Dear ladies and gentlemen, welcome to the conference call of MONETA Money Bank regarding the 3Q 2023 financial results. Please note that this conference call will be recorded. This event will have a live presentation, followed by a Q&A session. As a reminder, all participants will be in listen-only mode. Today's speakers are Mr. Tomáš Spurný, Mr. Carl Normann Vökt, Mr. Jan Friček, Mr. Jan Novotný, and Mr. Andrew Gerber. May I now hand over to Mr. Spurný, who will lead you through the conference call. Sir, please go ahead.
Good morning, ladies and gentlemen. I have the pleasure of opening today's conference call. We begin with summary of the bank's performance. First, I will cover the performance of the third quarter 2023, so this is page two. During the quarter, we generated net profits of nearly CZK 1.5 billion. We consider that good performance amidst the operating environment and circumstances. Perhaps more important is the fact that if you look at our operating income, the operating income category grew by 5% quarter-on-quarter. Here I would like to comment the fact that on a net interest income, which is probably the most watched category of income, we have managed to both meet and exceed the forecast that we provided you for the quarterly basis.
On net fees and commissions, we've had a good run. The category is growing at around 3% quarter-on-quarter, and other income is also quite satisfactory. On the other hand, if you look at our operating cost, it has decreased by 7% on quarterly basis, and the cost of risk is within expectations of the management. Now, if we turn to page three, we look at the year-to-date results. On the net profit basis, year-to-date, MONETA generated CZK 4 billion of net profit. Albeit, this is slightly lower than the previous year. It's 3.7% lower. We consider this, again, a good result, especially in view of the original guidance and in view of the upgraded guidance. Again, if you look at the key categories on operating income, we see stability.
That number comes 0.7% lower than last year, but we consider this actually an excellent, excellent result. If you look at the operating expenses, they're 1% higher, so we consider that stable, and this is due to the fact that the bank suffered significantly higher mandatory regulatory contributions. Cost of risk at CZK -172 million. Again, this is below the original expectations and according to expectations that we had at the end of the second quarter. The year-to-year comparison is obviously colored by the fact that in 2022, we still had benefit from upgrading COVID-related exposures, hence we released provisions. The provisioning line is now negative. On page four, we highlight key developments of deposits and loans.
Our deposit base reached CZK 393 billion. This constitutes annual growth of nearly 23%. This is in line with our strategy to expand both the volume of funding that the bank commands and to attract new customers into the franchise. I think on both dimensions, we were successful as the bank managed to attract 154,000 new customers. On the loan portfolio, the performance is according to our operating plan, where we sought and targeted stability in the loan portfolio. We're at CZK 270 billion and nil growth with a slightly changing composition of the loan book, more towards small business and SME. As a benefit of the larger customer base, we have an excellent liquidity. This is observable from the relevant ratios.
And lastly, part of the free liquidity has been invested into government bonds. As we enjoy on government bonds, tax-exempt income, which helps us to manage the, amongst other, the tax line. Then if we turn to page five, a couple of brief comments with respect to the operating platform. As you see, we operate 140 branches. We have made a decision to close additional six units, and we will achieve that by the end of the year or, in early, first quarter 2024.
Our cost performance has been greatly enhanced by the fact that we adjusted the level of resources in the bank, we currently employ 2,533 full-time equivalents, and this is in line with the target of restructuring measures that were enacted in September of 2022, and targeted 2,500 level of employment. We also enjoy cost efficiency from ATMs, as we have entered into and continue to be in alliance with three of our competitors. So the reach of the bank and the cost behind the reach is managed with respect to ATMs. And lastly, we have continued success in attracting new users and customers into the digital platform.
Andrew will speak of that, and you can see a notable shift of growth into the Smart Banka mobile banking application of the bank. Now, if you bear with me for a couple more minutes, I will briefly cover our view of the macroeconomic environment. So we are on page seven. If you look at the GDP growth of Czech Republic, it actually is negative for two consecutive quarters, so we are in a recessionary environment, and the expectation for this year on the overall growth is nil. So the picture is not particularly optimistic. Nonetheless, looking at unemployment, the unemployment has been quite stable. The last published figure is 2.6. Expectation by the end of the year is 2.7.
