Good day and welcome to the Erste Group Bank AG preliminary results 2021 conference call. Today's conference is being recorded. Now, I would like to turn the conference over to Mr. Thomas Sommerauer. Please go ahead, sir.
Thank you very much operator, and good morning to everybody from Vienna. Today's 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. As is customary, they will lead you through a brief presentation highlighting the achievements of the past year and in particular also of the fourth quarter of 2021. After they have done so, they will be ready to take your questions. Before handing over to Bernhard Spalt, let me highlight, as is also customary, the disclaimer on page two of the presentation. With this, I hand over to Bernhard Spalt, CEO.
Good morning, ladies and gentlemen. Disclaimers become more customary in these days. I would not have anticipated that I would start today's presentation of very, very good results with a special topic on the Russia and Ukraine situation. I think we should tackle that head-on and address the situation in terms of the impacts on our own business model and on our own balance sheet position. Let me start by saying that you do know that we do not have any direct subsidiaries in Russia, Ukraine, or Belarus. Our credit risk exposure is not significant in any of these countries. We do not revise what we talk about later when it comes to our assessment of our credit risk situation and our risk provisioning dynamics, to put it at that.
Also, our market exposures will not pose a significant threat to our balance sheet and our P&L. It is very natural that we are on top of all the sanctions and monitoring that, and we will of course comply to whatever the regulators and the authorities will impose on us. We're screening the portfolios and the levels of impact daily on that. So far, we do not see business model-wise as well as when it comes to the impacts on our own corporate customers any material kind of impact. Let me take you to slide number five, which is the core of today's presentation, and I think this should also be the core of our discussion today. This is the underlying development of our business and the economic dynamics.
I do think what we have seen in 2021 was a very good business environment in all of our countries. One of the elements was that in the countries which are not euro-denominated economies, we've seen a very substantial and robust response of the national banks when it comes to addressing inflation fears and hiking interest rates, most notably in the Czech Republic. Of course, this does help our business model. We ended up with a quite strong operating result of +17%. This is a function of NII growth on the back of loan growth because demand is picking up. It's also backed up by a very strong fee and commission income line in the context of investments, regular investments for longer-term sort of purposes, is picking up throughout the region.
This is a model which does work out. We have announced this in our Capital Markets Day in 2019, that this would be a strategic priority and emphasis, and it does play out really well in all of them, our major markets. We have a quite robust and strong top-line development, which we see for 2021, and which we will also think will shape the fate for 2022. I also do think that we have put in quite some effort into managing our cost. Overall, what we've promised so far that we will show positive jaws has materialized, and it will continue to materialize.
The target which we set ourselves in 2019, much before Corona hit the world, of achieving 55% cost income ratio by 2024 will be certainly achieved in this year. I think when it comes to credit risk it is still very benign. We're sitting on a record low non-performing loan ratio ever since we're publicly traded. We never had an as low NPL ratio as that. Not to speak of our coverage ratio, which is now exceeding 90%. The risk costs which we allocate are still showing an environment which can really withstand the shocks which have come upon the region really robustly and well.
I think strong top line, good cost management and credit risk completely under control, and that is shaping our business model, that is shaping our balance sheet. It will help us to navigate through whatever comes now, which is hard to anticipate, hopefully better than sort of one would think. Now, when it comes to guidance for 2022. We have a good guidance, but of course, volatility is rising and the uncertainties are more than we have anticipated until now. We still think that GDP growth will continue to support our business model. Yes, we also think that inflation in the context of this, politically and economic development in the region, inflation will still play a major role, and energy prices will not come down quickly, rather to the opposite.
Yes, inflation will be a challenge. I do think our loan growth will support a mid-single digit NII growth. We do think after a record year, 2021, we will see in the fee and commission income a low to mid-single digit growth rate. We reiterate positive jaws. Of course, we want to reiterate that we will be below 55% cost-to-income ratio at the end of this year. Risk costs show no indication that we should not sort of be very positive on that territory. All in all, we are targeting a solid double digit return on tangible equity for this year.
The resulting capital buffer, which we have, which you all perfectly will know, above our management target of 13.5% Common Equity Tier 1 will be, and we get to that a little later, predominantly used for supporting our organic growth, our opportunities to invest into inorganic opportunities in our markets, so bolt-on acquisitions. Then, sort of, possibly we will debate about different kind of payout policies in the future. I think this wraps up pretty much the situation. I will be quite quick on the next couple of slides because I think that was the most important topic or the most important frame which I wanted to shape. Now, what is new to you, and I really want to spend one or two minutes on it.
In the whole context of ESG, where everybody speaks about the environment and everybody speaks about green, I think the S part and the G part is equally important in that kind of equation. On the G part, what we have done and what we started, for now, and this will be a recurring event, is an employee share program, where we want to turn all of our 44,000-45,000 employees into shareholders. We want to give them shares, and we want to incentivize them to buy shares, and we would top up investments which employees will make in the future. I think that is something which I believe is creating or is building a cornerstone when it comes to corporate governance.
It's building a corporate cornerstone when it comes to sort of engaging employees and letting them participate in the success of the company. This will be a perpetual program. The profit participation will be for this year, EUR 350 net for all of the employees, and we will top up single investments in a staged way. This is a long-term program, and we want to consolidate these shares in an employee share foundation. This is something which will in itself grow over time. The cost which we put down here is for the profit participation EUR 20 million. For the annual cost of the subsidy for own investments, it's an additional EUR 13 million.
