Good day, and welcome to the Erste Group Bank first quarter 2022 results conference call. Today's call is being recorded. I'd like to turn the call over to Thomas. Please go ahead, sir.
Thank you, operator, and good morning from Vienna to everybody who is listening in. We follow our usual conference call routine. The call will be hosted by Bernhard Spalt, Chief Executive Officer of Erste Group, Stefan Dörfler, Chief Financial Officer of Erste Group, and Alexandra Habeler-Drabek, Chief Risk Officer of Erste Group. They will lead you through a brief presentation highlighting the major achievements of the past quarter, after which they are ready to take your questions. With this, I would ask Bernhard Spalt to take it away.
Thank you very much, Thomas. Good morning, ladies and gentlemen. Welcome to our Q1 preliminary results for 2022. I will try to indicate the slides which I'm commenting upon, and we take it briefly over the next couple of sort of slides to guide you through where we are.
On page four, setting the stage a little bit and setting the frame, we have been enjoying a clearly V-shaped recovery out of the corona crisis last year that was pretty much clear for all of our countries. There was strong growth momentum which stayed, still helps us here in Q1 2022. Of course, we're now facing different and other challenges.
We're going into this situation with strong corporate balance sheets, which are capital strong, which are very good on liquidity, and where the order books are more than full. I think the starting point is qualified by order flow dynamics of the last year, which shows a strong recovery momentum. Now, this translates into very robust loan growth.
Also, the non-euro-denominated economies have responded to the high inflation pressures with very sizable interest rate hikes, which of course helps us on the revenue side. This is the starting point, how we go into 2022, and this then translates into an operating result which is very robust, but 10.4% up in Q1.
If we look at just the interest growth and the net commission income growth, this shows a very, very strong development of the underlying business. Both loans as well as asset management businesses as well as other fee business have developed incredibly strong, exceptionally strong in the first quarter. Expenses, of course, were also on the rise.
T here was, however, as you have read, a one-off element, and this is the Sberbank CZ, which we have booked now for EUR 68 million, and we expect, without going too much further details, which we expect to be a very temporary phenomenon and where we would expect over time that we will have full recovery, and we will not suffer any permanent losses here.
I think if we strip out this one-off element of Sberbank, then our expense growth would not be double-digit, but would be 5.8% in this quarter. What is also important to say is that credit risk environment is still very, very healthy.
As I said, strong corporate balance sheet, almost no delinquencies so far, employment level is still high, and we also see no trend reversal at that point in time. However, if the second and third round effects of the geopolitical conflicts continue, one cannot rule out that this situation will change over time, but not this year.
It's also important to say that we carry over a very robust amount of reserves in credit risk provision, which we booked for the purposes of corona, which we have not, to a large extent, touched, and which we will be able to deploy once the forward-looking information for our credit portfolio changes. Overall, credit risk situation is still very much under control, still very benign.
Ultra-low NPL ratio levels, ultra-high protection levels. I think that's a sort of fortress, if I may say so, in terms of balance sheet composition. Now, when it comes to 2022 guidance, which we gave last time, there are two elements which I want to express.
Of course, the new situation, geopolitical conflict, in a context of very persistent and high inflation levels or very fragile delivery supply chain, and also sanction regimes which so far have not been seen and tested in the past, will slow down growth. We will have to adjust GDP expectations for this year. We do not expect, and let me say this, a recession for this year.
We expect, however, significantly lower GDP growth rates. At the same time, if you look at the combination of loan demand, interest rate hikes, and also demand for asset management products. We believe that we can post this year at least high single-digit NII growth and also fee growth will be very robust this year in the single mid-single digit area.
Let me come to the capital side, where we posted on the surface a very low 13.7% Common Equity Tier 1 ratio. This is characterized by a couple of features. Of course, you know that we do not accrue interim profits in the third quarter.
That's point number one. Point number two, which we have already talked about last time, we now take into account the new capital regime on the structural FX risk. Of course, we have seen much higher credit risk, credit growth than we would have expected. The positive FX translation effect within the other comprehensive income is not taken into consideration in this quarter.
There are a couple of effects which we will sort of see differently in the next quarter, which bring our CET1 ratio down to 13.7%, but very much dominated also by credit growth, which was above our expectations. Now let me take you very quickly to the next two slides.
Slide number five to start with, on the impact of the direct impact of the war in the Ukraine to our own business model. You do know that we don't have any subsidiaries. You do know that we don't have any kind of material direct exposure to the region. You do know that the trade relations between our region and Russia have been going down significantly over the last 10, 15 years. There is no direct first-round impact.
Of course, we do have customers who do maintain strong business relations with the region. We are screening them. We're getting more and more close to this portfolio. From what we see is that the credit risk implication, even if this gets a lot worse from here, will be very digestible. Also, banking exposures are insignificant.
Not insignificant, but very manageable, and no cause of concern. Sberbank, I already commented upon. We have three countries where Sberbank is still an issue for us. This is Austria, the Czech Republic and Hungary. All of the other countries have been dealt with. As I say, no matter how this resolution or sort of cleanup will take place, we do not expect major net losses over time here.
This is the direct impact. If you look at page number six, where we talk about the securities business and the trading business and the markets related business, again, here, we are, I think, very safe because our exposure here is insignificant and negligible, and we do not expect any material economic risks to the bank. No change here. Now, let me get to page number seven of the presentation, where which speaks more about the macro implications of this Ukrainian war.
It's not only the Ukrainian war, it's also a combination of the geopolitical conflicts with a very high inflation situation all over the region, together with originally already very fragile supply chains, which are getting now more stuck, and also a sanction regime where I think it would be naive to think that sanctions will only hit Russia.
Yes, of course, the Russian economy will be put into a coma, but the sanctions will also have a dampening effect to the Western economy, clearly, and it will sort of slow down growth. This is very clear. All of our GDP growth expectations, which we have seen before this geopolitical conflict, have been adjusted. You see this on this page. There's one other element which I think is very important to watch and monitor and which is hard to predict.
This is the dependency of Europe and our region as well when it comes to supply of oil and gas. Energy supply is a strong dependency and a concentration risk of most of our countries, with the notable exception of Romania and Croatia, who managed to become relatively independent.
Others, we need to find a playbook on how to get independent of Russian energy supplies. I think that is a destabilizing factor, clearly, and also possibly a growth opportunity at the same time. I do think that, once alternatives need to be found when it comes to the dependence on Russia as a supplier of energy, then possibly investment opportunities will come up.
At the same time, what I already said, I do expect, and we have said that, throughout the last 12 months, I guess, we expect inflation to remain elevated. Energy prices are high, food prices are high, and commodity prices are, to say the least, volatile in a stated way. Of course, currencies will see protracted volatility, to put it that way. Let me guide you to page eight, our Group income statement performance when it comes to the net profit reconciliation.
