U.S. Markets closed

Edited Transcript of TLV.BX earnings conference call or presentation 18-Nov-19 2:00pm GMT

Q3 2019 Banca Transilvania SA Earnings Call

Cluj Jan 8, 2020 (Thomson StreetEvents) -- Edited Transcript of Banca Transilvania SA earnings conference call or presentation Monday, November 18, 2019 at 2:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Ömer Tetik

Banca Transilvania S.A. - CEO

* Simona Mihaela Nadasan

Banca Transilvania S.A. - Deputy CEO of FI & Financial Markets

================================================================================

Conference Call Participants

================================================================================

* Alexandros Boulougouris

WOOD & Company Financial Services, a.s. - Co-Head of Research

* Catalin Diaconu

Raiffeisen Bank SA, Research Division - Analyst

* Hai Thanh Le Phuong

Concorde Securities Ltd., Research Division - Head of Research

* Lucian Albulescu

IPOPEMA Securities S.A., Research Division - Analyst

* Simon Nellis

Citigroup Inc, Research Division - MD and Director

* Shirley Chu

ABAG - Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Dear ladies and gentlemen, welcome to the conference call of Banca Transilvania. At our customers' request, this conference will be recorded.

(Operator Instruction) May I now hand you over to Mihaela Nadasan, who will lead you through this conference. Go ahead.

--------------------------------------------------------------------------------

Simona Mihaela Nadasan, Banca Transilvania S.A. - Deputy CEO of FI & Financial Markets [2]

--------------------------------------------------------------------------------

Thank you very much. Hello, everybody, and thank you for joining us for the conference call with regard to the third quarter results. I am joined during this call, as usually, by our CEO, Ömer Tetik, just that he has to be in another city today. And in order to avoid any kind of unclear, let's say, phone quality, we preferred to have the conference call organized from close by George Calinescu, our CFO; and by myself.

As you have most probably already seen our press release from last week, third quarter was a very good quarter for Banca Transilvania, and we will definitely come with additional details during this conference call and also trying to answer all the questions you are going to have today or you might hand over to us in the coming days and weeks.

You are also familiar with the previous quarterly financial releases. We have also, this time, uploaded on our website the presentation having some details with regard to how Romania as a whole was having the behavior during the first more or less 0.5 year and for certain ratios, we have also statistics closer to nowadays, how the banking sector was having the evolution and then with more details with regard to what Banca Transilvania was achieving during the third quarter of the year.

If you have the chance to open our presentation, which is on our website in the presentation section, with the third quarter Q3 item in the title, there, on Page 3, you can see how you can find some details with regard to the banking sector dynamics. We were having, also during 2019, 2 quarters in which, despite the fact that we were having all the uncertainties at the beginning of the year with regard to all the regulatory changes in Romania, the banking sector was having a quite decent evolution with growth when it comes to the total assets, even though when it comes to the GDP growth, clearly, this ratio was not growing in the same aggressive pace as last year.

So when it comes to the quality of the banking assets, the trends, which started to be seen in the last 1.5 years, with -- let's say, we're continuing the improvement of this ratio, and more or less, with the level of the NPE ratio at around 4.5%, 4.6%, which is a level we consider that most probably will remain stable for the next couple of quarters. So with an NPE ratio somewhere between 4% and 4.5%, it is to be considered that the banking sector in Romania is more or less in a decent shape and with the right quality of the balance sheet of the bank.

In terms of growth drivers for the banking sector during 2019, throughout the sector, clearly, on the liability side, the deposits were having quite a nice growth. And the entire banking sector is enjoying very good liquidity, a little bit too good, as this is the case also for Banca Transilvania and for the sector as a whole as well.

When it comes to the asset side, the corporate loans were the ones having the fastest growth pace for the first 9 months of this year, but retail loans were also growing, not in an aggressive pace, but more or less with a decent growth, both like housing and consumer loans.

In terms of currency, as that was the case also for the last 2, 3 years when interest rates in local currency were very similar to the ones in foreign currencies, clearly, new production was done mainly in local currency so that nowadays, the stake of local currency loans is representing the majority of the banking -- bank loan -- banking loans portfolio.

In terms of currency risk, we're having a quite stable exchange risk -- exchange rate risk. And from this perspective, we are not anticipating high volatility when it comes to the exchange rate also for the period to come. Therefore, in terms of estimation, when it comes to the quality of the loan book structure in general in the country, we may say that irrespective of the currency in which the loans are currently booked in banking sector in Romania, the quality and the behavior of the exposure is going to be rather similar than facing very different kind of behaviors.