This you should expect, as long as we are in a position that we are profitable, as long as we're in a position to pay dividends, this is not something which will go away, but this will constitute a regular program. Now, let me take you to slide number seven, the group income statement performance. You see that the Q4 net result is slightly down because of the cost side. From an operating result line and from an underlying performance, it's still very strong. The NII growth is strong, the record fee income is still there. I do think we've got good reasons to say that the business model has worked throughout this year. Remember, we're still in a Corona time, has worked out really well.
The quarter-on-quarter net profit reconciliation, and even more so the year-on-year net profit reconciliation, which is very much supported, of course, by a completely different risk line, is showing a very decent result, I would say. Now, I will be very quick on the key income statement data. Net interest income and net interest margin, we should expect to develop strongly in the context of interest rate hikes happening in the Czech Republic, happening in Hungary and Romania, and also loan growth further developing. I said cost of risk will remain at a little bit more normalized but still very low level.
I think on the earnings per share and on the return on tangible equity, we should expect good results, going forward. Balance sheet development on page 9 shows that we are growing our assets, predominantly on the net customer loan side. This is happening on the corporate side, this is happening on the mortgage loan side, and this is happening now for the first time after a long time, also on the consumer loan. What I frankly did not expect is that the deposit side is still growing so much. I would have thought that the recovery and the sort of phasing out of the COVID crisis would change the savings behavior of our customers significantly. Has not happened so far, so we still see an inflow of deposits.
Our loan-to-deposit ratio is still developing in a way which is sort of different than we would have anticipated, let's put it that way, despite interest rates being where they are. I think I said everything on the key balance sheet data. Maybe just one more thing on the risk side. The NPL coverage ratio now at 90.9%, as usual, does not include collateral. This is a very important sign of strength of our balance sheet, I would say. The capital ratios. We're now at a CET1 ratio of 14.5%, which is very significantly above our internal management target of 13.5%. Quickly on the macroeconomy, page 12.
The recovery continues, has continued in 2021. I do not expect that we will see a major change in the dynamics in 2022. We will see GDP growth still. Yes, we will also, of course, see inflation dominating the macroeconomic environment. Interest rates are depicted here. I think the major steps have been taken. I would not rule out that the one or other steps it comes, but this will shape the balance sheet position of our bank in 2022. As I said, the economic rebound is set to continue. It will be not as dynamic as for 2021. Now on page 14, what is happening on the ground.
Retail, we still see a very strong demand, an overhang of demand over supply when it comes to housing loans. This will be featuring also a lot of discussions when it comes to how can younger families afford a living, how can younger families afford a house or an apartment, in a context of ever-rising real estate prices. We see demand for consumer loans, of course, coming back on the confidence that unemployment rates will stay very low, and there is a significant scarcity of skilled or even unskilled labor force throughout the region. What is helping our strategy really much is a strong demand for securities products, which will continue to shape future customer behaviors, specifically in a context where longer-term protection issues are more and more understood by a mass population.
That's also true for the insurance products. On the digital side, we're now on George with almost 8 million customers onboarded in six markets. We now continue to roll out George to the corporate customers and extend our offerings there. We believe this is a system and a platform which is basically technologically the same platform throughout the six markets, which is working well throughout a long time. I think I mentioned that in our last earnings call. We don't talk about it much, but if you look at the developments of the savings banks and at the minorities line, Austrian savings banks have done really well. We shouldn't sell them short in the year 2021.
On the corporate side, loan demand continues to grow, and that is very good, both on the working capital as well as on the investment loans. Now, I still don't know to what extent all of these NextGenerationEU programs will support further loan growth or will cannibalize further loan growth because they will provide also liquidity and also other instruments to the market. I still could say overall this will be net positive and will support further loan growth in the corporate area. Capital markets have been doing fantastically, I would say, over the year 2021, with an operating income of more than EUR 600 million. Our issuance activity has been stellar, I would say.
Growth in asset management was still dominating the space with EUR 77 billion assets under management. With that, I would like to hand over to our Group CFO, Stefan Dörfler.
Thank you very much, and good morning, everybody. Let's turn to page eighteen and net loan development. We have registered a total of EUR 14.2 billion net loan growth in 2021, which translates into 8.6% growth, something which we regard as a very strong growth representation in our countries, and then we will go into details later on when it comes to NII. The growth has, throughout the year, been mostly well-diversified across the countries, you see it in the details and client segments as well, with the housing loans and the double-digit growth on that product standing out. As Bernhard Spalt already mentioned, there has to have been an even stronger, both absolute and relative growth on the deposit side.
Nineteen point four billion year-on-year in absolute numbers, which translates into a growth of 10% plus on our deposit base. All of that has led to a slight drop of the loan-to-deposit ratio year-on-year from 86.9% to 85.6%. An important remark here is of course that the deposits to our P&L have lately been much more beneficial in those countries where we have seen rate increases. I want to mention, since this has been an element of our discussions in past calls, that in Austria and Slovakia, the consequent charging of non-retail deposits for the negative interest rate has significantly reflected positively in the P&L. When it comes to NII and NIM, we turn to page 20.
The NII in the full year-on-year has been up by EUR 200 million or 4.2%. Please have a look at the quarter four 2021 over fourth quarter 2020 NII comparison, and there you see that this comparison ends up in a 10% increase, which shows the strong dynamics from the rate increases, especially, of course, in the Czech Republic. All in all, the NII year-on-year development has been driven by the strong loan growth, the rate hikes, this is particularly true for the second half of the year, and not to ignore the TLTRO effect in the euro countries. Maybe some words around the rate sensitivities.
