Good day, and welcome to the Aster Group Bank AG Results for the First Half of twenty twenty one Conference Call. Today's conference is being recorded. Now I would like to turn the conference over to Mr. Thomas Somerawa. Please go ahead, sir.
Thank you, Sharon, for this kind introduction. I would also like to welcome everybody on behalf of ERSE Group who is listening in today. We are doing this call, as usual, from Vienna. And your hosts will be Bjorn Spalt, Chief Executive Officer of Eraste Group Stefan Toerfler, Chief Financial Officer of Eraste Group and Alexander Harvalla Travec, Chief Risk Officer of Eraste Group. And as is customary for this course, my colleagues will lead you through a brief presentation highlighting the main achievements of the past quarter, after which time, they will be ready to take your questions.
As is also usual, I would like to direct you before handing over to Bernd Spijl to Page two, which contains the disclaimer on forward looking statements. And with this, Bernd, I hand over to you.
Thanks very much, Thomas. Good morning, ladies and gentlemen. Welcome to our Q2 earnings call. Let me directly take you to Page four of the presentation. In terms of key developments description, what do we see?
I do think that what we have hoped for and what we have predicted by at the beginning of the year that 2021 will be a year of recovery comes through. The CE macro recovery is in full swing. We see very positive business developments and growth developments all over the region based on a situation where not only the warmer sort of season helps to keep infection rates down, but also vaccination strategies have been employed both publicly as well as privately, and they have been deployed a lot better than I would have thought. If I look at the relatively, how shall I say, amateurish handling of the testing and tracing strategy last year by the public sort of authorities. This year around, the vaccination logistics has been set up very well.
We do have ample capacities and the logistics work throughout all of our countries. And this prepares the ground for an economic opening and a robust and long term economic opening. So what you see is that economic growth has returned. And it's also important in the context of our business models that we have seen first rate hikes, and we will see more rate hikes. And here, a specific attention and importance is certainly the Czech Republic.
So I think most of the optimistic hopes and promises turn into something like a reality. I don't think that it's the time to call victory over the virus and over the volatility because we still have some way to go. But what could have been achieved so far has been achieved, and there's a very, very strong recovery taking place. If you look at our specific business performance in the first half of the year, you do know that we have announced in the Capital Markets Day of twenty nineteen that we build very much on our ability to generate fee income in the context of an ultra low interest rate environment, which will be very sticky. And I would say that what we have done so far and what we'll continue to see, and I think that's also important to say on the fee generation side, no matter whether it's asset management, insurance business or transaction fees, card business, is very much, very much helping our revenue line, and it's a very strong performance, I would say.
Of very high importance is clearly, and Alexandra will talk about that in much more detail, the risk development. We have taken a we will not kick the can down the road approach last year, where we took a lot on forward looking credit risk provisions in the anticipation of rising insolvency rates and rising unemployment rates, what we see is that the government support programs have been very robust, have been very effective to a certain extent and that Moratoria, even exits from moratoria have been digested really well. So we see a very positive and benign credit risk environment, where not only credit risk costs are low, but also our NPL ratios are going back again, and our protection and coverage ratios are going up again. So I think on that, very strong. I would, in terms of outlook, say we will get to that much later.
We will expect NII to go up. We also expect, and that's important to say, loan growth to be better than we would have thought. So we guide is mid single digit with upside, a very elegant wording. And we also will return and do return to a double digit return on tangible equity. In terms of dividend, we all know that the ECB has lifted its not ban, but recommendation not to pay, which is basically the same.
So what we'll do is we will return to our old dividend policy, which I think was saying that we want to pay progressively on the dividends. So we will propose to an extraordinary general assembly close to the end of this year, a catch up dividend for the business year of 2020 of EUR 1. We have put aside €0.80 on the first half year for the dividend for the business year 2021, which one then can easily translate into a dividend proposal for the business year 2021 next year of 1 point euros 6 So I think this is broadly the summary of what we see. Let me take you to Page five of the presentation. I will be very quick here.
On the left side, you see the Q on Q net profit reconciliation, which is dominated very much by operating income, uplift, constituting a TLTRO contribution of €90,000,000 plus, which we have announced already last time. Stefan went through that in much more detail last time. So this came through. So this we have posted. And on the operating expense side, we have had in the second quarter lower expenses because of the deposit insurance and the resolution fund contribution.
So on this, you see a substantial increase on the net profit quarter on quarter. If you look at the year on year net profit reconciliation, the major, major driver is clearly risk cost. We will talk about that later. So in the year 2020, when we took this forward looking approach in 2021. We see, as I said, very benign environment.
So we see a net profit for the first half year of €918,000,000 which I think compares even favorably to a precrisis year 2019. Now Page six, executive summary on the key income statement data. I don't want to repeat what I said, but maybe on the net interest income. Clearly, the abundance of liquidity puts pressure on net interest margin. We do not see that subsiding.
We don't see that going away. This will be a feature for the future as well. So yes, volume uptick helps us, and the return of the demand side will also help us to generate loans. But the margin side will still be a tough game. On the costincome ratio, and we will get to that later.
Yes, we have, again, seen a quarter with positive jaws, and this is something which we promised and which we will continue to deliver over the next quarters to come to stick to our guidance and our ambition of 55% costincome ratio 2024. Other than that, yes, return on tangible equity already commented upon double digit, and this must be our aspiration also forward looking. Now let me take you to Page seven of the presentation. On the balance sheet development, asset wise, clearly, yes, there has been loan growth, quite significant loan growth, net loans up by almost 4%, which I think is a strong sign. But of course, also in the context of the TLTRO, in the context of abundant liquidity, we see a substantial increase in cash positions.
And if you look at the liability part of our balance sheet, the dominating feature still is a very robust deposit inflow. Now while it's really hard to make a firm guidance here, intuitively, one would say that the second half of the year in the context of an opening economy, in the context where people start to consume again in the context of corporates resuming their investment behavior, these cash positions and these deposit positions should go down, would be my hope, my expectation. Let's see how this will develop. So what you see is we have got now CHF $3.00 3,000,000,000 balance sheet with a, again, very, very, very strong liquidity position. On the which taking you to Page eight.
Clearly, loan to deposit ratio is now at 83% record low. Credit risk weighted assets are going up in the context also of a growing loan book, but also in the context of one off effects when it comes to models. So this is something which I would like you to consider as a rather special development for the first half year. Forward looking, we should look into a growing loan book, which is in tune with risk weighted assets development. NPL coverage ratio and NPL ratio, already commented upon.
Capital position, very, very strong with 14.2% common equity Tier one and a strong leverage ratio as well. Now taking you to Page 10, and I will reflect on that only very shortly. Whatever you see here in terms of forecasts is showing an upward trend. So yes, recovery is in full swing. Recovery expectations are even going up.
And the whole context of the EU Next Generation Fund and the EU multi annual financial framework will give an additional boost, not only in terms of consumption of and hopefully exploitation of these funds, but also in terms of co investments, follow-up investments and follow-up demand. So I think this will be having a supercharge effect on the local economies in all of the places. And then it's also, again, very important to mention that the interest rate policy central banks in the region will respond to this growth situation and to price pressures. So we will see further rate hikes down the road, which will help us on the net interest income side. So on Page 11, sort of it's just a couple of more details.
