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Edited Transcript of RBI.VA earnings conference call or presentation 8-Aug-19 12:00pm GMT

Half Year 2019 Raiffeisen Bank International AG Earnings Call

Vienna Aug 16, 2019 (Thomson StreetEvents) -- Edited Transcript of Raiffeisen Bank International AG earnings conference call or presentation Thursday, August 8, 2019 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Hannes Mösenbacher

Raiffeisen Bank International AG - Chief Risk Officer & Member of Management Board

* Johann Strobl

Raiffeisen Bank International AG - Chairman of the Board & CEO

* Martin Grüll

Raiffeisen Bank International AG - CFO & Member of Management Board

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Conference Call Participants

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* Alan Ramsey Webborn

Societe Generale Cross Asset Research - Equity Analyst

* Alastair William Ryan

BofA Merrill Lynch, Research Division - Co-Head of European Banks Equity Research

* Amandeep-A Singh

Deutsche Bank AG, Research Division - Research Analyst

* Anna V. Marshall

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Gabor Zoltan Kemeny

Autonomous Research LLP - Research Analyst

* Simon Nellis

Citigroup Inc, Research Division - MD and Director

* Thomas Unger

Erste Group Bank AG, Research Division - Analyst

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Presentation

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Operator [1]

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Good afternoon, ladies and gentlemen, and welcome to the conference call of Raiffeisen Bank International. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Johann Strobl, Chief Executive Officer. Please go ahead, sir.

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Johann Strobl, Raiffeisen Bank International AG - Chairman of the Board & CEO [2]

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Thank you so much. Good afternoon, ladies and gentlemen, a very warm welcome to our conference call. I'm here with Martin Grüll and Hannes Mösenbacher. We will guide you through the presentation, which you hopefully had a chance to look at it already. I think, similar to the first quarter it needs a couple of explanation and highlighting things because comparing first half of '18 with '19 is at first glance, not so easy. So we are happy that we have the opportunity to explain some of the developments. When you look at the numbers, and I'm now on Slide 4, what you see is a substantial reduction in operating results. But if you dig deeper into it, then we see a nice improvement in the net interest income. So if we compare like-for-like, which means excluding Poland, which was in the numbers last year, then we see this very good improvement of the net interest income and also the net fee income without Poland has a 5% plus. So this is what we like very much. In addition to the special effects of last year and the exclusion of Poland, we had valuation losses, which economically have no impact at all because it's about valuation of hedges. But in the numbers we see it, of course, and Martin Grüll will give more details on that. We saw a very good performance in risk costs. This is why the consolidated profit is quite good with EUR 571 million. And again, the negative impact from the Polish operation might be explained later a little bit more as well. What was important for the very good improvement of the like-for-like net interest income is the strong growth in customer loans, which is compared to end of last year, up with 9%, some of it, and this I will come later to that is rather short-term business with low interest margin. But the bigger portion of it is a solid loan growth. CET1 ratio based on the good result improved to 13.8%, also, I have to stress here that part of the improvement comes also from depreciation of the Russian ruble.

Quick remarks to the AML, the authorities since the development of 2019 haven't taken any actions against us, we had from the very beginning been in close contact and consistently -- constantly informed them on our ongoing analysis. We have closed this, and the way we see this that no transgressions by RBI or its customers could be seen. And so I can confirm that we fully adhered to AML regulations. And this confirms also my view that the policies and the systems are good.

Moving to the next slide, yes. I think we -- I mentioned already that especially the quarter-on-quarter result improved very well. On the other hand, we have to admit that what we mentioned in the last couple of calls that we more and more feel a cost pressure. This now is visible also in the numbers, whereas, as I mentioned before, provisioning is very good.

One word to the net interest margin, I mentioned it already that we see a margin pressure through all our products and countries. But the reduction also partly is driven by short-term business, which per definition has rather low margins. Cost to income ratio had been negatively impacted also by the -- by this valuation impact if we would deduct this, then it would be rather at little bit above 58%. The increase in the general admin expenses, which year-on-year looks stable, but as I mentioned before, there is a substantial increase because if we take out bond, then we see this practically here. It comes from year -- like-for-like year-on-year comparison from adding a substantial number of people to improve our innovation and digitalization capacity and what we deliver, and we will come to that. It works nicely. Earnings per share is at EUR 1.64. The book value is at EUR 33.6.

Coming to my next slide, in which direction are we heading and where are our priorities in the corporate area, I want to stress again, we see good developments and room for improvement as well in the digital transformation also in the corporate area. We believe we have room to improve to broaden our customer base, and there's quite a lot of revenue potential. I think what makes us unique to many other competitors is our broad network, and this is perfectly positioned to service, especially international customers. And in the presentation here, we show a couple of numbers as well. So quite a substantial part of our income comes from international customers and our service model, is especially prepared to meet their needs.

If we move further to the next slide, one -- some more information on the retail business, I mentioned before that we are adding quite a lot of people to especially improve our mobile banking. And I can report that we are making very good progress. We launched new mobile banking apps in a couple of countries like the Czech Republic, like Romania, like Croatia, like Ukraine. We introduced just these days new payment wallet and a couple of countries will follow. We built in biometric log in, in a couple of markets, this will be also expanded. And so we think we're very well positioned in meeting the needs of our clients, and we share with you some market data, so what we see is various countries have a different stage of development. But our forecast is that in '21, we will see that the gaps, which we now see in some of the countries will soon be closed. And maybe 60% or 2/3 of our customers then will use mobile banking services. And this will -- is clearly also one of the reasons why we set the targets that we improve the penetration of mobile banking and digital sales for our customers in retail, and this will support us in reaching our goals of improving our customer base by 15% and also outgrowing the market in some areas.