The rate sensitivities that we have been guiding in CE for Czech Republic in particular, but also for Romania and Hungary, have exactly played out as expected. Nowadays, with investments, FX hedges and other balance sheet management measures, we have been substantially adjusting those sensitivities so that you should consider those sensitivities to have come down significantly. Happy to address more details in the Q&A. Very importantly, is how we look at the rate sensitivities in euro area. Should the ECB, of course, given latest developments, maybe in a different light. Still, should the ECB move rates the first 50 basis points up to a zero level, we would have a positive, however, limited effect on our P&L.
Once we go, we cross the zero line, and further hikes might happen, this would certainly have a very supportive element to our profitability in the euro countries. Turning to page 21, I would repeat what Bernhard Spalt already said, that the biggest dynamics in 2021 certainly has been around our fee income. 16.5% year-on-year, but also 16%, fourth quarter 2021 over fourth quarter 2020, which was an extremely strong quarter already, prove that we have been setting the right measures and that our colleagues on the business side are executing excellently on this absolute top management priority. Trading and fair value result worth a brief comment. Overall, for the year with EUR 230.
Sorry, for the year, I would say inside the corridor that we usually guide for. It's worth mentioning that the fourth quarter, due to the fair value accounting of the baby loan in Hungary, has been a little bit worse, and therefore, we have overall a relatively weak fourth quarter trading and fair value result. Still, in general, 2021 has been a satisfying year on trading and fair value side. All in all, the operating income has increased by more than 8% year-on-year and 7.4% fourth quarter 2021 over fourth quarter 2020. Couple of words around the operating expenses, where you find the details on page 22. Sorry, on page 22.
The higher fourth quarter costs are, and this is important to mention, not mainly or at least not yet, to a relevant extent, related to the significant inflation increases in all our markets. Much more to higher paychecks on the back of the mentioned employee share program, higher bonus provisions, and significant FX effects, especially in the Czech Republic. I wanna bring across two key messages when it comes to costs, beyond what, Bernhard Spalt also already said about the very disciplined execution.
Number one is that if you look at the overall operating expenses in 2021, what we have been guiding for, meaning it's basically 2019 as a benchmark, is we have been delivering exactly in that corridor by 2021, having overall OpEx of 2019 plus the employee share program. For 2022, let's be clear, the cost uplift from the external factors will be relevant, and we will guide for more details once the current, I would call it dust, is maybe and hopefully settling a little bit.
Turning to page 23, we sum up that the operating result of EUR 3,435.5 million is a very satisfactory result and reflects not only a 17.1% growth over the result 2020, but and I think that's noteworthy reflects a compounded annual growth rate if we compare it to 2019 of 7.5%. We all remember that 2019, before the pandemic, has been an excellent result, and I think it shows that 2021 we have been fully re-embarking on the long-term strong growth story of Erste. With that, I hand over to Alexandra for the risk matters.
Thank you, Stefan, and good morning, ladies and gentlemen. I continue on page 24, and I can be reasonably short as many important points have already been mentioned. Q4 was a further confirmation of the positive development we have been observing over the first three quarters in terms of risk. Risk cost for the full year amounted to 9 basis points, mainly due to the continuous absence of material new defaults in an overall favorable risk environment, and this despite the latest Omicron wave. Net allocation of risk costs in Q4 amounted to 24 basis points, EUR 107 million, and were driven by some defaults in Austria and Hungary and method effects in Romania. The FLI remained stable in Q4. The more optimistic macro outlook was compensated by the materialized risk of new virus variants and increased inflation.
Overall, this prudent approach that we took means that we kept the full FLI impact that we booked in 2020 over the year-end 2021. Regarding SICR overlays, manual overlays, the heat map update that we performed in Q4 led to some release. For the full year we released roughly one quarter of the manual overlays. The rest of more than EUR 118 million have been kept and are put forward to 2020. Now to page 25. Here you can see the development of our NPL ratio, and it's already been mentioned, given the low number in new defaults and the growth of our loan book, the NPL ratio improved to a record low of 2.4%, with a still very high coverage of more than 90%.
Altogether, the big reserves that we are bringing forward, the low default environment makes us confident that also in the upcoming year the risk charge will remain benign. Our outlook, being below 20 basis points of risk costs. However, also I have to state that the current situation and state of war, of course, is a risk to the outlook, which is explicitly mentioned. With this, I hand back to Stefan Dörfler.
Thank you very much. Since there is really nothing worth mentioning around the other operating result, and the net profit of EUR 1.923 billion for the year 2021 has been explained in nearly all components, let me invite you to turn to the pages 29 to 31, where we update you on wholesale funding and MREL. The increased MREL-related issuance has been leading to a rise in stock of senior unsecured bonds, left-hand side, page 29. This is going to be a longer-term effect, whereas the temporary increases in certificates of deposit are reflecting the activities of the business colleagues to optimize P&L during the year in treasury operations.
We have been registering a year-on-year increase in interbank deposits, predominantly driven by the increased TLTRO III balance, which I will turn to again when we look at the overall capital and liquidity position. With regards to the maturity profile that you find on page 30 and the latest in funding activities, let me mention that the 2027 maturity peak is very much attributable to the MREL issuances. TLTRO III, just mentioned, the outstanding amount currently or by the end of 2021, and still the same today, is EUR 21.2 billion. Let me remark that should there be no extension of the program, we will plan for significant redemption in the course of the second quarter.
More details once the ECB has taken an official decision on the future of that program. Last but not least, let me mention that we are very happy that we could execute a very successful transaction early in the year, a dual tranche of 6.5- and 15-year covered bond transaction, something which, of course, we still could execute under very favorable circumstances. The overall 2022 funding volume needs of Erste are very much comparable to the 2021 levels. When it comes to MREL, I'm really happy and proud that all our resolution groups have successfully completed their inaugural MREL issuances in 2021, respectively at the beginning of 2022, and we are excellently positioned to execute further plans during the year 2022.
