Good morning and good afternoon, ladies and gentlemen. Welcome to the presentation of Komerční banka's first half and second quarter 2022 financial and business results. Today, it is third of August, 2022. Please note that this call is being recorded. Our speakers today will be Mr. Jan Juchelka, Chairman of the Board and CEO of Komerční banka, followed by Mr. Jiří Šperl, Chief Financial Officer, and Mr. Didier Colin, Chief Risk Officer. With us today, we also have Mrs. Jitka Haubová, Chief Operating Officer, and Miroslav Hiršl, Head of Retail Banking, David Formánek, Head of Corporate Investment Banking, and Margus Simson, Chief Digital Officer, in case you wish to ask them some questions later on.
As usual, we will begin with the presentation of the results, which will be followed by a question- and- answer session. During the presentation, all participants will be on listen-only mode. I would like to ask you to keep your microphones muted during the presentation part, and of course, I will give you a chance to ask questions later on. Thank you. That's from me for now, and I would like to hand over to the CEO, Jan Juchelka. Thank you.
All right. Good afternoon, good morning, everyone. Thank you very much for being with us on the occasion of presentation of Komerční banka results for first half of 2022. It is my pleasure together with my colleagues from the management board to guide you through the prepared presentation. We will do it in the fastest possible time and give you enough space for questions. Thank you also to those of you who have already presented their first view on the results. Let me start with the main highlights. Komerční banka in the first half of 2022. Let me just declare that it was a first half of a year presented by strong economic activity of households as well as companies.
Even though the uncertainty was rising, people and corporations were still in the mode of spending money and investing money. As a result of that, Komerční banka grew its loan book by 8.7%. The client's deposits went up by 2.7%. The non-bank assets under management went up by 4.8%, which is a trend we like. The overall revenues are up by 29.5% compared to the previous half year. Let me just remind that 2021 was still under the stress of COVID, governmental measures and partly also with the limited activity of some of the market players.
Operating expenses went up by 7.5%. Combination of those two are creating very strong positive jaws. Cost of risk landed at a very mediocre level of 14 bps or CZK 0.5 billion in nominal value, if you prefer this one. As a result of those aspects, the net profit recorded by Komerční banka for first half is CZK 8.3 billion, and it's up by 62.3% on year-over-year comparison. ROE delivered to the investors is 13.5%. Return on assets is 1.2%. For tier one, 20%, and the overall capital adequacy is slightly above at 20 points.
Komerční banka has experienced a growth in the client base, and we are up by 30,000 new customers, which is a result of three main flows. The first one is organic growth. The second one is clients opening accounts when coming to our branches for their reimbursements as former Sberbank CZ a.s. clients, where KB was acting as a payment agent of money from the guarantee fund. The third flow is the incoming refugees and immigrants from Ukraine. We have signed a contract with MONETA Money Bank, a.s. on sharing the ATM network, which is giving us two main benefits.
The first one is we will be able to relocate ATMs to places where there is no ATM available for small towns or villages. The second is that some of those machines will be decommissioned, will slightly decrease the electricity consumption and will be more responsible in front of the ecology of the environmental field. Komerční banka continued its cooperation with fintechs. We have taken over a dedicated specialized advisory company named ENVIROS, which is a group of experts in environmental projects, and we want to bring them as close as it gets to our client's proposition for small and medium-sized and large companies.
It's mainly for corporate banking, but we believe there will be a lot of work, and we can create an angle vis-à-vis our main competitors when using these experts. Lemonero, which is just for a quick reminder, an artificial intelligence-based sort of a virtual CFO for e-shops. We are currently at 25%. At best, we went to 96%, as we see that the peer-to-peer platform is working very well, and it's exponentially growing the money invested through this investment portal. Let's move to the next page, which is describing the macroeconomic context. GDP in Q2 went up by 0.2%, so not yet a recession.
Nonetheless, our macroeconomic team believes that there will be a mild recession flowing in later this year. Nonetheless, the pretty dynamic growth on year-over-year comparison represented by 3.6% was mainly driven by domestic consumption and fixed investment. Even though the manufacturing and construction was somehow still impacted negatively by the disruption of supply chains. Labor market remains pretty hot. Here we don't see any relief yet, and we somehow expect that the situation will not dramatically change in a positive way down the road.
