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Edited Transcript of KOMB.PR earnings conference call or presentation 3-May-19 12:00pm GMT

Q1 2019 Komercni Banka as Earnings Call

Prague 1 May 14, 2019 (Thomson StreetEvents) -- Edited Transcript of Komercni Banka as earnings conference call or presentation Friday, May 3, 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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* Andrzej Nowaczek

HSBC, Research Division - Analyst

* Gabor Zoltan Kemeny

Autonomous Research LLP - Research Analyst

* 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 the Komercní banka Q1 2019 results. My name is Molly, and I'll be your coordinator for today's event. (Operator Instructions) Please note that this call is being recorded. (Operator Instructions) I will now hand you over to your host, Jan Juchelka, to present this conference. Thank you.

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

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All right. Good afternoon, everybody. Thank you for giving us your time. It's my pleasure together with the team to present to you the first quarter 2019 results of Komercní banka. I'm here in the room with Jirí Šperl, our CFO; Didier Colin, the Chief Risk Officer; Mr. Miroslav Hiršl, the Head of Retail Banking; and Mr. Jakub Cerný, the Head of Investors Relations.

I will guide you through the first part of the presentation so please, if I can bring you to the Page #4 and provide you with the main highlights of the first quarter of 2019. KB has registered almost 40% of year-to-year increase in the number of clients with KB mobile banking, and we have created here the largest community of mobile banking users in the country when counting 665,000 clients. The volume of transactions submitted in first few months to mobile devices rose by 82%, totaling CZK 15.6 billion. Our clients have downloaded to their smartphones already more than 90,000 payment cards. When using various solutions such as Apple Pay, Google Play, Fitbit Pay or Garmin Pay, where KB was always the pioneer in introducing these services to its clients. After 5 months after launching the new authentication technology named KB Klíc, we have more than 200,000 customers using it. Our ultimate goal is to move the entire portfolio of clients into the solution.

Total volume of KB Group lending keeps expanding at mid-single digit pace on a year-over-year basis across the segments, and in total, it rose by 4% on a year-over-year comparison. Deposits are up by 4.5%, which was translated into the growth of net profit by almost 6% on a year-over-year basis to CZK 3.2 billion. The transformation project -- the first chapter of the transformation project, which started in 2018, was successfully closed, and we have completed the establishment of the agile organization here at the headquarter of KB, when creating 16 tribes and 5 centers of expertise and 40% of the headquarter staff working in agile mode here in Prague.

Page #5, we are displaying our -- giving back to the society. We pay a lot of attention to be the good corporate citizen in this country. We are showing to you here the volunteer activities of KB employees. We are also continuing helping the unprivileged young people through our Jistota Foundation. We are more active, and we were more active in activities dedicated to education and educational events, where we supported Singularity University Czech Summit a few weeks ago. We continued cooperating with young children between 15 and 18 years when supporting the Economic Olympic Games and through the same foundation Jistota, Komercní banka, we do cooperate with Czech Streetwork Association when contributing to the seminars on financial literacy addressing the vulnerable young population.

We continued supporting floorball, the fast-growing very popular sport, especially amongst the young people here, and we're a partner for the super final 2019. And turning to Page -- to #6, we have confirmed our market leadership in innovations and digital solutions in the first quarter.

I've already mentioned tokenization of payment cards by our clients. And here, I would like to say that Czech population seem to be very in favor of Apple Pay mainly, which recorded very sharp increase of users immediately after its launch in the first quarter, and it's now more than 100,000 users. Thus, Google Play has achieved slightly higher than 40,000 users after one year of existence. KB Klíc was already commented. So we are growing the portfolio of active users, and we do plan to widen the usage of this authentication tool.