When it comes to the macro development, in general most probably everybody is already knowing that the GDP had a certain slowdown during the third quarter of this year. And so that Romania is definitely facing a [twin] deficit, which it has to handle, especially as we are now coming, let's say, to the final part of the year, and that's not -- there are different measures to be taken in order to make sure that, to a certain extent, these imbalances are going to be either corrected or well kept in -- under control.

As you also most probably know, there was a change when it comes to the government of the country. We are having a new government in place for a couple of weeks. And well, without being extremely optimistic, what we have to mention is that we have received quite important signs that the government is very keen on trying and developing a good cooperation with the banking sector with the Central Bank of Romania. There are clearly ongoing discussions between the Central Bank of Romania and the Finance Ministry in order to work together and to jointly put the efforts in order to better manage the state budget in order to keep the 2 deficits as good as possible under control.

Also, we are anticipating that in, let's say, preparation of next year, parliamentary elections, investment projects and the pace in which such investment projects are going to be presented and proposed to happen when it comes to specifically the infrastructure of the country, it's going to continue at a reasonable pace and that the trend we were noticing over the last couple of months, is going to continue also for the next 6 to 9 months.

Important factors when it comes to the GDP growth, clearly, everything related to services, agriculture but also industrial output. So more or less, we can say that throughout the GDP [sector] structure, there are several areas which are contributing to the growth in the country.

Well, that would be more or less a short snapshot when it comes to what's happening in the banking sector in general and macroeconomic-wise when it comes to Romania. If we are coming to Banca Transilvania and the business, we were having for the end of 9 months of this year, it is important to mention that what was very important for the bank's management and what we would like to emphasize is the fact that the operational income, the operational profit of the bank was achieved and was slightly above the budget, while the overall bottom line was significantly above the budget. Clearly, we will

(technical difficulty)

quality and the behavior of our loan book.

Looking at Slide #10 in our presentation, there you might see that when it comes to both net interest income, net fee and commission income, the growth was quite substantial. Important to mention that last year, at the end of September compared to this year, when we are looking at individual figures, we have a very big difference, meaning that the Bancpost last year was just consolidated, while this year we are having it included in our financials. So it is important in order to have, let's say, the clean picture to look better at the consolidated figures when it comes to the way in which we were having the evolution, when it comes to the net interest income and fee and commission income for the first 9 months of this year versus last year.

Important to mention that even though from a liquidity perspective and the level of deposits from customer, we are enjoying a significant level of liquidity, meaning that we are forced somehow to handle a much larger amount of money than we were -- than it would be, let's say, efficient compared to the asset side of the bank, but nevertheless, we were able to keep the net interest margin stable even though, yes, we have more resources than the team needed in order to have just decent liquidity ratio.

Here, we have to emphasize the fact that Banca Transilvania is a very important player when it comes to the overall cash management in the country that we are having a significant market share when it comes to the overall clearing in the country, settlement with state budget, transactions between customers, all of this bringing a significant amount of money in current account

(technical difficulty)

has with the Banca Transilvania at 0 interest rates, which are not creating interest rate expenses, but which are, in the end, contributing at the overall income base of the bank with larger number of transactions, higher and fee -- higher fee and commission income, given the fact that the number of transactions, which are routed from [foreign] accounts are continuously growing in BT.

In terms of the cost of risk, here, we were mentioning a couple of times that every time we are preparing the yearly budget, we are looking at the average cost of risk, which would be throughout an economic cycle. And we intend to achieve a certain profitability for the bank, while having the cost of risk considered somewhere around 100 basis points.

Last year and this year, clearly, considering the way in which the overall economy was having the evolution, the real estate market, when it comes to collateral evaluation, the repayment behavior of clients, both company and retail clients have improved significantly plus that we were having also recoveries from previously written off loans.

All in all, even though the cost of risk and gross expense was somewhere, also for the third quarter, around 70 basis points, which was more or less the level also for the last 1.5 years, the overall cost of risk, including all the recoveries was in line for the first 9 months of this year, just a little above 0, meaning that just the marginal kind of expense was booked this year in terms of provision. However, we are definitely conservative in the way in which we are looking at the bank's performance. And clearly, we are let's say, organizing our entire activity, and we are focusing on those products and services which are able to ensure the bank's operational profitability level so that whatever is coming as less -- lower cost of risk items are, in the end, contributing just to exceeding the budget we are promising in front of our shareholders.

In terms of the NPL ratio and of the NPE ratio, Banca Transilvania is also at the end of the third quarter at very similar levels to those -- for the -- as of mid of this year, with PAR 90 at 3.13% and with the EBA NPE ratio at 4.6%. Coverage ratio, in terms of provision, being kept stable throughout the entire year.

