U.S. Markets open in 5 hrs 24 mins

Edited Transcript of EBS.VA earnings conference call or presentation 30-Oct-19 11:00am GMT

Q3 2019 Erste Group Bank AG Earnings Presentation

London Nov 5, 2019 (Thomson StreetEvents) -- Edited Transcript of Erste Group Bank AG earnings conference call or presentation Wednesday, October 30, 2019 at 11:00:00am GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Alexandra Habeler-Drabek

Erste Group Immorent AG - Member of Supervisory Board

* Andreas Treichl

Erste Group Bank AG - Chairman of the Management Board & CEO

* Bernhard Spalt

Erste Group Bank AG - Deputy CEO & Member of Management Board

* Stefan Dörfler

Erste Group Bank AG - CFO & Member of Management Board

================================================================================

Presentation

--------------------------------------------------------------------------------

Andreas Treichl, Erste Group Bank AG - Chairman of the Management Board & CEO [1]

--------------------------------------------------------------------------------

All right, ladies and gentlemen. Welcome to the presentation of our Third Quarter Results 2019. Next to me, Alexandra Habeler-Drabek, our CEO -- CRO. I got another CRO, the intended CEO, Benchatrit, and on the here side on the right outside. There's a number, Stefan Dörfler.

As you know, it's my last presentation of the quarter. And I got picked up, I could have picked the worst one. So that's okay.

Let's look at net profit for the quarter, EUR 491 million, up 38% vis-à-vis last year. That's pretty neat. If you look on our year-on-year basis, for the 9 months, net profit is flat. It should be a lot higher if we didn't have the BpL case in Romania. So they screwed up absolutely record 9 months result for us. But the quality, of course, is a lot better, substantially better operating result is offset by an unfortunate one-off of which we are hoping to get something back over the next quarters.

If you look at the margins. On a quarter per quarter basis, slightly down by 4 basis points. We all know, I mean margins are under pressure, particularly in the Eurozone, but this is also due to an expansion of the balance sheet. And we, I think said already a couple of quarters ago, we favor net interest income over net interest margin and you see that we have expanded our balance sheet quite substantially.

The operating result is nice, again, 12% increase in a difficult environment. And as a consequence further improvement of our cost/income ratio, I mention again that we're at 56.3%. If you take that part of the cost/income ratio that actually goes into shareholders' return, which is excluding the consolidation of the savings banks, we are at 54% cost/income ratio. So actually, already below our long-term target, but a lot of things will happen in the future that we can keep or improve that ratio.

Cost of risk. Again, very benign. And as a consequence of all of that, the pretty nice return on equity of 14.3% in the quarter and 16.1% on tangible equity. So here, you see the expansion of the balance sheet, from EUR 236 billion to EUR 252 billion. The loans to banks, over EUR 6 billion plus, but still a major part of balance sheet expansion, customer loans, EUR 8.5 billion plus in the 9 months. And a company, again, that picture we've seen now many times that deposits grow even a bit faster than our net loans.

And in that, they are basically 2 stories; one is a very good one that people entrust us their money, although we don't pay them anything. But that part of the story is that we would like to -- or maybe the chance, not the bad part of the story, the chance for the future is that we manage to transform a substantial part of that into asset management products where we can achieve a decent return, hopefully, above inflation rate for our clients. That's one of, I think, the really important things that the new management will take care of that we push asset management for the middle class in our region.

If you look at our loan-to-deposit ratio, we have lots of room to do that. Our loan-to-deposit ratio is at in 91%, so we could transform billions and billions and billions of customer deposits into asset management products and still have a loan-to-deposit ratio of below 100%. Although we grow our loan portfolio a lot stronger than many other banks.

Yes. NPL coverage improved again, NPL ratio below 3%. And capital, we are at 13.1%. If you allocate the profits we'd be flat at 17.5%. I think those are the most important numbers. And with that, I hand over to Bernhard.

--------------------------------------------------------------------------------

Bernhard Spalt, Erste Group Bank AG - Deputy CEO & Member of Management Board [2]

--------------------------------------------------------------------------------

Thank very much, Andreas. Good morning, ladies and gentlemen. If we look at the macro picture, you see a very benign environment, driven by a very robust domestic demand. We see loans growing, we see full employment across the region, which is, to a certain extent, already a limiting factor when it comes to companies being able to execute their order backlog. This, in the combination with a low interest rate environment, not only gives us access to a very sound loan growth, as we'll see a little bit later, but also to an asset quality, which is still improving and credit risk costs which are still very benign. And NPL inflow in this context is very low.

So if you look at public finances, very healthy at that stage, almost all of the countries who fulfill the Maastricht criteria, they have sustainable current account balances. And this is not about to change. So if we look into 2020, the picture is more or less the same. What we see, of course, is on a lower level. So in the context of an overall somewhat cooling off of the economy, growth rates in terms of GDP growth will slightly come down, but the overall picture will remain very healthy and sound.

If we look at one of the key drivers of our revenue streams, interest rate environment, this is something which is a little bit of a mixed picture. Euro area is in a very deep end for long low or negative interest rate scenario. This will not change as we all, I think, would agree. If we look at our CEE currencies, more specifically, Czech Republic, we have seen a series of interest rate hikes. This will not continue, but we also do not anticipate any interest rate cuts in the Czech Republic. So our base case forward looking is that we will stay on these kind of interest rate levels.

If you look at the currency development. I think it's very important to say that over the last year and also over these quarters, we see very stable currencies, which for these markets in this kind of interest rate environment, I think, is worth mentioning. And we also do not expect that to change forward looking.

