas will be achieved much, much sooner. I would say, give us two to three weeks, and we are there, so we are on the track at the moment.
Maybe I will just add to both elements of the answers which were mentioned by Jiří and by Miroslav afterwards. When speaking about the proportion of future revenues coming from inorganic growth, you can also extend the question to number of clients. We did calculate with certain inorganic growth, also with the number of clients to achieve the 2 million. If there is no transaction until 2025, we will continue doing our best in onboarding new clients and to get our number of clients for Komerční banka as close as it gets to 2 million. So this is also, let's say, related to your question of part of the revenue stemming from potential inorganic growth.
When Miroslav is speaking about, and now to the first observations stemming from the first users, new users of the KB+, Miroslav is very humble to say that there is, like, good part of it, which are the newcomers, who likes it, and the migrated clients who are less in comfort because they need to make one proactive step in order to enter the new world of KB+. Which is very much understandable, and this is what we expected. But the fact that we are migrating those clients in as a business migration, so we need to have an interaction either through digital channel or through the distribution channel or through the banker on the phone. We are also trying to use this opportunity to cross-sell and upsell the existing clients.
Counting with the fact that newcomers are super happy with what they see and discover with KB+, we believe will create a positive traction on the side of numbers and on the side of growing Net Promoter Score. Thank you.
Thank you very much. That's very helpful.
Thank you. The next question will be asked by Ahmed El- Saharty from Rohatyn Group. Ahmed, please, go ahead.
Thank you. Thank you, Jakub, and thank you, gentlemen, for taking my questions. My question is related to increasing your deposit base this quarter. I'm just trying to understand, is this a strategy to defend your market share and keep deposits from competition? Or is it more a strategy to gear your book towards a declining interest rate by parking in longer duration, which should obviously serve you well going forward once the cuts begin? And lastly, you mentioned that your expected target for deposits is a 5% year-over-year increase by year-end, but you are up about 15% year-to-date, roughly. So does this mean you expect to shed away or return deposits to client in the fourth quarter? I just want to understand I got that right, and yeah, that's it for me.
Thank you, guys.
Well, I can take the question. So, I will start with the question number two, and of your expectation. You know, currently, we are growing plus, but at the same time, probably you could see on the deposit slide that, in 2022, there was significant drop of the deposits, not only for KB, but on the markets. It was because of... And I was explaining several times, shrinking the balance sheet due to Resolution Fund charge, but end of 2023 is the first year, when this is so important.
Because in 2024 the fund will be completely full, which means that end of 2023 balances will be important only for kind of running a charge to the Resolution Fund in 2025 or so. So that's why we believe that the drop in Q4 this year on deposit side, and generally on the balance sheets of the banks will be a bit more. Now to the, let's say, longer term perspectives, the question was that we are expecting to, well, so now I'm a bit lost. The question was why we are increasing deposits.
It is easy because last year we lost a bit because we somehow delayed a pricing of the KB's deposits. Simply this year, we would like to regain it back. Don't search behind anything else.
No, I mean, again, let me clarify that, I guess. Right now, the market rates is still competitive, right? You're still seeing heavy competition on the deposit side. And one might argue that next year it will be a little bit easier and less expensive to gather these deposits. So why, you know, run towards gathering the deposits this quarter or maybe next quarter, whereas you can sort of intensify your competition and once the interest rate come down and regain that market share? So one might say you're sort of gearing up the book towards longer duration by hedging through swaps. And yeah, so that's what I'm assuming, but I just wanna make sure that that's the case.
If not, you know, it might be a little bit early to come into the competition this late.
Yeah, but, well, at the same time, we are not buying market shares. Our deposits pricing is at the level of the competition, so, that's, that's, our current, current, strategy. And of course, once, once market interest rates are gonna go, down, we will, react, accordingly. On the other hand, you know, the, the pass-through rates, for example, on saving accounts, will not be as fast as, you would imagine, because for, for the time being, despite the, the, the, the rate, offering, offered to the clients is, whatever, between 5%-6%. These rates are applicable and, valid only for a relatively small part of, of, saving accounts.
Of course, once market rates go down by 2 percentage points, the impact into cost of specifically savings accounts will not be equal.
Okay, got it. Thank you so much. Sean?
Thank you. Now let me ask David Chic from Autonomous Research to ask his question. David, can you hear us?
We cannot translate this language. Can you repeat, please?
There seems to be an issue. Let's wait a second. Okay, in the meantime, please, if you have a question and you are not in the Teams application, you can unmute yourself and ask your question directly via, via telephone. We have also received a new question coming from Kamil Stolarski from Santander. So, Kamil, please, the floor is yours.
Hi. Hi, thank you for taking my question. Two questions from my side. I'm thinking about NIM, because I remember that, for example, a few years ago, NIM at Komerční was 2.6. Just before COVID, it was 2.2, now it's 1.9. And if I compare this to trends that I see for Polish banks, or to Hungary, it's like the direction is so much different. And I was wondering, like, in the medium term, do you see, like, a chances for the NIM to normalize, at the levels that Komerční was historically reporting? So like, we know what went wrong.
