Earnings Call: H2 2019

Feb 28, 2020

Chief Financial Officer of Erste Group and Alexandra Habeler-Drabek, Chief Risk Officer of Erste Group. They will highlight the main achievements in financial terms for the fourth quarter of last year, 2019, and also for the full year 2019, after which they are ready to take your questions. Before handing over to CEO Bernd Spalt, I would like to point you to the disclaimer on page 2. With this housekeeping out of the way, Bernd, please take it away. Thank you very much. Good morning, ladies and gentlemen. Let me start on page number 4, the group income statement performance, and let me drive to the chart on the right-hand side on the year-on-year development. The year-on-year development shows a very good business model in very robust CEE countries economies. What you see is an 8.7% in operating results performance. Very good revenues, good cost management in this year. A very strong negative result on the other operating result line, which then translates into a net profit of EUR 1.47 at the end of the year. If we go to Q-on-Q chart on the left-hand side, we see the individual development in Q4. Expense side has, as usual, shown some seasonal updrift on the back of IT expenses and marketing and increased the rates to 2.25% for the ninth step in a row, which of course, in terms of supporting our core business is very, very positive. Currencies on page 11 reflect very strong local economies being stable over time. This has been true for the last years. Hungarian forint slightly weakening, but nothing sort of would be too worried about. If we go to page number 12 and look at the market shares across the region, very stable, very robust. It is worthwhile mentioning that on the corporate loan side, we are across markets gaining market share, which I think is something which we also mentioned on the CMD, and we expect that to continue. Other than that, stability all over the places. Let me turn to page number 14, on the business performance on the performing loan stock growth. Here, you see sort of the reflection of what I said in the beginning, 7.1% loan growth, very much supported by domestic demand. All over the region we see a very positive picture, which we do not expect to short-term change. We see across all the segments a favorable economic fundamental support of this loan growth going forward. Same on the deposit side on page number 15. Deposit build-up continues, also over most of the markets and segments. You see a slight reduction on the Czech side, which is not something which is a sort of trend reversal, but rather a momentary reflection of a volatile development on the public sector side when it comes to deposits. Other than that, very stable and deposit inflow continues even on the low interest rate levels. Page number 16, net interest income and net interest margin. NII has been increased year-on-year and also even stronger quarter-on-quarter, which is usually the case on the fourth quarter we see a stronger increase in NII, which then translated into also a little bit of a better net interest margin. Does not mean that overall we will see margin pressure on customer business going away. The interest rate hike in the Czech Republic, certainly in this context, is a positive, even though at that moment, it doesn't produce any sort of remarkable positive aspects because we have decided to pass on some of this to the customer's deposit side. But overall, what you see, loan growth translating into NII growth, as we have indicated when we talked last. If you go to page number 17, NII and fees are going up. We have indicated that we want to target EUR 2 billion fee income for the full year 2019. This is what we also have achieved. Seeing fee income growth, in line with our strategy and strategic pillars, delivers results and this will continue over the next quarter. This is something in terms of revenue streams, you see all revenue streams delivering into an operating income growth. If we go to page number 18, costs, as I said, season behind Q4, but year-on-year, I think we have shown good cost containment. In a context of overall probably 5% wage growth, coming in with 2.4% cost growth is showing that we're really tackling that matter. Costs are slightly higher in Q4, but coming up with a 59% cost/income ratio, which is also shown on page number 19. With that, I would like to hand over to Alexandra, to cover the risk aspects. Thank you, Bernd. Good morning, everyone. Risk situation on page 20. Risk situation remained positive. With high asset quality still benign risk costs, as already mentioned by Bernd Spalt, decreasing NPLs and increasing coverage. The Q4 risk costs amount to roughly EUR 80 million, which were mainly driven by parameter updates in the area of the forward-looking indicators. We have some minor impacts from the default definition and some coverage increase of existing NPLs. The risk costs for the full year 2019 amount to EUR 39 million. This figure is composed of roughly EUR 100 million net allocations for the on-balance part, which translates into the already mentioned seven basis points of relative risk costs and minus the EUR 70 million net releases in the off-balance part, we come to the EUR 39 million overall for the full year. The NPE ratio down to 2.5%, which is not only