I do think that what is important to say, and I want to sort of guide you to the right part of the chart, which is a year-on-year net profit reconciliation, where you see that operating income has been very strong in this first quarter, both on the loan side as well as on the fee and commission income side, even above our expectations.
The operating expenses, as I've said, are qualified not only by Sberbank, but also by the deposit guarantee scheme contributions. I think overall, the underlying business has been doing really, really well. If you look at page number nine of the presentation, the key income statement data, net interest margins are going up.
For the first time, for very many years, we see a reinvestment situation on the bond portfolio, which is net positive. Our reinvestments are yielding better returns than the maturing bonds on our books. This we have not seen for quite a while. The loan demand together with the interest rate hikes helps us on the net interest income side quite significantly.
We've been talking about the cost side. If you strip out the Sberbank side of them, then I would say that also the positive jaws, which we always have promised, are quite visible on an underlying level. Return on tangible equity, you see we promised double digits, and we do see double digits delivered here.
On page number 10, where you look at the balance sheet performance, yes, very strong loan growth, but what surprised us, and it's continuing to surprise us, is that we still see an unstopped inflow of customer deposits.
I'm always very much tempted to say now this is a turning point, now we see a sort of changed dynamics in terms of more loan growth than deposit growth, but still the deposit growth in these times of uncertainty is very, very robust. Of course, helps us as an incumbent player as we're being sort of perceived as a very reliable and dependable player in the market. On page number 11, this has since been reflected in a record low loan-to-deposit ratio of 83%, which we so far have not seen.
Credit risk side, I covered with 0.3%, again, record low NPL ratio with a record high of almost 92% coverage ratio. I do believe the balance sheet is a fortress and is supporting our ability to support the local economies even in very difficult times. Now, a couple of things still on the macro. Let me guide you to page 13, macro update.
Y es, we do see a lower economic growth in this situation of uncertainty for 2022, though we do not see at that point in time a recession, but we see a significantly lower growth. Let me speak about a couple of countries in this context more specifically.
If I look at Hungary, for example, the GDP growth forecast is now at 4.8%. It's likely to sort of overshadow the upswing in the foreign demand and outweigh the consumption growth driven by fiscal expansion. I do think that we will see here again a slowdown below 4% next year. On the monetary policy front, we expect that the key policy rate to gradually converge to 7% in summer.
Romania should grow by almost 3% this year, hopefully. Provided that the geopolitical tensions subside, the economy should rebound significantly next year. The National Bank of Romania is expected to bring rates 4.5% this year as inflation really flares up significantly.
Croatia for another country ended 2021 on a very strong note. Q4 delivered a quite solid 9.7% year-on-year growth. The 2022 year outlook is impacted by the war, of course. We expect a baseline forecast at 3.4% GDP growth.
Austria has been doing really well in 2021 with 4.5%, and the first weeks of 2022 have been also still very, very strong. Winter season has been okay, and the pre-crisis weeks in the last couple of weeks have been showing the similar patterns as last year. I think yes, we will see impacts.
We see a slowing down of the economy, but still, we believe our base case is a mild and moderate growth in our region throughout this year. Now, page number 14, very quickly, on the retail side, what is happening. The demand for loans is still strong, especially on the housing side, in all of our countries.
Despite the fact that interest rates are going up, despite the fact that inflation rates are going up, and despite the fact that we have not only countercyclical buffers, but also macro-prudential measures in place like loan-to-value and debt service-to-income levels, we still have seen so far a very strong demand for housing purposes. We do expect that this will now be somewhat reduced, but we do not expect this to completely change in terms of trend reversal.
The demand is still very strong. It will sort of suffer somewhat, but it does not come sort of to negative territories. Customer deposits, as I said, still continue to increase significantly, and the client demand for securities do remain high.
If you look at page number 15, operation-wise, Omicron has not hurt us when it comes to keeping our branches open and operative. It has not sort of stopped us from delivering our services. George is now available to more than 8 million users in all of the six markets where George is now live. I think that is something which is going on, which is continuing to develop according to plan, and according to expectations.
Customer experience is very, very good in all of the countries. On the corporate side, page number 16, we still have a very dynamic loan development where customer loan growth demand, loan demand has been strong on all of the segments, whether it's SME, the real estate side or the large corporate side. The order books, as I said, are really full, so there's a lot of demand. Where there is a scarcity, there's of course a scarcity of skilled labor force, and sometimes a scarcity of input, of material input. Generally, the demand situation is very strong. Capital markets have been doing really well.
On the asset management side, just to conclude that view, that picture, is of course, we have seen, in the third quarter, the market volatility also hitting asset management volume. Assets under management stood now at EUR 73.6 billion at the end of the third quarter, which is slightly down from the high point. I think overall, I would say, very robust region, very robust business model.
Of course, dynamics are now coming sort of down in a way that people are getting now more cautious, where people are possibly postponing then again in the future investment decisions, and the decisions to take up housing loans. Overall, very robust business model, very robust region, and high profitability.
With that, I would like to lead over to Stefan to go into the operating trends. Thank you.
Thank you very much. Good morning. Let me give you a couple of more details on the underlying operating trends. Let's start on page 18 with the developments on the lending side. The year-over-year loan growth has been strong and well-balanced across all business segments, slightly more pronounced in the first quarter towards the corporate side.
We expect a certain slowdown on the back of higher rates, inflation, and of course, the reduced macro outlook. However, feel very confident with the mid-single digit year-over-year loan growth outlook. Let me please refer you also, and please bear in mind that the year-over-year euro loan growth in the Czech Republic is quite well supported by the FX effect. Of course, also in the local currency, very strong growth.
Still, please take into consideration that there is a certain share of FX effect in the euro numbers. When it comes to the deposit development, you are aware of the exceptional inflows year-on-year basis. The loan-to-deposit ratio has been relatively constant.
However, it's not going further up as we originally expected in the V-shaped recovery due to the new crisis and our very attractive rate for many new depositors. 83.3% is the number for the first quarter, pretty much the level of the first quarter in 2021, and usually, of course, a little bit down from the year-end number.
Again, let me point to the fact that there is a significant FX effect, in the area of 35%-40% in the Czech numbers, in particular when you look at them in euro terms. Very importantly, and of course, in the core of our focus, in the developing 2022 business year, are the facts that are represented on page 20, NII and NIM development.
The way I would phrase this today is that we see stabilizing trends on the net interest margins across the businesses, not yet on an overall group level significantly going up. However, in those countries where we saw rate hikes, clearly an upward trend seems to be developing. In the euro countries or quasi euro countries, we see a stabilization.
Why has the NIM then been going up in the first quarter? That's very much on the back of excellent group market contribution, the investment book that already was mentioned by the CEO and a significant large corporate take-ups in the first couple of weeks of the crisis, which already left some footprint in the March results.