Now in terms of market shares on the micro side, we see on the loans -- on the deposit side, generally, a stable picture, with one exception, which I want to draw your attention on. We don't speak much about corporate loan business, but this is something where we have been able to capture market shares all over the region. So in all of the markets, including Austria, we are growing our corporate loan book. Most specifically in the SME part, which I think is very important to mention because it's a core business. It's a business which also brings fee income. It's a business where the diversification is spectate and also from a credit risk point of view, once the cycle is turning. So I think this is a very sound growth sort of pattern. It also comes along, of course, as we will later see in the risk-weighted assets development with a relatively heavier risk-weighted asset density.

If we look at the performing loan development, we have been growing over the last year, and this trend is continuing in the last quarter, very robustly our loan books, both in the retail as well as on the corporate side. And this is something which is a reflection of the economy, sale is growing, the demand growing and order books being full. This is also something which we anticipate to continue, albeit, at a lower pace. So we see loan growth rates continuing next year. I would envisage more a mid-single-digit percentage compared to what we have seen up to now. So loan growth continuing on a healthy basis, but a little bit slower than what you have seen today.

If you look at the deposit side, we still see a very strong deposit inflow on the retail deposit side. In a constellation, again, if we look at the Czech Republic, as an example, we're not passing on any kind of interest rate hikes of the past to the customers. Still deposits are flowing in. So when it comes to forward strategies, I think fee business will be important and our ability to translate and to recycle these excess deposits into assets under management will be critical. And we're very confident that we can build on this.

Now if we look at NII and net interest margin, NII beats our net interest margin. NII are being -- if you decompose it -- decomposed to volumes, loan volumes are rising, so they help our NII. Margins on the customer side are flattish, I would say. Different in different countries, but are overall flattish. And if you look at the government bonds, which have come down significantly all over the region, then this is creating headwinds when it comes to reinvestment challenges, if you want.

So in this context, our NII is rising. And our net interest margin is now at 2.14%. If you want to look at it forward looking, I would say that net interest -- we will be able to grow NII, still at a lower level. Net interest margin, I would not expect to grow.

Operating income. I've talked about net interest income. I've not talked about fees. Fees have been showing a very positive development. We have indicated that we expect something like a EUR 2 billion fee income for this year. We are still confident that we can achieve that. This quarter, we're above EUR 500 million net fee income. This is driven by loan business. This is also driven by assets under management business, this is being driven by our bancassurance products. And this is something where I think we need to continue the growth dynamics.

Cost. I think this quarter has seen a very positive development. I would not consider this as a run rate, but it's a very good development. I would expect for the last quarter of this year, a typical seasonality. But we will still be confident that we can achieve our costs to end up below EUR 4.3 billion at the year-end for the full year. This is what we have indicated. So we have so far shown significantly positive draws. Cost/income ratio is the reflection of what I've been talking about and I think we're still -- we'll work on our cost basis.

Now I would like to hand over to Alexandra when it comes to risk development.

--------------------------------------------------------------------------------

Alexandra Habeler-Drabek, Erste Group Immorent AG - Member of Supervisory Board [3]

--------------------------------------------------------------------------------

Thank you. Good morning. Can you hear me? Yes. Okay. As it has been already mentioned, risk costs extremely low. So an excellent quarter for risk again.

We are standing at 3 basis points year-to-date for on balance risk costs, which means approximately EUR 35 million. And when you add the off-balance part where we have seen very strong releases, especially in the first half of the year, we have roughly EUR 43 million net releases year-to-date. NPL ratio is also already mentioned, further down from last quarter, we are now standing at 2.7%. The trend from the previous quarters is continuing, meaning that, first, of course, the loan growth is contributing to the reduction of the NPL ratio, but also the absolute volume of NPL continues to come down. And quarter-on-quarter, this was EUR 200 million. NPL coverage, extremely high at 77%, driven by the reduced NPL volume. And with this, I would like to hand over to Stefan. I'm sorry to cut off. Continue. You need 2 more because I forgot.

--------------------------------------------------------------------------------

Stefan Dörfler, Erste Group Bank AG - CFO & Member of Management Board [4]

--------------------------------------------------------------------------------

No problem. Here we go. A few words about the balance sheet development. I think when it comes to loan-to-deposit ratio, the right word to describe the development in the last, not only last quarter, but in the last half year is stability.

We have been we have been seeing a very stable and good inflow on the deposit side, as has been mentioned already, we will definitely going forward try to manage a good flow into our asset management activities and still keep all our liquidity ratios very well under control. What is very important, and this brings me already to Page 27, is that we have been seeing across the countries a very good loan growth. As most of you will, for sure, remember, there were times when some of the countries were lacking behind significantly. This is not the case at the moment. We have a very good growth also in countries like Austria or, of course, especially Hungary as well.

What is worth to mention and especially also in the context of our RWA growth, an important remark as mentioned in the comment line below the charts is that the mix has been significantly biased towards the corporate business, as it was mainly ready we see most of these businesses are very healthy and good growth. Asset quality remains very positive. However, this is not a ratio that we would like to see long term. So 9.6% on the corporate side, 3.5% on the retail side is definitely a ratio that's a little bit too much biased to the corporate side, we'll work on that with our colleagues on the business side.

Worst to mention on that ratio, of course, the fact that both in absolute and relative terms, NPLs have been shrinking significantly again. I will not bother you too much with the liquidity situation, just mentioning on this slide that all the ratios are comfortably fulfilled, and we feel very comfortable also going into the next periods that we can live up to all the regulatory requirements on the liquidity front. Of course, that doesn't come for free. There is a certain price tag related to that, you all know that, but we try to manage it in a good balance between fulfilling all the ratios and supporting the business in the same moment.