We still, and I want to drive your attention to that, we still see very, very strong labor markets with almost full employment throughout the region. So I think this is also very important to mention. So when it comes to can the whole growth potential be captured in the region, it comes also to the question, will there be enough skilled labor force to work on the orders, which are building up now in the order books of the company? So I think this is a critical question, which will also stay around for quite a while, how can we get access to enough skilled and even unskilled labor force to attend to all the growth opportunities. Public finances also, of course, public debt has been built up in this time.
But at this interest rate environment is not threatening. And generally, I would say that these all these structural fund developments will help to create growth opportunities and help also to increase the tax base for the governments as revenues. Now on Page 12, retail, what is happening on the ground. We slowly returned to a precrisis mode when it comes to branch traffic. So we're almost there where we have been when it comes to customers visiting our branches.
Consumer loan demand still muted, I would say. It's still a matter of confidence. It's still a matter of is it all over yet question mark. But housing loan demand, incredibly strong, very, very strong throughout the region, and we will expect that to continue over the next couple of quarters. So on the fee side, the fee income line has been very much a reflection of a high demand for securities products, where cash and deposits do not generate any returns.
Customers do have a very strong desire to invest on a monthly basis into alternative opportunities, and this is being taken up well and helps us on the fee side. So security savings plans are really, really doing well, and this will not go away. And also insurance products are doing well in this context. If I may take you to Page 13, digital. George now has over 7,000,000 customers with the rollout to Croatia and Hungary.
Our platform, George, is now fully operative in all group countries except Serbia. We passed this milestone of 7,000,000 customers. And the engagement rates are high and also the daily actives are growing every single day. And digital contributes to sales and earnings more and more. So you see on the lower chart how the development of digital sales develops.
And we have quite a couple of features which are in the pipeline, which will help our customer experience down the road. On the outlook side, I think that the expanding of the digital platform user base will sort of help us also very much on the corporate side. We are very strong retail, clearly. But also on the corporate side, on the SME side, there's a strong desire to have a digital experience on all in. So and I think we're doing well here.
On the corporates and markets, what is happening also here, a very strong sign for recovery. Loan demand is coming back, not only when it comes to working capital loans, but also investment loans. M and A activity is clearly going up on the way out of the crisis. And our own capital markets business, it comes to transactions, when it comes to own issues, when it comes to mandates, is clearly showing a much improved market. Our asset management sales are up.
And our own first issue in a green bond, a benchmark issue of 500,000,000 has been a very strong success, seven years 10 now. And we printed at 35 basis points above mid swaps, and it was very much oversubscribed. So I think this is a territory which really fits well to our business model, and we will talk about that possibly a little later on. With that, I would like to hand over to Stefan on the sort of P and L and balance sheet details.
Good morning, everyone. Much has been said already about the operating trends. And basically, we have very much positive information to share with you today. And let me start by going back on Page 16 to the net loan stock and growth. Here, we have been upgrading our guidance to mid single digit with upside, and this is based on 3.7% year to date growth and a year on year growth of 5.1% comparing 2020 to 2021.
What is remarkable is that retail, and in particular, within the retail area, mortgage business has been strong throughout the months in the year 2021. And we expect this momentum to keep up while, of course, the adjustments on the interest rate side in the countries like Czech Republic and Hungary will potentially slow down a little bit the growth in those countries, which brings me already to the distribution across the countries. Czech Republic, Romania and Hungary have been the main, I would say, outstanding drivers of the growth. In Czech Republic, we have to consider that there was a certain element of Czech corona appreciation. In the euro numbers, still, it's fair to say that the growth in mortgage business, in particular, has been unprecedentedly high in the year 2021.
Going to Page 17 and looking at the deposit development, you will remember that we talked about potential kind of stabilization of the loan to deposit ratio in the course of the reopening of the economies in this quarter two, and exactly that happened. And that's why the LiPoNon deposit ratio now stands at 83.4%, slightly up from the level of Q1. One remark here regarding the composition. More than 50% of the year to date increase comes from retail, and that also shows in which area we have more, in which area we have less possibilities to manage the deposit inflow. Just referring to the fact that my colleagues on the corporate business side have, in the meanwhile, introduced, I would say, a market according pricing of corporate deposits, something that is very difficult not to say impossible on the retail side.
Now looking forward or going forward, we expect a certain stabilization to establish further on the back of the environment that Bjorn Spalt already explained. However, it remains to be seen how in this structural over liquidity environment, longer term, the loan to deposit ratios of banks operating in Europe will actually develop. Just one very brief remark regarding the quite significant volatility on the segment. This very simply comes from seasonal increases and then further then afterwards decreases in our activities in the group markets and branch business across the currencies. On Page 18, we have a detailed breakdown on our NII and NIM development.
Of course, the not dominating factor in the second quarter was the catch up booking of the DLTRO III. The current volume stands at €19,800,000,000 We have been adding €1,800,000,000 in the June take up. And as already explained by Bernd and as indicated by myself already in the Q1 call, we have been delivering now fully on the slightly above €90,000,000 catch up booking in the second quarter. What is important to remark here is how is this distributed across the geographical segments. And you see in the breakdown of especially on the Q1 'twenty one versus Q1 'twenty one sorry, Q2 'twenty one versus Q1 'twenty one also in the year on year comparison that the countries where this TLTRO III booking took place are Austria, EBO, Austria Savings Bank, Slovakia and then not to forget other, which is the holding ALM booking since we book the group component, the group element of the TLTRO III in that segment.
Important information for you, how would the NIM look like adjusted for the TLTRO III booking in the second quarter? It would have been pretty much stable, ending up around 1.98%. So compared to the first quarter, a stable development, still, as already explained, there is given the economic development, the liquidity situation and the competitive environment, there is still significant pressure on margins in certain business segments. All in all, and this brings us to Page 19, this results in an excellent operating income development from the quarter. Talking about fees, we fully kept the momentum on fee income.
And based on a further strong asset management and with the reopening of the economy, an increasing quarter on quarter development on payments and lending related fees, we are fully back on track for our medium term growth story around fees that we have been outlining back 2019 in the Capital Markets Day. Few words about trading and fair value result. With some quarterly volatility, especially in the year on year comparison to the second quarter twenty twenty, remember, there was a bounce back after the sell off in March 2020. We are still simply running around the run rate of 50,000,000 to €70,000,000 per quarter. And given current market environment, we will stick to this run rate for the rest of the year.
Page 20 on operating expenses. We can keep reasonably short, which I think is always the best to talk about expenses. We have been keeping our expenses basically flat year on year despite some adverse FX effects in the amount of about 10,000,000 just for Czech corona. And we have the ambition, as you remember, we have always guiding, keep an orientation against the 2019 cost. We have the ambition to land somewhere around these levers.
It's depending a little bit on FX effects and how spending will further evolve in the second half of the year. But be sure, we will be applying significant and very disciplined cost management in the second half of the year as well. And therefore, we believe that costs will simply be a stabilizing and supporting factor for the operating result overall, which we have summarized on Page 21. Here, I would simply draw your attention to the cost income ratio development. It was already mentioned by Bernsberg that all the signs are confirming our trends that we want to work on going forward to the longer term goals on costincome ratio.
