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Edited Transcript of EBS.VA earnings conference call or presentation 30-Oct-19 8:00am GMT

Q3 2019 Erste Group Bank AG Earnings Call

London Nov 15, 2019 (Thomson StreetEvents) -- Edited Transcript of Erste Group Bank AG earnings conference call or presentation Wednesday, October 30, 2019 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Alexandra Habeler-Drabek

Erste Group Bank AG - Chief Risk Officer & Member of Management 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

* 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

* 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

* 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

* Samuel Magnum Goodacre

JP Morgan Chase & Co, Research Division - Executive Director and Head of Emerging Market Europe, Middle East and Africa (CEEMEA) Banks

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Presentation

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Operator [1]

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Good day, and welcome to the Erste Group Third Quarter for 2019 Results 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 very much, operator, and good morning, ladies and gentlemen. Welcome to this conference call.

At this stage, I would normally say that we are following our usual procedure, but today will be a little bit different. It is the last quarter that Andreas Treichl is hosting, and other than that, I think I would like to say thank you to him for his great contribution. It was a great experience to work with you over the years, and it was never boring, for sure. And it was always intellectually very rewarding. So with this, I would like to hand over to you. Andreas will introduce the other participants. Some of them you know already. And Bernd Spalt, obviously, he's a guy who's coming back to the conference call business. Andreas?

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

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Okay. Thanks very much. I will do the introduction. With me are Alexandra Habeler-Drabek, our Chief Risk Officer; Stefan Dörfler, our CFO; and Bernd Spalt, currently my deputy, who will take over as CEO as of January 1 next year. Since this is my 88th and last presentation of a quarter, I will just do the introduction and then hand over to my colleagues.

So if we start on Page 4. The third quarter net profit came in at EUR 491 million, that is 38% plus vis-à-vis the second quarter. On a 9-month basis, net profit has been stable vis-à-vis last year but of a much better quality as the increase in operating income was offset mainly through other one-off results that will not occur again we hope.

So if we go to Page 5, you see the basic margin picture is as expected. It's not as bad, actually, given that on a quarter-to-quarter basis, the margin is just down by 4 basis points, which also has to do with the extension of our balance sheet since we have more bank-to-bank business on the asset and liability side. And we still are basically keeping the principle of saying net interest income beats net interest margin. The operating result was very positive with 12% plus. As a result of that, the cost income ratio came down again to EUR 56.3 million. If we exclude the savings banks, so the cost income ratio that actually goes into shareholder return is now down to EUR 54 million. Cost of risk is nothing much to mention about. And return on equity, both on tangible and on also clean basis, are up to 14.3% and 16.1%, respectively.

If we look at the balance sheet, again, strong growth of net loans and even, again, slightly stronger growth on the deposit side. Again, a lot of retail deposits coming in at 0 interest rates. An issue for us, a great chance, our hope that over the next years, we can transform an ever-increasing part of those retail deposits into asset management products and thus by create higher fee income.

If you go to Page 7, key balance sheet data are actually all pretty positive. Loan-to-deposit ratio, very stable, so also is the loan to total assets. Ratio -- net loans up by nearly 6%. A slightly stronger increase in risk-weighted assets due to the fact that we had unusually strong growth in the corporate lending business. Nonperforming loan coverage is now up to 76.9%, and at the same time, the NPL ratio dropped for the first time in a very, very long time, below 3% to 2.7%. Capital ratio, CET1 ratio at 13.1% because profits for the quarter are not included. So including that and taking off the dividend would be at around 13.5%. Again, liquidity coverage and leverage ratio, all okay, nothing worth mentioning.

And with that, I hand over to Bernd.

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Bernhard Spalt, Erste Group Bank AG - Deputy CEO & Member of Management Board [4]

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Thank you very much, Andreas. Good morning, ladies and gentlemen, a warm welcome from my side. I'll take over from Page #9 with the macro picture of the region. What we see is a very healthy economic growth on the back of solid domestic demand and also full employment across the region. This, together with a very low interest rate environment, forms a very good base not only for loan growth but also for healthy asset quality and low-risk costs as we will see a little bit later. Public finances are in good shape. Most of the countries are fulfilling Maastricht criteria. Levels of indebtedness are low. And the current account balances are sustainable.