That is something you should also expect further on throughout the year. Meaning that I see couple of risks to the further NII development, a couple of opportunities. On the risk side, naturally, I would name especially the funding costs at a certain point in time going slightly up since on the levels that we see now in some of our countries with regards to interest rate environment, it's a natural effect that deposit pricing is adjusted to a certain extent.
The other point obviously is that on the loan growth side, there is a certain question mark for the further development, meaning I see both risks and opportunities on that side since there are, in the expectations, some reductions expected. In the same moment, we have seen loan developments holding up very strong so far.
It was already mentioned that the front book versus back book development has turned around, and this remains for the rest of the year for sure. We have been quite, I would say, successful in picking the right spots in the curve, and we expect a good contribution from the investment book. Last but not least, obviously on the back of higher rates, we expect the net interest margin not only to stabilize but potentially to step-by-step move slightly higher.
Hence, in our base case scenario, we expect at least a high single digit NII growth on a year-on-year basis. How about the other operating income components? With that, we turn to page 21. Fee income, as already mentioned by Bernhard Spalt, has been holding up very well in the first quarter, and this has been across all the fee income types.
Obviously, there are certain risks to further fee income development in 2022. Still, our guidance of mid-single digit year-on-year growth, and please, let's remember that 2021 has been a fantastic year on the fee development, is what we are guiding for as of today. Given the very high volatility in recent weeks, I would call the net trading and fair value result of the first quarter a round zero.
However, please take into account that there are two effects in there. On the one hand, the fair value portfolios from the savings banks and the fair value accounting of the baby loan in Hungary, both round about 30 million of impact, EUR 30 million of impact in the first quarter, which drew down significantly the first quarter fair value and trading result.
What I wanna say with that is the normal run rate of EUR 50-75 million per quarter on that income line is solidly okay, adjusted for these special effects from the two components. When it comes to operating expenses explained on page 22, we have already heard all the elements around the deposit insurance, deposit insurance contribution.
I want to reiterate that out of the EUR 132 million cost increase, sorry, year-on-year for the first quarter, the lion's share of this increase came from deposit insurance increase, concretely EUR 92 million. OpEx have been under strict control.
However, of course, we expect a certain up drift to arrive throughout the year as we have been discussing in calls already in the past. All of that results on page 23 into an excellent EUR 801 million operating result for the first quarter, which represents a 10.4% year-on-year increase. With that, I hand over to Alexandra for the risk situation.
Thank you, Stefan. Good morning, ladies and gentlemen. I will be reasonably short as the main points have already been pointed out by our CEO, Bernhard Spalt. Let me turn your attention to page 24. Risk environment again and continuously was benign also in Q1. Our risk costs of 13 basis points came mainly from some single new defaults and downgrades in the corporate segment.
The vast majority is not related neither to the COVID pandemic nor to the war in Ukraine. Given the existing big uncertainty in the geopolitical and in the macro environment, we kept the full cushion of performing loan loss provisions, which, as you know, is EUR 630 million, equaling roughly 30 basis points of risk costs. When you turn now to page 25, also not very much to say.
A record low NPL ratio, a record high coverage, and also the share of our Stage 2, in line with our expectations, improved to 16.6%. Stage 2 coverage with more than 4% is strong. With this short risk part, I would hand back to our CFO, Stefan Dörfler.
Thank you, Alexandra. On the other result, page 26, nothing spectacular other than, if you allow me this comment, resolution fund contributions going up, and the same again in this quarter. For the first quarter, we have booked so far EUR 22 million more than in the year 2021. Why doesn't this really reflect in the absolute total number?
That's for the reason that this has been offset by positive valuation effects, meaning concretely that on the group level, our booking for the Hungarian option, when the option of our Hungarian minority shareholder option, has this time going into our direction when it comes to the P&L effect. On page 27, all of that translates into a EUR 449 million net result.
Summarizing, this is mainly driven by substantially higher operating income, and also to mention, to a certain extent, on lower minority charges with the lower results on the savings banks level this time. Let me just mention that we have been applying a tax rate of 19% for the first quarter, so very much comparable to the full year 2021.
This is, I would say, the usual approach for that part of the year. The return on tangible equity has already been mentioned, 12.2% for the first quarter. When it comes to wholesale funding and capital, please, let's move directly to page 30. On page 30, I want to inform you about what we have been doing so far on group level on the funding side.
In January, as already mentioned in the February call briefly, we have been executing two times EUR 750 million syndicated covered bond transaction. In March, we have been executing a EUR 500 million four-year senior preferred bond contributing to the MREL plan. Then we also did a small, nice transaction, as you will see on the next page in a minute, in Romania for the MREL plan. With regards to the TLTRO, the total outstanding amount is EUR 21.2 billion.
As we have mentioned a couple of times, from a liquidity standpoint, we could redeem the full amount at any time, or let's say, at every redemption window. The concrete timing, though, of repayments will be decided depending on the relative profitability, and we will inform you on that, on our respective quarterly calls.
When it comes to MREL. On page 31, we gave a more detailed update last time, so there is little else than the two transactions that I mentioned already on the group and on the Romanian level this time to mention. Just take away, please, that we are in complete fulfillment of all SRB requirements, and we will continue to execute our MREL plan according to market situation, and of course, in full compliance with all regulatory expectations.
The CET1 ratio waterfall on 32, I'd like to draw your attention to the one-time jump due to the consideration of structural FX. Was already mentioned by Bernhard Spalt, and we have been talking about that in the last call.
In concrete terms, this has now had an impact of 30 basis points exactly as we expected, also indicated earlier on. The strong loan and consequently credit RWA growth and the negative parts of the other comprehensive income developments let us arrive at the 13.7% CET1 ratio by end of Q1.
It's very important to me to mention that in any pro forma calculation, though, including the positively contributing factors into the capital, the CET1 ratio lands safely above 14%. Since there are no really new and additional important information, parts on 33, I would pass on to Bernhard Spalt for the conclusions and outlook. Thank you.
Thanks very much, Stefan. Let me take you to page number 35 of the presentation on the outlook 2022, and I will strictly remain on the right part of the presentation. We've been touching the key takeaways for Q1, so I think that should be clear.
On the outlook, as I said, real GDP to rise between almost 0%-5% this year. Inflation will be very elevated, lower in Austria, but probably double digits in most of our CE countries. We do expect a mid-single-digit loan growth for this year in this environment, in this operating environment. We do expect at least a high single-digit NII growth for this year and still achieve a very robust, mid-single-digit fee growth.
We continue to promise positive jaws so that we should be below our 55% cost-income ratio already in this year, which has been the original target for 2024, remember. On the risk side, as Alexandra has been elaborating upon, we stick to our below 20 basis points credit risk costs for this year.
On the back of a very strong credit portfolio to start with not only strong corporate balance sheets, but also with very high employment levels, and very sort of robust personal income side. I think that is something which is a starting point with almost no delinquency.
