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Edited Transcript of KOMB.PR earnings conference call or presentation 1-Aug-19 12:00pm GMT

Half Year 2019 Komercni Banka as Earnings Call

Prague 1 Aug 12, 2019 (Thomson StreetEvents) -- Edited Transcript of Komercni Banka as earnings conference call or presentation Thursday, August 1, 2019 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Didier Luc Marie Dominique Colin

Komercní banka, a.s. - Senior Executive Director, Chief Risk Officer & Member of the Board of Directors

* Jan Juchelka

Komercní banka, a.s. - Chairman of the Board & CEO

* Jirí Šperl

Komercní banka, a.s. - Executive Director of Strategy & Finance

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Conference Call Participants

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* Gabor Zoltan Kemeny

Autonomous Research LLP - Research Analyst

* Michal Konarski

Dom Maklerski mBanku S.A., Research Division - Analyst

* Samuel Magnum Goodacre

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

* Simon Nellis

Citigroup Inc, Research Division - MD and Director

* 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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Hello and welcome to Komercní banka Second Quarter 2019 Financial Results Call. My name is Mahan, and I'll be your coordinator for today's event. (Operator Instructions)

I am now handing you over to your host, Jan Juchelka, to begin today's conference. Thank you.

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Jan Juchelka, Komercní banka, a.s. - Chairman of the Board & CEO [2]

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Hello, good afternoon, everybody. It's my pleasure to have you on the line and proudly present with my colleagues from the management team the second quarter and first half results of Komercní banka.

I will jump directly to the presentation, which is, I guess, in front of you. And let me start with the macroeconomic environment in frame if I may, because the country has achieved another very strong quarter with continuous growth of GDP. In the first quarter, we reported 2.8% growth year-over-year and plus 0.6% on a quarter-over-quarter basis. The unemployment remains extremely low, which is pushing back on nominal wages, which was up on year-over-year in the first quarter by 7.4%. House prices growth decelerated to territory of 10.5% in first quarter 2019, and the inflation is above the target with 2%. So in June, it was 2.7% driven mainly by prices of food.

[National bank estimators], as you may remember, increased its rate in May by another 25%. And we are remaining at this level. And the market rates are (inaudible) accordingly. So the 3 months PRIBOR moves to by minus -- plus/minus 2.23% in the rest of second quarter, whereas the longer end, the 10-years IRS declined to 1.55% which is down by 12 bps on a year-to-date basis.

In that still favorable macroeconomic context, let me turn it back to Page #4, and give you the highlights of 30 June of 2019 for Komercní banka. We have continued our super strong growth of clients using our mobile banking application, and we grew by almost 200,000 users on a year-over-year basis to a total of 700,000, which makes us highly probably #1 bank in -- on the Czech market in mobile banking.

Our clients were extremely, let's say grateful for the introduction of the ability or the possibility to tokenize the cards, and we have raised 112,000 cards tokenized in one of the available applications, which in our case, is the full scope through our palette of solutions with Apple, with Google, with Fitbit and with Garmin. Majority of those 112% (sic) [112,000] is with Apple Pay.

We are trying to make our proposition to the clients attractive, and we are achieving that effect also by combining our expertise with partners. Here you see the second line, the result of our partnership with Warner Bros. We have issued limited edition of cards featuring the design of the popular The Big Bang Theory television series, which was sold out extremely -- extremely fast.

Going back to our half financial results, which is a hard fact. The total volume of KB Group's lending expanded by 3.2% year-on-year basis, to the level of close to CZK 650 billion. Our overall volume of standard client deposits within KB Group expanded by 4% to the levels of CZK 840 billion. Hence, let's say, driven mainly by the solid growth of client assets in mutual funds, which grew by 9.4% and the pension funds savings by 8.2%. Revenues for the first half of the year improved by 5%, while the recurring operating costs were up by just 2.9%.

The quality of the loan portfolio remained very strong and in excellent condition, and KB was once again able to release additional provisions for credit losses. So we are achieving that for the first half of the year CZK 0.4 billion in total. That total translated into bottom line, brings the consolidated net profit of over 7.2% (sic) [CZK 7.2 billion]

After this opening slide, let me move to Slide #5, where you can see what we have done in the territory in the disciplines related to our clients and the front-end solutions. We have displayed to the market our real estate portal, the main cincink, which is one of our [release], stemming from so-called internal start-up call. It's our subsidiary stake outside the bank and offering the assistance with residential property sales, purchase and rentals, including intermediation, including legal services, including valuation and financing. And down the road, extending the service offer to additional -- by additional services.

