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Edited Transcript of EBS.VA earnings conference call or presentation 31-Jul-19 7:00am GMT

Half Year 2019 Erste Group Bank AG Earnings Call

Vienna Aug 22, 2019 (Thomson StreetEvents) -- Edited Transcript of Erste Group Bank AG earnings conference call or presentation Wednesday, July 31, 2019 at 7:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Alexandra Habeler-Drabek

Erste Group Immorent AG - Member of Supervisory Board

* Andreas Treichl

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

* Stefan Dörfler

Erste Group Bank AG - CFO & Member of Management Board

* Thomas Sommerauer

Erste Group Bank AG - Head of Group IR

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Conference Call Participants

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* Alan Ramsey Webborn

Societe Generale Cross Asset Research - Equity Analyst

* Amandeep-A Singh

Deutsche Bank AG, Research Division - Research Analyst

* Andrea Vercellone

Exane BNP Paribas, Research Division - European Banks Analyst

* Anna V. Marshall

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Gabor Zoltan Kemeny

Autonomous Research LLP - Research Analyst

* Hadrien De Belle

Keefe, Bruyette & Woods Limited, Research Division - Analyst

* Johannes Thormann

HSBC, Research Division - Global Head of Exchanges and Analyst

* Máté Nemes

UBS Investment Bank, Research Division - Associate Director and Analyst - European Banks Research

* Riccardo Rovere

Mediobanca - Banca di credito finanziario S.p.A., Research Division - Research Analyst

* Robert Brzoza

Dom Maklerski PKO BP, Research Division - Analyst

* Stefan Maxian

Raiffeisen CENTROBANK AG, Research Division - MD & Chief Analyst

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Presentation

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Operator [1]

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Good day, and welcome to the Erste Group Bank AG Results for the first half year of 2019 Conference Call. Today's conference is being recorded. Now I would like to turn the conference over to Thomas Sommerauer. Please go ahead, sir.

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Thomas Sommerauer, Erste Group Bank AG - Head of Group IR [2]

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Thank you, operator, and also a very warm welcome to everybody who's listening in on behalf of Erste Group. So this second quarter 2019 conference call will be hosted as usual by Andreas Treichl; and complemented by new CFO, Stefan Dörfler; and new Chief Risk Officer of the Group, Alexandra Habeler-Drabek. They will lead you through the highlights of Q2 and the first half of 2019. After which time, we are ready to take your questions.

With this, I would hand over to Andreas Treichl. Before that, I would also like to highlight the disclaimer on Page 2. But Andreas, please, take it away.

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Andreas Treichl, Erste Group Bank AG - Chairman of the Management Board & CEO [3]

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Thank you very much, Thomas. Let's move to Page 4, if you have read the disclaimer on Page 2. The first quarter net profit came in at EUR 355 million, slightly down from EUR 377 million in the first quarter. And for the 6 months, we booked EUR 732 million in net profit, down from EUR 774 million in the first half of '18. Actually the first half of 2019 could have been another absolute record result if it wasn't for Romanian Judge with a very peculiar interpretation of law.

Leading the other side. Let's move to Page 5, the margin picture. Net interest margin for the first 6 months has been down to 2.18% mainly due to balance sheet expansion, also due to the fact that we issued EUR 2 billion in subordinated debt in capital in the first half of the year, you will hear more about that later. The operating result has been very good.

The absolute operating results came to EUR 1.447 billion, that's an increase of 11.5% vis-à-vis last year. And as a consequence of that, also the cost-to-income ratio, particularly in the second quarter, came down substantially to 56.6%. Risk costs, another half year with absence of those. And if you look at the return ratios for the first half year, the return on tangible equity was 11.5%. Of course, it would be much higher without the Romanian case, but we see absolutely no problem on keeping the 11% plus outlook for 2019.

If you go to Page 6, you see that loans increased substantially, customer loans by EUR 6 billion, but here you also see, the balance sheet expansion with EUR 5.5 billion in financial assets that have been added in the first 6 months.

Customer deposits grew even faster than loans, again, by over EUR 7 billion.

On Page 7, loan-to-deposit ratio came down again a bit due to stronger growth on the deposit side than on the asset side. Net loans increased by 4%. So an annual rate of 8% to EUR 155 billion with this type of loans growing faster than the risk-weighted assets. NPL coverage has again improved. I think we are first time now above 75%, and the NPL ratio has dropped below 3% to 2.8%.

Capital, both phased-in and the final CET1 ratio at 13.5%. And another improvement in the leverage ratio, small, but good.

Go to Page 9, the business environment. Actually for '20, we are still very positive on the region with growth rates in the CEE region of just slightly south of 3% or in some countries even substantially above the 3%, and Austria, basically following the Western European trend with a slight drop in gross in GDP, but not much. Inflation is relatively stable in the region, so is unemployment or even coming down and most of all of the countries that we're in, with the exception of Romania, public debt has also come down.

So I think a pretty good picture. And I think, again, proved that the CEE region will outperform the rest of Europe, not only in 2019, but also in 2020.

If you look at the interest rate environment on Page 10. Of course, it's not much to be said in terms of Austria and Slovakia. Keep in mind that we are giving here you average rates because Austria 10-year GOV now is already in the negative territory. What's interesting to see is a bit of an inverted yield curve in the Czech Republic, short-term rates are higher than the long term. But what's good for us and what also makes us positive on NII development in the second half of the year, is the simple fact that we see slightly, but the increasing rates in the Czech Republic, in Romania and in Hungary, in 3 of our major countries.

If you look at Page 11, the currency environment. Not much to be said about it, the Czech crown a bit stronger. The RON and the forint a bit weaker, and no change in Croatia.

On the market share side, we're gaining market share across the board. In Austria and in the other countries, you see sort of a mixed picture. Some of that is intended due to pricing. But principally, I think we are very, very satisfied with the development of our market shares. And of course, much of that is also being helped by the success of George, where we will reach our 5 million client number next month.