The potential inflation impact from increased salaries might be one of another engine for the peak of inflation, which is still probably ahead of us. Consumer price inflation at 17.2%. Our macroeconomic team expects it might be peaking at exactly 20% later this year. We will definitely come back to it when speaking about the financial performance. Speaking about rates, Czech National Bank has, let's say, verbally through the newly appointed board members, signaling that we should not expect any move at the earliest session of the board, which is coming this week.
Nonetheless, we are of the opinion that inflation will be knocking on the door in a stronger way. There might be another hike until the end of the year at the level of 50 basis points. Let's move to the next page, please. Here we are showing part of our awards or recognition which we have received either from our business partners or from independent agencies or from the state. I will start with the state, because I do expect the questions might come from this corner. Komerční banka is one of the top 20 income taxpayers in Czech Republic for 2021. More concretely, number 11.
For many consecutive years, looking back, we are one of the very important and very responsible contributors into the state budget through the income tax payment. Komerční banka signed the deal with MONETA Money Bank on ATM network sharing, which I have already commented. Komerční banka initiated, together with Visa, together with Association of Social Responsibility, and together with Heureka, which is a comparator of e-shops, a pretty positive project of sustainable e-shop initiative. Komerční banka was awarded by Visa as a number one sustainable bank in Czech Republic. One of our colleagues, Monika Truchlíková, who is the tribe leader for payments, was named the number one lady in payment systems.
Zlatá koruna, Golden Crown, dispatched this year its inaugural award for a sustainable product. Which was given away to Komerční banka for its loan for sustainable technologies through a so-called Green Crown or Zelená koruna. I have Lemonero, ENVIROS and Adves, so we can skip those and move to next page, please. Speaking about lending activities, we are up by 8.7% on year-over-year comparison. The main drivers were coming from all the segments, and I am glad to hear and see the activity also, the activity of the corporate clients, which is just underlying my initial comment of strong activities of market players amongst households and also amongst corporate clients.
Speaking or zooming on the corporate clients, we are speaking of, let's say again, across the sub-segments, small business is growing up by 1.4% year-over-year, corporates by 11.7% and the leasing financing by 4%. Going down the page to the graph related to housing loans, we are back to quarterly production of approximately CZK 10 billion, which is bringing us back before the hot season of 2020 and 2021, somewhere to the territory of 2019. Despite this active role in lending money to Czech economy, we are at very comfortable level of net loans to deposits at 74%.
Liquidity coverage ratio is at 174%. Probably we can go to the next page. Here we are, displaying six remarkable deals concluded by our corporate bankers. Let me pick up those of you those two of them. One is Dr. Max, a complete refinancing plus increase of financing of this retail chain of drugstores by Penta, owned by Penta. Pretty interesting international transaction at the perimeter of Central and Eastern Europe, where Komerční banka played the role of bookrunner, mandated lead arranger, and coordinator. The other one is Aqualia, which is EUR 1.1 billion refinancing and increase of financing, where we were mandated as a lead arranger.
Our financing went across the sectors in corporate banking, and I am thanking all my colleagues from corporate banking for this remarkable achievements. Let's move to deposits. Deposits were growing by 2.7%. People and companies are moving money from current accounts to more attractive term deposits and saving accounts. What is probably more important for us is that we continue experiencing the trend of fresh money inflow into investments.
Investments, the so-called non-bank assets under management, which in our case is mainly the solutions provided together with Amundi or through our private banking, went up by 16.3%, which is a long time not seen dynamism. The insurance schemes are down by 10%, and our pension company grew by 3.2%. In total, it's almost 5% growth in this non-bank assets under management. If I'm not mistaken, we are above CZK 200 billion, like CZK 205 billion, total amount. We can move to next page, please. This is the financial performance. I'm handing over to my friend, Jiří Šperl, our CFO.
Thank you.
Thank you, Jan. Indeed, the financial results in the first six months of the year are very sound. As mentioned, CZK 8.4 billion is without any doubt the best first half of the year in the history of KB Group. The net profit is supported mainly by net interest income, but also by a strong fees and commissions as could be seen on the waterfall chart, while the financial operations landed at the comparable first level as one year ago. Costs both administrative and risk ones are under control, which all in all leads to the mentioned bottom line.