I'm jumping over those 2 slides, if you don't mind, and come to a very important part that's the funding structure. We had a really great year in 2019, in terms of our funding achievements. We have been issuing through all asset classes, 81 nonpreferred senior, senior and then 2x covered bonds. All of those transactions, it's fair to say, have been executed in a very successful manner, not only with regards to the achieved spreads, but also with regards to the quality of their respective order books, which I think also going forward when times might be -- become a little bit more tricky on the capital markets, is a very important factor.

Maybe one remark with regards to our redemption profile. I think if you look at the years 2020 -- 2021 and 2022, you see that the efforts of the last, I would say, 5 to 7 years in order to have a smooth and very well to be managed redemption profile have paid -- are paying off now. It's quite a volume to be refilled. However, we do not only feel comfortable that we will do so very well, but are -- know that have been improving it in the last 2 years.

No news, at least none with, let me say, particular value for you, I believe, on the NP/MREL front. What we can say, though, is that we have, together with our colleagues in the local management, we have been making very good progress in understanding better what kind of issuance activities we will be executing in what form in the years to come. So there, you can expect further details in -- partly in the Capital Markets Day and then later on early next year when we have the final, so to say, road map on the table from the regulator.

There is one open question just to mention it here because I know it would be otherwise topic for the Q&A. And that's the topic about Romania. The Romanian regulator is still in discussions with the GST on whether to apply MPE or SPE, I cannot say more about that. We are not participating in these discussions as the only open topic when it comes to the resolution groups within the MPE.

All right. That brings me to the capital slide here on Page 33. 13.1%, the not profit including ratio as CET 1 fully loaded for end of September 2019. Of course, this translates into roughly 13.5% including the third quarter pro forma. We stick to our range forecast for the end of the year between 13.5% and 14%. I don't give it a concrete figure here yet, but it will not be 13.5%, I would say. So -- which means we are comfortable delivering what we have been promising. It's obvious that we have to find always a good balance between investor requirements and investor demands and the regulatory front. We -- if you look at the overall development over the last year, I think we can say that it was a very good and positive development.

And with that, I think we come to the outlook, which will be done...

--------------------------------------------------------------------------------

Andreas Treichl, Erste Group Bank AG - Chairman of the Management Board & CEO [5]

--------------------------------------------------------------------------------

Yes. So the outlook, I think, not much to mention other than that we confirm it. We do not want to mention anything about 2020 today because then you don't have to come to Vienna at the end of November. So confirmation of our outlook. Let me just make one comment again because it just happened yesterday at. One of the questions that we get is, how can a company that spends EUR 1 billion on tech compete with a company like JPMorgan that spends $10 billion-plus on tech -- we'd like to point out that there are a lot of companies who spend $100 million on tech who do a great job. And that doesn't include the personnel expenses that also go into it. I think it really depends on the quality of your spend.

Now today, and in the future, one of the key elements for an institution like us will be our ability to attract good people. We all know that we now have 47,000 people in the group. It will be substantially less over the coming years. So our dependency on the quality of the people that join us will become higher and higher. And the fact that we are one of the 10 most attractive employers in our country is pretty great. There are very, very few banks on this planet who are one of the top 10 employers. And yesterday, we even became one of the top 10 employers for IT graduates. That is a fantastic thing for us, which we have to keep on because we need lots of them over the next years.

So thanks a lot for listening in. We're here to take all the questions that you might have.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Unidentified Analyst, [1]

--------------------------------------------------------------------------------

Obviously, I'm going to ask you about cars because you're about and that's the thing that hasn't happened yet. And Volkswagen (inaudible) cars, there seems to be still boring. (inaudible) Hungary, Czech Republic and Slovakia (inaudible) car codependent. So what gives you comfort eases beyond clearly the current situations (inaudible). Why doesn't this drag you down. And secondly, to the very (inaudible) for now stuck without in the (inaudible) to send it on, I mean it was really, really nice to print that you've got 10-year relief for less than nothing, right? But also that's very weird for a bank to be in that situation for an extended time. How do you deal with that, really, because it was always temporary before and in just the last few months, it's suddenly comparing (inaudible). How does that shape what you doing right now?

--------------------------------------------------------------------------------

Andreas Treichl, Erste Group Bank AG - Chairman of the Management Board & CEO [2]

--------------------------------------------------------------------------------

I'm good on the cars. So yes, of course, our region is depending on -- very much on the car manufacturing industry, not as much as many people think. It's somewhere between 6% and 7%. And it's a different situation than we have in other countries because the component suppliers are -- play a bigger role than manufacturers, but manufacturers also play a big role.

Slovakia is, on a per capita basis, the largest car manufacturer on this planet. The slump in car sales, of course, affects us in the region. And because of the fact that practically in all our countries, the car manufacturing industry plays an important role, we look very much into it whether it's in the Czech Republic, it's in Slovakia, it's in Romania, it's in Hungary, and it's even in Austria a big thing. So we were not worried about our corporate exposure to the car manufacturing industry, we're also looking into our retail exposure since we have 16 million clients in this region. So we would expect to have close to 1 million clients that are employed in -- either directly in the car manufacturing industry or in a component producer.

Overall, the risk that we have on that is much lower than we actually thought. However, if you look into the future, one of the key aspects will be that in the change of the car industry, whatever will be needed in order to build batteries or in the future, it will have a very dramatic effect on the components industry, because no matter what the energy is that will fuel cars in the future, they will be much simpler than the traditional cars. So what we need is a replacement.