Even if growth slows down significantly or more than we think, this will not lead to major credit events this year. We also benefit from a very significant cushion built in the times of COVID. I think that is a very strong pillar of our business model.
On a capital position, 2022 dividend per share, we don't discuss much, but at that point in time, we will discuss that at the next quarter. You can safely expect that we continue to sort of follow our policy of a growing dividend sort of payout year by year. On the profitability side, we stick to our double-digit return on tangible equity for 2022.
I do think that our region, as well as our business model, is dealing well with a situation which holds a lot of uncertainties, and uncertainties will not go down from here, so they will possibly continue to rise. We are perfectly in a position to deal with these uncertainties and going into the situation from a position of real strength. With that, I conclude our presentation, and we're very happy to take all your questions. Thank you very much.
Thank you. If you'd like to ask a question, please signal by pressing star one on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. We'll pause for just a moment to allow everyone an opportunity to signal for questions. We'll take our first question from Izabel Dobreva, Morgan Stanley. Your line is open. Please go ahead.
Hello. Good morning. I have three questions, please. My first question is on the costs. I saw that they were affected this quarter by the deposit guarantee contributions. If we look at the underlying cost growth, it's running at about 4% year-on-year for the quarter.
My question is this a representative run rate of underlying cost growth for the rest of the year as we go through the coming quarters, given, on the one hand, the wage pressures are accelerating, but then on the other hand, I know in the past you were guiding for some efficiency savings. My second question is on NII.
This quarter, there was a step-up in the Austria other segment, which you called out, and sequentially, I think it's about EUR 30 million, coming from bonds in the interest rate book, interest rate derivative book. Is this a one-time gain, or would you expect to be able to hold on to that and build on to it from the coming quarters?
Perhaps you can also qualify the benefits from the replicating book. That would be helpful. Then my final question is for Alexandra on the cost of risk guidance. If I recall last quarter, the low 20 basis points cost of risk guidance was assuming a release of the overlay, about half of it, and now the guidance has been reiterated. So how should we interpret this?
Are you still assuming you will be making some releases of the overlays, or has the underlying asset quality just come in a lot better than expected?
All right. Stefan?
Thank you very much, Izabel. I start with the costs. I would first stress that we are, especially in this incredibly dynamic inflationary environment, very much sticking to our overall operating performance as a guidance and what we mostly talk about, so cost-inc ome ratio, OpEx and so on.
It's very tricky, as you can imagine, to give specific cost indications for this and that legal entity at that point in time. Still, I think your assumption and what you take away from Q1, assuming that the inflation expectations are around about in the area that we have seen in the presentation, is a good idea to look at it.
I think we will see over in the course of the year certain per ex upward drift that we have been. I think very successful in negotia ting in Austria in terms of having a very limited increase there from 3.2% or so in the negotiations of the collective agreements. Of course, there are other countries like Romania especially, or Hungary, where we have been adjusting already, and I think for very good reason the salaries of our staff. This will drift higher. Of course, the full annualized impact will not be seen yet in 2022.
Definitely, we should expect a level that can be, you know, on the OpEx side, that can be managed in the lower to mid-single digit area. When it comes to OpEx factors, yes, most of what we saw will be one-off, yearly. There might be even from the savings banks and so on already paybacks this year, God only knows if I may say so, but certainly, this should not be, you know, extrapolated in any form.
I'm reasonably optimistic that we can keep those cost factors that are really in our control very much strictly managed and limited. In overall, it's about creating a positive operating dynamics and keeping a positive operating dynamics. NII.
First statement, this is really, as Bernhard already mentioned his presentation, first time in definitely more than 10 years that we can say the dynamics in the front book versus back book or on the investment book contribution are becoming significantly positive. That's one part of the answer. You were mentioning rightly the treasury and markets impact.
This is something which will not necessarily repeat each and every time, but still I would not call the effects there a one-off as such, since the positively contributing factor into the NII on the back of higher rates, on the back of much more positive realized investment levels, will remain, and we believe that there will be a significant positive contribution on the front book versus back book.
You remember we had -EUR 50 million, -EUR 30 million in the years back. I can't, and I don't want to give you a number today, but be sure it's a significant double-digit number. We will have a positive contribution. My plan is to give you a full year front book versus back book and investment book contribution by the end of the second quarter. That's the plan.
Mm-hmm.
To your question on risk cost guidance, Isabelle, I can confirm that the risk cost guidance of less than 20 basis points for the current year still includes some release of the EUR 630 million cushion that we have approximately in the same amount as we announced in the previous call.
In other words, we plan to carry forward at least half of our reserves to 2023, which should serve as some cushion for an uncertain future. Also, to just avoid any misunderstandings, as you refer to FLI only, the EUR 630 million consists of FLI and stage overlays. 450 FLI, 180 stage overlays.
Thank you very much.
Okay. Next question then from Mate Nemes.
Good morning. Thanks very much for the presentation, and congratulations on the results. Just one question on the Czech Republic, please. Are you seeing the funding costs there already going up? Because one local peer yesterday reported some 50-60 basis points increase in retail deposit costs. How are the trends looking for you given your very much comfort that you have in this country? Maybe one more question on M&A.
Do you have an update on the potential opportunities where you're looking at the moment, and what specific opportunities do you see from the current crisis? That coupled with your capital, can you please comment on how much excess capital do you think you currently have to deploy for M&A, particularly after the first quarter moves? Thank you very much.
Okay. I hand over to Stefan for the first question on Czech funding costs.
Yeah. Thank you very much, Mate. It's I can be very concrete on that one. In so far as, given the, I would say, weekly dynamics, there are of course very detailed interaction of my balance sheet management colleagues and my Czech team. There have been adjustments in the Czech market already on the term deposit market. Assume that around 2.5%-3% are the levels that are now offered on three months, six months, 12 months term deposits.
However, of course, that requires the respective clients to come to the bank and move their savings or their holdings on the current accounts into those products. That's something which doesn't happen, of course, 100% of all the respective clients. That's something which we see. The answer is there have been, as you would expect, there have been moves.
We are positioning ourselves given the liquidity situation at the middle, slightly on the lower end of this development. It's very important for us to have a very solid and positive reputation. We offer appropriate market rates to the clients, but in the same moment, of course, protect our P&L.
The levels are around 2.5%-3% as of today in the three months, six months, 12 months area. I personally expect this to shift still a little bit higher, since we have a 5% key rate in Czech Republic. Just to mention, for the sake of completeness, don't forget that the Czech curve is significantly inverse, on the back of expectations that rates might turn around in 2023, and therefore longer-term deposits so far, at least in the mass market or so, are not of relevance. Thank you.
Okay. Thanks, Stefan. Bernhard, do you wish to comment on M&A opportunities?
Well, I do, of course. There's not much which I can tenderly tell you at that point in time other than that we're still screening opportunities in our region when it comes to banks for sale, businesses for sale, or as I mentioned, special businesses for sale.
