Hello, welcome to the MONETA Money Bank 1H 2023 Financial Results. My name is Terry, and I'll be the conference operator for today's webinar. All participants will have the opportunity to ask questions today, and you can do this by using the Raise Hand icon or the Q&A chat box, both found on your Zoom toolbar. Alternatively, if you have joined us on the phone, you can press Star followed by 1 on your telephone keypad. Today's speakers are Mr. Tomáš Spurný, Mr. Jan Friček, and Mr. Jan Novotný, and Mr. Carl-Normann Vökt. I would now like to hand over to Mr. Tomáš Spurný to begin. Please go ahead.
Good morning, ladies and gentlemen. I have the pleasure of covering the first part of our presentation. If we can turn to page number two. We first cover the quarterly result. In the second quarter of the current year, we delivered net profit of CZK 1.26 billion. This is 4% quarter-on-quarter growth. I think, more importantly, if you look at the results of the quarter, we are also delivering strong Net Interest Income. Net Interest Income increased more than 6% quarter-on-quarter, and it exceeds the forecast that we provided to you in February 2023, by about CZK 180 million. We look with confidence into second half of the year.
The other positive news with respect to the quarter relates to net fees and commissions. On the quarterly basis, this category of income increased by 7.6%. This is due to strength of our distribution in asset management as well as insurance delivering a solid result. If you look at the cost base of the bank on quarterly basis, it has declined by more than 11%, even though we caught the tail end of mandatory contributions, namely, to the Deposit Insurance Fund, which has changed prices at the last minute, and we suffered a higher charge on insurance during May 2023. Nonetheless, we believe that the result is in line with our guidance and with our operating plan.
During the second quarter, we incurred risk charge of about CZK 150 million. The first quarter was impacted by both disposal of significant NPL portfolio, which produced material gain, and also we had some releases of provisions at the very tail end of the COVID-related provisioning. With that, I would turn to page three, where we look at the semi-annual results published this morning. If you look at the net profit, we stand at CZK 2.5 billion, rounded up by CZK 20 million. This is, in our view, a good result in the view of guidance, which we will cover at the end of this presentation, where we increase the minimum net profit target to CZK 4.7 billion from CZK 4.3 billion.
If we briefly cover the other categories, which will be commented upon by Jan Friček, on operating income, CZK 5.9 billion. In order to meet the guidance for this year, CZK 12 billion, we have to produce additional CZK 6.1 billion in operating income, and we are confident that the number will come in based on evolution of the second quarter. Cost base is under control. I would remind you that the CZK 2.9 billion has in it more than CZK 300 million of mandatory regulatory contributions, which always impact the first half of the year. This year, second quarter, as I said, we suffered additional charge. The semi-annual cost of risk is CZK 30 million.
This is combining the excellent first quarter with the normalized, second quarter charge that we have in the P&L, which I covered on the previous page. If we continue to the balance sheet, if you look at our activity for the past 12 months, in response to the high interest rate environment, we shifted the business model to focus on deposit gathering. The deposit gathering produces growth of 24%, and the higher volume of deposits supports the growth of the Net Interest Income. We ended up with CZK 368 billion. Nonetheless, if you were to add the additional CZK 2.8 billion that we placed in subordinated deposits, which is not included in this figure, the growth would be even higher. I would like to underline that our growth of deposit base comes at 3 times the market growth.
The deposit base also positively impacts the liquidity ratios, where we have increased the liquidity by 120% or de facto CZK 66 billion on a year-to-year basis. If we turn to the lending base, so our performing loan portfolio, it stands flat at CZK 269 billion. This is in line with our strategy, where we focus on two aspects of the loan portfolio. First aspect is underwriting high margin, high rate products. Second aspect is gradually pricing of the portfolio, both of which these aspects will be covered by Jan Novotný in his part of the presentation. If we turn into the evolution of our operating platform. If you look at the operating platform, the most important development concerns employment of the bank.
Last year, I believe it was in October 2022, we announced a target of 2,500 FTEs. We come in at the target. We are actually 11 FTEs short, but this restructuring materially contributed to arresting the impact of inflation. About half of the restructuring relates to lower demand for credit products overall, namely on the side of retail, and the other half is related to productivity improvement or discontinuation of some business activities which we found inadequate in terms of return on capital. If you look at the other aspects of the operating platform, on the positive, we reached agreement with four banks to not only share ATM infrastructure with respect to withdrawals, but we are planning to implement by the end of the year, functionality of deposits.