We are certainly well ahead of our general schedule today, and we will see how the market will develop, and select the right timing for our upcoming transactions. On page 32, let's, last but not least, talk about capital. The waterfall on page 32 and as well, in more detail, the breakdown on page 33 do not contain any surprises or particular new things from the fourth quarter as we have been informing you and the whole market, throughout the year about RWA developments, dividend accruals, the application of the exemption for software deduction, and last but not least, also worth mentioning, the call of our EUR 500 million AT1 transaction in the year 2021.
One information that you cannot find in the slides, as it relates to the year 2022, I'd like to flag. The EBA guideline on the treatment of structural FX risks under the CRR came into force with January 2022, and for Erste this will result in about 30 basis points CET1 impact due to the market risk RWAs updrift. This will become visible in the course of the first quarter. Last but not least, page 34, very much in line with what Bernhard Spalt already mentioned in his introductory statements. We outline once more and very clearly our primary, or our priorities when it comes to the use of our overcapitalization.
Under normal circumstances, we reserve up to 50% of gross capital generated in any given year for distribution to our shareholders, and the other 50% for funding organic growth. This is a slight upward revision of our so far dividend policy, and we believe that, of course, subject to the latest developments, we are strong enough to generate the capital in the form to deliver on that target. We want to be and want to participate in a leading role in the sector consolidation across our region. I think first very interesting and as we strongly believe very good transactions have been brought our way. We think that in the next couple of months, there might be additional opportunities opening up. With that, I hand back to Bernhard Spalt for the conclusions.
Thanks very much, Stefan. I will be reasonably quick on that. I will focus on the outlook and not on the key takeaways because I think they have been amply described in our statements so far. Outlook for 2022, we do expect that the economic growth will continue, maybe a little less dynamic, but still. We expect a mid-single-digit loan growth in our region. We also expect a mid-single-digit NII growth on the back of securities investments and insurance business growing. Positive jaws is still very firmly on our agenda, so we will overachieve our target for 2024 when it comes to cost-to-income ratio, and risk costs firmly under control, I would say. With that, our dividend policy has been described by Stefan.
Also, a clear expectation of double-digit return on tangible equity would be our statement for 2022. Now, of course, macro uncertainties have increased in the context of this political and humanitarian escalation, b ut I would say the bottom line is we've delivered very solid results. I do think the bottom line is we're exactly in the right region in a position of a business model which works long-term. I think we're relatively disciplined when it comes to delivering on our targets. I will conclude our statements here, and we're very much looking forward to take your questions. Thank you.
Thank you, sir. Ladies and gentlemen, to ask a question, please signal by pressing star one on your telephone keypad. Please make sure the mute function on your phone is switched off to allow your signal to reach our equipment. If you wish to cancel your request, please press star two. Again, please press star one to ask a question. Our first question comes from Magdalena Stoklosa from Morgan Stanley. Please go ahead.
Hello, good morning, and thank you for the presentation. I'm sorry that this is my first question given your results, but I have to ask about Russia and Ukraine. I know that you don't have any direct exposure, but could you talk about the broader channels through which you may be affected? The indirect links, like deposit insurance, maybe select pockets of credit risk. For example, the ECB made a statement this morning that one significant bank is seeing deposit outflows and is failing or likely to fail. How will that impact Erste indirectly, and how are you thinking about where the risks may come from in the broader CEE business? I have another question on M&A buybacks, but I will leave it for after you answer.
Yeah. Thanks, Magdalena. Let me take that question. I'm not sure if I will answer all the questions to your satisfaction because some of the aspects are relatively early stages. It is important to reiterate that we do not have any kind of bank holdings in Russia, in the Ukraine or in Belarus. First statement. Second statement, we do not have a significant credit risk exposure to this region. I do think that even our customers, and we're doing stress testing and analysis every single day, I think our customers will be able to navigate through this as much as we can see. I do not expect any kind of direct significant impacts from our business model.
When it comes to the singular case of this individual bank, which is now subject to an authorities' intervention. Let me get a couple of things very clear. Sberbank Europe is a bank which is active cross-border in Europe. It's owned by Sberbank Russia. What the European authorities, and they are the authorities in charge, and this is Single Resolution Board and the ECB has found, and I think this is a how shall I say, smart intervention, that in order to protect against massive liquidity outflows, they have imposed a moratorium with a duration of basically 48 hours until when sort of a decision will be taken again by the European authorities on what kind of strategy will be deployed in order to minimize damages.
It's too early to speculate whether this will end up in a sort of going concern, in a resolution case, in insolvency case. It's much too early to tell. What I can tell you, this is a relatively small bank in the context of our markets. It will not shake the financial markets, the banking markets in our region, in any of the countries, and the markets will be able to digest that. It would be completely not serious to talk now, to speculate now about sort of cost implications or P&L implications of that.
What I can tell you is, it's good that stability is now created by the European authorities, that an orderly process is in place, and we will be able to respond to a potential assessment of the situation over the next couple of days. This is as much as I can say. Other than that, I do not see any kind of repercussions on our business model.
Let me add one sentence and underline what Bernhard Spalt has said on potential indirect impacts on our client portfolio. We are closely monitoring and analyzing our corporate client portfolio, not only in the last days, but for many weeks. So far, this analysis did not show any material indirect risk to our portfolio.