It's probably now also worth to mention a positive contribution of the sale of Modrá pyramida building, completed in May this year, bringing an extraordinary profit, something between CZK 150 million and CZK 160 million. In the waterfall chart, it is part of so-called other. The trend of growing quarterly net result is continuing practically already the seventh quarter in a row, as shown at the upper right chart, supported mainly by, I'll say, booming top line, booming revenues, which is the red color of the bar, while maintaining the cost base relatively low. That's the blue part. Regulatory costs are just one exception here. We isolated them in this chart, and I will touch this point a bit later on.
Naturally, these outstanding results have been transposed over to the key profitability indicators, as shown at the bottom of the page. Jan was already mentioning ROE, so ROTE, return on average tangible equity, which already is touching 16% level. It's best to say after linearization of regulatory fund charges. Let's move please to the next slide. Also, the balance sheet is growing strongly. It's almost +13% year-on-year, to almost CZK 1.5 trillion, and it's another historically highest level. On the liability side, that's the right part of the presentation, it's driven by the deposits and also by the money market this quarter. While on asset side, the growth basically goes across the board.
Jan already was commenting client loans in detail, so not to talk about it more. The liquidity surplus has been placed, and again, not surprisingly, to the govies and repo of loans with CNB. Please next slide. Yes, capital. I would say the capital is a chapter itself. Despite the year-to-date drop by almost 100 basis points, I was commenting on that three months ago. Just to remind, it's mainly a matter of changes related to a new regulation on the LGD recuperation. In the isolated second quarter, the adequacy slightly increased roughly by 20 basis points, and that's mainly due to the inclusion of the profit of 2021 into the regulatory capital after the general meeting held in May.
Having said this, and at the same time knowing that the fully loaded capital requirements are at the level of 17.6% roughly in mid of next year, this is still giving sufficient space for either to pay the retained earnings from 2019 and 2020 in Q4 this year, as indicated to you already for some time, of course, after proper discussion with central bank. To use it for M&A in line with KB 2025 transformation plan. Last comment at this slide is related to density ratio, which is described at the right bottom column. It is basically kept flattish and fluctuating year-on-year between 35 and 36 percentage points. Please, next slide. Revenues. Let's start with net interest income. It's a very strong delivery, more than 40% year-on-year.
Trend-wise, still growing, as visible on the upper right chart. Jan was already mentioning very strong business performance. This is no doubt first reason for this excellent results. Another one is related to the environment and interest rates, market interest rates increase more specifically. Having said this, nobody should be surprised that the main driver of NII is income from the deposits, as we are placing liquidity into the higher interest rates. The income from loans is growing as well, and it's both year-on-year and quarter-on-quarter. On the other hand, much lower year-on-year it is by 4%, which is naturally suggesting that the erosion of the margins continue further.
The same as one quarter ago, it's mainly the case for retail loans, while corporates are able to maintain the margins sufficiently high. I think I was showing you the picture, which is at the bottom left part of the chart. That's a visualization of what I said right now. Here you can see a very strong correlation of interest rates of corporate clients loans with the market rates. Again, it's just two bold lines. The red one is the three month PRIBOR, and the blue one, five years interest rate swaps. Corporates are the pink ones.
You see the correlation is really pretty strong, which is not the case for neither consumer loans. That's the upper part, the highest interest rates, neither for the mortgage loans. That's the black figure. Couple of sentences about the net interest margin. Year-on-year, it's roughly by plus 50 basis points. Lending this quarter at 2.22% year-to-date. For the rest of the year, we are still expecting the increase of this important indicator. There's a question whether we will be able to achieve the pre-COVID level, which was at the level of 2.4%.
Last comment here at this slide, please notice a very strong increase of net interest income delivered by investment banking. It's both the case quarter-over-quarter and year-over-year. IB delivered roughly five times higher net interest income year-over-year. Later, I will touch this point in or when discussing financial operations income. Please, next slide. Fees and commissions also promising results. Growing upper mid-single digit, exactly 6.3%. Here, there are two main drivers. Transaction fees by strong 14%. At the same time, it is fair to say that it's partially base effect because first half of last year was significantly affected by pandemic restrictions. This is first one. Second one, other one is or are fees from cross-selling growing also double digit by 11%.