Moving to the next slide, we again saw very good, solid quarter in Russia, stable in the quarter-on-quarter comparison, up 5.5% in the loans to customers, profit is EUR 128 million after tax, very good, risk costs low, NPE ratio low, coverage ratio high, a stable NIM at some 5%. So overall, we have been what I always try to draw your attention to is that the portfolio of what we have in Russia is a very balanced one. And also our model to have a strong focus in the big regions of Moscow and St. Peter works quite well, and we are very confident that with the huge investments in people, what we have done in the last 12 months in Russia, we can be, at least in terms of NPS, the #1 bank in Russia in '21.

Moving to the outlook, the macro outlook, our takeaways from what we have seen in the last couple of weeks is that the forward-looking indicators are weaker. We see this in the PMIs, whereas the hard economic data holds very well and gives us quite a lot of confidence that we also can achieve our outlook. And if you look at the expectations for '19, and see, we have close to 4% in Southern Europe, above 3%. I think this is a good development. And also, in '20, we expect that the growth rates will only be slightly below the 3% as of now.

Of course, the expected rate reductions by the Fed and by the ECB will make life not easier for banks. And of course, if no new negative developments might come in Russia or Ukraine, then we dare to use a room for rate cuts.

I'm on Slide #10, which is our outlook and our targets. So I confirm that we expect an average loan growth in mid-single-digit area that we -- and this is changed to the last outlook, we now see reduced risk costs where we believe it will be this year, below the 45 basis points. We also expect a further reduction in the NPE ratio. So we see the cost pressure. We keep our target that we want to achieve a cost to income ratio of 55% in '21. We confirm the 11% return on equity to 13% CET1 ratio and also the payout ratio of dividends. So with that, I hand over to Martin.

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Martin Grüll, Raiffeisen Bank International AG - CFO & Member of Management Board [3]

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Thank you very much, Johann. Also from my side, welcome. We are quite satisfied with the development, we clearly gained momentum in second quarter in operating result. As you can see on Page 12, visibly improved. I will elaborate in more detail on the next slide, growth, we are growing quite strongly. Year-to-date, our head office grew by EUR 3.6 billion. I have to also tell you that only about EUR 600 million is long term. So the rest, around EUR 3 billion is repo business or short-term advances to customers or trade finance. Russia grew year-to-date EUR 1.9 billion, here we had special support from the FX effect, roughly RUB 900 million appreciation impact. Czech Republic, EUR 0.5 billion, corporate loans and households growing strong. Slovakia, also EUR 0.5 billion; and Hungary, about EUR 400 million increase of loans year-to-date.

Levies, as you may know, are, of course, down quarter-on-quarter because most of the -- these expenses must be paid up front. One word about risk-weighted asset, risk-weighted asset quarter-on-quarter went up by $1.4 billion. We expect continued growth in the coming quarters. And therefore, the risk-weighted asset will go up visibly in the third and fourth quarter.

Moving on to Slide 13, showing you the operating income and the general administrative expenses, net interest income quarter-on-quarter is up EUR 15 million, as I said, it's not only higher volumes, it's also coming from the ruble appreciation, net interest margin, slightly down in the second quarter to a level of 2.40%. This is a level which we expect to maintain for the entire year. Roughly I have to say because that certainly depends on the level of competition in various countries, net fee commission income, EUR 35 million up. I mean, traditionally, the first quarter is rather low. So that was expected, and we see good momentum in Russia and in Romania.

Net trading income and fair value result is a bit distorted. Again, I must say, while we have further implemented hedge accounting for the mortgage -- Austrian mortgage portfolio. So here, the negative effect is lower. We have a higher effect on the valuation -- coming from the valuation losses of fair value liabilities. This is a valuation loss, which is not an economic loss. It neutralizes to 0 over the life of the portfolios. And it appears only on consolidated accounting level. So it's neither on any unit level, it's only in the course of consolidating our financials, and this mismatch occurs, and it was EUR 28 million over -- in the second quarter. And as I said, this will neutralize over the life of the portfolio. Coming to the general and administrative expenses, which caused quite an attention, 6.7% may look quite strong quarter-on-quarter. I want to elaborate a bit more in detail what were the drivers of this growth, EUR 13 million is driven by positive FX movements, EUR 4 million is coming from the yearly agreement with the trade counsels, the collective agreement, so staff expense increased. A EUR 10 million is a onetime charge coming from our restructuring, which we are undertaking in head office, it's called TOM, this is an abbreviation for a target operating model. So here, we spent in June, a EUR 10 million as a provision and EUR 7 million is driven by technical disclosure change resulting from IFRS 16. So quite a big part is driven by special effects. Of course, the collective agreement adjustments are sustainable, but it explains the quite significant jump from the first quarter to the second quarter. Looking in the future, we do expect the entire cost for the operating expenses for the entire group to be clearly above last year, including Poland.

Slide 14 shows you the usual overview, let's not spend too much time on this, and let's move into the countries.

On Page 15, you see Central Europe, Czech Republic, we had a nice growth, 2.5% quarter-on-quarter. NIM also slightly improved, Hungary, very strong loan growth. NIM is a bit under pressure there. Slovakia, 1.5% loan growth, NIM stable. Moving on to Southeastern Europe, where we see a very solid development, growth is quite visible. Net interest margin improved overall in that segment and risk cost is still moderate. If we make a little deep dive in the countries, Albania, good development, NIM slightly better. Bosnia, 3% growth here. We saw a lower NIM, but still over 3%. Bulgaria, a very positive development, 2.4% loan growth after very good growth in 2018. And also, this is a country where the margin is improving. Croatia 2% growth on the loan side, stable margin. Romania 2.7% growth, NIM further improved to a level of 4.5% now. And in Serbia, we also had growth, 2.5% at stable net interest margin.