I am a bit more optimistic personally, because the labor market still is quite, or in many industries, people are looking for people and are not able to staff the positions, so, and this goes across the board, pretty much. So I am a bit more optimistic on the unemployment by the end of the year. On government debt, we see continually increasing indebtedness. However, there seems to be a glimmer of light at the end of that tunnel as the government was able to pass so-called consolidation package, and this reflects into the expected public deficit for 2024. For 2023, the expectation is - CZK -295 billion.
Next year, the expectation is at level of CZK 255 billion, so there will be a relatively material decrease of the deficit. The expectation is that one quarter of the decrease will come from higher receipts to the treasury, and three quarters of the delta will be the result of implementation of the consolidation package. What is also important is that this week, the parliament approved the main lines of public budget for 2024. So now, the discussion will not be about the size of the budget, but rather allocation of the public finance amongst various ministries. On page eight, we cover inflation and interest rates. If you look at inflation, the monthly inflation is coming down. It's in the single digits now.
The year-to-year inflation is still double- digits. We expect that October inflation will have some negative development due to specifics related to 2022, but also due to weakening of the Czech crown against the major pair of currencies, and this will probably reflect itself. On the two-week key rate, there's nothing to report other than Central Bank recently made a statement that the Board of Governors will discuss strategy of decrease of the rates. So our in-house expectation, or rather a prayer, is that the rates will be cut early next year, not during this year, because it would have some negative impact on our 2023 guidance, but we believe that we can manage that. Contributors to inflation, housing and energy and services, this is obvious that the pressure remains there.
On the swaps and bond yields, what we observe on the medium to long end of the curve, volatility, which is persisting at the level of 15-30 basis points on weekly basis, accompanied by weakening of the, w ith that, I will ask Andrew to give you a view on evolution of the digital and physical distribution platforms of the bank. Thank you for your attention.
Thank you, Tomáš, and good morning, ladies and gentlemen. In the next pages, we'll go through a brief update on the digital and physical distribution capabilities of the bank, starting on page 10, where you can see the development of the digital platforms. Mobile banking continues to grow rapidly. We attracted 199,000 new users in 2023, and the mobile banking channel is becoming the, the predominant channel, processing 75% of all transactions. Overall, the growth in digital users was 8.4% year-over-year, reaching 1.3 million, and this was driven by a combination of our deposit gathering activities, and a deliberate effort by the bank to push more of our clients into our mobile banking applications.
At the same time, on the right-hand side of the page, you can see the development of digital transactions, which grew 18.6% year-over-year. And this is double the rate, more than double the rate of growth in the number of users, which I think speaks to the effectiveness of our digital strategy in engaging customers, and increasing transaction activity. Moving to page 11, you can see that online plays an increasingly important role in deposit gathering. In the top right chart, you can see the development of balances on deposits originated online, which grew 48.6% year-over-year to CZK 110.7 billion. And below that, you can see that the online-originated deposits now represent 30% of the overall deposit base.
Of course, branches continue to play an important role in deposit gathering, and also grew 19.3% year-over-year, with balances of CZK 256.8 billion. Going on to page 12, we look at the number of visits and payment transactions in each of the channels. Overall, the number of visits to branches continues to decline, down 13.4% year-over-year, while the number of visits online increased 22.3%. And likewise, for payment transactions, we see branch-based payment transactions decreasing 16.6%, whereas online continues to grow, up 17.3%, and is really now accounting for the vast majority of all payment transactions.
On page 13, we look at the loan origination, where you can see that in a tighter credit environment, the online distribution has slowed more rapidly than branch-based. Overall, branch new lending units were up 0.8%, whereas in the online channel, we declined 10.4%. And I think this reflects the different nature of the lending that we're doing in each of the channels, where the online tends to be smaller loans taken for shorter duration, and this type of lending seems to have been more dramatically impacted by the change in the credit environment.
