Good afternoon, ladies and gentlemen, and welcome to the third quarter 2023 results conference call of Raiffeisen Bank International. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Johann Strobl, Chief Executive Officer. Please go ahead, sir.
Thank you very much for your kind introduction. Good afternoon, ladies and gentlemen. Thank you for joining us today in our last update call of 2023. We are happy to report a very stable set of results, driven by further revenue growth, still very few risk costs, and more importantly, further strengthening of our capital position. I'm also happy to report that we have called for an extraordinary shareholder meeting on the 21st of November, at which we will propose the distribution of last year's dividend. You will recall that with the 2022 preliminary results, we announced a dividend of EUR 0.80 per share, and we are now in a position to make the distribution. I believe it is important that our shareholder participate in the excellent results achieved last year.
Despite the strategic decisions that we are facing and the further provisions in Poland, RBI is in a very strong position and entirely capable of remunerating its shareholders. On the subject of our strategic decisions, and while there is little I can share with you today, I'm confident that we are making good progress. As you know, we are focused on achieving the deconsolidation of the Russian business by selling or by spinning off the business. On both of these options, we have made good progress. In previous calls, we shared with you a potential spin-off date at 31st of December, which today appears very unlikely. This is because we still see a clear, perhaps easier path to deconsolidation through a sale. Please understand that I will not go into any more detail.
Unrelated to the Russia strategic consideration, but equally important to you, is our dialogue with the US Treasury and the request for information relating to our sanction compliance program. OFAC has confirmed to us that they have received all the requested information, that they are working their way through it, and that they are satisfied with our cooperation. While I cannot comment on any potential timeline, I am as confident as ever that we are fully compliant across the board. Let us now move to the third quarter results, which are in line with trends observed in Q1 and Q2. Excluding Russia and Belarus, we can now report the consolidated profit of a little bit more than EUR 1 billion after nine months and a return on equity of near to 11%.
Now, please bear in mind that this reported 11% ROE includes over EUR 600 million of provisions in Poland, which brings our coverage of the portfolio above 70%. The CET1 ratio for the group, assuming a worst case in Russia, improves to 14.4%, or in fact, 14.8%, if you also assume relief on the Russian-driven operations RWAs. Moving to my next slide, again, confirmation of the trends observed earlier this year. Core revenues continue to develop very nicely. Loan volumes are very muted, and costs broadly reflect the inflationary environment. Moving to the next slide, let's take a closer look at our core revenues. First of all, NII, which continues to develop very nicely despite the very little loan growth we have seen year to date.
Euro rate hikes continue to feed through in Slovakia and Croatia, of course, where we have seen little pressure on deposit pricing, but also in other CE markets where we have a very sticky euro savings. In the Czech Republic and Romania, the pressure on the liability side appears to have stabilized. Heading into next year, we expect NII, excluding Russia and Belarus, to be broadly stable, perhaps down a touch. Key CE markets such as Czech Republic, Romania, and Serbia should be broadly stable, and in Slovakia, we could continue to see further improvement. We do expect some pressure in head offices, however, and in Hungary, as well, where size of it, rate cuts are expected.
Net fees and commission income are very stable, slightly positive for the core of the group, excluding Russia and Belarus, and more noticeably down around 20% in Russia in the quarter, where we continue to shrink our payments business, and of course, this includes further weakness in the ruble observed in the quarter. Moving to the next slide, where you see the balance sheet. We focus on loans to customers on the one hand, and deposit trends on the other hand. Loans to customers roughly unchanged on the quarter. We see further reduction in Russia, with an 11% drop in euro terms and 4% in ruble terms, and generally small increase in core Central Europe and SEE markets in local currency terms. The EUR 1 billion increase in group capital markets is largely for repos and lending to our corporate customers flow.
To a large extent, this is in line with our expectations and the softer macro tone across the region. Deposits are also very stable. Retail volumes are very stable, even slightly positive. As I have already mentioned, we believe that the competitive pressure in Czech Republic and Romania is behind us, and euro deposits are still very sticky and insensitive. Corporate deposits, which by their nature are more volatile, saw inflows in the quarter. Of course, these deposits are nice to have, but we do not plan our liquidity and funding needs around them. Moving to the next slide, speaking of liquidity, you can see the improvement in our liquidity ratios, both on the group level and at head office. At the local level, across our network units, I mentioned the very stable retail base.
In head office, clearly, the large inflows of corporate deposits have driven the LCR up to almost 200%. Again, these deposits are nice to have, but we do not plan our liquidity and funding needs around them. As you know well by now, we run a very conservative liquidity profile here at head office, with very little duration mismatch between assets and liabilities. And furthermore, the securities portfolio is only used for the HQLA stock, and even here, securities only account for about half. The rest of our HQLA stock is in cash and other central bank placements. Moving to the next slide, I think this is more for documentation, the development of the CET1 ratio from half year to the end of Q3. The big movers had been the retained earnings and to some extent, a slightly negative impact by FX developments.
