Erste Group Bank AG

Andreas Treichl – Chief Executive Officer Willi Cernko – Chief Risk Officer Gernot Mittendorfer – Chief Financial Officer

So good morning, ladies and gentlemen, welcome to the presentation of our first quarter results. With me, Willi Cernko, our Chief Risk Officer; Gernot Mittendorfer, CFO.

We’re going to lead you through the presentation, and then we’re ready to take any questions you might have. You can ask all questions.

As usual, there are a couple of questions that we will not answer, if they’re indiscreet. So we get to the Page 4 just quickly.

Net profit is slightly lower than in the first quarter 2016. On a quarter-to-quarter basis, operating performance relatively flat and also on the risk side, although we had an event here in the first quarter.

Actually, it’s a pretty good sign that we can swallow something like that without having a major effect on the risk cost line. Other result.

Now this is sort of the true improvement on the banking levy side. It’s already €8 million, and in reality, so the gain out of the negotiations and the final solutions that we have with the Austrian and the Hungarians is, on a quarterly basis, about €30 million, €35 million saving on banking levy through – on a quarterly basis.

The operating performance, and if you look and compare it to the last quarter 2004, it is not so dramatic. Of course, not pleasing that we have a loan growth and NII still remain flat, but at least we had an uptick now on the fee income side.

We’ll get into that later. If you look at the margins, the drop seems to be a bit heavier than it was in the past.

Actually, it’s not. Part of that drop has to be seen out of the extension of our balance sheet, the substantial increase in bank lending and bank deposits, basically around the Czech situation.

That should normalize now, again, in the second quarter. Cost/income ratio, not an incredibly pleasant picture, but also that should find some relief during the next quarters.

And as you know, that’s one of the big things that we’re working on. We’re at 61 or 63 or 60.5.

It’s all too high. And we know we got to go back to well below that line in the mid-50s.

Cost of risk, of course, a good story. Return on tangible equity close to 10%.

Here you see the sort of the extraordinary extension of the balance sheet on both sides, loan to banks and bank deposits, but also in the net loan increase of €2.3 billion, there’s about €1 billion in there which is not business-related but comes from the markets business. So corporate and SME and retail loans actually are within the 5% gross patterns.

So you got to take about €1 billion out of the €2.3 billion gross to get to €1.3 billion. And then if you extrapolate for the whole year, we’re pretty much on the track of 5% loan growth.

If you look at the overall economic environment, you would probably see that there’s a chance that loan growth could be stronger. And some of our competitors are also growing a bit stronger in some of the segments.

Those are mainly risk-positioning issues that we have, where we have quite a bit of flexibility during the next quarters to speed up growth if we’d like to. Loan-to-deposit ratio.

The loan-to-deposit ratio dropped to 92%, which is, I can recall, I think, at least as long as I’m running the bank, the lowest – or the best loan-to-deposit ratio we ever had. Unfortunately, you don’t get any money for a good loan-to-deposit ratio.

But still, it’s a good sign. On the other hand, it’s also a weak sign because it’s a reflection of the complete lack of investment management products for the affluent or mass affluent and retail clients.

The loan-to-asset ratio is still very good. It’s a bit less good than last quarter, but that’s only due to the extension of the balance sheet, and also the leverage ratio is as – dropped slightly below 6.

But that’s definitely going to go back to above 6 again this year. NPL coverage ratio and NPL ratio, very good.

We kept it at 4.9%, including an incident. So that’s pretty comfortable to see.

And capital ratio is relatively flat. Do not include first quarter profits nor dividends, nor – but includes the risk costs for the first quarter.

So total tangible equity, a slight increase. If you look at the business environment, it all looks relatively good.

Even if you look at the forecast for 2018, you see inflation levels at relatively decent levels, and you see sort of, with the exception – everywhere, you see a little bit of an uptick, and you see about 3% real growth in our markets, with the exception of Austria. However, the quality of the gross of those 3% real GDP growth is quite different.

Very different in Romania, from the Czech Republic. Very different in Slovakia, from Hungary.

But all in all, GDP growth, pretty good and decent inflation. And at the same time, unemployment is decreasing.

Real wages are growing. And the public sector is, whether you like the public sector or not, you can have different views on that, but they’re performing rather well.

Public debt is going down almost everywhere. And on the deficit side, the countries are not doing so badly.

And some of our countries are – belong to the best-performing countries in Europe. So in principle, the environment is rather positive in our region, also for 2018.

Nothing really much to be said on the interest rate side. I think the only surprising thing that we have for the moment is the Czech situation, where the Czech crown keeps relatively stable.

And I think that the fear that we would see a strong appreciation of the Czech crown after eliminating the floor is almost gone and turns around now actually into a belief that the chances for a depreciation of the Czech crown is actually higher than of an appreciation. Therefore, the likelihood that we see an uptick in Czech crown interest rates is increasing.

