Erste Group Bank AG

Welcome to everybody from Vienna to this conference call. This call will be hosted by Andreas Treichl, CEO of Erste Group; Gernot Mittendorfer, CFO of Erste Group; and Willibald Cernko, CRO of Erste Group.

They will lead you through a brief presentation highlighting the achievements of 2018, after which we will be ready to take your questions. Before handing over to Andreas Treichl, let me draw your attention to Page 2 of the presentation where you can see the disclaimer.

And with this, Andreas?

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

Let's start on Page 6 of the presentation. Strong asset growth in 2018.

Total footings increased from EUR 220 billion to EUR 237 billion, so more than 7% growth. If you net the cash position against the bank loans, the major item of growth on the asset side are client loans with nearly EUR 10 billion-plus and also on the liability side, major item deposits from customers there, again mainly retail deposits that have been growing by EUR 11.7 billion.

If you have a look on Page 7, the loan-to-deposit ratio has come down to an all-time low of 91.8% and total net loans have increased to nearly EUR 150 billion. The NPL coverage has improved quite substantially from 68.8% to 73%, and at the same time, the NPL ratio has come down further from 4% to 3.2%.

The fully loaded Core Tier 1 ratio at the end of 2018 came to 13.5% and both Basel III capital and tangible equity increased quite substantially. Liquidity coverage up to 150% and the leverage ratio remained flat at 6.6%.

Now if you look at the economic situation in our region, we actually look at the numbers for 2019 more positively than some others. We see relatively strong growth in the region with Austria, above 2%, 2.5% in the Czech Republic [technical difficulty]

Hello, okay, sorry, I heard we were interrupted. So let me start with the presentation on Page 4.

This is again Andreas Treichl. So Page 4, if you look at the fourth quarter, an improvement of nearly 25% vis-à-vis the third quarter bringing results to EUR 565 million, which, I think is absolute record quarter.

If you look at the year-on-year performance from EUR 1.3 billion in net profit to nearly EUR 1.8 billion based on strong growth of the operating income, basically flat expenses and extremely low to nil risk costs and also a lower tax bill. If you look at the key ratios on Page 5, you see that the net interest margin has come back a little bit.

It's basically stable at the 2.3% area on a group basis. The operating result has improved by nearly 9%; cost-to-income ratio stable; risks costs disappeared in 2018 on a yearly basis; and our returns on the tangible equity increased very nicely vis-à-vis the year before.

If you look at Page 6. Total assets, very strong loan growth, nearly EUR 10 million, resulted in total footings increasing by 7% to EUR 237 billion.

And on our liability side, the same picture. Very strong growth on the deposit side, EUR 12 billion in new customer deposits.

Going to Page 7, you see the resulting ratios of that. Loan-to-deposit ratio has come down to 91.8%; net loans 7% up to nearly EUR 150 billion; NPL coverage improved from 68% to 73%; and at the same time, the NPL ratio decreased further to 3.2%.

We reached our long-term target for the fully-loaded CET1 ratio already at the end of 2018 with 13.5% and liquidity coverage ratio improved to 150%, leverage ratio stayed flat. So if you look at the business environment of our region on Page 9, we look at 2019 somewhat more positively than other groups.

We see [Technical Difficulty] Okay, ladies and gentlemen, sorry, we seem to have problems with the line. I'll start again with the business environment.

If we're getting cut off again, then we will switch to the mobile phone. So have patience, please.

What I was saying is that our expectations of the economic outlook in our region for 2019 is somewhat better than that of others. We do expect in most of our countries 3% growth plus, and we have forecast for Austria of 2.1% and the Czech Republic of 2.5% GDP growth.

In both cases, there is a chance of an upgrade later on this year. Overall, I think the economic situation is very, very good.

The problem is with Romania, where it's basically public-sector induced through strong wage growth and consumption, whereas in the other countries, the growth seems to be extremely well balanced, which you can also see that current account balance, with the exception of Romania, is positive in countries. On the public debt side, we see improvements across the board.

So a pretty positive picture all around. On Page 10, you see, well it is, of course, very helpful for us.

The increase in interest rates in the Czech Republic and there are also chances for further increases in Romania. We'll see what the actions of the Central Bank in Hungary will be this year.

Very little volatility on the foreign exchange front and I think pretty, pretty stable positive picture. If you look at our market share development, it's also good news.

Market shares are either stable or growing in all our markets and very positive is also that after long periods of losing market share, it has turned around in Hungary and also in Romania. If you look on Page 14, you see where the loan growth is coming from.

Very strong growth in Slovakia, in Hungary and in the Czech Republic. Again, this year, also Croatia and Romania.

Well, also above market performance in Austria with performing loans growing in Austria at nearly 5%. Very much the same [Technical Difficulty] Okay, sorry, it happened again.

I'm on the mobile phone now. On Page 16.

The net interest margin, pretty flat throughout the region, though not really much to be reported about that. We also see no reason why that picture should change much in 2019.

So the result of that, you see operating performance in 2018 pretty good, 5%-plus on the group level, group performance for Erste Bank Austria, in the Czech Republic, in Romania and in Hungary and relatively flat in Slovakia. Operating expenses, you should consider that we have had very substantial wage growth in most of our countries, particularly Czech Republic and Romania, but still we kept overall costs more or less flat, which, I think is pretty good performance on our part in 2018.