The next slide is the outlook to 2023 in the CET1 ratio, where we believe it will be stable till year-end. Moving to the next slide, which is to some of you, quite, of interest, is the development in Russia and the impact of, price book multiple zero deconsolidation scenario in Russia. So we have reached a 14.4% landing point, if this would have happened at, the end of September. Well, the main drivers are a CET1 capital of EUR 4 billion and RWAs of EUR 13 billion, which are attributed to Russia. And I have mentioned already that in this number, the operational risk RWAs are not included, which, which amounts to 40 basis points. Moving to the next slide, capital ratio development and SREP.
I think again, this is for documentation reasons, and, core information is, the developments, what we expect in the Pillar II requirements and in the OCI buffer. Moving to the next slide, the MREL and funding plan. What you can see is that, we have in head office, a good buffer of nearly 600 basis points, which of course benefited from the senior non-preferred issuance in September. And at the network unit level, we are also in a good position. Be aware that this, presentation has a reporting date of, 30th of September, and on 12th of October, we successfully issued EUR 300 million by our Romanian, subsidiary, and with that, they also meet their requirements. If we move further, some more details on Russia. What you see is a further reduction of our activities.
Main initiative in this year had been the payments area, which followed last year's significant shrinking of the loan book. I have already mentioned the revenue slide on the revenue slide by a drop of 20% in the fee income in Russia in Q3, and you have seen the balance sheet impact as well. What is also worth highlighting, and here I tip my cap to Hannes, is the net cross-border exposure, which now stands at around EUR 40 million. You will recall that this was over EUR 600 million at the start of the war. What is even more impressive is that this reduction was achieved without taking any stage three write-offs. RWA in Russia is further down in the quarter, largely from ruble weakness, but also further lending reduction.
Besides this, liquidity and capitalization of the Russian business remain very strongly with an enormous buffer to the local requirements and a very good liquidity cushion, and a very low loan deposit ratio of 42%. Moving to my next slide, the macro outlook. Yeah, we had seen a slowdown in the first half of the year. In the second half, stagnation or a mild recovery. The manufacturing sector, which is key for Central Europe, especially because its main trading partner, East Germany, keeps underperforming, and this of course limits the GDP development in Central Europe. Southeast Europe benefits from the very strong tourism season and remittances, which still flowing in strongly, and as a result, they are outperforming the Euro area and Central Europe.
Yeah, recovery in Ukraine is making progress, but of course, it's limited by the ongoing war. And in Russia, we have an L-shaped scenario for the coming quarters. Moving to the next slide, this is the way we look at inflation and key rates for this year and also coming year, 2024. Probably this is anyhow in line what you see. And now coming to my final slide, which is the guidance. And here we have the core group, which excludes Russia, Belarus, and we have the total group as well. So we have a net interest income of around EUR 4.2 billion-EUR 4.3 billion, net fee and commission income at EUR 1.8 billion, maybe a slight positive development in loans to customers by 2%.
We will have OpEx at around EUR 3.1 billion, which will bring this cost-income ratio at around 50%. Risk costs will be before use of overlays, about 30 basis points. Hannes will talk about this. This would bring a consolidated return on equity at around 10%, and a CET1 ratio, which will be above the 13.5%, but to that, I have talked already. When looking at the full group, net interest income EUR 5.6 billion-EUR 5.7 billion, fee and commission income up to EUR 3 billion, slightly reduction in the loans. Cost-to-income ratio with OpEx of EUR 4 billion will then be around 43%-45%. Risk cost 40 basis points. Consolidated return on equity around 16%. As I have mentioned before, at year-end CET1 ratio of 16.5%.
Hannes, I hand over to you.
Johann, thank you. Good afternoon, ladies and gentlemen, and thank you for joining us this afternoon. I trust you have seen the figures, and I will be very brief on the Q3 developments. Virtually no risk cost in the core of the group, very low non-performing exposure, and of course, a very good coverage ratio. At the same time, we continue to work on our overlays. We have increased our stock in the core of the group while releasing overlays in Russia. RWAs are lower on the quarter, largely driven by FX and supported by additional securitizations. Loan growth continues to be very muted, and we expect this to continue into year-end.
Furthermore, you will recall from our last call that we guided for EUR 2 billion of RWA relief until year-end 2023, and I'm happy to confirm that this was already achieved in October and will be reflected in the Q4 numbers. We are working on a few other changes, so there is potentially some more relief to come this year. Important finally, we have now reached a coverage of near 72%, and this could even increase a bit more into year-end. At the same time, we are now broadly rolling out our settlement offer after a successful pilot program. So now let me have a look a little bit broader on the environment, which has deteriorated since we last, last spoke. First of all, on the micro side, we clearly see some first clouds forming.
GDP growth and surveys have weakened, and in our daily business, we are seeing more signs of fragility. Economic stagnation appears to be well entrenched. Core inflation is expected to remain elevated for some time, and energy and food prices also remain an area of risk. In commercial real estate, specifically, we are seeing the first signs of deterioration and expect some risk costs here in Q4. Second, the geopolitical picture has become more unpredictable, and we are now facing a multidimensional scenario. As we look ahead, we maintain our guidance of around 40 basis points of risk cost for the full group in 2023, and around 30 basis points for the core, excluding Russia and Belarus. I realize that this implies a noticeable increase in Q4, and while I cannot say for sure where this will occur, the environment is sufficiently challenging to warrant caution.