And of course, that would be a positive development for us. Yes, currency volatility, practically nonexistent.

Where we would have expected substantially more volatility was in the Czech Republic, but you actually don’t see it. A relatively strong picture of stability.

If you look at the market shares, you really got to go into details. But there is an underlying positive trend.

We still have a reduction in our market share in loans in Romania. It’s completely leveling off and actually turning around now in Hungary, but that reduction of the market share is also part of our NII problem.

NPLs usually had higher interest rates. We’re either selling them off or they’re running off, and they’re replaced with somewhat lower-margin volume.

That’s why we need a lot more volume in order to bring NII up. But in principally, a good picture.

If you go back some years, you – sort of decent years, where we had quarter after quarter a drop in our market share in the Czech Republic and Slovakia. That’s over.

That’s over, and it’s turning around. Yes, loan growth, actually, almost across the board, on a quarter-to-quarter basis now, even, I think, for the first time in 15, 16 quarters, you see a slight growth even in Romania.

And the only place where you see a drop actually is in Erste Bank Austria. That is because we have had some rather aggressive competitors on the large corp side, where we just didn’t want get into a low-margin business.

Deposits are growing across the board. Deposit growth is overstated due to money market deposits coming in, in the Czech Republic.

But even excluding them, our deposit growth is absolutely great, but is the basis, I think, of one of the biggest problems that we have in wealth creation in Europe, which is lack of capital market products with whom we could structure regional asset management products that we can sell to low- and mid-income retail clients. NII, I think I’ve said enough about it.

I don’t have to repeat it, but interesting to look at it on a country-by-country basis. And then if you disseminate, sort of segment the whole operating income, it is not a very pleasant picture, but it’s not so bad.

And it takes a bit, and then we can actually, hopefully, turn it around. And of course, it would be fantastic for us if we could speed up our ability to actually sell asset management products on a broad basis.

It would reduce our deposits and would increase our fee income. If you look at the operating expense side, actually a slight improvement in some markets.

And in some markets, a slight deterioration. Yes, I think with that, I can hand over to you.

Yes, thank you. I want to spend just a few comments on the cost of risk.

The good news is performance is still, I would say, pretty good, rather boring. There’s just one exceptional case that is in the back here.

The results is a creation corporate case, and what is shown here is, to a large extent, related to this case. When we have a look at the NPL ratio, we say we remain at the level of 4.9%.

If we would exclude the creation corporate case, we would have improved materially. But what I can tell you is despite the fact that we have – are confronted with this case and that is reflected here, we stay within our given guidance last time.

So I think I can hand over to Gernot.

Yes. I think, from my side, when we look at the assets and liabilities, there’s not a lot of changes, except the development that we were commenting already in the Czech Republic.

All the trends are continuing as we’ve seen in the last couple of quarters. So performing loans, up.

Nonperforming loans, down. We are now showing a peak higher growth rate on a quarterly basis, yearly basis, if we take out the Czech money market.

Even with these, we are a little bit higher than last year. So – and this is a broad-based trend that you’re seeing in all countries at the moment.

A logical consequence of the NPL development and the NPL performance and the better asset quality, you can see in the quarterly development of new allocation uses and releases from the NPL stock. There we are continuing in the levels that we have seen in the last couple of quarters.

You’ll remember a year – 1.5 years ago, we had doubled these amounts, moving in and out. And now the P&L impact of the unwinding almost disappeared, and we will be in the double-digit million contribution coming from numbers of more than €200 million in 2, 3 years ago.

So a very clean P&L and very clean net interest income. And then we should stay now in these levels and show a stable development from here.

Liquidity ratios, as usual, extremely comfortable and very solid buffers. So continuation of what we’ve seen over the last couple of quarters and growth mainly seen in – from the customer deposit side now in the Czech Republic.

But this should be slowly disappearing over the next couple of quarters, these extraordinary developments. On the debt securities, on the issuance we’ve done this year, a covered bond in January, and now in the beginning of the second quarter, our second additional Tier 1 issuance, and that’s it for the year.

We are covered, and we are not planning to do anything in addition. The 81 that we were issuing is already pre-funding a Tier 2 that’s expiring next year.

So the – we will have a comfort around this as well. Maturity profile, very comfortable.

And as you could see, our issuance activities, grossly half of what is maturing because the rest is easily covered by other means and deposits. TLTRO, we were participating in the last one because we can show growth on the underlying loan business and have a utilization of €3.5 billion and are comfortable that we fulfill all the requirements to make use of the negative funding costs.

On the capital side. We could see, and this was already mentioned, the loan growth is mainly happening in the low-risk portfolios.