KB remains investing in API solutions, which we are proposing actually to third parties and third-party developers. We connected the existing Fakturoid solution, which is our external partner already appearing in our mobile -- or sorry, the Internet banking solution to MojeBanka business platform. So positioning it exactly what they should appear and assisting entrepreneurs and small businesses with the invoicing service.

KB has also launched a very, I would say, simple solution for those companys' owners who think about the future strategic development, and provided them with KB M&A Point, which is another user-friendly M&A valuation to display to our website where in exchange for basic data of the company et al, it can estimate the value of its main asset. We are gaining the opportunity to prepare tailor-made advisory feature -- tailor-made financing pitch for them.

Moving from Page #5 to Page #6. Let me say, in -- briefly, that we continue strongly our engagement towards the society being the good corporate citizen of this country. And combining the individual approach of our employees to wholly give 1 free day dedicated to volunteering activities, with our continuous financial support to the society, to people who need help.

We are orienting our -- we are using our energy to those territories where we think the state is not, let's say, focusing this priority, which is mainly the palliative care for old people and for younger people as well. We continue our cooperation with the culture we've seen of Czech Republic and besides or in parallel with our cooperation with PKF Prague Philharmonia, we also support one of the most popular music festival -- modern music festivals in the country, named Rock for People. And on top of it, we continue our strategic partnership with National Gallery, Prague and with Prague Zoo.

Already 207 branches of our bank are equipped by a solution named eScribe, where the people and the clients with hearing -- where we are supporting the clients hearing impaired with a solution where the communication with the relationship manager is provided by an eScribe machine.

Going from the citizenship back to the results, let me say, at Page #8 -- or let me just confirm what I mentioned that the overall environment in this country remains very strong. Hence it was translated us to be visible, at Page #10, to see real strategic transactions, strategic for our clients and strategic for us in the name of cementing the relationships with corporate clients across the segments and across the sectors.

Moving to Page #11. You can see that we -- growth, [too], rather strong lending activities results. The gross lending, excluding direct repo was up by 3.2% on a year-over-year basis and grew by 1.2% compared to the first quarter of 2019. The composition of results stemming from that goes -- is very well distributed between the retail and the corporate segments. Let me go to the -- when we zoom a bit on the corporate segment, and you see that in the upper right corner graphs, the contribution came mainly from corporates and financial institutions, whereas the largest, I would say, or the strongest growth was recorded on the side of our leasing activities provided through the SG Equipment Finance company. The small business is contributed by the growth on year-over-year basis at almost 2.2%.

In parallel with this dynamic growth, we are remaining -- we stay in the consolidated area of net loans to deposit ratio was 75.7%. The -- as far as the housing loans are concerned, and here, we're showing you the combined numbers for KB mortgages and the construction saving company Modrá pyramida production was growing back or very close to the, let's say, normalized territory of last year after the drop in the first quarter of 2019. And we believe we will further continue to sort of normalization of the situation as -- with mortgage loans.

Client deposits and this is displayed at Page #12 is showing growth by 4% on a year-over-year basis. The mainly -- the main contribution came from both individual and business deposits. With sort of mediocre growth in building savings -- in building savings. There, as you may remember, we consciously are deciding to terminate historical contracts with clients, where the economics were not playing in our favor. The total amount due to clients grew by 7.3% on a year-over-year basis and 4.2% on a quarter-to-quarter basis.

As already mentioned, there was a remarkable growth, mainly on the cycle, assets under management investments or mutual funds investments, which was affecting the year-over-year comparison, the level of 10%. And the pension fund, which grew by more than 8%. The life insurance reserves grew rather slowly by 1%. People are moving their savings from current accounts into saving accounts or term deposits, which is visible in the upper right corner of this slide. And the dynamics of growth in Terms and Savings accounts is massively higher than to current accounts. Nonetheless, after we turn to stock point of view, the current accounts remain in a place where Czech households are placing their money.

Here I would end my opening speech and move the microphone to Jirí Šperl, the CFO, who will start with Page #14.

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Jirí Šperl, Komercní banka, a.s. - Executive Director of Strategy & Finance [3]

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Thank you. First, in terms of financials, KB is reporting another solid quarter. As mentioned by Jan, the net profit after tax is at the level of CZK 7.2 billion, which means that on a recurring basis, the growth is at the level of 6%.