What is really important for us is that we have trust in the fact that, particularly in the V4 countries, the Visegrád countries, they will actually develop a battery manufacturing capacity. And as it looks right now, this is on a pretty good track. If you see what's going on between Hungary and Poland and Czech Republic and Slovakia for that moment, it is to be expected if things don't change, but that's what we have to hope for that about 2/3 of the European battery manufacturing capacity will be in our region. If that's the case, we feel safe. If that doesn't happen, we might be in trouble.

--------------------------------------------------------------------------------

Stefan Dörfler, Erste Group Bank AG - CFO & Member of Management Board [3]

--------------------------------------------------------------------------------

Yes, I can -- I mean I can comment on negative rates. I think there are 2 options to comment on the quite general question about how negative rates, so to say, drag into bank's benches. The one is, if you want just result and figure, specifically and the other one is more related to the overall economic effect. Let me first stick to the individual effect. I think obviously it's not a very comfortable situation to deal with it. On the one hand, with regard to limitations to reprice your deposit side, as you know, we have been very successfully managing our NIM over the last few years in this downward sloping interest rate environment by repricing the deposit side. And this was not only the case in the CEE countries, but also in Austria, this was a major factor to improve the returns in our Austrian entities.

Now this obviously on the retail side has come to an end, or it has been at least dramatically slowing down at the zero line. So that's a technical effect that you obviously have to deal. We could quite successfully manage that on the one hand by shifting significant parts of the lending side to fixed rates. It was a very important factor for 2 reasons. On the one hand side, we could keep the margins on a much better level than I strongly believe it would have been the case, should we have sticked fully to the floating .

But there's also a second factor, and that's the fact that you could -- can avoid, this way, all the consumer protection stuff that comes along with the floating accounts. I mean this is a specific thing in Austria. There's no other German market and others are purely fixed rate and we have had, I think, in the last 3, 4 quarters, a ratio of around about 80%, 85% fixed rate. So it's good for the customers, it's good for us, it's good for everybody.

Now the much bigger overall problem, I think, and many of you have been writing about it and our management has been talking about it is the long-term effects on the economy and on the society. In order to build up wells for retirement to generate with, let's say, middle class income, anything that could be called, so to say, a buffer for the future. And obviously, as you know, that the asset management mix in a typical central European pension fund has been traditionally biased strongly to fixed income products. So obviously, this gives you, at best, no return, or at best, no return. Because, usually, you would even after inflation have a negative return, i.e., the only way to deal with that, which is partly also done on the second pillar in Austria to go into riskier, but long term, of course, better yielding asset classes.

So I think in a longer-term perspective, if we talk about 10, 15, 20 years and that's, I think, the bigger long-term consideration, this part is much more of an issue, I would say, not specifically for banks, but for the financial industry and then for the economy overall. So that will be my answer. We are dealing, I think, very successfully with the specific tasks to do. It's challenging. It is a very challenging situation. If you look at Switzerland, for example, there's a comparison and the local banks or the part that is the local activity, it's very tricky. But I think we can deal with it. The longer-term effects are a challenge to the economies overall. I think if you roughly -- we're going for these topics with your questions. Thank you.

--------------------------------------------------------------------------------

Unidentified Analyst, [4]

--------------------------------------------------------------------------------

So a couple of things. One on growth. You alluded to a slowdown in loan growth next year. Is it something which is actually happening already? So do you see loan demand coming down? Or is it something which you rather just expect for 2020 based on your economic outlook? And if yes then which countries, which segments do you see this slowdown? And in terms of the mix of the growth, do you see this already shifting towards retail, which I presume is higher-margin business than corporate. The other thing is on the IT budget. So this EUR 1 billion IT budget, on the one hand, how much of this did incur -- what share of this could be the legacy. It could be the legacy IT cost where you could have several for savings? And how much of pressure do you see upwards from the digital investments you are targeting?

--------------------------------------------------------------------------------

Bernhard Spalt, Erste Group Bank AG - Deputy CEO & Member of Management Board [5]

--------------------------------------------------------------------------------

Maybe I'll pick up the question on growth. By and large, it's very much a prediction for the future. We see first signs at various sort of small sense of a deceleration. But if you look at what we are, a bank like us is a leverage play on the local economy. And if we assume, and if you agree, that GDP growth rates overall will come down next year somewhat then the logical sort of consequence will be that also loan demand will somewhat slow down. And loan demand is also driven by, how should I say, confidence in the future economic development. Overall, I would expect that as the economy, somewhat cools down, investments will be postponed.

So I think it's more than a prediction of what will happen naturally as our sales being a functional of the local economy.

When it comes to loan composition, I do not think that one can say that retail loans are generally better margin business than corporate loans. If you look at where margins go in the Slovak Republic for mortgage loans, then they are already at Austrian levels or below. So it really depends country-by-country and portfolio-by-portfolio. And if you look at the loan growth which we saw over the last quarters, then it's very much driven by SME business. And this is not a margin light business.

So I think overall, yes, I would expect retail to play a bigger role over the next couple of quarters compared to what we did so far compared to corporate. But this is sort of not a massive tectonic shift.

--------------------------------------------------------------------------------

Stefan Dörfler, Erste Group Bank AG - CFO & Member of Management Board [6]

--------------------------------------------------------------------------------

Maybe a fewer additional words about -- because you were also asking if I'm correctly, about, so to say, the mix of the growth and so on. I think what is what is very important, and this has been mentioned in our presentation already. For a long time, the -- let me say, the lack of a footprint or, let's say, the strength of the footprint on the corporate side could not keep up with the strength of the footprint on the retail side. I think about the last 2, 3 years have been showing that our strategy to build a strong second pillar, not giving up a single penny -- not a single percentage point on the retail side, building up on the corporate side, second pillar has worked very well. And a lot of the market outperformance came as a result of that strategy.