Thank you very much. My second question was on M&A and your buyback buffer. I understand from the comments that M&A is your preferred option. Could you give us an update here, and specifically how you think the current environment will affect the M&A pipeline? On the buyback, over what time frame would you make the decision to pay out part or all of the buffer as a buyback? Is it possible we get it already this year?
Well, on the M&A, I think, let me start like this. I don't think that we said M&A is our sort of first order of priority. Our first order of priority is, of course, that we invest our excess capital into any kind of growth opportunities in our existing operations. The second priority is that we watch out for M&A opportunities again in our markets. We have not talked about it much, but we have acquired or we are now sort of in the process of acquiring the Commerzbank subsidiary in Hungary, which I think is a perfect fit to our business model, and it ticks off all of the boxes, which we have mentioned last time in the last earnings call when it comes to, is it a strategic fit? Yes. Is it earnings accretive? Yes.
Is it capital accretive? Yes. Is it sort of also generally digestible when it comes to our ability to integrate. I think this has been a very good example of what we want to do and what we think we will see over this year. I think yes, M&A bolt-on acquisitions in our regions will still feature 2022, and we are looking into a long, how shall I say, pipeline. Of course, M&A is a tedious business, where you look at 100 different things and only some of them will materialize. Overall, I think you should expect that we want to concentrate on capturing growth opportunities and organic growth opportunities throughout 2022.
If nothing materializes throughout the year, and if our capital sort of position continues to grow, we might reconsider that. But I think firmly it's our intention to make use of our excess capital to buy strategic fits.
Thank you very much.
Thank you. No, go ahead.
Just on the buyback, if you could tell us how you're thinking about the timing.
Following up on what I said before, I don't want to give out any firm guidance now, no firm timeline. Have some patience. We're still looking into opportunities which we see, and we will keep you posted. There is no firm timeline here.
Thank you very much.
Gabor Kemeny, Autonomous Research. Please go ahead.
Oh, hi. I have a couple of questions, firstly on net interest income. Can you please give us an update on your
Rate sensitivities, and possibly by country. If you could comment on how you think about the pass-through of the higher interest rates to deposits from here. Then secondly, on the NII guidance, which is mid-single digits. I think you flagged a negative one-off in the fourth quarter in Hungary. But if I exclude that, actually your NII is the annualized Q4 NII is already pointing to a 6% growth. So I would be interested to hear what makes you relatively cautious on the outlook. The final question on Ukraine risks. I mean, you mentioned that you carried forward the full FLI provision to 2022. Can you confirm what the amount is and what is your scope to use these provisions for potential unexpected Ukraine-related fallout?
Thank you.
Morning, Gabor. Let me take the NII questions first. Your second point was regarding a one-off or so. This is not precisely correct. I was talking about in the context of the fair value and trading result. I was talking about the impacts of the baby loan in Hungary, which is for known reasons in the whole market accounted for in fair value. Due to the increase in interest rates, there was a negative P&L accounted in the Hungarian entity, round about EUR 30 million or so. This is not in any form an NII topic.
I would call it, unfortunately, because from my personal point of view, it's much more a loan product, but for accounting reasons that are in the whole Hungarian market these days applied, it is a fair value product. That's number one. Second point when it comes to sensitivities. Let me reiterate, I think the main focus point, both in our analysis and as in the market talk, has been euro recently. That's why we did a very thorough analysis on the impacts of potential rate increases of the ECB. Let me repeat and be more precise on what I said.
We would have a positive, however limited effect should the ECB turn away from its -50 basis points negative rate area up to a zero line. Reasons for that is that we have a significant share of floored loans in our loan book, and those would, of course, not been triggering any positive effects on that side. Deposit side, you are aware how it functions. Once we would go significantly into positive territory, we expect a very positive P&L effect.
You can be sure that, let's say if the ECB should in a very, you know, sharp move, go from -50, say, to +50 or +75 basis points, then the annualized overall impact would be in a very solid three-digit million euro positive impact on our NII. That's on euro terms. When it comes to the CEE currencies, generally speaking, you have to significantly scale down your former assumptions. I mentioned in the presentation that we have and we are quite happy about that. We have realized in terms of what we see now in the monthly incomes, it's pretty much exactly what we expected on the rate increases so far.
However, now with slowing down production to a certain extent in profitable products on the loan side, of course, some reactions on the deposit side. There have been some adjustments in the Czech market, obviously, on the back of the significant rate increases. The third point is that we have been taking active investments and balance sheet measures. If you apply something like a cut to half, if not more, to the original assumptions, you will be pretty much right. We are also expecting that throughout the year we will see the end of this hiking cycle.
If you followed, and I'm sure you did, very closely the wording of the Czech National Bank, there might be still one, maybe two steps ahead. Until then, they think they get a good grip on the inflation, and then they are rather talking about normalization, if not, potentially even cuts, towards the end of the year. That is something which we pretty much share. Of course, that was a little bit before the latest developments, but subject to the Ukrainian-Russian conflict and potential impacts. This is also our view, and therefore, we reflect it in our positioning. That's basically it.
Overall, of course, for the year 2022, just to mention that we see a significant positive impact from the rate hikes that happened in the year 2021 and still in the beginning of the year 2022. I think the third question was very much towards Alexandra.
On your question on FLI and on the amounts of the reserves. Overall, 95% of the reserves we booked in 2020 will be put or have been put forward to 2022, which is roughly more than EUR 600 million, EUR 620 million. In our current guidance of staying below 20 basis points of risk costs, we assume t hat we would release from these reserves roughly a little bit more than 50%. This would give us still some room for our guidance, even given the current situation in Russia and Ukraine. How much of the releases we will then need to use to cover or to compensate impacts from the current war crisis is hard to be said, but there, of course, there is still some room to our guidance.