On the above report, on the top of this slide, we could see the main contributors. So it's clear that there is one-off that's extremely positive, which is net interest income, growing by almost CZK 900 million year-over-year, while the others are contributing slightly negative. On the other hand, fees and commissions, that is fees and commissions on financial operations that is visible positive quarter-over-quarter the dynamics. I will talk about that a bit later.

All-in-all, this leads to further improvements in the key profitability indicators. We are showing 3 of them. So ROE above 15% -- I'd say 15%, return on our average Tier 1 capital to 18.4%, although improvement and per year keeping -- maintaining flattish return on average assets at the level of 1.3%

Moving to Page #15. Focusing on the balance sheet, total assets for growing year-over-year downgrade by 6.6%. In absolute terms, it's slightly above CZK [70] billion, which left to a total assets almost CZK 1.2 trillion, which is a new record in terms of focal asset in the spirit of the KB group.

On right of the slide, the growth was driven by client deposits. It's more than 7%. The figure is a bit different because here, it is including repo operations -- off our repo operations. And where these funds have been placed, 1/3 into loans, roughly CZK 20 billion, and the rest into securities and placements with Central Bank typically repo with Central Bank.

Capital, Slide #16. So year-to-date, capital adequacy increased by relatively strong 48 basis points. Some of you probably remember that majority of this growth was already reported in Q1. In Q2, the capital adequacy is small in [storage]. The increase was 3 basis points, which in other words, means that the cash capital generated in Q2 was almost fully consumed by organic growth. Accounting [taxes] went slightly down by CZK 2.5 billion, but it's clear it's sort of year-to-date profit and the dividends.

Regarding -- maybe this is interesting -- regarding risk related assets benefiting -- it's a decrease year-to-date relatively significant with from -- I'm referring to, right-hand side, the table. It goes from 42% to 38%, but which is clearly helped influenced by upgrading the Czech Republic into sovereign upper-investment grade, which has been forwarded in Q1.

Net interest income, a strongest growth by 8% year-over-year, but still -- I'm now referring to [both in chart]. So the trends are continuing, meaning that the strong growth was supported mainly by growth of net interest income from deposits, but only 1% by our income from loans is on the year-to-date, year-over-year under pressure, minus the 6%, mainly influenced by peer competition and declining spreads.

On the other hand, if you have a look on the quarter-over-quarter interest perspective, it's a bit different. So quarter-over-quarter, NII is more or less flattish. There is even slight declines, which we just allocate to 2 basic facts: First one is the fact that a long-term interest rate decreased relatively significantly. Just to illustrate, current 5-year interest rates were available 160 basis points and 10-year interest rates was even lower at the level of 155 basis points.

This is first sort of reason. First perspective. And the other one, and it was already mentioned by Jan, [returning] of deposits and deposit mix. Just to remind 2 figures. So current accounts are year-over-year being too flattish, while our term deposits and savings are increasing by let's say 12%.

Focus, this led to the effect to the situation that net interest income from the deposits is even slightly down quarter-over-quarter. On the other hand, it was partially offset by positive evolution in loans area, where let's say, decline quarter-over-quarter has stopped and there is even slight increase, so an improvement in this data.

Let me mention 2 or 3 sentences about evolution of margins, quarterly NIM. So quarter-over-quarter it runs down by roughly 13 basis points. On the other hand, there are some technical reasons related to the calculation of NIM. So from my perspective, more of a realistic and whereas it's to compare NIM per year-over-year. And here, we are reporting a slight increase from 2.12% to 2.15%.

Just to summarize a bit NIM's -- NIM part, we're sticking to our original guidance, which means that NIM for full year 2019 will be a very comparable level like NIM for 2018. The chart at the bottom left, we are just showing evolution of clients' interest rates, new production as compared to market interest rates. The average renewal partly an interest in slope. So here, you can see how the yield curve has invested in the last, I'd say 6, 7 months.

Turning to fees income, on Page 18. So it is basically, it is flourishing there still but it's a slight decline of minus 0.7%. In absolute terms, it is CZK 20 million down. Again, the trends on a year-to-date basis are basically continuedd. Trend is better. The driver of growth are specialized financial services, fees from cross-selling and also deposit product fees, while transaction fees and loan fees are down.

