Ladies and gentlemen, welcome to the Addiko Bank AG publication of the Consolidated Annual Report 2023 conference call. I am Sandra, the call's operator. I would like to remind you that all participants have been placed in listen-only mode and the conference is being recorded. The presentation will be followed by a Q&A session. You can register for questions at any time by pressing star and one on your telephone. If you participate via the audio webcast, you can write questions on the Q&A function on the webcast by pressing the question mark button. For operator assistance, please press star and 0. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Herbert Juranek, CEO. Please go ahead, sir.
Thank you. Good afternoon, ladies and gentlemen. Let me welcome you to the presentation of the Year-End Results 2023 of Addiko Bank on behalf of my colleagues Ganesh, Tadej, Edgar, and Constantin. We have prepared the following agenda for you. I will start with the executive summary, the key topics, and our new midterm guidance. After that, I will pass on to Ganesh, who will update you on our achievements on the business side. In the second chapter, Edgar will provide you with the details of our financial performance, and Tadej will inform you about our progress in the risk area. At the end, I will do a short wrap-up and present to you the outlook on 2024 before we move on to Q&A. Now, let's begin with the highlights.
I'm pleased to be able to announce a 60% year-on-year increase of the net profit for the business year 2023 to EUR 41.1 million. This corresponds to EUR 2.12 earnings per share. The return on average tangible equity went from 3.4% in the year before to 5.5% in 2023. Our operating result jumped up by more than 41% year-on-year to EUR 103.9 million, despite increased funding costs and inflationary impacts on the expense side. This positive result is based on a 6% increase of our customer base as well as a 6% increase of our focus area deposit volumes combined with a double-digit year-on-year growth in our focus business. In addition, driven by our acceleration program, we improved our sales and operating efficiency to keep our cost base under control. Moreover, we made progress to prepare our expansion into the Romanian market. I will come back to that later on.
Now, let's take a look at the risk side. We are proud that we have successfully managed our non-performing exposure down to a historic low of EUR 138 million, which results in an NPE ratio of unbalanced loans of 2.8%. At the same time, we were able to improve the coverage ratio from 75.4% at the end of 2022 to 80.9% at the end of 2023. Our cost of risk stayed at low 34 basis points or EUR 11.8 million. Based on the overall positive performance of the business year 2023, we will, according to our currently existing dividend guidance of 60% of the annual net profit proposed to the General Assembly in April, pay an ordinary dividend in the amount of EUR 24.6 million. That's equivalent to EUR 1.25 dividend per share.
This dividend per share is 5% higher than the dividend paid out last year, which was, for good measure, based on the profit of two business years, namely 2021 and 2022. Let's go to funding and capital. The funding situation remains strong with EUR 5 billion deposits and a loan-to-deposit ratio of 69%. The liquidity coverage ratio went above 310% at year-end. Furthermore, our capital position improved to a very strong TCR ratio of 20.4% fully loaded, all in CET1. The proposed dividend is already deducted in this calculation. Last but not least, we have published our ESG strategy and made substantial progress on our ESG action plan. All our projects and deliverables are according to the plan. Now, let's look at the attainment of our midterm target. As you can see, the positive message on this page is that almost all targets could be fully achieved.
Only the sum of other results and expected credit loss expenses on financial assets is with 1.7% slightly above the guidance. The reason for this is based on two topics. Number one, we, the management of Addiko, decided to keep a EUR 6.5 million post-model adjustment for remaining uncertainties in the given economic environment. Number two is the additional provisioning for Swiss Franc-related claims to enable faster resolution. As we already communicated, the statute of limitation to file new Swiss Franc claims in Croatia expired in June 2023, providing clarity on the final number of cases in the fourth quarter of last year. Now, consequently, we were able to prepare and to launch a strategy to resolve the unconverted Swiss Franc cases in Croatia. Furthermore, we also undertook prudent provisioning for a limited number of Swiss Franc-related claims in Slovenia.
If we would exclude these adaptations, the sum of other results and expected credit loss expenses on financial assets would be at 1.5% for the full year 2023. Next page, please. Let's have a closer look at the regulatory and the governance front. As already announced, Slovenia will introduce a windfall tax for all banks in 2024 of 20 basis points based on the total assets for a period of five years. In addition, the countercyclical buffers in Slovenia and Croatia and the systemic risk buffer in Austria are becoming fully effective. Both the new tax and the higher capital requirements are already included in our planning assumptions and respectively in the midterm guidance. As of January 1st, the new SREP conditions are applied with no change in the Pillar 2 requirements and a decrease of 25 basis points in the Pillar 2 guidance.
Since we, as a management, are in charge, we always were transparent in our previous earnings calls when we informed about the intense discussions with our supervisory authorities about our dividend policy. As you know, the regulators expressed their concerns about our target payout ratio of 60%, calling it aggressive and urging us to reduce it. After severe discussions, we decided to stick to our guidance and, as mentioned before, to suggest to the General Assembly to pay out 60% of the 2023 net profit in 2024. However, in order to address the request of the ECB, the forward-looking guidance for the payout ratio has been adjusted to approximately 50%. At the same time, the resulting new dividend guidance for 2024 and subsequent years will be changed to a dividend per share target, as I will show you in a minute.
Nevertheless, at this point in time, it is important for me to mention that despite the reduction of the payout ratio, it is the clear ambition of us as a management team to be able to pay next year at least the same dividend in absolute terms as we pay this year. In addition to the changes of dividend policy, we decided to overhaul our midterm guidance in order to give you more insights into our plans. This revision is based on the work which has been done within the acceleration program, and it takes into account our plans based on the opportunities which will be established with the completion of the program in the second half of this year. The third extension of our net interest margin is just one part of it. But let me show you the full picture.