However, within the corporate -- or let me rather put it, the nonretail world and if you look into the -- also the slightly the volatility of the volume there, there is also an instant business in. So I think it's a clear target to have a strong footprint in the long-term, sustainable SME business, also in the larger corporate business in our region. However, the leveraged real estate business, in particular, are also I would say, opportunistic institutional business is not in the focus. So that's very important. That, of course, also partly driven with some liquidity situation and so on. Yes? So that's what I want to point out. And just let me use the opportunity to sales on a year-on-year comparison, when we talk about positive shows and how this develops over time, which then will lead to your second question, IT costs.

I think it's worth to mention that year-on-year, the first 9 months, we have been increasing our operating income by nearly EUR 300 million, in other words, close to 6%. And the costs -- the operating expenses have only going -- have been going up even less than 3%. And we are very confident that also by the end of the year, we would be less than 3%. This is, I think, a very strong sign that the market growth has been beaten by Erste Group, and this makes us very confident that on this track with healthy growth we can also perform well going forward, which means that we have to keep the costs reasonably under control.

And the IT budget, the question, what is legacy, what is sort of digital investments cannot be answered very precisely with a percentage or a number. However, I'll just give you 2 examples. Out of the last 2 years, which show and prove that we have been doing our homework well. IFRS, as you know, has been a significant burden on the implementation side. It's ticked off. It's simply off the table, has been done. IFRS 9 is fully implemented. We are learning, of course, quarter-by-quarter, some further specifics. But as a project, it's done and dusted. We have, on the risk management side, I think, successfully fulfilled a lot of the challenges. There is more to come going forward. We do not expect it to grow further.

So I think the mix is becoming more healthy. Do we see a reduction in overall IT investments? I don't think so. And it's also not the plan because as we all strongly believe in a reasonable strong footprint on the digital front in the whole region, there is room for investment there. So if you calculate with the share of round about 25% directly into IT of our overall costs, you won't be that wrong, I guess. That will be my statement if the colleagues will agree to that view, that's how we discuss it. And I think at the Capital Markets Day, we will also put a little bit more light on what investment areas we are focusing, of course, it will be George as one strong element. It's no discussion, but there are also other things that we are focusing on.

--------------------------------------------------------------------------------

Unidentified Analyst, [7]

--------------------------------------------------------------------------------

I've got more questions, but I'll ask 3, then maybe some more later. The first one is for Mr. Treichl that with this soon new add-on as Chairman of the foundation. We have heard this morning of a possible Lukewarm interest for Erste Bank. You'll have a look that you'll decide. No. I mean look. But obviously, the foundation has to decide whether it will be happy to proceed if it gets diluted. So since, to a degree, it will be up to you and the Board of the foundation to decide what the future holds for the next 5, 10 years for Erste bank, what matters for the foundation? Are they happy to just be diluted and become not so relevant, at least in percentage terms? Is it the dividend that matters? Obviously, that's another consideration if Erste doesn't dilute shareholders to pursue such an opportunity, you may need to cut the dividend.

So how do you balance that out? One is a strategic development of the bank versus financial interest of the foundation or strategic priorities of the foundation. Second question is on tiering and TLTRO. Can you give us an idea of what benefit you get where on an annualized base next year, but I believe starts in November from tiering. And do you just plan to repay the TLTRO tranche as they mature or could you potentially roll them over? And final question is on the repo and money market business that are carried out at the holding. Can you give us an idea of the risk weight density of that business because it's a bit opportunistic sometimes?

--------------------------------------------------------------------------------

Andreas Treichl, Erste Group Bank AG - Chairman of the Management Board & CEO [8]

--------------------------------------------------------------------------------

Okay. So on your first question. I think the foundation, if you look at it in the way that it wants to be a supportive shareholder for the group, also in the sense that the foundation would like to basically do that part of the financial life business that the group is taking care of that the bank can do profitably. So by doing that, like financial literacy and doing social banking, the foundation can actually be a very useful shareholder for the bank. So I think it would not be good if the foundation drops to a single-digit number. So it really -- the position of the foundation will really depend in its belief in a continuous dividend growing, hopefully, growing dividend payout from the foundation, then a lot of things are possible. But I won't start thinking about that before January 1.

--------------------------------------------------------------------------------

Bernhard Spalt, Erste Group Bank AG - Deputy CEO & Member of Management Board [9]

--------------------------------------------------------------------------------

Yes. Gearing is very quickly answered. It's a zero-sum game. So we have the cost related to the 10 basis points cut on ECB level are pretty much recovered by the advantage of the minimum reserve, I think it's clear that Austria and Slovak Republic are the relevant countries in that respect. And our minimum -- our placement is exactly the way that it's building out. I think there has been good research around it which was pretty much to the point.

And with regard to the density of the holding business, yes, the holding business is the one business on the lending side that includes most of the -- I would even say, pretty much all of the opportunistic business, If you want to use that term, I wouldn't use it, but if you want to use it, then you would only use it in the context of the holding business for the simple reason that we are -- we have been concentrating all the markets business that is not connected to client business in the countries, in the holding books that we have pretty much 70%, 80% of the group large corporate business there.

And I would say also the vast majority of the institutional business is there. So that's correct. And of course, these businesses are more volatile in their liquidity management as well as in the risk-weighted asset consumption, and that's why we are in close contact with those colleagues, in particular with regards to risk-weighted assets planning going forward.