If you have a look on quarter-over-quarter perspective, there is a visible sign of recovering. And it is recovered in all categories up. From my perspective, the most valuable growth is reported in fees from cross-selling that is growing quarter-over-quarter by almost 10% driven by increased amounts, and also amounts assets under management, and also influenced by the fact that the appetite of our clients has changed or improved, and they are ready to invest more into, let's say, dynamic and mixed funds. Before, the growth was driven very much by money market funds. That also feeds on a mixed share of focus on this is much higher. So it improves the (inaudible).

Financial operations. Year-over-year down, worse, but it was expected after extraordinary 2018. At the third quarter in '18 was extraordinarily high. In the third quarter of this year, we even are expecting bigger, let's say, decline year-over-year. Maybe to mention, there are a few -- 2 drivers. So first one is positive, related to incurring gains on FX from payments on the both volumes and spreads. On the other hand, capital markets are down by 32%.

Quarter-over-quarter perspective, it was more positive. The financial operations income are increasing by 1/3, 34%, 35%. And it is related to 2 basic reasons: The first one is a base effect, because in Q1 of '19, we reported negative DVA contribution. And second reason is that due to market volatility and due to demand for interest rate and also FX rate hedging revised.

So that's our financial operations. Last slide, related to cost to OpEx. So traditionally, reflected under control year-over-year, but from a reported basis, it is up 1.6%. At the same time, you are showing recurring basis because we could -- you might remember that last year, we had some one-offs. One of them was just for example, creation of transformation reserve. So on a recurring basis, it is 2.9%, out of which 1.8% is related to personnel costs, only 1.8%, whereas the positive impact of a relatively significant [SP to capital] started to appear.

Regarding the geo -- regarding the administrative costs, there are some increases driven very much by digitalization. And also, you can see at the very bottom of the chart, that there is exploration of depreciation. It's almost at 10%, but it's very visible, and it's a result of accelerated investments related to KB change. We are still sticking to a very good level of the cost-to-income ratio, which is at the level of 43% at the end of second quarter of 2019. That's all for now.

I'm passing the floor to Didier to comment on the asset quality and added costs.

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Didier Luc Marie Dominique Colin, Komercní banka, a.s. - Senior Executive Director, Chief Risk Officer & Member of the Board of Directors [4]

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(inaudible) This is around 5% of the total, which puts us in-line with [RPA]. Regarding NPL, the ratio decreased slightly from 2.5% at the end of last quarter to 2.3%. And this was under the effect of the positive resolution of one of our non-retail [report] to client situation. And the second factor was the continued [weakening] of our sales in the second quarter.

Other than that, the default rates across portfolios and products, it continued to be flat and at historically low level. It's a bit of a relative term in the corporate segment, but accelerate in the material level. And finally, the coverage ratio continued to stay stable in the range of 60%, which is the level of [the preceding last] 6 quarters.

Going on to the closing close of the cost of risk on the following the slide. I will directly comment on a year-to-date basis, for the reason that we [provision close] of the structure of the cost of risk between Q1 and Q2, have a very similar structure. So the net release slightly above CZK 350 million or from a negative [10] basis point were made of 3 main components. The first one is coming from the (inaudible) fall slightly below CZK 100 million and 2 drivers behind the strong -- continued strong recurring performance on our market exposure as well as the positive result -- a better result coming from the retail NPL portfolios. So that's the first fact in tough components.

Second component, which is (inaudible) -- slightly above CZK 300 million, is the one from the positive resolution of one finance situation in the second quarter. So for the amount of CZK [700 million]. And the last and third component of this first half cost of risk is the level of approximately CZK [50] million on net [rations] for other non-retail exposures. So this is the total structure of our cost of risk. And in terms of what we expect until the end of the year, we can reasonably say that we should be in the territory of the next release for 2019 year.

And I will pass the call back to Jirí to comment on the asset quality and added (inaudible).

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Jirí Šperl, Komercní banka, a.s. - Executive Director of Strategy & Finance [5]

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(inaudible) on the outlook was the focus on the financial look (inaudible) on 3 cost of risk line basically confirming our previous guidance, meaning that total revenues are going to grow slightly. Net interest income in second half will be impacted by 2 effects, so I was already mentioning, meaning one term interest rates have declined and the change of mix of our deposits.