We grouped the KPIs in three categories: income and business, risk and liquidity, and profitability. Furthermore, we increased the outlook by adding the years 2025 and 2026 to the picture. We also included our previous guidance in the last column. An empty box indicates that we have not disclosed this KPI before. Before I go through the list line by line, I would like to point out three general remarks. Number one, if you want to check the macroeconomic and interest rate assumptions behind these figures, please look at page 21 of this presentation. Number two, concerning Romania, as we intend to undertake a careful ramp-up to ensure a successful progress, we did not include any notable impact on revenues. However, the estimated yearly OPEX run rate increasing to EUR 3.5 billion and the cumulative CAPEX of below EUR 2 million are included.
The intention of this business expansion is to prepare a future growth engine which will unfold its full potential starting from 2026 onwards. Number three, we consider 2024 with the completion of our acceleration program as the preparation year to enable a bigger step towards our midterm goals in 2025 and 2026. So let's look at the individual KPIs. Instead of giving you an absolute target number of our loan book size for our yearly outlook, we decided to use a 6% compound average growth rate target for the period. This number is a blended rate and includes the intended further reductions in our non-focus portfolio, while at the same time, our focus business shall grow double-digit to achieve more than 95% share of the total loan book until 2026.
Based on this development, we see further potential to continuously increase our net interest margin up to more than 4.1% in 2026. On the same basis, we estimate a net banking income growth of more than 4.5% for 2024. And based on our efforts of the acceleration program, we expect the growth rate to go up to circa 9% in 2025 and 2026. For operating expenses, we have set our target to stay below EUR 191 million. This shall be achieved also in the later years through synergies coming from the operational excellence program. Based on the experience we gained with the respective initiatives in 2023, we consider this aspiration as absolutely achievable.
Although we are currently on a very low cost of risk level, we took a prudent approach and assumed in our plans a cost of risk for 2024 of 1%, increasing to less than 1.1% in 2025 and less than 1.2% in 2026. While we continue to strive to further reduce our non-performing exposure also in the future, we carefully included an NPE ratio of less than 3% according to EBA definition in the guidance. Subject to the yearly SREP result, we plan a total capital ratio of above 18.35% going forward. Due to the planned growth of our loan book, our loan-to-deposit ratio will increase from 69% in 2023 to below 80%. Now, one of the most important midterm goals is to achieve a return on average tangible equity of more than 10%.
We are confident that this target will be achieved latest in 2026 based on the results of our acceleration program. The other very important target is the dividend per share. Here, our midterm goal is to raise the dividend per share on a regular basis to an amount above EUR 2 until the business year 2026. Now, how to make that happen? We consider our acceleration program as the key engine in order to achieve our midterm guidance. Therefore, I want to give you more details of the achievements and the outlook for 2024 for each pillar of the program. Let's start with business. The initiatives of the program enabled a double-digit growth in our focus book and a remarkable 23% growth rate in our lending customer base. Furthermore, we enlarged our partnership universe with more than 560 partners and more than 1,200 locations.
This is a great basis to achieve significant healthy growth rates going forward. Consequently, our focus loan book will hit 90% of the total loan book already this year, combined with a continued positive impact on our net interest margin. This development will be also supported by broadening of our product offerings and further extensions of our network. At the same time, we will make the digital interactions with our clients even more convenient while keeping our pricing on premium levels. Our projects to expand into Romania are well on track and shall start with a soft launch in the second half of the year. Now, what's going on in operational excellence and digital? A lot. We gathered a team on artificial intelligence and started to work on a group-wide basis on this, which will create substantial benefits in all three pillars of the program.
Ganesh will tell you more about it. Moreover, the Kaizen methodology has been rolled out within the organization and is already used in the respective projects. Based on that, we were able to launch new end-to-end capabilities in three key countries. For example, in one country, we achieved to reduce the onboarding time for new SME customers substantially to 20 minutes. This new onboarding process is currently rolled out to all countries. Overall, we accomplished further growth in the number of our digital customers by another 8.5% year-over-year. Accordingly, we will continue with our efforts to finish the automation of our key processes in 2024. The completion of this exercise shall give us the opportunity to increase efficiency and to improve our cost base for 2025. The initiatives in our third chapter, best-in-class risk management, were also quite successful in 2023.
We optimized our collection processes and reduced the non-performing exposure again by 15% in 2023 to a historic low of 2.8%. Moreover, we implemented a new risk reporting platform across the group, which enables us to better control and steer our exposures. On top of that, we increased the automation in the customer segment by 6% year on year. Of course, we will continue that path in 2024 to strive for excellence, to establish a scalable and automated leading-edge underwriting, monitoring, and reporting environment. This shall lead to further improvements in terms of efficiency, effectiveness, and most important, also portfolio quality. So in summary, we believe that the acceleration program will bring us closer to our ambition to be the best specialist bank for consumers and SME in Southeast Europe.
With that, I would like to close here and pass on to Ganesh to tell you more about our achievements and our plans on the business side.
Thank you, Herbert. Good afternoon, everyone. Moving to page eight, 2023 posed several challenges, including rising interest rate, persistent inflation, and muted loan demand. However, our strategic approach characterized by maintaining premium pricing supported by unique selling propositions and prudent underwriting enabled us to achieve an impressive 11% growth in our loan book. With the premium-focused yield of 6.3%, our new business yields have reached 7.7% in consumer and 5.7% in SME. Our primary focus remains on optimizing our loan portfolio by reducing exposure of low-margin and high-exposure non-focus and medium SME business loans. Instead, we aim to replace these with higher-margin consumer and micro-SME business loans. Currently, our total book consists of 87% of cross-performing loans, reflecting a commendable 15% year-over-year growth in new business originations. On the liability side, while observing customer shifts towards term products, we still managed to expand our deposits to EUR 5 billion.
