Morning. Good afternoon, ladies and gentlemen. Let me welcome you to the presentation of the results of Komerční banka for the first quarter of 2023. Today it is the 12th of May, 2023. 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, our Chief Financial Officer, and Didier Colin, Chief Risk Officer. We also have with us today Margus Simson, Chief Digitalization Officer, Jitka Haubová, Chief Operating Officer, Miroslav Hiršl, Head of Retail Banking, and David Formánek, Head of Corporate and Investment Banking. You will have opportunity to direct your questions to them as well later.
As usually, we will begin with the presentation of results, which will be then followed by a questions and answers session. During the presentation part, I would like to ask you to keep your microphones muted. We will keep all participants on listen-only mode. That's from me for the beginning. Now I would like to hand over to the Chief Executive Officer, Jan Juchelka. Thank you.
Hello. Let me also welcome you on behalf of the management team of Komerční banka at the occasion of presentation of consolidated results of Komerční banka Group for the first quarter of 2023. Before jumping on the concrete pages of the presentation, just let me say that the first quarter as for everyone in this industry was pretty interesting, framed by certain level of uncertainty, which was stemming from the various collapses of regional banks in the United States and the story of Credit Suisse.
I need to say that Czech market remained pretty immune, vis-à-vis those events, even though one should take into account the activity which was, let's say, framed by various gossips and reactions of clients which did not materialize in any substantial situation on the market. Czech banking market remained very strong also for the first quarter. And I will be happy together with my colleagues to lead you through our presentation and give you also a bit of flavor of how important it was for us from the perspective of implementation of our strategic plan. Welcome again, and we go to the pages.
The group net income totaled at the level of CZK 3.6 billion, which is by 1.4% higher than first quarter of 2022. ROE, I'm happy to say that we continue delivering double digit currently at the level of 11.6%. Thanks to a very strict cost policy, and we will come back to it in the part presented by Jiří Šperl. The cost-to-income ratio has landed at the level of 55.9%. We have continued our role in the Czech economy. As a universal bank, we continued financing our clients across the segments and across various industrial sectors.
In total, it was, it is represented by a solid growth of 5.1% on year-over-year comparison. Even though deposits are down by 3.5% year-over-year, we have recorded very strong rebound of deposit base by more than 6% for the first quarter compared with the last quarter of 2022. We are climbing back to our usual market shares also on the side of deposits. I am happy to say that Komerční banka is enjoying the trust of its clients as far as the deposits are concerned. Inside this, the same discipline, we are growing very, very quickly our base on assets under management outside the bank.
In our case it's mainly solutions of mutual funds made by Amundi or private banking sales or the production of insurance company Komerční pojišťovna and/or pension society of KB. Despite this dynamic growth of financing of Czech economy, we are keeping loans to deposits ratio in very comfortable level of 80.5%. The balance sheet is represented by liquidity coverage ratio at a level of 162%. Total capital ratio of 19.8%. Core Tier 1 is 19.2%. Cost of risk, which is probably also a positive message for the markets, went down by 21 basis points in the negative territory by 21 basis points, which is the result of excellent quality of our assets.
As a result of this, we proposed and supervisory board and general shareholders meeting approved the proposal of the board of directors for paying a dividend at a level of CZK 60.42 per share, which is keeping us in the corridor of 65% payout ratio from the results of 2022. We have new board members or let's say one new board member, Marie Doucet, as an independent director, and we have re-elected Petra Wendelová as a re-elected member of the supervisory board. Maybe we can move to next page.
In the first quarter, this is what I announced as an important milestone for us was the date of eighteenth of April, where Komerční banka introduced to the market its new platform. When speaking about platform, and we have Margus Simson around the table in case of your questions, we speak about brand new core banking system, the analytical layer above the core banking system, plus new mobile banking and internet banking application, and a new application also for our branches. That's probably from, let's say, technological point of view, the most important message. We have built a technologically new bank from scratch, and we have been starting migrating clients from the old to the new.
From clients' perspective, they are getting much more modern 24/7 online solution, either into their mobile phones or to their internet websites or to their favorite branch. Komerční banka is fulfilling and continuing fulfilling its strategic plan KB Change 2025. Visa recognized us as the leader in sustainability, and we were second time awarded as sustainable bank number one in Czech Republic. What is also good to know is that we concluded an agreement with BNP Paribas/Hello bank! Czech Republic, who is leaving the market, for exclusive proposal for their deposit clients, to be welcomed in Komerční banka. Here we expect inflow of thousands or potentially few tens of thousands of new clients for our retail. Next page, please.
When I spoke about implementation of the strategic plan, you see in front of you the main milestones of how we are building the bank from scratch, from minimum viable to minimum marketable retail bank, which will be followed by marketable corporate bank and followed by migration of both retail clients and corporate clients. If I'm not mistaken, now it's time for a short video.
Right. That was our fascinating video also. Now we can move on to the discussion of the macroeconomic context for the results once the Chief Executive Officer is back with us.
Can you hear me back?
Yes, we can hear you now. Yeah.
Please. Can you hear me now?
Yes.
Yes, we can. Hello. Can you hear me now? All right, great. I hope you enjoyed this short video. Can we put back the presentation, please? I'm sorry for the.
It is back now. You can comment on the macroeconomic context.
I don't see the presentation on the screen.
I think we do see it.
Yes, I can see it now. Sorry, I had to switch from one computer to the other. Probably we can continue with the macroeconomic environment. First of all, the GDP was growing by 0.1% quarter-over-quarter. It was slightly down on the year-over-year basis. What is good is the Czech economy, including the exports or mainly exports, were, let's say, continued in their contribution into the growth of the local economy. Labor market remains very tight. What is probably one of the most relevant, I would say, flaws in the economy nowadays is remaining, is the inflation remaining in high double-digit numbers.