If you look on Page 14, you see that we have loan growth across the board, very strong in Hungary and in Serbia, and high-single-digit numbers in almost all countries. And even in Austria, we show loan growth of above 5%, that's a pretty nice performance.

Just for interest, we are now down on the nonperforming loan side to EUR 4.5 billion from over EUR 12 billion some 5 years ago. And 5 years ago, we had EUR 115 billion in performing loans and now we're up to EUR 155 million, so EUR 40 billion plus, I just mentioned because I think it's pretty nice.

On Page 15, also, deposit growth continues to be strong. Yes, I mean, we're happy about it, but I think you know well enough, what we think about it. We would much rather see much stronger growth on the asset management side, and that is one of the things that we're really concentrating on a lot. We need to develop and we are in good process of developing products -- asset management products that we can sell to our millions and millions of middle class clients that we have. So we can take them out of noninterest-bearing savings deposits into low yield, but at least some return on asset management products.

If you look at Page 16, you see the net interest margins in the different markets. And you see actually, not a very dramatic development. The increase in the margins in Romania is, of course, also on the back of increased market rates. Czech Republic, relatively stable between Q1 and Q2 and actually a bit of an improvement on the margin side in Austria. As a result of that, you see operating income on Page 17, growing in all our countries, very strong in the Czech Republic, very strong in Hungary and in Serbia and pretty good performances in all of the other countries.

On Page 18, the expense side. Not only a drop vis-à-vis the first quarter, which, of course, was expected since we front-load most of our deposit insurance items and regulatory items into the first quarter, but it's also an improvement vis-à-vis the second quarter of last year, so that's pretty nice to see. And the consequence of that is the cost income ratio, which you can see on Page 19, which is also improving in all our countries.

And with that, I'd like to hand over to Alexandra for Page 20.

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Alexandra Habeler-Drabek, Erste Group Immorent AG - Member of Supervisory Board [4]

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Thank you, Andreas. Good morning, ladies and gentlemen. Andreas has already commented on the positive trends in risk, so there's not so much to add from my side. Then we go to Page 20, risk cost. Given the positive development over the second quarter, we are now expecting for the full year, not more than 10 basis points on total cost of risk. Regarding the NPL ratio on Page 21, I would like to stress that the positive development and the reduction in the overall NPL volume is mainly due to high recoveries, upgrades and write-offs. So sales are not longer playing a very big role.

We're expecting the NPL ratio also until year end to stay below the 3%.

On Page 22. Last but not least from my side, the NPL coverage now above 75%, and we expect the coverage ratio to remain stable around this level also until the year-end.

And with this, I hand over to Stefan Dörfler.

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Stefan Dörfler, Erste Group Bank AG - CFO & Member of Management Board [5]

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Good morning, everybody. Thanks, Alexandra. Unfortunately, I have to start my part with the only really unpleasant event in the first half year overall. And that was the booking of the Romanian Building Society following high court decision in the second quarter, you know very well about that. Ultimately, there was amount slightly north of EUR 100 million being booked on that item. You see it on Slide 23 on the other operating results. Other than that, there is not too much to mention. With this, I want to jump immediately to Page 26, and talk a little bit about the balance sheet development.

As you can see in the headline, and Andreas already mentioned it, loan-to-deposit ratio has been around about stable in the area of 19.5 -- 91.5%. A few items I would like to draw your attention to. First of all, of course, and most importantly, for our business model is that we have been growing in our core business substantially again in the year so far, around about 4% in absolute numbers, EUR 6 billion. And that has been coming from both corporate and retail, however, as you will see in the following slide, significantly more from corporate in that time period. The other point worth mentioning and I will come to that also later on in some pages, and Andreas mentioned it. Again, in the second quarter, we were able to realize and issue 2 very successful capital market transactions, and that is visible here on the balance sheet representation on the debt securities, which grew by around EUR 1 billion in the first half of the year.

On Page 27, we have a breakdown of the customer loans by country of risk. Andreas already mentioned it is very important for us. We have been growing solidly across all geographies, which has not been the case always in the past. So that's a very good sign in terms of our regional footprint. Corporate, as I mentioned already, were growing significantly more than retail. However, still in the retail space, we were growing above 6%, which I think is also a very substantial number.

Risk has been mentioned already by Alexandra. So you see the numbers here on the right-hand side. When it comes to liquidity, we keep a very comfortable and sound liquidity position, LCR is in the area of 150%, not too much more to mention in that respect. What is, of course, both a comfortable situation and a burden when it comes to P&L in the same moment is our constant deposit inflow is, of course, related to our excellent reputation and good name.

However, as you know very well, in some cases, this over liquidity also puts a certain burden on our income, in particular, when it comes to NII.

On Page 30, you see the overall representation of our funding situation, nothing too much new for you. However, what is very interesting and I think also very much worth to mention, is the fact that, again, in the second quarter, we were able to print 2 very successful transactions. They are more specifically explained on Page 31. There you find a detailed description of our 15-year mortgage covered bond, EUR 500 million printed at mid-swap plus 7 basis points, which I think also shows very clearly as well as the order book, how tight the market is pricing that kind of issuance, in particular, from good names like Erste Group.

Very important for us was the non-preferred senior transaction, where we could execute a 7-year transaction at the level of mid-swap plus 80 basis points. Again, with a very large book in the amount of EUR 2.3 billion before finally cutting down to the issuance side. And this is also for the months and years to come, a very important sign that we will definitely move on issuing this category in order to manage our liability side.

I think we can pretty much skip Page 32. No news on that, other than the fact that, of course, the non-preferred senior transaction as to the management of our MPE/MREL strategy. Last but not least, from my side, capital development, Andreas already mentioned, due to both the business and with that risk-weighted asset growth in the first half of the year and of course, the dividend that we have been accounting for, the absolute CET1 fully-loaded position has been stable. However, due to our expectations with regards to income in the second half of the year, we expect to add on capital in the coming months.

And with that, I hand over to Andreas for the outlook. Thank you.