Let me just remind you that both for the year 2019 and 2020, we have been arriving at the costincome ratio of pretty exactly 59%. And we our ambition is to clearly bringing this ratio down for the full year twenty twenty twenty twenty one, sorry. In other words, a strong and clear positive CHO result development for this running year. And with that, I hand over to Alexandra for the risk cost development.
Thank you, Stefan, and good morning to everyone. Risk costs in the second quarter amount to CHF 47,000,000, which is only slightly up compared to Q1 with 11 basis points. And again, as also in the first quarter, we're positively influenced by repayments and upgrades. On the other hand, we saw some increase in defaults compared to Q1, but with these defaults still on a very, very low level. Year to date risk costs are €83,000,000 10 basis points.
If there's still a lot of volatility and uncertainty outside regarding the corona situation, we remain cautious and have not yet updated the FLI. The review and the update of the FLI and the heat map calculation are planned for the second half of the year. In the upcoming months, we are expecting a portfolio deterioration connected to effects of COVID and also the final phasing out of most of the government measures. However, we have reviewed our NPL inflow expectations for 'twenty one, and we revised them significantly downwards. So we expect the NPL ratio to stay below 3% also as of year end.
Given this reviewed NPL inflow assumptions, we also have reviewed and adjusted our risk cost guidance, and we now expect a faster return to a normalized level of risk costs and, therefore, guide for maximum 30 basis points for the full year. When you switch now to Page 23, NPL ratio has been mentioned. Bernd Spalter has already mentioned the increased NPL coverage, now also above 90% again. And a short word on post moratoria experiences. What we have seen so far has also continued in the second quarter of this year.
So no significant increase in hard defaults has been observed yet on the post moratoria exited moratoria volume, which was huge. So when you remember, at the peak, was €15,000,000,000 in the moratorium, which is exited, and we still stand at a very, very low default ratio. Before I hand back to Stefan Boerfle, let me add one short comment on what has been mentioned by Bernsberg regarding the model or regulatory one off impact on credit risk RWA. This is a twofold effect. One is the implementation of the CRR2 and the second is the implementation of the LGD model.
Very important to say, the model driven increase is due to a methodological change as we were an early adopter of the updated regulation on PD and LGD, and this is not a sign of a worsening of the recoveries impacting the LGD. And with this, back to Stefan.
Thank you very much, Alexandra. Since there is exactly nothing to say about other operating results at that point in time. Let me jump directly to Page 25, which sums up the net results. We have been talking about risk costs. We have been talking about operating income.
TLTRO has been prominently mentioned. All of that results on the basis of a tax rate, which we currently calculate with 20% into a Q2 net profit of €563,000,000 respectively, euros $918,000,000 for the first half year, resulting into a guidance for the full year of a double digit return on tangible equity. On Page 27, to follow-up with wholesale funding and capital chapter. I just would like to mention that for obvious reasons, the interbank deposits have been driven throughout the last twelve months by the TLTRO III take ups. You see those booked here on the right hand side of that page, and there is nothing particular to mention.
On the left hand side, I just want to mention the yellow box, which is showing the increased MREL related issuance and with this, the stock of senior unsecured bonds. This is expected to be prolonged in the upcoming quarters in execution of our MREL issuance plan. On Page 28, we show an update on our wholesale funding capital long term funding. There is not too much activity to mention apart from the already mentioned sustainability bond, which we are very happy about. It was a €500,000,000 seven year preferred senior note, and we are very keen on extending our footprint in that field.
Be prepared to see more on that area in our long term funding activities going forward. Page 29 is an update on MREL. And let me spend a few seconds on this one since we are very happy to announce that in execution of our MREL issuance plan, we have been progressing very well in recent months in our countries, executing our NPE strategy. And here, namely to mention is our issuances of Banca Commerzale Romania in Romania, In Croatia, we just recently were successfully printing a EUR 400,000,000 transaction in euro. Don't forget, for such a market, this is a very remarkable transaction, and we are very happy that we could execute at very favorable levels for this still, to be fair, underdeveloped capital market.
And last but not least, we were issuing preferred senior green bond in the amount of €100,000,000 in Slovakia. So I think what one should keep as a summary in mind, fully on track in our AML execution actually at more favorable levels than originally anticipated. On Page 30, you find our usual CET1 waterfall representation. And what is, of course, the most important information here is what Bjorn Spade already in the headline presentation mentioned is the detailed explanation of what we are planning to distribute in the upcoming quarters on the dividend side. To sum it up once more, one per share additional payment following the ECB lifting of the restriction, subject to the approval, of course, of the extraordinary general meeting.
This is supposed to happen in the 2021. And then based on our accrual of €0.80 per share so far in the first half of the year, we are targeting €1.6 dividend per share for the full business year 2021. All of that, combined with the RWA development that Alexandre already mentioned, ends up into a 14% nearly 14.2% CET1 ratio Basel III fully loaded. Just to mention, for the order of completeness, the phased in number would be 14.4% as of June 2021. And on Page 31, I just want to mention that we have been receiving the ECB approval to call our AT1 instrument as planned.
The final formal management decision will still take place in August. However, we have already been deducting this AT1 volume from our ratio, and that's why it's mentioned explicitly here on Page 31. And with that, I pass back to Bernd Spijl for the outlook.
Thanks very much, Stefan. Let me take you to Page 33, just to wrap it up. I think the first half year has been a quite strong year in terms of operating environment returning to a growth mode. Business performance, strong, especially on the fee side, a benign credit risk environment. And capital, strong liquidity, strong.
And I think, overall, a positive picture. I still would want to say that we still remain cautious. It's not the time to sort of early celebrate the victory over corona. There's still many things ahead of us. But what could have been achieved has been achieved, I think, in the first half of the year.
So the outlook is, to that extent, positive that we have upgraded and everybody is upgrading the GDP outlook for the region. We expect positive jaws, as we've promised last time, to continue featuring our performance. We have talked about the dividend policy in abundance. And profitability, yes, we expect double digit return on tangible equity for 2021. So with that, I would like to conclude our presentation, and we're very much looking forward to take your questions.
Thank We will now take our first question from Isabel Dobreva from Morgan Stanley. Your line is open. Please go ahead.
Hello, good morning, and thank you very much for the presentation. I wanted to ask you two questions on net interest income and one question on provision. So firstly, with the NII. I had a question on the check print because it was flat sequentially despite the loans being up over 2% over the quarter. And if we look back one quarter ago, the NIM had stabilized in Czech.
So could you share with us the moving parts behind why the net interest margin dropped this quarter? And also your outlook for the Czech NII by year end. So in other words, what would you assume in terms of rate hikes when you give us the full year NII guidance for the group? Then my second question on net interest income is regarding Hungary. And I saw that the NII there declined by about €11,000,000 sequentially.
And in the slides, you mentioned there was an intercompany loan. So could you quantify for us the impact of this item? And also, is that a one off that we should be cleaning up? And then finally, I have a question for Alexandra on the provisions. I just wanted to clarify the 30 basis points cost of risk guidance.
Am I correct that this does not assume any macro releases because those would be in the second half? And if so, is it possible we will see write backs in the second half because the Stage two ratio is still quite high?
Isabel, it's Thomas speaking here. Some of the questions we understood and some we didn't. I think Alexandra is clear with the question on provisions. And Stephan, not completely clear. Czech?
The quality was very bad. What exactly if it's just a general comment on Czech and I, no problem. But you were, I think, asking something specifically, Isabelle, on NII. And maybe while Alexandra is addressing the question which we understood well, maybe think about it. Can you repeat it then once more?