We believe that this will not only improve our cost position, contribute to CO2 reduction targets, but also broaden the reach of MONETA for those clients that need to meet the ATM infrastructure for deposits. We grow the client base and digital, I will cover in separate parts of the presentation. With that in mind, let's take a look at the operating environment as we would like to present some key numbers. If you look at page seven, the operating environment is frankly challenging. On one hand, you have economic stagnation, with the most optimistic forecast with respect to GDP growth for this year, it comes in about 0.5%. Hence, the economy is clearly slowing down.
The positive factor remains with respect to unemployment, because the unemployment is hardly moving up. This, in our view, contributes to benign credit environment, to continued benign credit environment, which actually is most likely and it's very true, as the metrics on risk management are at historical lows, and this will be covered by Norman in his part of the presentation. We continue to suffer from high inflation, which is followed by materially high public budget deficits. As you can see, the public budget deficit is estimated at CZK 295 billion for this year. At mid-year, the deficit stood at CZK 215 billion. We believe that there is more downside on government spending and upside through consolidation.
The consolidation package, which is reduce public spending by CZK 150 billion in midterm, is still in the Parliament and pending approval amidst fairly material obstructions. We think that it might be altered during the parliamentary debate. If you look at indebtedness of Czech Republic with respect to GDP, that metric seems to be continually increasing. If you look at the next page, inflation. Inflation, the latest number reported by Czech National Bank, stood at 9.7%. The annual number is in excess of 15%. The inflation is continues to be driven by housing costs, energy, groceries, and this causes some public discourse in the media. Our view, one of the house view, is that the struggle to subdue the inflation is certainly...
continuing but not yet over. We believe that the rates will come down rather than at the end of this year, by beginning of next year. That house view is framed or anchored in comments by at least three members of the Czech National Bank's board. This is the governor, and Vice Governor Frait and Mr. Procházka, whom cautioned that the markets might be too optimistic. If you look at the rates, the short-term key rate remains stable at 7%, if we then examine the yield curve, we can see that the swap market, since beginning of the year, decreased its estimates of medium and long-term rates, by about 25 basis- 50 basis points. The medium view is fairly optimistic on ability to subdue the inflation.
Now, this is with respect to the operating environment, and let me cover a brief update on our digital platform. If you look at our digital platform, this actually shows the tremendous importance of it, or materiality that it gained over the last five years. I recently looked at a presentation made to our staff and management. This was from 2017, where the digital platform at that time processed about 20% of all transactions. If you look at the digital platform from the perspective of first half of this year, we did more than 40 million transactions, split into three categories. Payments grew by 18%. If you look at our effort to add service and customer relationship management features, this category grows by nearly 17%.
If you look at our distribution capability through the platform, we have more than 20% growth. On the following page, we try to provide a simplified view of materiality of the digital platform with respect to distribution. Here we focus on eight key products of the bank, and if I start with deposits, if you look at the individual lines, the digital today enables 40%-60% share on key deposit products, and so on and so forth. This really gains materiality by every quarter. Nonetheless, the branch network still carries material parts of services, certain services, and distribution capabilities for the bank. On the following page, we also show you the trend of the digital trending of the digital platform.
On one hand, we have solid double-digit growth of users, unique users on the digital platform. If you examine the growth of the mobile platform, the mobile platform actually exceeds the 11% growth by more than double, and the traffic is undoubtedly shifting onto the mobile platform. It's also visible from the share of transactions between internet banking and mobile banking, but I believe that by the end of this year, 80% of the traffic, perhaps more than 80% of the traffic, will migrate onto the mobile platform. The bank is updating its investment plan, as we would like to further digitize product distribution and service enablement for small businesses and SME companies, and this will be the focus of our effort during the next three years.
Now, very briefly on the branch network, how it complements the digital offers. If you look at the branch network, it has become largely irrelevant in terms of payment transactions. Today, in the branches, we process about 0.5% of the payment traffic. Nonetheless, the branches are pivotal to cash services, where we process during the six months, about 590,000 transactions. Nonetheless, you can see that the cash intensity within our branch network is declining. If you look at it from perspective of branch visits, we actually have good growth in branch visits, because in many locations, some banks discontinue to provide over-the-counter cash services. We believe that being a rural bank, serving communities with less than 10,000 inhabitants, it is our responsibility to ensure that cash services are available.