Very helpful. Thank you.
Thank you. Next question Mate Nemes, UBS, please go ahead.
Yes, good morning, and thank you for the presentation. I have three questions, please. Firstly, on Czechia, you mentioned, I think on the slides, that you saw some negative other results in the country from higher impairments on buildings and software. If you could provide some additional color on this, what nature of these charges, if you could explain. Secondly, on operating expenses, I think you guided for sub 55% cost-to-income ratio for 2022. It seems like your NII guidance is perhaps more on the conservative side. I'm just wondering if you could help us just narrow down your expectations on operating expenses.
Is it fair to perhaps expect not higher than 3% OpEx growth in 2022? Finally, a question on RWA and capital. You mentioned the 30 basis point negative impact on CET1 from structured effects. Do you have any other RWA impact on the horizon, be it regulatory-driven or other that we should expect? Thank you.
Okay. Yeah. Let me start off with the Q4 in Czech Republic, I think. I just double-checked. The major impact on the costs in the fourth quarter in Czech Republic were actually higher paid employee share program. Not to forget, I think I mentioned it briefly in the presentation, there was a significant FX effect with the strengthening Czech koruna. I think that's basically it. Let's be fair.
We have a significant inflationary updrift in Czech Republic, which is on the one hand very supportive on the top line, but certainly puts quite some pressure on our cost line, and it remains to be seen how much of impact in the operating expenses this will have in the course of year 2022. There wasn't anything spectacular with regards to IT expenses or write-downs or something like that. So this I can guarantee. Bernhard, do you wanna talk about the cost integration? Or should I say a couple of words on this? As you like. I think it's completely right what you said, Mate, with regards to NII. When we were post-budgeting, guiding last time meeting you after Q3, we have...
We had a positive perception of the rate hikes in CZ. However, they generated an additional dynamic thereafter. Therefore, we are today also a little bit more optimistic on the NII front, which is a major factor. Other than that, Bernhard, please.
Yeah. Maybe just to reiterate our assumption. Stefan has talked about the top line, but let's also talk about the cost line in the context of inflation really rising and sustainably rising. It is not a temporary feature, and we've indicated that already in our last earnings call. We believe that throughout the region, we have record low unemployment rates. We have a scarcity of skilled labor force, and we believe that personnel expense line will go up. Yes, potentially, we're not ultra-aggressive with the guidance of below 55, but you should consider that the cost updrafts on the pay mix line will be substantial in any of the countries. We're talking about inflation rates of around 8% in Hungary, of about 9% in Romania.
It is something which will feature 2022. We will be able to digest it through very good top-line performance, but it's also significant what is happening on the inflation side.
On the development of credit risk, RWA is expected to increase roughly by 5% on a yearly level, but predominantly driven by business growth. Partially we expect an offset by gradual improvements in the corporate portfolio quality, but overall a purely business-driven increase. No negative method effects or regulatory changes are expected for credit risk RWA. As you know, the EUR 6 billion add-ons that we are having, we are currently working on a release, and we expect a release of roughly 50% of these add-ons over the next two years, but the focus being in 2023. Op risk is.
Thank you very much.
Also on the op risk side, no regulatory or methodic effects are expected.
Thank you, Alexandra.
Thank you. We will now move to our next question from Johannes Thormann from HSBC.
Good morning, everybody. Johannes Thormann, HSBC. Some questions from my side. As a personnel follow-up on the personnel cost, could you elaborate a bit more on what kind of general salary inflations you're budgeting for this year and to understand the dynamics in Austria, how strong is it in Austria? How strong is it in Czech Republic? Do you think you need to catch up with other industries, or can you still manage to get to a gap like some years ago when the car industry did far higher rate or salary hikes than you did in that environment?
Secondly, on M&A and probably asset management, you said you wanted to buy some asset manager several times, but looking at the scale of your business, it either is it's a reverse takeover or it's just a small bolt-on. Wouldn't it make more sense to really sell your asset management and then or find a cooperation agreement like you do in bank insurance? What is the benefit of owning a asset manager, why do you need that? The last question from my side would be just on the interest rate scenario. Just what is the impact in Hungary, just as to be complete, as you elaborated on the Czech and the euro scenario already. Thank you.
Yeah. Hello, Johannes. Let me take the pay mix and the interest rate questions. I think you got it pretty right in your question already that there is, it's time for differentiation from market to market. Let's start with the Austrian side. Just to give you a feeling, the last two years we have been finalizing the so-called collective agreement negotiations around 1.6%-1.7% year-on-year wage. This year, the average inflation of the year 2021 ended up at 2.8%, which is, from a formal definition, anchoring the, let me say, the start of the negotiation benchmark.
However, when we look at the headlines, these days in newspapers, they are talking about, of course, the 5% inflation headline number that we have seen both in Austria and pretty much also for Europe. In other words, this is setting the frame. We think that there will be something like a 3.x result for the collective agreement in Austria. We saw from other sectors that something between 3% and 3.5% is realistic. Negotiations have just been starting. Of course, the latest developments might, if you want so, unfortunately, help us a little bit on the employer side. But this is about the levels that you should be thinking of.
Completely different situation, as Bernhard Spalt already mentioned in some of our countries. I would rank in terms of the immediate current pressure that we feel by Romania being pretty much first and then a crowd around, you know, Czech Republic, Hungary coming later on in Romania for various reasons. We don't have the time to go into all the details, but there everything single-digit, for across-the-board increases, I think is already kind of a success in some fields. IT in particular, data and so on, you certainly see in the markets across the sectors wage increases way above 10%.