If we look into the year 2020, the picture will not change much. Growth rates will come down somewhat in the context of an overall cooling off of the economy, but the general picture will not change and will support our core business. If we go to the interest rate environment, one of our key topics. The picture is still dominated by a negative -- firmly negative interest rate environment in the eurozone. If we look at our CEE currencies, we see positive interest rates and positive yields still, with government bond yields under pressure all over the place.

So if we look into NII and the major constituents, which are volumes, which are supporting a growth of NII forward looking, which are margins in the core customer business, which are probably stable, it is, and which are also -- NII has also been determined by the investment portfolio and to be invested risks, which in the context of falling government bond yields all over the place will be under pressure forward looking.

Now on the currencies, if you look at Page #11, you see that our currencies are, as usual, very stable despite of the overall context, which I think is a very positive message. And then if we go to the micro picture, market shares in our region, they are stable, both on the asset as well as on the liability side, with one specificity, which is corporate loan book, where we're gaining market share all over the region, which I think is very positive. Yes, it comes at a relatively higher risk rate, but it's also coming very much from the SME business, which brings along also fee income. This is in the context of a very strong discipline on the underwriting standards. We do understand that we are at a relatively late stage of the economic cycle. And in this context, we pay particular interest into not softening lending standards at that stage.

If we go to the performing loan stock, we see a healthy growth rate all over the countries, particularly in other Austria, in Hungary and in Serbia. We see solid loan growth rate, which will probably slow down a little next year in the context of the overall economy. And performing versus nonperforming mix is getting better every quarter. When it comes to the liability side, we still see strong deposit inflow despite our not paying anything at current accounts in most of the markets. So we still see a lot of liquidity flowing in -- from especially retail customers, and we do not see this trend changing over the next couple of quarters. If we look at NII and net interest margin, Andreas has already mentioned it, NII, net interest margin. We see that we're now at net interest margin of 2.42%. Overall, we see healthy volume growth.

We are now on Page #16. We see very healthy volume growth supporting our NII and margins in the core customer business being under pressure, specifically in Slovakia on the retail side.

On Page #17, we look into the operating income totally apart from NII, which I just mentioned, net fee income has performed very strongly, supported by the positive macro environment. We stick to our indication that we will reach something like EUR 2 billion net fee income for the full year of 2019, and we expect that also to remain healthy forward looking.

On Page #18, operating expenses. I think we have seen very positive quarter and expect some seasonality for the last quarter to come, but overall, cost development with EUR 1.15 billion for the last quarter has been very disciplined and positive. And we stick to our confidence that we will remain below EUR 4.3 billion expenses for the full year 2019.

Turning to Page #19. Cost income ratio accordingly improved to 58.6% year-to-date. And overall, sort of we stick to what we have said that we will achieve for this year in terms of our operating income growing faster than our operating expenses.

With that, I would like to hand over to Alexandra on the risk side.

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Alexandra Habeler-Drabek, Erste Group Bank AG - Chief Risk Officer & Member of Management Board [5]

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Thank you, Bernd, and good morning. For risk, again, a very good quarter. Year-to-date, we stand at very benign 3 basis points risk cost on balance. When we include off balance, where we saw, especially in the first half of the year, very large releases, it is up to roughly 43 million releases in absolute terms as of year-to-date. So we confirm the outlook for the end of the year of maximum in banks going to the risk cost.

Driver of the positive development is still as in the previous quarter releases in corporates, but which are slowing down and we expect to level out. The NPL ratio, as already mentioned, is further down to 2.7%, which, again, as in the previous quarters, is due to 2 effects: one is the loan growth and the second is also the reduction of the NPL volume in absolute terms. NPL coverage, again, up to almost 77%, extremely high level. This increase also driven by the reduction in the (inaudible).

And with this, I hand over to Stefan Dörfler.

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

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Good morning, everybody. I'm jumping to Page 26 and add a few comments regarding balance sheet development. On that slide, you see, as usual, the development in the loan deposit ratio, nothing spectacular to say about it, very stable. And also in terms of the mix, it's a stable development. The difference between loan growth and deposit growth has been coming down a little bit. This is something we also tried to push going forward to have a stable development on the loan deposit ratio, overall.

Page 27 can pretty much be summarized as a picture of healthy growth. We have been growing all across the region. What is also commented here is the fact that corporate business growth has been significantly stronger in recent quarters than the retail growth, which also results in a RWA development that is higher than you usually see from Erste. We are working on balancing this mix sustainably going forward. What is worth to mention, however, is that nonperforming loans, as already mentioned, have been coming down significantly again, both in percentage terms and in absolute volume.