There's also a new constellation which again, I would not want to comment specifically, but just structurally, if you look at situations like Sberbank, where possibly assets are being up for sale, then we have a situation which is quite positive, I would say. We either sort of can purchase portfolios at a price which is, how should I say, attractive to us or the somebody else bids more, and then the recovery on the deposit guarantee scheme will be a lot better.
I think that is a situation which plays into our hands, so we're looking at it and we're watching and monitoring it from a position of strength. There's no need to rush. Nothing has changed significantly. As soon as there's anything more tangible to tell you, we will get back to you. The situation is unchanged. I think the opportunities are out there. Sort of coming back to the latter part of your question, what is our sort of excess capital? I think that's very easy to be answered. Our internal management limit, which we want to hold, is 13.5% Common Equity Tier 1.
If you look at our present situation and if you sort of include the interim earnings, if you look at the OCI development, and if you look at the intrinsic ability to build up capital accretive business, I think it's easy to calculate what the sort of what is, which can go on.
Thank you, Bernhard. Can I just ask, would you be ready to go below the 13.5% target in the interim in order to execute on a transaction? Just given, you know, the recent moves and maybe expectations for the future.
Not long term. I do think that 13.5% is a good level. If we combine it with. It's a good question. If we combine it with what we have said so far, that if we want to buy something, that it should be really capital accretive. One sort of should not treat this 13.5% as a religious level in a way. If I buy something which itself will build up capital relatively quickly, one could even go below that.
Great. Thanks very much. Thank you.
Okay, thanks.
We'll take our next question from Gabor Kemeny, Autonomous Research.
Hello. First question is on rates. I mean, rate expectations have increased quite a bit on the back of the recent events and now point to a bit further rate hike, I believe. Can you give us an update on your rate sensitivities, please, especially i n Czechia and the Eurozone?
My other question is a broader one on the Czech Republic, where I think you now expect a stagflation as a base case for this year. You've been growing profits here pretty consistently quarter by quarter. How long do you think this can last, you know, in your expected stagflation scenario? Thank you.
Stefan, the first question on rates.
Yeah, absolutely. Hello, Gabor. I can be quick on this one. Czech rate sensitivity down to around 25 basis points, translating into something like a little bit north of EUR 10 million nowadays. The real part to watch, I think for all of us in the months to come is Euroland. As we have indicated in the past, the first part of a potential change into positive territory would be already positive for the bank, however, not skyrocketing. Everything brings us back to the zero line in Euroland will be, you know, kind of double digit area or so.
However, should we already go into positive territory, and significantly so in the Euroland, then this would still already in 2022 already have certain impact and obviously would be a positive going further than in a full year of positive rates Euroland. Of course, that's all subject to the further ECB decisions. That's the way to look at it as of today.
Okay. Thanks, Stefan. Bernhard, the second question was around how long can we deliver good profits in the Czech Republic in a stagflationary environment?
Look, the Czech Republic, and the structure of our business will still, for quite a long time deliver a very positive result, for our business model. Of course, if stagflation is here to stay, one of the consequences, economic consequences of stagflation is higher unemployment, of course.
Now, if you look at the employment levels in the Czech Republic, to go from here to real unemployment situations where also sort of, consumption levels will drop very significantly is quite a way. If that stays around for the next two years, then you have a point, then this is something which will change, income streams, and it will change customers' behaviors.
If this stays around for this year, and then slowly recovers, I think we have zero problem because of the employment levels and the levels of personal wealth are so robust, and the corporate balance sheets are so good that personally we will not even feel it in our own income statement. If this stays around, to follow up on your question, if this stays around for two years, the situation might turn. I would agree.
Understood. Thank you.
Allen, please go ahead with your questions.
Oh, hi. Yes, sir. Your line is open. Please go ahead.
Okay, thanks. Hi. Thanks for the call. Could you talk a little bit about the nature of the corporate demand for loans in the first quarter? I mean, do you see it as the companies reacting to a more difficult situation, locking in credits while rates were lower?
Do you see anything exceptional in that? Because clearly, you mentioned a couple of times that in some ways that's driving your loan growth a little bit more than perhaps the retail was. Clearly in terms of the mid-single digit outlook, I mean, after what you've achieved in the first quarter, even if there's some impact of currency, I mean, it does suggest a rather sort of you know, brutal full stop in later quarters.
I mean, it doesn't sound as if you're seeing any signs of that yet from your comments earlier this morning, and I just wondered if you could sort of put that into context. Specifically in the Czech Republic, in terms of the mortgage demand, are we going to see a real sort of, you know, full stop in terms of mortgage demand in Q2?
I think there's a regulatory issue there as well. I'd be interested both on the corporate side and then on the retail side in the context of your overall growth forecast. That would be one thing. Then on deposits, I think clearly you've got a number of markets where, you know, most of your deposits have been sight deposits.
Could you give us any parameters that show how much of a shift you're seeing already from sight to term? How quickly you think, looking at past experience, that's likely to happen in markets to which you're sensitive to that? That would be great.
Stefan, please.
Yes. So on the corporate take-up, and this was very much the case, as you can imagine, in March, on the back of the evolving war in Ukraine, we saw a significant take-up of working capital on the corporate front. This is something which certainly cannot be extrapolated throughout the year. This is something which you, of course, also found partially back again on corporate deposits.
I think a typical reaction we were, and I'm really proud to say so, on our teams on the corporate front very much and very close to the clients, helping them out on short-term needs, and that worked very well. This is something which was definitely an effect of the very early part of the war situation.
The other thing that you mentioned, and this is, of course, very much also a focus on our side, is the mortgage demand in Czech Republic. I think it's realistic to assume that it will slow down to a certain level. You were, I think, using the word full stop.
No, that's not something we would expect. Please, again, don't forget the downward sloping shape of the curve. The borrowing levels on the longer end are still at, historically, I would say, in the meanwhile, no longer too low, but average level. It very much depends on what Bernhard discussed in the last question. It depends on the overall economic situation of the people, on the household incomes relative to their spending.
I think that's the decisive factor that we need to watch. Obviously, as you can imagine, we are monitoring the situation on a monthly basis, and my current expectation would be a slowdown, certainly not something like a full stop.
Deposits, so far we see a very slow shift. I'm talking about single-digit percentage shift from sight deposits to term deposits, even in Czech Republic, whereas you can imagine the interest rate gap between the levels on the sight deposits, which are practically zero still, and the term deposits is quite significant. That's on the retail side. We expect this to shift to a certain level higher and keep you informed about it.
Typically, a lot of the money, don't forget that, is kept as a liquidity reserve by people and not so much as an investment as such. Historically speaking, it's very difficult to say because we haven't had, for a long time, a comparable situation.