Moving on to Slide '17, showing you, Russia, Ukraine and Belarus. Russia core revenues are growing or grew in the last quarter, very nicely, net interest income almost 8% up; and fees, almost 15% up. Margin seems to be stabilizing. You may remember, we had a significant drop in the first quarter coming from 5.70% to even slightly below 5%. Now it's 5.1%. So we expect this also to maintain for the rest of the year. We had a solid loan growth, 5.5% in quarter-on-quarter supported by the positive development of the ruble. Ukraine, also here, we see a satisfactory development, 7% better net interest income quarter-on-quarter, 10%, more fees, net interest margin still at a very attractive level of 11% and loans growing at 5% in euro terms. That's on Eastern Europe.

Coming to Slide 18, showing the group corporates and market segment, which I would like to call the underestimated segment in a way that we found out that a couple of analysts are allocating a relatively big cost of equity, which probably should be reconsidered, we clearly see the cost of equity below 10% for this segment. Hannes will elaborate in more detail about the risk profile of that segment. And I think you will very quickly find out that this segment has a very sound risk profile, which definitely would not have a high cost of equity.

In terms of performance, we had, on the risk side, one larger case. Without that, the provisioning would be pretty low in the second quarter. Otherwise, net interest income going up 1.4%, fees, almost 4% going up. So all in all, and also we saw some growth, 2% in the total segment. So we are quite satisfied with the development of group corporates and markets.

Coming to the regulatory capital development, we retained the profits, acknowledged this also by KPMG and also the European Central Bank. So we undertook a special review for the half year results, which allows us to officially show 13.8% on the CET1 level, 15.4% Tier 1 and 18% on the total capital level, we do not expect -- or we do not see a reason why the Pillar 2 requirement of 225 and the guidance of 1 percentage point should materially change next year? Funding and liquidity, very stable development, NSFR, loan deposit liquidity coverage ratio all in the green territory, very positive. I think there's no need to elaborate on this in further detail.

Coming to my last slide. I'm on Slide 21 now. Nothing really new on the MREL front, the communication to RBI seems to be shifted again. We would expect the ratio not in this year, rather, first quarter of next year, transition periods may go up to 4 years. On that slide, we show the risk-weighted asset of all the resolution units and each resolution units gets its respective ratio with a total capital ratio of close to 28% in the Austrian resolution unit, we would not expect any major gap coming from the calculation of the MREL requirement. That's it from my side, and I would like to hand over to Hannes now.

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Hannes Mösenbacher, Raiffeisen Bank International AG - Chief Risk Officer & Member of Management Board [4]

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Well, thank you, Martin. Also, a very good afternoon from my side and thanks for taking time before enjoying your holidays. Well, if you look at the first half year from a risk point of view, well, of course, it was a very favorable and a very pleasing first half year, but also the second quarter having risk costs summing up to EUR 12 million in the first half year, NPE ratio now down to 2.3% and also a really very benign coverage ratio of 59%.

Martin indicated based on his business trips, you realized together with our investors relation that maybe some more detail is needed to explain our group corporate market business model. Well, if you look at this refurbished slide, you see that we have some 4 main pillars, it's group corporate and markets and the dimension we have chosen here is an exposure at default before employing any credit conversions. So you see that the group corporate and markets business is summing up to some EUR 80 billion. Then we have our Central Eastern Europe portfolio, having some EUR 48 billion of our South European part, it was EUR 29 billion in our Eastern Europe part, summing up in total to round about EUR 24 billion. Well, if you now would look into the deep dive regarding this group corporate and markets, what would you find? In basic, its 3 main business segments, you will find here. The one is our corporate business, we're employing with the Austrian, with good rated Austrian clients with the bigger ones. The second big part is our Western European clients. And as indicated by our CEO, Johann Strobl in presenting the key focus areas. This is exactly our strategy. Having Western European companies who also explore business opportunities in the EU region, and we can combine our local knowledge with our products and business knowledge, and we do this via Vienna. So this is what we will find within the corporate part. But the second big part is a sovereign portfolio. This is mainly to manage our liquidity position across the RBI group. And then finally, we do, as already mentioned quite often some FI business, what we will do here. We have some derivative business, also supporting our local units. But on the other hand side, you also see short-term secured lending on a repo basis.

Well, again, talking on this slide, what have been the main developments on the RWA side, there are 2 or 3 things to be mentioned on this Page 23, you can see that we have seen good growth in Russia, but please bear in mind they're 2 things to be mentioned. The one is we have seen the ruble quite strongly appreciating in the first half year, round about 10%. And secondly, yes, we have seen good growth on the retail side, on the corporate side, the growth is also motivated sometimes with short- term business. Market risk, RWAs are down, why so? Last year, when we have been in the sales process of our Polish entity, we had increased our hedging activities of the sales proceeds. This cost us some RWAs on the market risk side, and you have this 60 days rolling window. So now in the first half year, the hedging consumption of -- in terms of capital is now running out, and that's the reason why we see smaller RWAs on the market risk side. Well, let me go on the next slide to really now deep dive into the different segments. And please also what is important here, in my first slide, I was talking on exposure default before employing any credit conversion factors. Now we have decided, well, it's used also to credit conversion employed and also to reflect the sometimes very good collaterals we have in place. Where were these good collaterals coming from. We are working together with the agencies, The Austrian Development Bank, International Development Bank, which do then provide some guarantees, of course, this for user bank means that you have a collateral and guarantee features in place. If you look at the corporate part at this GCM business, you see exactly what I have indicated that it consists mainly out of corporate financial institutions and sovereign. This is the right-hand Chinaman reflecting to. On the left-hand side, you see, yes, it is Austria, and it's Western Europe. And then you see some others, United States, Russia federation. So how come that we have also Russian federation in the group corporate markets with this limited amount of exposure of net EAD. Sometimes the transaction are complicated or in terms of size bigger, but also the contribution from RBIG is needed to structure the transaction. And that's the sole reason why you see these exposures. If I go to the rating distribution, and you know this from our detailed description in the half year and full year report, report -- communicating with you, starting off with minimal risk. So I think if you would like to translate it into an external rating scale, this would be somewhere EE, AA, AAA and then going down along the credit scale, but to cut the long story short, what you can see is that about 90% have a solid or very solid credit rating, which, of course, is also the reason why we now see a very benign risk cost development.