On Page 26, a few words about our liquidity position -- Page 28, sorry. It's an excellent quarter again with regards to our liquidity position. LCR has been even going further up. Liquidity buffers are, I would say, prepared for any regulatory going live in Sfr equally, so has developed well. So we are very confident that we can enter into the new regulatory regimes in the status that we hold at the moment.

I would like to skip the following 2 pages in order to draw your attention to our long-term funding situation. And here, I think it's worth to mention that the year 2019 has been a particularly active year with regards to our funding activities, a very successful year. Of course, as you all know, this also comes at a little bit of a flip side of the coin of depressed net interest margin on the asset side. However, we are very proud that we have -- in all cases, that's true for AT1 transaction, nonpreferred senior, the senior transaction, and the 2 covered bonds. We have been outperforming all peers in both categories in the sense of quality of the book as well as of achieved spreads in the execution of the deals.

In the third quarter, in particular, we have been executing a 10-year mortgage covered bond, and this was the first 10-year covered bond ever that has been issued in a negative yield in our region. Nothing new to say about the situation about MREL and MPE resolution strategy. What I can inform you about is that it has been made quite good progress in preparing our local MREL funding activities. We will be more outspoken in this respect, as always, communicated in the near future once we have the final guidelines from the regulators on the table.

And last, but not at all least, on Page 33. I am informing you about the latest update on the capital front. As you know, we have always been guiding for end of year 13.5%, 14% core equity Tier 1 fully loaded ratio. As already mentioned earlier, as we speak, end of Q3 2019, we're talking about 13.5% if we include, on a pro forma basis, the Q3 profits, and we are showing the official 13.1% in today's report. So there is a very good confidence that we will be quite significantly north of the 13.5% by the end of the year. However, we won't be more specific about that today.

And with that, I hand over, I think, back to Andreas for the outlook. Thank you very much.

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Andreas Treichl, Erste Group Bank AG - Chairman of the Management Board & CEO [7]

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Thank you very much, Stefan. The outlook, there is not much left for me to say than, of course, we do confirm our outlook for 2019. And I want to keep anything about 2020 for our Capital Markets Day, which will take place in Vienna at the end of November.

So let me just try to finish that call on a positive note. As you all know, one of the problems of European banking has been and will be in the future, amongst many other things, to attract high talent into the financial services industry. And during the last 10 years, it has been pretty difficult for banks in Europe to appear as a top employer. You'll find very few banks being one of the top 100 attractive employers in their respective countries. And that is particularly true for IT graduates. Now I'd just like you to know that we have just been announced as one of the top 10 employers overall in our country. And for the first time in our history, we've also been announced as one of the top 10 employers for IT graduates. So that gives us a hope that also during the next years, we'll be able to attract really good people into Erste Group.

And with that, we are 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 Andrea Vercellone from Exane.

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Andrea Vercellone, Exane BNP Paribas, Research Division - European Banks Analyst [2]

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3 questions or 3 areas. The first one is net interest income, specifically Romania and Austria, if we look at central bank data, we see quite a lot of pressure in both countries, asset-driven in Austria, liability-driven in Romania. But if I look at Erste, the trends don't mirror that. I mean it was quite a good performance in the quarter. So can you give us a bit of color as to why that could be?

Also I was curious to know if there's a positive one-off in Erste Bank Oesterreich. You mentioned something accrual of some saving products, but I don't know if that translates into a positive one-off or not in the quarter. And also relative to Austria, if you can make some comments on how sustainable is the current level of NII in the segment other Austria. Obviously, it's volatile due to repos in money market transactions, but maybe you have some view on Q4.

Quick one on fee income. Have you got anything to flag on new rules on SEPA payments? Is there a drag to be expected or the Q3 numbers already reflect that in all of the countries? And finally, on provisions. You had a lot of write-backs -- well a lot. You have some write-backs on off-balance sheet nonperforming loans this year and in previous years. Can you give us an idea of the stock of loans -- stock of nonperforming loans, which have already been fully written off as of now?

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

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Yes. Let me start with the NII question. Other Austria is very simple. Yes, it's simply volatile. It's a reverse repo volume quarter-on-quarter. So nothing special to say there. Austria is much more interesting, Austrian and EBOe. I think what is important here to mention, if you look at the figures and the quarterly and also year-on-year development on Page 16, what we are very happy about is that we can really say that the run rate of EUR 160 million, give or take, EUR 160 million per quarter is, I would say, the base case. There are always specialties of quarter-to-quarter number of days and interest rate calculation. But EUR 160 million plus is what we should expect there on the NII front given development on volumes.