On the lower half of the page, at the same time, if you look at the volume, you look at the lending development in volume terms, you see the picture's a little bit more balanced, where the branch-based lending volume was down 0.8%, while the online was down 0.9%. So, a more balanced picture there when you look at it in terms of volumes. Going on to page 14, we look at the cash handling through the branch network and ATMs. Overall, the volume of cash withdrawals is decreasing, driven by branches down 17.8%, and partially compensated by ATM withdrawals, which grew 4.5%, but from a much lower base.
Likewise, with respect to deposits at branches, they decreased 23.7%, and again, partially offset by growth in ATM deposits, which are up 27.2%, albeit again, from a very low base. And then overall, as Tomáš mentioned originally, as Tomáš mentioned earlier, as we see the change in customer behavior, we're reviewing the operating platform of the bank, and we decreased the branch network by 14 branches year-over-year, and correspondingly, the staffing of the front office positions by 5.6%, as we continue to adjust the operating base of the bank to reflect the change in customer behavior. So overall, I think our digital channels continue to develop strongly, especially in deposit gathering.
In lending, we see a more muted development, but we think this will change as the credit environment changes. We continue to manage the network tightly in order to ensure efficiency and good customer service. So with that, I will hand over to Jan Friček, who will take you through the P&L section.
Thank you, Andrew. Good morning, ladies and gentlemen. I am now on page 17, and will continue with the profit and loss statement. Let me repeat the key financials. MONETA delivered net profit of CZK 4 billion, and 7.8 CZK per share, with the return on equity of 17.1%. Nearly stable operating income at CZK 9.1 billion is the result of a net fee and commission income growth of 22.3%, together with by CZK 400 million higher other income, which offset the net interest income decline by 11.3% year-on-year. Nearly stable cost base at 4.2%.
Despite persisting inflationary pressure and significant contribution to the regulatory funds this year, and lower cost of risk was achieved through persisting solid asset quality and gains generated by the NPL disposals. And lastly, effective tax rate was reduced from 19%- 15.3%, which significantly contributed to this year's profitability, and this results from our investment into government bonds, generating tax-free income. On page 18, we continue with the detailed analysis of the net interest income. First of all, quarterly development on the left shows positive trend throughout 2023. However, the third quarter result still ended up below the last year. Main drivers of the development are then provided on the right.
Lending interest income is up by CZK 292 million year-on-year, predominantly attributable to higher loan portfolio yield by 40 basis points, and also treasury income increased by nearly CZK 1.5 billion, supported by income from incremental liquidity and also interest rate swaps portfolio. Also, cost of funding continues to grow by nearly CZK 1.9 billion, and this is predominantly driven by the deposit base expansion, and also, the repricing of significant portion of the balance to current market level. On page 19, we report our performance against forecasts on, net interest income and the net interest margin. These forecasts we have published already in the first quarter.
As you can see, in the third quarter, we met and slightly exceeded both net interest income by CZK 48 million or 2.2%, and also net interest margin by 10 basis points. Our forecast for the fourth quarter remains unchanged despite the Czech National Bank's decision to cancel remuneration on mandatory deposit reserves. As we communicated earlier, we seek to offset the missing income of CZK 120 million through predominantly through continuing deposit base expansion at a higher than originally assumed growth rate. Nevertheless, I have to highlight that the forecast remains highly aspirational, and there is a risk we might end up slightly below. On page 20, we continue with the net fee and commission income analysis.
First of all, on the left, you can see net fee and commission income grew by 25.6% year-on-year, of which the income side increased by 24%, supported by successful distribution of the third party product. Also the expense side went up by but only on a lower rate of 17%, and this is mainly due to increasing transactional activity of our customers. On page 21, we analyze the fee income side in more detail. In the third quarter, this is for the first time when the income generated by the third party product distribution franchise reached 50% or actually exceeded half of total fee income. As you can see on the right, this income grew by nearly 54% year-on-year and reached CZK 420 million in the third quarter.
The growth is predominantly driven by the insurance product distribution, namely Life insurance and Pension insurance, which all together increased by 71% year-on-year. And on the left, you can see broadly stable development of other fee income categories, except for the transaction fee income, which went up by 8.7%, and this is also attributable by higher transactional activity of our customers. On page 22, we provide some detail to the cost performance. First of all, quarterly development shows 5.9% reduction, and also on the year-to-date level, we report only marginal increase of 1%. If we look at the individual cost categories, you can see that the only increasing category is regulatory charges, which went up by nearly CZK 80 million, if we compare year-to-date with the last year.
