Erste Group Bank AG

Thomas Sommerauer - Head of Group IR Andreas Treichl - CEO Andreas Gottschling - Chief Risk Officer Gernot Mittendorfer - CFO

Gabor Kemeny - Autonomous Research Matteo Ramenghi - UBS Pawel Dziedzic - Goldman Sachs Paul Formanko - JPMorgan Cazenove Riccardo Rovere - Mediobanca Matthew Clark - Nomura Alan Webborn - Societe Generale Johannes Thormann - HSBC Cathal Carroll - Carraighill Capital Benjamin Goy - Deutsche Bank Stefan Maxian - Raiffeisen Centrobank Cristina Marzea - Barclays Capital Muriel Perren - Citigroup Hadrian de Belle - KBW

Thank you very much, operator, and a very warm welcome to everybody who is listening into this call. Today's call, as usual, will be hosted by Andreas Treichl, Chief Executive Officer of Erste Group, Gernot Mittendorfer, Chief Financial Officer of Erste Group, and Andreas Gottschling, Chief Risk Officer of Erste Group.

They will lead you through a brief presentation giving highlighting of Q4 2014 and also for the full year, after which time we are ready to take your questions. Before handing over to Andreas Treichl, let me also highlight the disclaimer on forward-looking statements on page 2 of the presentation.

And with this, I hand over to Mr. Treichl.

Thank you very much. Good morning, ladies and gentlemen.

Let's start on page 4. On the right side you see the reconciliation of our annual results.

On July 3 last year, we announced that we expect a net loss for the full year of 2014 anywhere between €1.4 billion and €1.6 billion. We ended up the year with a negative result of €1,442 million.

If you look at the major components of the P&L, you will see that the operating result actually remained rather flat, which was somewhat of a positive surprise for us. And then you see three major negative items; risk costs with the risk charges particularly in Romania; then you see over €300 million in income taxes and a negative development of the other result of €788 million, which includes another €500 million of diverse tax items.

If you look at the quarter result, we ended up the fourth quarter with a positive result of €42 million. You see a deterioration on the operating expense side vis-a-vis the third quarter that includes a couple of one-offs.

One are one-off expenses for partial retirements and then we had the full hit of the AQR in the fourth quarter. Other than that, a substantial reduction in risk costs and an improvement in the other result, finally ending up with a slightly positive fourth quarter.

If you turn to page 5, you see on the right hand side those one-off items that actually had no effect on the regulatory capital, on the left hand side those one-off effects that actually had an effect on the regulatory capital. Both sides, one-offs without the effect or one-offs with an effect on regulatory capital, add up to about €1 billion.

So you have a total of about €2 billion of one-off effects in 2014, which includes the €400 million additional risk provisions in Romania, the heat we took in Hungary due to the FX conversion and the consumer loan legislation, 100 -- €200 million of deferred taxes that we wrote off, where we now are left with only €300 million on the balance sheet, and banking taxes €256 million. Unfortunately that's not really a one-off, because they will not disappear as all the other items on this page that hopefully will disappear in the next years, but they will be reduced.

As you know, we had a reduction in Slovakia last year, our tax bill in Austria was also reduced by about €40 million and, as you know, due to the negotiations we had with the Hungarian government we will see further reductions not in 2015 but in 2016 and in 2017. On page 6, you see most important ratios.

Actually, as we predicted, relatively stable net interest income margins, and Gernot then will lead you through the margins on a country-by-country basis or I do it myself. Then we have the operating result, as you see, more or less flat.

However, a deterioration of the cost/income ratio in the last quarter, but that's mainly due to the extraordinary items that we had in our total general and administrative expense line in the fourth quarter. An increase in risk costs, which pretty much match the €400 million additional risk costs that we took in Romania.

However, from the third quarter to the fourth quarter a substantial reduction of risk provisions, a development that we expect to continue over the next quarters. Earnings per share and cash earnings per share turned slightly positive.

If we go to page 7, you see the major changes on the asset and liability sides. If you look at the asset side, for the first time, actually, on a year-to-year basis an increase in net loans of nearly €900 million, which is based on an increase in performing loans of over €2 billion and a write-down of our intangibles by €1 billion to now €1.4 billion in total, On the liability side, no major developments other than that -- although we had the €1.8 billion deconsolidation of the Czech pension fund, you see an increase in customer deposits and you see that increase despite the fact that we had some rather serious repricing of our deposit base, but we still had above average inflow of customer deposits.

On page 8 the stable development of the loan-to-deposit ratio slightly -- a slight increase from 98% to 98.6% due to the fact that for the first time in a long time loans increased slightly more than deposits. We are turning even more into a purely risk-weighted assets lending institution, with credit risk-weighted assets now amounting to €87 billion.

And there you see NPL coverage and NPL ratio and in both a very positive development. The NPL coverage ratio increased to nearly 69% and our NPL ratio finally dropped below the 9% to 8.5%.

Fully loaded Basel III Core Tier 1 equity at the end of 2014 at 10.6%. We go to the business environment on page 10.

What's important for us, given our strong concentration on retail and SME, is that, whereas in the past years economic growth was mainly driven by exports, we now finally see a slight improvement on the domestic demand side, which should have a positive effect on the development of our loan volume. Two exceptions; a below average growth in Austria; and from a macro point of view the problem country for us in 2015 appears to be Croatia, which is the only country in our region that has no growth.

That also correlates quite a bit, interestingly, with the public debt relation to GDP, where you see that Austria and Croatia are in the lead, whereas public debt in the Czech Republic, Slovakia and Romania are at extremely comfortable levels. Interest rates on page 11 are, of course, a challenge for us.