On Romanian side, as also commented on that particular slide, it's more a liability, again, meaning that the interest rate development on Q3 helped a little bit. However, it's not a development where I would say that we can expect domestic directional changes there. So I think the level that you see here has been relatively stable, and that's also what we expect going forward.

Regarding SEPA, I can't be quite specific. Yes, the regulation, which kicks in January 1, 2020, will have a quite significant impact on the fee income. Of course, this is not exclusive to Erste. This is an overall challenge for all the banks dealing in this area. And we have made our calculations across the countries and expect a drop of EUR 25 million to EUR 30 million in fee income year-on-year 2019 to 2020 out of this position.

And I think, Alexandra, you will take the provision.

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Alexandra Habeler-Drabek, Erste Group Bank AG - Chief Risk Officer & Member of Management Board [4]

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Yes. Regarding on recoveries, from previously written-off amounts, you're right that they are significant, and they are -- they still are significant, above EUR 100 million this year. And the overall amount of already written off is roughly EUR 1.5 billion. So we expect that these recoveries from the written-off amount will still continue a little bit also in the year to come but on a very considerably lower level as this year and the previous years.

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Operator [5]

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We will now take our next question from Anna Marshall from Goldman Sachs.

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Anna V. Marshall, Goldman Sachs Group Inc., Research Division - Equity Analyst [6]

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Couple of questions for me, please. Firstly, on the costs, could you please explain in more detail the drivers of the cost savings in admin costs, especially in Austria, and how much scope there is for this to be sustainable?

And my second question is on capital and capital distribution. So firstly, I understand that you said that you expect an increase in Q4, but just wanted to understand the drivers, and if there is going to be any change in terms of risk-weighted asset growth coming from the corporate segment.

And the second part of that question is regarding your view on dividends versus buybacks. I understand this is topic for only in case there is a higher than 14% CET1 ratio, but just conceptually, wanted to understand your view in terms of preferences, dividends versus buybacks, and if you would expect your supervisor to have any issues with the buybacks.

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Stefan Dörfler, Erste Group Bank AG - CFO & Member of Management Board [7]

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Big question. Thank you very much. As we commented already in the presentation, there is quite some seasonality in the cost booking for reasons that you are aware of. So I think it's important that we not only speak to the guidance that we have been giving after the half year results, but we are more firmly now forecasting total year costs below EUR 4.3 billion, which I think is on a year-on-year basis, growth limited somewhere, if I'm not mistaken, around about 3% or slightly below, which I think is given the enormous wage inflation that we had to swallow across the CEE region, quite good results.

However, of course, I also want to point out, and this is clear, that we will be working on efficiency measures further on in Austria. I think we have discussed this in various calls. However, I would not be -- it would not be correct to say that the Q3 results, in particular, are a result of that. So please, let's stick to the total year guidance, and further on, we will work on that on the Austrian cost side.

And I think, Andreas, you will comment on the dividend outlook.

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

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Yes. I think as we mentioned already on the last call, that, principally, we would prefer if the situation arises to pay higher dividends, but we know that there are tax incentives for investors in certain jurisdictions on share buybacks. So we're considering both of those issues. Whatever is better for the investors, we will do. But given the fact that this is definitely not an issue for 2019, we still have some time to decide on that.

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Operator [9]

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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 [10]

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Yes, 2 or 3, if I may. The first one is on the comment you made on NIM, where you stated the NIM is down due to the expanded volumes. Now if I understand it correctly, this is just, let's say, a mechanical way you calculated the NIM. If a loan book or some loan are originated toward the end of the quarter, by definition, the contribution to NII is relatively small, but the denominator goes up. Is this exactly what you mean? And if that is the case, that means that the NII is going to have an impact, a positive impact from the carryover effect from your volumes, maybe written originated toward the end of the quarter. So maybe NIM is not exactly down. It's just the way you calculate it. Just wanted to understand if I get it correctly.

The second question I have is, again, on MREL. What is the real impact for you to benefit, sorry, to have a multiple point of entry strategy? Do you expect it to be -- to have to issue much less senior nonpreferred and to be compliant with the subordination requirement under BRRD2? And connected to that, somehow connected to that, do you still expect to issue some AT1s to fill the 1.5% bucket in AT1 instruments?