Because I think it was a precise question on something, yes?
Then I would start with your question on the risk cost guidance. So the 30 basis points for the full year do include assumptions on partial releases from FLI. So as you said, whether you're correct, this is without, no. This is including some releases. So we have a current assessment that we would carry on some parts of this FLI reserves or general provisions onto 'twenty two, but some we expect to be released for the full year.
And it also includes parameter updates. So we already had one parameter update in Romania, and you can also see it in the quite good in the risk cost figures on Page 22 for Romania for Q2. So there, we will this, we are also performing. And of course, we are expecting here some counterbalancing effects to the FLI partial release.
Thank you very much. I think we got the Hungarian question. You were asking about what one offs were taking place during the second quarter. Those were breakage costs on an intragroup Tier two repayments, yes? So that's what happened in Hungary in the second quarter.
And generally speaking, on the Czech NII, I think any impact of the rate increases naturally will only be visible in the second half of the year since the rate increases just took place in June. And we expect it's a point of discussion whether there will be one or two further hikes still this year. So the annualized impact, of course, will be less than hopefully then for 2022. However, yes, we are very positive on NII development in Czech Republic on the back of the rate increases. And if there was a more specific question, then may I kindly ask you to repeat it because we didn't understand it.
Yes, sorry, my line was bad. The only other remaining question on the Czech Republic was if you could explain why the net interest margin dropped sequentially because the NII was flat even though the loans were growing, and we saw the net interest margin inflect in Czech last quarter. So what led to the drop?
That's unfortunately very easy to explain. The one part is not a problem, and it's explained on Page 18 that we have, of course, an FX effect, which then in translation into euro shows a little bit adverse picture. But the second reason is very simple, enormous competition and pressure on margins in the very well growing mortgage business in the Czech market. Those are the reasons behind.
Maybe
just double check whether because we couldn't hear you properly, you also raised a question on the Stage two development? Or was this a misunderstanding? Yes. Yes. Stage two, we see as a peak and unchanged to the previous assessment, we expect that it will go down until year end to around 15%.
We will now take our next question from Matt Nimas from UBS. Line is open. Please go ahead.
Good morning. Matti Nimaszir from UBS. I have three questions, please. Firstly, on housing loans. You mentioned that you're seeing very strong demand across the entire region for housing loans.
And I'm just wondering how do you see this demand evolving in the next couple of quarters or perhaps next year in light of the monetary policy tightening cycle in some of the countries, I guess, notably and most importantly, Czech Republic, but also perhaps in Hungary. Do you expect some sort of feeding of that momentum over the next couple of quarters? Secondly, on capital management, I'm just wondering with the CET1 ratio now very firmly above 14% after the dividend accruals and Airstrek getting back to double digit Votis, could you update us on your plans regarding surplus capital? Are you willing to tolerate some slack on capital ratios, perhaps so you can have some optionality should opportunities arise? And in this context, if you could update us maybe on M and A, what do you see in the region?
And lastly, a question perhaps for Alexandra. Are we expecting any further methodology changes or regulatory driven changes on RWAs?
Thanks very much for the question. Let me start with the housing loans and the expectations. I think if you look at the overall supply demand balance, I would expect that there will be still for the next couple of quarters a very strong demand, even a demand overhang. So there will be still a lot of requests coming tightening policy of the central banks, I think, will not be the decisive factor here. I don't think that this will lead to a fading away of this momentum.
What I think is a more problematic issue is the overall development of house prices and real estate prices as such. So affordability might be a more limiting factor when it comes to house price development through the region. So I still see a sustainable demand overhang, and I see also real estate prices growing more than wages are growing. So I think that might be somewhat of a limiting factor over the next couple of quarters. But still, I think demand will be strong.
On the capital side, let me elaborate on the M and A part of it and then hand it to Stefan when it comes to our views on how we want to deal with excess capital. On the M and A side, our story is unchanged. We see all over the region, all of our countries where we are present, opportunities potentially and in reality coming up. And to the extent that these potential targets fit to our strategy, to the extent that they're capital and earnings accretive, we'll take a look from a position of strength. At that stage, there is nothing sort of specific which I can report other than that we're watching out.
Yes. Just adding to that, it's, for us, of enormous importance to be able to finance organic and if popping up, inorganic growth to the extent possible out of our own capital strength. That's one element and one driver of having a good cushion on our capital position. However, you're, of course, spot on. We have been and I think to the surprise of, I would say, many in the market, we have been seeing a very swift and strong recovery, which is stabilizing.
And even if we are performing well in the second half of the year, bringing further up our capital position. And it's our clear commitment, and I think we have shown this also throughout the crisis, to distribute in a proper and balanced manner to our investors. So in other words, the progressive dividend policy confirmation is the one part. The other part is that we have all the toolbox around should there be less of opportunities than we currently think around us in order to acquire some really interesting targets, then we will certainly think and have to think of distributing capital further and beyond the dividend track anyway.
And now to your question on the outlook on the credit risk modeling world. So we are very advanced in our model overall. TRIM exercise is digested. Basel IV, also very important to note, still with no noticeable adverse impact expected. So going forward, we are focusing on remediation measures regarding various add ons and then so called limitations.
So this should contribute to an optimizing of our RWA consumption. This does not mean there will be no more changes in the model. But as I said, majority is done, and now focus is on optimization.
We will now take the next question from Johannes Thormann from HSBC. Your line is open. Please go ahead.
Good morning, everybody. Johannes Thormann, two follow-up questions and one other, please. First of all, on the dividend policy in terms of progressiveness. Is it rather on absolute or relative levels in terms of the payout ratio in the next years? If you could help us with that.
And secondly, on the cost of risk, as you decrease the guidance to maximum 30 bps, what are the remaining areas of concerns? How is Austrian tourism doing? Is there any other area where you're currently massively concerned also to understand the outlook for the next years? And then maybe you can also help us with the absolute risk cost levels for those years. And last but not least, a simple question on could you update your tax rate guidance?
Johannes, I will take and very quickly and briefly the two questions around dividend policy and tax rate. So dividend policy is dividend per share, the progressiveness. And on the tax rate, 20% is our current guesstimate. You know that we had an elevated level in the year 2020 for explained reasons. Overall, this is the area where we guide for what we guide for in the upcoming years.
Let's see, depending on the overall results in the second half of the year, it could even tend slightly lower, but it remains to be seen. So that's currently our best guesstimate on the tax rate.
I will
quickly is it yes, then I would continue with your question on more flavor on the cost of risk guidance. So as mentioned previously, the 30 bps are, of course, strongly reduced guidance still. It contains some element of caution, which means so that I am understood correctly, as you have asked what needs to happen or whether I'm worried. I'm not worried, but we are cautious. And as you have mentioned, Austrian tourism, the next winter season is extremely important.
But even if the situation would not develop perfectly and would continue as it is, we are confident that we have this maximum 30 basis points as we are currently assessing that we only will release part of the FLI stock and will carry on part of the FLI to 'twenty two. So we would expect, even if in a not 100% super perfect environment, for the years going forward to stay on this already normalized level of risk costs.
Okay. Thank you very much.
We will now take the next question from Gabor Kemeny from Autonomous Research. Your line is open. Please go ahead.