This is mainly driven by the funding base expansion, and also due to one-off contribution to the Deposit Insurance Fund in relation with the Sberbank liquidation. On page 23, we provide more detail to the personnel cost development. As you say, as you can see, on a quarterly basis, we report a 5% reduction year-on-year, and this was delivered on a basis of reduction in the employment intensity by 9.5%, measured as number of FTEs. The reduction, as you can see in the chart on the right, was equally distributed amongst functions of the bank. The control enabling and front office functions. The saving generated by the lower employment was partially offset by increase in average salary.
So far in 2023, about half of our employees obtained salary increase in average by 10%, which led to the increase of average salary at the enterprise level of 6%. Finally, on page 24, we provide some detail to administrative costs and D&A. As you can see, both categories decreased by 2.3% year-on-year, and this is mainly attributable to reduction of the branch network to a 140 unit, elimination of redundant processes, automation and productivity improvements across the bank. With that, let me hand over to my colleague, Jan Novotný.
Thank you, Jan, and good morning, ladies and gentlemen. I have a pleasure to walk you through the next section of today's presentation, the balance sheet development section. Let me start on the page 26, where you can see that we have reached a record high level of the balance sheet amount at almost CZK 450 billion. On the right side of the page, you can see that the outstanding growth comes from the very key category of core customer deposits, that we have grown by more than 22.7%.
On the left side of the page, you can see that as formulated in our strategy, we place the excess liquidity mainly in investment securities and in reverse repo operation with Czech National Bank, and we continue consciously keeping our net customer loan book on a very similar level compared with Q3 2022. Now, talking about the gross performing portfolio, that you can find on page 27, you can see the split between the customer segments, which stays broadly stable with retail at 67% share, small business at 5%, and SME at 28% at the end of Q3 2023. Now, on the next page, page 28, you can see the evolution of the loan portfolio yield with two lines. The dotted line depicting the yield, including the hedging results, and the solid line for yield, excluding the hedging effect.
As you can see, we are very successful in increasing the portfolio margins through both repricing the loans where possible, as well as originating new volumes at significantly higher level across the products and segments. At the end of Q3, we ended up with yield of 5.3% on overall bank, and on the right side of the slide, you can see the more detailed split, the retail portfolio and commercial portfolio, respectively. Now, let's move to the liability side of our balance sheet. On the page 29, you can see the composition and growth of the core customer deposits and wholesale funding, with overall 23.5% growth, and also the segment split with a share of the retail deposit at 73%, commercial at 23%, and wholesale at 4%.
What is also very important to mention is that we have raised over CZK 73 billion of new money in last four months, and we envisage further growth going forward. On the next page, page 30, you can see the evolution of the cost of funds for the key categories. Overall cost of funds ends up at 3.42%, and you can see that the increase is slowing down all across the component, with one exception, which is the wholesale funding category. However, this is mainly due to a very successful deployment of the subordinated deposits offered to our customers to meet our MREL requirements. This is all from my side. Thank you very much for your attention, and please let me hand over to Carl Normann Vökt for the next section of today's presentation. Thank you very much.
All right. Thank you, Jan. Good morning to you as well. We're now on page 32 with an overview of cost of risk for the last seven quarters. Year to date, we recorded a cost of risk of CZK 172 million or 9 basis points. If you look at the two main segments, retail and commercial, in retail year to date, we recorded the cost of risk of CZK 102 million, and in commercial it was 70 million. If you compare 2022 with 2023, I think the main difference we observed last year, we still benefited from significant upgrades of previously downgraded receivables to stage three, which when were upgraded to stage two. This happened to a much lesser extent this year.