And then the very final question I have is on asset quality. Also based on the comments you've just made on reversals from loans already totally written off and considering the NPLs are down, the coverage ratio is up. Do you still see decent -- actually, very decent GDP growth in the areas where you operate? You have -- it is -- this is the seventh quarter where you book basically 0 credit losses for the results. Is there a reason why that should change in the foreseeable future? So credit losses to remain noncore to a number that is close to 0.

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

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Okay. Let me take the first question on the methodology or what the NIM represents. Your statement is absolutely correct. Yes, this is an expression of the mechanical calculation. If I would want to manage expectations forward looking, I would not sort of assume that NIM will go up, right? On the customer loan side, as I've said, we see stable margins at best. And if we look at the reinvestment of our investment portfolio, we will see pressure here very clearly. So NIM will not go up, certainly not.

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Stefan Dörfler, Erste Group Bank AG - CFO & Member of Management Board [12]

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Yes. MPE, SPE, I think the way I understood your question is where is, so to say, the benefit between MPE and SPE -- let's be very honest, if we calculate on a overall group level, the required efforts in terms of funding activities and so on, there is practically little difference. That's a fact. So you're pointing to that correctly. There is also no disadvantage connected to it. So at the end of the day, the funding volume, while slightly differently distributed, results into pretty similar total volumes and probably all the costs. I mean we have this specific in particular, as you know, that in one country, Romania, there is not yet a final decision about whether they would accept the NPE regime or not. There's a discussion between Romania and the GST about that, and we do not yet know about the final outcome. So that's all to mention on that respect. And I think AQR -- or the asset quality was the third question. Yes.

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Alexandra Habeler-Drabek, Erste Group Bank AG - Chief Risk Officer & Member of Management Board [13]

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On the asset quality, as I mentioned before the previous question, a major contributor of the 0 to even positive risk costs, we added recoveries on the written-off portfolio, and this will come to an end only. So I'm still -- so I would not exclude to see an eighth quarter, which looks extremely good on risk costs. I'm still also positive for next year, but more -- it will be higher than this year. So also economy around also from Germany, automotive industry, we see some -- we expect some impacts. But main driver of the change, the leveling out of the recovery is from written-off exposure.

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Operator [14]

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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 [15]

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Johannes Thormann, HSBC. Just a follow-up question on the risk situation. At which time do you really expect that the cost of risk will go above the 10 bps you're currently having as a guidance? Which would be the economic conditions where you would think they could go back to the normalized level, what previously was guided of 30 bps or more? And in this context also how low can NPLs go? When do you expect a reversal of this?

And secondly, sorry for spoiling, but could you update us on your current thinking of mBank potential bid for this?

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Alexandra Habeler-Drabek, Erste Group Bank AG - Chief Risk Officer & Member of Management Board [16]

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I'll start with the risk costs. So as you mentioned this normalized level of 35 to 40, I'm more positive on this for next year's date. To be more precise on -- in which quarter and if it is 10 basis points or 15, this is -- I cannot comment on this, but I would see next year more positive than the mentioned 30 bps.

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

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On mBank, I think we have been talking about Poland as a natural market for us if we want to be the strongest bank, and CEE is unchanged. So yes, Poland is a very interesting market. mBank sort of is a very interesting target, generally. So do we want to buy it? I don't know. Do we want to look at it? Most certainly. So I think it's early days. So we will have a look at it. You do know that we're not yet present in Poland. So it needs to make overall economic sense strategically, definitely, is a very interesting target.

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Operator [18]

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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 [19]

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Pleased to see that you've got to the EUR 500 million -- you've passed the EUR 500 million mark in quarterly fee income. And can you sort of just give us a little bit of color of where that's come from, and if you think that, that can continue to grow? Or have you made some sort of one-off changes, and that's a level that you think you can keep? I mean I don't want to preempt a few weeks' time, but clearly, that's been a positive across 2019. So that was the first question.

And secondly, you've made a fairly clear statement in terms of saying NIM will definitely not go up. Presumably, that means NIM will go down a little bit. And I wonder what you -- how you feel about the impact of the reinvestment yield. I mean we've lived for -- we lived for a number of years when the reinvestment yield was a big drag on your NII. I mean is this the same thing all over again? Or do you think this time, it's more manageable? Have you put things in place to mitigate that, just to give us an idea? Because, clearly, you said core customer margins are stable, but you had quite a negative impact over a period of time from that yield, and the structure of the balance sheet isn't all that different. So perhaps you could just give us a little bit of context on that. That would be also helpful.