A couple of clarifications from me and another question. First one on your NII guidance. So when you guys were rising net interest income in 2021, is this a function of the PITRO gain? So would you expect your NII to increase on the back of the rate hikes, etcetera, excluding the PITRO? And the second one on the capital distribution comment.
So just how shall we understand your planning here? So let's say, if the capital ratios, the CET1 ratio stays above your 13.5% target, potentially above 14%, would you think about share buybacks in the next few quarters? And just another question on the IT spending that you are flagging for the second half, would you be able to quantify that And maybe elaborate a bit on what are you actually spending on?
Okay. NII, Gabor, very clearly, this is the guidance is including the TLTRO catch up of the second quarter. And we would not still including Czech rate hikes and so we would not be that confident for 2021 without the TLTRO catch up booking. Going forward into 2022, and I'm sure we'll discuss that after Q3 earnings call and latest then beginning of next year, we will assess the impact of the rate increases and to what extent this enables us to give a positive guidance on NII for 2022 then where we have the full annual impact, but that's too early to discuss today. So the answer clearly, including booking.
On capital distribution, I want to Bernd will, for sure, also want to say something about it. And since it is very much connected also on potential M and A elements. But to clarify the technicalities, it's completely unchanged. We've always been saying, should we sail significantly and constantly sustainably above 14%? We have to discuss very thoroughly the capital distribution in addition because that's significantly above our management target.
So in other words, 13.7% or whatsoever will not trigger such a discussion, but a consecutive 14.2%, 14.3%, fourteen point one fourteen point four certainly would bring us in a situation where we very concretely could would have to think of further measures on that side. Bjorn, anything to add on that?
No, it's precisely, I think, the line, 13.5 target unchanged. So nothing to add on what Stefan has said.
And I didn't fully understand the IT spending reference, Gabo. Can you help us what you meant there? I think I'm sure you have been referring to some statement on what they was like, but I'm not fully aware of what you meant there.
Yes. You are writing some slight increase in the costs for the full year. And I think in the outlook statement, also mentioned some spending on digital and IT. And I wondered if you could elaborate on what this spending is and if you could help us quantify the additional spending relative to H1 in 2020?
I think two remarks, a general one and an IT specific one. The general one is that we expect and if you look at concrete numbers of half year one and compare them to our, let me say, rough estimate and guidance for the end of the year, you'll see that, that includes a certain uplift in the second half of the year. Not yet any kind of impact of wage inflation, which might be kicking in a little bit later on and impacting 'twenty two, but definitely some more spending on the back of strong economic momentum and so on. So that's confirming what we've always been saying. And if we are consequently following the interpretation that the economy is strong, that, of course, also has a certain impact on spending.
So that's generally speaking. Specifically on IT, it has always been strongly confirmed, of course, especially by the COO, the COO and our Chief Platform Officer, that digital investments, investments into our digital future are absolutely key investment areas. And so obviously, in a mix of overall spending, this is going to be more prominent. However, if you look at the IT spendings in total, we are saving a lot of money, and we are making very good progress in modernizing our overall IT. So I would say in an overall balance, the share of the IT spending is not going to increase, however, the investments into our digital footprint is.
Thank you. A small follow-up on your capital distribution question, please. Do you have any preferences between like doing share buybacks or potentially paying a special dividend or raising the dividend payout?
Let me take this one. I think we're broadly agnostic as to the tools of capital returns to our shareholders. We also get mixed mixed feedbacks, if I may say so, from our investors what would be a preferred instrument. But we ourselves are open to both instruments.
We will now take the next question from Mehmet Stephen from JPMorgan. Your line is open. Please go ahead.
Good morning. Thanks very much for the presentation. I have three questions, please. The first one on your NPL ratio and coverage guidance. Now with coverage at 91%, you were previously guiding that over time, you'd return to normal levels in your coverage ratios and as NPLs would build up?
And you were expecting a 3% to 4% NPL ratio before. Now that you're guiding for lower than 3% NPLs, how do you see coverage ratios in relation to that? And shall we expect visible provision releases if all goes according to the plan? And my second question is on fees. The performance is really eye catching.
And I was wondering if you're able to give us an indication of how much of this is a catch up from last year and how much is related to the structural changes that you're pushing for? And looking forward, is your 4% annual growth guidance by 2024 still a good level to think at least maybe, let's say, for 2022? And finally, on dividends, do you have a more specific time line in mind in terms of the EGM and the potential date of payout for the catch up dividend from 2020?
Maybe if you allow, I would take the last two questions first because they are especially the timing of the EGM. It's easy to answer. It will be November. We have a forecasted date. It's not yet officially fixed.
Therefore, I hope you will understand that I cannot give you the exact date, but it's planned for the November. On fees, I would say that's very, very straightforward to be answered in the way that, obviously, especially in the payments area and partially in the lending area, it's there is an element of catch up in there simply because of the lockdowns and so on, all the measures around COVID. However, in the other fields, we see really a very, very constant growth because we are not building our asset management and security strategy on any actionistic kind of short term shorts, but this is built very much on ongoing investments on our broad retail investor space. So the answer to your question around the 4% annual growth rate is yes. This is exactly what you should build your expectations on the years forward, and we will work very, very hard on delivering on those.
Maybe just to follow-up on what Stefan has said on the fee side. We have put up this 4% compound annual growth at a time when corona was not there. It's not only that we not don't have lost the last year, but we are now performing better than we would have thought. So I think there is every reason to believe that this is a sustainable strategy working. And there is no reason certainly to reduce the targets, yes.
Now to the questions on NPL and NPL coverage. So for the year end, we would expect the coverage ratio to go down a little bit compared to the extremely strong above 90%, but still stay comfortably above 80 while reducing because, as you know, new NPL inflows usually have a lower risk cost coverage. And especially in this case, we are assuming also some loans being state guaranteed and therefore, needing lower coverage. Going forward, this 3% for this year might go up slightly next year, but not considerably. And also for the upcoming years, we expect a coverage to the coverage to remain comfortably above 80%.
When it comes to Stage three, when you look at Page 23, you see the 54% coverage on Stage three, and this is a level which we plan also to take forward.
We will now take the next question from Jeremy O'Mahon from Goldman Sachs. Your line is open. Please go ahead.
Yes. Good morning from my side as well. I have two questions. The first one is on Page six, just looking at your cost of risk here of eight and eleven basis points. And I want to ask the question this way: What would need to happen for the cost of risk in the second half of the year to be in line with the cost of risk for the first half of the year, I.
E, essentially 10 basis points. What is would anything need to change for the better? Or would things just need pretty much to stay as they are? So that's question one. Question two is on Page 17, Page 17 where you discuss the inflows into your deposits into your deposit base.
And I was wondering two things here. Number one, what is the particularly for your euro denominated liquidity, what is the reinvestment profile of these surplus deposits, I. E, what yields are attainable for the net inflows that you're getting in euros?
And what
form do these reinvestments take? And the second thing I wanted to ask here is, I think that you commented at some point that you're hoping for the inflows to slow down because pricing for corporate and retail deposits, so I'm assuming you were alluding to negative rates for the euro accounts is almost impossible. And I was wondering why is that? I mean one thing is to go negative rates on retail or corporate accounts, but another thing is just to change the fee pricing structure around these things. And I was wondering why is that so problematic?