It was in March, it was 15%. We hope and we see that the impulses for its further growth are probably disappearing. Based on the numbers presented yesterday, the inflation is, let's say, having short-shorter breath than before. As a result, Czech koruna remains very strong, which doesn't help the exports, but helps the imports, and mainly in energy and oil and gas, we are getting, let's say, more favorable impulses into the economy as far as inflation is concerned. Czech National Bank keeps the rates at 7%, we will see whether our macroeconomists' expectation and outlook about decreasing rates by June will be fulfilled later in this year.
We can move to next page, which is dedicated to financing. As I have already mentioned, the loans are up by 5.1%. Speaking about dynamics inside this growth, there is pretty strong and sharp increase of the part of loan book denominated in EUR. We are very much taking care of shielding the clients in front of potential risks stemming from the currency rates. We are, let's say, looking at their level of hedging in their concrete respective businesses.
Housing loans, in general, so in our case it's mortgages and loans originated by the building saving company, are bouncing back, slowly, but are somehow, let's say, somehow growing. What is more, I would say, what is more important is that all the categories, such as consumer loans for housing and businesses are growing in, let's say, a sympathetic single digit, sympathetic single digit level. Which in our case, being a universal bank, is, let's say, a good mixture of a good composition of the engines of our growth. Maybe we can move to the next page, which is dedicated to deposits.
As I have already mentioned, quarter-over-quarter, we are up by almost 7%, even though on year-over-year basis we are down by 3.5%, which is not a new element for you who are following quarterly reports of KB. I need to say that we are very happy with the almost 24% growth of assets under management in mutual funds, both Amundi for retail or private banking solutions for our private banking clients. Life insurance reserves are somehow lagging behind the expectations. Nonetheless, Czech people are also coming back for their long-term deposits in the form of pension savings. I will stop myself here and hand over the word to Jiří Šperl, our Chief Financial Officer. Thank you.
Thank you, Jan. Good afternoon, everyone. As mentioned by Jan, we are bringing a solid result, CZK 3.5 billion in Q1 this year. Slightly up year-over-year. On the other hand, the structure of the growth is more colorful than usual. That's what is exactly shown in the left upper chart. On positive side, I should probably mention the mainly excellent cost of risk. Year-over-year, it is better by CZK 710 million due to further improved asset quality of the bank, and the team will comment on that. On the other hand, there is also relatively material drop in NII year-over-year by roughly CZK 500 billion.
Also, OpEx is deducting from the bottom line slightly, roughly CZK 340 million. This is our somehow natural. The growth is only in relative terms, 5%, in the 15% inflation environment. I would say that the year-on-year impact of other categories is rather minor. Upper right chart is focusing on the evolution of the bottom line, it's only confirming what we are indicating already six months ago. What I mean is that Q2, Q3, and Q4 last year were kind of extraordinary quarters, when we are able to harvest and benefit from all what was possible. In a way, we front-loaded the positive impacts. Now in Q1 this year, we are getting back somehow to normal.
You can see both on upper chart, right upper chart and bottom chart, the clear correction down. I will comment on that in more detail later in my presentation. Thanks to a very positive result of cost of risk, the profitability indicators stayed at comparable levels like for full year 2022. Let me mention two of them, and I'm focusing on adjusted for IFRIC 21, so a linearized impact of resolution. ROE still at almost 14% level versus 14.4 for full year 2022. ROE 1.3 versus last year 1.4, relatively small variations. Let's move to the other slide, which should focus on the balance sheet. In terms of balance sheet, the group reported a significant growth quarter-over-quarter. It's almost 10%.
That is however linked to the year-end balance sheet optimization due to resolution I was mentioning. On year-over-year basis, the growth is rather moderate, and it's around 2.33%. On liability side, it is still driven by senior non-preferred debt or loan, if you wish, taken from Société Générale. It's a regulatory obligation. It is MREL related. Last year, we have taken EUR 1.5 billion. This year we need to take another roughly EUR 1.4 billion, and thus to be compliant with the regulatory obligation. In Q1, there were no new issuances. On asset side, I would say there are no surprises. Neither the funds are placed preferentially into the loans and the remaining liquidity surplus into Czech govies, growing relatively strongly by more than 14%.
The middle of that you can see in repo loans with the central bank, where we have recorded a decline -12.4%. Let's move to the capital slide. At the end of Q1, and then was I think already mentioning that the figure, the capital adequacy stays very strong. It is at 19.8%, i.e. in the upper part of our management buffer. That's even after all the dividends approved last year, extraordinary dividend and also by recent general meeting. Plus of course, we are accruing a dividend 65% from 2023's profit. That's nicely visualized in the bottom chart. In Q1, the adequacy increased by roughly 30 basis points.
That's basically mainly influenced by the new capital of generated, adjusted by the expected dividends, as I was mentioning. The impact of risk-weighted assets is in Q1, rather minor. Let me now focus on key accounting categories of the revenues and also of course. Please next slide. Well, NII, the biggest variation, it went down by 7.4% year-on-year. The main reason here for is clearly on deposit side, declining by 13% year-on-year. As indicated before last year, we were still benefiting from the different aspects like rising interest rates cycle, delaying of our pricing on deposit side. Naturally now we do not benefit from that anymore.