I expect it to go into double-digit area, but not that you have a transition of like, I don't know, 40%, 50%, at least not in the short term. We'll keep you updated on that. On corporate side, as you can imagine, this shifts much quicker. There we are in the area of 15%-20% as of today, since, of course, the people managing the monies there are reacting much faster.
Thank you, Stefan.
Could I also ask?
Go ahead, Allen.
Okay.
We'll take our next question from Johannes Thormann, HSBC.
Hi, everybody. Johannes from HSBC. Three questions from my side. First of all, follow-up on M&A. Which countries would be in your focus, as Slovakia and Czech Republic are probably limited by market share? All other, or including Austria, or is the focus still on Hungary and Serbia?
Secondly, on the fee income, which segment surprised you most in its strength this quarter? And last but not least, in terms of the risk situation, which of the neighboring countries to the east worry you most in terms of spillover effects? Thank you very much.
Okay. Thank you, Johannes. I would hand the first question to Bernhard, and then Stefan, and then Alexandra.
Thomas, can you repeat the first question because there was so much noise? I didn't get it.
Yes, it was.
I will repeat it.
It was basically on M&A, which countries do we prefer?
All of the countries which we are sitting in plus Poland unchanged. Of course, when you look at the position which we have from a competitive position, Czech Republic and Slovakia will be more difficult, and we're dominating a large share of our markets. The short answer is, other markets we believe completely in. If an opportunity turns up, we would be sort of not preferring one country over the other. We would look at both of them.
I take the fee income question. I think the question, you put it that way, Johannes, what surprises we had. When it comes to the improvements on year-on-year levels, none. We expected those to go up. When it comes to the dimension of the improvements, I would say across the board positive.
Why do I say so? Because intuitively, one might say that on an asset management side, you should see maybe some impact. Yes, this is, of course, also our expectation going forward. However, we started the year on a much higher level of assets under management. We have seen a very strong start into the year, and also the March was still, of course, based on those asset management levels.
This is something which can be expected to come down a little bit, both in terms of volumes of transactions on the security side, but also in terms of contributions from custody business and assets under management. On the payment transactions, I'm especially on a year-on-year comparison quite optimistic. Let's not forget that here indirectly, the inflation level also kicks in positively since you have a multiplier in there on that side. No surprises in terms of direction, positive surprises in terms of absolute levels.
Now to your question on what country or whether there's a country which is worrying us more or most. Our home market went into this crisis from a position of strength, and this is true for all our geographies that we are operating in. Also the very extensive portfolio screening that we performed did not reveal any weakness of any particular country. Summing it up, no particular worries to a particular country connected.
Thank you.
We'll take our next question from Mate Nemes. Your line is open. Please go ahead.
Yes, good morning, and, thank you for your presentation. I have three questions, please. The first one is on capital. On slide 32, and then also during your remarks, you mentioned that, in the OCI impact, there's no consideration of positive FX translation effect.
Could you just clarify what that means exactly and whether that could mean, a slightly more positive OCI impact in, the second quarter? That's the first question. The second one is on, the investment book. I think, Stefan, you mentioned that, we are seeing good front book to back book dynamics, which has turned finally. Can I ask if you're also planning to increase the size of the investment book all else equal to benefit from higher yields?
The last question is, perhaps for Alexandra on cost of risk and asset quality outlook. In Czechia and Hungary, now we are seeing policy rates at or above 5%. Can I ask you how you think about cost of risk in the next couple of quarters and especially into next year in these two markets? Are these levels already creating perhaps some prospective deterioration in asset quality, or that could mainly come from potentially higher unemployment as Bernhard alluded to? Thank you.
Stefan?
Yeah. Thank you very much. The your assumption is clearly right. We can't include the positive FX effects in OCI until the profit is not included. This is a high single-digit basis points number, which will clearly return into the CET1 number by the end of the second quarter. When it comes to the other positive effects I mentioned, and they have been explained both by Bernhard and myself, so of course, income and including of minority, all these things. I think it's very important, and we were also, of course, at first sight not happy with the 13.7% number, as you can imagine.
Taking everything into account, I can again repeat that we are safely sailing towards a 14%+ number later in the year. Second question was on the investment book. The answer is yes, with one remark still. Please bear in mind that obviously, both when it comes to our overall sovereign exposure to the respective countries, as well as to our interest rate risks, both externally in terms of regulatory limitations, but also internally, the interest rate sensitivities are going a little bit more wild than in usual times. If I say usual times, the last 10, 15 years with rate increases of that dimension, also the models on the interest rate side put a certain limitation.
The answer is clearly yes, we have been very active in investing into the sweet spots of the curve already so far. We will do so going forward based on our interest rate expectations, but we will not go anywhere beyond some kind of reasonable risk limits just for the short-term profits since the interest rate risk sensitivity is not to be underestimated. That would be my answer, and I hope that has been sort of hitting the point of your question. Thank you.
Absolutely. Thank you.
Now to the risk part. Not very surprising given the current uncertainty, I will refrain from giving a risk cost guidance for the year 2023. However, what I would like to mention, especially to the two geographies that you have been mentioning, on the interest rate, especially Hungary, already for some time, our new business is mainly fixed rate.
So from the rate hike, we do not assume any specific risks. Inflation, of course, is included as a factor also in our risk models. So also this shouldn't turn out to be a big surprise. Unemployment in both markets, Czech Republic and Hungary, is no area of concern currently. Also not for 2023.
Thank you, Alexandra. Very clear.
We'll take our next question from Riccardo Rovere, Mediobanca. Your line is open. Please go ahead.
Thanks. Good morning, everybody. Thanks for taking my question. I have three, if I may, one for Bernhard, one for Stefan, and one for Alexandra, if I may. The first one for Bernhard. When you mentioned you might eventually be interested in Poland, what makes Poland so interesting for you, given that Poland has been more of a headache over the past few years for banks already present there, and they clearly tried to repolonize the banking system over the past few years.
There must be something interesting in Poland that maybe I personally cannot see. The second question is for Stefan on the rates. I mean, the rating team moved fast and systematically up over the past few, well, more than a few months.
If you had to throw a ballpark, your balance sheet, to what extent has already been responsive to the various rate hikes? Meaning all the rate hikes that you've seen are already somehow captured in your balance sheet or there is something that still has to be incorporated.
You provided a sort of indication, maybe not a guidance, but a sort of indication what might be the impact if the ECB had to move. I think I missed that, and I would really appreciate if you could repeat it. Then I have a question for Alexandra. When I look. Your cost risk guidance for 2022 was conceived before the events in Russia and Ukraine, I imagine.
Now you are reiterating it, and you do not, let's say, specifically mention risks to this guidance. I mean, there is a statement, but it's a fairly general one, and maybe it refers to all to the overall slide. What makes you so confident to reiterate this guidance without even adding a kind of disclaimer on this guidance?
Before you mentioned at the moment, we don't see any particular risk in any particular country. Should we actually be maybe more concerned about particular sectors like the automotive in Slovakia or Hungary or maybe Serbia? Any color on that would be really helpful. Thank you.