Fee income, confirming flattish. In other words, right there was 0. And gains from financial operations that were somewhat a decline was slightly less than we expected 3 months ago. But due to in many ways better-than-expected financial operations income in Q2. The revenues, in terms of OpEx, confirming that the level is similar as inflation and cost of risk [for the first commented] I mentioned by the year. I'm stopping here.

I don't have any doubt that it will be one of your questions. Thank you.

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Jan Juchelka, Komercní banka, a.s. - Chairman of the Board & CEO [6]

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Right. So thank you for paying your attention to the presentation, which was very presented and in addition we are ready for the questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) So our first question comes from the line of Gabor Kemeny from Autonomous Research.

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Gabor Zoltan Kemeny, Autonomous Research LLP - Research Analyst [2]

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I have a couple of questions. The first one is on your NII guidance. Do you still guide for mid-single-digit NII growth this year, even though you flagged headwinds from a deeper inversion of the year's curve? And the other question on NII. How do -- how would it impact your outlook if the Czech Central Bank were to cut the base rate, which I think would make the year's curve less inverted?

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Jan Juchelka, Komercní banka, a.s. - Chairman of the Board & CEO [3]

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Okay. So regarding the net interest income guidelines, they are more or less confirming our guidance 3 months all with a maybe the mid [count] must not be necessary, count necessary 5%, maybe it could be a bit less but still a mid-single digit. Maybe it will be more explicit if you expect the net interest income of second half at the level of third half given the front. This is the first question.

The second question, sensitivity for potential chapter of [3 quarter], like CNB. Usually we are guiding or illustrating that some sensitivity of net interest income and market interest rates, so would be our 3 that we are confirming here that this is the volatility, that the borrow shift that moves up and down by 100 basis points, which leads to impact of CZK 1.2 billion. So emphasizing the volatile part of our shift. Anyway, a bit both the negative (inaudible) into the net interest income of KB.

At that point, although related to this, it's -- it is not our baseline scenario. And so maybe, if you remember that last third quarter, we're guiding that we're expecting 0 to 1 pipes in 2019. Today, we are also in terms of (inaudible) we think no changes. And we are in this perspective, changing our guidance. And we are not expecting any more hike in 2019, and probably [needed and planning]. On the other hand, we don't expect it is not part of our baseline that CNB is going to drop its key base.

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Gabor Zoltan Kemeny, Autonomous Research LLP - Research Analyst [4]

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And just to quickly follow up, so what would happen if we only get a move at the short end of the yield curve? So if we get a CNB rate cut and the long-end doesn't move, do you have a sense of how would that impact your NII?

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Jan Juchelka, Komercní banka, a.s. - Chairman of the Board & CEO [5]

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It's more or less -- certainly more or less a similar [case] with increase of CNB, right. So in the situation, when CNB was increasing its rates, 1 hike also roughly, roughly CZK 200 million, CZK 250 million in the upcoming following 12 months. So this is also one for the potential cut.

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Operator [6]

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So the next question comes from the line of Simon Nellis from Citibank.

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Simon Nellis, Citigroup Inc, Research Division - MD and Director [7]

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Could you give us an update on the deregulation on foreign payments? I think that was going to impact your fee income. And what the impact could be? Also, we heard from MONETA that there's deregulation on mortgage termination fees. If that's going to have an impact as well on commercial, I guess, it should, that would be useful.

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Jan Juchelka, Komercní banka, a.s. - Chairman of the Board & CEO [8]

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Okay. So for the sector, as for deregulation, it's going to become very sort of mid-December of this year in a very simplified [rate]. The description is that cross-border payment fees, that maximum will be higher than the local fee charge. As also indicated several times this all hits all the Czech banks and for KB to be quantified that the impact in, let's say, CZK 300 million to CZK 400 million, which is roughly 5% of our fees and commissions income. So the guidance is versus information from an underlying basis that should be positive, should grow. But at the same time, there will be this kind of one-off impact of up to 5%, 6% of our fee income.

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Simon Nellis, Citigroup Inc, Research Division - MD and Director [9]

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That hits in December. So I guess, the full year impact will be seen next year.

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Jan Juchelka, Komercní banka, a.s. - Chairman of the Board & CEO [10]

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I'm talking all of 2020, yes.

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Simon Nellis, Citigroup Inc, Research Division - MD and Director [11]

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Yes.

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Jan Juchelka, Komercní banka, a.s. - Chairman of the Board & CEO [12]

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Fair enough, to be clear. Almost no impact in 2019.