That's what was mentioned by Jan, strong increases in sale of mutual funds by KB. Let me move to financial operations. Year-over-year, flattish, minus 0.5%. It is interesting to see the change of the structure. I'm referring to bottom right chart. Very promising and very positive output is in the area of net gains on FX from payments. That's the blue part, which is again, structural FX income. Behind are very strong recovery in traveling and related currency conversions, both inbound and outbound. It is pretty nice, plus 50% year-over-year. While the capital markets are declining by roughly 23%, and that's exactly what I was mentioning before. Simply, the structure of our investment banking guys change relatively significantly.
The big part of IB income is, under accounting-wise, under NII, and not as a part of the financial operations. Please, next slide. Our last slide on my side for GOI, which is cost management. I also touching the point at the beginning of my presentation. We believe that the growth by 7.4%-7.5% in the environment of inflation at the level of 16% or even more is still a good result. This is the first reason, inflationary pressures, and the other ones are regulatory funds. Nothing new for you. It was already the case the previous quarter. They have increased by 24% in absolute terms, CZK 250 million.
Just to add the similar comment I added before, without this impact, the growth of the costs would be exactly 5%. If you go into structure, personal costs +3%. This is basically following the increase of basic salaries from the beginning of the year. Maybe here it's worth to say and to mention that mainly due to the inflationary and also wage inflation pressures, we agreed with our trade unions to go for another step of increase of the base salaries still before the end of this year. It will be valid since October 1st. The average increase is going to be at the level of 5%. Administrative costs are growing by +7%.
What you can see behind is mainly accelerated transformation. That's very much about the investments into digitization, investments into IT, et cetera. Newly, we added the new chart. Now I'm referring to the very left bottom chart, where we are showing the new cost-to-income ratio after the linearization. From the chart, you can see that in the last two quarters we are already almost at the targeted 2025 targeted cost-to-income ratio, which is whatever below 40%, which is giving us a good comfort that we will deliver the target or even better by 2025. That's it, I'm passing the floor to Didier.
Thank you, Jiří Šperl. Good afternoon, ladies and gentlemen. I will start with a brief and reassuring introduction on some of our early warning indicators and key risk indicators, which are not presented on this slide, but closely monitored in the current environment. Starting with the default rate across product and segments, we continue to see a stable picture with all being posted at low level, except for the SME segment, which started to show some sign of increase going back to the COVID level and related to our Russia-related portfolio.
In this area of corporate segment, we have seen some minor deterioration of our credit risk grading distribution towards higher risk profiles, and at the same time, a growing number of risk contingency requests from our clients. As to the retail area, so far, no sign of deterioration for our mortgage loan and small business loan exposures. In the area of the consumer finance businesses, we have seen a bit of deterioration in the early collection client migration rate and also some very moderate increase in the number of loan restructuring requests. Overall, nothing that should or would trigger some concern.
In fact, our setup is providing adequate responses to all our clients needing support in a more turbulent time. This coming as a result of the COVID period where we spent effort to strengthen this capacity to answer our client requests. This early warning indicator resilience or stability translating to the stable indicators presented on your screen. Starting with the S2 or sensitive exposure, we have seen or we've recorded a slight contraction quarter-on-quarter from 8% to 6.7%. This is more a technical IFRS 9 related decrease.
Overall, we expect this S2 ratio to continue to fluctuate between 5% and 10%, which is a quite wide range, but well explained by the volatility of the current macroeconomic environment as well as the unavoidable procyclicality of the IFRS 9 standard. This level is in line with levels recorded by our peers. Last point on this non-defaulted part of our loan portfolio, as in the previous quarters, the so-called S1 S2 exposure migration continue to be of low intensity, which is also a positive sign. Now turning to our NPL portfolio.
So far, we've recorded a very limited level of inflow into this defaulted area, again, concentrated on our Russia-related portfolio, and primarily on the, as I just mentioned before, SME segment, which was offset by some positive resolution for some of our clients in turnaround situations. All this supporting a stable NPL ratio at 2.4% at the end of Q2, and a stable provision coverage ratio for this exposure class at a level of 50%. Going to the next slide, which gives you the overview of our cost of risk development for the second quarter. This picture, I will first comment for the entire semester, and the picture we present is very much in line with the one that was presented in the previous quarter.