The rates, and let's distinguish short-term, are stable already almost one year, and long-term, even already started to decline five to 10 years. On top of that, currently we are already fully competitive in terms of pricing of deposit. If I'm saying fully competitive, I'm not saying we are the best on benchmarking to the tier one banks, because small banks are offering even more. Which on one hand side, stopped the trend of declining deposits, but at the same time increased our cost of funds. This is, of course, impacting this category as well. What is not helping either is a continuing shift of current accounts to pay deposits. Jan was mentioning pay deposits, I mean, basically time deposits and saving accounts.
There is also a slight decline of the net interest income coming from the loans, which is the blue part. It is -3% year-on-year, which is clearly a spread effect on a year-on-year basis. I'm talking now about the back book. The spreads are down basically across the board with one exception, which is large corporates, where we are still able to maintain these margins. Of course, all in all, this led to, and now I'm referring to left upper chart, to year-on-year decline of NIM, net interest margin, by 21 basis points from 2.22 to 2.01. I.e. slightly more than expected, and I will comment on the implication during the outlook. On the next slide, there should be fees and commissions.
They are growing moderately by 1.4% year-on-year with the transaction activity, activities trending up. It's mainly card payments case, which is growing year-on-year by 8%. There is a correction in the fees from gross. It's -3%, mainly due to lower year-on-year contribution from mutual and pension funds. There are also a bit lower fees from the specialized financial services, and here mainly due to the lower contribution from debt capital market services. Which is bringing me to financial operations. Next slide, please. Here, the net profit is down year-on-year by 7.5%, but we still treat it as a super strong result.
It's necessary to mention here that Q1 last year was kind of historical record. As can be seen from the bottom chart, we are only slightly below this record, and the bank is fully satisfied with this result. Year-on-year correction, slight correction is visible solely in the capital market gain, that's the red part of the chart. Again, it's rather base effect versus the record for Q1 last year. The good result is supported mainly by the solid demand from SME clients for tailored hedging strategies, and it's particularly those based on FX options. The FX income from the structural book, that's the blue one, is reflecting seasonality of the traveling.
We definitely expect that in Q1 and beyond, we'll get back to the levels around CZK 550 million. Let's say, year-over-year basis, it's basically flattish. I think next slide is OpEx, so please. Costs are traditionally under control, growing only by 5% in a very high inflation environment. The personal costs are plus 4%, mainly as a result of increase of salaries as of October last year. We were informing you during the full year of result presentation. Gaia is growing relatively significantly by 23% year-on-year, it is mainly linked to our transformation and mainly the cost of double run of two IT systems.
Of course, we also needed to, and will need to invest a bit more to the marketing for the launch of NDB. Regarding the regulatory costs, we booked, and that's the pink color, we booked lower contribution to resolution fund, as already indicated in Q4 results. Just to remind, at that time, Resolution Authority announced that the whole sector of contribution would decrease in 2023. That's true that the invoice will come, haven't come yet, will come beginning of June. We believe that this is gonna be confirmed.
Here also to mention and to focus on a very recent and slightly negative piece of news at the beginning of this week, ČNB announced a bit higher charge for Deposit Insurance Fund due to Sberbank. Simply the fund is not technically at the requested level. Net proceeds from the sale of Sberbank haven't came yet and will come soon in Q3. Economic-wise, of course, it doesn't make any sense, but it seems that the banking code doesn't allow to take into account the future cash cash ins. The increase costs for KB is available for CZK 45 million.
Last point to the OpEx depreciation, it's growing by 8% year-on-year, mainly reflecting the depreciation of already activated components of our New Digital Bank. That's for now all from me, and I'm passing floor to Didier.
Thank you, Jiří. Good morning, good afternoon, ladies and gentlemen. Going into the credit risk section, I will start with the two main takeaways for this section. The first one is the continued low default intensity across all segments and products with a moderate exception concerning our consumer lending portfolios. The second key message is the continued strong and in fact better than expected recoveries which we achieved on our NPL corporate exposure, which is the main driver behind this Q1 provision net reversal and positive impact. Going into a bit more detail regarding the asset quality. As you can see on this slide, we recorded a residual increase of our S2 exposure by roughly CZK 3 billion.
What is worth mentioning again, as it was in the recent quarters, is the low level of dynamic of migration between the S1 and the S2 categories. In fact, these two reverse flows are balanced in terms of their intensity, and the materiality is below CZK 15 billion, which compares to near CZK 800 billion in total for those S1 and S2 exposure. The S2 ratio was, as a result, stable at 13%. As previously mentioned, in fact, our provision coverage ratio for non-defaulted exposure in the last three, four years, so between just before the entry into the COVID period until the end of the first quarter 2023, we doubled this provision coverage ratio from 0.3 to 0.6%.
The default inflow, as I just said, in the first quarter continued to be very limited, more specifically. We continued to observe a very good level of resilience for the mortgage loan exposure, as well as, which is a little bit more surprising, for the small business client segment exposure, this default rate being slightly below the pre-COVID levels. We recorded a bit of volatility for the corporate segment, but the absolute levels of default rate also being at the pre-COVID levels. We recorded a bit of increasing trend for our consumer lending exposure.
In fact, this increasing trend is quite, in terms of its risk drivers, well-identified. It was quite easy for us to perform the needed adjustments. As a result of all of this, you see that the defaulted exposure marginally decreased, in fact, Q-on-Q by a little bit less than CZK 1 billion crown, and the NPL ratio reduced also a little bit from 2.3% to 2.2%, as a result of which our S3 provision coverage ratio remains stable in the range of ±50%. Going to the next slide, which is which gives you the cost of risk overview.