Our clients, especially the little clients, are giving us back the feedback that the mobile banking solution is popular. We are hitting the score at 8.8 positive points level out of 10. So it's increasing compared to 2017. What is more important for us is the feedback that they are ranking this mobile application as high as the popularity or satisfaction with our relationship managers. So we -- here we are witnessing the quality of views towards our physical channels and digital channels. And last but not least, we have successfully launched the very last tribe in -- at the beginning of March, by which we have, as I mentioned already, closed the chapter of the first part of our (inaudible) project -- [or] transformation project here at the headquarters. Going from the general comments to reality of Czech economy. Let me mention that, as you surely know, the Czech National Bank has increased yesterday by another 25 bps, the rates, and we are currently at the level of 2%. One more hike is expected by the economists in 2019, probably coming in second half of this year. The economy remains in very strong and stable shape. The GDP that was growing in fourth quarter of 2018 by 2.6% on year-over-year comparison. The economy grew by 2.9% in 2018, and the main engines of the growth were private investments and consumption of households. At the end of 2018, we started to see also increased activity of public spendings and public investments, which we hope will continue also in 2019. The unemployment state is very low level -- record level in European Union, below 2% in February. So in reality, there is no unemployment in this country, which is also translated into minimal wages increased by almost 7% on a year-over-year basis in fourth quarter of 2018. House prices growth accelerated to 11% on a year-over-year basis in fourth quarter of 2018. Inflation were above the target at 2%, so it went up to 3% in March, driven by all possible aspects, including food and fuel price increase, wages increase and others. I already commented the Czech National Bank, on which the market rate rated accordingly. Going from the macro picture into our business achievements, we have listed, on Page #10, 6 remarkable transactions from the first quarter of 2019, by which we would like to stress and emphasize that KB is continuing supporting financial economy across the sectors and across the industry's private and public segments.

Turning to Page #11, the gross lending, excluding repo operations, is up by 4% on a year-over-year basis, almost half and half, driven by retail segments and corporate segments.

In the corporate segments, all the relevant parts grew by single-digit growth, the fastest growing in first quarter was our leasing company, SGEF, which grew by almost 7%. Also, the volume of housing loans was suffering a little bit in the first quarter, mainly as a reaction on newly introduced regulatory measures by Czech National Bank in the last quarter of 2018.

Going from loans to deposits base, the growth was similar, 4.5% year-over-year basis. Here, the contributors, again, while distributing between retail and corporate segments, what I would like to pick up from this page is mainly new positive dynamics in the non-bank assets under management growth, where people are coming back to the investments into mutual funds, pension scheme and life insurance.

Here, I would like to thank you for your attention, and will turn -- and will give the floor to Jirí Šperl, CFO.

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

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Good afternoon. KB reported in the first quarter of 2019 a profit level of CZK 3.2 billion, which is almost 9% year-over-year. The main 2 contributors were, without anecdotes, net interest income that added almost CZK 0.5 billion year-over-year and also strong risk profile where the bank was able to raise almost by CZK 100 million in cost of risk, more than in 2018. On the other hand, there is also decline, mainly in net fees and commissions, slight decline, 2.1%, CZK 31 million and also financial operations. I will get back to that in a minute. But also, what contributed to the results is also recurring OpEx, and (inaudible) OpEx was growing by roughly CZK 30 million. All this translated into profitability indicators. For the first time, we are showing also that the indicators after IFRIC 21 evaluation related to (inaudible) fund per charge. So ROE is at level of 14.5%. Return on average Tier 1 capital, almost 19%, 18.2%, and we are still maintaining strong return on average assets at the level of 1.3%.

In terms of balance sheet, total assets were growing by 4.4% year-over-year. Quarter-over-quarter, it is even more, 6.9% due to strengthening of the balance sheet at the end of the year. Again, it is kind of slight effect of [evaluation]. On liability side, the growth was very much influenced and driven by client deposits. It's almost 85% of total asset group growth, and as was mentioned before, it was driven mainly by time deposits, while current accounts are the smaller to finish. These new funds or resources has been placed partially into loans, is roughly 1/3 of the increment, and the remaining roughly half was placed with financial institutions and mainly with Central Bank -- (inaudible) loan with Central bank.

Moving to Page #16, which is focusing on capital ratios and capital generation. It's important [that] capital adequacy increased in first 3 months of this year by almost 50, 5-0, basis points at the level of 18.9%. Partially, it was influenced -- and it's roughly half, by profit adjusted by provisions for dividends. So profit generated [roughly 70 basis points] dividend provisions, assuming 65% dividend payout ratio directly for this [6], so the impact is [25], and the rest was related to decrease of risk-weighted assets, roughly by CZK 6 billion. And here -- so you can see, there are 2 effects. First one is CZK 4 billion related to organic growth of the bank, related mainly to the loans of the branch and [to them] the offsetting effect, minus CZK 10 billion, due to the fact that Czech Republic has been upgraded to develop account [for upper investment grade range].

I'm moving to Page #17, focusing on the net interest income. So we are reporting strong growth, almost 10%. There are no changes in net interest. So net interest income is still positively influenced mainly by net interest income from deposits, but [as it] strongly grows that [24%] mainly supported by higher yields from [investment of deposits].