I mentioned some deterioration in the commercial real estate book, and of course, one or other unexpected default in the corporate book can quickly add some 5 or 10 basis points in risk costs. Allow me just a word on our commercial real estate exposure, where despite my words of caution, I believe that we're in a solid position. We are talking about 6% of the group's exposure with an average LTV in the range of 50%-60%. We have conducted 2 stress tests in the past 18 months. Our exposure are backed by cash flows, which have been stressed, and in many cases we benefit from fixed rate expenses. So while we may see some defaults in NPE in closing Q4, this is a natural part of our business and we are ready.
Looking ahead to next year, our risk cost guidance is a touch more cautious for all the reasons I have just highlighted. From 40 basis points in 2023 for the core of the group, my first estimate for 2024 is around 55 basis points, and as usual, this does not assume any release of overlays. Well, having said all this, thanks for listening, and we would be now eager to take your questions. Thank you.
Thank you, gentlemen. Ladies and gentlemen, we may now start the Q&A session. If you wish to ask a question today, you'll need to press star one on your telephone keypad. Please ensure that the mute function on your telephone is turned off, or we will not receive your signal. Once again, if you wish to ask a question, you'll need to press star one. If for any reason you need to remove yourself from the queue, you can do so by pressing star two. We'll pause for a moment in order to allow our queue to assemble. We do go to our first question from Mehmet Sevim with J.P. Morgan. Please go ahead.
Good afternoon. Thanks very much, and congratulations on the strong results. I have three questions, please. Maybe starting with Russia. Seems now you're pivoting towards a direct sale option, and I do appreciate you can't say much at this point, but maybe you can walk us through the regulatory approvals that are required at this stage. So what specific approvals would you require, from which authorities, both in Russia and at home, and is there any clarity at all on the timing from here? My second question would be on NII. Johann, you mentioned during your remarks that you expected 2024 NII to be flat or maybe a touchdown. Could you please walk us through the underlying assumptions in different countries and particularly those where we are seeing or at least expecting rate cuts?
Finally, on dividends, clearly this was a very pleasant development, and if I maybe can ask whether we should take that as a signal that the dividend trajectory from here is more normal, that is, you'd now stick to the current financial calendar that you also present in the presentation. Thanks very much.
Yeah. Thank you very much. I think starting with your first question, in Russia, what we have is of course the requirement of the Russian Central Bank, but you then also have within the administration at least three entities which would give us or would need to give their blessing. And so it's not a straightforward approach, but we can believe that those interested parties have established a very strong relationship already, or let's strong—maybe strong is a little bit too far going, but have a relationship with these institutions. In Europe, we would need for sure the approval of the European Central Bank, as well as the Austrian FMA, because it's a sale of a significant participation.
I mean, here it's too early to say how long this will take, but, as I said, we're still in a mood, which is rather optimistic. When talking about the rate NII developments, then I think the more important point is that, in some countries,
... We will see in 2024, and I think I have mentioned it. It was Hungary, it is Czech Republic. We see, we assume a key rate reduction. And, yeah, the good development what we had in NII came to some extent by competition and liquidity available in the countries, which was better than I had ever expected, but on the way down, this will have an impact. I think we shared with you that in Austria, as this is a large corporate business, it's a small margin business and little impact from the rate developments what we have. Yeah, Czech Republic will also see a reduction in rates. So I think there are some areas which are because of no elasticity, we will see then.
Yeah, not any more support than before what I have said, this will bring, well, might bring the NII a little bit down. When talking about dividends, we're happy that we can distribute dividends still this year, and we will update you with the final results for this year, then early next year.
All right. That's very helpful. Thanks very much.
Our next question is by Gabor Kemeny with Autonomous Research. Please go ahead.
Hi. I have a couple of questions, maybe firstly, speaking with NII. Yeah, I think this, this guidance of stable to slightly down implies, at least a EUR 200 million drop, from the annualized Q3 rate. I guess you commented on the rate cut, but maybe, you can, you can also comment on the changes in the, reserve requirement, remuneration in, in, at the ECB and in, and in the, and at, at the Czech Central Bank. So what could be the impact of that? And, and what is your current liquidity surplus at the, at the ECB? That would, be, also interesting.
And the other question I had was on the ROE guidance for ex Russia and Belarus, where I was a little surprised you kept it at 10%, because I think if I add up the upgrades to your NII guidance and the better provision outlook, that means something like EUR 300-EUR 350 million better PBT, so quite substantial. Is it a kind of caution on Polish FX charges, or why the unchanged 10% ROE outlook? Thank you.
Yeah. Thank you. Thank you, Gabor. Starting with your, with your question on the impact of the minimum reserve requirements. So our guess is that, on head office, the impact in 2024 might be about EUR 10 million. We have then, also in Slovakia and Croatia, which might add up to EUR 8 million, Hungary EUR 16 million, and in the Czech Republic, 25 million. In Serbia, also some increased minimum reserves, so another EUR 6 million. So if I add these up, this is, a significant amount for, for next year. When going to your, other question, ROE 10%, also, we have a very strong result. Yeah, depending on the development of, litigations inflows, maybe there is, a little bit more to do in Poland this year.
So here we have seen quite an active activity by many of the customers. And then I mean, historically, we had some seasonality almost at year-end. Hannes indicated that the good risk result might not continue in Q4. And some seasonality in OpEx we also have to be aware ex Russia and Belarus, as you have said. And your third question is the?