So we are growing our customer business without growing our risk-weighted assets. As usual, the CET1 ratio in the first quarter is not including, the same as in the third quarter, not including the quarterly profit, and the risk costs are deducted, so a slight reduction.

But overall, a very solid development on a phased-in ratio above 13%. So with this, I hand back to Andreas Treichl for the final remarks and the confirmation of the outlook.

Okay. Outlook, I think we reconfirm the outlook for 2017.

And I think what we’re basically doing is we’re setting a floor with the 10% ROTE. So there is an upside potential depending on the development of the fee income, whether – what happens on the interest rate side, if there’s something happening in the Czech Republic, or if we have stronger loan growth than expected, or we’re able to turn more deposits into asset management products, I think there is a chance for an uplift.

But ‘17 and ‘18 are very challenging years for us, both inside the group and externally. And we’re working very heavily on our chances to seriously improve our operating leverage.

We’re making good progress, but we don’t want to sort of talk about the unlaid eggs. So a slightly better chance for some – for us being able to outperform the outlook than last time.

Before I end, I just want to show you something that is pretty amazing. If you think about really long-term investments, since I’ve been around for a while, you need to take a look at that because this shows you actually what this financial institution is all about.

If you don’t think in 2-year or 3-year terms, but in 15- to 20-year terms, look at these 2 numbers: €32 billion and €33 billion. Now the total deposits in the Czech Republic is a bit overstated because this has some market deposits in there.

But when we bought Ceska Sporitelna 7 – well, I don’t know, 17 years ago, it had exactly 18% of the deposit base of Erste in Austria, so less than 1/5. Now it’s bigger.

It’s bigger than Erste. And 10 years from now, it’s going to be 3x the size of Erste.

And the same thing is going to happen on the loan side. We’re not there yet.

Erste is still a bit ahead of Ceska Sporitelna, but it’s just a matter of a couple of years, and then the bank is going to be substantially bigger. And my guess, 10 years from now, Slovakia will be bigger than Erste Bank in Austria maybe.

Okay. With that, we take any questions you might have.

[Indiscernible] I’ve got just a few questions. The first one is, can you maybe talk about where you think NII is heading?

Obviously, you’ve got much of Q2 already done in the Czech Republic, given the – what you’re expecting on the FX side. And then the second set of questions is more on the Agricole situation.

I’m just curious as to how you – the exact amount of provisioning you’ve taken, the size of the actual exposure. Do you have any linkages to the actual subsidiaries in Slovenia?

And the situation is quite fast-moving, and the governments across 3 countries that are involved in that situation are introducing laws to take control. And they’re prioritizing supplies in the capital stack over the banks and the bondholders.

So maybe just some color there on that situation would be good, please.

Okay. On the NII side, there is – part of that is in our discretion, and part of that is not in our discretion.

We can increase, of course, our NII if we turn a bit more aggressive on the consumer lending side and if the composition, particularly, of our retail loan portfolio moves from mortgage lending into more consumer lending. And the second part of that is something that really is very much engaged in it for the moment, that we increase our position in the micro and SME lending markets, not in every country, but in most countries.

And actually, we are – and what’s different from a year or 2 years ago is that, including Romania and Hungary, we would now feel, from our risk management capabilities, fully comfortable of increasing our volumes both in consumer lending and also in the micro and SME side. As, and I think as you can see from time to time, we have actions that are not extremely positive for the consumer – for the lending margins because some of our competitors get very aggressive in 1 or 2 fields, 1 or 2 countries.

You have that in Slovakia, when you have margins in the mortgage lending business suddenly coming down. But there is no tendency that sort of this results in the real, true long-term reduction margins because you see offsetting trends again.

And some parts of our business margins are actually improving. So part of it is under our control, and part of it is not.

I guess that’s saying that a sort of a further reduction in margins and or NII becomes less and less likely, so the chance for an uptick during the next quarters is definitely there. What would be extremely helpful, if we see some positive interest rate action in the Czech crown.

On the euro side, the way we look at it for the moment, we don’t see anything happening, much to our anger because we think it’s completely unnecessary, but we see sort of the monetary policy of the ECB resulting in a rundown of the purchase program in 2018 only. And our present guess is that, that will be over in the second quarter of 2018.

And then there is room for improvement also on the euro side. But for the moment, we don’t see it, unless something happens and they change their mind or an account turns out to be incredibly powerful.

Let’s see. I mean, that would be a positive which we have not included in our forecast.

In the Czech Republic, later on this year, we actually see a chance now.

Okay. When it comes to the creation case, please respect that I’m not able to enter into details, but I want to give you a few ideas to get the flavor on that.