Nonetheless, we will continue in rationalizing the network. By the end of the year, we will close seven branch units, which were selected during a review during a mid-year review. From the perspective of loan applications, we see similar trends. The branch network reduces. It reduces the number of application it receives. This is a function of lower demand, and it's also a function of branch closures, which were realized and executed through the first quarter of this year. With respect to number of staff that we deploy in front offices throughout the branch network, you can also see that the reduction is consistent with the 13% reduction of staff overall within the bank.
With that in mind, I will now turn over to Jan Friček, who will provide you with detailed evolution of the PnL overall. Thank you.
Thank you. Thank you. Good morning, ladies and gentlemen. I am now on page 15, and we'll continue with the profit and loss statement. In the first half of the year, MONETA delivered net profit of CZK 2.5 billion, with the operating income of CZK 5.9 billion, and delivered Return on Tangible Equity of 18.9%. Lower revenues is driven predominantly by Net Interest Income, down by 14%. However, partially compensated by net fee and commission income growth of nearly 21%, and more than double operating. On the cost base, we report CZK 2.9 billion, which is just marginal increase by 4% year-on-year. However, this year we charged regulatory charges by CZK 80 million higher than last year. Last year we obtained the M&A cost reimbursement.
On the cost of risk slide, we report CZK 30 million in net cost for the first half. Such a solid result was enabled by continuing solid performance of our loan portfolio, also gain realized on NPL disposals. On the following page, we can continue with the Net Interest Income development. In the second quarter, we increased the lending income by CZK 391 million year-on-year, predominantly due to increased loan portfolio yield by 60 basis points. Also, treasure income went up by CZK 1,300 million due to higher balance of liquidity, higher income from hedging derivatives, and also the market interest rate increased by 2.5% during the last five quarters.
On the expense side, our cost of funding increased by nearly CZK 2 billion, which is a function of the deposit-based expansion by 24%. Also we repriced significant portion of the deposit base to current market level. As a result of that, our Net Interest Income declined by CZK 300 million year-on-year. However, from the quarterly development, you can see that in the second quarter, we increased the result versus the first quarter, which is actually in line with the projection we provided last quarter. If we flip the page, which is already on the screen, page 17, here we show the original projection of Net Interest Income for the last 3 quarters of the year.
You can see that in the second quarter, we outperformed the forecasted number by CZK 77 million, which was achieved by better than expected income from hedging derivatives and also small one-off gain. The projected income going forward, basically, the drivers of the projected improvement going forward remain the same. It is ongoing expansion of the deposit base with the positive margin against the two-week repo, and also increasing loan portfolio yield. Below that, we report Net Interest Margin in the second quarter. We outperformed the forecasted result by 10 basis points. Going forward, we project stability in this respect. On page 17, we continue with the detail about net fee and commission income. Sorry, page 18.
In the second quarter, as was mentioned, we increased the overall result by nearly 22%, of which the income side increased by 20%, driven by higher transactional income, and also increased income for distribution third-party products, namely insurance and asset management. Below that, you can see that expense side increased as well. At significantly lower rate, this is in line with increased volume of client transactions. If we flip the page, we can provide you with more detail about the income side. In the chart on the right side, you can see that, year-on-year, we increased the income from insurance and asset management by 47%. In the second quarter, the result reached CZK 378 million. This represents nearly 50% of the total income in this category.
Is driven by improved distribution capacity and also improves the commercial conditions negotiated with the insurance company. Now we can continue with the cost base on page 20. On a comparable basis, we report a stable development with CZK 1,372 million for the second quarter this year. You can see that the higher regulatory charges book up was compensated by reduced personal costs and administrative expenses. Let me also point it out that for comparable purpose, we adjusted the figure of our cost base for the second quarter last year for M&A cost reimbursement, which we obtained last year. On the next page, we provide more detail about personal expenses development.
In the second quarter, we achieved a reduction by 2.6% year-on-year, predominantly due to reduced employment by nearly 13%. This was partially, only partially compensated by increased average salary amid the high single-digit inflation on the labor market, the pressure coming from the labor market inflation. We complete this section with the page number 22, where we show a decline of administrative costs by nearly 7% year-on-year. Again, this is on comparable basis. The reduction was achieved predominantly due to lower marketing intensity in the first half of this year, and small savings on other items. On the right side, in the chart, you can see that the D&A charge remained broadly stable. With that, let me hand over to my colleague, Jan Novotný, who will comment on the march.
Thank you.