2023 was clearly positively impacted by significant NPL sales in the amount of around CZK 1.1 billion, generating a positive P&L impact of CZK 291 million. If we move to page 33, here you have an overview of the evolution of the gross receivables, provisions and coverages. While the portfolio remained flat largely year-over-year, we managed to reduce the stock of NPLs with a corresponding drop of loan loss provisions by 10%. So the current stock of provisions amounts to CZK 4.6 billion. Within that, we have a managerial overlay of CZK 960 million, which shall address increased risks coming from elevated interest rate environment and the higher inflation.
As far as the overall coverage is concerned, this dropped from 1.88%- 1.68%, which is the result of the reduction of the NPL. If we move to page 34, another view on the NPL evolution since December 2022. Overall, the stock of non-performing loans dropped by around CZK 200 million year-over-year. In the third quarter this year, we saw a drop by CZK 51 million, which led to this current stock of CZK 3.5 billion. Going to page 35, here you see the NPL ratio and the breakdown of the two portfolios when it comes to the NPL stock.
Back in September 2022, we had an NPL ratio of 1.4%, which then dropped to 1.3%, at the end of Q1 this year, and since then has remained flat on that level until now. In terms of NPL stock on commercial, that remained flat year-over-year, and the retail NPL book dropped by more than CZK 200 billion. And the last page within the risk section, page 36, here an overview on delinquencies. As we have reported already last time in July, delinquencies remain still on a fairly low level and haven't really moved since then, and overall still remain on significantly lower levels than we had observed before 2022.
So summarizing the risk section in a nutshell, we can say we have seen a fairly solid performance regarding our credit portfolio. The key unknown is what's going to happen over the next couple of months. As we have heard earlier, on the macro front, we see rather mixed a mixed picture, in particular on the growth front. Positive is that the unemployment rate remains on a fairly low level, which is positive news for our retail book. The Czech National Bank is going to update their forecast for the full year and future periods in the course of November. On the back of that information, we will then review our input into our IFRS 9 provisioning models, as well as we will conduct a review of our ECL management overlays in the course of November and December.
What I can say now, should there be no deterioration on the macro front and should there be, not any major commercial defaults, I would expect that the cost of risk, which we guided you in July, to be somewhere in the range of 15-35 basis points, that that would come in rather on the lower end of that range. But as said, it is subject to no major commercial defaults and no other extraordinary developments on the macro front. And with that, I hand over to Jan Friček, who will guide you through interest rate risk and liquidity. Thank you.
Thank you, Normann. I'm now on page 38. Balance of high quality liquid assets at the end of the third quarter reached CZK 143 billion, which constitutes year-on-year growth of 101% or CZK 72 billion. This significant growth was chiefly driven by expansion of the deposit bank. Strengthened liquidity position is also demonstrated by increasing share of high quality liquid assets on customer deposits, which went up from 22% last year to 36% this year in the third quarter. And on top of that, in the third quarter, we established additional liquidity buffer through listing of our own mortgage-backed bonds. These bonds are held internally, hence they are not reported on the balance sheet. However, in case of liquidity crisis, these bonds can be placed with the central bank as a collateral within repo operations.
Against which we would get up to CZK 70 billion of additional liquidity within D+1. So this additional liquidity buffer would increase the share on customer deposits from 36%- 54%, so by 18% increase. On page 39, we provide a view on our balance sheet from the interest rate sensitivity point of view on the market trade change. If you look on the left, you can see that out of total interest earning assets, we hold CZK 202 billion or 46% of assets at variable interest rate. And this position is balanced with CZK 245 billion of liabilities at variable interest rate. These assets and liabilities are repriced, contractually repriced within three months, fully in line with the market rate development, with one exception, this is savings accounts.
CZK 186 billion of savings accounts can be repriced also within three months. However, just based on the bank's decision, independently of market rate development. The similar, one comment on this page, the simplified NII sensitivity indicates that, interest rate, market interest rate declined by 100 basis points, would generate incrementally CZK 435 million of additional net interest income, and this is on annual basis. Now we can move forward to the capital management section. On page 41, we provide overview of our capital requirements. First of all, the countercyclical buffer of release of countercyclical buffer by 25 basis points happened on the first of October.