I already mentioned that risk is, to a large extent, we’re likely to lose the creation corporate case and that we feel ourselves pretty well-provisioned. What I can tell you is the way we are dealing with that subject is pretty professional.

The cooperation between the restructuring team, between the banks, the suppliers, the government, the regulator, is really excellent. And we were able to manage it, first step, to create a standstill, then the government implemented a legal frame to create the foundation to take the next steps.

So we are pretty confident that, on our side, we are well provisioned. On the other side, there is a good hope that the restructuring is going to be successful.

And it is considering the entire corporation, not just the creation of that.

I mean, I hope you don’t mind me asking, but can you just give us an idea? Is it – how much is the provisioning?

Is it low – In the low hundreds versus the actual exposure? And is that the top co?

Or is it within the actual – within the different entities within – at the kind of OpCo level?

As already mentioned, to a large extent, the – our cost of risk is reflecting the creation corporate case, and we feel ourselves well provisioned.

A couple of questions on Czech here. A competitor of yours reported quite a nice uptick in the trading results recently, which we didn’t see at Erste.

Do you see an increasing client demand towards the hedging products since the de-pegging? And that’s one thing.

The other thing, how would this impact your Czech business if the – If these huge speculative inflows into the currency were to reverse? So would it be just a kind of optical thing that, of course, if that was in outflows, your loan-to-deposit ratio would adjust.

How worried are you about the devaluation of the currency impact in your P&L and capital?

Yes, we – first, on the trading. We saw increased trading activity, and we saw activities from corporate customers basically hedging ahead of the pegging because I mean, the Central Bank was pretty clear in the communication and kept what they said.

And so corporates had enough time to prepare for this. We were looking at the size of the intervention that was taking place, and we were already mentioning that we are not really sure that after the peg is removed that the crown will jump to a level of 25 as some people were thinking.

And the current development is proving us right in this assumption. We saw a slight appreciation and still a lot of money involved in betting on a stronger Czech crown.

We would think that if the crown appreciates too fast, that the Central Bank would probably, on a selective basis, try to avoid too-fast appreciation. And we think that there would not be in the market also the goods, given the size of the intervention, to prevent a steeper depreciation.

So we were looking at both directions and their potential impact. It’s very clear.

The appreciating Czech crown is translating our P&L into higher euros. So higher income, higher costs, higher capital because we are holding the capital in Czech crowns, and the opposite development you would see in the other direction.

I think one thing we should have in mind, if the crown is moving in the other direction, as it is currently doing, then there might be a different interest rate level, which has a significant positive impact on us. So we were not really dramatically active in our own positioning because we had both options with a certain probability possible.

And now we are a little bit surprised how calm the situation was and how smooth the exit was functioning because we saw neither an overshooting on the upside nor an overshooting on the downside. So if the situation stays at it is, this is definitely positive for us and positive for our customers.

And just to follow up on the NII, to make sure I read your NII guidance well. So do you think the Q1 level of the NII is close to a kind of run rate in this interest rate environment and you see potential upside from rising interest rates?

Or do you see any potential upside even before interest rates start to go up?

Well, I mean, we have a lot of effect already in, in our net interest income in the first quarter. And loan developments are not bad.

But margins are pretty low because of the predominant mortgage business that we are having at the moment. So a composition effect could definitely improve the situation.

And other than that, if we are seeing continuous slight better loan growth, that’s definitely helping. And I think the majority of effects are already reflected.

When you talk about speeding up loan growth if we want to, and you’re saying that you’re happier with sort of SME and consumer asset quality, why don’t you? Is it just because there’s not actually that much demand?

Or the people that are spoiling the party, in terms of being aggressive on margins, are stopping you? So if you’re more comfortable, you clearly have no problem in terms of capital to grow, so why don’t you do a bit more of it?

And what’s the issue here? I mean, is it a pull or a push?

That would be interesting to understand how you feel because it looks, in terms of what you’re saying about loan growth, is that, on the whole, it’s retail that’s better at the moment and the corporate is probably the laggard. And is there any sign of any more sort of longer-term investment lending coming through?

If you can, and you’ve got the capital and you feel more comfortable, why not sort of push the boat out a little bit in the next quarter or so? I mean, your thoughts on that would be interesting.

I think sort of – when you had the full year numbers, I think you expressed a hope that fee income would grow, but that it would be difficult and tough. And you come back and you’ve done a 3% growth year-on-year on your fee income.

So is that achievable across the rest of the year? Or is there something – Is there still just a low base?

I mean, I think you said this morning that you do think now that fee income will grow. But I mean, is sort of 3% reasonable ?

And that would be interesting since it clearly a bit of a change from what you were suggesting back in the dark days of February. The next thing I’d like to ask you is on Romania.