Yes, the liquidity you keep with the ECB, if you have the-
The liquidity surplus at ECB. So it's EUR 116 billion, if I got it right.
Was it stable, roughly, in Q3 or changed in any way?
Yeah, it fluctuates, but, but of course, this is with, as I, as I said, in the presentation, we have quite an active money market and repo business. And, and so this, this together then creates a volatility in that amount. But as I said, for our steering of the liquidity, these high volatile elements of our deposit base is nice to have, but it's not important for our liquidity steering.
All clear. Thank you, Johann.
We go next to the line of Benoit Petrarque with Kepler. Please go ahead.
Yes, good afternoon. It's Benoit Petrarque from Kepler Cheuvreux. So three questions on my side. The first one will be on the exit from Russia. I was wondering, how you plan to deal with, you know, capital controls, restrictions on foreign currency transactions? So, you know, how will you deal with that? That will be the question number one. The number two will be on NI. Could you update us on the sensitivity to rate cuts? So if I understand, you've taken that into account in your guidance on NI, but just wondering if you could provide the sensitivity on, say, 100 BPS per country. And the final one will be on cost development for 2024.
You know, do you see inflation pressure getting a bit less for next year? And I think so in your previous comment, you mentioned some potentially one-offs, if I understand, on OpEx, excluding Russia and Belarus. I was wondering what you refer to. Thank you very much.
Yeah, thank you for your questions. I start with the most complex one. I mean, we currently work under the assumption that an approval is a package which also gives a clear understanding how much capital over which period of time can be or will come to the head office, and no capital, and probably is also not the same. Here, I think we are. What we see is that some international corporates could repatriate the money. Recently, it got more complex. So this is one of the uncertainties what we have. When talking about your second question, the 100 basis points sensitivity of the NII.
The numbers what I have shared with you in the answer before, when talking about what are our assumptions of rate cuts in some of the countries. So these cuts were already part of the, let's call it, cautious guidance what we gave on the NII development. So I think one can say this is included. When talking about the OpEx expectations for next year, here, we of course have an environment which is still inflationary. We have done in a couple of countries, there we had a lack in wage increases, so we had been, for a while, very reluctant. We had to increase wages. What you can see, I think, at least some 4 or 5% of OpEx increases for next year's will occur.
I think the uncertainty comes from some one-time spending around the Russian deconsolidation in this year. Partly, these have been compensated by non-recurring costs from the integration of the acquisitions what we had. So, this would be a first guess. And I mean, of course, we are talking in euros and then the question also is in local currencies. Probably there is a little bit more than the 4% I have mentioned, maybe 8% or something. Thank you.
Yes. Thank you very much.
Next, we go to the line of Johannes Sherwin with HSBC. Please go ahead.
Good afternoon, everybody. Johannes Sherwin, HSBC. Three questions that I made. First of all, on your Polish business, 71% coverage ratio sounds nice, but do we need to go to 100%? Or what is your current worst case assumption in terms of provisioning needs, of coverage needs? Secondly, on your risk overlays, you said guidance is before usage of risk overlays. And risk overlays cannot be maintained forever. Do you expect that you need to release some of the EUR 800 million next year, or do you think you can keep them until, I say, 2025 or whatever? If we could get some more details. And last but not least, just at which point in time will you be able to give a midterm target for our region?
Only post the deconsolidation of the Russian business, or could you say at some point this is even possible, with or without the need of that? Thank you.
Well, if I may start, Johannes, with the first two questions, on the Swiss franc matter regarding Poland. As we indicated, we are currently slightly above 70, and we may add a little bit more dependent on the inflow to be observed in quarter four. You ask about what could be one of these worst case scenario, and is it 100%? I think, you know, I know that people like talking about worst case scenario, but we will also must take into consideration that there are some clients where the remaining debt outstanding is maybe some EUR 20,000-EUR 30,000. And usually if you go the legal way, it takes at least 3 or 4 years.
So we will always have a certain cohort of people who are just saying: Well, I recognize the debt, I repay the remaining 20,000 EUR or 30,000 EUR, and I would not like to go for a 3 years or 4, 3 or 4 years battle in a legal situation. So that was the reason why we believe then, with the 70+% coverage, that we will be well covered. But of course, if the inflow keeps on staying pronounced, we would add additional money. But you could think about the current portfolio. There was once a discussion whether or not also compensation could be shall be considered, but there is a clear interpretation that, with the, with the annulment of the loan, that no further compensation shall be considered.
To your second question, when talking about 2024 guidance, is without overlays, and when would we be forced to release some of these overlays? You know, if we look at the total stock of overlays, I think we could easily divide them 50/50. So around EUR 400 million go with RBI Group, Group Corporates & Markets, SEE and CEE. And then we have a small part in Ukraine still as an overlay and a bigger part still in Russia. So I think as long as this situation stays, I think we will find good arguments with our auditors that we can keep this high level of provision in Russia and Ukraine.
The other one is: What is the main source for our overlays, what we have for the remaining group? And as we call them, it's commercial real estate, it's inflation. And as long as we stay in this elevated level of inflation and high interest rates, I would also feel confident that, we could argue. Why so? Because as we realize and recognize that the very strong and pronounced increase of rates never seen beforehand in this comparable dynamic, has a certain lagging effect, and the lagging effect is at least 12-18 months. And this would be exactly my argument in saying: Well, guys, listen, this is what was intended by this strong and pronounced increase of rates.