a record low, as already mentioned, but also considerable improvement from the 2.2% on a year-on-year comparison and from 2.7% even quarter on quarter. NPE ratio is at 1.6%, which compared to year-end 2018 of 2.2% is also a considerable improvement. Also, the NPL volume in absolute terms decreased further to roughly EUR 4.1 billion, which is a 50% decrease compared to year-end 2018 and still 3% decrease compared to the third quarter. The main drivers of the NPL volume decrease are still net recoveries and upgrades. NPL sales do not play a major role. It was roughly EUR 200 million for the full year. The NPL coverage already mentioned amounts to more than 77%, which is an extremely comfortable level. With this, I hand over to Stefan, then back to Bernd. Sorry. Thanks, Alexandra. Let me quickly cover the other result on page number 23. As I said, dominated by the goodwill write-down in the Slovak Republic. As we have anticipated, the banking tax, which has been introduced, was a banking tax which was not limited in time, so we recalculated the expected cash flows and accordingly wrote down the full goodwill of our Slovak participation, which translated into EUR 165 million impairment. We had, on the other side, EUR 20 million bad will realization on the acquisition of a small Macedonian bank by one of our savings banks. And we have booked EUR 11 million in Romania on the banking tax. I think other result line has been, this year, heavily impacted by one-off effects, as we see. Now, concerning business performance on page number 24, before I hand over to Stefan, if you look at the net profit line, this has been impacted by positive operating results and negative one-offs. On a group level, we end the year total at EUR 1.47 billion net profit after tax. With that, I would like to hand over to Stefan, our CFO, to cover the financial statements. Thank you very much, Bernd. Making reference to pages 26 and 27, those two slides represent very well the healthy business growth that we could achieve throughout the year 2019. Healthy in three respects. First, the basis on how this growth has been funded. You see that the net loans and the customer deposits both have been growing around about EUR 11 billion year on year. This has been the major part of the balance sheet growth. As already has been mentioned by Alexandra, all that came along with a very healthy risk profile. Equally importantly, we have been able to grow across all the countries and across all the core segments of Erste Group, led particularly by strong growth in Hungary, Slovakia, but also in the savings banks in Austria. As has been mentioned already, our liquidity situation is very sound and there has been a good development on LCR side. On page 28, you find some details with regard to the liquidity buffer, so no big changes there. If any, then to the better. We made use, in the year 2019, and here I'm already on page 30, of the very favorable environment for our funding side. We have been executing both several benchmark transactions, I come to that in a second, and also quite a lot of very successful private placements for our clients in our business throughout the region. On page 31, you find a representation of our maturity profile. Two remarks to our activities in the year 2019 and in the year 2020 so far. In the year 2019, we could execute benchmark transactions in all key asset classes. In all the asset classes, apart with the exception of the covered bond area where we executed two transactions, we have executed one transaction, EUR 500 million each, which was exactly according to our funding plan. In all cases, we could execute at never-before seen low and tight spread levels. This has been further prolonged in the year 2020. In January, we were executing a EUR 750 million covered bond issuance. As for sure you have been following, we executed our AT1 transaction earlier this year on a 3.38% annual coupon. It's the second lowest coupon ever executed in this asset class in Europe, and found a very good response in the market, both in terms of quantity and quality of the book. As promised, we give you the latest update regarding our MREL resolution strategy. As you know, we have direct presence in seven geographically connected countries, and Erste Group's setup suggests a multiple point of entry resolution strategy. The binding MREL target for the Austrian resolution group are expected in the first half of this year. With that, I'm on page 33. In the meanwhile, we have already been starting to execute our MREL funding plan. We have done so with the first transaction in Romania, and in the meanwhile, have also executed a small transaction in Slovakia. Both of those came in even better levels than we already had been expecting. The final page I want to talk about, and very importantly, of course, is page 34, where you see all the details with regards to our common equity Tier 1 position on a Basel III fully loaded level. We are at 13.7, phased in 13.8 by the end of the year 2019. For the year 2020, Erste Group does not expect any changes with regards to expected minimum requirements. The current minimum requirements have been confirmed already by the regulator based on an SREP decision. The only small change refers to a five basis points lower than expected counter-cyclical