I move on to the next slide on Page 25. Even further deep diving on these 2 main contributors to the segment, meaning on the one hand side, the corporate and on the other hand side, the financial institutions. Corporates on a net EAD basis is summing up to EUR 20 billion. The financial institutions when they're taking care and reflecting all the securities and collaterals received summing up to EUR 7 billion. You see on the corporate side our very good rating distribution, but even more so that also industry-wise, we are very well diversified. And on the right-hand side, you anyway, see what we always communicate that when we talk about our financial institution exposure where we are doing this short-term collateralized credit spread trading, we have very, very good counterparts and also a very good rating distribution, kicking off with over 70% on minimal or excellent credit ratings. Hopefully, this gives a little bit of an insight to better understand our group corporate market business, what we are doing here, our intention, of course, we are happy to take your questions later on. But before we open the floor, let me just spend 2 more slides, the one on the provisioning and on the impairment. Well, low-risk cost in the half year with EUR 12 million. And in the second quarter, just summing up to EUR 2 million. We have also reflected the details, we have quite some countries where we have seen nice releases to mention Hungary and Czech Republic. Others in the same tone like Albania and Ukraine. There was one that we had to book a little bit. This was Romania out of this EUR 20 million, you could see some EUR 10 million, EUR 11 million come out, just of the regular business and the remaining thing is regarding default definition updates.

Brings me to my last slide when talking about NPE ratio and coverage ratio. We have now an NPE ratio of 2.3% and a coverage ratio, which is now at 59%. Those values are 2.3% on the NPE ratio, is lower than the EU average, and the coverage ratio is well above the EU average when talking about SSM banks in Europe. This is my presentation, and we are now more than delighted taking on your questions.

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Questions and Answers

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Operator [1]

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Ladies and gentlemen, we may now start the Q&A session. (Operator Instructions) We will take our first question from Amandeep Singh from Deutsche Bank.

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Amandeep-A Singh, Deutsche Bank AG, Research Division - Research Analyst [2]

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I have a few questions, please. First one is on Poland, just to touch there. What are your views on the Polish price market case? What can we expect, if, say, European Court rules against banks? And second is on cost. As you still maintain your 55% cost to income ratio in 2021, I'd just like to know what kind of levers can you pull from here to reach to that target, given we're still expecting cost inflation in most of your markets. And my third and final would be on capital and dividends. Since you are comfortably above your 13% target, can we expect that at some point you change your dividend policy to from a broad range of 20% to 50%, to say, a more stable higher number? Or given that you still have an excess capital and the stock there is at devaluation, have you thought of any other options, like say buybacks at some point? And just final one on that. How much dividend did you accrue in your capital advantage?

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Johann Strobl, Raiffeisen Bank International AG - Chairman of the Board & CEO [3]

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Let me start with the expected European Court of Justice ruling. Our understanding is that the European Court of Justice had been approached by Polish Court System, asking a question, what is the outcome if one of the clauses in a contract should be unfair, unfair from the customer perspective. So this is clearly a consumer protection question. Our expectation is that there will be some clarifications about how to apply this European Law, but at the end, it comes back to the question how to deal with, if at all, part of the clause within the contract seems to be unfair. And to our understanding, this question of potential unfair clause refers to the way the exchange shall happen. So the exchange methodology, you should be aware that, I think, already back in 2009, the customers got the choice to either do the transformation of the Polish Zloty into the Swiss franc with the bank or they just deliver the Swiss franc on their own and acquiring the Swiss franc somewhere else maybe by the competition or wherever. So based on that, we do not expect that there should be a big impact. It could be -- it could be that there comes a clarification that, yes, if these clauses are deemed to be unfair, then I would assume that another mechanism steps in, which might be that banks have to use the central bank rate for exchanges. And this is then if it is the case, it's acceptable or it would be acceptable. Referring to your cost income ratio.

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Martin Grüll, Raiffeisen Bank International AG - CFO & Member of Management Board [4]

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Let me take over. We are still confident that we can reach the target 55% in 2021. We believe that with the -- now a bit slowing economic cycle, this will remove some of the upward pressure on the cost. So we would clearly not expect from 2020 onwards such a dynamic increase, which we are experiencing in 2019. I have already mentioned that we are in the process of implementing TOM, which is the target-operating model to be reviewing the operating model in head office in Vienna, which is also designed to optimize the efficiency, last but not least we believe that we have passed actually the peak in terms of regulatory expenditures. So all in all, beyond 2019, we expect cost to stabilize. And this is important now, while, of course, revenues continue to grow.

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Johann Strobl, Raiffeisen Bank International AG - Chairman of the Board & CEO [5]

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Yes, coming back to your third question, which is about dividend. I agree that currently, the range is broad, most of you are aware that there is going on consolidation activities in some of the markets where we are active in, we have expressed our interest to participate if we see an industrial logic, meaning that the business model of the potential target supports our own one. And that the price is reasonable, and I don't know how long these opportunities might be in the market. But I assume, at least for this year and maybe next year, this will be the case. So till then we will keep this range broad -- broader to also have opportunities to participate in this consolidation but be assured that later on we will make clarifications on the payout ratio or other activities to bring the ratio in line with our targets.

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Operator [6]

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Our next question is by Anna Marshall from Goldman Sachs.