All right. Let's start with Bernhard, please.
Yes, sure. Riccardo, thank you very much. As always, you put questions on the table which are on the surface very simple and then not. Let me start with the strategic configuration. We are playing here a long game. We're not in this game for short-term tactical considerations and sort of opportunities, but we're in here because we believe, and this is the heart of our mission and strategy, that the eastern part of the European Union is a growth opportunity for the next many decades. I think we have proved over the last couple of years that this trajectory works out. Now, the only large country which fits this kind of territory, which is not inside our own realm, is Poland.
Poland is large. Poland is part of the European Union, and Poland is a prosperous country with still a lot of convergence potential. I completely agree with you that there are a lot of structural problems if you look at Poland as an investment case. I even don't want to go now into this geopolitical conflict. We can cover that also.
The problem starts a lot earlier. The problem starts that we have their foreign exchange denominated loans which are not resolved. We have their regime where you cannot acquire 100% ownership, whereas we need to have a sort of local free float for whatever kind of purpose. All of these are things which are not particularly attractive and which need to be resolved over time. I can see the obstacle very clearly.
I also can see that the current proximity to this geopolitical conflict raises the vulnerabilities. What I want to say is, coming back to my intro, you know, sort of first statement, we're in here for the long game. I do believe that this crisis, as many crises, will be over at some point in time, and we will be again back into a European and global context where Poland can play a very attractive role and a very good role.
I do think that if we, if you believe us, that we are not sort of changing our strategies based on 12 or 24 months horizon development. Believe us that Poland has been attractive to us and is still attractive for us. No, we're not naive, we're not stupid.
We do see the problems on the way, and we will need to deal with them. Possibly this conflict situation also offers opportunities to solve structural problems which the current establishment in Poland has decided not to resolve. I hope this answers the question.
Yes, this answered the question very well, I would say.
Stefan, please.
Yep. Thank you, Riccardo. I try to be very crisp on the question, to what extent have we been responsive with our positioning? I think you should assume that we have been adjusting our overall positioning in the course of the rate hikes very much in those countries where we believe the cycle is at least step-by-step going towards its end.
I think as you can also see from the rate sensitivities, we have significantly reduced also both actively and on the other hand, also passively, this has happened to the respective currencies. The repricing effects are obviously lagging on both sides of the balance sheet. On the asset side, we are catching up.
We have been repricing significantly in many of the countries already, the respective FTDs and so on. Obviously the deposit side is not fully in our hands. When it comes to euro, situation is different, and I mentioned it before. I don't think that I need to repeat it.
There, we have this positioning, which is clearly assuming sooner or later the ECB will have to act, and then we will have a significant beneficial impact on our P&L. Let me close by a remark that's always very important to me as an old bond and interest rate trader. Never forget to watch very closely the overall shape of the curve.
Many people, I'm sure you don't of course, but many people tend to just look at the key rates and not taking into consideration, the overall shape of the curve, which typically, for every balance sheet of a bank is of very big importance. That's something which we are also watching very closely and are managing, in a very tight manner.
Alexandra, please.
Sorry to interrupt you, Stefan. Are you basically saying that your balance sheet is already responding, on the euro part, to the shape of the yield curve today?
What do you mean with responding? This I have to ask, Riccardo, before I say yes or no. What do you mean with responding in this case?
Well, it is already affected. Let's say it is already affected by slightly higher Euro rates and higher sovereign yields and so on.
Okay. Look, the one positive thing is obviously that our investment levels in the eurozone have been significantly improving since, as you know, the mid- to longer-term end of the curve in Euroland has been going up to something like between 50 and 120 basis points. That's actually the one part that already has been having a positive impact and is, of course, realized in the investments.
I would say on the day-to-day business as such, especially when it comes to the key rate, still, although compared to the last couple of years, the magnitude is quite significant, there hasn't been a big change, and this will only happen in bigger terms once the ECB changes its tone significantly more to the upside and real rate hikes, I would believe.
Okay. Yeah, that's clear.
Good. To risk. Riccardo, of course, you're right. Downside risks, there are plenty, and there is a disclaimer. When I may draw your attention to page 35, especially second bullet point on the risk factors to guidance. However, you asked what makes us confident. Yes, you are right. Our risk guidance came originally from a time before the war, or very timely at the same time.
Why are we still confident and did not change the guidance? As you know, we built considerable reserves for the COVID pandemic already in 2020, which until now we have not needed to use. The impact from the pandemic on our portfolio, they're even lower, so the portfolio quality even higher and stronger than we expected.
When we reviewed our guidance now in the light of the current situation, we already built in more conservative assumptions when it comes to NPL inflows. We also had a close look at our recoveries, which showed to be very stable. Of course, a very thorough look on the various industries. There is a lot of underlying strengths in our region, low unemployment, significant support also through the EU funds. Tourism, important for Austria and Croatia, almost back to normal.
Real estate markets still supportive, and the order books are currently full, and this also holds true for the automotive industry that you have been mentioning. Also please do bear in mind that especially in the automotive industry, we have a very high-quality client portfolio.
That's clear. Thank you very much.
We'll take our next question from Hugo Cruz, KBW.
Hi. Thanks for the time. Just two quick questions on NII. First, on the rate rises from the ECB, the impact. I've heard your guidance, but I was just wondering when we start to see a positive effect, how it will play out in your different divisions. Will it be all the similar type of effect in the Euro countries, or will it be more booked in kind of the corporate center in the markets?
Just wondering how I should model that. More on the CEE countries where you've had a lot of rate rises in recent quarters, you know, Czechia and Hungary. You know, if we look at market expectations, at some point, these rates will start to fall.
You know, how should we think about that decline, you know, will it be reflected kind of straight away in the NIM as well, or will it take longer? You know, because you mentioned you have fixed rates a lot in the loan book. You know, are you positioning to avoid any negative impact on NIM if rates start to fall? If you could talk about that, it'd be great. Thank you.
Yeah, sure. Let me start with the second part. I mean, this is of course, you're very, very rightly so looking a little bit beyond the so to say, around the corner, I would say. This is something which, as you certainly know, quite some analysts befo re the war started had in the cards for the Q4, for example, for Czech Republic.
I haven't seen recently any statements that that still this year we would see a turnaround in rates there. So I would expect this to be delayed. I explained in answering Riccardo's question before that, I would say we have balanced our positioning in the CEE countries so that we are much more balanced now.
If there would be rate cuts already end of 2022 or beginning of 2023, I would say from that end, we would even have hopefully filled up our fixed rate positions to an extent that we can bolster these effects. Clearly, NIM forecast at that point in time for later quarters or even going into 2023, I would not dare to make.
On the Euro side, yes, that's absolutely the very important question. I would say everything that's coming on the investment book obviously will be in a corporate center. So this is something which you would not see on the business divisions.