buffer, starting from July 2020. This results in the clear decision of the management that our common equity Tier 1 ratio target remains unchanged at the level of 13.5%. With that, I hand back to Bernd Spalt for the outlook. Thank you very much. Let me start page 36 on the key takeaways, and then I get to the outlook. Key takeaways, as already summarized, up on the back of very strong local economies. We have been showing strong operating results and as promised, positive jaws for last year. We have improved our cost/income ratio to 59%. Our balance sheet is still very strong. Asset quality is very robust. Capital position, as Stefan said, 13.7%, and we have been delivering a return on tangible equity of 11%. So for the fifth consecutive year, we have been showing double-digit return on tangible equity, and our profitability, generally, is very robust. On the back of that, we will propose to the annual general assembly next year a dividend per share of EUR 1.50. Outlook for 2020, yes, we expect a slight economic deceleration, but still the economies will be growing above European average. Domestic demand will drive that. We still have the ambition, as indicated on our CMD, to show positive jaws, which is hard, but still our target for this year. Net loan growth will be mid-single digit, as we see it in all of our economies, and we will continue to accumulate capital. So our business is still capital accretive, which will support our CET1 ratio going forward. We still target, of course, a return on tangible equity of double digit going forward. And with that, I would like to conclude the presentation and hand back for questions. Thank you. If you wish to ask a question at this time, please press star one on your telephone keypad. Please ensure the mute function on your telephone is switched off to allow your signal to reach our equipment. Again, please press star one to ask a question. We will now take our first question from Gabor Kemeny from Autonomous. Please go ahead. Hi. Thank you for the presentation. I have a couple of questions. First thing on jaws. You mentioned that you aspire to positive jaws in 2020. Since you outlined this guidance, we had short-term interest rate hikes in Czechia and in Hungary. So what further developments would make you more confident that you can deliver positive jaws? And what has prevented you from making this an explicit guidance so far? Secondly, on the recent macro developments, early days probably, but can you give us a sense of how you think about the potential impact from the coronavirus at this stage? I think at the CMD, you gave us your exposures to manufacturing and trade. Are these the segments which you would be most focused on? And perhaps you could give us an idea about your exposure to the Chinese supply chains. And just finally, what do you think is the likelihood that even in the absence of outright corporate defaults, we could get an uptick in your provisioning in the first quarter or the coming quarters because of more negative macro parameters feeding through to your forward-looking provision models? Thank you. Thanks for the questions, Gabor Kemeny. I take the first one with regards to the positive jaws and, as you rightly put it, ambition. There are three very simple reasons, and I exclude the coronavirus discussion from that, why we are hesitant to name the positive jaws a target. Number one, the very good result in 2019, which simply, on operating results basis, sets a very high level. Secondly, of course, the interest rate environment which is still, and in particular in the Euro area, a significant challenge to all banks operating in this Eurozone. And thirdly, while it was mentioned in our presentation already, we have been very successful in containing the upward drift on wage inflation. We have to monitor, and I am sure you saw it, the inflationary tendencies in some of our core CEE countries, which of course Limit our ability there to cut down costs or reduce up-lift there. That is on the one hand. On the other hand, what makes us very optimistic is that we see a very good and very well-developing fee business. We have been starting off very well in January. And we are very optimistic that we can grow the business based on our strategic goals as envisaged. On NII, we clearly expect a growth based, again, on volume growth and, of course, the interest rate environment, at least so far, in the CEE countries has been supportive. So overall, we exactly stick to what we have been communicating at the Capital Markets Day. We set ourselves the target to grow the operating result, and we have the ambition to deliver positive jaws. That is where we stand. And with that, for the coronavirus question, back to Bernd Spalt. Thank you very much. On the coronavirus, I think it is very early days and there is no degree of certainty where we can predict on which kind of industries would be affected. However, clearly there will be companies which have supply chain logics which will be impacted and which will then also have a negative impact on EBITDA and cash flows. We are talking individually to the large corporate customers, where we understand the exposure of affected regions. So there is no sector-specific, I think, approach. It is rather a business logic approach, which drives the potential