When it comes to the capital of the bank, clearly, we have to take into account the way in which we should manage strategical -- from a strategic perspective, the level of capital in the bank, taking into account the fact that the years to come will mean both additional requirements in terms of MREL requirements but also, we do not intend to sit on an inefficient structure of equity, making sure that we are delivering the expected return on equity to our shareholders.

So more or less, we definitely want to continue to the extent regulators and shareholders are going to -- well, regulators will not request and shareholders will approve, we'll continue with the dividend payout policy we were having for the last 2 years. But this is something which, in the end, is going to be confirmed. Once we are going to see the end of the year results and further to those results, we are definitely going to come with a proposal to be discussed by the bank's shareholders.

Looking at the income statement of the bank, clearly, it is important to mention that we were seeing growth, when it comes to the net interest income, really connected to the organic growth of the bank, net interest margin being stable throughout the year. We were seeing a very nice growth when it comes to the fee and commission. In some of the banks, here, having a significant contribution coming from the overall number of transactions which are routed through our account, we were having better-than-anticipating net trading income. This is also, again, like a confirmation that the way in which we are managing our [TBS] portfolio proved to be correct over the last couple of years. Besides the good results, which are booked in the P&L of the bank, we are also enjoying a quite substantial amount of reserves in the equity coming from the revaluation of this portfolio.

Clearly, the entire activity in that area is targeted to not only have current good results, but to be in a position to offer and to come for the bank's overall financial results with stable contributions coming from this portfolio. So to make sure that we are not creating any kind of debalances to our P&L with -- when it comes to our investment in state -- Romanian state bonds.

When it comes to the operating expenses, important to mention that if we are looking at the consolidated figures, where we are more or less -- which are more or less the comparable kind of items, we are seeing that, in general, operating expenses have been kept under control during the first 9 months of this year. Clearly, we are continuing with the investment we were mentioning when it comes to all the digital platforms of the bank, trying to make sure that we are investing in technology in order to make sure that internally, we have the right structures and the right systems in place in order to be able to properly process the increasing number of transactions through our accounts. And also, when it comes to the interaction with clients that we are delivering the expected experiences to them.

So in that area, we are definitely going to continue with investments. And as you were able to see in our press release, there were significant increases when it comes to the number of users, both with regard to mobile banking, with regard to our payment application, wallet application, Apple Pay, so all these areas were recording significant growth in the last 3 months. So this is an area where clearly the development and the way in which the bank has to continue investment is a quite accelerated one.

In terms of other expenses and income, just in order to provide some -- or to come with some additional details. This year, we were not having one-off. Last year, we were having one-offs linked to some tax items coming from Bancpost. And those were booked both as an income due to the way in which the SBAs with the sellers of Bancpost were awarded and also the expense. So more or less, net effect on the bottom line was 0, but there was volatility in terms of items booked as other income and other expenses for 2018. In 2019, we don't have that item anymore.

If we would go through the presentation, you are going to find on Slide #12 some details with regard to the structure of our loan book, half of it being loans to households, half companies. In the companies, the -- let's say, the European definition of SME customers are representing, in fact, more than 95% of all our company clients. In terms of currency structure, we are keeping the same weight we were having previously with around 70% local currency, 30% foreign currency.

In terms of the NPL ratio, again, like the ratio relatively stable for the last couple of quarters, just above 3%. And with the same kind of coverage ratio in terms of both cash provisions and collateral related to those portfolios. In terms of deposits, the same again. No changes compared to the overall structure of the resources in BT for the last couple of quarters. The majority of the funds coming from households, but also with a quite decent contribution of company clients, mainly when it comes to current accounts opened with BT.

Then you can find, starting with Slide 15, some details with regard to the way in which our business lines were having the evolution over the last couple of months. Very important to mention when it comes to the retail segment that we have in terms of active cards, a market share of about 22%, with around 4 million active cards. So we are clearly one of the most -- in fact, #1 and a very important player when it comes to the card business in the country.

When it comes to SME clients, SME clients defined according to our internal definition. Here, we are serving around 300,000 clients. Again, a quite important market share when it comes to the total number of active SME companies in the country, somewhere above 20%, in fact, like closer to 30% of all active SME clients in Romania.

For the corporate banking sector, here, it's important to mention that we continued our sectorial specialization trying to set up better prepared teams in order to deal with very specific sectors, so that we can become a more important player in these areas as well. But we are not switching from our main focus from retail and SMEs, only that, given the size of the bank, we definitely have to be an important player in this larger corporate segment as well. Our previous focus when it comes to agriculture, medical sector, IT services is continuing. So more or less, we are not changing the strategic approach we were having from starting with the last couple of years when it comes to the businesses we would like to support and where we would like to be active players.