I mean, you’ve made some quite big provisions over the last year or so on their sort of consumer protection legislation and then presumably the walkaway law. And your friends across the park in Vienna are going to write-back their walkaway law provisions in the first quarter because the law has been declared unconstitutional.

So could you sort of help us understand what’s the sort of – is it – it’s not just the walkaway law, is it? It’s the sort of the consumer protection legislation.

So if the law was unconstitutional, what is actually going through the corps that you’ve made all these big provisions for that is going to cost you over the next years? So could you just sort of clarify where we are on that?

That would be helpful. And I think the last one was every – I just think that every quarter now you talk about the asset management issue and you bang your hand on the table and tell everybody they’ve got to do something about it.

But I mean, what? Now what happens?

Now is it a question about you need the ECB to create a different law? Or do you need now some form of sort of consumer protection?

What is it? Surely, most people who are getting absolutely nothing on their deposits wouldn’t mind getting a little bit more or wouldn’t mind some longer-term savings.

So what is it? You say it’s terribly unfair, but what would actually – what would change it?

What’s needed to make your life easier?

I start with the first question there, corporate, why we are not taking it. I mean, marginal profitable business, we are not heading at the moment.

It’s just simply inflating some of the numbers. We don’t see any additional gross selling opportunities.

It’s just you are into a business and – for a couple of months, and that’s it. I mean, yes, I would have wanted a little bit of positive contribution, but we are rather focusing on preparing ourselves to create, in the future, different business opportunities that are long-term contributing to our P&L.

On the Romanian consumer protection, we’ve done an assessment of the provision with the year-end numbers. And you know that we have added some provisioning.

Yes, there are some positive developments on the courts and in the markets, but we did not see such a material change in the course of direction that we found it necessary to reassess the provision at the end of the first quarter. We will probably have a look on – around the half year, but most probably, we will look at the development throughout the year and then look whether there’s a need for releasing of some of the provisions on this specific case.

The one topic on the walkaway law there, we are pretty clear that we should not expect any additional burden out of that.

You have made provisions against that.

Yes, and we will have a look whether they are still necessary and

And the law is unconstitutional. Therefore, you won’t have to spend the money on it?

Yes. Yes, yes.

And the second part is on the consumer protection cases. And there, you have mixed the decisions by the courts.

We are still winning. Our win-loss ratio is pretty much in our favor still, and this is something we are monitoring over a longer period of time.

I think, for you, the important thing is there’s nothing to be expected in addition. And if we continue like we continue today, we might have the one or the other write-back from this.

Now with regards to loan growth, I – it’s – I think there are a couple things that happened in the past that limit sort of the reasons why we couldn’t have more loan growth. Part of that was that we had, if you go back 4, 5 years, we had systemic risk management problems in certain countries, and I think we have eliminated them.

We have, from a systemic risk point, from a risk management point of view, we have no issue why we couldn’t grow in retail in Hungary or in corporate in Romania or whatever. So now it’s a matter of risk policy and the quality of risk management and corporate and SME and retail lending officers.

And one thing that you – if you look at, you see a big difference between, just looking at Austria, between our business and the business of the savings banks. Savings banks have somewhat higher net interest margin than we have, but they have nearly double – and somewhat stronger loan growth than we have, but they’ve nearly doubled the NPLs from us.

Well, this is a matter of fine-tuning and what is the more profitable way of running the business, and could we increase our loan volumes in retail, micro and SME lending without reaching the NPL ratios of the savings banks but improving our margins. This is one of the main jobs also that Willi is involved, and he probably had a lot of experience.

And if I may talk for you, Willi says we have weaker loan officers. They don’t dare.

They go much more by the books than in his previous bank. And that’s an atmosphere we have to create.

And I think we’re doing a good job on that, and we start improving on that front. Now the second thing you asked me that, that is beyond the quarter call, but I can – I am absolutely convinced that this is one of the generic weaknesses of Europe overall.

It’s just reflected now in the 0 interest rate policy of the ECB, but it’s not the ECB’s fault. They have fulfilled one purpose, and they missed on the other one.

They have one part of Europe, they do not have the other part of Europe. But in principle, the weakness is the fact that Europe has no capital market.

And particularly, our region has no capital market. And if we want to seriously increase the asset management business in our region, and some of our competitors are a bit better because they sell more on the insurance product side, but even the life insurance business for the moment is stuck.

So we have a completely debt-based accounting in Europe. We have a debt-based corporate legislation in Europe.

And we have a debt-based taxation in Europe. And unless we change that, we will never turn it around.

So I can use whatever I can do to make politicians aware of the fact. But in a region where you have 2% share ownership and where a corporate bond appears every 18 months and your government yields are at 0, how do you want to create asset management products unless moving into territories where we have no experience and where, if we screw it up, our customers rightly say, "Why did you buy a product for us that you are – you don’t know?"