That's, so to say, the flexibility and volatility around it. But let's not forget, the overall trend is also depending on the core business in the country. So it's also very important to watch how is the efficiency of the capital allocation in the respective countries with regards to return on the allocated capital. So let's not ignore that. In a longer-term perspective, it's even more important. If you ask me why, because the holding business, you can steer a little bit more flexible and short. I think this answers your question.

--------------------------------------------------------------------------------

Unidentified Analyst, [10]

--------------------------------------------------------------------------------

Yes, but I was just (inaudible) the number (inaudible)

--------------------------------------------------------------------------------

Bernhard Spalt, Erste Group Bank AG - Deputy CEO & Member of Management Board [11]

--------------------------------------------------------------------------------

Which number, exactly do you...

--------------------------------------------------------------------------------

Alexandra Habeler-Drabek, Erste Group Immorent AG - Member of Supervisory Board [12]

--------------------------------------------------------------------------------

For the reverse repo. Yes.

--------------------------------------------------------------------------------

Unidentified Analyst, [13]

--------------------------------------------------------------------------------

Yes. The reverse repo(inaudible) markets. Because let's say, if you want to do something on the M&A front and we use some business that you might do one more (inaudible) you (inaudible).

--------------------------------------------------------------------------------

Bernhard Spalt, Erste Group Bank AG - Deputy CEO & Member of Management Board [14]

--------------------------------------------------------------------------------

No, no. Let's just be very clear. And I think that has not been mentioned yet today because for us, it's completely clear. But just to be very out spoken that should become into position. That really an acquisition of mBank becomes a more likely scenario. This will not work under any conditions without a capital increase. Yes. So no, no, I think that's why we didn't mention it because it's clearly. So -- so in that sense, whether I'll have EUR 1 billion more or less of holding business will not make the big difference there.

--------------------------------------------------------------------------------

Unidentified Analyst, [15]

--------------------------------------------------------------------------------

Would you say that it was better on -- so is it a business that attracts 20% risk weighting or 60% risk weighting?

--------------------------------------------------------------------------------

Alexandra Habeler-Drabek, Erste Group Immorent AG - Member of Supervisory Board [16]

--------------------------------------------------------------------------------

We have a lot of reverse repo business with cash collateral, which has 0 risk weight. So overall, it's not risk weight heavy. Yes, I cannot -- it depends on the...

--------------------------------------------------------------------------------

Bernhard Spalt, Erste Group Bank AG - Deputy CEO & Member of Management Board [17]

--------------------------------------------------------------------------------

But you were asking about the overall holding, not just the reverse repo business.

--------------------------------------------------------------------------------

Unidentified Analyst, [18]

--------------------------------------------------------------------------------

Yes, reverse repo.

--------------------------------------------------------------------------------

Bernhard Spalt, Erste Group Bank AG - Deputy CEO & Member of Management Board [19]

--------------------------------------------------------------------------------

Okay. Let's then, of course, Mrs. Habeler-Drabek's answer is the right one. Sorry, I thought you were talking about the holding business.

--------------------------------------------------------------------------------

Unidentified Analyst, [20]

--------------------------------------------------------------------------------

I do remember, I think, in this room, I suspect, the last time acquisitions in Poland were being talked about that you were -- and that was Mr. Treichl talking as the CEO of Erste Group proceed violently against governments that have made very punitive bank levies, high and unforeseen regulatory charges. And at that time, your view was no way would you get involved in such a thing, having spent a lot of time fighting against these things when you have a strong market position to have influence.

To be honest, if you bought mBank, it had no influence given what happens in Poland. And at the moment, you have punitive bank levy, high regulatory charges, high and fairly incomprehensible levels of capital that you're required to hold. And I just sort of rather hope that you take that into account with the idea of the mBank business, excluding Swiss Bank mortgages could well be (inaudible) for sale at somewhere between 1.2 and 1.5x book. And it seems to me that it is just not something that make this -- makes any sense for you at all? And I understand that all banks look at all things. That means has your view changed that you're willing to take the risk of a frankly anti-bank government in order to get that strategic position filled? So has that changed? Because the financial side of it hasn't.

--------------------------------------------------------------------------------

Andreas Treichl, Erste Group Bank AG - Chairman of the Management Board & CEO [21]

--------------------------------------------------------------------------------

Well, it won't be my decision anymore. So the guy who hates governments who impose high taxes will be gone. On the other hand, I have -- I don't think there are many bankers that have as much experience in dealing with bank levies in other countries. I'm happy to advise the new management and/or offer my services in getting rid of taxes. I have been pretty successful on that in the past. Maybe I could even do it in Poland, probably take a while. But you're asking me. I would -- it -- basically, it's -- I fully agree with everything you say. But on the other hand, if you see really long term -- really, really long term, we are calling ourselves the Bank of Central and Eastern Europe. That was always our strategy. And for the moment, it's pretty much like we call ourselves the Bank of the United States of America, but we're not in California and Texas.

So long term, it would make us a lot more logic, whether it's worse, the pain, on having another government that treats banks like open -- good source for financing via taxation, that's another story.

On the other hand, look at the profitability of the market. It's -- including the tax, it's a lot better than many other markets in Western Europe that don't have banking levies.

--------------------------------------------------------------------------------

Unidentified Analyst, [22]

--------------------------------------------------------------------------------

Could I ask a question just about risk costs going forward. I mean if you -- again, if you look out, say, 3 or 4 years, where do you think the normalized cost of risk is? Are you factoring that into pricing today? How is your thinking about that changed? And what kind of things will change in terms of pricing when we finally start seeing risk costs go up? I mean do you think the market will be able to react when you price loans at higher rates? Or are you just going to have to bear with a few years with pain?