This material level of natural losses above CZK 500 million, slightly below overall CZK 5 million at CZK 432 million, in fact is coming mainly from the corporate segment, where, on the side of the defaulted exposure, we recorded, as I just mentioned, recoveries, net recoveries, in the range of slightly above half a billion Czech crown. While for the performing corporate exposure, our cost of risk net down to zero, which is in the current context quite a good result.
We had a bit of rating deterioration in a magnitude that was very isolated, without any cost of risk effect, this small deterioration, in fact, being absorbed by the consumption of our corporate inflation overlay reserve that we booked back in 2022. If we look now at the retail portfolios, we had a residual level of net creations, net provision creations, slightly below CZK 100 million . This to its majority came from our consumer lending portfolio. Again, with clearly identified risk drivers, which put us in a position to take the necessary actions. The other portfolios continue to show a very good level of resilience, and this is particularly true for the mortgage loan exposure.
Decided, in fact, not to activate the consumption of our inflation overlay for retail exposures. This being justified by a voluntarily prudent approach in the context of high inflation and this inflation reserves for the retail portfolios being quite precisely calibrated for sub-portfolios showing a higher risk profile. We prefer to stay on the, on the prudent side, and The guidance for 2023 full year, we've decided to revise it a bit down from the previous level, which was in the range from 20-25 basis points, being revised down to 15 basis points. And there are basically two factors behind this downward adjustment
The first one is the reduced default intensity compared to the assumption that we had taken previously. In fact, this default intensity across all products and segments now is forecasted at level which are slightly below 2020, 2022 levels. The second factor behind this adjustment, favorable adjustment in our cost of risk guidance is coming from the improved recovery potential on the side of our defaulted corporate exposures.
On those words, I will hand over now to Jiří, who will continue to guide you through the outlook, 2023 outlook section. Thank you. Jiří, the floor is yours.
Thanks, Didier. Yes. Well, compared to three months ago, we are broadly confirming 2023 macro assumptions. That's true that there will be slightly better GDP, at the same time, slightly higher inflation. It is also the case for the banking market outlook, meaning that both loans and deposits will or are expected to grow mid-single digit. In terms of KB business and KB Financial outlook, we are going to adjust slightly the guidance, not in loans area. We are sticking to the previous mid-single digit growth guidance, even slightly higher than the market, so gaining market share.
By the way, it is also the case of Q1 this year when we gained the market share slightly in loans area. Even more importantly, it was the case both for retail and CIB. Not significant, but the direction is there. In deposits, after weaker Q1 than expected, we do not expect to gain market share as originally guided. We will probably go the similar pace as the market. This, of course, together with the faster switching from unpaid current accounts to the paid deposits than expected, will lead to the slight decline of the revenues, influenced mainly by higher drop on NII front, while we are confirming fees and commissions still mid-single digit.
The same, quite, let's say, quite meaningful growth of the income from the financial operations. For reference, the change in the guidance for NBI is the following. Three months ago, we were guiding flat-ish NBI. Now we are talking about slight decline. There are no changes in OpEx, i.e., upper mid-single digits, and cost of risk will be very likely better as Didier mentioned. Risks to the outlook are listed at the very bottom of the slide. Basically, they remain the same. It means a further escalation of war, worsening of the external economic environment, etc. , etc . We added one risk of a kind of impact of the stability package by the government.
This risk already is materialized. It materialized yesterday. To say now, not impacting 2023, but rather years beyond. Maybe I think it is worth to say. Just a second. What has happened yesterday, government yesterday presented measures to stabilize public finances from 2024. We are still analyzing the impacts, already now it is clear and, of course, subject to be approved by parliament, et cetera, et cetera. Still a lot of things could happen. There are two simulated impacts. The biggest one is, of course, on corporate taxation. As it was approved or announced yesterday that the corporate income tax is gonna grow from 19% to 21%.
To just to give you a flavor, impact on KB would be expected or the first estimate is expected at the level of increased tax costs by roughly CZK 400 million annually. The other material impact is going to the taxation of the employee benefits. Here I'm talking about abolishment of exemption of certain benefits. It is related to cafeteria, part of value of meal. OpEx, mainly in personal costs. The simulation is suggesting now that starting from next year, it would increase OpEx by roughly CZK 90 million annually. That's in a summary, the outlook and including the most recent information. Now I'm happy to return the watch to studio.
Thank you very much, Jiří. Ladies and gentlemen, this has concluded the presentation part of this meeting. We will now be happy to answer your questions. If you have a question, please, you can click on the icon with raised hand picture.
At the upper part of your screen, and then please wait to be called. Let me remind you that this call is being recorded. Also if you are connected through a telephone, I will give you a chance to ask your questions later. We have a first question from the line of Olga, which I guess might be Olga Veselova from Bank of America, if I'm not mistaken. Olga, go ahead.
Yes. Thank you. Thank you so much. This is Olga Veselova from Bank of America. Thank you, commercial team for the comprehensive, presentation and very detailed outlook for the full year. I have several questions. One is, what was driving the deposit inflow, in the first quarter, and why do you need to keep competing for deposits by pricing if deposit growth is so much faster than the loan growth? This is my first question. The second question, remind us, your estimate of windfall tax for this year, and when it is actually paid during the year. Third question is, your outlook, short-term outlook on net interest margin for the, for the next quarters.
I appreciate you gave us NII outlook for the full year, but if we can think about margin in a little bit shorter terms, what trends do you expect there? Thank you.