On Slide 18, you are finding some details with regards to the group structure, no changes there. So we continue to be active in leasing asset management capital markets, consumer finance, micro finance. Results for all our subsidiaries are very good. They were having an important contribution when it comes to the overall profitability of the bank. Forgot to mention previously, Victoriabank, our subsidiary in the Republic of Moldova, where we are having, let's say, the behavior of the bank there is as anticipated. For the last 1.5 years, we were sending there our people, we were putting in place our regulations, we were building up a sales force, making sure that we are definitely knowing well the market and that we are having the right approach when it comes to that geography. Clearly, also, there, our focus is SME and retail clients.

I'm not sure if I was able to cover all the very relevant topics for our presentation today. But yes, most probably, this would be the most important items to be highlighted. Happy to listen to your questions and trying to come with specific answers linked to the areas where you are interested to find more information for.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) The first question from Catalin Diaconu, Raiffeisen.

--------------------------------------------------------------------------------

Catalin Diaconu, Raiffeisen Bank SA, Research Division - Analyst [2]

--------------------------------------------------------------------------------

So I have 2 questions. The first one would be, if you can tell us a bit more about the one-offs in the cost of risk in -- just in the third quarter?

The second one would be why did personnel expenses decline quarter-on-quarter? And what's the new run rate? Or was it just a one-off?

And the third question would be what is the current guidance for loan growth this year? I mean you already are above 6% and in the budget, you have 7%. So would you increase your guidance, given the current performance of the bank? And that's about it for now.

--------------------------------------------------------------------------------

Simona Mihaela Nadasan, Banca Transilvania S.A. - Deputy CEO of FI & Financial Markets [3]

--------------------------------------------------------------------------------

Okay. So when it comes to the cost of risk there, we can't say that there was a certain item contributing in a significant way to the cost of risk behavior. It was -- or it was coming from several items, which were adding on to a larger amount of releases of provisions plus some decent recoveries coming from written-off exposures. Clearly, we can't say that there are -- we were not selling any kind of NPL portfolio. So it's just the ongoing kind of activity when it comes to the way in which we are managing our loan book and the loan book is having the behavior.

When it -- I'm going to answer the third one, which is then connected to the cost of risk. So when it comes to the loan growth, what we were mentioning until now also in previous calls was that we are not -- let's say we prefer to see how the fourth quarter is also helping the evolution. As you know, in terms of budget, we were forecasting a growth of around 7%. So a growth rate between 7% and 8%, potentially higher than that on specific sectors, could be considered. But it's not like much.

Definitely, we are not going to stop the engines. We are going to continue lending and if the quality of the loan request is going to be considered appropriate by us, definitely, we will continue the lending process. But we can say that we are changing the, let's say, the targeted final amount for the year, more or less, a growth between 7% and 8% is going to be the figure which is to be achieved by us.

When it comes to the personnel expenses, there -- when it comes to the second quarter, there we were having some regulations and there were a couple of one-offs related to the yearly bonuses for 2018 results.

So in general, if you would be considering -- you should consider the expenses -- some expenses like the average throughout the year because on a yearly basis, to the extent the bank is having or is delivering similar kind of results, such bonuses are to be expected for next years as well. So some of them are amortized, and they are considered throughout the year. But there were also some items which were booked in the second quarter. Hope I have answered your questions.

--------------------------------------------------------------------------------

Catalin Diaconu, Raiffeisen Bank SA, Research Division - Analyst [4]

--------------------------------------------------------------------------------

Yes, okay.

--------------------------------------------------------------------------------

Operator [5]

--------------------------------------------------------------------------------

The next question is from Hai Le Phuong of Concorde.

--------------------------------------------------------------------------------

Hai Thanh Le Phuong, Concorde Securities Ltd., Research Division - Head of Research [6]

--------------------------------------------------------------------------------

Can you hear me now?

--------------------------------------------------------------------------------

Simona Mihaela Nadasan, Banca Transilvania S.A. - Deputy CEO of FI & Financial Markets [7]

--------------------------------------------------------------------------------

Yes, yes, yes, we can.

--------------------------------------------------------------------------------

Hai Thanh Le Phuong, Concorde Securities Ltd., Research Division - Head of Research [8]

--------------------------------------------------------------------------------

Okay. So MREL (inaudible) moment? And are you planning to tap the bond [market] -- the capital on that side?

And my second question would be on provisioning, like, clearly, the first 9 months was very good. Do you expect the [fourth] quarter to be the same? Or shall we expect some seasonality and maybe more active provisioning in the quarter?