If we make a mistake by putting together a Czech-Slovak-Austrian-Hungarian mixed share bond, corporate, whatever portfolio, and we screw it up, customers will understand. But if we mix Chile and commodities and U.S.

shares and Indonesian bank bonds into a product in order to create yield and then we screw it up, they’re going to kill us. Rightly so.

So it’s a very difficult situation. And if politicians and central bankers and regulators in Europe don’t start to understand that, we’re in trouble.

And I’m very, very open about that. Unfortunately, most of my colleague CEOs do not speak out then.

Just on the fee income.

That on the fee income, we’re trying to do the best that we

[Indiscernible]

We’re trying to do the best that we can, and you see slight increases in fee income. But the market for asset management in the Czech Republic is not €6 billion.

That’s where it is for the moment. It’s €60 billion.

And now again, so we’re making marginal increases. And 10 years from now, the market should be €120 billion.

If all of that will be in bank deposits, good night. So we’ve got to do something about it.

So maybe just following on the fee income then. Can you explain what was behind strong performance in 1Q?

And can we extrapolate it then to the coming quarters? In other words, is it because the stock market performed better?

Or is it more sustainable because of flows and so on? And the second question, and it’s coming back to my question before, is on NII.

And I know you tried to avoid it, but maybe I can get a little bit more clarity. Do you see 1Q as a trough for NII for this year?

As simple as that.

First is fee income.

So on the fee income side, I mean, it’s across the countries. There’s just so bits and pieces that are slowly improving, part of this – some more fee income coming in from Hungary.

We came up with a couple of decent products in Austria from mid-market clients. We created some product where we can actually go back – I mean, 75, 80, 90 basis points fees.

So we’re slowly increasing our asset management volumes, and we’re getting a bit more – it’s getting slightly better. But it’s too – it’s just too slow, the progress.

So I guess the chances are there that you see continued growth now on the fee income side. And also, our position in the market has improved.

We gained a lot of clients. We’re very strong in the mass affluent market.

Our competition is rather weak, particularly in the mass affluent market. So the mass market clients go to BAWAG, and the mass affluent and affluent come to us.

So market dynamics are relatively good for us. But I’d like to see a much more dramatic change and that I just don’t see in the near-term future.

So my best guess is that you’ll see a slow improving tendency on the fee income side for the moment.

On the net interest income, I mean, the question is difficult to answer. I mean, remember, 5 years ago, it was always the question, when do NPLs peak.

And we knew that we are around there, but it was difficult to say the exact quarter. I think we are seeing now the bottom.

Where is – whether it’s this quarter or one of the next ones, it’s difficult to say. I mean, we will have still some support on the net interest income probably in the second quarter because we are still accounting our TLTRO with 0.

We didn’t take the advantage of anything. We just simply looked at the portfolio developments and loan developments.

Other than that, I think we know all the – you know all the impacts that are coming from our bond portfolios unwinding. Business development, I think, is very clear.

We are not investing too much. We are, I would say, in terms of liquidity management, under-invested in comparison to the past, to maturity, [Indiscernible] duration is coming down.

There, we are pretty transparent, but it’s difficult to say is it this quarter, is it another one. But we are reaching the lower end of the whole thing.

The follow-up question. Yes, microphone?

So you mentioned that there are still constraints for asset management to growth, and you pointed out a few of them already. But to what extent your current infrastructure is a constraint?

Will the implementation of new IT systems, potentially more flexible products and so on change the picture a little bit and allow you to grow faster? Do you have any hopes related to that?

Or that’s

There was one significant, important development in late last year, and this was the airing of the – a functionality to the George platform in Austria. And once it is rolled out in the other countries, we will make business easier for our customers.

That implementation was definitely helping in the first quarter this year. It remains to be seen whether this is a continuous improvement or whether it was after the launch, an uptick.

But we believe that in terms of infrastructure, we are now, on a continuous basis, improving the offerings for our customers.

And we have – I think if you look at the pure fees from asset management, I mean, they increased from first quarter 2016 to first quarter of 2017 by about 12%. It’s probably fair – I mean, you can’t really nail it down completely, but looking at the inflow, that about 50% of that increase came from George.

So that alone increased our fee income, on a group basis, by about 6%. And we only have it in place in Austria.

Whether you can translate the George effect from Austria into the Czech Republic and Slovakia, I don’t know. We don’t know.

We’ll see. We’re starting that in – this fall.

But it definitely creates volume. But it doesn’t solve the supply problem that we have.

We just don’t have enough products. And I’m – on that front, I mean, I’d love our retail lending officers to get a bit more innovative.

I’m really nervous if the creators of our asset management products get innovative.