And as also officials from the ECB are saying: Well, let's now see how also the demand side, causing the inflation, is slowing down. So that's this would be my way of thinking. So the first EUR 400 allocated to Russia and Ukraine, as long as the war situation persists, I think we will have all the arguments on our side, unfortunately, to keep these overlays in place. And on the remaining EUR 400, I would say we have a certain lagging effect from the interest rate increase. And if things starts materializing for the topics where we have created the overlays, of course, we will also make use of them. Johann?
Thank you, Hannes. When talking about midterm ROEs, I think we have two elements which in the past or till now have created some uncertainty, which Hannes was talking about. The first one, which was the developments in Poland, the rulings, the behavior of customers on the Swiss franc mortgages. Yeah, I hope we soon come to an end of this negative development for us and at least in the P&L impact. And the other topic is of course Russia, where some additional uncertainty is also. We have this dual steering approach is still with us. So, I would not commit today that with the preliminary results, we are already there to give a midterm guidance for the business without Russia.
Okay, thank you.
We go next to the line of Máté Nemes with UBS. Please go ahead.
... Yes, good afternoon, and thank you for the presentation, well done on the results today. I have three questions, please. The first one is on still NII. Could you perhaps share your assumptions underpinning the NII guidance in terms of volume growth? Or what sort of volume growth do you bake in to your NII when you say stable to slightly down next year? That's the first one. The second question would be on RWAs. Hannes, you mentioned the EUR 2 billion RWA relief achieved in October, reflecting Q4 numbers. I'm just wondering, could you give us some visibility on any other organic, inorganic RWA moving parts when it comes to 2024?
Lastly, clearly your CET1 ratio in a PB zero, the consolidation of Russia is now 14.4%, significantly stronger than a couple of quarters ago. You were reportedly looking into perhaps some inorganic growth in some C countries. Could you give us your views on capital allocation from here onwards? Do you see opportunities via M&A? Do you see opportunities perhaps to increase organic growth in certain areas? And if not, how should we think about perhaps excess capital going forward? Thank you.
Thank you for your questions. When talking about the volume part of the NII assumptions, and here mainly about loan growth, then I think when given the GDP outlook what we shared with you, one can expect 4%-5% loan growth in 2024. And this leads then also to your question of RWA, or no, I should rather say capital allocation outside of Russia. I think here, in terms of organic growth, the countries as a general assumption, but depending then also on the opportunities within the countries are still Czechia, Romania, Slovakia, let's see, Serbia. One has to say that throughout this year, and we will see how good the margins are improving.
In the mortgage business, we have seen very, very low demand, but also very, very challenging margins. So the new volume was rather, yeah, significantly down in some markets by 50% or more. So this explains why we still do not see significant increase. But the core markets, as I repeated for you, are Romania, Slovakia, Czechia, Serbia. Of course, the Austrian corporate business always gives room for something. And in retail, Kosovo has some opportunities. Hungary is an area where if the parameters are fine, then retail would be good to grow a little bit. When talking about an organic, of course, we will look at opportunities in the markets, which I have mentioned to you.
But, one has to be aware that, that other peers are also looking at that. So at the end, it might also be, competitive approach and, yeah, if it fits to the bank, to the markets, then, then to some extent we are interested in. And the RWA EUR 2 billion relief in October, this was, an answer for a, a question to Hannes.
Well, Máté, the question, the way I understood it, is that you were curious about also about 2024. So the October EUR 2 billion, summing up that we have introduced an IRB approach for our mortgage business with the building society here in Austria, where we have usually over the cycle very low risk costs, and therefore we benefited from this very good risk performance, also with lower risk weights when switching to the IRB. And secondly, as I mentioned, also the revert of the sovereign model to the standardized approach was another EUR 1 billion. Looking ahead to the sneaking into the 2024, what non-organic effect you could expect is around about EUR 1.5 billion-EUR 1.6 billion of relief. What would be the main arguments?
The one is, you know, this, again, change of this Article 500A, where we have seen in the beginning of the year the updrift. You could, we are switching also to an IRB model in our creation unit, and, we will have to have, an update on our corporate rating model. So this would be the reason how to argue a relief on the non-organic side of around about EUR 1.5 billion-EUR 1.6 billion. Thank you.
Thank you.
Thank you. There are also questions in the chat, and the one was: Any news on the OFAC probe? Here, I can confirm what I used in my introduction. The feedback from OFAC is that, you know, you delivered all the requested information, you were very cooperative, and it will take some time to analyze these information, what we received. So the positive cooperation and the completeness was confirmed. The rest I can only add from our perspective, which I tried to express as well. Of course, external experts, not only our experts, were looking at the data, the transactions, what we had to deliver, and they had been fine with that.
The problem is, of course, that in such a process, one cannot give a timeline for, in the best case, to close it. And then there was a second question. If the extraordinary shareholder meeting on the twenty-first of November will be also used to vote on the spin-off of Russia, if the sale does not materialize, so this is not on the agenda, this topic, and we will not ask for a shareholder decision at this point in time.