affection. Overall, we think our economies themselves are very resilient and very robust. And of course, it is very early days to give an overall interpretation on a macroeconomic level. There was one last question. Gabor? Or yeah, let's finish this one. Adding on this what Bernd Spalt just said, we stick to the risk guidance for 2020 of maximum 20 basis points, and we currently do not expect a noticeable uptick in provisioning. I already mentioned before that already in Q4, of course, we have implemented the new parameters in the FLI. So we see the impact of the FLIs. What makes me confident that the hike will not be strong is that we still see very sound recoveries on our NPL portfolio and on the written-off stock, which is offsetting these impacts on the portfolio loan loss provisions. Thank you. We will now take our next question from Andrea Vercellone from Exane. Please go ahead. Just a question, well, a series of questions on capital. You got several model change approved in Q4, which led to lower RWAs as you had been guided for. Is there any more model changes in the pipeline for 2020 that still need validation, or you're done? Do you still expect further benefits from that when they come through, if there's any? Still related to RWAs, you have been having quite good positive tailwinds due to positive rating migrations over the past one or two years. You just mentioned that you see no problems with asset quality, at least in the immediate future. So shall we expect tailwinds on that front as well in 2020? Finally, vis-à-vis your capital target, are you already in a position to have a view as to whether you will fund part of the Pillar 2A requirement with hybrid capital? Or you remain of the view that you will continue to fund it with common equity Tier 1? Thank you. I will start with the model changes. Currently, we have already out two models for approval. The one is the SL model, where we expect the approval on short-term and where we expect some relief on the capital add-ons that we are having. The second one, which is out, is the HT model, where we would not expect a final approval for 2020, and there is no impact. Also on the PCR IRB, we would not expect any impact this year, so we will file end of March and then onsite approval process, which takes long. Second question on the rating migrations. Also in the last quarter, despite of the not overall so super friendly economic environment, we have not seen a downward shift of rating migrations. To be very realistic, do I expect tailwinds also going forward? No, but also no major headwinds. We are expect that our solid asset quality will remain, at least what can be said as of today. Andrea, I will take the question regarding capital impact then and of the Pillar 2 requirements. I reiterate what I said already in the presentation. For 2020, there is absolutely no change from the regulatory front. Not only to be expected, but this is firmly communicated and based on the SREP decision. However, yes, for 2021 and given the communication by the ECB for the new Article 104a of the CRD V concerning that split of Pillar 2 requirements, we would expect a certain corresponding reduction of Erste Group's common equity Tier 1 minimum requirements. However, I am sure you remember the discussions that we had in Q4 around this particular point, the overall CET1 minimum requirements reduction is also subject to the Austrian implementation of the CRD V with regards to additive treatment of O-SII and the systemic risk buffer. So we currently are slightly optimistic that there could be a certain reduction in the requirements on the Pillar 2 level for 2021. But it is definitely too early to say what the concrete impact will be. We hope that we can get more clarity on the buffer regime until middle of this year, so middle of 2020. This is currently the timeline that we expect, and we of course, keep you updated on developments on the regulatory front. Thank you. We will now take our next question from Anna Marshall from Goldman Sachs. Please go ahead. Good morning. Thank you for the presentation. To follow up on the capital topic, also regarding CRD V, what are your expectations regarding the treatment of intangible deduction related to software, whether you expect any positive impact from that? My second question is on tax. Could you please provide more color behind the quite low effective tax rate in Q4? Thank you. I can reply immediately to the tax question. This is typically Q4 effect and based on the planning for the year 2020. We had this as I regard, relatively limited effect. Other than that, no changes on the principal levels of the tax rate. With regards to intangible assets on CRD V, to be very honest, this is rather a minor topic in the context of the overall CRD V discussion. We do not have any estimates in that respect. We believe that compared to the potential effect out of the split that I have been referring to before, this should be rather minor. Thank you. We will now take our next question from Johannes Thormann from HSBC. Please go ahead. Good morning, everybody. Johannes Thormann, HSBC. Just one question concerning your risk situation. As you confirmed the cost of risk guidance for 2020, what is needed and what is needed to happen to bring your cost of risk back to, say, 30 