As was already mentioned, the Czech National Bank reduced our Pillar 2 requirement by 30 basis points from 2.6%- 2.3%, effectively from January 1. With that, our capital management target, including 1% management buffer, currently stands at 16.1%, and will reduce to 15.8% from January 1. On individual basis, our management capital target stands at 20, 20.6%, and will increase to 22.7% at year-end, due to a higher MREL requirement. The reduced Pillar 2 requirement on the individual basis will be reflected only once we obtain updated MREL requirements from the Czech National Bank, which we expect during the second quarter next year. On page 42, we provide the detailed view on our capital position on the individual level.
You can see that at the end of the third quarter, we report a position of CZK 38.9 billion, which is by 18.7% above last year. The increase is driven by retained earnings, and also by newly issued Tier 2 and MREL eligible instruments. MREL regulatory ratio stood at 23.8%, with an excess of 320 basis points. However, two-thirds of this excess, or 2.1%, will be consumed by higher MREL requirements at the end. Finally, on page 43, we provide a view on the capital position on consolidated level. At the end of the third quarter, our position stood at CZK 34 billion, and this is a combination of Tier 1 and Tier 2 capitals, with the risk risk-weighted assets of CZK 171 billion.
Tier 1 capital ratio stood at 15.5%, with an excess of 2.3% above the capital management target, or CZK 4 billion in absolute amount. As you can see in the chart, with the development of excess capital in the bottom right corner, on top of the CZK 4 billion excess capital, we maintain the dividend accrual of three point two billion, representing 80% of consolidated capital year-to-date. So all together, at the end of the third quarter, we hold available capital of CZK 7.2 billion or CZK 14 per share. With that, let me hand over to Tomáš for market guidance and final remarks. Thank you very much.
Okay. Based on all of that, if we go to page 45, we seek to, or we aim rather, to deliver net profit of CZK 5 billion. Ideally, we would like to match last year, but this is quite difficult. If you look at the 5 billion in view of the previous guidance, this is 700 higher than what we published on February third, and consequently, in July, we upgraded the guidance to the current 4.7 billion. So we definitely aim to overperform the number from July by at least 300 million. If we then look at the medium-term plan, we are currently working on upgrades or refreshment of the plan.
What is obvious from the initial calculations is that we will keep the CZK 4.8 billion minimum target for next year. And I again stress, this is for us, always the minimum to be delivered. And, if you look at the past, if you look at the past 24 quarters, since we are publicly traded, we have overperformed the minimum guidance, on all of the quarters, except, for adjusting during the COVID time, the guidance in 2020. So we will definitely aim to keep this, and we will publish the upgraded plan, or updated rather than upgraded, updated plan, in February 2024.
Apart from that, what is important to mention is that if we examine debate about MONETA last year, and at the beginning of this year, there were doubts whether we are able to fulfill the MREL requirement through other means than retention of current earnings. We have successfully ticked off the requirement. We have solid capital base, both on individual and consolidated basis. So the road is open to the road is open to dividend distribution. There is no barrier on on that road as of as of today. With that, I would like to thank you for your patience, for your attention, and for your participation. And we are ready to answer your questions.
Thank you. We will now begin the Q&A session. If you would like to ask a question and have joined the call via Zoom, please write it in the Q&A chat in the bottom toolbar or use the Raise Hand function on your screen. Before speaking, please make sure that your local device is unmuted. Once your question is answered, please cancel the Raise Hand function. If you have joined us on the phone, please press star followed by one on your telephone keypad to enter the queue. One moment please, for the first question. Our first question is from Mikhail Butkov from Goldman Sachs. Mikhail, your line is now open. Please unmute yourself and proceed.
Good day. Thank you very much for the presentation, and congratulations on strong results. I have a couple of questions. Firstly, on the lending growth and your outlook for the next years, which is not changing with this presentation, but I just wanted to ask, what do you think is important for lending growth to accelerate, as we likely will enter the rate cutting cycle from the next year? Another question is on the deposit yield, so they continue to gradually increase. When do you think they will reach the peak levels, actually? And finally, as we are closer to the next year, what are your MREL requirements for the year 2024? Thank you.