We go next to Krishnendu Dubey with Barclays. Please go ahead.
Hi, thanks for taking my question. This is Krishnendu from Barclays. I have, I have three questions. I guess you have—you've been very helpful on the NII guide and the cost guide. It would be really helpful if you could talk about the moving parts of for the fee income for fourth quarter as well as for the next year. Second question is on the RWA increase, I guess, on slide 10, you highlight a 95 basis point impact from the RWA increase. So it has three components, I guess, loan growth market and the operational RWA. So if you could talk about what is what part of this is operational RWA and what is causing this increase? And the last question is on Poland, I guess.
You build up a decent provision. I guess you sold off a business to BNP, and the non-compete has probably ended last year, I believe. So is there a chance of you entering the Polish market again and doing the core banking operations in the country? And aligned with that, I believe there was a pilot project for settlement. So how is that progressing, and can you update us with the details on that? Thank you.
Thank you for your questions. When talking about the fee business, what I tried to express is that we have one part of the fee income, of course, is related to the loan business. And here I explained what one can expect till year-end and also for next year. So here we see a limited positive impact. Then, of course, with the reduction of the Russian business, so in parts of it, the head office had also been supportive to international customers and having some FX transactions, which will also reduce. Yeah, there might be some support on fee volumes by the inflation.
One should not expect too much on additional pricing because of the inflation, because here we see, of course, a significant price sensitivity, meanwhile, in all the markets. And of course, if you have a longer historic time horizon, then you would reconsider also that in Croatia, we have the euro adoption, which, of course, costs EUR 20 million, if you compare historic numbers, this year and also the future.
When talking about Poland, I think, on the settlements, Hannes gave in the—in an earlier question, answers which, if I may shortly summarize and repeat, were that we believe as of today, what we see based on our model, so the inflow, what we have seen so far and the modeled inflow over the next couple of quarters, we believe we are well-provisioned. As in this provisioning model, the annulment part is a very, very strong component. Of course, as Hannes said, you have in this model also, settlement a period to come to an end of three to four years, which then for provisioning requires also a discounting, which then is one of the reason why-...
Why the current seventy percent over time will be different. So this provisioning is fine, unless we see in the coming quarters, another wave of litigation inflows, which would need to then do a further provisioning. Let's have a look at that. To your question, reentering the Polish market, one can say we cautiously and to a very small extent, have reentered the Polish market. We have built from scratch a digital bank, which operates under the Austrian license, so can act throughout Europe. We have decided to start in Poland because we believe in our region, this is the most advanced digital market, most competitive one. We started with unsecured lending. We are in the process to adding daily banking, so an account and some other features.
But this is more a European exercise than a Poland one. I don't see a full reentering in Poland. And Hannes will take some other questions from you.
Thank you. And the other one, you know, update on settlements in Poland, as I was talking about, we have the one order. We have over 300 test cases, demonstrating that our procedures are well working, and now we would do the whole story at scale in the Q4, and then we will see how well, also on a broader scale, our settlement offers will be perceived. And then talking about the split up on these 95 basis points of RWA growth, you could assume some 55 basis points, motivated by organic credit risk, RWA growth, and the remaining 40 basis points is a sum of op risk and market risk. Why so? Because in op risk, we in a standardized approach, and you have a 3-year average.
And of course, you know that in the last two years we have earned very well, and therefore, a year with a little bit less cross-income is leaving the time series, and a new one with higher income is added. Thank you.
Thanks a lot. Thank you.
Next, we go to the line of Riccardo Rovere with Mediobanca. Please go ahead.
Thanks. So thanks for taking my questions, a couple if I may. The first one I'm looking at, sorry, slide 52, where you show the size of the Russian business in euro. And I noticed that the loan book, it goes in a year from EUR 13 billion to EUR 6 billion, deposits go from EUR 25 billion to EUR 15 billion. Certainly there is devaluation, the ruble effect here, but still in euro terms, it's the size of the operations is going down fast, really fast. So I don't know. Let's assume for a second that the spin-off, you know that part is takes time. It's already taking maybe more time than you were expecting some time ago.
At what level, in euro terms, the Russian business would be small enough that at that point, the spin-off and all that part would become kind of irrelevant or redundant? You just, just, just let it go, just hand over everything to the Russians, if that is possible. This is the first question. And the second question I have is on the digital euro, do you see threats, risks, opportunities from that, or do you plan any particular investment on that, given the ECB has decided to move ahead on this project? Thanks.
Yeah. Thank you, Riccardo. I think it's indeed, we have seen a significant reduction on the Russian loan book. One can say that also with the changes in the international transaction payments business, I think we have achieved quite a lot. Nevertheless, in the Western perspective, this, we have to be aware the size of the bank is still significantly larger than the two or three other international banks in Russia. I think the issue what we face, and one can see it also in the structure of the balance sheet, comes from the still high deposit base.
We have not decided on a level where one could use your wording and say, now Russia is irrelevant within RBI Group, and we can keep the bank. Of course, as you see from our activities, in addition to a sale and a spin-off, we are working on the reduction of the business. So that the overall impact on RBI is not so important anymore, but no numbers so far, decide. And as I said, focus-
Johann, if I, if I may interrupt you just one second. Excluding the devaluation of the ruble, are you happy with the downsizing of the business, the speed, sorry, of the downsizing of the business? Were you expecting it to go faster? Any color on that would be nice.