They are coming down in all our markets. We actually see very, very little reason why that trend should reverse in 2015, so net interest income will remain a challenging item for us over the next years, hopefully will be made up through positive developments on the loan side.

On page 12, actually, if you look at it, there were basically two events. One is already dating back to 2013, which was the depreciation of the Czech crown.

Our guess is that for the moment the level of 2007 will be pretty much locked in, although there are rumors that they might take another action. We don't believe that for the moment this will happen.

And then the depreciation of the forint at the end of last year, which now led it to a level of HUF315 against the euro. Page 13, market share development actually rather positive.

The retail loan, which we're putting a lot of emphasis on, stable development in Austria and the Czech Republic, a slight increase in Slovakia and in Romania, and in the rest of the area relatively flat. The deposit side is basically driven by pricing actions we are taking.

Then we get to page 15, here you see the business line and the geographic view on the growth of our loan portfolio. You see an increase on the retail side and with the savings bank.

And if you look at it from a geographic point of view, you see that the loans have been growing in Austria, in the Czech Republic, a slight reduction in Romania, growth in Slovakia and an reduction in Hungary, but that might reverse now in 2015 and 2016. On the deposit side, not too much to be mentioned, so let's go to page 17 and the components of our net interest margin.

On a group level, rather stable. Now if you look at it from a geographic point of view, you see in 2014 a stable net interest margin in Austria, slightly down between Q3 and Q4, but in both components of Austria are up vis-a-vis 2013; a stable net interest margin in the Czech Republic; and actually the only country where you see a real steep reduction of our net interest margin is Romania, but that development should be over too and, of course, it has to do with the unwinding effect, which will still continue throughout 2015.

If you look on the operating income side on page 18, relatively stable, a positive development in Austria; slightly positive also in the Czech Republic vis-a-vis the third quarter; and due to the same reason as with net interest income reduction, pretty steep actually in Romania; positive, slightly positive in Slovakia and in Hungary. On the operating expense side, so the fourth quarter with €1 billion clearly overstated, due to the extraordinary items, and the third quarter understated.

So, given our efforts to keep the expense base flat during the next quarters you should see a nine in front, hopefully with an increasing -- with a decreasing number behind the nine. On the cost/income ratio side, not much to say, the only thing one has to point out is, and that's pretty obvious, that in the CEE countries you see somewhere in the 40s, whereas in Austria in the high 50s or 60s, so of course that's an area of our attention.

With that, I hand over to Andreas Gottschling, who will continue on page 21.

Thank you and a very good morning also from my side. On the risk costs, we're happy to face a decline both year on year and quarter on quarter, albeit it from significantly elevated levels.

The main dynamics of Q3 and Q4 were extra provisioning, especially in Romania, in Q3. Then, of course, from that particular one-off a significant decline.

And in Q4, additionally, some portfolio provisions arose through the usual backtesting of the parameters. Additionally, to mention the Hungarian dynamics, the relative risk costs that arise in Q4 is on the back of the Swiss franc conversion, which ran primarily against the outstanding loan notional and hence changed the ratios.

Turning to page 22, the non-performing loan decreased significantly by €1.4 billion to workout, including sales. This held pretty much across all business line, with a slight muddying of the numbers through the shift from €800 million between SME and large corporates.

We are now at a 8.5% non-performing loan ratio, which is a multi-year loan made possible, amongst other things, through massive portfolio sales that were executed, as announced last year, mainly in Romania, with there nearly €0.75 billion alone. Additionally, there is also significant positive ratings migration on the back of accelerating economic activity in all countries except Croatia.

Turning to page 23, on the back of the shrinking NPL stock, the NPL coverage has, of course, significantly improved almost across the board. We've also finally reached our target ratio of 60% plus in Croatia and we were able to maintain a stable NPL ratio in Romania quarter on quarter, in spite of the large sales activities.

With that, I will hand over to the CFO. Thank you.

Good morning, ladies and gentlemen. Thank you very much.

We continue on page 27 and there, as already mentioned, the breakdown of our assets and liabilities. We are now at 61.6% of our asset base in direct customer loans and is funded by customer deposits.

62.5% of our liabilities are coming from customer deposits, which results in a loan-to-deposit ratio of 98.5%. We could see especially in the deleveraging countries a significant improvement of our local loan-to-deposit ratios and significant deposits in local currencies covering easily our lending activities.

On page 28, as already mentioned, you see the breakdown and development by country of our performing loans. Growth in Austria, Czech Republic and Slovakia were enough to balance the reduction in other areas and show a €2 billion growth in performing loans.

NPL stock down to 11.5% with a breakdown reflecting our NPL sales activities. We continue on page 30, looking at our liquidity coverage ratio and the overall development.

It's a continuation and even an improvement from a very comfortable level in terms of liquidity buffers and showing the very well-known picture of Erste Group. Page 31, you see the development of intangibles; no movement on a quarter-to-quarter basis, just a slight reduction.

Basically, the €600 million in software, this is €500 million to €600 million, is something that we will continually be seeing on the back of substantial investments that are in the pipeline, driven by permanent regulatory requirements and necessary upgrades. So this will be a pretty stable number going forward and the remaining goodwills that we have on the books, coming from Ceska sporitelna and Slovenska sporitelna, are very where supported by the business development and the budgets going forward.

Page 32 shows the deposit funding -- customer deposit funding of the Group and a breakdown of different customer groups and maturities. So a very stable development and, as already mentioned, growing in spite of our deconsolidation of the Czech pension fund.

Page 33, our funding breakdown, you see on the left-hand chart a continuous increase -- a relative increase of our sub debt volume and combined with a reduction in other areas, we were issuing a covered bond benchmark in January of €500 million. This was purely a LCR-driven initiative and our activities in 2015 will be purely driven by ratios, keeping it on a comfortable basis.