Thank you, Jan. Good morning, ladies and gentlemen. I have a pleasure to walk you through the next section of today's presentation, which is the balance sheet development section. Let me start on the page 24, where you can see the evolution of our balance sheet for both asset and liability side. You can see that the very steep growth, more than 15% year-on-year, is driven by very successful deposit gathering campaign. In the key category of core custom deposit, we have achieved 24% year-on-year growth, and this growth contributes quite significantly to the improvement of the interest income generation capacity. We have also slowed down our growth in net customer loan portfolio, as we are focused mainly on the repricing of the current portfolio, plus we are focusing on originating, especially the high-yielding products.
Overall, balance sheet has reached CZK 423.8 billion, and we will continue to grow the balance sheet according to our strategy. Now let me move to the page number 25, where we are showing the total gross performing loan portfolio split per segment. As you could see on the previous slide, the portfolio grew up by 0.8% year-over-year and has reached CZK 269.2 billion, with a slight decrease in the retail share, very stable share of the SME portfolio, 27%, and continuous growth in high-yielding small business, where we reach almost CZK 13 billion in assets. In appendix, you can also see the detailed product split in each category.
On the page 26, the next page, you can find the evolution of our loan portfolio for the last four quarters, with the solid line depicting the portfolio yield and the dotted line depicting the yield, including the hedged results. Overall yield is already at 5.2%, thanks to significant focus on the reprice of current yields at 3.6% new origination at the higher level, and also increased interest rates for hedging the portfolio. You can also see the split on the right side of the page for the retail and commercial part. Retail at 4.9%, commercial already at 5.8%, both continuously growing. On the next 2 pages 27 and 28, you can see the detailed analysis of the yield evolution. There's just a small remark.
On those slides, the dotted line shows the new origination yield, and the solid line shows the portfolio yield. Across both pages, you can see that we are keeping the new volume significantly above the portfolio level, which, together with the repricing effort, supports portfolio growth for both retail and commercial products. Talking about the repricing of the current portfolio, let me please move to slide number 29, where you can see the detailed split of the portfolio into variable rate, fixed maturity, and fixed re-fixation period. As you can see, there is a huge portion of the portfolio which we may reprice in the future. It's 29% within the next 12 months, 47% within the next 24 months, and more than 70% in the next 36 months. This all creates an additional room for NII improvement in the next three years.
Now let me move to the funding base section. On page 30, we are showing the steep growth of our customer deposits base, with almost 24% growth year-on-year. This is a very big success of our strategy in last two quarters, and it helps not only to increase the profitability, but also to improve even further our excellent liquidity position in a very healthy and granular structure, with 73% share in retail, 32% share in commercial, and only 5% in the wholesale categories. On the next page 31, you can see the decomposition of the cost of funds in more detail per product.
You can also see that the growth of cost of funds has significantly slowed down in last two quarters. We expect further slowing down going forward. There is an expectation of further decrease either at the end of 2023 or beginning of 2024. That was all from my side. Thank you very much for your attention. I will hand over back to Jan Friček, to walk you through the liquidity and interest rate management section of today's presentation. Thank you very much.
Thank you, and let me briefly comment on the liquidity and interest rate management. I start on page 33. This was already mentioned by Mr. Spurný at the beginning. At the end of the second quarter, our position and high quality liquid assets stood at 120 billion, and this is more than 100% or actually 120% up year-over-year. If we compare this position against the core customer deposit base, the share increased from 18% last year to 33% this year. Also on this page, it is visible that our strong liquidity position of the balance sheet has been improved from 88% loan-to-deposit ratio to 73% in the second quarter this year.
On the following page, we provide a structural picture of our balance sheet from the interest rate sensitivity point of view. You can see that, at the end of the second quarter, we maintained CZK 177 billion of S yielding variable interest rate. This constitutes a share of 43%, against 23% share reported last year. These assets predominantly consist of liquidity placed at the Czech National Bank, loan portfolio with variable interest rate, and also fixed rate loans swaps to variable through hedging derivatives. In the liability side, we reported a position of CZK 226 billion with variable interest rate, and these liabilities predominantly consist of savings accounts, which we are contractually able or capable to reprice within three weeks.
As a result of this structure, we estimate that the reduction of two-week repo rate by 100 basis points will bring us CZK 485 million of incremental net interest income. With that, let me hand over to Carl Normann Vökt. Thank you.