Okay. Mikhail, on the first question on the lending growth, we need a combination of the following factors: subdued inflation, second, lower interest rates, and confidence of households as well as companies in the future. All three elements currently are absent, apart from declining inflation, monthly inflation level. From our perspective, we are seeking to reinvigorate the growth in lending through incentive schemes and other forms of communication to our staff, and we expect that this could materialize in the second quarter of the next year.
Then we could see some nascent growth in the demand, and as well as that catch up of wages to the minimum credit environment, credit requirements, namely in terms of disposable cash flow. So, we need little bit more time. On deposit yield, we will see a drop of the deposit yield or stability in the second quarter of 2024. On the MREL requirement, it's 22.7 for next year. And this is before a reflection of reduced Pillar 2 requirement. After that will be by 30 basis points lower.
To 22.4.
To 22.4, and then now our position stands at 23.8. So effectively, we are already reporting an excess of 1.4%.
This is relative to the next year, MREL requirement?
This, this should be relative. But as I mentioned, Czech National Bank will provide us with the updated MREL requirement during the second quarter.
Okay.
We do not expect any change. So this is valid, the 22.3 is valid, 22.4 is valid for next three quarters, and then we get an update, and it's subject to change according to the wishes of the regulator.
All right. All right, thank you very much for the comments.
Our next question comes from Mehmet Sevim, from JP Morgan. Mehmet, please unmute yourself and proceed with your question.
Good morning. Thank you so much for taking my question, and congratulations on the strong results. Just wanted to ask one follow-up on the CNB's removal of minimum required reserves. And previously you announced you'd be working on business opportunities to offset some of the negative impact. I think you did explain it during the presentation, but I'd appreciate if you could be a little more maybe explain a bit more in detail how you want to do it. And also just wanted to check if any of those efforts were already visible in the third quarter in non-NII lines, such as trading, maybe, or will that come through time within the NII line? And maybe on a related note, are there any further discussions on the regulatory front?
For example, in Europe, we see all those discussions about the ECB potentially increasing the minimum reserve ratio. Should that happen, would you expect a similar move in the Czech Republic, or are there any considerations? Thank you so much.
In the Czech Republic, we have 2%, the ECB requires 1%. So we don't expect that this would increase, actually. On how we are trying to find additional business opportunities, that was a euphemism. First and foremost, we have an internal debate whether we can depress the cost base by approximately CZK 100 million next year, from the guided level of CZK 5.8 billion to CZK 5.7 billion. This is one part of the discussion. So assuming that the income shortage is CZK 450 million, we can cover approximately 22.5% if we decrease the cost base, and this is an unpopular discussion with my colleagues. The second lever that we have available in 2024 is growth.
As long as we can grow the deposit base at similar pace or let's say at a double digit pace, then we would offset part of the, part of the impact, assuming that we can grow profitably, that the margin against the two-week repo rate remains positive throughout the growth, additional growth of the deposit base. We are very skeptical internally whether we can achieve at the same time, at the same time, the efficiency of growth and related profitability. So the situation from this perspective is very, is very difficult to find opportunities. With respect to lending growth, whatever we do during the fourth quarter or first half of next year, will not offset the delta on the, mandatory reserves income.
So the situation is quite difficult, and we'll most likely lead to downgrade of the operating income growth from the current level of CZK 12.8 billion, down to a lower, lower number. And we will compensate on the cost. We are also reviewing the cost of risk line, as we always put in a fairly conservative assumption, and thank God, we've never reached the level of the cost of risk that we've guided, so we have a safety margin in that. And we rely on positive performance of the tax line. But I want to be very clear and transparent as always. It will be very difficult to grow the revenue, as planned, as and as communicated in the guidance from February 2023.
Great! That's very helpful. Thank you very much for your comments.
As a reminder, if you'd like to ask a question today and have joined via Zoom, please write it in the Q&A chat on the bottom toolbar or use the Raise Hand function to ask a verbal question. If you have joined us on the phone today, please press star followed by one on your telephone keypad to enter the queue. Our next question is from Thomas Unger of Erste Group. Thomas, please unmute locally and proceed with your question.