--------------------------------------------------------------------------------

Simona Mihaela Nadasan, Banca Transilvania S.A. - Deputy CEO of FI & Financial Markets [9]

--------------------------------------------------------------------------------

Okay. So when it comes to the MREL requirements. Here, it's important to mention that the subordinated bonds, which we were issuing back in 2018, is in fact, MREL eligible. So more or less, we were slightly preparing ourselves in advance when it comes to potential MREL requirement and the extra work to be done in next 2 years can be handled also via strategy we are going to have with regard to the equity of the bank. And also, we might be looking for other instruments in the market.

But it's not like we are targeting that to happen now. So most probably, with the stuff that we are already having in our books, and with, let's say, wise management of our equity structure, we are going to be able to meet MREL requirements without facing any kind of difficulties.

When it comes to provisions, there, you should look a little bit at the seasonality when it comes to the level of provision. Also for the last couple of years, the fourth quarter was bringing slightly higher provisions. Some of them being also connected to the way in which customer behavior were having the evolution in the first quarter of next year. So this year, we were having a similar kind of, let's say, way in which provisions were having the evolution fourth quarter versus first quarter of the next year. So compared to the overall level throughout the first 9 months, we would anticipate a higher cost of risk when it comes to the fourth quarter behavior.

--------------------------------------------------------------------------------

Hai Thanh Le Phuong, Concorde Securities Ltd., Research Division - Head of Research [10]

--------------------------------------------------------------------------------

Okay. So what is the MREL ratio just following up like, what is the requirement that you have at the moment?

--------------------------------------------------------------------------------

Simona Mihaela Nadasan, Banca Transilvania S.A. - Deputy CEO of FI & Financial Markets [11]

--------------------------------------------------------------------------------

So in terms of specific requirements, we don't have like a specific requirement. We do have some recommendations and looking at those recommendations or analyzing them, we are in the process of preparing our answer to what MREL requirement is going to be meaning in the next 2 years.

--------------------------------------------------------------------------------

Operator [12]

--------------------------------------------------------------------------------

The next question is from Lucian Albulescu.

--------------------------------------------------------------------------------

Lucian Albulescu, IPOPEMA Securities S.A., Research Division - Analyst [13]

--------------------------------------------------------------------------------

So a couple of quite technical questions from my side. Can you give us some indication on the minority interest expense in this quarter? Because last year, they were not really significant, but I think this year, with Victoriabank, they're actually larger. So should we expect something similar to the level in these results?

Then second, related to the recoveries from loans written off, can you disclose how much you still have going forward or if there is some kind of indication of a trend? Is it going to be flattening out in the coming quarters?

And maybe last question. Do you see any effect of the cross-border payments directive that starts to be applied in the fourth quarter?

--------------------------------------------------------------------------------

Simona Mihaela Nadasan, Banca Transilvania S.A. - Deputy CEO of FI & Financial Markets [14]

--------------------------------------------------------------------------------

Thank you for all the questions. So to be honest, I don't have now here with me details with regard to the minority interest expense related to the way in which Victoriabank is going to have, let's say, its meaning when it comes to the bank's overall picture. I will have to get back to you with those details. When it comes to recoveries from loans written off there, in terms of, let's say, growth outstanding figure there, we have like RON 2 billion, but -- well, it's not like currently, we would be having the intention to sell because as you know, the tax environment is not helpful in that respect. So that's why we are going to just continue our recovery activities which is done through one of our subsidiaries, which specializes specifically on this topic.

And then with regards to the effect of the cross-border directive. Clearly, we -- let's say, are preparing ourselves in that respect. And we are taking into account the change. However, we are trying to mitigate the negative effect coming from the fact that several fees are going to be sealed at certain levels. However, this part of activity was not one of the main growth driver or the main income driver for our fee and income position in the bank. So there is going to be an effect, but we consider that we do have the tools to mitigate to a large extent, the negative effects coming from this new directive to be implemented now -- already now at the end of 2019.

--------------------------------------------------------------------------------

Operator [15]

--------------------------------------------------------------------------------

(Operator Instructions) The next question is (inaudible), [Morgan Loan].

--------------------------------------------------------------------------------

Unidentified Analyst [16]

--------------------------------------------------------------------------------

This is (inaudible). Just wanted to follow up on the question around cost of risk. In Q3, you had some more repayments and recoveries. Can you please maybe disaggregate that? And if you can sort of give us the underlying performance of the portfolio in terms of cost of risk, excluding those payments and recoveries, that will be very helpful. And what sort of -- I know you said 100 basis points is sort of the normalized level you see going forward. Would that be a good assumption for Q4 [in] 100 basis points? That's my first question.