Okay. I will start or maybe, yeah. Deposit info in Q1 for this year. Well, I think it is very much related to the shrinking of the balance sheet at the end of the year. At the end of the year, it's kind of a seasonal drop, and the drop was in Q4 of last year, really significant. We are getting back to normal. From my perspective, it would make more sense to compare to the Q3 balances. If you compare to Q3, we are slightly below. You know, we are not fighting for the deposits. We are in the middle of the pack, if I'm talking about tier one banks.
That's true that small banks are offering more, you know, we don't want to fight with them. That's first question. The other was related to the windfall tax, right? You know, we are sticking to our guidance we were giving you during the Q4 result presentation, meaning that the impact in 2023 will be very limited. It is a matter of our policy not to guide, let's say, taxes. We are stopping at GOI plus cost of risk, of course, we don't comment on taxes. In terms of the payment, you're right. We are going to pay some kind of advance payment for 2023.
This payment is gonna be based or is based on the result of 2022. We already publicly announced that we are expecting to pay roughly CZK 1.8 billion . At the same time, there will be kind of a settlement in middle of 2024, we are expecting that a huge majority will be repaid back. The last question was related to NII or sort of NIM generally. Well, we are guiding high single-digit drop. Maybe it's worth to stay on this topic a couple of minutes. Well, the main reason of this drop are several boards.
First one, first one in Q4, last year, still, we didn't complete the upprice of the deposit. Some of you remember that in first, let's say, nine months, we delayed our response to the increased market rates. We started in Q4, but still this pricing hasn't been completed. Now it is the case, and of course, this is relevant for the whole year. Having said it, this simply cost of funds are gonna be much higher. This is one thing. Other thing, deposit competition is more severe than we expected. Third reason, I should mention is that we are missing a kind of positive impulses of the growing interest rates.
Fourth point to mention is, and we are commenting on that during the presentation, is that the unpaid versus paid deposit ratio is deteriorating, and it is deteriorating faster than we were expecting. Fifth, I think fifth reason is, rather a bit technical, but it's lower contribution of IB, but it has been somehow transposed into rather FX operations in financial income from refinance operations. Probably the last point to mention, and I was, I think, touching during the previous earnings call, that we are a bit setting us into the position ready for decrease of the market interest rates.
What I mean is that we slightly increase long-term receive fixed interest rates and thus locking the income, so net interest income at still relatively high interest rates. Of course, given the increase in the shape of the yield curve, this is partially touching our immediate, recent net interest income. Basically five, six reasons I wanted to mention. Transposed into net interest margin, I think we were guiding, we were guiding three months ago, a drop by 25-30 basis points.
taken into account all the points I was mentioning before, taken into account the result of Q1, we are a bit deteriorating this guidance from 25-30, to 30-35, on average by 5 basis points.
Yes, very comprehensive. Thank you. Can I just clarify one thing? Raising of senior non-preferred debt from
Of course, it is a kind of semi-capital instrument. The margins here are much higher than are on the senior debt. On the other hand, as you might remember, we are running under SPE approach, meaning, all these instruments have to be intragroup transactions. To say, here we are significantly benefiting from that fact, because if we would have to go to the market ourselves, the spreads, margins would be much, much, much higher. This is currently our big competitive advantage compared to other Czech banks who are, for example, running under MPE, multiple point of entry.
Thank you so much, Jiří.
Thank you, Olga. May I remind you, if you have a question, please click on the raise the hand button. I can see question from Kamil Stawski from Santander. Please, Kamil.
Hi. Thank you for having my question. I wonder, what is your current sensitivity to potential rate cuts in Czech? Can you elaborate a little bit more on. Because I understood that you have increased the hedging during the first quarter, and how material is that? My second question would be about the cost of transformation. I wonder, is there any impact on the cost reported in profit and loss statement related to the new project, and how much is it? Or is everything like capitalized and there is no impact in the P&L as of now? Thank you.
That's probably again to me. First one was to sensitivity. Currently our sensitivity, and we are usually showing the parallel shift of the yield curve by 100 basis points in upcoming 12 months, impact in upcoming 12 months. Probably you remember that, 12, 15, 18 months, we are fluctuating at the level of above CZK 1 billion. That's what I was referring to at the beginning of my presentation. We benefited from that, because the rates really went significantly up. Currently, we are the sensitivity, the same, the same, you know, parameter or indicator is fluctuating at level zero. We don't go beyond zero. We don't take strategic positions.
We are, I would say, well set up for the expected decrease of the market interest rates sooner or later. In terms of cost of transformation, well, I can just confirm that what we said, I don't know, roughly two and a half years ago, when we were announcing the expected cost. The overall cost should fluctuate at a level of CZK 7.7 billion. At the same time, what we said at that time, and this is still valid, 70% out of that, we are absorbing and are gonna absorb via, let's say, limiting of the investments into the old world. Maybe worth to mention that if I'm saying CZK 7.7 billion, it's in 2019 prices.
Please adjust that by inflation since that time. Yeah. That was second question. Was there still the third one? Sorry.
No, that's all. It's all clear. Thank you.
Okay. Okay. Thank you.
Thank you, Kamil. Our next question comes from Simon Nellis of Citi. Simon, proceed.
Hi, everyone. Thanks very much for the opportunity. Maybe, Jiří, you could elaborate a bit on the trading and other income. 'Cause I think you're saying that revenues will be slightly down. You're quite pessimistic on net interest income fees growing, I guess, mid-single digit. I guess it suggests that you think the very strong financial income can be sustained. Can you walk us through what the risks are around that or the upside? I think you're on mute.