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Anna V. Marshall, Goldman Sachs Group Inc., Research Division - Equity Analyst [7]

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A couple of questions from me as well. First one on margins, please? And on your outlook in general. Is there any impact on your outlook from the more dovish interest rate environment? And could you please indicate what kind of rate assumptions were factored into your outlook? And also remind us of the rate sensitivity for the key countries. So both kind of rate cuts, rate hikes?

And my second question is on loan growth. Obviously, you've indicated that part of this growth that has been seen year-to-date is short term. But in general, kind of what are your expectations in terms of trajectory into 2020 or kind of into the year-end? How much longer this kind of above the mid-single-digit growth pace is going to continue?

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Martin Grüll, Raiffeisen Bank International AG - CFO & Member of Management Board [8]

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I may open -- I may answer the first question. So the margin outlook, we -- as I said before, when I presented the Q results. We do believe that we can maintain the 2.4% for this year. Of course, in our outlook of 11%. We have somehow factored in also higher FI message or penalty rates imposed by the European Central Bank. From today's point of view, I believe that we will have some compensating effect by way of adhering as we have it in Switzerland or in Japan, and -- in which in our case would be a quite attractive compensating effect.

So on the question of your rate sensitivity, we would have in Russia, to give you the largest countries, if the rate curve shifts to the 100 basis points, this would be EUR 15 million impact. So if it goes up 15%, if it goes down 100 basis points, it will be a positive impact of EUR 10 million. This is due to our current positioning, Czech Republic, well, 50 basis points. We don't expect any major changes in the interest rate by the National Bank, but for good order sake, plus 50 basis points would be EUR 5 million minus EUR 50 million would be minus EUR 15 million. And in Romania, where we have seen quite a positive development on their margins, plus 50 basis points would be plus EUR 5 million, minus 50 basis points would be minus EUR 12 million.

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Johann Strobl, Raiffeisen Bank International AG - Chairman of the Board & CEO [9]

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The loan growth, as I tried to build my arguments on the macro outlook. So with 3% real GDP increase. We believe that 5-something, which is mid-single digit will be achievable also next year. I think we have seen the impact of the new limitations by some of the central banks by limiting the capacity to take loans for weaker retail customers working quite well. So we have seen reduction in new business in some of the markets by 20% or 30%, but this still holds with our mid-single-digit growth rate. So they were based on our macro outlook, we are confident that we can achieve that.

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Operator [10]

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Our next question is by Gabor Kemeny from Autonomous Research.

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Gabor Zoltan Kemeny, Autonomous Research LLP - Research Analyst [11]

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I'd like to follow up on the cost income ratio target of 55%. I think earlier, you mentioned that you would expect a large part from that 2/3 of the improvement in the cost income to come from the revenues and 1/3 from the cost. Can you give us an update on this split, given the cost pressures you see across the businesses?

The other one on Polish FX loans. Mr. Strobl mentioned that it's a possibility that banks may have to compensate clients for the FX spreads. Do you have a sense of what potential impact could that have on Raiffeisen. I think the authorities had an estimate of PLN 9 billion to PLN 10 billion for the sector from such compensation.

And the last question is a short one. What remaining exposures do you have in Asia? I think you showed that it's 5% of your FI RWAs in the Group Corporates segment.

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Martin Grüll, Raiffeisen Bank International AG - CFO & Member of Management Board [12]

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Starting with the cost income ratio. The -- as we said, we will stick to our target, it will take some time. So 2021, I think, is doable. I can repeat what I've said before, we would expect more than something between to EUR 2 billion or EUR 3.50 billion and EUR 3.1 billion for this year and then a much more moderate increase in 2020. So -- and on the top line, I think we have shown that we can grow our loan book quite nicely. And if we manage to keep the margin flat, I think it would work out. And -- but yes, it's probably more coming from the revenue side than from the cost side.

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Johann Strobl, Raiffeisen Bank International AG - Chairman of the Board & CEO [13]

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Referring to your question in Poland, I -- I do not want to mention numbers now to avoid any misunderstanding, but I share our thinking with you. We had a portfolio of a size of EUR 3 billion, which is now 2.3%. And I think what you should refer is that the worst case might be -- when we think about a decision that the former way of changing or fixing -- to the fixing mechanism that then it's part of the bit of a spread, what you should consider as usually, it's always around the central bank rate, which was used. And the way why it's a little bit more difficult, I expressed before, of course, quite a lot of customers use the opportunity to send the Swiss franc and not this, what this and get it changed directly by us. So we will see if a ruling or something else might come or even LOI, I don't know, then we would have to calculate every single case and see how often the customers send their Swiss franc directly, and so it's far too early to do so.

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Gabor Zoltan Kemeny, Autonomous Research LLP - Research Analyst [14]

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And what share of your portfolio is FX indexed? And what share is FX denominated?

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Johann Strobl, Raiffeisen Bank International AG - Chairman of the Board & CEO [15]

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Some 80% to 85% is indexed of the Swiss franc portfolio.

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Hannes Mösenbacher, Raiffeisen Bank International AG - Chief Risk Officer & Member of Management Board [16]

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Well, I might take your third question regarding our exposure in Asia. As we said a couple of times, when we communicate our Asian exposure, this, of course, is now also international business in Asia conducted via Vienna. If you refer to run down portfolio, I'm happy to report that we are now well below EUR 100 million. So there are just 2 or 3 long-lasting work cost clients remaining, and we even closed down our entity in Hong Kong in the second quarter because we worked out in cleaning up the portfolio was finished in the second quarter of 2019. So you see that is cleaning up of the portfolio. I would even say it's finished.

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

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And the cross-border exposure is to -- from Vienna is to Asian clients or like any thoughts you would have.