Of course, there are other functions in the bank where this doesn't hit us so significantly, but definitely high single digit is very realistic and we talk to our colleagues there on a weekly basis, and that's definitely a relatively hot topic in Romania. Now, in Czech Republic, we have managed extremely well the last two three years, so that we have not only a super attractive employer position, but also have a very good overall relationship with the unions and so on. Nonetheless, we have to react, so it will certainly be an elevated level of wage inflation. Still, given the dynamics on the top line, we are very little worried about this market. Last but not least, the other countries are somewhere in between that.
Let me just conclude that we are very confident that the top line performance in particular also NII in those countries where we see higher inflation should be outperforming the cost increases. The other topic with regards to interest rate sensitivity in Hungary, well, we see it as a low single digit on 25 basis points, depending on the pass-through. You know, the Hungarian system is very tricky because there is actually two interest rates guiding the market. On an overall group level, less significant than the Czech and the euro yield, but definitely positive and supportive for our Hungarian results.
Yeah, Johannes, let me take the question. Asset management strategy, because I'm quite passionate about it, if I may say so. We have zero intention to sell our asset management operation. We're the number one player in asset management in the region, which puts us in a perfect position to do bolt-on acquisition and increasing value. I don't think that anybody else could do that.
I think it fits perfectly well when it comes to creating a value chain, also connected to our core customer business, both on the retail as well as on the corporate side. I think this makes perfect sense when it comes to a value proposition, a holistic value proposition. It's an entirely different, sort of, thing when you compare it to the insurance business, where I do believe that we understand a lot about the distribution and the sales, and our insurance partners tell us a lot about the product management part. I think on asset management, you should expect us to buy and not to sell.
Okay. Thank you.
Mehmet Sevim, JP Morgan, please go ahead.
Good morning. Thanks very much for taking my questions, and congratulations once again on your results. Just coming back to the interest rate sensitivity, can you please talk about your interest rate expectations for the remainder of the year, particularly in the Czech Republic? Do you expect a reversal in the rate cycle at some point in 2022? And are you seeing any pressure areas in your NII? I'm just trying to understand if there's anything specific that makes you conservative, arguably conservative in your NII guidance. Thanks very much.
First, Mehmet, I think one can discuss what is conservative, not so conservative. I think we have been making good experiences the last two or three years, especially given the environment that we have been setting certain floors and caps on certain matters. If you and I'm sure you did thoroughly study our statements, we say at least simply for reasons that you know lie in the dynamics. I get back to your question on Czech opinion in a second. I think of course if certain things play out positively, meaning that the loan growth and that's one thing of course I would like to flag.
It is to be expected that loan growth development is also a function of interest rate environment. Should we encounter a comparable loan growth as in 2021 over 2020, then I fully agree with you. Any guidance that we have been talking about would be called conservative. However, realistically speaking, there is of course a certain impact to be expected on at least the growth of the production on housing loans and so on in our region, which has been such a supportive driver in the year 2021.
When it comes to our view, and please bear in mind that any comment I make is a little bit subject to what happens around us these days, where some of the interdependencies we might not yet fully understand all of us together.
Apart from that, we think that the Czech National Bank, with its guidance overall, with this kind of plateau level, somewhere, you know, another one or two rate hikes from here, and then getting a grip on the inflation and at a certain later point this year or beginning of next year, they might be in the position to scale back a little bit their levels is something that our top economists, both in the region and locally in Czech Republic, are very much joining. That's a scenario that we think is realistic. Obviously, there is a tail risk that things go in a different direction and that certain prices in the market and the inflation will get additional dynamics.
Our base case scenario is exactly comparable to what the Czech National Bank has been communicating in recent statements in January and also in February, if I'm following everything closely. That's where we stand, and we regard this as the most likely scenario subject, of course, to the latest turbulences.
Great. That's all very helpful. Thanks very much.
Alan Webborn, Société Générale. Please go ahead.
Oh, hi. Thanks for the call. Two questions, please. Firstly, in terms of your fee growth guidance, sort of low- to mid-single-digit, is there caution in there? Is it related to what you reflected was the benefit of charging for deposits last year? Is that a notable drag, or are you concerned that sort of, you know, market volatility may crimp slightly the impact from asset management fees? Just give us a little bit of a view as where your guidance was formed on that basis. That would be helpful. The second question. Sorry.
The second question was, compared to where you were in Q3, when you were sort of quite strongly promising clarity on buybacks, which you've now given, it would appear that there seems to be more enthusiasm, if anything, for M&As than there was there. I mean, is it the case that you're seeing more opportunities perhaps than you saw at the end of Q3? That was the second question. Thirdly, on Hungary, are you impacted, and is there any impact in Q4 from the moratorium on interest rates for mortgages in Hungary? And that was the third question. Fourthly, point of detail. There seems to be a sort of slightly lower than EUR 30 million negative in other income in the Czech Republic in Q4.
What was that, please?
Yeah. Good morning, Alan. Let me take the first two questions. On the fee income guidance, it's a little bit of a blend of three elements. One is what we've seen last year was a record development solidly double-digit growth in a context where markets have been really benign and how should I say? The yields which could be achieved were spectacular throughout the entire year. Secondly, we are seeing now interest rate hikes in the countries which offer alternatives. Thirdly, of course, in the context of the latest turbulences, we would expect that volatilities on the financial markets will have somewhat of a dampening effect when it comes to a not yet very well-educated investors market in our region.