For the retail portfolios, we continue to be in negative territories at a level of -5 basis points, and this with the two same underlying drivers as in the previous quarters. The first one being some strong recovery performance supported by the situation of the residential real estate market, and the second driver being a continued resilient payment discipline of our client. Going now to the non-retail portfolios and going the opposite way, we recorded for the first semester a level of 40 basis points. Again, here, two drivers and two identical drivers as in the previous quarters.
One being these isolated defaults mainly recorded on our Russia-related portfolio, and the second driver being a continued reserve build-up in anticipation of some potential impacts from inflation pressure on our corporate segment portfolio. If you transpose this into the structure of our cost of risk for the second quarter, which was posted slightly below CZK 300 million, we created near CZK 200 million on our corporate NPL exposures. We released 50 million on defaulted retail exposures. We created near CZK 300 million on non-defaulted corporate exposure, again with the intention to continue to build up our reserves.
We had a technical release on the non-defaulted retail exposures due to IFRS 9 standards in the range of slightly above CZK 100 million. Now, if I go to the guidance. The guidance we issued a quarter ago was at a level of 20 basis points, and we are going to simply renew this guidance, maybe giving it a bit of an interval between, say, 15-20 basis points under our central macroeconomic scenario. Just to give you a bit of a flavor of what this means, this would translate into a level of provision expenses for the second semester, anywhere between half a billion and CZK 1 billion, compared to a bit over half a billion CZK for the first semester.
I will finish with one very brief comment regarding this guidance as it is slightly below our through the cycle cost of risk at 30 basis points. This, the reason for this gap is simply reflecting one, the significant COVID and post-COVID reserves that we built up in the last two years with some possible partial releases. The second driver is a continued strong level of recovery performance coming from our corporate NPL portfolio, which is despite the adversity of the current environment, a very good news. On those words, I'm going to hand over back to you, Jiří Šperl. Thank you.
Thanks, Didier. Let's spend a couple of minutes on the outlook. I would say compared to the previous guidances, there are rather more changes in the outlook versus three months ago presentation. That's mainly in macroeconomics. Jan already touched them, so let me probably focus mainly on banking market and KB outlook. Let's start with banking market outlook. Mainly increased rates have naturally an impact into the growth. For banking market, we slightly downgraded the expected full-year growth from upper mid-single digit to mid-single digit. I would say both housing and corporate loans will grow a bit slower.
Again, the main reason are the increased level of market interest rates. Regarding the bank deposits, here, basically, we are sticking to the previous one, mid-single digit. Let's move to KB business outlook. Here, we upgraded our guidance from mid-single digit to upper mid-single digit. The reason is obvious. Simply, three months ago, we didn't expect so high dynamics of the growth of Q2 growth, mainly supported by the corporates, which by the way, will be also the case in the second half of this year. Retail execution is rather difficult one, given the context and given the environment. Here, we would like to continue in gaining the market shares.
It is not the case for KB deposits, where we are guiding low single digits%, given our, let's say, liquidity position. The trend of switching to term deposits is expected to be continued, but probably a bit slower than was the case during the two previous quarters. We see very visible signs of this slowdown last one or two months. Regarding revenue, revenues or P&L generally, let's start with revenues. We are upgrading the growth from high teens level to the level of 20% plus. From the previous slides, it's very clear that what is the main reason.
It will be supported mainly by NII, where we are expecting growth by more than 30%, by one third, and again, supported by the rates environment and also continuing volumes. Regarding fees and commissions, again, the trend is gonna continue. Here we are also upgrading a bit. Off the top of my head, we were guiding low to mid-single digits. Currently it's closer to mid-single digit. Regarding financial operations, no change of the guidance. Here still we are expecting a bit lower income compared to last year due to, say, extraordinary successful year 2021. Regarding OpEx, also slightly adjusted. Just to remind, last quarter we were guiding mid-single digits. Due to inflation and also unexpected increase of base salaries of KB's employees, we are increasing the guidance.