The second is, of course, a follow-up on the question on loan growth for the year. You're already around 6% year-to-date, there's an incentive we need to go above 8% given the new regulation around taxes, right, and the extra bank tax. Do you see a high probability of you crossing that 8%, meaning you'd still giving good loans and being able to cross that mark? Or you don't see that possibility as of now given we're in mid-November already? Those are my 2 questions.

--------------------------------------------------------------------------------

Ömer Tetik, Banca Transilvania S.A. - CEO [17]

--------------------------------------------------------------------------------

This is Ömer. I hope you hear me.

--------------------------------------------------------------------------------

Unidentified Analyst [18]

--------------------------------------------------------------------------------

Yes, I can.

--------------------------------------------------------------------------------

Ömer Tetik, Banca Transilvania S.A. - CEO [19]

--------------------------------------------------------------------------------

Okay. That's good because I'm not included, I mean, I was trying just to be the silent partner. But starting with second question. The idea is that, indeed, the last quarter of the year, usually it's a good production, especially in retail, consumer cards and micro and small loans. But still, as you said, in November, we remain very slightly below 8%. Although we didn't close this quarter yet, we are not, how to say, as Mihaela was also saying, we are not trying to take an extra mile just to reach 8%, we are trying to process what we have, the customers that are eligible. But on the other hand, most probably will be around that.

Because there is also, I guess, too much talk of foreign exchange volatility, interest rate increases -- of -- the global talk of trade war, recession and so on. We see larger customers are closing their loans. This is one of the reasons also in Q3.

As per IFRS model and also individually [as] a couple of big-ticket transactions, which were provisioned, we have seen that they were fully or significantly reimbursed, that it caused some reversals. We are still at an economic growth cycle, although everybody speaks about it to be slowing down or about to finish. That's why the [movement] of cost of risk is not -- it's quite healthy. It's impacted by the good economic trends, spending increase and positive -- quite good recoveries with the economic sentiment improvement.

The positive -- most probably Mihaela or George can give a more clear result, but even if we take out all the one-offs and exceptional recovery, our cost of risk will not still reach 100 basis points as we [issue]. We are going to continue budgeting it. But also on the other hand, we are not expecting a huge jump in the next few weeks, months, in the cost of risk. So that for the whole year, it will be stabilized at 100 basis points. So that we would like to keep more [positive service] prudential approach, conservative approach. And if what half of the analysts and economists are saying will come through that the economic growth will start slowing down, we have -- we will have enough meat on the bone to -- as a buffer to meet if there will be an increased cost of risk. I don't know if George or Mihaela would like to add something.

--------------------------------------------------------------------------------

Simona Mihaela Nadasan, Banca Transilvania S.A. - Deputy CEO of FI & Financial Markets [20]

--------------------------------------------------------------------------------

So that said, in terms of, let's say, the gross expense with provisions, we are booking usually like 70 basis points. That was the case for the last 6, 7 quarters. So most probably, for the fourth quarter, we would be around the same level. It depends now on the level of recoveries if, let's say, the average for the year is going to be influenced, and to what extent by the cost of risk to be booked in the last quarter.

--------------------------------------------------------------------------------

Unidentified Analyst [21]

--------------------------------------------------------------------------------

Got it. That's very helpful. Just another follow-up, and this is not even about the bank, this is just more about Romania and macro issues, if you don't mind sharing your insights there.

Are you worried about the sort of strong deficit for the country and that causing any sort of imbalance or having a destabilizing effect on, say, the currency and also the business environment? And that's number one there.

And then the second one is, do you have any sort of insights or your own forecast about the direction of monetary policy rate? Do you think the National Bank would start cutting rates soon? And what sort of magnitude would you anticipate in that case?

--------------------------------------------------------------------------------

Ömer Tetik, Banca Transilvania S.A. - CEO [22]

--------------------------------------------------------------------------------

Again, although -- this is Tetik. We are living in very interesting times. Basically, we do not expect National Bank of Romania to come in and to decrease the rates because that would put extra pressure on the exchange rate, and we see that this is the hot topic now that is concerned about. Although the increase might be, in a very short period of time, it's a rapid increase from 4.74 to 4.77 still, we are speaking about less than 1% increase for the full year. So the fluctuation is quite recent yet.