Thank you, Jan. We are now covering the risk section. We start on page 36 with an overview of cost of risk. In the first half of this year, we recorded a net creation of provisions of CZK 13 billion or two basis points. The commercial book produced a book of CZK 31 million, where the retail portfolio showed, mainly thanks to NPL sales, a net release of CZK 1 million. Compared to the first half of 2022, where we significantly benefited from upgraded COVID-related receivables, the first six months of this year were influenced by NPL sales, having a positive impact on the cost of risk line in the amount of CZK 249 million.
Apart from the aforementioned sales of non-performing loans, the other main drivers of this positive result are so far observed solid core performance and good payment morale of previously downgraded receivables. On the following page, 37, here we show five snapshots of the development of the loan portfolio, loan loss allowances and overall coverages. While the gross receivables grew by around CZK 1.8 billion year-over-year, loan loss allowances dropped by around CZK 300 million, largely driven by a drop in our NPL stock. With regard to the total stock of provisions in the amount of almost CZK 4.8 billion, here you can see then, that more than CZK 900 million constitute managerial overlays, addressing increased risks stemming from high inflationary environment and higher interest rates.
As for the overall coverage, this dropped from 1.9% a year ago to 1.75%, which is largely driven by the reduction of our NPL stock in the reporting period. Moving to the next page 38. Here, we show the development of NPL in and outflows since June 2022. The second quarter of this year shows an NPL formation of CZK 960 million, which was lower than the CZK 1 billion formation we observed in Q1. However, due to lower NPL sales in the second quarter compared to Q1, it led to a minor net NPL formation of a bit more than CZK 60 million. As for the NPL stock, this decreased from CZK 3.8 billion a year ago and currently stands at CZK 3.6 billion at the end of June.
Going to page 39, here, we have a more detailed overview of how the NPL stock evolved in the last five quarters. Year-over-year, both the retail as well as the commercial NPL stock show drops and stood at close to CZK 2.8 billion for the retail book and CZK 800 million for commercial, respectively. As for the NPL ratio, it's dropped from 1.4% a year ago to 1.3%, which is identical to what we reported in the first quarter. The last page of the risk section, page 40. Here we have an overview of how our delinquency rates developed. Across all packets, as you can see here, delinquency rates continue to stay on a comparatively low level and are still well below levels seen before 2020.
Summarizing the risk section, I would say the core message is that the performance of the credit portfolio remains solid, judging from the fairly low delinquency rates observed so far. Based on the most recent macro releases, the inflation dropped below 10% already in June, and is expected to continue declining in coming months. On the other hand side, key metrics around consumption and trade still show a rather mixed picture. So far, it seems that the challenging macro environment has not influenced the labor market yet. However, to which extent this will stay like that remains to be seen. On the back of the so far positive development of the core cost of risk metrics, we are lowering our guidance of cost of risk for the full year from the current 25-45 basis points to 15-35 basis points.
We, of course, will continue monitoring portfolio performance metrics against the macro and the pertaining stock of provisions, and this will be subject to reviews going forward. With that, I hand over back to Jan Friček. Thank you.
Thank you, Norman. Let me go through the capital management section. I start on page 42 with the overview of capital requirements of on an individual and consolidated levels. In the second quarter, Czech National Bank decided to reduce the country's cyclical buffer by 25 basis points, effectively from the 1st of July. With that, our capital management target on a consolidated level decreased to 16.35%. This is including 1% management buffer, and it is expected to remain the same for the rest of the year. While on the individual basis, our capital target on MREL currently stands at 20.85%, and it's expected to increase to 22.95% by year-end, due to higher MREL requirement.
The following page, we show our capital adequacy, development of capital adequacy on the both levels, where you can see that both positions are well above the respective capital management target or even requirement. On the following two pages, we go into more detail, a view on both capital positions, starting on page 40, 44, with the individual level. At the end of the second quarter, our regulatory capital stood at 38.8 billion CZK, and this is including MREL, the Tier 2 instrument. The increase in the second quarter was achieved by successful distribution of subordinated deposits of 2.8 billion CZK, which was already mentioned, and this instrument is reported as a Tier 2. The MREL adequacy ratio, which is reported below of 23.7%, is well above the current capital target.
This is even more important, it is by 75 basis points above the expected capital target for MREL at year-end. With that, our capital position is large enough or provides sufficient sufficient cushion against the requirement to continue accruing 80% of our consolidated net profit for future dividends. On page 45, we complete this section with the consolidated consolidated view. Our regulatory capital on consolidated level stood at CZK 33.8 billion At the end of the second quarter. Since the incremental Tier 2 instrument is predominantly utilized on the individual level to cover the MREL requirement, we decided to show excess capital on a Tier 1 capital level, as it better represents our dividend capacity.