Yeah, I think, I think we have, we have achieved quite a lot, if you say where we, we started from. I think that if you look into more details, then of course, when looking at the loan book, you have quite a lot of volatility from the FX developments. I think we did quite a lot in the short-term corporate book, and on the retail as well. The mortgage business, of course, in an area where you have a volatile interest rate environment, one cannot expect that refinancing happens by other banks or whatsoever. So here, I think customers are cautious, and this is why you have this development. Yeah, I mean, everything is different from a Western perspective than usually.
So usually you would enjoy this, this nice deposit base. Yeah, here, it's a challenge to reach a size where, well, let's say, the international pressure also is going to be reduced, and as we still feel that we act, as I described. When talking about the digital euro, I can, I could now talk an hour or so and echo what other European banks are saying. Yeah, we don't see a use case and anything more, but of course, as soon as it comes, we then we'll act. But we're not on the forefront of developing that. I think we're capable enough when it comes, that we will be ready in time to offer what's required to our customers.
But it's when we talk about where we now invest, then it's not the days for the digital euro. But in the area of digital offerings, we have quite a lot, as I have said, everything what you would need, and the rest has to be specified by the Europeans, and then we will invest. Thank you.
Thank you. Thanks a lot. Thank you very much.
We go next to the line of Juliana Sherwin with Goldman Sachs. Please go ahead.
Good afternoon. Thank you for the presentation, and congratulations on my side as well. Three questions, if I may please. The first one would be on the Russian RWAs. So in the second quarter, you were guiding for EUR 14.5 billion of net RWAs to be deconsolidated, compared to EUR 14.3 billion of accounting RWAs. And now, the RWAs to be deconsolidated stand at EUR 13 billion versus, I think, EUR 13.7 billion accounting. So I'm just trying to reconcile how a 4% reduction in accounting RWAs translates into a 10% reduction in effective RWAs. If you can help me, please. The second question is on asset quality. I think you saw some credit exposure downgrades from grade three to grade four during this quarter, and I think mostly in Germany and Hungary.
I appreciate that you have already commented on credit risk, but could you please elaborate a bit on trends you are seeing in those geographies in Austria, and especially on the CRE front, please? And the third question is on Ukraine. Your GDP growth assumption looks quite promising there for the next years. Do you see any opportunities, perhaps, for loan growth on the back of the reconstruction in the western and central part of the country that is to come? Thank you.
Thank you. I try to answer your question. I think we have. And you allow that I just talk about the end of September and the RWA impact in Russia. So we have a credit risk RWA of about EUR 9 billion in Russia, and we have a market risk of EUR 4 billion because of Russia, which is of course our own participation in the Russian entity. And of course these four billion of RWAs are mostly in head office, as this is where the participation in the Russian entity is booked. And so this probably it's the reason why it's difficult to run through a few information and then come to a reconciliation of the numbers.
So here, I tried my best at this point in time, but, I mean, more technically, also, the team would be happy. I think we have on slide 11, maybe this, this is helpful, where we have the idea how the RWAs are reported in Russia. I think let me I would need to open this up on my side as well. But, this is the EUR 13 billion in total, and what you might use then. When maybe this is, this is good enough for an answer at this point in time. When talking about the Ukraine GDP outlook, indeed, we are positive. I think the country has well adjusted to the developments, the war impact. This is, of course, the basic assumption of all our forecasts.
The war impact to the biggest extent is limited to the areas of war, of fighting, and the damage in other parts of the country is very limited. This is a basic assumption, and the second part of it comes, of course, from the good support from the international Western part, so from Europe and the US. So both, both of these are helpful. I think when we talk about reconstruction, I think it's fair to say that reconstruction comes in different phases. And what you currently have is that Ukrainian companies are suffering also to exporting goods without international guarantees and to importing here and there goods which they would mean to replenish the production environment what they have. So here one can say it's still a challenge.
I think then the second part would be infrastructure is very important, so this is a European exercise, mainly. When talking to the international institutions, EBRD, EIB, and others, there is an increasing will to support this reconstruction, and so one can be positive for that. We are not planning in the plans, of course, we have not that big expectations built in. But, of course, for the well-being of the country, we hope that this comes in the phases as I have described, and the more, the better. And Hannes will talk about your other question.
Thank you, Johann, Juliana. When talking about commercial real estate, I think we have to be fair in talking about the four main contributors to commercial real estate. This is warehouse, this is hotels, this is office, and this is shopping malls, basically. On warehouses, I think, of course, with a slight reduction on the economic momentum, we may see a little bit less use of the warehouse, but nevertheless, they are usually built close to highways on critical turning points. So therefore, I would not believe that we would see too many of defaults and provision needs when it comes to warehouse. The hotel sector also nicely recovered out of the pandemic.
We see that in many of our countries, is it Croatia, is it Albania, but also here in Austria, we could see that the tourist season was outstanding. So on the hotels part, I think, of course, always depending on how the financing is being done, but nevertheless, we would also believe that not too many problems would materialize. Remaining two, but this is office and shopping malls. Office here, we have a structural shift. I think also on the demand side, those who are working in the city know that the occupancy rate on the office is still low and not fully utilizing the capacity available. The other one is shopping malls.