Question on cost of risk, which was put. So what needs to happen that they stay as low as they are? As you all have read is that we our guidance is 30 basis points max, yes, which is also indicating that we would not exclude a lower number. But now concretely, what needs to happen to stay low. So if all uncertainty around the COVID infection rates having potentially an impact in autumn and also going forward to 'twenty two would vanish, and the macro would develop so much more positive that we that the new FLI update would even indicate a larger release than we are currently assessing, then this could happen.
Also on top, a continuous non de facto, non defaulting scenarios and non NPL inflows. But when we, for example, look at The Czech Republic, there, the moratorium has ended quite early in October. And in the first quarter and second quarter now, we see the NPL inflow, especially on the retail side. Not huge and also counterbalanced by NPL outflows, but it still shows it takes some time after the end of the moratoria until the issues pop up. And as I have said, default ratios are Yes, this is true.
Also, the amount of clients needing restructuring is low. But still, this is roughly 10% restructuring needs of the post moratorium clients. And time will see whether these additional support measures are sufficient to prevent them from defaulting. But to be very precise, so we would not rule out being better in case situation develops better, which is indicated by the word maximum.
Maybe, Jorni, I'll take the part on the loan to deposit ratio and why would I hope that the cash positions will reduce over time. This is not so much a reflection on sort of can we pass on negative interest rates to the customers. I will get to that in a minute while this is difficult. But it's more a reflection of what is happening economically. So far, in a situation where there was a lot of reduced visibility, where there was a lot of reduced certainty on how this crisis will play out.
People increased savings patterns and put money even if it yielded nothing on their accounts. We have a savings rate in Austria,
just for
example, of 14%, which has been never seen in history. And I don't think that this will change. Now that people come back to the streets, now that people can travel again, now that people can consume again and can spend again, they will use before they take up consumer loans, they will use parts of the cash which they have piled up. So that's one element. And also on the corporate side, I would say that now investment behavior is returning.
Projects are coming up. M and A opportunities are coming up. Cash positions will come in handy when it comes to financing these opportunities. So I would expect, even if I might be too early with that, that over time, this will change liquidity positions going forward, and it will help to normalize our loan to deposit ratio. Point number one.
Point number two, why is it so difficult to pass on negative interest rates? This is relatively simple. On the corporate side, we are passing on negative interest rates to our customers. So here, it's not difficult. And as it's not difficult and as it's not legally forbidden, we're doing that.
It is impossible to pass on negative interest rates to the retail population because there is still a valid high court ruling in Austria and the Central and Eastern European countries are seeing that broadly. Similarly, that you're not allowed to charge negative interest rate on a savings product. Now your very correct question, why can I not just charge fees to our customers so as to mitigate this effect? You do know in the European context, we have a very strong and strict consumer protection framework, where the arbitrary passing on or establishing of fees has significant borders. So think, yes, we're trying to sort of come up with services which justifies fees, but just sort of raising fees without any kind of additional services does not work on the European consumer protection frame.
So overall, I think we will see that pressure, that high liquidity pressure subsiding, I hope, because of different spending and investment patterns. And I think that will be broadly the picture.
Yes. Thank you very much, Bernd. I think nothing to add on this side. Just a few words on your kind of reinvestment question that I think you were asking. I mean beyond the general answer that we, of course, ideally want to deploy it for clients' business on the asset side, on the loan business as well as leading our clients into profitable asset management business.
We are, of course, using all means on the multiple on our multiple central bank access to optimize on treasury management through Hungarian, Czech, U. S. And so on, swap placements and so on and so forth to optimize the P and L there. However, it's, of course, our core goal to really make use of it for our clients in principle. Just one remark on the CFX swap business.
We can, of course, better than others, generate some returns there on the ECB on the top of the ECB deposit rate. However, given the overamounting overall liquidity, that's limited to a certain share of the size, if this helps. And Mark, maybe because we discussed that in a different dialogue once, what is very positive for the year 2021, I'm sure you all follow the volatility on the long end of the bond curve in pretty much all currencies. We were, I think, pretty successful. And this is, of course, seen in the numbers in using the upticks in the bond yields for our reinvestments.
And that is, of course, very well adding to our NII impact from the investment
next question from Alan Webborn from Societe Generale. A
couple of questions. Firstly, is the Corporates and Markets division now a new driver of earnings growth for Uster? You talk about quite a lot of activity there at the moment. Do you think this is an area where you will be investing more in? Do you see higher ongoing returns?
Is what's happening in the region accelerating? What's your view about the potential of this business, which often seems to be something that we talk less about? That would be the first question. The second point of detail, would you be able to now or afterwards just detail exactly where the share of the TLTRO NII came through in Q2 between Corporate Center and the other bits, that would be helpful. Thirdly, where are you along the development of the corporate, George?
Is it actually active? When do you think it will be active? That would be interesting. Fourthly, on wage growth, not just from you, but all CE banks are flagging rising employment costs. I mean, is this something that's surprising you more than you thought?
Do you have measures in place to offset it? Because clearly, you're making quite a strong comment on positive cost jaws, and I just wondered what your views of how that's been progressing. And last question on ESG. I think you have a lot of quite granular targets, which some of which have already been achieved in the regions, a number of which are, I think, finishing in 2021. And I think you did talk about updating and renewing some of these targets.
I wondered what progress you've made and when can we expect more in terms of measurable targets on ESG from us to group?
Alan, let me take the question on corporate, and let me take the question on ESG. On corporate, I think a couple of things to mention. One is, I think, corporate will continue to be a very important driver of our profitability. You need to look at corporate in a way that has connection to the retail line in terms of our asset management targets. Our fee strategy not only depends on demand side on the retail population, but depends also substantially on our ability to generate products and to come up with attractive investment propositions.
And to that extent, these two businesses go hand in hand and don't need to be necessarily seen separately. They work on the same target from different ends. And here, we'll continue to be a very strong strategic focus. Secondly, on the investment side, we continue, and we will up our investments into corporate infrastructure. What we have done over the last years on charge retail, we will now need to do also on the corporate end.
So in terms of the front end and the customer experience part, we're very heavily sort of working on offering solutions which are modern and convenient and up to date. So I think this will be an investment focus. And lastly, I think corporate will really benefit from all of these opportunities on the climate change, digital transformation and structural reforms driven by so many public funds, which need to be co financed by debt instruments. So I think we see a lot of opportunities when it comes to sustainable growth on the investment loan and project finance side as well. And maybe as an element, which is again important, this post crisis environment will show a lot of M and A activity.
And I think our investment banking and our advisory services there will also benefit from that. But if you look at it from a market share point of view, corporate is still significantly lower in terms of market share than retail in our core businesses. So we think that when we look to what we have to offer and what kind of sort of strategies we pursue, there's a catch up potential when it comes to market share over the region. So I think this is a big pillar of our core business, I would say. On ESG, you've correctly said that we have already come up and delivered on our targets, which we've so far established.
I would say that on our next earnings call and also on our year end earnings call, we will see next steps in terms of what we put out. You have seen probably that we would really put an end to coal financing in 2030 and that we have a transition period from today until 2023 when corporates can present their transition plans. But from 02/1930, we will not finance anything which is carbon which is coal related. And there are many more things to come. You've seen our bond issue with the CHF 500,000,000 benchmark issue.
We're doing a lot of sort of products on the asset management side, and we will come up with the next steps in our next earnings call.