Interbank deposits were going down on a quarter-to-quarter basis, but this is a normal development. Continuing on page 34, you see the maturity profile of the Group.

If you remember, the last three years we had redemptions of €5 billion to €6 billion on an annual basis. Now we are below €4 billion and have increased the average maturity to eight years, so we have a very flat maturity profile and very favorable situation.

The collateral coverage significantly improved in the last quarter, because we are only investing in eligible collateral. Page 35 shows the capital position of the Group.

We have the year-end phased-in and fully loaded Basel III ratios at the same level. The reason is that the up-drifts for the fully loaded ratio are compensated by EFS reserved development.

So we are showing a 10.6% CET ratio, well above the target that we've announced in the middle of last year, and a total capital ratio of 15.7%, again, well above the requirements in the self-imposed targets. And with this, I hand over to Andreas Treichl for the outlook.

Thank you very much. Page 37, as you can see, we have not altered our outlook.

Basically, you can summarize it in the following way. Principally, from a macroeconomic point of view, we're slightly more positive on the developments in Central and Eastern Europe, with the exception of Croatia and the fact that Austria in terms of economic growth is lagging behind the EU average for the moment.

But in the other markets and also due to the recent events in Hungary, we look at it more positively. Number 2, we also believe that our competitive position, particularly in retail banking, in our markets is improving.

However, we believe that there are still so many substantial regulatory and political questions outstanding that can have an impact on the performance of banks in Europe and in our region that we have no base to turn positive on our financial outlook. We maintain our position that we expect a return on our tangible equity for 2015 in the range between 8% and 10%.

And, of course, we continue to believe to have some loan growth in the low single digits and a significant decline in our risk costs. With regards to taxation, again, the situation looks locked in that it will improve for us in Hungary.

Our discussions with the Austrian government are still going on, and I'm not really so certain whether we can actually negotiate a reduction in the excessive taxation that we experience. So, basically, we stick to our outlook for 2015 with return expectation on tangible equity of 8% to 10%.

Thanks very much, ladies and gentlemen, for listening. We are now ready to take any questions you might have.

Morning. Thanks for the presentation.

I have a few questions. So firstly, on your provisioning, so it came in above the full-year guidance somewhat, mostly because you had some provisioning in the other segment, and I understand you are saying that you had some perimeter adjustments.

But can you maybe comment which geographies and which business segments are these adjustments who led it to and why would you assume that these will not recur, this will not reappear again over the coming quarters. Secondly, on your bank levy guidance, so you now assume that the SRF contribution will not be deductible from the Austrian bank levy.

Would you then assume a recurring, roughly, €100 million/€110 million charge per year based on your negotiations with the government? And, lastly, on the operating guidance outlook, if I assume you're your run rate -- that your costs run rate is lower than what you had in Q4 -- if I just try to break out your operating profit guidance, so if your costs are lower than what you had in Q4, your fee income has obviously been solid, would you estimate a roughly high single-digit decline in your NII estimates?

So, based on my numbers, that's what your operating guidance basically implies. Can you maybe comment on this?

Thank you.

Let me give an answer to your last two questions first, because both actually, in my view, are covered in the outlook on page 37. We do expect bank levies in 2015 to be around €360 million and that includes the contributions to the resolution and deposit insurance funds.

And in terms of the operating result, we're saying on a Group-level a decline in the mid-single digits and we see that as our outlook for 2015. Now to --

And in terms of the geographic segment as well as the business line as given on page 21, that was in Austria the EBOE, where we had the portfolio provisions as well as in the commercial real estate side. And no, I don't think these are recurring items.

These are basically back tested from also the significant market activities that we had this year and reflecting the workout as well as the sales. And I think this [nicely] at market.

Good morning. It's Matteo Ramenghi from UBS.

Thank you for the presentation. I actually have one question, which is regarding the future dividend policy, because you come with a better capital ratio than expected, 10.6% fully loaded Basel III, you are growing volumes aggressively over the next two or three years, most likely, and the bank will be profitable, so you will keep generating profit.

Now, I assume, while you will grow, it's not in high-risk density loans and, therefore, the capital generation should be quite strong. Should we read into that that you have potential to move your dividend policy in the future perhaps ahead of what it was in the past?

So maybe towards a 50% payout ratio or even more, which would be, I think, a substantial driver for the stock. Thank you.

Well, actually, no. We made no comment in our outlook on our dividend policy, and that is very simply based on the fact, and which is not true for us, but I guess for all banks in Europe, that we have been told by our regulator not to make any comments on our dividend policy, given the fact that there are still a lot of regulatory considerations out there, and we are expecting some form of solution this year.

We would, of course, intend to keep a dividend payout ratio 30%, and if what turns out to be true what you say, we have two options; either to increase our payout ratio or to return shares. So, obviously, the general direction that you're pointing out, is very much on our mind and I hope it turns out true, and we will find, of course, always on -- possible on giving returns back to our shareholders.

So I guess in 2015, I'm very hopeful that we will get clearance on all those questions on part of the ECB.

Good morning and thank you for the presentation. I have a couple of questions and I can have them one by one, if that's easier.

So, firstly, I was hoping, if you could perhaps indicate or quantify a little bit better for us risks to your guidance that you outline on slide 37. What kind of losses Erste could be looking at, if Croatian authorities, as I understand, move towards with Swiss franc reform?

And, secondly, what implications, direct implications of geopolitical tensions and risks in Eastern Ukraine and Greece do you see for the Bank? Do you have any exposures to any of those geographies?