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Hannes Mösenbacher, Raiffeisen Bank International AG - Chief Risk Officer & Member of Management Board [18]

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You could have international clients are going to Asia. So it's the country of risk what we consider here, so its exposure reflecting to Asia.

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Operator [19]

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Our next question is by Alan Webborn from Societe Generale.

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Alan Ramsey Webborn, Societe Generale Cross Asset Research - Equity Analyst [20]

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Do you maintain your view of mid-single-digit cost growth on the sort of base X Poland for 2019? Or do you think because of the couple of items that you've mentioned in the second quarter, you missed to be a little bit above that? I appreciate you said that you're passing the peak and things will look better next year. But I just wondered if you kept on that target. That was the first question.

The second question was you've got a couple of markets in Bosnia, Hungary, where the margins seem to have slipped a little bit in the second quarter. Could you just sort of elaborate a little bit on why that is given that's an ongoing rate? Or do you think there could be an improvement there?

And also in the sort of corporates and markets area, I appreciate you talked about there being more sort of repo business, but that seems to be, again, the margin seems to be coming down a little bit. And is that a reflection of the sort of business that you're likely to do? And I guess sort of trying to marry that with the -- what you're talking about the GAMS client focus. And is this designed to actually improve the GCM business and profitability? And as you implement this change, would you expect to see better for the underlying growth rather than just using your balance sheet short-term to come through in terms of deepening that franchise? And is it there in the GCM that we should start to see some benefits as you do that? That would be interesting to see what you think this -- the GCM business will look like as you expand and improve and invest in the GAMS business going forward? That would be also interesting.

And then again, I hear what you say on the overall volume going forward, but you've got a number of markets where the volume growth has been exceptionally high in the first half of the year, like Russia, Hungary, there are 1 or 2 others. And is this a process of you allocating more capital to the regional managers who were employing it? But then we -- then it settles down in terms of percentage? Or is it just that the opportunity in those markets for you currently is strong? And do you think that those markets will continue to grow faster than the overall business? I'd be interested on your view there as well.

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Martin Grüll, Raiffeisen Bank International AG - CFO & Member of Management Board [21]

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Yes. We stick to our mid-single-digit target growth. We believe that -- I mean, first of all, what I said, I would like to repeat that a big chunk, in particular, in Vienna, where we reported a EUR 3.6 billion growth year-to-date, only EUR 600 million of that is long term. So the rest is repo business and short-term advances, trade finance. And that, of course, somehow "spoils" the margin, but it boosts the net interest income. So as long as we have enough capital, we believe this is the right strategy to do huge volumes or larger volumes of short-term, risk-free, low-capital, light-capital business. But on the average in the coming years, we do not believe that we will significantly be above the mid-single-digit target on the loan growth. I mean that question, of course, is interlinked with the net interest margin in Group Corporates & Markets, as I said before, a very big proportion is done on the short term, low margin, but also low-risk and low-capital consumption business. In Hungary, we had quite visible negative development that was driven by a couple of big tickets with top-rated customers, and so on and return on risk-adjusted economic capital point of view, it's good. We see here in this country, retail margin is stable.

All in all, we believe, as I said before, that we can keep the 2.4% also because of changing the mix more to the retail. And we will just don't do long-term, low-yield business that will bring us more back to the original mid-single-digit on the growth, but on the other side, protect the margin.

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Alan Ramsey Webborn, Societe Generale Cross Asset Research - Equity Analyst [22]

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And can I just sort of ask you about the project on the GMS side. I mean is that something that you aim to improve the profitability and the margin that you're getting in your GCM business? Is that how we should think about it?

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Johann Strobl, Raiffeisen Bank International AG - Chairman of the Board & CEO [23]

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Let me answer -- try to answer that question. For the GCM income, of course, the GAMS business is important. We see and what I understood you were referring in your question also to what is the potential of GCM business in that market. We see improving. We see a couple of countries who try to develop the markets in that area. Also, I believe this will take time. So of course, we are investing. We're trying to get some of the few mandates which are offered. But I personally believe that, that capital market business in Central, especially in Southeastern Europe will take quite long to develop. In Central Europe, okay, there are opportunities. There are ideas in Hungary to build it faster than with the support of central bank and the government. But I think in the long run, it's rather to get more business in the service area by offering the best service.

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Operator [24]

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(Operator Instructions) And we will take our next question from [Hazer Gregory] from Allianz Global Investors.

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Unidentified Analyst, [25]

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Yes, a few questions from my side. First, on Slide 39 of the presentation. Can you just tell us how the CRR2 have changed the calculation of available distributable item for Austrian banks?

My second question is about the money laundering internal review. Can you share with us some of the findings, but also the methodology in terms of scope on the period?

And my third question is on Russia. What, in your view, second another wave of sanction will have in terms of impact on RBI?

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Martin Grüll, Raiffeisen Bank International AG - CFO & Member of Management Board [26]

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Let me start with your first question. We have not yet switched to the revised CRR2 ADI before. If we do so, and most likely, we will show this also, ADI would be approximately EUR 7 billion, but please keep in mind that there is no legal and regulatory certainty in Austria yet.

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Johann Strobl, Raiffeisen Bank International AG - Chairman of the Board & CEO [27]

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So let me answer your question to the AML findings and to our systems first. So I think there has been 3 areas, which we should look at. The first one because it was also recently in the media. We have an ongoing dispute with the Austrian authorities about KYC documentation areas. There we will go on to the next instance and try to get the clarification on the requirements and the interpretation of the standards as we firmly believe that we adhere to this standard. So this will take some time. The more recent case is what we have coming out of the peer league. So there had been 2 areas. One was a complaint, which was dealt with by the public prosecutor. And there was the decision not to act on the complaint, which was filed in March in this complaint RBI and other banks was named. And so this is done not to a surprise to us as this complaint was applied 2x earlier as well, so it was not a surprise that as there was nothing new in that something would come out.