Moving on to page nine, in our consumer segment, we focus on driving growth by targeting digital-savvy customers and point-of-sale segments and lower-ticket, high-priced loans. Last year, we concentrated on, firstly, expanding lending reach through 564 partnerships across 1,200 locations, doubling our partnership lending business, and driving incremental growth. Secondly, transitioning from branch-based digital solutions to a more cost-effective, branchless end-to-end digital customer experience, eliminating the need of branch visits. Thirdly, we focused on increasing non-lending product revenue, particularly in cards and insurance, resulting in an 82% increase in cards' commission income. Finally, we also launched the BNPL program in Romania, offering a customer new financing options while providing valuable insights into lending risk dynamics. These insights will be instrumental as we prepare to launch our consumer lending services in Romania.
Overall, we have achieved a strong 46% growth in new customer acquisition, accompanied by a 121 basis points increase in yields and a 16% year-over-year development in gross disbursement. Shifting our focus to SME, we have prioritized delivering low-ticket-sized loans and mandatory account packages to underserved micro and small segments through our digital agent platform, where speed is a prominent unique selling proposition. Over the past year, we have concentrated on three key areas. Number one, process enhancement. By continuously improving our loan application process, we have reduced time to cash and increased our unique selling propositions, allowing us to implement price increases. Number two, introduction of new online channels.
Our commitment to convenience led us to introduce new online channels and a mobile app enabling SME clients to apply for loans online, distinguishing us as the only bank offering these services in key countries such as Croatia, Slovenia, and Serbia. Number three, product expansion. As part of the acceleration program, we were developing new products to enhance our SME ecosystem and revenue stream. Results highlight a 41% year-over-year growth in our microbusiness segment and an 18% growth in new business across the small and micro landscape. Notably, we achieved a significant 153 basis points increase in pricing year-over-year. In 2024, we anticipate another strong year as we remain committed to executing our specialist strategy, prioritizing customer value through premium pricing and disciplined risk management.
Addressing the challenges from the previous year, we aim to turn around our net commission income performance by various factors such as euro introduction in Croatia, fee increase protection in Serbia, and conservative payment behavior from customers. We believe this is temporary and anticipate a positive shift in the stabilization of interest rates and a lower inflation alongside initiatives to engage customers through new product launches complemented by fee adjustments to drive our net commission income up this year. Moreover, we dedicated ourselves to leveraging technological advancements, particularly AI, to enhance productivity, elevate customer service, automate processes, and identify risk. We recognize AI's pivotal role in banking and actually explore and test various use cases to drive innovation and efficiency. Moving to page 10, we summarize key states to achieve not only our midterm guidance but also our banking specialist vision, which we outlined three years ago.
Our consumer vision is to enable an ecosystem that offers embedded financing through partners such as merchants, retailers, and healthcare providers at the point of sale. We anticipate this channel to contribute more than 30% in the future years. Additionally, we believe that adding convenience through end-to-end digital lending channels will disrupt the entire region. ADICO, with our best-in-class customer experience, aims to lead this disruption by capturing 20% of the branch business, allowing our branch employees to focus on advisory services. Finally, our mobile platform plays a key role in enhancing customer engagement by providing easy access to new products and services. In our SME vision, we aim to address SMEs' pain points by offering an integrated platform that minimizes administration burdens, secures funding, and manages cash flow.
We will achieve this by building a comprehensive solution that not only provides fast loans and financing products to the underserved micro and small SME segment but also offers a convenient mobile banking solution with superior customer experience complemented by good servicing. Furthermore, we will enable seamless connections to their accounting and other financial service providers. Finally, our vision hinges on our acceleration program, empowered by risk and operational excellence previously outlined by Herbert. In summary, we are positioned well to deliver strong growth in the future as we continue innovating and solidifying our specialist position in the consumer and SME space. Please let me hand over to Edgar.
Thank you very much, Ganesh, and hi, everybody. Starting on page 12, where we printed the composition of our audited result for the full year 2023. In summary, quite an exciting year. Net interest income improved significantly and was up 29.2% compared to the previous year. The quarterly improvement naturally slowed down given the increasing deposit funding cost but was still visible in the fourth quarter at an increase of 2.1%. As a consequence, our NIM inched up steadily during the year and ended at almost 390 basis points in the fourth quarter and 375 basis points for the full year. Overall, our key revenue driver, the interest income, so excluding interest expenses, improved by more than 40% year-over-year.
This was driven by higher yields from our premium pricing of new business, repricing of the variable backbook, which represents only roughly 20% of our total book, and the contribution from Treasury and liquidity management. We ended the year with 87% of our book in higher-yielding Focus Loans, which is an improvement of five percentage points in just one year. We are expecting to reach 90% ahead of schedule within 2024. This was, of course, a key driver for the improving interest income. As in the previous quarters, the Treasury and liquidity management income also significantly increased year-over-year and overcompensated the steady increase in deposit costs. Interest expenses ramped up throughout the year. On one hand, this is a natural increase given the rate environment. And on the other hand, it's driven by our plan shift from on-demand or a vista to more term deposits.
We have achieved a healthier composition with 62% A Vista share compared to 68% at year-end 2022, while at the same time increasing deposit volumes and recording a 6% year-over-year increase within our focus areas, consumer and SME, as Herbert mentioned already. For 2024, we expect deposit costs to land slightly north of 120 basis points from approximately 80 basis points for the full year 2023. The second key income driver, the net commission income, continued to be down year-over-year due to lost FX/DCC business in Croatia, and that as a direct consequence of Croatia joining the euro in January last year. As Ganesh mentioned already, we have a plan to get back to a positive NCI trend going forward. All this led to a solid improvement on net banking income with an increase of almost 19% year-over-year.