These deposits, it's most often attributed to deposits, but I wonder what's the outlook and the chances for normalization, and if you are happy with the current level of net interest margin. Second question was about the cost, operating cost in 2025, because at least in my models, I'm assuming that the 2025 costs should be lower than in 2023, because, you know, of this headcount reduction, there's still some a few branches for the closures. And because of the fact that today you are having this additional cost of the transformation, which should be gone.
I was wondering whether your guidance for 2025 costs being at the level of 2023 is just cautious, or it's this is what the base scenario that we should be assuming. So these two questions.
So it's likely for me. So first one was about NIM midterm and some kind of variations versus the Polish market. You were mentioning 2.4 pre-COVID, I think... Well, but it was kind of, no, but the 2.4 was the-
No, no, I was mentioning 2.1 to 2.2 pre-COVID, and then 2.4 to 2.6-
Yeah.
seven, 10 years ago.
2.4% margin was in 2022. Again, there was a lot of reasons why it jumped relatively significantly. I was mentioning some of them already today, so delaying of the pricing of the deposits. We were positive to the increase of the market interest rates, et cetera, et cetera. So we had 2.4%, from my perspective, was not kind of sustainable anymore. You can see that even in the margins evolution this year, so we are dropping to 2% from known reasons.
If you have a look beyond 2023, of course, now what is not helping at all is or are measures by CNB in canceling the elimination of the minimum obligatory reserves. But the guidance for the NIM for 2024 would be probably at the level of 2023 with a rather risk of a slight decline. Because already the impact of minimum obligatory reserves is, I don't know, 6 or 7 basis points, so it is not negligible.
At the same time, this should start to be offset by the positive impact of the change of the, let's say, non-paid over paid deposits ratio. I think I was guiding three months ago that we are expecting that this ratio is gonna bottom in Q4, so we still believe that this is gonna be the case. So, let's say progressively, this is going to bring the positive impact also into our NII, partially in 2024, but almost fully in 2025.
So that's why we believe that in 2025 our NIM could be not at 2.2 to 2.4 as we achieved last year, but between 2.1 and this level.
Thank you. And on 2025 cost?
And yes, this was the other one. The guidance is to have it basically flat-ish. You know, your expectation or you would expect that we would have even lower costs, but we do not see that. I was mentioning one of the reasons, and that's the fact that decommissioning of some components of our old stack is gonna be delayed. Of course, the Resolution Fund charges should help, but at the same time, still, there is some inflation, and there is significant increase of the depreciation because the acceleration of the assets coming from the digitization, et cetera.
So we do not see there further potential for a decrease of OpEx by 2025.
Okay. Thank you. Thanks for the help.
Thank you. In the meantime, David sent his question in writing, so probably for Jiří. If the management can comment on deposit betas, where they are now, and how you expect them to evolve from here, possibly splitting retail and corporate betas.
Well, thank you for this question. Actually, on top of my head, deposit betas for the time being are at roughly 65% for retail and much more for corporate. I remember the figure 85%. In terms of the outlook, I'm not in a position now to comment, but we can discuss offline, unless my colleagues do not want to compete me.
I'm just adding that these were betas for paid deposits, yeah.
Sure. Yeah.
Okay. So once again, if you wish to ask a question via telephone, please unmute yourself and ask your question directly. We will give you a few more moments to do that. Okay, so there seems to be a question coming from Marta Czajkowska-Bałdyga . So, Marta, please go on.
Yes. Hi, thank you for presentation. Can I just ask, you mentioned in the presentation potential upcoming catalysts, positive catalysts for the mortgage sector, in 2024. Can you comment on that?
In more general terms, the mortgages currently are growing, let's say, moderately and adequately to the needs of the clients. We are facing, and not exclusively as the only country in Europe, probably, the fact that, the affordability of new housing, especially for the young generation, is not the highest. And the main catalyst for 2024, highly probably will be the decreased rates, you know? So we have few more ideas at the level of Czech Banking Association, how to potentially like help the market up, even potentially with the help of the state. But it's so early stage of discussions, that it's not worth to mention any detail here. But the price will speak mainly, yeah.
If I may, to complement by one sentence, of course, interest rates and other, let's say, impulse could come, starting from January the 1st. By the way, it is part of, kind of, austerity package. The changes that are starting from January next year, the value of VAT for the construction works, is going to decrease from 15% to 12%. So this could help to, let's say, generate some accelerated demand after January next year as well.
Okay, thank you very much.
Thank you. Thank you, Marta. So we don't seem to have any further questions at the moment. So I'm handing back to Jan for a concluding remark.
Yeah. Thank you very much, everyone, for investing your time into our presentation. Thank you very much for very interesting questions and feedback you are giving us at these calls. We obviously remain available for any further questions you may have in between. We are looking forward to see you and to discuss with you at the occasion of the next quarter results presentation. Thank you very much, and I thank also to all my colleagues for preparing, organizing and answering, and presenting the paper. In the meantime, let me wish you a good afternoon and peaceful weekends. Thank you.
Thank you very much.
Bye to all.
The meeting has ended. You may now disconnect. Thanks a lot.
Thank you. Bye-bye.
Thank you. Bye.
Goodbye.