The third was within U.K. leakage, there has had been list of names published, which had done transactions with procure. And so we figured out that those customers with which we dealt with, and we did our own research, which means reviewing again our pay receipt, but also then running all the historic transactions through our AML system. And this has been some EUR 3 million and the reward out this period, we have and also a permanent contact with authorities in Austria. So they didn't start any further investigations. And we found that -- and this is confirmed by the external party that the documentation was okay, first. And second, there has been a little bit more than a handful of transactions, which they were not suspicious, but given the long historic time, it couldn't be fully explained. So these were reported to the authorities, but also on that, there were no actions. So for us, this case is closed.

Referring to, and this means to the methodology. I strongly believe that our AML framework is a sound one we use -- broadly used international system called Norkom. The way we handle it, I think, is state-of-the-art. This system had been checked several times in the last couple of years. So I believe that the system is strong, good enough to deal with what we have to do.

Regarding to your question on Russian sanctions. So what came recently, so the last couple of days, I think it was the 2nd of August. These are areas, which do not directly impact us as -- okay, this is not our -- this is not the area where we are active in. So on the one hand, on the other hand, to our understanding, this is, to some extent, also address to U.S. entities, referring to the primary dealing of Russian sovereign non-ruble denominated funds. So I think from that, there shouldn't be an impact on our business model.

Yes. And referring to the earlier points where some of our customers have been part of the sanctions. So I think that they dealt quite well with that. And our exposure was reduced substantially since it started a year ago.

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Operator [28]

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Our next question is by Simon Nellis from Citibank.

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Simon Nellis, Citigroup Inc, Research Division - MD and Director [29]

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A few questions. I was hoping you could actually elaborate a little bit on that dispute that you have currently on KYC documentation. How long do you think the process could take? And what kind of fine is possible if it doesn't go well?

Second, I see you had a very low tax rate in the Central European division. Just wondering what's behind that.

On the tax issue. I'd also be interested in an update on the Romanian bank tax, I don't think it was booked this quarter. Is it expected to be booked next quarter? And then how much? And then just on the Group Corporates & Markets division, I saw that risk weight density came down. I'm wondering if that will continue? Or was that as a one-off? That's it for me.

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Johann Strobl, Raiffeisen Bank International AG - Chairman of the Board & CEO [30]

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Okay, coming back to this dispute. What is -- let's call it, different understanding. At the end, it comes down to one question. So the understanding and also the wording is in the KYC, you have to apply a risk-based approach. And so the question is what do you perceive as risky business or risky customer? And if it's classified as risky, what needs of documentation do you have and especially what is the frequency?

And of course, there are various areas of dispute. But if I want to put it in a nutshell, I would say, question is, and this is in our view, if you have documented the chain to the ultimate beneficial owner and you have the understanding that nothing has changed, then the question is, do you really have to update all the signatures, details, documentations over the various jurisdictions? Or do you have on a yearly frequency? Or do you have more time on it? And then also, if trustees are involved, how detailed do you have then? Or do you have to collect also information about the trustees.

So this, in a nutshell, is the core of the different understandings and defined from the first instance was EUR 2.75 million. And then there are, of course, as an administrative costs added to that. The defined and so far, administrative costs, we will pay now as after it's standard here that after the second instance, you have to pay, but we will go to the right (inaudible) to the administrative higher court and ask for clarification again. I would not expect that this would change the fine. Of course, I rather hoped that the fine would be reduced. This is my expectation. But at least, what's important is the clarification on the standards, what we have to adhere to and especially what the risk-based approach should look like.

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Martin Grüll, Raiffeisen Bank International AG - CFO & Member of Management Board [31]

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May I comment on the low tax rate for Central Europe? There are 2 specific reasons. One, is a quite positive one. We could release provisions for tax -- it was a small, but double-digit million euro amount because we won the case after 4 years. And the second is that, for the time being, we do not activate any deferred tax assets in Poland.

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Hannes Mösenbacher, Raiffeisen Bank International AG - Chief Risk Officer & Member of Management Board [32]

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Well, let me answer the questions regarding the RWA density. As you know, we are an IP bank, we're an IBF bank. And so for me, it's a base effect since we have increased our secured repo business, which has, of course, given the structure of the product, the super low RWA density. This brings you down on the total GCM when talking about our doubling density. And secondly, as also outlined by our CFO, Martin Grüll, that on the corporate side, we have done short-term advances. They have also a lower credit conversion factor, short-term as well is also giving you some benefit on the risk weighting. So -- 2x is a base effect. So I would not draw a conclusion out of this in terms of trending it.

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Martin Grüll, Raiffeisen Bank International AG - CFO & Member of Management Board [33]

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And then there was the question on Romanian bank tax. As you know, at the end of March, the law was amended. In our case, we expect around EUR 10 million tax burden, as you may know, it depends also on the growth momentum for this year. And this is also the reason why the auditors have agreed that after calculation of the gross momentum, it should be then booked at the end of the year.

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Simon Nellis, Citigroup Inc, Research Division - MD and Director [34]

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And the EUR 10 million, that's assuming a full tax rate? Or is that assume some kind of production or higher growth?

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Martin Grüll, Raiffeisen Bank International AG - CFO & Member of Management Board [35]

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That reflects also this kind of bonus. Yes, the bonus, there are 2. Two bonus components, one is on margin and one is on growth, and it reflects only in our case, it reflects only the bonus on growth.

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Simon Nellis, Citigroup Inc, Research Division - MD and Director [36]

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What -- would it be unmitigated if it was a full charge?

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Martin Grüll, Raiffeisen Bank International AG - CFO & Member of Management Board [37]

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You achieve a certain level of growth that you can lower the tax, and that is reflected in the EUR 10 million. This is why it is only EUR 10 million.