At the same time, NII from loans [is still] declining, reflecting intense competition on the market, we were visualizing the pressures on loans on the chart at the bottom of the slide. So you see here the evolution of average market rates on new Czech loans for reduction. So you see that the market interest rates and here we are using 3 months LIBOR, went up in last 18 months roughly by 120 basis points. That is why also consumer loans translated -- went down by 60 basis points and mortgages roughly 60 basis points. So you see it is not [following] the market interest rates too much. On the other hand, business loans margins are roughly resilient, growing by roughly 110 basis points. So basically in line with the market rates.

Moving to fees and commissions. So [10%] commissions are seasonal and weaker but not only seasonal rate, but I will talk about also the year-over-year. The difference is minus 2.1% and [is CZK 32 million]. The main reason behind is that the clients migrate to digital transactions that are cheaper, and there are also lower income from asset under the management, where the clients still prefer to invest into the less dynamic funds, the money market funds and most choose more dynamic (inaudible) final. (inaudible) So that's it on commissions.

Moving to net profit from the financial operations. It -- year-over-year is down by 13.5% to about CZK 570 million. Basically, there are 3 reasons behind. The first one is, it's too -- kind of a lot of volatility on the markets in Q1 this year. It's the first reason. Second reason is related to the fact that a larger part of gain from market operations in book in interest income, reflecting increase in rates. And third reason is related to the fact that it's not negligible. Negative contribution coming from decrease in so-called DVA on directives, reflecting lower credit spreads on KB liabilities. I don't say that this is non-recurring impact, but the impact in Q1 is relatively huge. It is CZK 71 million, and you also would have seen the impacts in previous quarters.

Costs are operationally under the control. It is growing by 3.2%, which is the total dividend rose by personnel and non-personnel [upfront] costs. In terms of personnel costs, just increase of savings, knowing that number of employees on average declined by almost 40%. In terms of non-personnel costs, they are growing at a similar pace. And this speaks to cost income ratio of -- at the level of 62.6% on a reported basis. Also, we are showing the cost-to-income ratio adjusted by IFRIC 21 under Standard and after this adjustment cost income ratio is closer to 40% -- roughly at 42%. All from my side, I'll pass it on to Didier.

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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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Thank you. Good afternoon, everyone. So we go to the Slide 22, dedicated to asset quality. And the picture in front of you, in fact, is quite similar to the ones presented in the previous quarter. The picture of our loan book grew by IFRS. The last one is [2, maybe 3 of capital] in this quarter. Something worth mentioning is the stabilization of the [S2] (inaudible) which puts us is in line with [the continued] goals. One [is to increase capital], continue to decrease marginally to 2.5%, referencing again (inaudible) write-offs and a few capitalization upgrades, non-retail segments. Not presented on this slide but are different [than] segments continue to be recorded at historically lower levels. And finally, as you can see on the bottom chart, the [present provision] ratio for our [people's of] exposure has remained stable at -- around 60%.

Moving on to cost of risk on Slide 23. And as already mentioned, so we recorded a net release of CZK 176 million, negative 11 basis points. This reflects 2 major components: The first one is coming from our non-retail (inaudible) exposure, where the top 5 recovery during the first quarter reached level of CZK 315 million, and the second component is the successful -- continued successful [favorable retail loan portfolio] as well as good level of performance recorded for the recovery of mortgage exposure. On the other hand, the level of (inaudible) creation has been fairly used during the first quarter. And we have not recorded any adjustments into the capital recalibration of operating number. So this explains the level of performance of the first quarter. And this closes the presentation and opens the floor for questions and answers.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from the line of Gabor Kemeny calling from Autonomous.

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

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My first question is about net interest income. You show in the presentation that there was a 7% drop in the interest income of some loans, and you indeed pointed to declining spreads on lending. Do you see any signs of stabilization here? And going forward, shall we still expect the upside to come from the deposit side in the rest of 2019?

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

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Okay. Spreads on personal loans, for the time being, we don't see any stabilizations in first quarter of 2019. The spreads on [corporate] loans declined further, roughly by 4, 5 basis points. It is mainly the case for consumer loans. That's true that the new production of mortgage loans is generating more interesting spreads. Maybe to remind that, at the end of 2018, the average spread on new production was at the level of 40, 50 basis points. After decline of the market interest rates, the banks didn't decrease the bank rates as well. So currently, the new production on mortgage loans is the level of 100 basis points. So that's loan side regarding the deposits, I would say that the spreads in announcement of current accounts is increasing due to hedging policy of the bank. On the other hand, it's perfectly visible from our presentation that it's kind of structural shift, where the current accounts are basically flattish, and it's significant increasing our firm/saving deposits. I have to say that it is a case mainly -- it's mainly on corporate clients. If you're asking about current accounts, still, the bank doesn't pay anything. So it's only about shift of the mix.