--------------------------------------------------------------------------------

Alexandra Habeler-Drabek, Erste Group Immorent AG - Member of Supervisory Board [23]

--------------------------------------------------------------------------------

So the so old normalized risk costs, we expect being between 35 and 45 basis points given our region and our business model. For the next year -- so for the quarter to come, I'm much more optimistic -- not excluded it. The very good quarters we've already seen this year will repeat again. But also for 2020, I'm still more optimistic on risk costs. Also given still strong recoveries we see from the written-off -- but what else, but this will even out. So this will reduce due to our expectation also already in next year. On pricing, of course, we've factored it in. We have risk-based pricing and this we are applying already now.

--------------------------------------------------------------------------------

Unidentified Analyst, [24]

--------------------------------------------------------------------------------

And just by division, I mean where will you see that, say, in Austria versus Central Europe, maybe by key markets like Romania and Czech?

--------------------------------------------------------------------------------

Alexandra Habeler-Drabek, Erste Group Immorent AG - Member of Supervisory Board [25]

--------------------------------------------------------------------------------

Romania is, when you look at all our countries from our expectation on average risk cost is the higher -- on the higher end. So a little bit above the EUR 45 million, maybe EUR 50 million to EUR 70 million normalized risk costs, but Romania is still -- there's a lot of this -- especially from Romania and Hungary, there's a lot of recoveries from written-off portfolios is still coming. Austria, Czech Republic, Slovakia, on the lower end.

--------------------------------------------------------------------------------

Unidentified Analyst, [26]

--------------------------------------------------------------------------------

And I guess that also...

--------------------------------------------------------------------------------

Alexandra Habeler-Drabek, Erste Group Immorent AG - Member of Supervisory Board [27]

--------------------------------------------------------------------------------

This should not be a surprise, yes.

--------------------------------------------------------------------------------

Unidentified Analyst, [28]

--------------------------------------------------------------------------------

If you're already pricing that in that level of risk cost, then your normalized ROE is quite a bit lower as well. Unless you do other things like cutting costs.

So my next question would just be on certain markets where you have high-cost income ratio like Austria. Why can't you get that down faster? Some of your competitors are not running at kind of 45% or below. Why can't you do? So maybe you can just describe why it's a challenge and why they've been able to do it and others haven't?

--------------------------------------------------------------------------------

Andreas Treichl, Erste Group Bank AG - Chairman of the Management Board & CEO [29]

--------------------------------------------------------------------------------

Look, I mean when we talk about Austria, I think it's an obvious that comparison to the one competitor that you've been thinking of very likely, with all respect -- and with all expect, not only to ask the question, but also to us, this competitor is simply not feasible if you look at the structure of the shop and what they are doing and everything. So here, I would really take the liberty to say this doesn't compare apple to apples. That we have a significant challenge ahead of us with regards to improving the cost base in Austria is no discussion.

I think if we look at the development of the operating result in Austria, in particular, and I'm talking about the part that is 100% in our control, but even also for the savings banks in terms of direction and market shares and positive shows. This was -- the last 2, 3 years have been a very good direction. The part, which is to be managed going forward is twofold in my eyes. One is that we have significant efficiency deficits within our own, call it, incumbent organization between Erste Group and Erste Bank Austria as well as the IT companies. This is something we're working on already in a very granular manner, and I will not announce anything that I cannot then execute. But I'm very optimistic that we get something done there.

And the second part, of course, is very much to the -- based on the, let me say, the structure, the structure of the group overall, meaning that we have, of course, a certain shareholder costs allocated on the holding side. I think it's fair to say that a significant part of that in a proper distribution is allocated to countries, for sure. However, not everything can -- and also by the way, should be distributed. So I think it's the combination of those 2. Do we -- what do we definitely need to achieve? What we need to achieve, and I think we have been seeing in the last years, but mainly driven by top line is a positive direction and positive momentum there. And given the, let me say, more challenging environment with regards to NII, no discussion about it, I'm very optimistic, but this is an obvious thing that given the investment book income and so on, there is a challenge ahead of us. This will have to be delivered more from the cost line. Yes. So that's my answer to that.

If you look at the developments in the last quarters. Again, it was mentioned already, fourth quarter might be a little bit more difficult. But overall, it's a good momentum. We have to accelerate that going forward. But compared to competition, excluding this one competitor, I think we are on good track and will be on better track going forward.

--------------------------------------------------------------------------------

Unidentified Analyst, [30]

--------------------------------------------------------------------------------

I've got a couple of questions, please. First one is just a follow-up. In terms of NIM pressure and the negative rates that we have, can you please remind us where we are in terms of charging large customers for deposits? And given that the rates are going to stay at lower for longer, have you thought of even charging, say, large deposit holders at some point?

And secondly would be -- and this was especially retail customer segment. And second would be on Czech Republic loan growth. Even if you exclude the reverse repo business, the loan seem to have barely grown Q-o-Q, especially corporates are down 1%. So are you seeing any kind of major slowdown in there because of much talk about slowdown in German economy, et cetera?

--------------------------------------------------------------------------------

Andreas Treichl, Erste Group Bank AG - Chairman of the Management Board & CEO [31]

--------------------------------------------------------------------------------

So I can give you a very precise answer on number one because in my former capacity as CEO of Erste Bank Oesterreich, I have been introducing executive debt coming historically from the market size. It was, for me, completely clear that for large deposits of corporates and institutionals, there has to be a proper pricing, also with the miners in front to be introduced, and we have done so. And we have -- of course, we are becoming strict down there. It's also been how the market develops. You always have to take into consideration the overall client relationship. So it's a case-by-case decision. But overall, we have done that already, and we keep on doing that. So that's number one. So it should be good market pricing. Yes. We have discussed about retail. But on corporate side, institutional side, in particular, not even mentioning interbank and everything is done.