And I guess sort of thirdly, any view on the situation in Romania in terms of difficult with political changes and so on? But you've been growing quite a bit in that market, and if you take a negative view, then things could get quite tough. But there's a potential for perhaps a more positive outcome. And I just wondered how you feel about the opportunity in that market now.

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

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So thanks for the question on net commission income. I can be very straightforward and clear here. We have been growing payment fees very much. Excellent development there, both based on volume as well as on price adjustments. And we have been -- compared especially to Q1 and also partly Q2. We have been on a much better run rate on the asset management side. Recently, as you know, the basis for the year 2019 due to the drop of markets in Q4 '18 was not so good. We have been making up for that in Q3. Can we expect a run rate of north of EUR 500 million every quarter? I wouldn't promise that, but it's, of course, the medium-term ambition. As I mentioned before, in answering the question of the other colleague regarding SEPA, you have to take it into consideration, however, our clear plan is for 2020. This I can already say today, to be significantly north of EUR 2 billion. That's the goal. However, again, one or the other quarter can be different from that.

So on NIM, I would not exactly, one-to-one, draw the conclusion that not going up means necessarily going down. Obviously, the one thing that we know today, unless a significant change in the long-term bond yields happens shortly, there is a drag on our investment book income from government bonds and higher liquid assets, that's a given. We've always been communicating that for the years 2020 and 2021, you can calculate with around about EUR 40 million, EUR 45 million less income on an annual basis from that position. And this has to be made up first elsewhere.

On the NIM overall, I'm always a little bit more cautious since this is, of course, a function of both liability and the asset side, and things can change pretty quickly here. So I would stick to exactly the wording that we've been giving also during today's call, don't expect an increase there. However, of course, we will be working hard on keeping it as stable as positive. Thank you.

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

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Okay. With regard to Romania, very shortly, I think, pretty clear situation. As regards our bank in Romania, the situation is definitely improving. As with regards to the overall financial system, the -- things are improving. Central bank is doing, in our view, a good job. The overall economic situation is also good in Romania, more and more investments also in new technologies. So from that perspective, it's fine. The problem with Romania is that at present and for the last years, in terms of the performance of the political elite and its impact on the development of the country, it's definitely the worst. We have strange situations in some of our countries but with absolutely positive outcomes. We have a very difficult situation in Romania with a clearly negative impact on the business environment in the country. So all we can do here for the moment is to hope that, that would change very soon.

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Operator [22]

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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 [23]

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A couple of questions, please. Firstly on costs. And it seems that the IT costs have been falling quite significantly in the last few quarters. Do you think it's sustainable, the savings you achieved here? And is this driven by the data integration projects you carried out in the last couple of years?

And the second is a broader question. You achieved quite significant positive [jaws] in the third quarter as well and the last few quarters. I understand that you will be more specific at the CMD, but what do you think you would need in the coming periods to keep the positive jaws ?

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Stefan Dörfler, Erste Group Bank AG - CFO & Member of Management Board [24]

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Okay. On the OpEx, yes, it's true. In Q3, we saw quite a slight -- seasonal drop on the IT push. That's very much due to booking on certain projects. Much more important is the second part of your question, how sustainable is that? And to what extent can we translate the achievement of the data projects and so on into future, let me say, containment of costs? I think we have to see 2 sides of the story here. On the one hand and you're well aware of that, that we will give an update at the Capital Markets Day. We are heavily and also in the long-term outlook investing into our digital future. That will, to a significant part, also be connected to IT investment, not only -- of course, there is also a lot of PEREX connected to that, i.e., attracting and hiring best talent. But of course, there will be quite some IT costs related to that. Overall, the mix in the IT cost will be different going forward. It will be less of, hopefully, also long term, it's not only depending on us, less of a regulatory management and more an investment into the future. We see that already for 2019, and this is the goal also going forward into the years to come. Can I give a percentage exactly today? No, I cannot.

Regarding the positive [jaws], yes, it's going to be more difficult; this is for sure. And this is not so much a question on the cost. Yes, we will have to manage the wage inflation and so on and so forth. You're well aware of those developments in certain countries, but it's mainly a question on the top line development. We have, in our budgeting dialogue with all the countries, seen that we can very likely maintain a positive outlook here, but it's going to be much tighter; that's for sure. And we will give a further update later this month or the next month on the Capital Markets Day. It's a challenge, but we are positive to outperform the market significantly in that respect.