Sorry. Yes. Yeah, that's what I can confirm. The first quarter basically confirmed that as well, the income at the level of CZK 1 billion. Basically, we are expecting that the upcoming quarters will earn, and could be even a bit better. We will see. So far we are running in line with the plan. You know, it's two parts. First, we are going to increase the FX income from the structural book, as I was indicating during the speech. This is one driver. Q1 was rather seasonally lower.
In terms of dealing income or capital markets income, we still count on the demand of hedging by our clients and also the volatility should improve. That definitely here we are expecting let's say double-digit growth, I would say significant double-digit growth.
Okay. Thank you. Just on the mechanics of the windfall profit tax, the prepayment. That will hit in the second quarter, or is it gonna be? Should we expect kind of a one-off hit to tax in the second quarter and then some kind of write back next year, assuming no changes in the mechanism?
We are obliged to, you are talking probably about advanced payment.
That's right, yeah.
We are obliged to pay it during the Q3. I don't remember exact months, but it will be paid during Q3 this year. No, no. Roughly in mid of next year, it should be settled then. We are talking about nine-12 months of value of money, if this is behind the question. nine-12 months.
Understood. Okay. Good deal for the government. All right. Thank you.
Thank you, Simon. Our next question comes from Martin Leitgeb of Goldman Sachs, Martin, please go on.
We cannot hear you. If you are saying something, we can't.
Martin, you seem to be muted.
Apologies. Classic mistake. Thank you for the presentation. I had a couple of questions still on NII. I think, Jiří, you mentioned that you've seen lending spreads stabilizing quarter-over-quarter. I'm just wondering, could you talk a little bit about how you expect those spreads to evolve from here in Q2 and the next couple of quarters? The second question is, just taking your NII guidance of high single digits decline year-over-year for the full year, that suggests around a 3% higher run rate for the remaining quarters this year, if I'm not mistaken. That would suggest fairly minimal net interest margin decline from here onwards, taking into account the good mid-single digit growth in loan terms.
Can you confirm if that is the case, and then perhaps give a little bit more color on how Q2 and the remaining quarters could look like in that context? Maybe a last one, on new mortgage production. I think there was a little bit of a pickup, in Q1 versus Q4. Is that something that you see continuing in the second quarter as well, or that's not really indicative quite yet, as long as interest rates are still at the elevated level? Thank you.
Yeah. I will take first two first. First one was about spreads on loans. Yes, I'm confirming kind of stabilization of these spreads quarter-over-quarter. What is helping a bit is the fact that as we are in declining. We were, by the way, indicating this, let's say potential, in declining market interest rates, and here I'm talking about mid and long term, the banks generally are delaying response in the down pricing of the loans. This is helping, and this is one of the reasons of this stabilization.
Your other sub-question was, so what by the end of the year? We believe that this trend is gonna continue, and at the same time that our let's say corporate part of the bank will be able to stick to the current ones.
That's on spreads. The other question was what? Was your quick calculation, what would be run rate in Q2, Q3, Q4? Your figure is 3%. Yes, it will be whatever between 3%-4% better than in Q1. Why? Because we believe that... In other words, having said that, this NII in the rest of the year should, let's say, should increase slightly. Why? Because we believe that we already absorbed the biggest and the diverse hits I was describing before. Yeah. Simply, we do not expect any more that the margins on deposits are gonna decrease. We believe that loans spreads will stay intact or intact.
At the end of the day, the net interest income should be driven by volumes, not having such a huge negative impact of the pricing. That's answer to the second question. Now, it's really my pleasure to pass over to probably Miroslav.
Yes, I will take it. Thank you, Jiří. If I look at the first quarter this year and compare it to the first quarter of 2022, it's still minus 70%. This is true. Technically, it's going down. On the other hand, it doesn't say much about the current development. I have to confirm that it seems a bit more promising at the moment. If I look at April, month-to-month growth of 60% was really decent. Even in May, even though not even today in the morning, the figures for the market are not available yet, it seems to be continuing. We see full pipelines, which are the best indication of the production. We are reasonably optimistic about at least partial recovery coming.
That's super helpful. Thank you very much.
You're welcome.
We don't seem to have any further questions through the online platform. Ladies and gentlemen, if you have a question to be asked via telephone, please unmute yourself by pressing star and six, and then ask your question. Yes. I would like also to invite you to ask questions. The Chief Executive Officer is with us, strategic or strategic questions are more than welcome. Cost of risk surprise as well, the DD is ready to answer. Margus with Miroslav NDB, etc. , etc . Please go ahead. If Simon wants to ask another question.
Yeah. Could I jump back in? I guess two things, and more on the strategy side and the new system. Can you maybe just elaborate a bit on what benefits you expect to see? I mean, you've done so in the past, but now that the system's actually up and running and you've gone through the whole process, you know, what kind of benefits should we be expecting, and how long will it take before they'll be visible in the financials?
Simon, thank you very much. I will kick off here, I will ask Margus and Miroslav to prepare themselves. The beauty of the solution is that we have been building this from scratch, we have brand new core banking system, the analytical layer, plus the front end. The front end is massively simplified compared to everything what we did in the past and compared to everything what other banks did in the past. We have the simplification as the main, I would say, leitmotif from the back to the front. It goes to the way we are pricing our subscriptions, the way we are composing our propositions to our clients and bringing it to them.
It is also simplifying massively the work for our people in the branch because the application for the service in the branch is of the same nature and using the same screens as they do in mobile and internet banking. Last but not least, it's much more flexible in the meaning of our ability to bring innovations to the market much, much faster than it was before. The system is being currently tested. It's in the full version available for everyone, tested in the sense of onboarding, let's say 10,000 or more than 10,000 users already. We see how stable it is, how it brings back the proposition or the functionalities clients are currently using.