Now to the other income, which comprises the net result on financial instruments and the other operating results. The development in this position is mainly driven by higher deposit guarantee costs and regulatory charges. In the fourth quarter, we also booked a restructuring provision of EUR 1.4 million in the context of our operational excellence initiatives. Down to operating expenses, which have continued the upward trend in the given environment, as discussed in earlier calls, and are now up by 6.3% year-over-year due to significantly elevated inflation, which ranges from 7.2%-12.5% in our region. The main driver remains high wage pressure and cost increases from service agreements that are tied to an inflation index. Our cost-to-income ratio landed at 60.3% during the fourth quarter and 60.5% for the full year, which is a year-over-year improvement of seven percentage points.
Despite the previously said inflation environment across our region and all related headwinds, we still managed to achieve our ambitious goal to contain expenses below EUR 179 million for the full year 2023. In aggregate, we have delivered very positive improvements of our earnings power, which is reflected in a 41% year-over-year increase of the operating result. The next item is the other result, which includes costs for legal claims as well as for operational banking risks following our prudent approach. As you can see, quite a large charge here for the full year 2023, most of which was already booked in the previous quarters, and which is mainly driven by the following topics. First, on Swiss franc legal claims. As a reminder, the group has not disbursed any Swiss franc loan after the year 2008. However, still, there are some dynamics here more than a decade later.
Most provisions are related to Croatia and reflect developments during the year 2023, specifically a higher inflow of new court cases. On a positive note, the deadline for filing new claims in Croatia expired on June 14th last year, which means we have now more knowledge on the potential total number of cases and can initiate a strategy to resolve claims from customers with unconverted Swiss franc loans, as Herbert pointed out already. For Slovenia, we also booked a low single-digit EUR million provision for related legal matters. Furthermore, this position includes impacts related to external factors that affected all banks, such as an interest rate cap introduced for housing loans in Serbia, a change in view from the tax authority on VAT for card business in Bosnia and Herzegovina, and the prepayment fee topic in Slovenia, often referred to as Lexitor.
Now to credit loss expenses, which in summary came in benign in the year 2023. Tadej will provide insights on the very positive development in a moment. To conclude, a strong result on the back of ongoing momentum in the top line, successful cost containment, and sound risk management, which allowed us to achieve the audited net profit of EUR 41.1 million, which is up 60% versus the EUR 25.7 million we achieved the year before. And all that while adjusting quite a bit of legacy that originated more than a decade ago. Over to page 13, which illustrates our further strengthened capital position. At the end of the year 2023, our capital ratio landed at a strong 20.4% fully loaded, and all of that in CET1. This figure now includes the audited profit for the year with the proposed dividend of EUR 1.26 per share already deducted.
As you can also see in the chart, our OCI continued the trend of recovery, adding back roughly 1.1% in CET1 for the full year, while RWAs continued to grow on the back of loan book growth. Briefly on SREP, Herbert has already mentioned the final SREP for 2024. In that context, we added an overview on requirements and guidance for the capital stack on page 64 for your reference. To summarize, a strong capital position with substantial buffers for continued growth. And now over to Tadej to share insights on risk management.
Thank you, Edgar, and good afternoon, everyone. 2023 was a great year from the risk perspective. We kept strong overall portfolio quality and were continuously focused on collection, which essentially resulted in a record low NPE portfolio and NPE ratio. As we can see on the left-hand side of the slide, the stock of the NPE portfolio decreased from EUR 163 million- EUR 138 million. That led to a decrease of NPE ratio to a historically low 2.8%, as mentioned already before. The right-hand side chart indicates that the fourth quarter of 2023 was especially strong from the perspective of NPE reduction. During the last quarter, we have resolved, upgraded, sold, written off, or achieved repayments of EUR 40.4 million of NPEs. At the same time, we had an inflow of EUR 24.9 million in NPE portfolio, almost half from the consumer segment.
This segment represented the largest share of NPE inflow but was at the same time materially lower than what we have anticipated. Higher NPE inflow in non-focus in the last quarter compared to the previous quarters was driven by one legacy large client. Due to positive restructuring actions, I'm optimistic that it will be successfully resolved. Overall, strong risk performance led to risk costs that I will present on the next slide. The credit loss expenses for the year 2023 amounted to EUR 11.8 million, including EUR 6.5 million of post-model adjustments. This was a decrease from EUR 18.5 million by the end of the third quarter of 2023. This resulted in a cost of risk of just -0.34%, showing a performance that was much better than anticipated. Provisions were released in the non-focus segment, resulting in a positive cost of risk of 1.77%.
Excluding the non-focus segment, the cost of risk would have been minus 0.65%. That would amount to EUR 19.4 million of provisions. Looking at the last quarter of 2023, bottom left table, we can observe that we had provisions releases in consumer segment and a relatively higher allocation in SME. However, the fourth quarter of 2023 was still lower or better in that segment than the last quarter of the year 2022. I would like to conclude that from the risk behavior and risk quality perspective, we have had a better year than planned. Strictly managed risk rules for new business and dedicated NPE management program led to lower NPE inflow and very successful NPE reduction. All that, at the end, reflected in a relatively benign level of provisions while keeping in mind that we have further increased NPE coverage ratio that is now standing at 80.9%.
Of course, unpredicted macroeconomic and environmental changes can potentially put our credit portfolio and specific segments under pressure. However, I believe that we are well equipped to detect potential deteriorations quickly and react decisively to keep the credit quality inside our prudentially defined risk thresholds. Besides that, we continue building new and enhanced risk solutions under our continued risk excellence program. With that, I hand back to Herbert.