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Simon Nellis, Citigroup Inc, Research Division - MD and Director [38]

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But if you didn't achieve the growth targets, the thresholds?

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Martin Grüll, Raiffeisen Bank International AG - CFO & Member of Management Board [39]

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If we would not achieve the growth, it may go up, but this is a linear, linear correlation.

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Operator [40]

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Our next question is by Thomas Unger from Erste Group.

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Thomas Unger, Erste Group Bank AG, Research Division - Analyst [41]

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The first one will be on Poland, and I saw that risk costs went down substantially quarter-on-quarter. It was quite a bit higher in the previous quarters? And is this what we can expect in the coming quarters? And now as the P&L as a whole, the contribution to the consolidated level, is that what we saw now in Q1? Is that something that we can expect for the coming quarters out of Poland?

Then a few questions on a few P&L lines on the consolidated level. Starting with the dividend income in Q2, it was significantly lower than in Q2 of last year. Do you expect that to increase in the coming quarters? Or was that a nonrecurring item in the previous year. And then also on the other net operating income and other results, you flagged some negative items in prior to the quarter release. And that obviously was offset by some positive items and I would like to learn about the details on that?

And then maybe lastly, on the trading and fair value results, is there anything that we can expect for the coming quarters? Or what do you see as a normal run rate for the coming quarters?

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Hannes Mösenbacher, Raiffeisen Bank International AG - Chief Risk Officer & Member of Management Board [42]

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Well, if I may start with the questions regarding the risk cost in Poland. Let me also go back to the first quarter results, what have been the dynamics. When we have sold our Polish operations. Some of our clients, we had quite some clients coming into areas and to settle the processes and to fix the processes. It took us somewhere around January, let's say so. And so we have seen increased default rates on sink declines, then you have to recalibrate. Recalibrate immediately means that risk costs go up. So this was the reason why we have seen inflective risk cost in the first quarter 2019 Poland, first thing. Now we have the usual run rate. We have a very good collection strategy. So on the retail side, yes, these are now the normal run rates, what you could see. Secondly, please bear in mind, while Q2, again, in Poland has a slight positive momentum on the one end side. The retail is now stable. So at least you could use the run rate, but we will also being able to proceed on a few cases. We also took with us on the corporate side. And there, we had a little bit of a write back. So you would have to adjust for this write-back, what we were capable to achieve on the non-retail side.

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Martin Grüll, Raiffeisen Bank International AG - CFO & Member of Management Board [43]

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Coming to your next question, the P&L dividend. I mean we had -- if that is your question, in the comparable quarter, second quarter of '18, a special effect, which is nonrecurring, clearly. And secondly, this quarter, we had about EUR 14 million dividend which is, of course, this is the time where you'll get dividends from those companies. So we would not expect that amount of dividend income in the coming quarters of this year.

On the trading, we, as I said, could manage to implement the hedge accounting for a quite large portfolio. So this volatility would largely disappear in the coming quarters of 2019. And the second effect, which I was elaborating, these are the valuation of fair value liabilities, which are booked in the trading book and which appear only on consolidated levels, not on unit level. We have to see how this would develop. That depends on the changes of the funding curve going forward. So that's quite difficult to predict.

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Thomas Unger, Erste Group Bank AG, Research Division - Analyst [44]

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Okay. And on the other results and the other net operating income.

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Martin Grüll, Raiffeisen Bank International AG - CFO & Member of Management Board [45]

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In the net other recurring income. If you compare with the last year, we had this special release of litigation case, ice lending bank, which brought us $25 million. So that's not comparable. And of course, nonrecurring. And there is another item, which is a result of changed disclosure. IFRS '16, that's in the counter value of EUR 7 million, and that's also, of course, nonrecurring.

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Thomas Unger, Erste Group Bank AG, Research Division - Analyst [46]

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And could I just ask you on the effective tax rate, it was close to 29 -- to 23% in first half of 2019.

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Martin Grüll, Raiffeisen Bank International AG - CFO & Member of Management Board [47]

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We would expect for this year, roughly 21%. And for the coming years, 22%.

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Operator [48]

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And our next question is by Alastair Ryan from Bank of America.

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Alastair William Ryan, BofA Merrill Lynch, Research Division - Co-Head of European Banks Equity Research [49]

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Yes, there's been low effects around cost, but revenues feel pretty strong and the balance sheet growth, again, well ahead of expectations here what say on it being partly short term, but most of your countries are growing faster than expected. You can easily be growing over the next 12 months, well above the mid-single digits. What's holding you back given the capital? Or you just don't want to raise your guidance at this point because you don't know -- stuff might happen and its medium-term guidance, but I feel like a business moving this much faster than it was before slows down that shelf play unless you're going to do something, too. So if your margin is stable and your balance sheet is growing faster, it feels like revenues were to be doing better than a lot of people looking for? Just walk us through that a bit, please?

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Johann Strobl, Raiffeisen Bank International AG - Chairman of the Board & CEO [50]

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As a general answer. I think the limitation in growth will come from the competition. So what we see in some segments that margin get very thin. And I think now it's the time to be here and there selective. So if the margin will be reasonable, then it's fine. And then we would like to make use of all the opportunities. But in some segments, it gets difficult because the margins are narrow. We will not stop lending in any of the areas, but if the margins are very small, then it will be reduced. So this is the reason why we are a little bit more cautious now, but I -- when we say the single mid-digit number, then this is more a midterm target than for this year.

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Operator [51]

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(Operator Instructions) As there are no further questions at this time, we will now conclude today's conference call. Thank you for your participation.

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Johann Strobl, Raiffeisen Bank International AG - Chairman of the Board & CEO [52]

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Thank you for participating. And I hope for most of you, this could be the start of the holiday seasons. I wish you all the best. Thank you so much.