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Simon Nellis, Citigroup Inc, Research Division - MD and Director [13]

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And on mortgage termination fees?

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Jan Juchelka, Komercní banka, a.s. - Chairman of the Board & CEO [14]

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Say it again, please?

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Simon Nellis, Citigroup Inc, Research Division - MD and Director [15]

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Is there a new regulation on mortgage refinancing or termination fees?

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Jan Juchelka, Komercní banka, a.s. - Chairman of the Board & CEO [16]

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As far as the (inaudible) implemented of consumer loan directed end of 2017 as I guided for, this led to the situation that clients [new win] helped us rise to the prepaid up to 20%, but of the original to nominal of the loans every year results in low -- any charge. So that's the environment we are running just now. On the other hand, given the interest rate environment, the amount of prepaid mortgage loans, it's enough. It's very, very much negligible.

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Simon Nellis, Citigroup Inc, Research Division - MD and Director [17]

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Okay. And then just one question on capital. Just looking at your slide. So you're accruing interim profits now into your regulatory capital. So it was just what, 35% of first half earnings were accrued to regulatory capital. Is that right?

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Jirí Šperl, Komercní banka, a.s. - Executive Director of Strategy & Finance [18]

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Yes, it is.

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Operator [19]

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(Operator Instructions) So we have one question coming through the line of Stefan Maxian from RCB.

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Stefan Maxian, Raiffeisen CENTROBANK AG, Research Division - MD & Chief Analyst [20]

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Can you give us an update on the current discussion about the infrastructure fund? And...

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Jan Juchelka, Komercní banka, a.s. - Chairman of the Board & CEO [21]

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I'm sorry. Could you speak up, please?

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Stefan Maxian, Raiffeisen CENTROBANK AG, Research Division - MD & Chief Analyst [22]

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Okay. Can you give us an update on the current discussion of the infrastructure fund? And whether you think that with this infrastructure fund then the bank tax discussion is over?

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Jan Juchelka, Komercní banka, a.s. - Chairman of the Board & CEO [23]

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Okay. I will take this part, thank you for the question. On the taxation, the Parliament and the government is taking the decisions in a [rough around] basis. So we are not able to say whether it's completely over or not. Our impression from the discussion is that it is, at least, for this year for the preparation, the budget for 2020. And that would be related to the bank tax.

Speaking about the infrastructure funds, we are keeping the dialogue ongoing. We believe that this country has under-invested infrastructure of all kind. We do believe that as far as transport infrastructure, both highways and railways is concerned as well as digital infrastructure is a chapter or a field where we can activate the balance sheets of banks in favor of creating new business opportunities and helping the country for higher prosperity, which we believe will pay back to banks with -- for the development.

So we consider that as a healthy dialogue. We are far from declaring any kind of concrete agreement. But let's say, we had agreement with the level of the main ideas. Our view on this is that we cannot do differently than to make our decisions based on due care. We have a very strong and, I would say, a strong and fair regulator above us. So we cannot define it differently than as a significant opportunity for those banks, who will be ready to contribute to that.

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Operator [24]

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The next question comes from the line of 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 [25]

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I hoped you could give a bit more color on the behavioral shift of the consumer base towards term deposits. You point out that the majority of your deposit base still is current account. But I think within the Czech Republic at its peak, term deposits are something more like 50%. So what is the velocity of the change in the last few months? Have you seen an accelerating shift into term accounts? And where, ultimately, could that go? And could you give us a bit of -- a bit of color on your pricing differential? What term deposits, savings accounts are costing you? That would be interesting.

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Jan Juchelka, Komercní banka, a.s. - Chairman of the Board & CEO [26]

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So here are the mix of our costs. And it's, I would say, it's a historical mix is that we do that, say, 2/3 of current accounts and 1/3 of current time deposits. Maybe it's first to remind that KB is a transactional banker #1 in the Czech Republic, which means that the historical observations are confirming that the majority of these current accounts will be here forever. It is [telling] us although to answer what I analyze the deposits for long durations. So then they're replicating, which is, again, the day is decreasing, more operated of profit of commercial bank. That's still after the increase of market interest rates. There are some certain shifts, 2 figures have been mentioned, the current accounts, 1% plus time deposits [year investment plus]. But it is very much related only just normalized to have -- to corporate deposits mainly. Top corporators where these clients, these clients are much more sensitive for market interest rate, but to say, we don't replicate these top large deposits (inaudible).