Okay. On the Croatian front, since we will not give [perfect foresight], we are currently considering the worst forced conversion that we can imagine, would still leave us in double-digit loss territory and not get worse than that.

On the Ukraine in Croatia ,together, if the -- no, Ukraine and Russia, sorry, if the conflict gets worse, our total exposure there as of yesterday was €301 million. So if we write all that off, that is the answer.

And Greece? Can I just clarify why you put it just for the --?

Greece is there, because the possibility of a Grexit with subsequent market volatility in FX and possibly or very likely European government bond markets would entail significant risks. But we are not able to quantify these in a meaningful way now, but it is a meaningful risk, given as close as we came to this kind of problem within the last days.

So I think it's worth mentioning and I think it's only temporarily been shifted. Therefore, it will remain for this year a risk to the guidance and at probably not just our Bank.

That's very clear. Thank you.

So the next question is actually on the slide 45 of your presentation, where you indicate that you might be looking at potential expansions in corporate and retail banking in Poland. So could you perhaps comment on the nature and timeline of this potential expansion and, of course, if you would be looking at any acquisitions in the next reasonable timeframe, one or two years?

Okay. Okay.

I think everybody knows that our long-term plan is to add Poland to our Group, but for the next years this is a clear no-go for us. For 2015 and 2016 we will concentrate fully on increasing the efficiency in the region that we're in, on making sure that we will be the leading bank in the countries that we operate in and we have a lot to do and no intention to enter into any kind of acquisition deals in 2015 or 2016.

That's very clear. And the last question that I had is actually a follow-up on the previous question on dividend and capital.

You mentioned that you are already past your 10% quality 1 level but -- and you're looking for further clarity and I think you mentioned potential dividends and share buybacks as other options to -- in the future that are available, but I think also in the last quarters you have stated that the capital requirements drifting upwards and you're looking more at 11%. And I was wondering if -- we've seen the news recently that Austrian Financial Stability Board will introduce or will discuss potential systemic risk buffers and, when you look at that, do you see a potential for capital requirements to continue drifting upwards?

Many of your peers and European banks are now maybe guiding towards 12% as a more appropriate level. Any comments of that would be very helpful.

This, of course, out there [permanently] is regulators will continue to regulate until they've been told by politicians to stop regulating, and that's what they're getting paid for. So the likelihood that regulators will now turn around and say we will decrease capital requirements I think is pretty remote.

And we had that conversations over the last years. When you're at 8% everybody expects 9%; when you're at 9% everybody expects 10%; now we're at 10%, now you're talking about 11%.

That is still out there and there are a lot of things for us to consider. We're faced with Pillar 1 and with Pillar 2 questions.

There are still a lot of items open where the regulator himself is still thinking about how to handle that. What are the components of Pillar 1 will be the components of Pillar 2.

We are faced with [Emril] which has a different composition now than [Pelac]. Then you have very different capital situations and outlooks given by French banks and German banks and you look at the Scandinavian banks that have substantially higher levels, so it's an ongoing discussion.

We had a deal with our local regulator that we struck in July 2013 when we repaid our participation capital which was based on our commitment to reach a 10%, fully loaded Basel 3 core Tier 1 ratio of 10% by the end of 2014. That's where we are right now.

Now we are in negotiations on the systemic risk buffer; whether that will result in an increase of the regulatory common Tier 1 equity ratio, I don't know yet. I personally don't believe it's necessary and I actually believe this is the wrong direction because the risk profile of Erste Group in 2015, 2016 and 2017 will be substantially better than in 2012, 2013 and 2014 but let's see.

That's still out there in the open and, hopefully, this year we'll have finally some clarification and a level playing field in the European banking system that will last for a while.

Good morning. Just a few one -- a few short ones.

On the fee income, we've seen very good numbers in the Czech Republic in Q4 and also for the Group a very strong fee income; could you please give us a little bit of color on the source, strength and sustainability of these dynamics? Also, on the Hungarian Swiss franc mortgage conversion, could you please quantify the net interest income impact into 2015 and 2016?

And also if you could give us a little bit more thoughts behind your Hungarian EBRD Government deal, that would be much appreciated. Thank you.

Okay, let me maybe start with our thoughts on the EBRD Hungarian Government deal. I think that is a very positive development for the banking system in Hungary given that the commitments on part of the Hungarian Government are very strong and that they have been reconfirmed after the signing of the MoU with the EBRD on part of the Hungarian Government with the European Commission.

The Hungarian Government has confirmed that they will stick to that agreement and fulfill all the promises made so, in principle, we're looking forward to a situation where in 2015 and 2016 not only Erste Group but also the other banks operating in Hungary can return to a profitable business space. That, of course, will also depend on general investor sentiment vis-à-vis Hungary.

We've learned yesterday that there are now negotiations with the media companies also to release of the tensions that they had during the last years. In principle, I think it's a really positive move and I hope it stays like that over the next years.

On the fee income, in Austria it was mainly driven by asset management and customers doing more businesses with us. Czech Republic; a similar situation, mainly a good performance in transactions and various other fee items including sales of -- product sales where we get a better fee income.

On Hungary, net interest income will be down in 2015 and 2016. We are still calculating the final impact but on the [affected] portfolio it should be in the range of 20%.

And this is one of the reasons for our low operating result guidance combined with the unwinding effect in Romania; what, in effect, that you could see already building up in the fourth quarter where the run rate is lower on net interest income. And one additional point on operating income and operating results you see a one-off effect in the Hungarian entity on the trading result of €32 million and this was driven by our auditor where we had to reflect development of the Swiss franc/forint position on the bank because there was a positive development in terms of trading.