I do think that what we guide here is a relatively fair and not sort of unbalanced guidance. I think that would be a combination of the three, which features this guidance. Secondly, on the balance between our level of enthusiasm between share buybacks and M&A, I think what you perceive is correct. We do believe that this year will be a year where we will see really further M&A opportunities. And if we're wrong, then we will, of course, revert to share buyback considerations. But we're possibly more optimistic on the M&A opportunities than we have been last time around.
Let me take up your question on the one hand, Hungarian impact of the moratorium on that one. Let me refer you to page 20, where we make a comment on that. The overall impact of the latest measures by the Hungarian government, at the end of the day, overall with all components, has been around about EUR 17 million-EUR 18 million in the year 2021. It is fully incorporated in the results. I think there was another part on Czech Republic. On Czech Republic, it also refers back to the question that Mate had earlier on.
There was a certain impairment on buildings and software in the fourth quarter. Nothing spectacular. Definitely not repeating. As you know, we are planning for a new Czech headquarters in Prague, which is in the planning phase. I would say. On the back of that, we have been also looking into the existing properties owned, and there was a small effect in some adjustments. Nothing spectacular and definitely not repeating.
That's super. Thanks very much.
Krishnendra Dubey from Barclays, please go ahead.
Sure. I just have one follow-up from the previous question on Hungary and, like, two other questions. On the Hungarian part, I think you highlighted in the presentation that you have mortgage interest cap and the moratorium-related debt overlap thing. So I just wanted to check how much of this is recurring in nature and how much of this is one-off. Second question, on the second round effect, you mentioned four factors on your second slide, second or third slide. So if you could give us the priority order in terms of what you think are most meaningful and what would be the least on the priority. The third one is specifically related to the same question. What is your interbank exposure to RBI? Thank you.
Hi, Krishnendra. It's Thomas here. Can you just maybe repeat your questions in a very concise way? Because we had a very
Sure.
We had a very bad line.
Sure.
Basically didn't get the punch of your questions. Yeah.
Yeah, sure. Sure. No problem. On the NII from the Hungary part, I was just trying to check what is the recurring and what is the non-recurring part. That's the first question.
Recurring or non-recurring.
Yeah.
I think just for me to make sure that we got the question right, you were asking whether in Hungary the effects were recurring or non-recurring.
Yes, I can take that right away, and then please let us know whether we got your, let me say, area of questions right. There are two elements that were relevant in Hungary in the second half of the year 2021. The first one, as I mentioned before, was on the back of the very successful and very profitable product of baby loan in the fair value and trading and fair value line. That's the one part. The other part is due to the, so to say, newly introduced moratorium and the caps on the respective interest rates that are charged to our clients.
Both of those, of course, subject to any kind of extension, new measures of the Hungarian government and so on, are not repeating. On the fair value part, it's even a position where we, of course, expect a significant positive P&L until the respective moratorium until the respective loan book expires. That's on those two. I hope we got it right what you were asking for.
Yes. Yes, yes. The second question is on the fourth slide you mentioned, what is the second round impact? If you can give us the clarity on the four factors that you mentioned. Related with, what is your interbank exposure to it, if you can.
Okay. Krishnendra, I think we will follow up after this call because the line is so bad, we didn't get the gist of your questions. If you are just in contact with Peter or myself, we will sort this out afterwards. Sorry for that.
Sure. Lovely.
Thank you.
We'll now move to our next question from Riccardo Rovere from Mediobanca. Please go ahead.
Good morning. Good morning, everybody. Two questions if I may. The first one is on your risk cost guidance of, say, kind of 20 basis points. How did you incorporate or to what extent did you incorporate the fact that energy prices over the past five, less than seven days, have gone up by kind of 50%? Gas was at 70 EUR per MWh, now it's about 115 EUR. To what extent did you take that into account? This is the first question. Then the other question I had is, you clearly state that your exposure to Russia is immaterial. I may have actually lost it right at the beginning of the call. I joined with a few seconds delay. But when.
What does immaterial mean? Literally a few tens of millions euros, a few hundred or zero. Would you be in the position to give us a better understanding of what immaterial means? Thank you.
Let me take both your questions. First, immaterial, a few tens of millions. The second, on the risk cost guidance for 2022, we took into account impacts of the development of the energy prices, and we already performed by the end of last year a very thorough analysis of all our clients which are strongly connected to this topic or dependent on the rise of energy prices. To be very concrete, we screened a portfolio of roughly EUR 6 billion, roughly 400 clients, and we were screening them individually, and this analysis did not show any negative material impact on our portfolio. In fact, we took it into account in our guidance.
There is no signs to be considerably worried on this front.
Sorry, Alexandra, to interrupt. You stated that this analysis was performed on EUR 6 billion portfolio, give or take.
Yes.
Okay. The energy prices, they affect the whole everything, food, everything, transportation.
Yes, exactly.
Travel, leisure.
Yeah.
E-everything.
Yeah. This is why we did this individual screening of all these clients. We did not only do it by the end of the year, but we do it regularly.
All right. Okay. All right. Thanks.
Okay. Good. Ladies and gentlemen, I think at this time we have no further questions. I thank the operator for his help in conducting this call. Before we finish, as usual, I hand over to Bernhard Spalt.
Yeah. Thanks very much, ladies and gentlemen, for taking the time and taking the interest. I would like to conclude today's earnings call, and I would like to invite you for our results for the first quarter 2022, which we will present on April 29. Looking forward to talking to you then, and stay safe. Thank you.
Bye-bye.
Thank you. Bye-bye.
This concludes today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.