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Gabor Zoltan Kemeny, Autonomous Research LLP - Research Analyst [25]

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That's useful. And can you remind us what's your approximate IT budget?

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Stefan Dörfler, Erste Group Bank AG - CFO & Member of Management Board [26]

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Always talk about the EUR 1 million, give or take? Really -- actually, EUR 1 billion, give or take. EUR 3 billion would be nice. It would also not be nice because then we could not afford too much. No, it is around about EUR 1 billion. Much more important to me, whether it's EUR 1,050 million or EUR 985 million, is the quality and the details in it, and that's very positively biased into future investments.

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Operator [27]

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We will now take a follow-up question from Riccardo Rovere from Mediobanca.

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Riccardo Rovere, Mediobanca - Banca di credito finanziario S.p.A., Research Division - Research Analyst [28]

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The first one is actually both around cost of funding. You have roughly EUR 3 billion of medium-, long-term funding expiring in '20, '21 and '22. So that's about -- it's about EUR 10 billion over the next 3 years. Everyone seems to be, let's say, concerned about asset yield. But can you give us a little bit of color on what is the benefit on the funding side from the current level of rates? Because I would imagine that if you had to issue today your covered bond or senior unsecured, probably the coupon you would pay would be 0 or very close to 0. And I wonder what would be the difference between the expiring cost of medium-, long-term funding coming to expiry and the brand new one that you might eventually issue at current conditions. This is the first question.

And the second question I have is on rates in Czech Republic. Out of the 100 maybe basis points increase in rates and policy rates executed by the local central bank over the past few years, could you be in a position to tell us what part of that has been transferred onto the cost of deposits since over the past couple of years?

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Stefan Dörfler, Erste Group Bank AG - CFO & Member of Management Board [29]

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Okay. I'm very thankful for the funding question because that's a joy to talk about that. I think you've seen all our transactions this year. On Page 31 is the maturity profile that you have been mentioning. We feel extremely comfortable with the structure of our maturity profile as well as with the mix. And we are ongoingly fine-tuning also the mix of our asset classes. You're well aware of the fact that there's always changes with regards to the nonpreferred senior versus Tier 2 stuff and so on and so forth. So let's simply say it has been a fantastic year on the funding side. We expect, given the quality of our curve in all the asset classes and in our -- the profile of the name in the market that we will benefit further. Can I be specific in terms of basis points? I cannot. That's simply impossible because the markets are fluctuating there. And let's say, on a nonpreferred senior transactions, 15, 20 basis points volatility on a weekly basis are quite normal.

I think that the Czech koruna question was more on the deposit side. Well, I think in the broad market, if you know the market, I assume, very well, there has been very little to say the least being passed on to the market. On the corporate side, there has been some reaction in the cycle of increasing key rates, I would say, 10, 15, 20 basis points still around about that. But since the mix is strongly biased to the retail side with regard to our deposits in Czech Republic, I would say it has been not material. So very positive, of course, tailwind from that front.

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Riccardo Rovere, Mediobanca - Banca di credito finanziario S.p.A., Research Division - Research Analyst [30]

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Okay. And if I may get 1 second back to the funding question. When you mentioned earlier that you expect, if I got it correctly, EUR 45 million target to NII -- on NII from the investment yield in government bonds or fixed income securities, in general, is it fair to assume that -- and I don't know you don't want to put a number or this is what I understand, but is it fair to assume that a part of that could be compensated by the lower cost of prime new issuances on the medium- to long-term funding without putting numbers, okay?

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Stefan Dörfler, Erste Group Bank AG - CFO & Member of Management Board [31]

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I think that's fair. And I just did a quick calculation. If you look at the volume that you need to fund and look at the volume that we are doing in the wholesale market, and this pretty much also translates to what we do in retail, something around about 1/4 to 1/3 of the cost that we have on -- so that the burden that we have on the investment book can be made up by excellent execution on the funding side. I think that's better.

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Operator [32]

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(Operator Instructions) 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 [33]

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I have 2 questions left. The first one is on risk-weighted assets. I wonder if you could perhaps give us an update on any remaining RW optimization initiatives or any expected regulatory or parameter changes, either on credit or operational risk RWAs that you have in the pipeline? That would be helpful.