But, as we speak right now, now we are converting the loans to forints effectively with the customers signing the new contracts. And this €32 million positive currency effect was balanced by other operating [result] in the same amount because it's going towards customers and, in effect, it is a closed position since we've gotten the euros from Hungarian National Bank and changed it to Swiss francs in November last year.

So the base line for 2015 is -- on the operating result level is inflated by these extraordinary one-offs and with -- we will see in the first quarter whether we have a similar one-off development if there's continuous development in this direction but we will point it out as soon as we've closed all the transaction which is happening in these days.

Thank you very much, and just a quick follow-up. Could you quantify the residual CHF impact in Austria, Croatia and Romania?

How should we think about the potential risk costs in 2015? Thank you.

I think Andreas has already pointed out the situation in Croatia. In Romania we do not have any Swiss franc exposure so there are no costs.

And I think we pointed out that we do not expect any direct impact of our Swiss franc exposure on the P&L in Austria. But, of course, there will be some, and are some, re-ratings of the exposure.

The Government law introduced in Croatia will be reflected in the first quarter results for the full year and this is where we stand at the moment. But, as already mentioned, this will not change our guidance.

Yes, good morning to everybody. Just one question from my side.

I just want to better understand your stance -- your position on Poland because I see on Bloomberg they report that you might be interested in, they say, potential expansion into Poland. But, before, you clearly stated that 2015 and 2016 you aspire, basically, to only focus on the current market where you operate and you expect no acquisition.

So I'm just trying to understand whether -- what is the -- what's the position here? No acquisition at all in 2015 and 2016; is that correct what I understand?

Yes, I said very clearly that I believe for our Group it is the best way for 2015 and 2016 to make sure and certain that we can execute our strategy within the region that we're in right now. We have slightly shifted our focus last year to retail.

We're investing heavily in our digital platforms across the region. We intend to take market share away from our competitors and, at the same time, we have cost issues that we want to solve in 2015 and 2016 in order to increase the efficiency of the Group.

And we still have a lot of open questions on the regulatory side so the Board of Erste Group is very firm that the best way for us to go and also the best solution for our investors is if we make sure that within the given framework that we're working in, we're doing everything to improve it. If we do a good job on that, then we might make another move.

Poland is still going to be around in 2018 and even in 2019 the country will still be around and there will be assets to grab. We have no hurry but we have a clear commitment towards the goals I explained to you for 2015 and 2016.

Okay. Very clear [indiscernible] clear.

If I -- just another question. On Romania, if I'm not mistaken -- one day the credit risk capital requirement should be moved to IRB and if I'm not mistaken this was supposed -- suspected to have a negative impact on RWA.

Will you please tell us where we stand here? Is the project still ongoing?

It is [expected to ease]. That has been halted.

Where do we stand? And if it does go ahead, what would be the impact [indiscernible]?

Thank you.

The project is still ongoing. Currently, the rollout plan, I think, entails a move there in 2018.

The impact by now has become pretty negligible because, of course, the Romanian portfolio is also significantly smaller than it has once been when it was calculated initially.

Hi. A couple of questions.

Firstly -- sorry if I've missed it somewhere but could you just talk about the €48 million AFS impairment in the quarter; where that was from and whether there's a risk of recurrence? And then on Romania, could you just give a bit more specific guidance on what the incremental headwind from the unwinding effect is compared to the fourth quarter net interest income?

And then, finally, just on your capital ratios, could you clarify who it is that you see as setting your binding constraints on capital requirement? Is it the ECB or is it the Austrian Central Bank?

It's not entirely clear to me who's now in the driving seat on your capital requirements. Thank you.

I can answer your last question. I'm not entirely clear on that too but I -- two things are fixed.

Our regulator is the ECB but the local regulators have been given leeway on the definition and the size of the system risk buffer, so those are two facts that we're clear on.

Thanks.

The €46 million in the last quarters was housekeeping minor participations where we were writing down some of the smaller things in 2014 to remove any question mark for the future.

So you don't see any risk of that recurring. That's dealt with there.

No, because the things are written down to zero or €1.

Hi, good morning. Thanks for the call.

Firstly, looking at the markets that have not caused you so many problems; the Czech Republic, Slovakia and Austria, what do you think the margin outlook is there for 2015? Clearly, we've been expecting and you've been flagging what was going to happen in Romania and in Hungary as a result of the reset and NPL sales, but it would be helpful to understand how you feel the operating environment --.

You're telling us that a couple of percent loan growth is what we're going to get; what do you think of the margin outlook in those core markets for 2015? That would be helpful.

And I guess the second question is a 30% payout by historic example is quite high and, clearly, you don't want Erste to die on the vine. You, clearly, when you can, want to keep expanding the franchise and I wondered, do you feel that 30% is something that all banks have to aim for?

I understand it's under discussion but, clearly, given the choice between the expanding the franchise and increasing the dividend, where do you think you will come down? That would also be useful.

And I guess the final question would be whether you think --. You've talked about the structural cost issues that you have; you mentioned it in a response this morning.

Time is going on; what are the structural problems you have to address and how quickly can you address them because you clearly have identified them? So any thoughts on that would also be helpful.

Thank you.

Okay, I'll start off with the margin development in our core markets. We have seen in the last year Austria was a quite significant, positive development in our own businesses and in the savings bank segment and this was driven by liability re-pricing that was taking place in the beginning of the year.

Given the interest rate moves in the meantime, part of it -- this is -- part of it will be disappearing in 2015 so we are close to the end of liability re-pricing in the Austrian country. Czech and Slovak we were low already.

In Slovakia we were last year improving our deposit pricing and we're benefitting from it. On the asset side, it will be depending on the composition of the loan book and the new businesses we will be seeing, you saw a slight reduction on the net interest margin in Slovak entity.