So if you ask me does that mean that the shift from the current, I would say, I can imagine it could be up to 10%, but not more. And to complete -- complete the answer, regarding the retail on individual customers, we still don't pay almost anything. They are much less sensitive to these interest rates, which is a situation we're strongly benefiting from.

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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 [27]

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And my second question is related to your efficiency profile. You obviously do have a low-cost income ratio, but I believe you still aspire to showing further improvement on that front. So could you give us a bit of a bigger picture view on how you plan to achieve that, particularly given the revenue outlook becomes more challenging? How do you further expect to improve that cost income ratio on the mid-term horizon?

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Jan Juchelka, Komercní banka, a.s. - Chairman of the Board & CEO [28]

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Actually, usually we do not comment on the longer horizons than it -- end of this year. Maybe just to remind one thing, which is that we announced roughly 1.5 years ago, the change to 2020 program. In this program we commented, or some commented, the promise to be at 45% or better. So that's what I can comment now.

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Operator [29]

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So the next question in the queue comes from the line of Simon Nellis from Citibank.

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Simon Nellis, Citigroup Inc, Research Division - MD and Director [30]

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Just one quick follow-up question. On your income from subsidiaries, it seemed a bit higher than the run rates. Just wondering what's going on? And is that going to be sustained? Or was that kind of a one-off?

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Jan Juchelka, Komercní banka, a.s. - Chairman of the Board & CEO [31]

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Regarding income from subsidiaries, of course, mainly positively influenced by better income, income from (inaudible), the insurance company subsidiary, which is not fully consolidated because the [performance] only 49%. So that's one [of] and the main reason that maybe is here, it is first mentioned because we are putting tables that build (inaudible) there was one-off reported in Q2 of this year, which was versus CZK 65 million, and it was booked from (inaudible) linked to the sale price of cadence 51%, (inaudible) [2000 to 2005].

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Simon Nellis, Citigroup Inc, Research Division - MD and Director [32]

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And how -- it sounds like operations are doing quite well, the insurance operations. Should we assume that the CZK 81 million is kind of the new run rate? Or is that too optimistic?

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Jan Juchelka, Komercní banka, a.s. - Chairman of the Board & CEO [33]

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It was rather impacted by some one-offs. So I wouldn't change the run rate.

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Operator [34]

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So the next question comes from the line of Michal Konarski from mBank.

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Michal Konarski, Dom Maklerski mBanku S.A., Research Division - Analyst [35]

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I'm looking at your GDP growth forecast for 2020, and that should be the level, if I see correctly, it's 2.1%, and this is the lowest growth levels since now a few years. I was just wondering if you've got any view how it will impact the cost of risk next year. And actually more on focusing on the corporate side?

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Jirí Šperl, Komercní banka, a.s. - Executive Director of Strategy & Finance [36]

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The question is a bit tricky. In fact, I said earlier that to the -- we expect by year-end the cost of risk to be in [naturally] territory. Regarding the impact, 3 main drivers. The first one is the performance on our mortgage recovery activities. And this one is very much supported by the current situation of the residential real estate market. The second one is that there is still a strong investor appetite for the current year. And we are pushing these sales activities in the context of the upcoming NPL backstop regulation. And the third driver is that we have a few client situations, for which we expect some substantial positive resolution.

And these 3 [engines] probably will stop working in the course of 2020, which means that following the second half of maybe 2020, we should go back to this normalization of cost of risk. But it is very hard to say if it's going to be in mid-2020 in the second half. It depends on the activity of these three engines. But -- so it's reasonable to say that 2020 could be a step towards normalized cost of risk. And other than that, the answer we can give you is that if you look at our cost of risk, so in the last 10 to 12 years, we were in the range of 30 bps. And so the question is, how much time will take us to get back to this -- to the cycle position. So that's the best answer we can give you right off the bat.

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Operator [37]

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Okay. So we do not have any further questions. I'll hand back over to your host.

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Jan Juchelka, Komercní banka, a.s. - Chairman of the Board & CEO [38]

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All right. Thank you, everybody, for sharing with us your time over this afternoon. We are very glad that we had the opportunity to present to you another strong quarter, and we hope you'll continue the journey down the road. Thank you very much, and let me wish you a good second half of the [patience]. Thank you. Bye-bye.

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Operator [39]

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Thank you for joining today's call. You may now replace your handsets.