Thank you, Tadej. We are coming to an end of the presentation. I will do a short wrap-up and give you the Outlook for 2024. Here you see the figures of the Outlook 2024 again, which are an integral part of the beforehand presented midterm targets. We are confident that we will be able to achieve them, although the macroeconomic environment is still difficult as the armed conflicts in Ukraine and Gaza are going on with all its negative consequences. There are no big news concerning our region. Our competitors continue to be reserved on increasing loan pricing. However, together with the expected interest cuts driven by waning inflation figures, we also see the pressure to increase deposit pricing going slowly down.
By and large, based on the forecast of our external economic research and based on our own view, we are assertive that the business development in our region will outpace the growth in Europe. Therefore, we will continue to expand our business in our existing geography on the basis of our prudent underwriting criteria. At the same time, we will continue to successfully perform our acceleration program to facilitate the next step to reach our midterm targets. To sum it up, we, the management team of Addiko, believe in our business model, and we are very positive for 2024. Hence, we will work with full energy to further improve the results during this year and to prepare a beneficial entry into 2025. Our ultimate goal is to create value for our clients and for our shareholders. With that, I would like to conclude the presentation.
Our next events are the AGM on the 26th of April and our Q1 earnings call on the 8th of May. I would like to thank you for your attention. We are now ready for your questions. Operator, back to you.
We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on the touch-tone telephone. You will hear a tone to confirm that you have entered a queue. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use only hands that are asking a question. Anyone with a question may press star and one at this time. If you participate via the audio webcast, you can write questions in the Q&A function on the webcast by pressing the question mark button. The first question from the phone comes from Mladen Dodig from Erste Group. Please go ahead.
Good afternoon, gentlemen. Thank you for organizing the call. And of course, congratulations on the very nice result and continuing to be on the right path, I would say. I have a couple of questions. So maybe I should go one by one if that's okay with you.
Yes, please. Go ahead, Madam.
So, did I understand correctly this recommendation, let's call it like this, from the regulator came as an individual letter to your bank, or this was widespread, how should I say, correspondence with the other banks in the region?
Yeah. Hi, Madam. Thank you for your response and also for the question.
Thank you.
As I said beforehand, we were very transparent about our communication on this topic with the regulator. This is an ongoing process now since we are in charge in this company. We had conversations with representatives of the JST. These were in-depth discussions. The expectations which were raised from their side did not, how shall I phrase that correctly? We had different views, let's call it that way, because we got requests up to or down to, let's put it that way, down to 30%, what would be appropriate.
As this seemed to be a really important topic of the regulator, especially when we paid out last year the dividend for two years, after careful discussions internally and also with our supervisory board, we decided to keep to our promise and pay out the 60% for the previous year in this year, in 2024, but at the same time also look up to the written general recommendations from ECB. Here, I would like to hand over to Edgar because this was based more or less on what has been announced in writing from the ECB.
Yeah. Hi, Madam. Great to have you on the call again.
Thank you.
Look, I think in general, the ECB is following the stance that somehow payout ratios out of profit, which are going above 50%, are looked at with a certain priority, let's call it this way, regardless of the bank. And this is our understanding also based on their paper or actually the ECB paper. I think it's called the ECB Bulletin Issue or something like this, which was published in June last.
Yes, I saw it. Yeah.
Yeah, where there was a comparison of many banks and clear indication that 50% is regardless of profitability. 50% more or less came out of kind of the expectation. They also based it, in the sense, on transition or contribution of transmission for monetary policy tightening if banks that are getting more profit or achieving more profit pay out more. So at the end of the day, it's clearly expectation. In direct conversations, I think Herbert already mentioned. And we hope that this is also seen positively.
But maybe also important to mention, and I want to reiterate what I said already beforehand. So on the one hand, we adjusted our guidance to the expectation of the supervisor. But on the other hand, we as a management team have the clear ambition to increase the dividend paid per share going forward. So our clear ambition for the coming year is as well to have at least the level, despite the fact that the payout ratio is lower, we want to see that as a basis what we paid out this year and further increase it.
Okay. So basically, it's fair to say that, for example, the next year conversation on this matter would again hinge on the overall macroeconomic and geopolitical picture in the world, right?
No. Well, we don't know what will come if circumstances severely change. But from today's perspective, we want to stick to the 50%. So we don't see any further reductions. Let's put it that way.
Yeah. Okay. Okay. I mean, I was even leaning toward coming back to 60, but okay, all in good time. Regarding Croatian provisioning, so now that you have more clarity on everything and considering that these core cases or reimbursements might come or might not, do you think that some of this provision might come back to the profits?
Madam, I'm going to take this. So very good question. Now we are confident that we are adequately provisioned. This was also confirmed as part of the year-end audit. We are not planning, if you refer to our guidance, we are not planning anything beyond this provision. So now we can work on the cases. We have, as I said before, finally a transparency on the number of cases that we can expect. We have provisioned those cases in terms of assumptions on how much we lose, etc., prudently. So in this sense, I would not expect any releases out of that. Yeah.
No releases expected. Okay. Okay. In one of the previous talks with your competitors from Slovenia, there was mentioned at some point of time that this balance sheet tax might be, again, a question of potentially joint action by the banks with the Slovenian authorities and probably either lowered or even avoided. I'm referring to the whole episode with the previous Swiss franc law. But do you think that this 0.2% might be changed at some point of time, or will live through its whole intended five-year period?
You're referring to the special banking tax or windfall tax?
Yeah. 0.2. Yeah. Balance sheet.
That was introduced just before Christmas last year. It's 20 basis points on total assets starting 2024. It's going to be there for five years. There is no indication that this would change. What does this mean for us in the other income position, which is basically the sum of the net result on financial instruments and the other operating results? It's roughly EUR 3 million per year. This is already included in our guidance.