Eln, on your two questions, TLTRO III and wage growth. So TLTRO III breakup, it's around about 15% in Slovakia. A total of about 20% of the catch up booking was in savings banks. However, please be careful, a part of that is shown in the Austrian ABOE part. This is the owned direct savings banks.
So total on ABOE side is, however, you look at it 20% to 30% and the rest is around about 55% is booked on holding group, what I mentioned in the course of the presentation. Wage growth, is it a surprise? No, it's not a surprise at all. For us, you remember before so pre pandemic, we have been very often mentioning and have been making topical, anything around the tight labor markets in our core countries, in particular, in countries like Hungary and Czech Republic. And Bjorn also today mentioned that this might be a limiting factor, not only for some of our customers, but even in the financial industry to execute some of the growth areas, tight labor markets.
In economic terms, I think it's basically net positive for us as long as it's under some control because, obviously, the wage growth goes very much to our customers. And therefore, it naturally contributes to an uptick also in the ability for them to spend, to invest and so on. And of course, it also drives in the non Euro countries, I would say, the more hawkish approach that some of the central banks have already been starting to execute. Nonetheless, I think the environment in general around inflation, wage inflation and so on is definitely one of the top topics for everyone to watch very closely in the quarters to come. And it remains to be seen how it actually then really ends up going into 'twenty two and force falling.
But can I just ask from that point of view, slight cost growth that you're forecasting for 2021, you don't think there's any risk to that?
No, thanks very much for reminding me on that one. I want to point out that we have never been setting, especially medium to long term, any absolute cost targets, which I personally also, I think the whole management shares that would not regard as a very, I would say, sensible approach. We always talk about costincome ratio. And of course, short term and explicitly for 2021, I'm absolutely confident that our cost indication for 2021 is not in danger. However, longer term, we always talk about parameters which are including the income and the cost side and not separately just on one of the items because those are naturally very closely connected.
So that's, I think thanks very much for reminding me to answer that one.
Great. Thanks for all those responses. Very good. Thanks.
We will now take the next question from Riccardo Rovier from Mediobanca. Your line is open. Please go ahead.
Good, thanks. Good morning to everybody. Thanks for taking my questions. I have four, if I may. The first one relates to Wealth Management.
Would you be able to give us an indication of what is the stock of Wealth Management at the June? And in that respect, with loan deposit ratio keep which keeps falling, well, it has stabilized in this quarter or slightly up. Now where is realistically where can the loan to deposit ratio can realistically go in the medium term? And what part of the deposits that you currently have on your balance sheet you think it could be moved off balance sheet into wealth management? This is first question.
Second question I have is on the SLIs from Alexandra. Now without entering too much into details, you clearly stated that the 30 basis point guidance assumes some kind of news on the FLIs, allocation or release. Is that is this number above 50%, below 50%, if you want to share some color with us on this topic? And just to be sure, the amount that you booked last year is, if I remember, well, it was €680,000,000 if that is correct. Last thing, maybe still for maybe still for Alexandra, you clearly stated that you have some RWA add ons here and there that you plan to kind of optimize over time.
And you stated that you have digested TRIM, Basel IV, not too much of an issue. Is it fair to assume that in the medium term, credit risk weighted assets should go up, should grow less than the loan book aside from a mix effect due to the maybe housing loans and so on. Is that fair to say?
All right, Ricardo. Let me start with the asset management slash wealth management information. So there's a constant and very solid healthy growth. The latest number on consolidated basis is about CHF 73,000,000,000 under management. However, I want to point out, this is our own asset management franchise.
And of course, we are also, especially for high net worth and so on, also using other products and to in the advisory business. And there, I think it was explained by Bernd throughout the presentation. I want to draw also your attention to Page 12, and we will constantly report about our developments there about the security savings plans. This is very much a focus, something which is broad, constant and long term. So in other words, it's developing on a broad base.
73,000,000,000 is the number of assets under management consolidated by the June 2021. On the loan to deposit ratio and our ability to transfer this one and to what level, to what extent we can translate it into asset management, investments as well as loan business. I mean, this is always a question which you only should be answering over longer term. And my I don't give you any percentages yet. It would be professional serious.
Given the experiences of the last few quarters and developments in the course of the economic uptick, I would say that sailing north of 80 should possible in the upcoming quarters. So in other words, no further reduction in the loan to deposit ratio is something which we will regard as healthy as hopefully also realistic. I would not forecast anything like going back to 90%, 95% in the short term. That would be my take on that. And with that, I would pass on to Alexandra.
So on your question on FLI. So the number that you mentioned and remember is correct with the $650,000,000 but this is not only FLI. This is what we have created on performing provisions, yes, so including the management overlays. And from this amount, we would expect to be as precise as possible, roughly 50 up to 50% releases current assessment for this year and the remainder being carried forward. To your question, RWA optimization of future development on the medium term.
So we would expect the RWA density to remain stable with a slight positive development. And as I said, so there is still a couple of add ons and limitations where we are working on in order to optimize the profile. But the profile and the development of the credit risk RWA will also be strongly dependent on the mix of business. So currently, as you also see in the material, business is strongly growing in corporates and they are often the SL segment and SL RWA considerably higher than, for example, for the housing loans. But overall, stable with a slight positive trend.
Thanks, Ricardo. It's Thomas speaking here again. Just a short housekeeping announcement. We have another seventeen minutes in this call. We will finish the call at 10:45.
So I would ask the remaining guys in the line to keep the questions short, and I would also ask my colleagues to keep the answers short as well. With that, over to you, Sharon.
Thank you. We will now take the next question from Krishnandra Dubey from Barclays. Your line is open. Please go ahead.
Hi, guys. Thanks taking my question. I have a couple of questions. First is regarding the fee and second is regarding the ROT. In terms of fee, the 1H twenty one run rate suggests an 11% or higher Y o Y growth in the fees, whereas you have guided to high single digit number.
Is that too conservative or there is something that we should consider by looking at the fees growth in the second half? And secondly, in terms of RoTE, you suggest double digit RoTE. So will it be somewhere like a 10% to 11% that you have historically talked about? Because our calculations suggest it's somewhere around 11%. So what should we think about the RoTE?
Yes.
I'll take the first the second question on the RoTE. Your understanding is exactly correct. So this is what we're thinking about if we're talking about double digit RoTE.
And I can also be brief here following Mr. Sommer's request to be brief. Please, I think it's exactly on track. I think you can expect that we walk on that path. And the second half, of course, subject to some turbulences in the capital markets, should be delivering on that track.
So no specialties in there in the Q2, which you should be adjusting for.
We will now take the next question from Robert Brozar from PKOPP Securities. A
quick question on Romania. First, should we treat the provisioning 90 bps annualized as a sort of run rate going forward? Second, there is other cost of €16,000,000 What is it? What has caused this? And finally, NII flattish over the quarter despite a growing loan book.
And on top of this, we had relatively strong growth in OpEx. Is it something to be sustained, this trend not so favorable going forward?
Yes. And thanks very much, Robert, for spotting that. Because not to getting too long, I didn't want to talk about every single country on net profit. While in Romania, we had an excellent and we still have excellent operating momentum, the second quarter was a little bit overshadowed by two special effects, which on country level were, let's say, material. The one and I ask Alexander to comment briefly on that, there was risk parameter update on PDEs, and that is was causing a CHF22 million risk.