This was driven by a very solid asset growth in the retail business but dominated by mortgage lending which was a lower margin than consumer lending. And then in the Czech Republic we could see a stable development on the back of very nice growth rates in the mortgage book but a flat year-on-year total consumer lending book.

So if we can -- if we see an uptick in demand on the consumer lending side, this could be helping and could be the source of stabilization. Where we see operation and net interest income in mainly Czech Republic a little bit -- and less in Austria and Slovakia is coming from the Government bond portfolios where we've -- we're investing our surplus liquidity, because there we are having reinvestment yields that are significantly lower than the maturing bond yields that we are seeing.

There we will see operation and net interest income and we have some potential to balance it through increased customer business. Overall, the development in these three markets is pretty stable and helping stabilize in the net interest income and net interest margin.

Yes. I think it is too early; not only for us but I think, principally, for banks in Europe to formulate a consistent dividend payout policy because we simply lack the denominator, and it's very clearly that we are now in a finding process on what should be the right capitalization for European banks.

And I believe if you talk to the ECB I think they are very aware of the fact that there should be an end to this being an open issue and that it is very necessary for the European banking system to have clear-cut rules and clear-cut goals for how the capitalization of the different banks should be. Before, we don't have a final answer to that.

I think it's very difficult to formulate a dividend policy because we don't know what the final ticket for us on the capital side actually will be. There's number one and number two.

As you know, there are a lot of regulatory restrictions being discussed on the ability of banks to pay out dividends and these discussions are still ongoing. And so a lot of question on will dividend payout policy or ability be only linked to actual capital ratios or will they have to be linked to certain [indiscernible] scenarios, and that is also something where we're quite hopeful that we get a solution and a final answer this year.

And then I think what we should do at Erste Group is to put ourselves into a position that our capitalization gives us some room to take advantage of smaller opportunities that within our given countries that might be available for grab, that would really fit our strategy. But I don't think that we would need to build up capital for any potential moves in 2017, 2018 or 2019 because if, in five or six years, we have an acquisition opportunity and we would not be able to raise capital for that, then I would -- then we probably shouldn't do it.

We're looking, over the next years, very much to optimize our capital situation and we believe very firmly and we will make, and are making, our point vis-à-vis our local regulators and the Austrian Central Bank and the ECB that we very much believe that, under normal circumstances, the risk profile of our Group should actually improve so we see no reason why we should get into ever-increasing requirements for our capital or solvency. Was that clear?

Yes, that is. Thank you.

On a structural cost question, you've seen in the first quarter some restructuring provisions that we've booked and you can just book these if you have identified it and put measures in place, so we will reap benefits of this additional extraordinary cost item already in 2015 and this is an ongoing process. We are mainly focused at Austria at the moment and Andreas Treichl was mentioning the cost income situation that we want to improve.

And this is a continuous effort and will lead to results on an ongoing basis where you will not see actions that we have seen in some of our geographies where we were more flexible in terms of labor market conditions. So it's a continuous process where we continuously show results and we could decrease our costs in 2014 vis-à-vis 2013, even though we had [indiscernible] driven by regulatory activities.

AQR which is, this year, translating into payment of the new regulator. ECB we've started already paying in the first quarter and other regulatory expenses are not disappearing by this.

We have continuous substantial investments in our IT systems and this needs to be funded in optimizing the rest of the structures. And this is just simply from our side the commitment that this would be done on a continuous basis.

Good morning, everybody. Johannes Thormann, HSBC.

Some follow-up questions. First of all, can you give us an indication when, excluding one-off [indiscernible] effects, Hungary will be profitable again, by which time [indiscernible] still stick to 2016?

Secondly, the booking of the banking levies; will it all -- the €360 million [indiscernible] the other operating result or some banks [indiscernible] have to book [indiscernible] expenses. How will you treat it?

And last, but not least, could you give us probably a cost of risk guidance range on Group level for 2015? Thank you.

Hungary 2016 is we're still sticking to the statement that our bank will turn profitable. We should see positive development after all the question marks around FX are removed.

We see already customers starting to repay their mortgages. There was last year a negative development that we could see.

We're expecting a positive business development and the reduction of a banking levy puts us in a position to bring back the bank in positive territory. On the banking levies we are showing it in a separate line and some of the things we're still in discussion where we are booking it but we will always, every quarter, show you very transparent where -- what kind of amount is shown in our results.

And third question I don't recall. What was it?

The cost of risk guidance range. If you can give us -- as you say, it will significantly decline in 2015; if you could give us a range, at least.

I don't know -- I know you don't want to fix a certain amount but if you could even in basis points cost of risk or whatever.

We've provided a guidance on the range of the return on tangible equity. From there you get a range of what the risk costs need to decline to get to that and I think that's all that we need to nail down right now.

Okay.

[Multiple speakers] more precise now. 2015 will be a year that will bring us on our way to bring our provisioning levels down to the range of 70 bps to 90 bps but how much we're going to get down to that in 2015 nobody knows.

Okay, but this is good news that you stick to the long-term target. Thank you.

Morning, everyone. I've just one question on your securities book.

I'm just wondering if you can provide some guidance around how you plan to mitigate the reinvestment role, if at all. And specifically on -- if you can talk about the size of the book, going forward, and whether you're willing to take on either maturity risk or geographic diversification away from the Austrian concentration.

Thank you.

The size is somehow -- the lower end is fixed because of liquidity ratio leads. We are talking about a €30 billion plus book currently at €38 billion.

We can be a little bit lower than the current range but not significant. It will be always -- as long as we have the structure of the business as we are having right now, it will be above €30 billion and there is not a lot of options.