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Andreas Treichl, Erste Group Bank AG - Chairman of the Management Board & CEO [6]

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Thank you very much, Stefan and Alexandra. On the outlook. We do expect the real GDP growth of 3% to 4% in 2019, and we remain positive about GDP growth in our region. If you are really interested in learning something about why we believe that GDP growth in the CEE region, particularly most of the countries that we operate in, will continue to outperform Western Europe, irrespective of its dependence on the German export industry, come to our Capital Market Day to Vienna on November 21. You're going to hear a lot more details and interesting stuff about why we have that opinion and why we're so firm about it.

Based on that, we continue to target our return on tangible equity at above 11% for 2019. We are affirmative on the fact that revenues will grow faster than our cost. The fact that we grow mid-single digits or more this year is already given. And the risk costs, we do expect to move a bit, but given the level that we are at now, we basically cap it at 10 bps for the year.

That's it, ladies and gentlemen. Thanks for listening. And we're now ready to take any questions you might have.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We will now take our first question from Anna Marshall from Goldman Sachs.

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Anna V. Marshall, Goldman Sachs Group Inc., Research Division - Equity Analyst [2]

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I have a couple of questions, please. My first question is on NII. Specifically, could you please provide more color on the year-on-year growth slowdown delivered this quarter and the outlook for the rest of the year? I've noted that you said that you have a more positive view for the second half, but just want to understand a bit more the drivers? And specifically also on Czech Republic. Could you please elaborate on the key drivers there? In particular, any comments in terms of funding cost development after a number of rate hikes and also in competitive dynamics. So that was the first question. And my second question is, could you please confirm the dividend allocation, which was assumed in the interim earnings inclusion in capital?

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Andreas Treichl, Erste Group Bank AG - Chairman of the Management Board & CEO [3]

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Maybe I can start with the last question, that's the shortest. We allocated EUR 0.75 for the first 6 months of 2019 for our dividend. To the NII, Yes.

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

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Okay. So then I'll pick up on the NII question. I think if you look at the year-on-year development on NII, it has been north of 5% growth on NII first half of year 2019 versus first half of 2018, which was significantly above, not only the cost development, but also the overall (inaudible). However, there were some factors in the observation period that put a certain burden on the absolute result on NII. In particular, I refer you also to the segment report and looking at the market results, there you see a shift -- slight shift between the trading, the excellent and to be honest, actually over our expectations result on the trading side, and that's representing a shift in the low double-digit area between NII and trading. So when -- on the trading side, obviously, taking into account, the net trading result as well as the fair value line. So we talk about around about EUR 13 million to EUR 15 million that you could -- you should actually take into consideration there.

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

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Okay. With your specific question on the Czech Republic. The main reason for sort of the somewhat weaker performance on the NII side in the first half of the year, was the composition of the growth of the loan portfolio. The majority of loan growth came from either mortgage lending or large corporates, both of them grew by nearly 12%. So low-margin lending business grew faster in the Czech Republic than the high-margin business as opposed to corporate loans and mortgage loans, the consumer loans only grew by 5%, and the higher-yielding SME loans grew by only 8%, even the 11% on the large corporate. We expect that to change in the second half of the year. So the composition of the growth of the portfolio will be margin better in the second half than in the first half, that's why we expect there a better performance.

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Operator [6]

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We will now take our next question from Johannes Thormann from HSBC.

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Johannes Thormann, HSBC, Research Division - Global Head of Exchanges and Analyst [7]

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Johannes Thormann, HSBC. 2 questions, please. First of all, you had a very good risk -- result this quarter. But the risk provisions in Slovakia show a completely different picture to your other markets. What are the reasons behind it? As this is Alexandra's auto market, if I may say so. And secondly, the countermeasures. Do you have any countermeasures in Austria to offset an additional rate cut by the ECB? What are your plans in this respect?

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

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Well, first of all, the most important countermeasure we took that -- we took Alexandra out of Slovakia and (inaudible).

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Alexandra Habeler-Drabek, Erste Group Immorent AG - Member of Supervisory Board [9]

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On risk cost in Slovakia. First, you have to see that we are overall in all our markets on an extremely low level. And also the bookings in Slovakia are nothing unusual or anything out of the budget or out of our forecast. In Slovakia, we have quite a high share of consumer loans, which is the higher. So in retail, we have simply higher default rates, but this is not new. And this year, it's not so much counterbalanced by releases in corporate. And we have some -- or Slovakia has some risk cost in the leasing portfolio, as we also mentioned on the slide. But for the full year, we are expecting some rating -- reratings also in this portfolio. So overall, this impact will be a low single-digit amount of risk costs. And overall, nothing to worry about.

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Stefan Dörfler, Erste Group Bank AG - CFO & Member of Management Board [10]

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Yes. The other question, if I got it right, Johannes, was regarding measures in Austria with regards to unexpected rate cut -- for the rate cuts, that's -- what was specifically -- I mean, in terms of if we go down to minus 15% or minus 16%, it's a -- so I think we have -- in all cases, we have not expected, as you know from our communication. We have not expected increasing rate short term anyway. Of course, the -- let me say, the development pointing to even lower central bank rates is a little bit new for the last 2, 3 quarters, I would say, the discussion around that. So I do not see any immediate impact on our performance '19, '20, of course, it's no question that if a longer-term negative rate environment that we've always said that persists, then this will, of course, be a challenge for all banks acting in Euroland.

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Operator [11]

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We will now take our next question from Amandeep Singh from Deutsche Bank.

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Amandeep-A Singh, Deutsche Bank AG, Research Division - Research Analyst [12]

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I have a couple of questions, please. First is on the PMIs. So basically, we have seen this continued pressure on German PMIs and this has also flowed through in the Czech Republic. Have you seen any impact from this on the manufacturing sector there? Maybe some early signs where you get a bit worried about maybe loan growth or on the flip side, maybe asset quality? And my second question would be, given that now ECB is going to cut rates and we're expecting lower rates everywhere. And even in Czech Republic and CEE countries has to remain where they are. So does this mean that we can keep the risk cost lower for longer?

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Andreas Treichl, Erste Group Bank AG - Chairman of the Management Board & CEO [13]

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I think you should take asset quality maybe Alexandra. Yes.