I understand we don’t want to count the chickens from the perspective of the operating leverage over the next couple of years. But just a few kind of broader questions about how we should think about what’s likely to come.

Your Page 15 showed how different your business is now in terms of the balance sheet for over all those years. Do you think that you’ve also, over all those years, kind of took advantage of the potential cost shifts per country, i.e.

do you think that your cost base also reflects how the group has changed, that you feel that you have taken advantage of the very differing kind of cost productivity stats across your – on the labour side, across your countries? And so that’s one.

And how should we kind of structurally think about it going forward? Now the digitalization, both on the front and at the back end, at the moment, it seems it’s a revenue tool for you.

When do you think it’s likely to become both a revenue tool but also a potential for cost rationalization as well? So that’s my first question.

And then my second is very short. Any commentary on the kind of IFRS 9 impact on the group?

You want to start with IFRS 9?

Yes, start with IFRS 9. Same as we always said.

Calculations are confirming the ranges that we were giving always. So 30 to 40 basis points impact and nothing surprising in the calculations at the moment.

Okay. I think, to the first question, I think that there are 2 things to it.

If you look at the cost structure of the banks that we run in the region, you can, as always, with some specificities to the country, but in principle, you can say that in the CEE countries, the very generic basis of our businesses is, from an operating leverage point of view, is good. It’s not great, but it’s good.

Ceska Sporitelna is in itself a decently efficient bank. Slovenská is a decently efficient bank.

Hungary is on its way to turning into one, Romania, and Croatia is good. So if in a normalized scenario, those are all banks that, in the more developed markets, kind of run at low 40 cost/income ratios, and Romania, in a good situation, could actually run a bit low 40.

Austria is a complete outlier in that not only the savings banks, but we as a group. And we basically have 3 operations in Austria.

We have the savings banks. There, we could say we don’t care because it doesn’t – okay, it makes our operating leverage look bad, but that operating leverage doesn’t feed into our return.

So when they have a cost/income ratio of 70 or 60, from a shareholder point of view, it is irrelevant, unless you would say that a good cost/income ratio increases your market value, which, I think, there is a basis you can argue with that. But even our own business in terms of cost efficiency sucks seriously.

And it’s – you just have to compare our business in Austria with our business in the Czech Republic. And you have it on the plate with 30% market share in the Czech Republic, 10 million people, and we will go below 500 branches this year.

So in Austria, we have 8 million people. So the market is 20% smaller than the Czech Republic.

Our market share is 2/3 of that what we have in the Czech Republic, and we got nearly 1,000 branches. If we would turn Austria, including the savings banks, into a bank that’s just equally efficient to the Czech market, we’re going to be at slightly above 300 branches, which would require us to go to the savings banks and tell them to close – out of those 1,000, we own 150, and 850 are owned by the savings bank.

We’d go to them and say, Okay, turn your 850 into 200, and we turn our 150 into 100. And then we’re really efficient.

We have a great cost-efficient business. We could probably do that.

But then we’re left with about 6,000 employees that we would have to do something with. If you read the announcement in Hungary, I said, We’re going to reduce employment by 250 this year.

That’s 10% of their workforce. And they just announce it, and they do it.

In the Czech Republic, we had over 20,000 employees and we’re down to 10,000. In Romania, we had 18,000, and we’re down to 7,000.

And in Austria, we had 18,000, and we’re now down to 18,000. So we know what we have to do, and we’re doing it.

If we start talking about it, it’s over. And everybody in our group knows that we have to do it, both making the bank more efficient and reducing employment and cutting down.

We’re working on it, and we’re not talking about it. I make one exception and I never do it again because it will ruin our costs.

But that’s only one part of the story. The real story is that we’re moving over – during the next years, based on – which is a real breakthrough for us on having – on building one digital platform between our 3 most important markets.

The only way that this can translate into a dramatic operating efficiency, and we are forced by doing that now. There is no way out for the Slovaks.

There is no way out for the Czechs, which is a terrible thing for the Czechs because they now have to do the same thing as the Austrians and the Slovaks. Although they are much superior to us, they have to accept on taking our products and our services, and it will be one set of products and services across the group.

And the days where people can come to us within the bank and tell us, Don’t do that. A retail client in Slovakia is completely different from a retail client in Vienna.

Don’t try to give them the same products or the same services or do the same marketing. Okay, that we have for the last 15 years.

That’s over. And everybody is accepting it, and we’re on the way on getting there.

It will be done, but it will take some years.

I had 3 questions, please. One is pretty quick.

On Czech unsecured lending pricing, what is going to happen in the next couple of quarters in terms of competition and pricing pressure?

Unsecured lending.

Unsecured, yes, consumer loans.

Unsecured lending.