or 50 basis points? What deterioration do you need to see in your models and of course in the real economy? Thank you. This is coming back to the coronavirus topic. It is honestly, no one can seriously assess, for the time being, what the impact will be. So also answering to discussion, what should happen to go up from 20 to 50, this is so much about speculation and, in fact, I cannot comment on this more. Okay. From a pure calculation perspective, you need three big defaults, but why should this happen? We stick to the 20 basis points guidance for 2020. Okay, thank you. We will now take our next question from Tobias Lukesch from Kepler Cheuvreux. Please go ahead. Yes, good morning. Three questions from my side as well. Firstly, you mentioned the market share gains in the corporate loan space. Could you please shed a bit more light on the reason for this? Is it on pricing? Is it on taking higher risk? Secondly, on the risk cost, you mentioned the higher NPL coverage ratio, which is up nicely now to 77%, up from 73%. Is there kind of ceiling what you see with regards to collateral which also has to be taken into account when creating the cash buffer. Is there any ceiling, 80%, 90%, something like that? Lastly, again, on the common equity Tier 1 ratio development you had some model effects that you mentioned, EUR 3.2 billion if I'm not mistaken, in RWAs, around 30 basis points. If we net this with the goodwill impact maybe on the capital, you could argue for a 15 basis points positive effect here. With regards to the strong loan growth you have of close to 8%, now you're guiding again for mid-single digit like you did for 2019. Can we expect that you grow common equity Tier 1 capital towards the 14%? Do you have a clear target here with regards to 2020? Thank you. Okay. Let me start with corporate loan market share growth. Where does it come from? It comes from SME business and large corporates business. The one thing which I can tell you, it's not because we soften our underwriting standards, rather to the contrary, because as discussed last time, we do not think that at a relatively late stage of economic cycle is the time to build in weaker structures. So we hold up on our underwriting standards and we gain market share still on the SME and on the large corporate side. We're not intending to gain any market shares on the commercial real estate side. To the question of the coverage ratio. First, the NPL coverage is net of collateral. This is purely provisions. When it comes to collateral, this would come on top. Adding collateral, we would have a coverage of above 100%. And of course, we have provided haircuts on collateral. But when it comes to where do we stop to count collateral ceilings, this is not in place. But of course, we are applying our haircuts to the different types of collateral that we have. Sorry. How much leeway would you have in, let's say, bringing collateral values down in order to increase the cash collateral? Can you ask it again? We didn't hear this. Okay. Thank you. All right. Okay. Then we move to the next question. Yes. We will now take our next question from Alan Webborn, from Societe Generale. Please go ahead. All right. Good morning, and thanks for the call. I think in your November presentation on the CMD, you talked about capping costs as a low single-digit level in 2020. You didn't repeat that specifically in the outlook, but could you just confirm that is what your aspirations are? Is there any sort of nuance of change in terms of the cost outlook between then and now? That was the first question. Second question, should we be expecting after, clearly, a very good margin performance at group level in Q4, that seasonally you will see a slightly weaker NIM in Q1? Just give us an idea of how you think that's going. Thirdly, was there anything unusual at all in the combination of the trading and fair value result in Q4? I get what you're saying, and you repeated back what you said on the investor day about that result being lower in 2020. But just if there was anything particular there. Then just a couple of points of detail. There seemed to be quite a big other operating income result in the savings banks in Q4. Could you tell me what that is? Was there anything specific either in the other Austria impairments or the Romania impairments in Q4? There also seemed to be a bit of a negative in Croatia in the other operating result. Could you tell me what that is? Thanks. All right. Okay, I'll try to run through your questions. Cost first, no change whatsoever to what we've been communicating. Implicitly, it has been mentioned, of course, with our target on growing the operating result and the ambition to achieve positive jaws, this will not be possible unless we are also successfully delivering what we have been indicating on the cost growth side. To repeat it in real numbers, we definitely want to land below EUR 4.4 billion overall operating expenses, or even better, so below a growth of EUR 100 million in operating expenses year-on-year 2019 to 2020. Regarding the margin, you were spot on. Yes, Q1 is to be expected a tick lower there. That's exactly correctly observed. Regarding the fair value expectation, fair value in trading result, always looking at those two lines together, it's a fact that 2019 has been