We are facing 13% redemptions of the overall book this year so the impact will not be dramatic. We will definitely not sell anything in the quantitative [indiscernible] and create some extraordinary profits because this is something that is stabilizing our net interest income and, as I was mentioning, we need it for liquidity steering purposes.

We're not willing to take any significant risk in terms of duration or in terms of diversification because we were pretty conservative in the last couple of years and we will stay and stick to that. So the task for us is to make sure that we can mitigate the negative impacts by improving our direct customer business because, at the end of the day, the book is supporting our customer business and this is the task for the next two years as long as we have QE in place.

Is that okay? Is that answering your question?

Yes, good morning. Three questions, please, from my side.

The first one is in July last year you gave the risk cost guidance for Romania for 2015 and one for 2016 for Hungary; do you re-confirm -- to you confirm the risk cost guidance with today's results? And the second one would be on your tax rate.

Can we assume at the lower end of the range you have given that's, say, around 25% for 2015? And then, lastly, on loan growth, do you expect loan growth in all countries, in particular Romania and Hungary, then starting from Q1 or will we see a major NPL sales in 2015 as well?

Thank you.

The risk cost guidance currently stands as we gave it there. The last thing you mentioned, the major NPL sales could change that if there were such a thing as a strategic sized transaction but, other than that, I think Romania and Hungary can stand.

On the tax rate, we've said 25% to 27%. This is still [indiscernible] range.

You can see that we have significantly reduced our deferred tax assets. We had to create some in Romania because we will be profitable in this year -- next year's so therefore we are not expecting any significant negative impact.

On the loan growth side, it should be -- we are growing in Romania already in the retail business but it's not materializing and it's not that visible because of our big NPL sales. Hungary we will see the [indiscernible] on the big through the reduction of the -- based on the legislation last year but from there we should be growing as well in Hungary and the other countries, Czech, Slovak, Austria, we continue as we could see in 2014.

Thank you, good morning. Four short question from my side.

First, of the bank tax, could you give us a breakdown of the [€360 million] number bank tax and resolution fund contribution? Also, how much of that would refer to the Austrian savings bank?

The second would be this unwinding effect that we see in Romania. Maybe to remind us again how much is the unwinding effect per quarter and how much of that effect have we already seen in the fourth quarter?

The third, just for clarification, was you said that the trading result of €32 million in fourth quarter in Hungary would be offset by other expense; would we see this other expense now in the first quarter, just if I got that wrong -- right? And, finally, just on the impact of the law concerning Swiss franc mortgages in Croatia, that you said it will be booked in the first quarter; what would be the exact again?

Thank you.

On question number three and the €32 million, this is in the fourth quarter.

Okay.

We have the plus and the minus in the fourth quarter but it's just in different lines. Croatia; the impact will be on the risk cost I think €10 million for this fixation of the Swiss franc and then we have to look into details our -- in which line we will be showing this.

On the banking tax, it will -- it's €240 million bank tax, €100 million contribution to the various funds and breakdown of the savings banks I think majority is covered by us from the Austrian part. I don't have the detailed figure with me; we'll come back with an email to you.

The second question was the --

Unwinding.

-- unwinding effect in Romania. This year in the presentation it was already -- we have, in total, a €200 million unwinding effect in 2014.

This was going already down and the majority of it is Romania. And you have a comment in the presentation; I'm just trying to find it.

It's on the -- we'll have it in a second. It's on page 29.

You see the specific unwinding contribution in 2013 in Romania was €142 million, 2014 it was €87 million and if you look on a quarterly basis, so you see already the fourth quarter run rate for unwinding in 2015, and this is the major source of maybe interest income reduction in 2015 vis-à-vis 2013. So you have the first six months high effect of unwinding in the Romanian result.

Third quarter already significant reduction and fourth quarter going towards the run rate for 2015.

Good morning. I have two questions.

First, if you could give us anymore color on your NPL workout plans. You had €1.1 billion NPL sales last year.

Anything more? Any thoughts on how much you're planning to do or could do in Romania?

Could you do more in Hungary? Is there scope to do something in Croatia in other regions?

And then my second question would be on the impact of this lower interest rate environment and lower yields, I think you flagged that there was an AFS revaluation; could you maybe quantify the impact that would have had on your equity and capital and any sensitivity, let's say, if Czech yields or Slovak yields move up 50 bps. What kind of impact would that have on your capital?

Okay, let's start with the workout plans. I think we'll continue to work out the NPLs in Romania at the current pace.

It was something which was already put into motion and 2013 was the build-up of the separate RE unit there so this is in full swing. And with the €0.75 billion we managed to sell in the second half of last year, we will try to continue at a similar pace as long as the markets are open and friendly.

In terms of Croatia, I would expect that there are going to be some NPL sales in Croatia. And in Hungary it's a bit early to judge because there, I would say, through the significant change of environment that is indicated by the MoU, we will reassess the situation there now.

So I would not give a figure] for Hungary.

But overall for the Group we should expect probably similar trends, maybe another 1% drop in NPLs? You wouldn't think that's a bit too aggressive on our side, if that's how we're thinking.

This is not too aggressive as long as the markets remain open. If there is any major change in the market environment, this would of course have an impact.

But other than that I would find that a very acceptable target.

Okay.

On the lower yields and the impact on the AfS, we have mentioned this is already in the fully loaded Basel 3 scenario. And here we could see a positive impact.

And we are using the impact with [rate cuts] in our calculation. But it's just -- this is a number that is moving up and down and we are simulating various scenarios.

But this is fully loaded in 2019. I think from today's perspective it's just a speculation how it will be looking like going forward.