Hi. Hello, thank you very much for taking my question. The first question would be on the trading results in the results from net financial operations in Q3. Was there any one-off effect in that? And do you expect anything for Q4 2023? Then secondly, on capital and the situation with the lower capital requirement very recently, and also the countercyclical buffer being reduced previously. That frees up capital. You talked about CZK 4 billion in excess capital. What do you plan to do with that?
Or, does it make you feel more comfortable about your regular dividend for 2023, or do you plan any extra capital distributions after the full year results? And then lastly, fees and commissions have developed very very strongly in 2023 or thus far in 2023. What trends do you expect for 2024? Thank you.
Okay. Andrew will take the fees, I will take the dividend, and Jan Friček will take the rest of it, which is the other income or the trading income, as you call it. Andrew, go ahead.
Yeah, I think the fee development in 2023 has been supported by strong development in insurance, where there are some one-offs resulting from a new relationship that we entered into with NN Insurance to distribute Life insurance. So that will create some headwind next year. On the other hand, next year, that agreement kicked in in the middle of this year. So next year will be the first full year under that agreement, so we will get some annualization benefit from the higher commissions that we get on that deal. But there are one-offs there that we will have to compensate for next year through growth. But overall, the distribution of life and pensions is developing well.
So we're reasonably optimistic of being able to make the targets in that embedded in that agreement next year and the year after.
On the dividend, we accrue at 80%. If you look at our performance in the past, we've distributed 84% of our earnings since entering the IPO element, since also incurring the unfortunate COVID period. So the minimum is 80, subject to discussion with our shareholders and subject to discussion with the regulator. We will consider various options, and I will not go beyond that. But everyone is aware that the dividend yield is one of the key attractions of investing into MONETA. So this is, let's say, one fact that is never disputed anymore.
And we will act as always in the past, in relation to protect the bank's capital base and to maintain the very good reputational capital with Czech National Bank, and at the same time, to provide shareholders with value. And I don't want to go beyond that. And Honza will comment on the trading income.
Yeah. So, that is CZK 400 million increase of other income, as you are asking about, is a combination of two drivers. The first is higher income on FX margin, which is the, which is coming through exchange office and also client payments, foreign payments. This gives us CZK 150 million additionally this year, and the growth should continue. While the second driver is the fact that last year we realized FX swaps with, in total, positive result. However, the result was split between the other income. Negative result was booked in the other income line of CZK 250 million last year, and the positive was offset through net interest income.
This year, we do not realize these transactions anymore, hence, there is no more the CZK 250 million negative impact, which we reported last year. These are two drivers. Going forward, the negative impact of last year will disappear, obviously, comparing to 2024 result. However, the FX margin should continue grow, to grow.
The FX margin, the FX margin is growing at about 20% per annum. You asked about one-off in that line. There is one one-off in that line. This is about CZK 50 million disposal gain on disposal of České dráhy. That's the Czech railway bonds that we sold during the third quarter in order to create a bit of a buffer if something unfortunate happened. Something unfortunate happened, the Czech National Bank stopped remunerating the minimum reserves. So this actually helps us. The one-off, let's say the anticipatory one-off, helped us to offset the setback created by Czech National Bank, which would have been this year CZK 120 million on the net basis, and this is how we have how we have offset it.
However, we did the sale of the bonds way prior to the decision of Czech National Bank, so it was more anticipatory than a reaction to a fact.
Okay, and the one-off effect was CZK 50 million, you said, or CZK 15 million?
CZK 50 million.
CZK 50 million. Thank you very much.
Thank you very much. Appreciate it.
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Okay. As it appears that there are no additional questions you would like to, on behalf of the team, I would actually like to thank the team because this business of delivering quarterly profit is actually becoming increasingly more difficult. I'm very grateful to not only the senior management team, but to everyone in the bank, as I believe we are working hard to match our commitments. And we want to thank you for your participation in the conference calls, as it is a very important venue of communication with analysts and potentially investors. So have a good day, and we are looking forward to the next quarterly call, which will be in February second.
We are not only facing a more difficult business of delivering profit, but also shortening deadlines of the result disclosure. We look forward to that communication, and we hope to have positive news for you continually throughout the beginning and the rest of upcoming year. Thank you very much, and have a good day.
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