But basically, we don't expect -- but on the other hand, doing the shift indeed, is a big concern. The good part is that both National Bank and both administration, which is dealing with monetary policy, but also the new government are discussing this and they are discussing in alignment so that we see after many years, a kind of a harmony between fiscal policy decisions and monetary policy part. So that's -- obviously, we don't know the details. We don't have yet, except the current account deficit, the budget deficit discussions are more of a backlog analysis. But on other hand, we're almost sure that it will be about 3% threshold. On the other hand, we see more and more voices, both from the political side and from the monetary policy side that the measures taken to slow it down or to bring it back to the levels they agreed with the European Commission within European Union.

Sincerely, take it as my personal opinion, but if the budget deficit will be 3.1% or 2.99%, I don't think things would change that drastically. Sometimes we are focusing too much on the numbers, leaving the underlying causes out of our [reserve]. But I would say that we see quite a strong alignment and cooperation now from both sides. So this is good news. And also, if there will be, I'll say, more positive messages, I'm sure that will help the market sentiment as well.

--------------------------------------------------------------------------------

Operator [23]

--------------------------------------------------------------------------------

The next question is from Simon Nellis, Citibank.

--------------------------------------------------------------------------------

Simon Nellis, Citigroup Inc, Research Division - MD and Director [24]

--------------------------------------------------------------------------------

Just quickly, costs have been coming down, I guess, that's coming from the integration. Can you give us an update on how much more cost savings might be coming? Or are you done? That would be my first question. And then my second question just would be, do you have the figure of remaining written-off loans that are off-balance sheet that might be worked out over time?

--------------------------------------------------------------------------------

Simona Mihaela Nadasan, Banca Transilvania S.A. - Deputy CEO of FI & Financial Markets [25]

--------------------------------------------------------------------------------

Okay. So with regard to your first question, we were mentioning that in fact the majority of the improvements are to be seen already in 2019. So differences between let's say, third and fourth quarter of 2018 when we were having all kind of integration cost and restructuring cost versus the achievements during 2019 are going to represents the largest part of synergies.

There's naturally some improvement in terms of overall efficiency per client given higher income per client to be achieved coming from also Bancpost clients will have positive effects in the future. But when it comes to the cost savings side, the majority of the synergies was realized or are to be realized and to be seen comparing the results, especially at the end of 2019 versus those at the end of 2018. When it comes to the loans written off, there the total portfolio of written off are like RON 2 billion local currency loans. Whereas, in terms of estimated recovery, quite difficult to put a figure on that one.

So if you are looking at -- that's definitely a very intelligent structure of NPLs, which are written off there. So retail companies, SMEs, corporates, so altogether, in principle, looking at what kind of recovery rates were achieved in the bank sector in Romania should be maybe a hint of recovery rates, considering the prices at which different portfolios have been sold. So that might be an indicator of what kind of recoveries we might anticipate on this portfolio as well. But it's rather difficult to come with a figure, except for this market comparison.

--------------------------------------------------------------------------------

Simon Nellis, Citigroup Inc, Research Division - MD and Director [26]

--------------------------------------------------------------------------------

That's helpful. Actually, one other question, if I may. Do you charge front fees on consumer lending fees -- on consumer loans? Do you charge some kind of upfront arrangement fee when you issue consumer loans?

--------------------------------------------------------------------------------

Simona Mihaela Nadasan, Banca Transilvania S.A. - Deputy CEO of FI & Financial Markets [27]

--------------------------------------------------------------------------------

No. No, we don't. There is a flat, like, operational kind of fee, but not like an upfront fee on those loans.

--------------------------------------------------------------------------------

Operator [28]

--------------------------------------------------------------------------------

The next question is from [Shirley Chu] [ABAG].

--------------------------------------------------------------------------------

Shirley Chu, ABAG - Analyst [29]

--------------------------------------------------------------------------------

I have 3 questions. The first one is regarding the market risk. So we can see from the third quarter results and there are significant net gain on financial assets. Can you explain what those are related to? And how sensitive is the trading book to interest rate changes?

And the second one is we can see the deposit has already exited on your annual budget. Can you explain how you're going to manage the excess liquidity, given that the loan growth is somewhat lower than the deposit growth?

--------------------------------------------------------------------------------

Simona Mihaela Nadasan, Banca Transilvania S.A. - Deputy CEO of FI & Financial Markets [30]

--------------------------------------------------------------------------------

Okay. So when it comes to the market risk, the first question you were having, I was mentioning that for this year, we were continuing the management of the TBS portfolio in such a way in which we are preparing the structure in terms of currencies, in terms of maturities in order to offset any kind potential negative effect coming from the interest rate curve.

So here, that 2019, as the way in which interest rates were having the behavior, we were definitely preparing the loan book -- sorry, the TBS portfolio in order to make sure that we are offsetting potential negative effects coming from either direction in which interest rates might go. We were benefiting a little bit of the fact that interest rates were coming down. But on the other hand, we didn't want to monetize everything. On the contrary, we prefer to make sure that the portfolio structure is having the right -- is right in order to offset potential increases in interest rates in the coming 1 to 2 years.