Okay. So you don't expect changes there, no? Can you tell me, please? I noticed in your Serbian subsidiary, the end of third quarter, there was a quite substantial profit. And then in fourth quarter, it almost halved from RSD 1.2 billion- RSD 660 million. Of course, the provisioning jumped up. But are there any, I don't know, specific reasons that led to such developments?
Sorry. Can you say again? We had a bit of a sound issue here.
Yeah. So I noticed in your Serbian subsidiary here in Belgrade, that there was a very hefty result at the end of the nine months, so RSD 1.something billion. And then suddenly, in the fourth quarter, that amount almost halved, so RSD 660 million. I noticed the jump in provisions, of course, and also some other items. Are there any specific reasons? What happened in Serbia, or is it something else?
Hi, Madam. Tadej speaking. There was no general, I would say, decrease of the quality of the portfolio, but the impact that we see in the last quarter is driven by the modeling changes that we did based on the new macroeconomic projections, but mostly due to applying the local regulatory demands in our models also. We did that in two steps. Change in the last step is driven by these model changes.
Okay. Thank you. A final question for me. I would say that I agree generally with your estimates on how the ECB deposit rate might evolve. If we encounter in the, how it's popularly said, higher-for-longer rates, how do you expect it would affect the demand in the region? We have seen, of course, that everybody expects that the region will advance faster than the developed economies in Europe. Do you think that longer periods of higher interest rates might affect this demand in a rather stronger way that we have seen so far? I would say that so far, the demand was satisfying considering all the inflationary environment and the high interest rate.
Well, look, for the time being, we don't see any big impacts overall. What we see is that especially on the consumer side, the demand is quite good and healthy. We see some impact on the SME side. Maybe, Ganesh, if you want to shortly comment the overall picture.
Hi, Madam. This is Ganesh. Yeah, we see on the SME side some soft demand overall. But I believe the SMEs are waiting for the rate cuts. And we believe the demand will come back on the SME side in the second half of the year. But apart from that, I think you've seen also our slide showing the market itself is growing around 7%-9%, depending on the market, except for Serbia. So quite a healthy growth rates we are looking at in all the markets where we are.
Yes. Most people talk about the muted demand and everything. But when you talk to the individual banks, I mean, the banks I cover, the performance is rather strong. So yeah. Thank you very much for the time. Sorry if I took maybe a.
No worries. No worries. No problem.
Thank you very much. All the best.
Thank you, Madam.
The next question comes from Hugo Cruz from KBW, please. Go ahead.
Hi. Thank you for the time. I have a few questions. Perhaps I'll do one by one as well, like my previous colleague. First of all, what figure growth do you assume for 2024?
What figure growth?
No, whatever figure. I think that's an easy answer. If you look at our guidance also for 2024, we guide on net banking income level and not single on fee level.
Yeah. I know. I mean, I was just trying, well, let me rephrase it. I was just trying to understand. So you target 6% loan growth. You target flat NIM. So let's assume the NII should grow 6%. So why shouldn't the net banking income, so I guess you're assuming quite a weak fee growth there. And I was just trying to understand, is that being conservative, or do you need particular trends to justify that weak fee growth?
Well, I wouldn't call it weak fee growth in that aspect. Also, if you look at year-over-year NIM, we ended, yes, the fourth quarter at almost 3.9% NIM. But the full year, 2023, was 3.75%. So we do expect a further expansion on the NIM side. That's one hand. And of course, as Ganesh pointed out before, and I think he also mentioned it, that we are planning to get back on a growth trajectory on the NCI side. The drop, as also mentioned a few times, I think, in each call, just to remind everyone, in NCI, year-over-year, was predominantly related to Croatia joining the Euro. So they won't join the Euro again in that sense. If you would take that out, it would have been flattish or low single-digit growth year-over-year, 2022 versus 2023.
Okay. Then my next question was around one of the slides mentions restructuring efforts in 2024 ongoing. I was just wondering if the opex target or elsewhere in the PNL, you expect to book any one-off restructuring charges in 2024?
That's a very good question. So currently, we don't see that we would need a top-up in restructuring charges in 2024. That doesn't mean that it could not happen in the second half. Within the execution of the measures that are ongoing, we see additional potential to take NPEs' run rate out from 2025 onwards. But currently, we don't see a top-up. And if there would be a top-up, it would be less material than the one we did in the fourth quarter, i.e., EUR 1.4 million.
Very good. Then on the launch in Romania, I was just wondering, what are the costs that you expect, startup costs there, in both 2024 and 2025?
So I think, as I haven't mentioned before, we are doing a soft or planning a soft launch in the second half this year. So we are ramping this business up purely digital slowly. We have disclosed, actually, on the new midterm guidance page what the cumulative CapEx is until 2026.
2 million.
Exactly. So up to 2 million. And the Opex run rate in 2026 would be 3.5 million. Before that, since it's a ramp-up slightly below.
It's slowly increasing as we start.
Thank you. Then slide 28 talks about RWA optimization. I was just wondering if you could tell us a bit more what that is. Is that synthetic securitizations or something else? What could be the potential impact and the timing of any decisions?
Can you go to 28?
So I know exactly which page Hugo is referring to. So this is ongoing optimization. We are currently not planning any SRT transaction or anything like this or other transactions that would lead to RWA relief. Of course, we are running the accelerated run of our non-focus. Part of that is also RWA optimization, especially at low-risk adjusted yields. And besides that, there is, I would say, an ongoing RWA reduction on a lower scale. But piece by piece, in sum, if you do it many times, it also adds up to a number that is big enough to be happy about. But nothing extraordinary. I think that's the key message.
Got it. Okay. And then finally, two more questions. Sorry for that. First, any plans to issue a Tier 1s or Tier 2s to optimize the capital stack? And second, do you have any plans to enter other countries after Romania?