Higher interest rate levels will have a negative impact on our AfS reserves and will have a positive impact on our profit generation. So we will have some lagging effect in our development but I don't want to speculate how things would be impacting our capital position in 2019.

It's just simply I was mentioning it because it's offsetting all uplifts at the moment and that's the reason why we had Basel -- current Basel 3 and fully loaded Basel 3 the same ratio.

Sorry, on the transitional one, you wouldn't have had the AFS. Was that what you were suggesting that only on fully loaded?

Yes.

And I understand that until 2019 lots of things can happen. But just for our understanding of sensitivities, are we talking about a 10 bps or 50 bps type of sensitivity?

We're talking about a 30 bps sensitivity.

Hello. A follow up on Hungary.

So based on your agreement with the government, would you assume that you will not have to take additional [offices] related to the asset transfers to the [bad bank]. And can you confirm your CRE exposure in Hungary, including those that you book in the other Austria segment.

And also on Hungary, I think you said in this agreement that the EBRD's involvement will probably be temporary, that the EBRD probably have an exit option. How do you see the government's involvement?

Will they also have an exit option or would you think about the state as a long term shareholder in Erste Hungary?

That is too early to say. We are still negotiating the contract both with the EBRD and the Hungarian government.

And the -- my guess is that both the negotiations will be lasting until the end of June. So we can give, you without speculating on how it looks like the final content of both contracts most likely when we present our half year results.

On the exact exposure on commercial real estate in Hungary, we'll get back to you. I don't have that at my hand right now.

However, a conclusion from the MoU or eventually the contract that we would be treated different than any banks in terms of an asset transfer, rather I would think it's highly improbable. But this is nothing that we can either exclude nor that we particularly worry about at the current time.

Hi, Muriel Perren from Citi's [technical difficulty].

Hello?

Hi, can you hear me?

Yes, yes, we can hear you?

Sorry. Hi, it's Muriel Perren here from Citi's credit team.

Thank you very much for your presentation. I would have two questions please.

You have been talking a lot about potential return of capital to shareholders. However you've not issued any additional Tier 1s yet and actually you'll need about 1.5% of your risk-weighted assets in those under CRD4.

Now naturally as a bondholder, you'd want to see as much capital buffer [indiscernible] given your requirements that you can, especially given what you're saying about the potential for a systemic risk buffer being implemented. So how should I be thinking about the timing here?

Is an additional Tier 1 something you are considering to issue maybe this year or in 2016 or are you in no hurry to issue? And if actually you intend to issue then how would that fit in with potential return of excess capital to your shareholders?

Or if you want in other words, what sort of capital management buffer would you be thinking of holding? And then the second question is could you give us an update on your amount of [indiscernible] items as at the end of 2014 and your expectation on Tier 1 coupon payment going forward, given that you missed one at the end of last year.

Thank you.

On Tier 1 coupon payment, we expect to resume the payments in 2016 for the year 2015. And on the additional Tier 1 question, we have a prospectus prepared and we have no hurry to issue additional Tier 1.

But given the current assessment of the situation, you can expect that we will be doing something in the course of this or next year. But we have not finally decided that.

And what sort of management capital buffer would you have? Other banks are talking about 10%, 10.5%.

Is this something you are thinking about as well or is it just too early to discuss it?

Well, whenever we are agreeing on certain capitalization ratios, you can add 50 basis points buffer to everything what we are saying for our internal management buffers. This is just if we need it for areas of fluctuations up and down.

Good morning. A very brief two questions on my side.

If you could talk a little bit on the fee competition outlook in the Czech Republic and how you see Ceska performing here. And the second question your other Austria/international business, could you provide us some sense of how far you want to de-lever this business going forward and perhaps the revenue that you made in 2014 just on this international business, not commercial real estate, but this in particular.

And that will be useful. Thank you.

The de-leveraging in this segment is mostly done, so it should be stabilizing from here. The breakdown we will come back to you or we will send it to you.

I don't have the number at the top of my head. Fee income in the Czech Republic, you know that it is a continuous debate in the country and we've introduced fee holidays on certain products, asset products.

And this is limiting the potential on fee growth. On the other hand, through new products and additional transactions we can make up the negative difference on this.

So I would expect a slow but solid development on the fee line going forward.

Okay, thank you. Maybe just a quick follow-up question on the bank tax.

Do you have any sense of are we going to see a reduction in Austria? We see cuts everywhere but not much in Austria.

Also if there is a cut, do you see it will meaningful decline partially offsetting those higher contribution to European Fund and Resolution Fund.

I said that before. For the moment I see -- we were successful in Hungary, with getting the banking tax being reduced in Slovakia.

In Austria I do have my doubts for the moment. But rest assured that we'll work on it and the day will come when we get that item cut too.

I will not rest before we manage that.

Yes, thank you for taking my follow-up question. Is it possible to have an idea of the average risk weight of sovereign exposure?

And is it possible to have also an idea of what countries if any, are risk weighted zero in 2014? Thank you.

On the average risk weight on the sovereigns, that's -- in terms of Pillar 1, they are the usual suspects that are excluded from that under the European legislation. [Others] excluded under Pillar 2, there are capital calculation underlying, but I don't have it at the top of my head what the average risk weight there is.

Okay, thanks very much. We'll get back to you on the average risk weighting which is actually quite interesting [indiscernible].

But the next time, I think we hear each other will be when we present our half year results, which will be -- oh, no our first quarter results. Sorry, we're just doing the annual review.

So the first quarter results which will be, I don't see the date here [multiple speakers] May 7. And then the second time, August 7, actually the half year results.

So adapt your vacation to that. Thanks very much for listening in and have a good day.

Thank you very much.