So this is why we have let's say, a reasonable net gain when it comes to the P&L, and we have also some quite important reserves in the equity coming also from the revaluation of the TBS portfolio but which we consider that it's not appropriate to monetize, but it is good to list in detail in order to make sure that the structure of the portfolio is the correct one.

In terms of deposits, I was mentioning also, while I was having the presentation, it's a matter of how much cash is in fact, sitting on current account with BT, not sitting, it's having the turnover through accounts in BT as we are concentrating more than 35% of all the local payments related to economic activities between companies in Romania and also with regard to the state budget. So we are definitely not having a strategy to further increase, let's say, the default if we don't have strategies in terms of wholesale funding. On the contrary, we try to be as, let's say, constructive as possible in order to make sure that our balance sheet is having the right efficiency, and this is also shown by the fact that the net interest margin was kept stable, even though we are sitting on significantly more money than the ones which we are requiring, according to the growth we are having on the lending side.

And again, when it comes to the lending side, we definitely do not want to push for growth irrespective of risk. So clearly, we are growing in those sectors, and on those products, which are, in the end, not imbalancing the structures of our portfolio and not -- they are not exposing us to significantly higher risk for the future.

--------------------------------------------------------------------------------

Shirley Chu, ABAG - Analyst [31]

--------------------------------------------------------------------------------

That's very helpful. And can I just have one quick last question on, do you see a smooth provisioning going forward in terms of cost?

--------------------------------------------------------------------------------

Simona Mihaela Nadasan, Banca Transilvania S.A. - Deputy CEO of FI & Financial Markets [32]

--------------------------------------------------------------------------------

In terms of provisioning, again, here, we repeat ourselves a little bit, so the gross expense with cost of risk throughout the last couple of quarters was around 70 basis points, definitely being then helped by all the recoveries, reversals of provisions. For the fourth quarter, more or less, we are anticipating the same kind of expense, and it's rather difficult to really estimate what kind of recoveries are going to be possible for us in the last quarter of the year. So more or less, we are anticipating that the fourth quarter should be, in terms of growth expense, in line with the previous ones. While on the recovery side, we prefer not to have a very strong commitment as definitely, it's not connected just to our vision, the -- well, it's rather also a condition of the market.

Okay. I would just kindly ask you now to have the last question and whatever additional kind of questions you might be having, please feel free to send them over e-mail to me and to my team, and definitely, we are going to process them in a timely manner.

--------------------------------------------------------------------------------

Operator [33]

--------------------------------------------------------------------------------

The next question is now from Alex Boulougouris.

--------------------------------------------------------------------------------

Alexandros Boulougouris, WOOD & Company Financial Services, a.s. - Co-Head of Research [34]

--------------------------------------------------------------------------------

This is Alex from Wood. Just a very quick question on net interest income. If you could give us some color of the trends going forward. I think in the third quarter, it was a bit weaker on a Q-on-Q basis compared to the second quarter on the consolidated and the PAR level. Going forward, and maybe into 2020 what should we expect? I mean do you think a net interest income growth close to loan growth is reasonable or we should expect some pressure in margins overall?

--------------------------------------------------------------------------------

Simona Mihaela Nadasan, Banca Transilvania S.A. - Deputy CEO of FI & Financial Markets [35]

--------------------------------------------------------------------------------

Okay. So when it comes to, let's say, the budget for 2020, we are still in the preparational phase. So difficult to really comment with regard to what to anticipate for next year. But just correlated to the way in which we were having the net interest income evolution over the -- again, last couple of quarters, so we were trying to keep the net interest margin stable. So that was one of the major focuses we were having.

From this perspective, if we are going to be able to have a slightly higher loan-to-income ratio for next year, then we might anticipate that the net interest income should grow definitely in line with the organic growth of the bank. And potentially, it could improve a little bit if the loan-to-deposit ratio is going to be a little bit more efficient. So in general, and it's also a matter of how, in general, the interest rate when it comes to the longer part of the year is going to look like, what the yield curve is going to look like. In principle, the average, which was seen during 2019 is going to be the main driver for 2020 as well.

Well, thank you very much for participating at our conference call. As mentioned, we are going to answer any additional questions you are going to have for us. The whole conference call is going to be posted on our website in 1 or 2 days. So thank you very much, once again, for participating in our call.

--------------------------------------------------------------------------------

Operator [36]

--------------------------------------------------------------------------------

Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.