Maybe I start with the first one. The second one, Herbert, can chime in. Currently, yes, we have a very high-quality capital stack. It's actually one stack only, as you can all see. CET1 highest quality. Currently, we don't contemplate plugging additional Tier 1 or Tier 2. Also, looking at the ROE, it starts to make sense once your ROE is ideally higher than the expected or the cost of the instruments. That doesn't mean that we are not revisiting the topic on a regular basis to review. But currently, we don't plan it.
On the other question on the plans for other countries, we want to concentrate in the first place on Romania. We want to make sure that this project will fly and put our focus on that. But I would say at the end of 2025, we would also then potentially think about the next step. So overall, it is that the model is copy-pastable to other countries. And we would have the potential. We investigated it as well. But we are not disclosing it for the present.
Very good. Thank you very much also for these results. Thank you.
Thank you. Thank you, Hugo.
Thanks, Hugo.
Ladies and gentlemen, that was the last question. I would now like to turn the conference back over to Constantin for questions on the webcast. Please go ahead.
Thank you, operator. I have a couple of questions received via webcast and email. Here's the first one from Dalibor Podkuliak from Zagrebačka banka. Please explain, A, a high-cost income indicator, which is one of the worst with comparable leading banks in the region. B, revenues and profit growth is less than the growth in leading banks UniCredit and NLB in the region.
Yeah. Maybe I start with a more general explanation and hand it over to our CFO. So you have to understand where we are coming from as a bank. This bank is doing a transformation journey, which started in 2021 and had a five-year plan, which will end in 2026. The clear target is to bring the bank to a range which is around 50% on the cost-income ratio. We think this is achievable. We are in the midst of this journey, a bit ahead of our plan. We believe we are well on the way in order to achieve that and improve here further. If you look to the overall business model compared with universal banks, we want to be the best specialist bank.
Also comparably, in doing our business, we believe that we will be more profitable than the universal banks going forward when we have achieved the full extent of this transformation. As we are currently in the midst of the process, the situation is a bit different for us compared to our direct competitors. Edgar, you want to?
Sure. Well, Dalibor, thanks for reminding us what we, of course, know. On your second point, revenue and profit growth is less than the growth in leading banks, UniCredit and NB in the region. We are, of course, observing also the results of other banks, specifically the two you mentioned that came out recently, UniCredit first and NB thereafter. And we, of course, congratulate them for excellent results. When you look at the profit increase still, I mean, our 60%, I think, is a visible improvement also versus the UniCredit Group 54% and NB 23%. Now, on the main drivers, right, all the banks had tailwind in the last year, specifically those that have a high share of the loan book in variable loans. And as I mentioned before, we don't have 80% in variable loans like most universal banks, including those two, roughly.
But we have 20, which means we had less of a tailwind that we could profit from during 2023. But at the same time, we have a good, stable position going forward when it comes to rate cuts that, according to current expectations, are inevitably going to come in. So this should be a more stable NIM in that sense.
As a final remark to that, what we see is we still have potential to further improve. If you look to our midterm targets, you see also the ambition we have. We believe that this will be achieved by us as a team.
The next question is from Wolfgang Mateka from Mateka & Partner Asset Management. Congrats to that excellent result. How did you do in comparison to other banks in the region? How is the current shareholder structure? Best, Wolfgang.
Hi, Wolfgang. Great to have you on the call. I think the first question, we probably already touched. If not, please shoot us a message if you want to go deeper. On the second one, Herbert will.
I will answer that. So as far as we know, there is not a big change on the current shareholder structure. There were no recent purchases or sales from our existing shareholder base. The AGM is coming up soon. We will then, in April, we will know if there were changes. But you also know that if something would have changed, on a more significant basis, we would know because there is the obligation if a threshold is breached, and these thresholds are 4% and 5% or 9.9%, then we would know.
I have received a couple of questions from Simon Nellis from Citi, who could not join today's call. So first, on the other income, can you provide a bit more detail on the restructuring charge taken in other income in the fourth quarter and what this is funding? Are you likely to book further restructuring charges this year? Also, why did the deposit guarantee expense rise so much in the fourth quarter? What portion of the EUR 7.1 million is bank levies and where? What is the outlook for deposit guarantee costs this year?
Okay. Thank you, Simon. Great to have your questions. Pity to not have you here in person this time. I'm going to take those as three questions, right? So the other income, can you provide a bit more detail on the restructuring charge taken in the other income in 4Q? And what is it funding? So these are restructuring provisions related to initiatives and measures of the operational excellence stream within our acceleration program. And they should fund release of resources related to process improvements and further automation that we are working on. I believe also Tadej mentioned parts of that, including Ganesh. Now, on the next part, are you likely to book further restructuring charges this year? I think I already answered that to Hugo. The answer is we currently do not see a need for a top-up. Can we rule it out? No. But currently, no need.
If we would need to top it up, it's probably going to be immaterial. The next one also, why did the deposit guarantee costs rise in 4Q? What is the portion of the 7.1 in bank levies and where? The outlook. Deposit insurance expenses rose during fourth quarter due to the notification of the Croatian Deposit Insurance Agency to again charge banks, also due to the expected increase of the overall deposit base. This is roughly EUR 1.5 million for two quarters, meaning also the charge for the third quarter was expected to come in, which it did at the end. The bank levies and other taxes, they are not included in the EUR 7.1 million you're referring to. They are shown as separate positions within the other operating income.
In 2023, we recorded their expenses in the amount of EUR 2.7 million, out of which EUR 1.0 million are related to ECB and SRB fees alone for all the EU entities where we are present. I think the next question is only what we expect for 2024, right?
Outlook for deposit guarantee costs, please?