From the chart in the bottom on the right, with the excess capital development, you can see dividend accrual of CZK 2 billion, which represents 80% of consolidated net profit. Besides that, we maintain excess capital of CZK 3.3 billion. These amounts together of CZK 5.3 billion represents our available capital for future dividend and growth. This also, if we compare it to share, or if we divide it by number of shares, it is CZK 10.5 per share. With that, I will hand over to Mr. Spurný for final remarks and update on guidance. Thank you.
Very well. On the basis of the results, we elected to upgrade the guidance. Excuse me. We upgrade not only 2023, but we have also, based on the current knowledge, adjusted the following four years. This year, the minimum target that we would like to deliver concerns CZK 4.7 billion. This is on the basis of adjusting some of the metrics, namely the cost of risk, as we believe that the cost of risk will come in the range of 15-35 basis points, provided that we do not have some systemic or isolated event that would change that. If you look at the five-year guidance on the following page.
We also illustrate the five-year guidance against the previous five-year result. In the period between 2018 and 2020, the bank made CZK 20 billion. This includes the COVID year, when we made significant provisioning charge against the potentially an anticipatory charge with respect to COVID. One could argue that it's not fully comparable, but these are the factual numbers. The minimum five-year cumulative target that we would like to deliver, and I stress the word minimum, is CZK 25.4 billion. This constitutes relative growth in cumulative earnings of 27%, and it also includes the three years when the windfall tax will be levied upon the banking sector.
If we turn a page, we also disclose the key assumptions under under the guidance, and on following page, we also disclose the minimum thresholds with respect to performing loan portfolios and deposits. Here, I would like to comment that we typically provide the guidance with the view that we would like to over-perform it on annual basis by a certain margin. There is a degree of conservatism on the lending side. I would say we are being super conservative. This guidance is framed in a very aspirational plan, how to increase market share on the deposit gathering in the Czech Republic. With that in mind, our perspective is roughly the following. We have made CZK 2.5 billion during the first two quarters of the year.
We have accrued about CZK 2 billion for shareholder distribution. The shareholder distribution is unimpeded by the MREL requirement, as we have successfully removed an obstacle due placement of CZK 2.8 billion of eligible instruments. This pertains to the larger picture. If you look at the micro components of the larger picture, we have a positive trend on NII, which has returned to growth, and we expect to continue in that performance. We likewise expect to continue the performance at the level of net fee commission income. We are confident that the cost base of the bank is under control, meeting the employment target and prospectively seeking to implement additional cost reduction charges.
This is closure of seven branch units, which will impact the results of 2024, and we are also consolidating headquarters space, subject to successful execution. This should also have marginal positive impact on the cost base. We are confident with respect to the past mistakes of the risk performance. If the stagnation of the economy continues for a longer period of time, we believe that the cost of risk picture might actually deteriorate. The guidance calls for CZK 400 million additional profit for the current year. Thank you for your patience, and we will answer your questions as best as we can. Thank you very much.
Thank you. If you would like to ask a question, please use the raise hand icon or use the Q&A chat box, both found on your Zoom toolbar. Alternatively, if you've joined us on the phone, please press star followed by one on your telephone keypad. The first question comes from Simon Nellis of Citigroup. Please go ahead. Your line is now open.
Oh, hi, gentlemen. Thanks for the opportunity. My first question would be just around the tax rate. I see that you're looking for the tax rate, effective tax rate, to go up by 50 basis points, but I think the statutory rate is going up by 200 basis points. Can you just describe why you think the effective tax rate will stay so much lower than the statutory? Also, do you see any risks on that front, given the fiscal position? On my second question would just be about your loan growth aspirations for next year. I think that you outlined on slide 50. It seems like you're expecting a contraction in gross loans, if you could just unpack what's driving that, what's behind that?
Right. I think if you look at the statutory rate and our projection, this is simply a function of increased size of the investment securities, where we obtain benefit of income tax exempt interest income, which we received from those securities. This mitigates the tax increase. Simon, on loan growth next year, frankly, if you look at the guidance, we don't expect any as we want to see how the environment will pan out or turn out in the next in the next six months. Broadly, on the lending policy of the bank, we've adjusted thresholds for minimum living expenditures. We adjusted some other prudential aspects to our underwriting model on retail.