showing a very good result there, therefore, we are a little bit cautious. The outlook, of course, if interest rates develop like the last few days, and for well-known reasons, that could also repeat on in particular the EUR 12 billion fair value bond portfolio. However, it's of course, at this part of the year, much too early to say how this will develop in the course of 2020. Therefore, we took a rather cautious approach there. We don't expect this to be much better than in 2019. I think that's fair to say. Last but not least, regarding the savings banks area in 2019 Q4, I think it was mentioned, but it was not explicitly, sort of say, put in relation to the other operating income. Ohridska Banka was acquired by Steiermärkische Sparkasse, and there, I use this term here, a bad will, so to say, in the sense of a positive impact on our income could be booked due to the level at which this bank has been acquired by Steiermärkische Sparkasse and consolidated in the group. I hope we've answered these points. Yeah. The Croatian, there's a Croatian other operating result negative in Q4. I know it's not very big, but- 10 million? Yeah. Sorry, I forgot this one. EUR 10 million based on provisioning for the Swiss franc issues in the Croatian market, in our portfolio. Thanks. We will now take our next question from Stephan Maxson from RCB. Please go ahead. Hello. Yes, thank you. Just two or three questions remaining. One, referring to the corporate center, and to the other result in the corporate center. It is actually around EUR 240 million. I understand that EUR 165 million of that is the goodwill impairment, but is there anything special in this remaining EUR 75 million negative in there? Second, just on your NIM development, you just said that in the first quarter, you expect the NIM again to tick down slightly. But going forward, would you assume the NIM to be roughly stable or would you expect further pressure there? Finally, just on a clarification. You have the wording in the presentation of a dividend per share of up to EUR 1.5. Is there any reason why you say up to, or is the proposal clearly EUR 1.5? Thank you. Okay. Hello, Stephan. I take right away the dividend question because that's simply a word, a semantic issue. It goes up to, not up to in the sense of at maximum, but it means up from last year. Thanks for the clarification. 1.5 is the proposal of the board to the supervising board respectively, then further on to the general assembly. No changes there at all. Okay. Regarding the participation, regarding the change in operating income beyond the goodwill write-down of Slovenská sporiteľňa, there was an overall EUR 45 million participation valuation. That is every year, as you know, we need to revalue all the participations, and the effect in Q4 was a total of 45, which then adds up with the goodwill to the 200 roundabout effect. Hans, I think you take the NIM. Yeah. On the net interest margin, we expect if interest rate levels do not change, which we think is the base case, we would still expect pressure on the net interest margin side, a slight one. This will certainly continue next couple of quarters. Okay. Thank you. As a reminder to ask a question, please press star one on your telephone keypad. We will now take our next question from Adrian Debell from KBW. Please go ahead. Morning. Thanks for the call. Just two quick questions on my side. Sorry if you already spoke about that, but any update on AML in Romania and what could happen there? Second question is, can you talk a little bit about the competitive environment in the Czech market now? Your NIM was very strong. Particularly with the rate hikes, do you see more migration to term deposits or pressure to pay more for deposits, and how is it reflecting on the asset side? That should be it. Thank you. I take the AML topic. As of today, and as of now, according to the available information, the National Bank of Romania did not initiate a formal investigation against the banks in relation to possible money laundering. We are expecting requests, but like any request that we receive from the authorities in relationship with money laundering, we will treat with utmost care and we will, of course, provide our entire support to the authorities. On the Czech market and the competitive situation there, Czech Republic continues to be a very busy and competitive market. Apart from the large players, almost all of the new banks and alternative providers are there. Yes, we see high competition. On the deposit side, we have, for the first time after many, many interest rate hikes, we've decided to pass on some of the last hike to a part of our retail depositors. Overall, I would say that this competitive situation will not ease. Still, if you look at the market share side, we're able to hold up and defend our market shares on all of the segments. Perfect. Thank you. As there are no further questions at this time, I'd like to turn the call back for any additional or closing remarks. If there's no more questions, then thank you very much for taking the time to participate in the call. We will have our Q1 results announced on April 30. Thank you very much, and talk to you then. Bye-bye. Thank you. That will conclude today's conference call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.