That's what I see as the main, as the main, value added. It's probably too early to say it will be immediately visible in the financials, though
We see that in the increase of our retail clients. We are still finding ourselves on the retail side with minimum marketable solutions, so pretty simplified proposition. Maybe, Margus, if you can elaborate more on the technological side, and then Miroslav, what is your expectation and first feedback from the clients?
Thank you. Jan already mentioned probably the key elements. If we are looking at the usually the incumbent bank's ability to deliver anything new to the market, then it is usually measurable with a timeline of 12-18 months from the idea until the conclusion. Considering that we have significantly simplified not only the customer-facing front, but we have also killed most of any kind of exceptions and technological nuances from our new setup of the technologies, then we believe that both the development and testing, I mean, the overall deployment of any of the new functionality should be significantly faster than the already mentioned 12-18 months. Hard to say how fast, but at least I would say that there is a good chance to deliver it at least in half of the time.
The second element for me is that when we are looking at all of those new technologies that we are using, mostly industry standard, solid core system from Temenos, et cetera, we do believe that keeping our technologies as free as possible from all the different customizations, which usually make the banks complicated and slow-moving, then that one is something that we practically do not have. We take the solutions very much as they are being offered by the service provider. What is a good indication of that one, our new core banking system has been in production actually one and a half years, and during this time we have been already executing two upgrades to that system. Usually for traditional bank, that kind of upgrade would take years to execute.
We already see certain promising signs of the technology emerging better.
I would add just a few words. The new bank, the new platform, including channels, is up and running. This morning it was 11,500 active users already inside. We acquired more than 1,000 new clients on the new platform since it launched three weeks ago. I know that 1,000 is might be marginal number. On the other hand, we see that all our new much more automated onboarding processes are working pretty well. Another interesting element is that more than 50% of those newly acquired onboarding clients went or came to us through end-to-end digital process, which is a significant jump forward.
The last thing that started just a few weeks ago, so we are rather on pilot testing mode, is migration of clients from the old stack to the new stack. We have first 50 clients who've successfully moved to the new stack and the process worked well, which on technical side was quite a difficult exercise and touching the wood and saying it looks quite promising at the moment.
Okay, thanks. When do you think you'll be able to turn off the old stack?
I believe that there is two different, like timeline elements. First, when is the majority of the customers already out of the legacy technologies, meaning that they do not require any significant development at all. As the regulation change, as the security issues are being found on a regular basis, that one is usually the one that is driving the investments that are needed to the legacy technologies. At some point, when the number of customers remaining to the old systems is already low enough, we can very clearly make the decision and say that whatever things are coming along, we just can live with them until the system is being switched off.
That one for me is the, from the financial and the kind of like the organizational perspective, the first moment when something is starting to happen. Based on our current estimates, I would say that that one, that point probably arrives somewhere in 2025. When the actual systems are being switched off by themselves, this is usually when the last customer is out, then it is the archiving process, deintegrating everything from the rest of the technologies, et cetera. That one usually can take up to one and a half years of time. That one is, for me, rather in the timeframe of somewhere 2027 and beyond. It doesn't matter anymore much on the cost perspective, I would say.
Thank you. Thank you very much.
Thank you, Simon. Our next question comes from Mehmet Sevim from J.P. Morgan. Harrison, please go on.
Good afternoon. Thanks very much, everyone, for the presentation. I have just two questions, please. Firstly, on cost of risk, maybe. It surprises on positive side quarter by quarter. Didier, your comment that defaults on the mortgage and SME side are still lower than pre-COVID levels is striking, given obviously the much higher rate environment and the economic environment at the moment. Is your guidance for the full year simply built on the assumption to get to normalized levels by the year-end, using a run rate, or are you actually seeing any signs of normalization already? If you think about the dynamics, should inflation come down and rates then also come down and wages start to grow in real terms, then arguably the outlook should actually improve towards the year-end from the current backdrop.
How should we think about the dynamics really, going into the year-end and in 2024? Maybe just one second question, and that's, I think, for Didier , on the deposit cost side. Apologies for coming back to this. Why do you believe that the margins have stabilized now, given smaller banks are still offering much higher rates and the mix shift to time deposit continues? What do you think that the main pressure could be from here, and, you know, could there be any room for further downside risk to NII as we saw in the first quarter? Thank you.
Thank you for the question. I will first probably remind ourselves of the resilience of our portfolios when going through the COVID period. You probably do not remember, but we had built some reserves both for retail and non-retail segments. The calibration of those reserves, in fact, were more than comfortable, or to say it differently, the cost of this materialization going through the COVID pandemic was much lower than we had expected. Since the beginning of 2022, we decided based on, you know, expectation that the corporate portfolios would be impacted. We performed a certain number of specific reviews.
One was in the middle of last year, beginning and middle of last year, on what we had called, you probably remember our, quote-unquote, "Russian portfolio." We also performed specific review in the context of higher energy costs. Those, in fact, those reviews produced in terms of downgrades and any cost of impact only residual effect. Again, to our surprise, but this is the reality, and I think what can be said, especially for the SME segment, but also for the large corp, is that our clients have shown quite good capacity to transfer these inflation risks onto their end customers.
It's true that part of the relatively residual for the non-defaulted part of our portfolio downgrades that we performed in the last more or less 12 months have been absorbed by the corporate inflation overlay. The intensity of these is relatively marginal. I'll give you a concrete figure. For the first quarter, the conception of our corporate inflation overlay was in the range of CZK 200 million, CZK 250 million. This is what we, in fact, what we have observed.