Looking at the leading indicators when talking about consumer confidence, we also may assume that people are less eager to use their savings for extra shopping. This is the four markets. The other one is, you know, what are the driving factors? And we still believe that given that inflation is a little bit higher for longer, we would also believe that interest rates are staying higher for longer. And of course, then you get two effects. The one is valuation effect, and the other one is a cost of refinancing. Many of the projects are anyway financed on a fixed rate basis, and other factors which could impact, and I would not go specifically to Austria, because what I'm mentioning holds also true-...
for Germany, for Czech Republic in quarters, but staying always the euro ones, euro-financed exposures. We also must not forget political measures. So as soon as you introduce a certain cap on the rental income or call it a break on the rental income, this is a little bit artificial, because on the one hand side, you have the inflation, you have higher interest rate costs also to bear, and on the incoming side, you put politically a cap on weaker consumer demand might be a challenge. And let's see, you know, if the inflation stays as high as it is, and also maybe these clouds I was indicating on the geopolitical part, what this does too on the consumer demand. What did we do? We have adjusted our underwriting criteria.
Now, we would rather underwrite on a debt yield of some 7%-8%. And as I said, of course, given this new interest rate environment, also valuation curves will be adjusted. And we will see that many of the companies who have benefited from an 8-year long of non-existing interest rates in Europe, will also see in 2023 some valuation adjustments. This is what I would expect for sure. And yes, could there be the one or other liquidity issue? I also would assume so. That is the reason why I reflected, and that's also the reason why we have created in total post-model adjustments for the commercial real estate of EUR 150 million. I hope this was a very comprehensive answer, Julia.
Otherwise, if you would need further details, Johann, and colleagues are more than competent to follow up. Thanks.
It's very helpful. Thank you for the detailed answers.
We go next to the line of Simon Nellis with Citibank. Please go ahead.
Hi, thanks very much for the opportunity. Just, three quick ones from me. Firstly, on Ukraine, I see that, you're back to growing the loan book and the assets. Is that the intention to continue doing that, or is there something else behind that, maybe currency? And on the risk cost, I see you've released provisions in Ukraine. If you could, talk about the outlook for risk cost in Ukraine a little bit, that would be helpful. Second question is on the dividend. Do you think you can maintain the EUR 0.80 dividend going forward? Might be too early to talk about that, though. And then last, just on OpEx, I think your EUR 4 billion OpEx guidance would suggest, a very large increase in the fourth quarter.
So are you just being conservative or is there gonna be exceptional seasonality this year? Thank you.
Simon, if I may take the first question, and thanks for participating. On Ukrainian, you know, thanks for noticing that we were capable to grow our loan book in Ukraine. We also have done this last year. We have provided last year, over 400 million EUR of new financing made available for agriculture, and of course, for the very strong companies in Ukraine. We have pre-approved limits in place, and they are being utilized, and we are happy to provide the necessary and needed financing. Risk cost outlook in Ukraine, as you have seen, we already have booked some roundabout, let me just look up the exact number.
If my memory serves me right, about EUR 80 million of risk costs in EUR 74 million in the first three quarters. We also have some overlays. Yes, maybe we would need another 20-25 million euros for a year. But please bear in mind, Simon, that this, of course, you know, is, is exactly the reason why we are so broad in our guidance, because dynamics could change, and then, then my current thinking could, could be proven wrong already tomorrow. So that's the... In our base assumption, we would add another 20-30 million euros for a year when it comes to risk cost in Ukraine. Johann?
Thank you. As you rightfully said, it's too early to make any statement on the future dividends, but as I promised, we will come with something when we have the preliminary results, which anyhow is early of February. To your other question, OpEx in Q4, I think it's a good question for a reason. If you look back in history, I think you would find years where we have a EUR 100 million difference between Q3 and Q4. This was not so much the case last year, where we had higher costs in because of the many reasons I have stated around Russia, so when we talk at overall group.
So I think, I think if we then look at Russia, the bigger part of the cost increase from the many areas to deconsolidate it and whatever was consumed, and one could see this already in Q3. On the other hand, Q3 is always a smaller one, because people consume their holidays and so then build up new things. So, yeah, there is some seasonality always, if you take out the extraordinary, the special, the one-offs, and we have also, if you compare Q2 with Q3, then I have to remind you that in Q2, we booked quite a lot of extra costs here in head office for Russia as well.
So this volatility will go, will continue in various areas for a while, and I hope that hopefully already last next year, we would be back to normal. So be aware when you compare quarter stuff, that you have the special impacts, which are specific to the Russian development when talking about Q4 last year, Q2 this year in Russia and head office.
Thank you.
We'll now turn the conference back over to Johann Strobl for any additional or closing remarks.
Yeah, thank you very much, Mrs. Operator, for your kind moderating of this call. Thank you to all participants who showed interest on Friday afternoon. Thank you for your questions and your nice comments. Looking forward to hear you again. Yeah, maybe at the preliminary results or whenever it's due. Hannes?
Thank you. Goodbye.
Goodbye.
Thank you. This concludes today's teleconference. We thank you for your participation. You may now disconnect your lines.