Can you please repeat your question regarding the Czech regarding once more the free...?

--------------------------------------------------------------------------------

Unidentified Analyst, [32]

--------------------------------------------------------------------------------

It's loan growth in Czech Republic in particular because even if you take out the group markets with the reverse repo business, the loan growth seem to have barely grown in terms of -- especially in terms of corporates.

--------------------------------------------------------------------------------

Andreas Treichl, Erste Group Bank AG - Chairman of the Management Board & CEO [33]

--------------------------------------------------------------------------------

Okay. Now I understand what you mean. Do you want to take through that, if you like?

--------------------------------------------------------------------------------

Bernhard Spalt, Erste Group Bank AG - Deputy CEO & Member of Management Board [34]

--------------------------------------------------------------------------------

Yes, quarter-on-quarter, it's relatively flat, both in retail as well as on corporate. I would not establish this as a trend. This is sort of not showing any kind of patterns yet. So I would anticipate that also forward looking, we'll see loan growth broadly in line or slightly above the GDP growth rate.

--------------------------------------------------------------------------------

Stefan Dörfler, Erste Group Bank AG - CFO & Member of Management Board [35]

--------------------------------------------------------------------------------

Yes, just checked it once more. It's the overall year-on-year development, and the loan book of corporates as both retail have been strong in Czech Republic. This was a seasonal effect on markets business, yes.

--------------------------------------------------------------------------------

Unidentified Analyst, [36]

--------------------------------------------------------------------------------

I'll ask some more then. On nonperforming loans and new definition of default. Is there any impact, if it's material? And if so is it Q4? Or is it in the future?

--------------------------------------------------------------------------------

Stefan Dörfler, Erste Group Bank AG - CFO & Member of Management Board [37]

--------------------------------------------------------------------------------

Costs, specifically employees' numbers, they've been going down in Czechia, Slovakia, Romania for a couple of years now. Is the trend still down for the future or you have now reached the size -- the footprint you want to reach in those countries in terms of employees numbers? I'm not going to ask about Austria, number of employees, which is going the other way.

The third, on capital. You mentioned this morning that you don't expect any release of RWAs because of future model changes. Did I understand that correctly? Because I would have expected some, like in Romania IRB or you have another -- I don't know another kind. I don't remember, something to do with -- something you have to tie it up on the credit model. And so can you just confirm that, whether there is some or there isn't something in terms of positive? And TRIM and other regulatory headwinds the next few quarters, is there anything or not?

--------------------------------------------------------------------------------

Alexandra Habeler-Drabek, Erste Group Immorent AG - Member of Supervisory Board [38]

--------------------------------------------------------------------------------

So I'll start with default definition. We will implement a new default definition in this quarter -- quarter of this year, the last quarter of 2019, and there will be no material impact. I take the model right away for -- on the other. On the model, this does not mean that we are not working on the models and that we are not aiming at also achieving capital savings, but also from an expectation management, I would not expect it'll be -- it will have a material relief on our capital side. So much more important is, what my colleagues already mentioned in detail, that we have a thorough look on the mix -- on our business mix. So hoping on big capital reliefs, I would not.

On the other side, also no negative headwinds. So neither from Basel IV we are expecting or any other add-ons of any exercises. So rather neutral in both directions.

--------------------------------------------------------------------------------

Bernhard Spalt, Erste Group Bank AG - Deputy CEO & Member of Management Board [39]

--------------------------------------------------------------------------------

Okay. So regarding CEE countries, FTE development, I think we should expect a slowly downward sloping trend. No hard cutting into the sales force, in particular, under no circumstances. However, adapting on the one hand to the increasing digitalization of the business, this is a clear trade-off, a positive one, as I believe, since we are getting more and more capable of doing the business end-to-end on the digital side. This, of course, results into step-by-step, in this transformation, lower number of typical traditional sales force.

However, it's going to be a slow process since in some of the countries, this transformation process takes time, and we definitely don't want to give up valuable revenues on the other hand.

And while you have not been asking for Austria, I take the liberty to answer first on Austria for 2 reasons.

First of all, first, and this is very important in the context of the IT costs that we discussed before. We have been and we analyzed in very much detail. We have been reducing significantly, after the big projects, the external capacity. So it's very important to understand that, especially in the IT companies, the share of externals in the ramp-up of the other regulatory risk challenges as well in the IFRS and the data exercises was really, really huge. So we're talking about the years '16, '17, in particular. This has been reduced, I would call it, to a normal level. So every IT manager with a lot of experience tells me that you need to have a certain share, 15%, 20% of externals, not only in order to exchange properly with the market new developments, but also in terms of managing the ups and downs in the project work.

The overall FTE development in our Austrian entities has not been satisfying. It has been going up as you're rightly observing, which cannot be the future trend.

--------------------------------------------------------------------------------

Andreas Treichl, Erste Group Bank AG - Chairman of the Management Board & CEO [40]

--------------------------------------------------------------------------------

Okay? That's it. Thank you very much for listening in. 21st of November, Capital Markets Day; 28 February 2020 for all of you (inaudible) on full year results. Have a great day. Thanks for joining us.

--------------------------------------------------------------------------------

Bernhard Spalt, Erste Group Bank AG - Deputy CEO & Member of Management Board [41]

--------------------------------------------------------------------------------

And thank you very much.