What we are saying is upper mid-single digit, but don't take it as kind of a drama. The impact will not be higher than 1%. If your guess is around 6%, you would be more or less right. Cost of risk mentioned by Didier. What are the potential risks to the outlook? Basically, we see four main ones. They are listed there, but let me reiterate. That's a further escalation of the war in Ukraine, first. Second, shortages of fuel, and that's mainly gas materials. Third, potential return of pandemic. Currently in the Czech Republic, there is almost nothing. For last 28 days it was at the level of 50,000 people infected, so really nothing. No doubts it will come during the autumn.
The last one is changes to relevant either interest or FX rates or to fiscal policy. In a nutshell, compared to three months ago, we are expecting higher inflation, higher interest rates. Due to that, lower growth of mainly loans, better revenues and slightly worse costs. Anyway, still delivering very extraordinary positive ROEs. That's it, and I'm returning back to studio.
Excellent. Thank you very much. This has concluded the presentation part of this meeting. Now we will be happy to answer your questions. Let me remind you that this meeting is being recorded. If you have a question, please use the icon with raised hand at the upper part of your screen, and then please wait to be called.
If you are connected through a telephone, let me ask you to wait a little bit and I will call you later. Thank you. The first question is coming from the line of Gábor Kemeny from Autonomous Research. Please go on.
Hi. Thank you for the presentation. A clarification first on the NII guidance, if I may please. You are saying it will grow by a third, I think, which I think would imply something like flattish NII the second half relative to Q2. I think you were talking about some possible margin upside from here and loan growth is still positive. Might be slowing, but still positive. Why would your NII flatten? And the other question I have would be maybe for Didier. How do you think about the impact of a potential Russian gas disruption, Russian gas cutoff scenario? It would be useful to hear your thoughts on the implications for asset quality and provisioning. Thank you.
Thank you, Gábor, for the question. To be frank, I do not share your opinion. The 1/3 growth doesn't mean that the net interest income is gonna be flourishing. This is still on growing trajectory. That's true that it's gonna slow down. So far, we have been benefiting from, how to say, structural position, and, you know, our sensitivity to market interest rates. This effect is gonna be decreasing or slowing down. This is one thing. Other thing is that, we haven't been, as is our, let's say, kind of pricing strategy, leaders in up-pricing of client deposits.
We are starting to become uncompetitive, so we tend and it is in front of us to pay to the clients a bit more. That's basically two main reasons.
Sorry, can I just quickly follow- up on your rate sensitivity from here as to changes in the CNB rates upwards or downwards? Thank you.
Sure. Sensitivity decreased very significantly. I think three months ago, we were talking about CZK 500 million-CZK 600 million for usual parallel shift by 100 basis points of the yield curve for upcoming 12 months. Currently, we are talking rather about CZK 200 million-CZK 300 million. Why? It's very much related to the change of the structure of our deposits. As current accounts are declining, this is the output. Regarding the sensitivity to increase of short-term rates, or in other words, to each repo rates, the impact, again, just on top of my head, but last quarter or three months ago, it was around CZK 100 million. Now we are talking here about low tens of million CZK.
Yeah, please. Your question was, what will happen to our cost of risk in the scenario where the Russian gas would be interrupted for an extended period of time, if I understood well. In fact, your question is precisely the reason why we identified the so-called Russian portfolio at the beginning of 2022, which is a portfolio for slightly below CZK 30 billion. This portfolio we've booked in the first half, roughly CZK 700 million. Under our central scenario, we expect to book another CZK 1 billion in the second semester. Under this degraded scenario where the Russian gas will stop to flow, we would create a bit more on this portfolio. That's a first piece of answer.
We would probably not release on our IFRS 9 reserves for the non-defaulted part of our portfolio, but we would continue to build some reserves. We would marginally recover a little bit less on our corporate NPLs, but here only marginally, because the recovery potential we have is a little bit nicely ring-fenced from the impact of such a scenario. We'll probably provision a bit more on the non-Russia related corporate portfolio. All in all, we probably would be somewhere between 30 basis points and 40 basis points, but certainly not at the level of 60 basis points, which would really, I cannot imagine that. This is a brief answer to your question.
All very useful. Thank you. Just a final one from me. Can you comment on how you think about the likelihood of a Czech bank tax being introduced, please?