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

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Okay. And in terms of your broader guidance, your NII guidance for 2019, which is a mixed single-digit growth. If we simply multiply your first quarter performance on NII by 4, we would get to a mid-single digit growth, I think. So what makes you relatively cautious on the outlook from here?

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

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No. We are confirming our guidance 3 months [also], meaning that it would mid-single digits, also. If I should say, the percentage growth in net interest income, I would say -- I would tend to say 5% year-over-year.

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Gabor Zoltan Kemeny, Autonomous Research LLP - Research Analyst [6]

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Okay. And a last question is on your capital requirements. Can you give us an update where you expect to be towards the end of the year? I think you earlier spoke about another possible hike. Is that kind of cyclical buffer, and you were expecting to get more clarity on the 2 guidance? Any updates on those?

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Jirí Šperl, Komercní banka, a.s. - Executive Director of Strategy & Finance [7]

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Okay. Currently, the current requirement is 16.35. We know that from July, it grew by 25 basis points up. (inaudible) cyclical. But if you remember that the statement is 1 year, so it was already announced in mid-2018. Another hike is coming, starting from January 2020 and another 25. Meaning that, starting from January 2020, the minimal requirement will be 18.8 -- sorry, 16.85. It'll be too, too much. This is one thing. Other thing is that [also] we don't know what will be [the] requirement for 2019. It increased for this year by 10 basis points. We don't know what will be the increase/decrease starting from 2020. And neither we know what will be [there] to start guidance. Still, we don't have any visibility on that. We should get the information probably in Q4 of this year.

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Gabor Zoltan Kemeny, Autonomous Research LLP - Research Analyst [8]

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Okay. So just to confirm on the fact that you are still expecting some more clarification and as far as you know, 16.85 is your fully loaded requirement?

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Jirí Šperl, Komercní banka, a.s. - Executive Director of Strategy & Finance [9]

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[You're right].

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Operator [10]

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(Operator Instructions) The next question comes from the line of Andrzej Nowaczek calling from HSBC.

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Andrzej Nowaczek, HSBC, Research Division - Analyst [11]

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My question is on the cost of risk outlook. You hinted earlier this morning that there may be another net release of provisions this year. If I remember well, in the last call, you were guiding for a few basis point charge. So what is the new cost of risk guidance? And more importantly, what keeps surprising you. Is it the economy, has the time lag with which rate hikes impact [repayments] changed, is it perhaps the low pace of credit growth, or did you just get better at managing risk?

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Jirí Šperl, Komercní banka, a.s. - Executive Director of Strategy & Finance [12]

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I will take the first question on the cost of risk. So 18% of the cost of risk normalization more likely to happen from 2020 onward. Regarding 2019, we have, in fact, (inaudible) situations that would have an impact, one is the resolution that's non-detailed [for these] situations, and these are very [helpful] to predict [that we could] see some (inaudible) developments. That's the first one. The second one is the modernization of our new model, which is a topic under the IFRS 9 (inaudible) possible legality to manage this as well, but the macro economy continues to be as we noted. It could also produce some favorable development. And I would say that, last, I [tend still maintain our] continued sale of non-retail (inaudible) to exposures, but this one is in terms of its magnitude (inaudible). So this is what will shape the 2019 guidance across [this non-retail]. And there was a second question?

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Andrzej Nowaczek, HSBC, Research Division - Analyst [13]

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Just a follow-up, can you give us a range -- can you -- for cost of [risk supplement]?

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Jirí Šperl, Komercní banka, a.s. - Executive Director of Strategy & Finance [14]

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I will give you my best range, which is that the -- through the cycle cost of risk as measured by average in the last 10 years. The disadvantage is [through] the -- some losses on some (inaudible) 8 or 9 years ago. These are around [30] basis points. So in fact, your question is how many quarters or years we need to get to that level, and it is a very hard question to answer.

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Operator [15]

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The next question comes from the line of Simon Nellis calling from Citibank.