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Alexandra Habeler-Drabek, Erste Group Immorent AG - Member of Supervisory Board [14]

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So all around on asset quality and on risk cost, it's always hard to assess the future development, but we expect no mix increase. So we do not see yet any deterioration in the asset quality, neither in any geography, nor in any segment of the clients. So overall, we are optimistic on risk cost also for the time to come.

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Stefan Dörfler, Erste Group Bank AG - CFO & Member of Management Board [15]

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And maybe if I may add. Because I think you were, in particular, picking up on the PMI. What we see recently in those of our researches communicated us in the countries. Andreas has mentioned it in his overall outlook for the region, for time being, we see significantly above our Western European levers growth outlook in our region, definitely, going into 2020. So we are quite optimistic on that. Obviously, should there be, whatever, a massive drop in the German economy, you were -- all well aware of that this is an issue, and we always mentioned that as a macro risk.

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Operator [16]

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We will now take our next question from Gabor Kemeny from Autonomous Research.

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Gabor Zoltan Kemeny, Autonomous Research LLP - Research Analyst [17]

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I have a couple of questions. Firstly, on NII. You mentioned this EUR 13 million to EUR 15 million reclassification from NII to trading. Is this -- are you expecting this to recover in the first quarter? So was this a one-off? Or is this going to be a recurring drag on NII? And more broadly, it looks like your NII growth has slowed down a bit from 7% to 5%, even if we take into account this impact you mentioned. Shall we expect a further slowdown in NII growth in the next few quarters, if the benefit from the Czech rate hikes from the Romanian rate hikes gradually come out from the base?

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Andreas Treichl, Erste Group Bank AG - Chairman of the Management Board & CEO [18]

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Well, I think -- let me just start. I think I made very clear that you should not expect a further slowdown in the second half of the year. Is that clear enough? Okay?

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Gabor Zoltan Kemeny, Autonomous Research LLP - Research Analyst [19]

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Okay.

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Stefan Dörfler, Erste Group Bank AG - CFO & Member of Management Board [20]

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And on the technical term, there was no -- if I was not precise enough there. Thanks for the question. This was not a reclassification. It's just for the fact that on the trading book, as you well know, under IFRS 9, there is always a shift between trading lines and NII lines. And to this was due to the massive shift in interest rates in the second quarter, it was more prominent than usual. So there is no reclassification in the technical terms, but simply a little bit better support to the trading result, it wasn't in the NII result. That's all. And in that respect, it will also not move back automatically, okay?

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Gabor Zoltan Kemeny, Autonomous Research LLP - Research Analyst [21]

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Okay. Understood. And another question on capital. I think you mentioned that you would be -- you would seek to distribute any excess capital above your 13.5% target. Can you give us a sense at what stage do you think you would have an excess capital? So how much do you think you would have to be above this 13.5% to assume that you do have an excess?

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Andreas Treichl, Erste Group Bank AG - Chairman of the Management Board & CEO [22]

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We just announced that we're going to increase our dividend for 2019. So since we have reserved EUR 0.75 very likely that our dividend payout will be EUR 1.50. And I think we said repeatedly before that if we're in that range, we don't see any action. If we go above 14%, we could think about paying either a special dividend or even thinking about share buybacks.

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Operator [23]

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We will now take our next question from Máté Nemes from UBS.

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Máté Nemes, UBS Investment Bank, Research Division - Associate Director and Analyst - European Banks Research [24]

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I have 2 questions, please. First as a follow-up on the question from Johannes in the context of potentially lower rates. Could you perhaps run us through your sensitivities to the major interest rates in your operating countries? And the second question is on the card business. I noticed that net fees and commissions from the card business actually went up to EUR 65 million versus the EUR 48 million, EUR 50 million run rate usual in the quarters. Could you perhaps talk about the drivers behind it? And is there any one-off in there? Or this is a new structural norm?

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Thomas Sommerauer, Erste Group Bank AG - Head of Group IR [25]

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Yes. Máté, could you repeat the second question, please?

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Máté Nemes, UBS Investment Bank, Research Division - Associate Director and Analyst - European Banks Research [26]

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Sure. So in net fees and commissions, the card business that in payment services seems like quite strong, I think EUR 65 million versus the EUR 48 million, EUR 50 million. What are the drivers behind this? Is there any one-off? That would be helpful.

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Andreas Treichl, Erste Group Bank AG - Chairman of the Management Board & CEO [27]

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Okay. That's a relatively easy question to be answered because if you look at the inflow of commission income from the card business, you see very clearly that it comes from those countries where George is already active: Austria, Czech Republic and Slovakia. So we do expect increased contribution from that also in Romania and continuing from the other countries. Romania will slowly grow into this year as it gains a lot of clients, the only countries that we have to wait for, but that should bring another push later on in 2020 are Crotia and Hungary, where we're presently in the beta phase. And in Serbia, you will still have to wait a little bit. Okay?

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Stefan Dörfler, Erste Group Bank AG - CFO & Member of Management Board [28]

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Is that okay for you because then I'll pick up your other question?

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Máté Nemes, UBS Investment Bank, Research Division - Associate Director and Analyst - European Banks Research [29]

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Yes. Yes.

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Stefan Dörfler, Erste Group Bank AG - CFO & Member of Management Board [30]

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With regards to our sensitivity to interest rate moves in our core market, if you might remember for one of the most important, if not the most and single most important market for Czech Republic, we have always been specifying that a change in the key rate of 25 basis points roughly translates into EUR 20 million. Why am I stressing roughly so much? Because obviously, it depends very much on how the market and with that, of course, all the Czech (inaudible) passes on rate adjustments to the market. So -- but that's a good over the time guideline. Now of course, when it comes to euro, it's a little bit more tricky, not to -- it's significantly more tricky because, of course, also the diversity of our business is more prominent. Our issuance goes in euro, so there are many elements. But it's completely clear that, as I mentioned already before, further massive cuts to the key rate will not support any European commercial and retail bank, this comes without saying. I think we are very well positioned. We have this year done an excellent job already, as you see from the income side, both in Czech Republic and in the overall group, when it comes to timing, our investment and our insurance activities. However, further significant activities by the ECB on -- in the euro key rates are definitely a challenge for all the things there.