Secondly, I think, we are exercising caution on, even on the SME side. In the current environment, where we believe the jury is still out, how things will behave in the second half of the year and first quarter of next year, for the moment, we are keeping the plan flat on the size of the lending base. This might change, and if it changes, we will accordingly communicate the change in policy.
Thanks. Very clear. Actually, just one more, if I could. The increase in insurance commission was pretty impressive, up 60% year-on-year in the second quarter. Can you also just elaborate on that? Is that sustainable growth? Do you expect continuation of high double digits?
I think the growth will taper off. If you look at next year, it will certainly be slower than this year. Throughout the closing stage of 2022, I put incredible pressure, and my colleagues can testify, if you wish, to that, to improve distribution of pension fund insurance. This increased more than 200% year-over-year, or close to 200% year-over-year. We've also elected to renegotiate the terms and conditions amongst our insurance partners, and we were successful in that to the amazement of some market participants. We also implemented significant changes into incentive schemes of the bank.
The incentive schemes are now dependent about 40%, if I simplify it, on lending, and 60% on fees and deposit volumes. Whilst, if you look at two years ago, everything was geared about 80% towards performance on lending. We have entirely changed the tack, and next year I expect that this will taper off, because people, it took some time for our people to adjust to this change. Like with everything else, sometimes you mine the potential, you harvest low-hanging fruit, and then it will become bit of a steeper going up the hill. I don't want to commit to the same growth on NFC. This is part.
This growth is part and parcel of our effort to adjust the business model to the current conditions, and we will, as always, remain very flexible to whatever happens in the market.
Super. Sorry, just on the insurance, what's the key product that you've been selling? Is it mostly, non-life or?
We sell credit products, we sell identity protection products. This category is broadly stable. The main advance we've made is in pension fund distribution, and in life insurance distribution.
Got it. Super. Thanks so much.
The next question on the line comes from Thomas Unger of Erste Group. Please go ahead. Your line is now open.
Hi. Thank you very much for taking my questions also. Firstly, I would like to ask you on your expectations for windfall taxes. How do these expectations, your projections for the year end, how have they changed with your new guidance, with the upgrade and guidance in net profit? That would be my first question. The second question is on NII. Now, your projections that you had for the quarters Q2- Q4 for 2023, you left Q3 and Q4 unchanged despite the fairly significant beat now in Q2.
Does that mean that you view the beat or the performance now in Q2 as a one-off? I know, I understand that you said that mostly came from hedging derivatives and a small one-off, but I'd like to have your view on what you think has changed for the coming quarters in underlying trends, or if it's all according to expectation. Lastly, on risk costs and the managerial overlays that now stands at CZK 931 million at the end of the first half.
If the risk environment stays the same for the next two quarters, Q3 and Q4, what do you expect to do with this management overlay? Do you reallocate, do you roll forward, or would you expect to release? I understand that it is very uncertain how the environment will develop in the next two quarters, but I'd like to have your view on this. Thank you.
Thomas, on the NII, and the forecast that we provided, I would start with saying that I think we are the only bank in the Central Eastern European perimeter that provides forecast like that. Clearly both analysts and investors. We elected not to change it in order to have some space for overperformance. It's as clear as that. What has fundamentally changed is that we added more subordinated deposits, which carries 7% interest rate, so this is higher expense. This one is negative. Second one, which is positive, is that we are repricing the portfolio year to date. At midyear, we underwrote, we replaced about 21 billion of volume in our loan portfolio, subject to due rates. This is visible from the pages that were presented by Jan Novotný. This one is a positive.
Third one, we have some volume that originated in the second quarter, which will actually produce results only in the third quarter, because that's the nature, that's the nature of that. We feel confident with respect to the forecast we provided, frankly, we are not really at liberty to provide more than that because we think that we have to keep some margin of error in order to manage the performance according to your expectation, your expectation in plural. With respect to managerial overlays, we are back testing these. Currently, the policy is to hold the position as we face uncertainty. Whether we do something with it, I would say the probability is low.
We are looking at the year from the prism of the guidance that we provided, and the guidance is very clear on the range of cost of risk. From the guidance, it is clear that we will not, we will not under the current circumstances, which could change, but under the current circumstances, we have no plan to touch it. With that in mind, the overlays are regularly back tested, and the back tests are typically done in fourth quarter, and they are done in conjunction with the external, with the external auditors. If anything is done, it will be subject to the back test, and obviously we cannot comment on that until we do the back test. I would, I would leave it at that, keep in mind.