Yeah. So for 2024, we expect these charges to be roughly on a similar level as in the year 2023, plus don't forget roughly EUR 3 million per year for this special banking tax in Slovenia, which also would be in this P&L line item.
Okay. The next question is on the other results. Why did modification losses decline versus the third-quarter level? What's the outlook for legal provisions this year and next year?
All right. I think I will take this one. To the first leg of the question, the modification loss you are referring to is mainly related to the Serbian housing loan interest rate cap that was set in motion beginning of October. This triggered a modification loss, which we booked as an adjusting event in our Q3 results. Back then, the calculation was performed using conservative assumptions on the whole portfolio of customers that can theoretically be affected by this regulation. Don't want to call it law, regulation. During the year-end closure, the calculation was further refined. The expected impact was calculated only on the subsegment of customers that were affected, leading to a slight reduction of the initially recognized impact. Just as a reminder, this interest rate cap on Serbian housing loans at 4.08% will be in force until the end of this year.
At least this is the current knowledge. To the second leg, we are adequately provisioned, which was also confirmed in our year-end audit. I think I mentioned that before. We deem this sufficient, assuming that there are new dynamics in the legal environment. For cautionary reasons, we have included a buffer in our guidance for any potential additional legal provisions in the high single-digit EUR million amount.
The next question is on dividends. Did the ECB provide any indication of what it needs to see to allow a payout of larger than 50%? Is there some sort of profitability level?
I think this is already answered by the question asked before, so.
I think so too. Maybe just to add, so according to our understanding, to a large extent, this 50% is to a large extent not based on an expectation, meaning 50% out of profit that is related to single bank profitability levels or risk metrics. It seems rather based on the ECB's view that high payout ratios contribute to the transmission of the monetary policy tightening. There is even a document I mentioned before, zum Laden, that is published. So this can be found, ECB Bulletin, I think, June 2023. If anyone wants to have the file, please reach out to Constantin. He can send you the public link.
And then the last question from Simon on taxes. What was behind the reduction in effective tax rate this year versus last year? And what is the expected effective tax rate going forward?
Okay. So that's me again. There is no earnings call without a tax question from Simon. Thank you very much for that. So to the first part, taxes were partially positively offset by the effect from the remeasurement of deferred tax assets on existing taxable losses following the future increase of the corporate income tax in Slovenia. So technically, it had to be done. To the second part, what we expect going forward, we do expect a tax rate of smaller or equal to 19%. I believe we have included that as a footnote also on the new midterm guidance page, which is page six. That's all.
Okay. Then I have a last set of questions related to Romania from Ingrid Krawarik of Der Börsianer.
Shall I do that? If you give me the.
Shall I read them?
I will read them.
Okay. Good. How much are the startup costs in Romania? How does such an online market entry succeed? Don't you have to be there? What does it mean, unsecured personal loans? What happens if you default? What is so attractive in Romania? A cost-income ratio of 60% seems to be high for an online bank.
Okay. I will start and then maybe some colleagues want to add. On the startup costs, we already mentioned that it's EUR 2 million capital expenditures. It's EUR 3.5 million costs ramping up until 2026 on an annual basis for the ongoing costs on the Romanian operations. Why is that so low? Because we have this digital model already available. We are just adapting it to the local market conditions. That's why we can do it in a very cost-effective way. How does this market entry work online? One of the main reasons why we decided for Romania is that the country and the possibilities are very digitally savvy, which means that we have ideal conditions for our business model there. We have access to data of the respective customers on the level of income and on the level of employer.
Our main business, which we will start in a first step, which is unsecured consumer lending, requires exactly these features. Our clear ambition is to do that in a digital way. We believe that we can provide a solution which is better than what is currently offered on the local market. We believe that we have a competitive advantage with our processes and with our product there. That's why we also believe that there is not a necessity to have a branch or to be presented on-site. We see a clear case for a digital entry in the country. On the question of unsecured lending, I maybe would pass on to Tadej. Is this anyway our current model and its core of the business? Maybe you explain briefly why we don't consider that as a problem.
Yeah. I think what has to be mentioned here is that our risk rules, processes, controls, fraud checks are actually developed to support that kind of a business. What we are doing now on our current markets, we will adapt to the Romanian market and continue business there in a digital way. Our consumer unsecured business is our core business in this respect. You would like to add, Ganesh?
Yeah. I will just add one thing. As I mentioned in the call, first of all, we already launched Buy Now Pay Later in Romania, which basically means we are oriented to the market already. And we already see the performance from a risk point of view and from the business point of view, which helps us to refine our value proposition, what we have in the market. That's one. And I'll just add to our additional topic with what Herbert mentioned before. One of the things we are noticing is that the digital business for new customers is not so prominent in Romania. And that is our value proposition against the competition. And that's something we have a unique space. And we would like to disrupt that market with that.
Okay. Then the final question was on the cost-income ratio of 60%. Isn't that high for an online bank?
Yes, we completely agree. So 60% is too high. We want to bring it down to at least 50%. And that's what we are working on. But I also have to admit that we are not a pure online bank. So we also have a branch network. And it will be different than for Romania. Already in our existing markets, like in Slovenia, we already achieved cost-income ratios well below 50%. So we are in certain markets at 47, 46. So we believe that it's only a question of time when we will reach it on group level.
I have received a follow-up question from Wolfgang Mateka regarding the already running share buyback program. Do you think about the new program being implemented in due course of 2024?
No. We currently don't plan a new program.
Okay. I don't have any more questions. We'll hand back to Herbert to close the presentation.
I would like to thank you very much for your attention. 2023 was, from our perspective, a very successful year. We, as a management team, will do our best to make 2024 even more successful. With that, I would like to thank you. We look forward to seeing you latest on the AGM or at our Q1 earnings call in May. Thank you. Have a nice day.
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