All right, I will take this one. Thank you for this question. We are trying as Czech Banking Association to keep dialogue going with the government. We are still of the opinion that there are better ways how to put at work the excess of capital of Czech banking sector in favor of infrastructure investments mainly. The dialogue is ongoing and no outcome, no tangible outcome of it. We have, like, zero evidence of any paper which might be called, like, draft of a new law or draft of the law of the taxation of banks. So our approach to that is to be proactive towards the policymakers and make them aware that on one side, we don't think that this.
What we see in the media is curing the public finance problem, which is rather of a structural thing. If we speak about putting more investments into a combination of public and private capital, we are very much open to keep the dialogue ongoing and to act upon this logic. As I said, there is no outcome. Taxes are being set by the government and by the parliament. We have nothing to decide here. For the time being, we don't have the evidence that the law is being drafted, and that's probably the maximum we can comment on it.
Thank you.
That all makes sense. Thank you very much.
The next question comes from Máté Nemes from UBS. Máté, please.
Yes. Good afternoon, and congratulations on the strong set of results. I had two questions, please. Firstly, on NII or more precisely on asset spreads and asset margins. It seems like the deposit repricing is really kicking in earnest, and as you mentioned, you need to reprice upwards in order to preserve your competitiveness. At the same time, retail spreads specifically remain under pressure. I'm just wondering, what is your outlook? What is your expectation in the next couple of quarters in terms of retail spreads and margins? Do you see scope for further repricing upwards that actually could mitigate from the disappearing effect of deposit spread widening? That's the first question. The second question is really on excess capital.
I think you were quite clear earlier that you intend to either compensate shareholders for foregone 2019, 2020 dividends or perhaps put that excess capital to value accretive M&A. Could you share any updates on that front? Are we still looking at a September timeline on a potential decision on that? Also whether you see anything viable and interesting on the acquisition front at the moment. Thank you.
Thank you for the question. Let's start with the margins on loans. As I was mentioning before, it seems there is not a big issue in corporates. For retail, it's a bit different. Simply the main reason for that is that the market rates are growing so fast that simply the banks are not able to up price this speed. Having said this, I strongly believe that the margins even on individual products, and it's valid mainly for the mortgage loans where current margins are in low tens of basis points.
That after some delay and after kind of stabilization of the market interest rates, the prices will stabilize and increase as well. Currently, the margins, and I'm talking on, let's say, bank book for individuals are at roughly 1 percentage point at the end of second quarter. Out of which mortgages are already only at 80 basis points, while consumer loans are still relatively attractive. I remember much more attractive yields. That's at the level of 3.6%. I strongly believe that we will be able to reverse this trend in upcoming quarters.
We are doing our best via kind of inviting of the competitors with increase of our client rates to do that as well. Not sure this. Yes. This was first question, NII on assets. The other one was related to the excess of capital and dividends generally. I would say we stay consistent. The business goes more or less as expected, probably a bit faster, but the variations are not significant. The capital remains very strong. Just to remind, we defined the capital surplus at a level of CZK 10.5 billion, which means CZK 55 per share. We will utilize it as soon as possible.
Of course, we need to discuss with central bank. We expect that these discussions will start at the end of summer, beginning of autumn. Still, I'm confirming that even the paying of this amount to the shareholders would keep us very safely within the management buffer. As always, we are saying or adding either it's utilization via dividends or utilization via potential M&A as this part of our strategic plan. In a nutshell, no changes.
Thank you.
Thank you. We have a question from Marta. Just come. Not sure if they are still going to ask. Probably not.
Actually, if I may. Good afternoon. Two out of my questions have been answered already. Just one last one. You had releases in retail segments, and you've been discussing this in detail earlier in the call. Can we get a bit more flavor of what was underlying without releases, without model changes, cost of risk of the segment in the second quarter?
To give you a simplistic answer, in the second quarter, we were in definitely negative territory. As I said, there is one component which continued to come from our recovery collection performance. There was also a bit of noise around those IFRS 9 reserves that contributed to this release evolution. Overall, in the second quarter, we definitely were in negative territory. Also supported by a level of payment discipline coming from our client that is much better than what we expected in the recent quarters. Also supported by the interest rate fixation season for 2022, where in fact the flows of requests from our clients for some restructuring is also much lower than what we initially expected.