Sure. Thank you very much. Maybe you comment on the windfall tax?
On the windfall tax, it will be marginal at best.
Okay. Thank you very much.
The next question on the line comes from Mehmet Sevim, from JPMorgan. Please go ahead. Your line is now open.
Good morning. Thank you very much for taking my questions. I'll just have a couple follow-up questions on your deposit base, please. First of all, as you're getting close to your deposit volume target for the full year, how are you thinking about your ongoing campaign, particularly in terms of deposit pricing? Assuming no change in the policy rates, what would you expect core deposit funding costs to peak, and how would it continue from that point onwards? Maybe on the deposit growth guidance beyond 2023, it still implies some very strong growth of 5% CAGR through 2027. Does this mainly reflect your expectations for a rebound in the market in general, or do you intend to continue to grow faster than the market as you've been doing so far?
If so, can I ask why so, particularly in the context of subdued loan growth expectations? Thank you.
As long as we can raise deposits at marginal cost, which is favorable against the short-term rates, we will continue to do that. If you look at the turnaround in the NII, it's driven by largely by the liquidity position of the bank. As long as the high interest rate environment prevails, we will seek to continue with that strategy, apart from the fact that it supports the value of MONETA franchises. The customers see us as one of the fair banks, and this is, let's say, proven by the fact that tonight we will receive a very important public award, which is subject to voting by public, not by some expert panels.
Our policy annoys competitors, which is a derivative benefit to what we are doing. We will continue with that. We expect the fact, the year-end cost of funding at 3.6%, so the full year number should be at 3.5%, we believe. This has margin of conservatism. It is obvious that if we, if we are not able to continue to doing this at a marginal profit which doesn't consume capital, we will alter that policy. You can say it's short-term, unsustainable. We believe it's sustainable until the first quarter of next year.
Yes, we are close to the target, however, short of it by about CZK 20 billion, hence we estimate additional CZK 20 billion in order to meet the target. I wouldn't be too optimistic to say we are at it. And we don't know what the large banks are going to do, because based on my discussions with journalists from Reuters and other media outlets, we are significantly annoying the competition with the approach, as we have the distribution power, as opposed to small banks, which are paying high, lot higher rates than we are. This is our tactical approach to the current market conditions, and it has been obvious for the last nine months.
Great. That's all very helpful. Thank you very much.
On the... Just to add maybe a comment on the asset side.
We expect to reprice this year, till the end of the year, about anywhere between CZK 20 billion-CZK 25 billion. It's not only that, we are increasing the cost of deposits, but we will actually, improve the yield on the portfolio quite substantially until the end of the year.
Thank you. Our next question is a written question submitted from Tejkiran Magesh of WhiteOak Capital Management. The question is: How are the CZK 2.8 billion subordinated deposits in June 2023 different from additional tier one securities? Who are these investors, what are the salient differences between these deposits at AT1 Bonds?
Yes. Honza Friček will cover the question.
First of all, this subordinated deposit is classified as a Tier 2 instrument from the central bank or a regulation point of view, and then this is superior to the CET1, and it's subordinated to the MREL instrument, which we also have on the balance sheet. We currently do not have AT1 bond, so from that perspective, this is the subordination potential is irrelevant. From the customer or investor's point of view, this was purely a retail product, so we distributed the product among the retail customers. The subordinated deposit is for five years, and it provides a fixed term, fixed interest rate coupon at 7%. It's priced advantageously. It's priced advantageously against the estimated spread over the swap rate, which we obtained from several investment banks.
We didn't suffer distribution costs.
Also we achieved the lower distribution costs through the distribution through our internal distribution capacity, and we avoid paying bridge price to an external distribution.
Thank you. As a reminder, if you would like to ask a question, please use the Raise Hand icon or the Q&A chat box. If you have joined us on the phone, please press star followed by one. We currently have no further questions, I'll hand back to Mr. Tomáš Spurný to you for closing remarks.
Thank you very much for your questions. Thank you very much for your patience with us. The remark is very simple. We have delivered 2.5. The minimum target is 4.7. This constitutes CZK 400 million improvement over what we've estimated in February 2023. We actually tasked to deliver it and hope to deliver perhaps more. We look forward to next event that we will have, subject to end of third quarter. Thank you very much, and all the best to all of you.
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