Regarding the mortgage exposure, in fact, with all our early warning markers or early warning signal devices activated, and so far, especially through the interest rate refixation, we had expected a level of restoration much more intense than in fact what we've seen. This is also a very positive test. You know, it surprised us, but that's the reality. Regarding the guidance, in fact, for 23, we have two components that I mentioned. One is that we will continue to record some good recovery performance on some legacy corporate defaulted exposures. So that's one thing.
The second thing is that any downgrade that we would perform or continue to perform on the non-default part of our corporate portfolio will be absorbed by this corporate inflation overlay. Therefore, the guidance lowered in the range of 15 basis points. Post 2023, in fact, what we see is more a guidance in the range of. Those two elements will no longer play the absorption effect from the corporate inflation overlay reserve and the legacy portfolio of the corporate side.
They will decrease in intensity, or they will be going down to zero. This is why we have a cost of risk corridor, if you will, in the range of 424, in the range of 20 to 25 basis points. I don't know if I sufficiently answered your question.
Yeah, that's perfect. Can I just ask, just in case you have the data with you, what was the portion of the mortgage book that is being repriced this year, to higher rates? If you have this also for next year, that would be great.
I certainly have it. Just give me a sec. For 2023, I'm saying this under the control of ESG, we have a magnitude in the range of CZK 40 billion-CZK 50 billion that is expected. As I said, it started a little bit, it started last year. The level of restructuring intensity has been so far residual.
Thank you very much.
One sentence. I'm confirming what Didier said. You know, I think you can even somehow quantify in a simplified way yourself because average refixation period of our mortgage loans is whatever between five to seven years. Each year, basically, I don't know, 10%-15% are being refixed. Knowing that currently the mortgage loans are at a level of, I don't know, 450, 480, this brings the figure which Didier was commenting. Each year roughly 10%-15%. Yeah, if I may get back to. Because you had also other questions. First one, yes. It was about deposit costs, yeah, and why we are expecting that it is not going to deteriorate.
Referring also to small banks. First, as mentioned before, we don't want to fight with these banks because still, as I was mentioning before, the liquidity is excellent, we are not pushed to do that. This is one thing. Other thing is that the cost of fund increase on our deposit side is slowing down quarter-over-quarter. Basically the majority of deposits are already repriced, and it's also our expectation that the trend is going to continue. Maybe there is one segment we probably will have to do something, that's a segment of affluent, more affluent clients. It is coming. It is not for the time being on the table.
That was first sub-question. The other was my notice, yeah, the biggest risk. I think in terms of net interest income is without any doubt further acceleration of the switching of current accounts to time deposits, because still the margins on current accounts are much higher. That's the biggest downside risk.
That's very helpful. Thank you. If I may, just one follow-up question on this. Jiří, where do you see the normalized levels or the breakdown of time deposits versus current accounts in the long term? Because I think if you look at the past, I think in early 2000s, it was close to 65%, 70%. Now we are at 35%, 40% according to system data. Do you think we can get back to those levels if the rate environment stays where it is?
We, we believe so. That's true that this ratio is probably the worst in the history, but not as far from the historical maximum. I don't remember when it was, but it's relatively very, very close. Once the rates normalize and went back to normal levels, and maybe to remind the normal levels are around 2%-3% in the Czech Republic. Simply the structure changed significantly to the levels, I don't know, which we had two years ago. So really, really majority of the deposits are in current accounts. That's how they are not motivated to go for time deposits. Mainly, mainly in retail, of course. In corporate it's a bit different.
Okay, thanks very much.
Answer is yes.
Thank you. Our next question comes, I believe, from Andrzej Nowaczek of HSBC.
Thank you, Jakub. I can't seem to turn the camera on. My question is still on margins. You alluded a couple of times during this call that you are well prepared for rates to start falling. My question is it perhaps one of those situations where you could defend your margin when, if and when interest rate, interest rates start falling? For example, because you have now more fixed-rate assets, you have more deposits in savings versus term products, you have hedged more. Is it different this time or are we back to the last cycle, i.e., COVID rate falls, rates fall, margins fall, and then we wait another few years for the cycle to turn again. Is there something different now? That's my question.
Thank you for interesting question. The answer is yes, we are much better positioned than several years ago. This was somehow quantified by the sensitivity impact. Of course, once interest rates will go down, current accounts are going to grow again, which will create a further sensitivity. For the time being, we are I would say well positioned.
Does this mean, your margin has plateaued, it will no longer fall?
Say it again, please.
Is there still downside to margin over the coming quarters?
On top of my head, my guidance for the rest of the year is, basically, we will stay flat-ish. I don't want now to be technical because, but our guided margin after today is a deliver of 2.05 to so something like that. If we mix all these effects at the end of the year, you should see the NIM at the level of 2.05 ±.
Okay. Thank you very much.
Andrzej, we don't seem to have any further question. Let me wait 10 seconds, if there is any further. Don't seem to be the case, I'm handing back to Jan for the conclusion.
All right. It's my pleasure to have the final word here. Thank you very much for spending the time with us, for your very interesting questions. We are doing our best to go over this interesting period of time whilst implementing the strategic plan. I am confident that Komerční will be able to continue presenting a solid performance also for the rest of the year in the context and in the frame which was presented today by my colleagues. Taking this opportunity also to thank you, Jiří, as the main speaker, Didier, and others for your contributions. Thank you very much, Let me wish you a great weekend.
Thank you very much for your for your questions, for your support. The call is now over. You can disconnect. Thank you.