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Operator [31]

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We will now take our next question from Alan Webborn from Societe Generale.

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Alan Ramsey Webborn, Societe Generale Cross Asset Research - Equity Analyst [32]

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You've talked about your focus on trying to push your middle class depositors into asset management products. You've been talking about that for quite a long time. Surely, you must be near to the point that you can actually start doing this. When you look at the sort of the growth in deposits in, for example, the Czech Republic in the first half of the year. I mean, it does seem to be something that must be causing you further pain. So I wondered whether -- are we near to actually seeing you being able to grow deposits lower than your growing loans? Or is there just a lot of customer resistance to actually moving into these products? Because you can't take that long to do. So I'd be interested to hear what your thoughts are on that? And I guess, secondly, in 1 or 2 of your CEE markets, clearly, interest rate structures have changed, and long-term rates have been coming down. Is there anything we should be concerned about in terms of balance sheet management, securities portfolios and the like going forward?

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

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So let me do the first question, Stefan will do the second. It is not really resistance on part of the customers. But if you look at the 3 major -- or the 4 major investment opportunities that have been used by sort of the typical mass affluent client in our region, whether it's in Austria or the Czech Republic. It's bank deposits, it's own government bonds or maybe neighboring country government bonds, it's life insurance and it's building society contracts, and all 4 of them yield nothing. So our job is to create products for those clients that are not able to assume substantial risk out of the paper that we have available to create products that they can invest in. I think we're doing a very good job on that. But we've been growing our asset management business, as you can see. If you look at the commission income, that's one of the strongest growth parts of our business. But quite frankly, we are at about 10% from where we should be. We should not have 10% plus deposit growth and 4%, 5% asset management growth, it should be the other way around. It's a supply issue and not so much a demand issue. You were pretty good in financial education. In the meantime, we can explain it to our clients. MiFID 2 doesn't make our life a lot easier. It's actually a pisser in that respect. But we're doing everything that we can to improve the situation. And we're increasing the volume of funds that we can actually sell to our clients at a very rapid pace. So this is actually one of the reasons why I do not give up on the EUR 2 billion commission income target for this year.

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Stefan Dörfler, Erste Group Bank AG - CFO & Member of Management Board [34]

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Okay. Thanks, Andreas. Just needless to add that I totally agree, in particular with our efforts in that field. And I can assure you that there will be -- in our Capital Markets Day that Andreas also already mentioned in his presentation, there will be clear statements with regards to our initiatives on the asset management side. And if you look at the net commission income also on that end, I think good development has been picking up. With regards to the interest rate development lately, yes, of course, you're absolutely right. And we have been showing it with the average rates on Page 10 of the presentation that also in those countries, where we have a little bit earlier, we have seen increases of the key rate, in particular, Czech Republic, due to the pressure from the overall global bond markets, longer yields have been coming down, which is obviously, deteriorating anybody's reinvestment environment. That's why it's even more important, not only to push our net commission income, i.e., our service business, but, of course, also to make sure that the growth enables us to place as much of the liquidity in our core business. When we -- when it comes to reinvesting high liquid assets for our bank book, you can always be sure that we try the best to mitigate a challenging situation by best possible timing. However, when an environment like in the second quarter comes down by 30, 50 basis points, the yields from the investment book will not get better. So there is very little else to say. You know that we have to hold a significant portion of sovereign risk in the region, and we will do our very best to have a best possible return from that, but it's given by the market at what level these returns will be. Thank you.

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Operator [35]

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We will now take our next question from Riccardo Rovere from Mediobanca.

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Riccardo Rovere, Mediobanca - Banca di credito finanziario S.p.A., Research Division - Research Analyst [36]

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I have 2, 3 questions, and then a couple of clarifications, if I may. The first one is -- sorry to get back to NII. When I look at your very good disclosure, I would say, that you provide us every single quarter on the various breakdown of the profit and loss lines. What I noticed is that, the NII contribution from assets at fair -- not for trading, but at fair value in interest income has come down significantly over the past couple of quarters. And that seems to me, at least to me, the main driver why the NII is bouncing back maybe a little less than what people were expecting. I was just wondering whether you have been dismantling decisions, tariff rate decisions, government bond positions or anything like that? Or if you haven't done it, just the yields have dropped so much over the past say, 2, 3 months that we should just forget the contribution that you were, let's say, enjoying before. This is the first question. The second question I have is on the liability mix. I see the deposits as usual are growing very fast at group level, but also securities issued are growing fast. I was wondering, the loan book is not growing as much as these 2 lines, at least quarter-on-quarter. I was wondering whether this is going to end up in a slower issuances over the next foreseeable future, also in light of the fact that you don't have any update on the MREL regulation. This is my second question. The third question I have is on the Romanian provision. If I remember correctly, the press release you sent out, well, some weeks ago, was talking about a charge of EUR 200 million or more than EUR 200 million. But if I understand it correctly here, what you have charged so far is EUR 150 million is there, anything more to come? Or the EUR 150 million is the whole of it? And then a clarification on -- sorry, on the DPS. You stated that you have accrued EUR 0.75. Did I get it correctly? And the second clarification I wanted to be 100% sure I got it correctly. Did you say that at the end of this year, you might eventually think about a special dividend or putting in place a buyback? Did I get it correctly?

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Andreas Treichl, Erste Group Bank AG - Chairman of the Management Board & CEO [37]

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Okay, Riccardo, let me do the last 3 points of clarifications and then I hand over to Stefan. The Romanian provision that we took is Europe 150 million. All I can -- not the EUR 230 million, so it's EUR 150 million. And all I can tell you is that we will use any means that we have to get that back. On the dividend, you're correct. We have reserved or announced to ECB reserve of EUR 0.75 for the first 6 months, which indicates a dividend payout of EUR 1.50 for 2019. As Stefan mentioned, we expect our CET1 ratio to increase from the 13.5% this year, but we do not expect it to increase above 14%. As a consequence, there will be no special dividend for 2019. As we have indicated this time and the last time that we will only consider that once our CET1 ratio has risen above 14%, okay?