So I'm sure she can more precisely explain how that will behave going forward. And then there was a tax booking in the second quarter, which was in other operating. Therefore, you saw a very strong operating result, however, a little bit of a downbeat net result in Romania. So both of them, to my knowledge, but Alexander, please comment on the risk, but are not repeating.
Yes. As it's also outlined on Page 22. So and I've also briefly mentioned, in Romania, the bookings is due to the increased portfolio provisions mainly due to method effects. This was the parameter update, which I also mentioned we will do in all countries and which will also have a counterbalancing effect. So adding to the risk provisions, counterbalancing the releases from the FLI and Stage two management overlays.
So on your question very concretely, is this roughly 80,000,090 million that you have mentioned the future run rate? No, it's not. The expected run rate in Romania is considerably lower than the Q2 bookings.
We will now take the next question from Olga Vistilova from Bank of America. Your line is open. Please go ahead.
Thank you. Thank you very much for the detailed answers. I have two small remaining questions. One is about the TLTRO impact on NII. Shall we perceive this as a one off or that orders can be actually repeated, maybe not this year, maybe next year?
And if yes, then when exactly do you book these gains? What triggers the booking of such gains? And my second question is about the cost of risk through the cycle. Alexandra mentioned that the reviewed cost of risk guidance signals a return to normality. Shall we assume that the 30 bps cost of risk is a normalized level for the group?
You, Olga, for the additional question on TLTRO because that's very important. So the straightforward answer is, should the conditions around TLTRO not be changed going forward? And should there not be further take ups or further runs by ECB that would add here, that you should not and we should not expect any comparable catch ups going forward because we simply accrue for the run rate. However, I think it's worth to mention that there are, of course, discussions in the market whether the ECB might be repeating, prolonging, adjusting the rules. And that way, of course, we will keep you in the loop of whether this has additional impact and further catch up bookings going forward.
And how did it come? It's very simple. At this point in time, when the bank and, of course, this is discussed with auditors, is firmly enough proving that the volumes and the volume growth, which is necessary to be eligible for the full amount of beneficial funding, then you can book those profits, and this is exactly what happened in the second quarter. And as of today, and given current conditions, this will not repeat. But of course, if ECB changes course on those programs, then things might change.
To the through the cycle risk costs, you know our through the cycle normalized risk costs are in the range of 30 to 50 bps. And when you recall in the last investors call for Q1 this year, I was indicating that I'm more positive, and I would expect normalized risk cost on the lower end of this range, around 30 basis So I can confirm your question or answer your question, yes, I would consider 30 basis points a very reasonable assumption for normalized risk costs.
We will now take the next question from Andra Vrstallan from Exane. Your line is open. Please go ahead.
Good morning. Three questions. Again, on the TLTRO, the €92,000,000 one off, can you confirm it relates to H2 twenty twenty and Q1 twenty twenty one? And linked to this, going forward, will you accrue for Q3, Q4, Q1, Q2 next year at 1% negative? Or will you do something else?
Then on Hungary, can you give us a sensitivity to rate prices, whether it's 25, 5,100 bps, whatever you want to
give
us? And is the loan book can you give us the split of the loan book between fixed and variable? And finally, Czech Republic, do you see any meaningful risk of bank levies linked to the upcoming elections?
Andrea, maybe I'll start. Let me start with your last question. Do we see a risk of, how shall I say, populistic moves in the context of upcoming elections? Yes, there's always a risk. I think it's equally important to say that over the last many, many years, the Czech Republic always has steered clear from introducing banking taxes and so I think which is not necessarily a guarantee that this will never come.
But I think that so far, this debate has been held in a very rational way and sort of let's wait and see what comes. But I think you can never rule out this risk. But we don't have any signs that this is now reappearing on the stage.
Andrea, let me start with the fixed variable split. This is and of course, there are significant differences across the countries. Across the group, the loan book is around about just below 60% variable and just above 40% fixed with a different mix of
Sorry, just meant Hungary.
Variable fix in Hungary. Okay. There, you have roundabout threefour of the book, 74% precisely, but you only have figures from March, April there is floating and around onefour is fixed. That's Hungary. And we don't give a ratio like in Czech Republic.
Simply, there are so many elements of the fair value part on the baby loan, as you know. Then the way the key rate translates into market rate is a completely different one in other markets. So obviously, it's net positive for us. The rate increased to nowadays 120, but we cannot translate it to any concrete euro figure on consolidated level. And on TLTRO III, there is the booking that we have been explained in the past I have been explaining in the past, which is running with this 66, so twothree of a percentage.
And only the catch up was booked to minus one. So we are exactly reflecting the approach that we have always been using from the very beginning and which is fully in line with the IFRS nine accounting rule book. So in other words, on P and L terms, and that's maybe the most important thing, you will not see any element of catch up, but of course, also no element of reducing P and L on the back of TLTRO booking.
Yes, but going forward, so Q3, for example, will you book the TLTRO at minus 1% or at minus 0.66% and then do a catch up if you meet the benchmark No, at year
no. Look, the thing is, I mean, this is the thing is, it's booked on minus 0.66 for the very simple reason. If you look at the rules of the TLTRO III conditions, and if you match the maturity, it's always a period which is defined with minus 1%, a period which is defined of minus 50%. And according to the IFRS rules, this is to be booked with an average interest rate, and this is exactly resulting in a minus 66. So it's not something that we book.
We don't book the run rate properly. It's the opposite. We are reflecting exactly the conditions that part of the programs and are building them into our accounting. The only point which is, of course, creating a jump are the respective achievements of the volume. That's in the nature of the full program.
And you see it also, if you look at the reportings of other banks, then some have been failing to achieve the volumes. In our case, we were fully achieving the volumes in all the legal entities where we were taking up TLTRO.
Okay. So, going forward, you will book it at minus $0.66 And then, if, for example, next year, you were to repay it, you will book a catch up then? The rate is minus one for the next twelve months. That's It's not minus six
different story. That's a different story. If you have an early repayment based on the catch up booking we this year and depending in this case, Andrea, we would need to go into the separate tranches. Because as you know, the full TLTRO3 program as it stands today is a mix of take ups, which have been starting back in 2020. So that's a good question whether early repayment before the maturity of the program, which we don't have
Yes, we can hear you loud and clear. Please continue.
Then I will hand back
to you.
Andrea is still on the line.
Yes. Then I think the last question from
Yes. Andrea, do you hear me again?
Yes, I can.
Yes. So early repayment is a separate story. Of course, this is something which is depending on decision making then only somewhere in June 2022 could trigger a certain catch up, but by far not in the dimension as we saw it now in the second quarter. And again, I think what will be most important is to see whether the ECB might consider an extension of the more favorable conditions later on in the course of the program. Yes, but for the year 2021, no whatsoever further changes to the from the TLTRO.
Thank you.
Okay. With this, I hand back. It's Thomas speaking here again to Berns Bart for his concluding remarks.
Yes. Thanks very much, Thomas. Thanks very much, ladies and gentlemen, for taking the time to tune into this call. We will meet again in this format on the 11/02/2021 to discuss the results for the 2021. Very much looking forward to talking to you there.
Have a good and safe summer, and thank you very much. Bye bye.
That concludes today's conference. Thank you, everyone, for your