Yes, unsecured. In Slovakia, have you seen the trough?

And do you believe the competitive environment is getting more reasonable from some of your peers? And last one, Swiss franc loans in Austria, can you give us an update of exposure probably the funding gap that some of your clients have?

I just understand the regulator is looking a little bit more into it, so just an update on this would be useful.

What was the last...

Swiss franc loans in Austria, like the funding gap on those.

Swiss franc. You see it in the presentation, the currency distribution among our assets.

And this is going down. It’s now below 4% in the group.

And remember, 3, 4 years ago, I think we had 16% of our loans in Swiss franc currency. And it’s a continuous decline.

And some of the customers are taking advantage now that the Swiss franc was at €1.09 again and are moving out of the Swiss franc. Some are still staying and monitoring the situation.

The regulator is always – is pushing since years to reduce this exposure. And we are in a permanent contact with our customers in trying to explain them the risks and giving them specialized offers.

We are, on a quarterly basis, reducing our Swiss franc exposures. It’s a steady progress, I would say.

And I think we are now inside – in the core group, if we leave out the savings banks, it’s below €2 billion. And – but we say, a very solid risk profile.

So the second question was around Slovakia and the business environment. We saw last year, in second quarter, a very heavy fight for market shares and a big pressure on the pricing.

It improved in the second half of last year but restarted again in the first quarter of this year. The competitive situation is difficult in the Slovak market.

You could see, we defended market shares, and we had – we were suffering on the refinancing of the bank book. This was driven by the implementation of the European Union mortgage directive and the reaction of some of the competitors.

We are the most profitable operation in Slovakia and are defending our position. Yes, I hope that we will have a similar development as we could see it last year, that we have a peak in competition and then things are settling again because, at the end of the day, what you can see last year, there wasn’t a real shift to market shares.

It was just simply that everybody was suffering in the market. But fortunately, we are coming from a more relaxed position than the other market participants.

I think you will – from my point of view, you will see less disruptive movements in the Czech Republic than you saw in Slovakia. And so it’s a more grown-up market, and the attention that the head offices put on their subsidiaries in the Czech Republic is much bigger than it is in Slovakia.

So the environment that we have in the Czech Republic is more normal. And Slovakia, you see you have disruptions from time to time, but they’re too weak and they fade away.

But they cost money for a quarter.

And one thing is, I mean, the 3 big banks in the Czech Republic, none of them was engaging in a price war in the last couple of years. But in Slovakia, it was different.

But pricing is down on – in Czech. That’s why I’m just asking.

Do you think it will feed through or not much?

I mean, if pricing is down on – it was already improving now in the mortgage business. It was – there was a market development on the consumer loans.

We are defending our market shares there and are still satisfied with our business. And then in general, even in all the markets, consumer lending is less price-sensitive than mortgage lending.

This is always – mortgage is there’s really movements.

Okay. No more questions – well?

Okay.

Your thoughts on the recent transaction in Croatia, Splitska Banka – so your thoughts on the recent acquisition of OTP, or Splitska Banka, in Croatia, do you think that could have an impact on you? Do you think you would like to grow a bit more?

No, no. I don’t think it will.

I think we’re happy with our operation in Croatia. I think they’re doing a very good job.

We don’t want to acquire anything in Croatia. We know that we now – we have one competitor in the region whose goal it is to sort of catch up with Erste.

And that’s the old Hungarian dream that is reemerging. They’ve got lots of capital and cash available.

And if they engage in dramatic acquisition activities during the next years, I’m really happy. That – if they try to become bigger and bigger and just acquire and acquire, nothing better can happen to us because that’s not where the future growth will come from.

In buying bank branches in 2017, good luck.

Can I quickly just ask about AT1 and Tier 2, so kind of you were replacing one with another. Is there any cost benefit from that?

So I guess we should have a marginal impact from Tier 2 maturing. So can you quantify that?

Well, the additional costs that we are having from the AT1, we have 2 – we have this year and a couple of months next year. But the difference between the 2 is not that big, and we have a higher-quality capital.

In the Tier 2 bucket, we are anyway very well-covered and way above the requirements. And we have now €1 billion of AT1 and are having a very solid capital structure.

And you could see we had already, on our numbers and on our capital structure, positive feedback from the rating agencies. And we are back on A by 2 rating agencies.

And I think that the recent issuance will have a positive impact on the assessment as well.

Okay. And maybe another question on the IFRS 9.

You mentioned it very briefly. Do you expect any significant negative impact on capital from, for example, IFRS reserve or any other things that you’re concerned about?

No. The impact I was mentioning is including everything, and we will have a little bit different numbers.

But the total impact has started to fall and nothing more.

Okay. Okay, thanks very much for your interest.

Second quarter results on August 4, 2017.