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Stefan Dörfler, Erste Group Bank AG - CFO & Member of Management Board [38]

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Thanks, Andreas. I will pick up on the 3 other questions. On NII, you have been very thoroughly reading the results pages and your conclusion is simply right. And it's actually also following up on the question that I've been trying to answer as good as I can before. So the observation of that line is representing, I would say, well managed, but still a slight drop here on the investment book. Now when it comes to liabilities, it's also, I can also keep my answer very short. Yes, we have done most of our especially public issuance program in the first half of the year, very successfully executed, as I'm proud to repeat once more. And so this will certainly slow down in the second half of the year. We will keep on doing our issuance for our clients on the -- in the retail sector and so on. However, when it comes to public issuance, only if there are very special opportunities coming up in the months to come, we will take some activities, but most of the funding plan has been executed there. And I think if I remember correctly, MREL was your third question. As I said, no -- not a lot of news there. The only thing that I can say, there will be no binding target to be expected for next year. This is what -- for the beginning of next year. That is what we already know for now.

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Operator [39]

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We will now take our next question from Andrea Vercellone from Exane.

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Andrea Vercellone, Exane BNP Paribas, Research Division - European Banks Analyst [40]

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2 questions. The first one has already been asked and wasn't really answered. But the answer is quite important, given where rates are going. So I'm going to ask it again. If you can provide us a sensitivity vis-à-vis your Austrian business and your Slovakian business to a 10, 25 basis points reduction in the deposit rates, whatever you can provide on a static balance sheet basis assumption. I understand there's many moving parts. We know that the direction is down. But it would be helpful to be able to have an idea as to how much down means? And also in terms of timing, my understanding is that Austria reprices quite quickly, not so sure, up or down, not so sure about Slovakia. I'd like to know that as well. Second question is on capital. A number of banks, which have reported so far, flagged quite visible impact from TRIM and guided for additional headwinds still to come in the coming few years from things like the new definition of default EBA guidelines. Is it still the case in your view that for Erste bank, we shouldn't be worried about any of these going forward, i.e., negligible impact? And still on capital, you have been having a positive impact from rating migrations because your asset quality is doing very well. As you update your model, including last year's numbers, H1 numbers. Do you expect a gain, a positive impact on risk-weighted assets in the coming year, 2 years?

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Stefan Dörfler, Erste Group Bank AG - CFO & Member of Management Board [41]

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Okay. Thanks for the question. Let me repeat that we cannot -- and it would simply be not serious to say in Euroland, if there is another 10% or 25%, by the way, 25 I regard as very unlikely, and I will explain in a second. This will translate into plus/minus something. This is a very, very difficult to say given the very diverse impact. Let me just stress also that and we just discussed it recently in the Management Board that there might be quite interesting, let me put it that way, combination of actions from the ECB. I'm sure you have been following considerations of, so to say, creating a 2-tier system with regards to liquidity and liquidity availability and so on. We are following all that very, very closely. And of course, depending on the concrete measures, also when it comes to CRE, we will do our calculations at best, inform you about our assumptions on the impact what is clear and I think this is, for sure, also the reason where you come with your question is that over a longer term, let's assume, if you look at the Swiss levels, we have minus 75 or something like that. Key rate in Euroland, the whole banking system in Euroland will have a serious challenge in front of it, and this will not be different from Erste. However, we are very confident to deal with it significantly more successful than others. And I think the other 2 questions, I'll go to Alexandra.

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Alexandra Habeler-Drabek, Erste Group Immorent AG - Member of Supervisory Board [42]

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Yes. I mean, that is the dream. So overall, out of dream into model-related topics, we have roughly EUR 5 billion add on, which we already show. So the last increase ahead in Q1 and to our base policy, do not expect any additions on this topic. On the risk models as you are well aware, we had the AMA model, the new model, which led to a substantial relief in Op Risk RWA. We have currently other models out for approval pending for the final approved implementation that we also expect a relief, not to that extent, like with Op Risk model, but also considerable relief. And apart from this for the years to come, it's too early to comment on.

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Andreas Treichl, Erste Group Bank AG - Chairman of the Management Board & CEO [43]

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The thing that you also asked about repricing, did I get it right?

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Andrea Vercellone, Exane BNP Paribas, Research Division - European Banks Analyst [44]

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Yes. In terms of indexation, i.e., for variable loans. I don't know if in Slovakia, you have mostly variable loans or it's mostly fixed by any indexation will be dragged in a very long time.

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Alexandra Habeler-Drabek, Erste Group Immorent AG - Member of Supervisory Board [45]

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On this -- on Slovakia, I can comment. So it's basically fixed. So consumer loans are all fixed and also mortgage loans are fixed, not for the lifetime, but over 3 to 5, up to 10 years. And this is the normal fixation period, which is on the market.

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Andreas Treichl, Erste Group Bank AG - Chairman of the Management Board & CEO [46]

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So if I may add, for Austria, there is -- on the one hand as we have been reporting in previous quarters and actually this turned out to be the right strategy, we have been doing much more fixed rate loans, by the way, also in the interest of the clients at the levels they could execute and they could take their loans in the recent years than in the past. So the Austrian market has traditionally been a market where the variable loans, also in the private sector we're dominating. However, of course, there is a significant stock of loans out there, which are variable. When it comes to adjusting for that the hurdles are -- and we know that very well from the Slovakian market are much, much higher in terms of kind of the cost for rearranging a loan for the client. So we -- wherever we were seeing opportunities, both for clients and banks, we were making use of part of reduction. However, in Slovakia, in the mortgage market, there you saw significant shift between the banks in the market because shifting from one bank to the other is a much less bureaucratic than in existing market. But overall, I think what you need to take with you is that the private market in Austria also has changed significantly in the last few years, and has been shifting much more to a fixed rate loan market than it has been historically.