And secondly, on George, you haven't talked about it today. I think a few quarters ago, you discussed the idea that perhaps you could enter new markets with George, and that would also be a preferred use for your excess capital. I wonder if your thinking has changed at all on that point? Or if there's anything you could tell us on that front?

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Alexandra Habeler-Drabek, Erste Group Bank AG - Chief Risk Officer & Member of Management Board [34]

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So I start with the RWA. We have currently out for final approval and implementation to 2 model changes, where we overall expect a release. When we exactly will get, especially of one model, which would have an impact on the corporate business, on the specialized lending? I cannot touch. We are waiting for it. But overall, also we expect a positive impact. What is much more important on development on RWA, what already has been mentioned is that we will concentrate and will put a big focus on the right mix of the segments and of the business. So from the regulatory side, I'm not expecting any major release in the years coming forward on the modeling side.

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Bernhard Spalt, Erste Group Bank AG - Deputy CEO & Member of Management Board [35]

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Okay. On George, maybe you do know that we are still in the rollup process of George. We very much advanced already. So we have covered the markets of Austria, Czech Republic, Slovakia and are now rolling out in Romania. The rest of the markets to come are in the next year. So this is the sequential logic of our George. We're doing business. After that, a third market could potentially come into place, also in the context of upcoming potential M&A opportunity. We have now -- we will cross this year a number of 5 million customers on George.

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Operator [36]

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We will now take our next question from Sam Goodacre from JPMorgan.

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Samuel Magnum Goodacre, JP Morgan Chase & Co, Research Division - Executive Director and Head of Emerging Market Europe, Middle East and Africa (CEEMEA) Banks [37]

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Just 2 questions for me. And the first one, Alexandra, is a follow-up on the RWA point just raised. Could you remind us of the parameter change which led to the significant reduction in operational risk over the course of this year? And is that indeed all done? You said you don't expect any further regulatory releases. But op risk still does seem quite high as a charge against capital.

And the second one is a follow-up on the mBank transaction and what is going on in Poland? And specifically, in your view, what would make that asset attractive in light of previous deals we've seen where, for example, the Swiss franc mortgage book has been carved out? Or to your knowledge, would it be possible in this situation to have the parent provide guarantees against that book? Obviously, just asking because it does have a hefty Swiss franc mortgage exposure. And obviously, the debate at the moment seems to have deteriorated relative to Swiss franc mortgages.

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Alexandra Habeler-Drabek, Erste Group Bank AG - Chief Risk Officer & Member of Management Board [38]

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So let me start with op risk. So overall, op risk did not decrease quarter-on-quarter. What you may refer to is on the year-to-year comparison, where through this rolling window approaching the office model, some old losses have been simply eliminated. So this is the normal procedure. But there are no parameter changes or any model change.

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

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Okay. On Poland and on mBank, I think if you look at it from our strategic point of view, we say that we want to be the largest bank in CEE -- in the eastern part of the European Union. Poland is a very important market in this context. Poland is a market which is a growing market. Poland is a market which has a currency which is not euro, thereby, it's a sort of positive interest rate environment, and we expect this not to change forward looking. So I think all in all, this makes it generally an interesting opportunity. Yes, we're not in this country. So no, there will be no in-country synergies to reap. But generally, it's providing growth in a noneuro context in the very heart of our strategic location.

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Samuel Magnum Goodacre, JP Morgan Chase & Co, Research Division - Executive Director and Head of Emerging Market Europe, Middle East and Africa (CEEMEA) Banks [40]

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And then perhaps if you wouldn't mind opining on the factor there is very large Swiss franc mortgage exposure, which presumably wouldn't be attractive for you to acquire.

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

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Two answers to that. First, we have quite a bit of an experience in dealing with foreign exchange loan books at that. And secondly, the probability that the Swiss franc loan portfolio will not be part of the transaction but will be economically carved out is relatively higher, I would guess. But no, we would not be buying a bank because of the Swiss franc portfolio.

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Operator [42]

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(Operator Instructions) As there are no further questions at this time, I would like to turn the call back to Mr. Andreas Treichl for any additional or closing remarks.

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

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Well, thank you very much. Thank you very much for listening in. Thanks very much for your question and your interest in Erste Group. The next date will be the Capital Markets Day in Vienna on November 21. And the date after that will be the presentation of our 2019 results, which will take place on the 28th of February 2020. I hope it will be a sunny day because I will be skiing on that day. Have a great day, and enjoy whatever you do after listening into us. Thank you.

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Operator [44]

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