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Simon Nellis, Citigroup Inc, Research Division - MD and Director [16]

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I have 3 questions. The first question is on the trading income or the financial income. Can you give us an idea of what you think the run rate is? I think in the past, you said it's probably around CZK 700 billion, but it was below that level this quarter. Do you think it'll return to that level, or are we looking at a lower run rate going forward? My second question would be on SME lending. It's been pretty stagnant. I knew you had some initiatives to try to improve the growth rates there. Just wondering what's the outlook there? And then last, if you could remind us what your exposure is to the car industry. I think there's been some potential tariffs that could be imposed and if you see any negative impact on your clients?

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Jan Juchelka, Komercní banka, a.s. - Chairman of the Board & CEO [17]

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Okay. So income from financial operations. From my perspective, Q1 FY '19 is not -- is rather under the potential of ideal operations. So I'm just confirming what I said 3 months ago, that the current rate is at the level of CZK 700 million from a perspective [K1] was confirming around CZK 700 million. Regarding the small business growth, that's like [we covered] in the presentation, we are showing roughly 3% year-over-year growth, that too, it's a bit less than we are -- we expected. But still, we are targeting by the end of this year a growth roughly by 4% to 5%. And exposure to other industry, I don't have in front of me exact figures. What's [in fact relative] is we are rather underrepresented in this sector, so maybe the year will add some more precise figures.

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

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The precise figure for the automotive manufacturer is 3.8% of our loan exposure.

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Simon Nellis, Citigroup Inc, Research Division - MD and Director [19]

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Sorry, that's 3.8%?

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Jirí Šperl, Komercní banka, a.s. - Executive Director of Strategy & Finance [20]

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3.8%. But then you would have the Q1 to have a recurring [you have to, but anything outside 1% then you can see a figure is arrived] at both 10%.

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Simon Nellis, Citigroup Inc, Research Division - MD and Director [21]

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10%, yes? Hello?

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Jirí Šperl, Komercní banka, a.s. - Executive Director of Strategy & Finance [22]

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Yes?

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Simon Nellis, Citigroup Inc, Research Division - MD and Director [23]

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So you think 10% of the corporate loan book?

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Jirí Šperl, Komercní banka, a.s. - Executive Director of Strategy & Finance [24]

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Estimated. That's a [slight] estimate.

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Operator [25]

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The next question comes from the line of Stefan Maxian calling from RCB.

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Stefan Maxian, Raiffeisen CENTROBANK AG, Research Division - MD & Chief Analyst [26]

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Two questions remaining. One, if you could comment on your expected fee and commission trends. We see in first quarter weaker on transaction fees, loan fees and cross-selling fees. If we -- if you would expect the bottoming out of this or of the fee and commission line during the year? And the second, I don't know if you've already commented at the beginning of the call, if you can share your thoughts on the bank tax discussion that we have right now in the Czech Republic?

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Jirí Šperl, Komercní banka, a.s. - Executive Director of Strategy & Finance [27]

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Okay. And maybe I'll -- let me use this -- I will take first question. So let me use this opportunity, and let's update the -- our guidance for the [year's] results, including fees and commission. So basically, we are sticking to the guidance we were presenting 3 months ago, meaning that the revenues are going to grow low- to mid-single digits, 2% to 3% with 3 drivers, net interest income the main driver. So it's created mid-single digit. Fees and commissions, we are still sticking to, I would say, flattish or lets' say, [back to 0] evolution year-over-year, where you like to influence significantly, mainly in selling of cross-selling fees to onboard more clients. It's more dynamic funds and so on. And so as also mentioned 3 months ago, that the financial operations are going to decline. So overall, the revenues low to mid-single digit. In terms of OpEx, still sticking to the guidance. Meaning that it will be -- that the reported OpEx will be at the level of these inflation, probably even below a recurring slightly (inaudible). So it will be roughly 3% on a recurring basis. The cost of risk already commented by [the year].

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

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Was there a question on the banking tax? Okay. So just a brief comment because you might have noticed the comments done by the Prime Minister. We had a dialogue with him yesterday. As a result of his dialogue, he confirmed his rejection of this idea, which is appearing in the political debates either with the opposition political parties or with his coalition partner.

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Operator [29]

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We have no further questions in the queue. So I'd like to hand back to your host for any concluding remarks.

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Jan Juchelka, Komercní banka, a.s. - Chairman of the Board & CEO [30]

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All right. We thank you all for interesting questions and the participation in the call. Thank you also for your attention paid to the shares of Komercní banka, and we are looking forward to the next reports for next quarter. Let me we wish you, on behalf of the team here, an enjoyable weekend. Thank you very much.

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Operator [31]

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Thank you for joining today's call. You may now disconnect your lines.