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Operator [47]

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We will now take our next question from Robert Brzoza from PKO BP.

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Robert Brzoza, Dom Maklerski PKO BP, Research Division - Analyst [48]

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I have one quick question regarding the performance of other administrative expenses. Because in the presentation, you noted that you had a lower level of marketing-related expenses. I'm just interested -- is it simply a different timing that maybe you have front-loaded the year with expenses? Or does it have any implications for the performance of operating costs going forward for the second half of the year? So that's my question.

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Andreas Treichl, Erste Group Bank AG - Chairman of the Management Board & CEO [49]

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No. I think we usually front-load the first quarter and the only one-off item in the second quarter is the Romanian, which is heavy. But basically, you can extrapolate the second quarter into third quarter and fourth quarter, exclude the EUR 150 million from Romania and that's it.

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Stefan Dörfler, Erste Group Bank AG - CFO & Member of Management Board [50]

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And I think when it comes to the cost because I think you were specifically referring to the administrative expenses. Andreas has been already in the Q1 call, mentioned the one specific event on the cost side, but it's I think not in the other, but in the normal admissive, it's around about EUR 9 million or EUR 10 million, what you said, I think, EUR 9 million, exactly that we simply put, in particular, for our 200-year anniversary on the marketing and event side, but that was already in Q1. So no additional costs on that side from what -- otherwise, I can only confirm what Andreas said.

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Operator [51]

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(Operator Instructions) We will now take our next question from Stefan Maxian from RCB.

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Stefan Maxian, Raiffeisen CENTROBANK AG, Research Division - MD & Chief Analyst [52]

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Just 2 or 3 questions remaining. One on Romania, just a clarification. So this EUR 150 million booking, that would be everything. So you would not expect actually another booking of that you reach this EUR 230 million in the second half of the year. Then as I understand, you did not yet book Romanian, the bank tax, if you just can give an update on that and on the amount that you would expect there? And on Serbia, you reported quite strong loan growth. Are you still looking there for M&A opportunities and especially, are you looking at Komercijalna there?

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Andreas Treichl, Erste Group Bank AG - Chairman of the Management Board & CEO [53]

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You're actually from the right bank to ask that question. Okay. On the EUR 150 million -- on the EUR 150 million, yes, that's what we expect. You can never be 100% certain, but the EUR 230 million were the maximum possible amount. And after us being able to calculate the out paid premium and all the damages around it, we came to that amount. So I can't give you 100% guarantee, but most likely, 99%, that's what it's going to be. The Romanian tax is going to be close to EUR 20 million and that we will book, I think in the fourth quarter. Yes, Serbia. To make you feel comfortable, we have no interest in buying Komercijalna bank after a thorough review.

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Operator [54]

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We will now take our next question from Riccardo Rovere from Mediobanca.

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Riccardo Rovere, Mediobanca - Banca di credito finanziario S.p.A., Research Division - Research Analyst [55]

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Just a quick -- the EUR 150 million in Romania, is that tax deductible with the usual Romanian corporate tax rate? Or does it goes straight to the P&L? This is the first question. And the second one -- sorry, yes.

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Stefan Dörfler, Erste Group Bank AG - CFO & Member of Management Board [56]

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No, most likely, we don't know yet for -- we don't know yet for sure. We are in the procedure, but as it looks right now, most likely not.

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Riccardo Rovere, Mediobanca - Banca di credito finanziario S.p.A., Research Division - Research Analyst [57]

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Will not be tax deductible?

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Stefan Dörfler, Erste Group Bank AG - CFO & Member of Management Board [58]

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Right. Right.

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Riccardo Rovere, Mediobanca - Banca di credito finanziario S.p.A., Research Division - Research Analyst [59]

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So basically, when I look at the second quarter numbers, the EUR 150 million is gross and net number is the same number, when I look at this -- the second quarter bottom line?

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Stefan Dörfler, Erste Group Bank AG - CFO & Member of Management Board [60]

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Si, si, si. Correct.

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Riccardo Rovere, Mediobanca - Banca di credito finanziario S.p.A., Research Division - Research Analyst [61]

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Okay. Perfect. Second question, I just wanted to have a call from you on competition. Eventually, margin erosion in Austria, but when I was looking at the data from the Oesterreichische National Bank and the situation didn't look that bad or let's say, when you look at the average lending rate and outstanding loans, the situation looks fairly manageable. Would you agree with that in general terms?

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Andreas Treichl, Erste Group Bank AG - Chairman of the Management Board & CEO [62]

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Yes, I think we also see -- I mean, Stefan you do that. He ran the business, so.

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Stefan Dörfler, Erste Group Bank AG - CFO & Member of Management Board [63]

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You're right, and we have to say that given the fact that we have been growing and not only growing in absolute terms, but also growing in market share all across the board, we were very, very satisfied with the level that we could keep up across the board because while there was some margin compression in some -- one or the other lend market deal on real estate, in particular, where we then didn't participate in that dimension, we have, in particular, in the SME, but also in most of the retail business, we are seeing reasonably stable margins, I would say, reasonable stable doesn't mean absolutely. But given the volume and market share growth, it was very positive. And so you have been reading the data rightly.

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Operator [64]

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We will now take our next question from Hadrien De Belle from KBW.

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Hadrien De Belle, Keefe, Bruyette & Woods Limited, Research Division - Analyst [65]

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Yes, just a quick follow-up question from my side on the net interest income. I could see that the other Austria division had another decline in the net interest income. When you say the second half should improve, is there an element of recovery in Austria -- Other Austria and -- and maybe elaborate on what's happening here? That's my question.

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Andreas Treichl, Erste Group Bank AG - Chairman of the Management Board & CEO [66]

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That is -- you're correct. I think you spotted it, and you should see overall an improvement, and some of that will also come from the Other Austria, and part of that is due to the fact that we booked loans in the second quarter, where you will see the first interest payment relatively heavily, actually, where you'll see the first interest payments in the third quarter.