All those indicators will continue to be very closely monitored, but that's the context we are in. In fact, this has to be understood in what Jan mentioned at the beginning of the presentation when talking about the labor market and the level of unemployment, which is really the key variable to consider. I don't know if I answered your question, but at least I tried.
I guess you can't answer more precisely. Thank you.
Thank you.
Yeah. If you have any further question, please use the Raise the Hand button on your screen. If you would like to ask questions through your telephone, please press Star and six, and ask your question directly. I think we will give a few seconds to potential questions via telephone.
Jakub, hi, it's Andrzej. I think I'm unmuted now, so if it's okay, I'll go ahead. I have a couple of questions.
Yes, Andrzej, please go on.
One is just to clarify what's happening with the investment banking net interest income. How much was it, more or less, in Q2 or in the second half? And what was the nature of it exactly? Are we talking about some accounting change here, whereby you book some IB revenues and profits from financial operations before, and now it's part of NII? Can you just maybe quantify it a bit?
Well, regarding this income, our expectation is that it will somehow be kept at the level of June this year. There is no change in accounting policies. It's just related to the fact that interest rates are so high. They are generating more margins and revenues in net interest income than in financial operations.
It is CZK a few hundred million, presumably. Set the order of magnitudes here from IB.
Andrzej, please say it again. I didn't hear.
A few hundred million CZK, perhaps. I'm guessing.
For the second half of the year?
No, in the IB net interest income in five years.
Andrzej, it's illustrated on page which is now being shown on the screen. It's this NII from IB. You have a time series available. It was like CZK 1.5 billion in the first half.
Okay. Very good. Okay, my second question is on asset quality. Over the years, you've been calibrating your risk management systems, and that's one reason why the coverage ratio has been gradually decreasing, if I'm not mistaken. What circumstances would you see a need to raise bad debt coverage, especially if we enter a recession?
For the non-defaulted exposure, if I'm taking, in fact, the coverage ratio, very much increased, kind of benefiting from the COVID period. I don't have the exact figures in mind right now, but we could send all the details to you if you would need them. That's for the famous S1, S2 asset classes. For defaulted, in fact, as far as I can remember, which is probably in the last four or five years, we've been very much fluctuating around this 50% coverage level. It's difficult to say for sure if this will continue to be stable at this level, but under our central scenario, this is what we will expect.
Stability for defaulted area and very much a build-up for the non-defaulted area in the last two years. We will continue to try to defy the IFRS 9 standard to keep this level of reserve on the non-defaulted part of our portfolios and even better to strengthen them if we can find the path to do that in the current environment. I know it defies a little bit the logic of IFRS 9, but I believe that it's probably what should be done. Did I answer your question?
Yes. Thank you very much. Thank you.
Thank you.
Thank you. Again, if you wish to ask a question through a telephone, please, press star and six, otherwise, use the raise hand functionality. We don't seem to have any further questions at the moment, so I'm handing back to Mr. Juchelka.
All right. Thank you very much everyone for being with us. You are almost 40 people around this call. We appreciate that very much. You have seen a pretty strong performance of Komerční banka in the first half of this year. We are aware that there are bumps on the road ahead of us. We hope the performance of the country and the Czech economy will remain strong despite the inflation peaking and despite the risks stemming from the geopolitical situation.
We will do our best to continue delivering the value for our shareholders while playing the role of responsible corporate banker in the country. We very much appreciate the hard work which is being delivered by our people. On top of these remarkable results, there is a strategic plan of KB Change 2025 being implemented in full steam. We strongly believe that the value creation as the main angle from which we are observing our future will remain the strong aspect of our being and business thinking. Thank you. Thank you everyone for your presence. Thank you very much for your attention paid to the shares of Komerční banka, and we are looking forward to seeing you at the occasion of the next quarter presentation.
In between, we remain available for any question you may have, and happy to discuss with you other aspects or other details should they appear in between our traditional quarterly meetings. Thank you very much. Enjoy the summer and see you soon. Bye-bye.
Thank you. This was the last sentence of this meeting. You can now disconnect. Thank you.
Thank you. Bye.
Thank you. Bye-bye.
Bye.
Bye.