However, once we go north of 0%, then you will see kicking in also positive effects, obviously in the corporate and retail area. Everything up to the zero level will be, for the lion's share, in balance sheet management/corporate center.
Okay. Thank you very much.
We'll take our next question from Simon Nellis, Citi.
Oh, hi. Thanks very much for the opportunity. Just two quick questions from me. Firstly, I think you mentioned in your release that you will have some further contributions to the deposit insurance for this Sberbank resolution, I think particularly in the Czech Republic. I know you don't know the figure yet, but can you just elaborate on what kind of magnitude roughly you think we're talking about?
And if there are further contributions that will be needed as well in Austria? My second question is, could you just run through exactly what the structural FX hedge impact on capital was and under what conditions might that recur? I think you say it's not recurring, but yeah. Those would be my two questions. Thank you.
Let me start with the deposit insurance, Simon, thanks very much for giving me the opportunity to be specific on that. We do not expect any whatsoever material impact. Here, I have to distinguish also in terms of payments in Czech Republic.
Now, the big problem with the whole Sberbank , if you allow me to say, is that the transparency around that case is, I put it frankly, limited. Anything that's publicly available for us or other banks in terms of what we can really talk about with you is very, very limited. That's a really tricky situation.
What we know, and our CEO has been talking about that in the presentation, we know as of today that the likelihood of full or near to full recovery is extremely high for all the three countries. How this will then be playing out in detail with regards to the contribution to the deposit insurance systems is a second question, and will probably, as we understand these days, be treated a little bit different from country to country.
The reason that we haven't booked anything in Czech Republic is that according to all information we have, unfortunately, mostly informally, it will not trigger any P&L contribution of relevance no matter what the process will be in detail. This is also something which I can, as of today, indicate to you for Austria.
In Austria, we have strong indications that we will not have an additional contribution this year, ideally even maybe a reduction of the amount. Please bear in mind that in Austria, there hasn't been a payment. The only country where there has been an additional payment due to the Sberbank case was Hungary, where we received a clear order through a letter by the authorities there.
That's the part on Sberbank. Most important part of the answer on the structural risks is there is no whatsoever recurring effect. We have introduced, and we are now fully compliant. We are not now fully compliant. We are fully compliant with all the elements of the regulation, which has been introduced with January 2022.
There will not be any whatsoever additional effect on that. Going forward, we expect it to remain around this level of EUR 2 billion-EUR 3 billion additional market risk RWAs. The size of the impact, as such, depends on the volume of our non-euro-denominated capital. Happy to give also a breakdown. I think the number I have in mind is about EUR 6.6 billion overall structural FX risk exposure, then split, as you can imagine, according to the size of our operations through the respective countries.
Very clear. Thank you.
We'll take our next question from Jovan Sikimic, RBI.
Yes. Thank you. Good morning. Thanks for your presentation. Maybe just some general comments from your side with regard maybe to potential, you know, I know, political regulatory risks in some of your countries.
I mean, we have some, you know, headwinds on the banking sector in Poland coming from the politics, also in Hungary, coming, potentially fiscal consolidation with potential increase of bank tax. What's your take overall in the countries where you operate in on that front, coming maybe as kind of banking unfriendly measures? Thank you.
Bernhard, may I hand this over to you?
Absolutely. Thank you. I think we're pretty used to situations where political risk is on the rise, and of course, we're now going into next kind of crisis situation, where there will be a necessity for public spending when it comes to supporting local economies in the context of flaring up of inflation and breaking supply chains and kind of other kind of crisis situation.
There will of course be incentives to local politicians to seek for pockets to fund kind of these situations. Now, I don't think that we have learned over the last many years to deal with these situations. I would not want to rule out that any kind of unorthodox ideas come about. This will come possibly, but not now, I think.
I think now we're at the beginning of a crisis, and political risk when it comes to determining who is paying for what comes at a time when the waters are a little bit more calm. I would say yes, you touch upon which is important. I don't expect anything now very quickly to turn up.
Yes, there is a risk, but I do think that what plays into our hand is that we are the rock of stability, and unlike in the sort of last global financial crisis, we're not the source of the problem, but the government need us at which a problem situation. Yes, unorthodox ideas might flare around. There will be talks around that. Am I worried about this now? No.
Sort of, there will be debates around this, and we will deal with them as they come.
Okay. Super. Thank you very much.
We'll take our next question from Krishnendra Dubey, Barclays.
Thank you, guys. Thanks for taking my question. I have a couple of questions. One, on the Hungarian business. Stefan highlighted a EUR 30 million hit because of the baby loans thing. Is that something which we could still see in the next few quarters? And is the number correct? That is one thing I wanted to check.
Secondly, on the mortgage market, I guess to a previous question you highlighted, in Czech Republic especially, you don't see a full stop in the mortgage lending, but you see a slowdown. A related question, are you seeing ESG related or the green mortgages on a rise, which could partly offset your regular mortgage origination? Thank you.
Yeah. Thank you very much. Baby loans, very simply, this is a fair value portfolio, so to say, therefore, it's a little bit hard to predict, because it depends purely on the further development and the shape of the curve. My assumption would clearly be that this will not only not repeat, but potentially even turn around at a certain point in time.
Definitely long term, since with the pull to par effect, like with the bond portfolio, you will see a full return of the current mark-to-market losses. So that's the one thing. By the way, you will see this in all the Hungarian banks, because according to my knowledge, the full market is accounting for this product on a fair value basis and not on an accrual basis.
That's point number one. Point number two, it's a very interesting, and I think very good question. We have for the reason of the current environment, not been talking so much about ESG today. You find quite some material in the presentation, of course, in supporting material.
I would say this is something which in the medium to long-term run is certainly an appropriate assumption, and we are working on that very much. We see this on the corporate front, in the team of Ingo Bleier already, that we are, you know, of course, targeting the strong representation of green assets, and this is going significantly beyond the normal growth rates short-term.
When it comes about the next two, three quarters developments on the mortgage lending side, I don't think that it will play a major role yet. In the sense of that it could influence significantly positively our development on mortgage lending in Czech Republic or also Slovakia, I would dare to doubt.
Sure. Thanks a lot.
All right. Thank you, Krishnendra, and thank you to Stefan Dörfler for answering the question. Thank you to the operator. Thank you to the operator for leading us through this conference call. With this, I would like to hand over to Bernhard Spalt for his concluding remarks.
Yeah. Thanks very much, Thomas. Thanks very much, ladies and gentlemen, for attending to this call and for showing the interest. Let me sort of make you aware of the next communication point, and this is our annual general assembly, which we will hold at May 18th, so not far out, where we will have the next sort of opportunity to sort of discuss our sort of development. Has been a pleasure to talk to you and I'll see you on the AGM on May 18th. Thank you very much.
This concludes today's call. Thank you for your participation. You may now disconnect.