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Hadrien De Belle, Keefe, Bruyette & Woods Limited, Research Division - Analyst [67]

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And just a follow-up here on the EUR 13 million one-offs or shift out of NII into trading. Is that a quarterly run rate or first half run rate?

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Stefan Dörfler, Erste Group Bank AG - CFO & Member of Management Board [68]

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Again, just you give me the opportunity again to say it was not a shift. So maybe I was not (inaudible) to explain you. If it was not a shift from A to B, not even mentioning anything kind of a reclassification, it was simply the fact that due to the representation of, in particular, trading book and also (inaudible) positions, you see certain results in the trading and in the fair value line that you would have seen before IFRS 9 in NII. This is not true for any kind of usual retail loan or corporate loan, but if you look up in the segment report, the results of the Capital Market segment, you see an extraordinary excellent result there. And this is -- we went deep into that because we expected, of course...

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Andreas Treichl, Erste Group Bank AG - Chairman of the Management Board & CEO [69]

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IFRS 16.

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Stefan Dörfler, Erste Group Bank AG - CFO & Member of Management Board [70]

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And that was the result of our analysis. So it's not a reclass, it's very important. And thanks, again, for the question.

It's not any kind of reclassification whatsoever. There was nothing in the course of ...

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Andreas Treichl, Erste Group Bank AG - Chairman of the Management Board & CEO [71]

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A change in accounting rules.

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Stefan Dörfler, Erste Group Bank AG - CFO & Member of Management Board [72]

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Yes. Okay. That's ...

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Hadrien De Belle, Keefe, Bruyette & Woods Limited, Research Division - Analyst [73]

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And this was one quarter?

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Stefan Dörfler, Erste Group Bank AG - CFO & Member of Management Board [74]

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What again?

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Hadrien De Belle, Keefe, Bruyette & Woods Limited, Research Division - Analyst [75]

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This was just one quarter?

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Stefan Dörfler, Erste Group Bank AG - CFO & Member of Management Board [76]

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This was just one quarter, yes, yes.

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Hadrien De Belle, Keefe, Bruyette & Woods Limited, Research Division - Analyst [77]

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And in the first quarter, was there any such a thing?

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Stefan Dörfler, Erste Group Bank AG - CFO & Member of Management Board [78]

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No, because there wasn't -- if you look at the interest rate development in the first quarter, interest rates in compared to the second quarter moves, in particular in Euroland, were relatively stable, less volatility. And that from that end, there was no changes there. So I think it's -- overall, when you look at the overall NII, it's a minor point, but of course, with regards to deviation to your expectation, it's actually...

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Andreas Treichl, Erste Group Bank AG - Chairman of the Management Board & CEO [79]

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Play the role.

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Stefan Dörfler, Erste Group Bank AG - CFO & Member of Management Board [80]

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Play the role.

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Operator [81]

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We now have a follow-up question from Robert Brzoza from PKO BP Securities.

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Robert Brzoza, Dom Maklerski PKO BP, Research Division - Analyst [82]

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Yes, right. I have one follow-up question on Romania. It's about the new pricing benchmark that went up for the loans, which are now being originated during the third Q. I'm wondering whether you have any estimates of a potential -- potentially positive impact of the higher pricing benchmark on your net interest income in Romania? And secondly, perhaps you can offer some explanation with regard to the volatility of this new pricing benchmark, because it's being set at over 2.60 for the third Q whereas quarter to date, the average made on the day liquidations, it sits at around 2.20. So maybe you have any potential explanation why is this so volatile, the pricing benchmark in Romania. Thanks.

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Stefan Dörfler, Erste Group Bank AG - CFO & Member of Management Board [83]

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So thanks very much for this question, because this gives me the opportunity to mention also to the other callers, a very important point. And that's the fact that we are very deeply involved, not only in other ECB working groups and the Swiss working group in that respect. In the whole benchmark regulation -- benchmark reform topic that most of you are very well aware of. This is, I think, due to the overall European Euroland and I'll come back to Romania in a second, a significant challenge administratively. And I think there will be quite some -- quite some need for proper implementation on the respective local lenders. We are working on that. As I mentioned, both from the market from the ALM from the controlling and from the accounting side. And we are -- we know that from various talks across the banking industry. We are very well ahead of most other countries -- most other banks when it comes to really taking into consideration all the measures. Now when it comes to the concrete Romanian situation, I have to ask others as I am not deeply into the details, what I know from the colleagues that there is with regard to our P&L and our overall results, there is no -- whatsoever major impact to be expected.

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Andreas Treichl, Erste Group Bank AG - Chairman of the Management Board & CEO [84]

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I think, we simply don't know it yet.

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Stefan Dörfler, Erste Group Bank AG - CFO & Member of Management Board [85]

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We don't know and we don't think it will ...

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Andreas Treichl, Erste Group Bank AG - Chairman of the Management Board & CEO [86]

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But it will not have a -- if it will have a positive effect, but it will be minor.

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Stefan Dörfler, Erste Group Bank AG - CFO & Member of Management Board [87]

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I think it's less -- even less a P&L topic, but much more market topic because there will be a lot of adjustments due to the benchmark regulation, both in the professional interbank market as well as in the client space. So that's what actually gives us more headache than any P&L impact.

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Andreas Treichl, Erste Group Bank AG - Chairman of the Management Board & CEO [88]

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Okay? If that helps you.

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Stefan Dörfler, Erste Group Bank AG - CFO & Member of Management Board [89]

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Yes, But on the very much details of the Romanian situation, I have to admit I'm not fully involved but we can find out, of course, what the local colleagues are doing.

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Operator [90]

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As there are no further questions in the queue, I'd like to hand the call back to your speakers for any additional or closing remarks.

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Andreas Treichl, Erste Group Bank AG - Chairman of the Management Board & CEO [91]

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Okay. Ladies and gentlemen, thanks very much for listening in, thanks for your interest in Erste Group. The announcement of the third quarter will be on the 30th of October, 9 a.m. Central European Time. Have a great August. All the best. It's wonderful to be in banking.

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Operator [92]

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Thank you. That will conclude today's conference call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.