And with that, I'd like to hand over to Willi, our CRO.

Thank you, Andreas. With regards to Pages 20, 21 and 22, just a few comments from my side.

What we can see – what we can talk about is further improvement with regards to the asset quality. This is shown on Page 20.

Page 21 that comes to the NPLs, we're able to manage to go further down in terms of volumes. Otherwise, the ratio is further improving, and I would see further room for improvement when we talk about this current 3.2% NPL ratio.

When it comes to the NPL sales, on an annual basis, we're talking about roughly EUR 300 million on a quarterly basis as it is mentioned here, EUR 108.3 million. One remark to Croatia, happy to tell you that we are going further down and I'm pretty confident that in the upcoming two to three years, we'll see a ratio that is comparable to the other countries.

Coverage ratio, as Andreas already mentioned, further going up, so we are well provisioned that this is reflecting our quality of assets. And with that, I will hand over to Gernot.

Good morning from my side. I continue on Page 27 where we see the development of our net customer loans and the development of performing loans.

Due to the reduction of the NPLs by volume minus 15.5%, we can see across performing loan portfolio from $137.7 billion to EUR 148 billion, a 7.4% development, very nice above our target that we've defined and very solid development. On Page 28, you see a breakdown, and as a result, LCR at 150%.

We have very comfortable liquidity factors and didn't see any changes over the last year. Page 29.

Deposit growth already mentioned, 7.7%. Continuous inflow, and this proves our favorable position, as we've already shown some market share growth as well.

Page 31, the maturity profile. We have a very favorable breakdown of the maturity profile.

We just have one benchmark redemption in May this year. So we're very flexible in our new issuance timing, and we're planning to issue a little bit more than last year, but are acting whenever the market, we think, is appropriate.

Page 32. The breakdown, I think, the most important development as of year-end, 13.5% CET1 ratio fully loaded, so we have achieved the target ratio already in 2018.

And as already mentioned, we will propose a dividend of EUR 1.4. So with this, I hand over to Andreas for the outlook and...

Thank you very much. So outlook, as I said before, we expect around 3% GDP growth in most of our markets and above 2% in Austria.

We say that our return on tangible equity for 2019 will be above 11%. Revenues will grow faster than costs.

Again, we will see mid-single digit loan growth across the regions. We would expect somewhat higher risk costs, but still we also expect them to remain at extremely low levels.

And the only notable thing is where we do not have clarification yet is the impact of the Romanian banking tax. We're still negotiating.

It seems very likely that something will be worked out that's not as bad as it looked in the beginning, but we don't know yet. Negotiations could still drag on for quite a while before we have assurance on what the gain on that will be.

You can rely on us in that respect. In the meantime, our experience on dealing with excessive bank taxation is vast.

We've dealt with things like that in other countries. We'll deal with this in Romania too.

With that, thanks very much for listening. We're now ready to take any questions you might have.

It will take a bit longer than usual because we will need to pass the mobile phone around the table depending on whom you address with your question. Thanks very much for listening in, and please ask your questions now.

It is Sam Goodacre from JPMorgan. I've got three questions.

Perhaps, we could take them one by one. And actually, Andreas, the first one is related to your last point on Romania.

Obviously, still a big unknown, but could you give us some color as to the potential impact on the way you operate in Romania in terms of anything you've initially had to do by way of your growth, your lending, your strategy? This, obviously, is potentially a very big impact, and I'm just wondering how it could possibly lead to an overwin the way you choose to do business in Romania?

That was the first question.

Okay. Well, we don't know yet enough about what the structure of the taxation actually will be.

And you have to understand that the term financial asset has not been clearly defined. And what we found out in the meantime that there are discussions on a government level on what the effect of that will be in terms of lending and lending costs to the private sector and also to the public sector, including what effect that would have if state bonds and treasury notes would be included.

So it's too early to say. All I can say is that what we need to do, of course, is try to respond to whatever the taxation will be in a way that we can reduce the damage to our P&L in our Romanian bank as much as possible without hurting the economic development of the country because we don't want the people and the companies in Romania to suffer directly or indirectly from that action.

So that will be a very, very difficult, complicated and well thought-through solution, but it's too early to give you any indication on what that will be.

Okay. The second question then is related to capital.

And if there are any implications for capital return or development and your thoughts about that given you've already hit your 13.5% CET1 ratio.

Very happy that we could deliver on the capital position, and as we've said, this is the targeted ratio, and we are proposing EUR 1.4 dividend this year and whatever we are not planning to hold any excess capital, you know that ratio is floating because we are not doing a first quarter and third quarter review. So – but we feel now comfortable, and let's discuss it further out in the year, what will happen to our dividend flows.

Okay. And then, my third and final question is related to your operating expenses.

And specifically the fact that you have had a very good decline in admin cost driven by IT and consulting fees being a lot lower. Is there more that you can do on that front to take out IT and consulting costs?

Or is this EUR 1.2 billion of other admin expenses now then the base of which we can work going forward?

Yes, the – one of the things that happened in 2018 was also that we replaced external staff with internal. So there is still more to be done on that front.

No question about it. But at the same time, you have to be watching the discussions that we currently have in Austria and in other countries about wage increases.

So we're in the midst of the discussions. We don't have the results yet.

We expect the negotiations in Austria to take us into April. And therefore, it's not going to be easy overall to come up with a major cost reduction in 2019.

But we're working on it. So the EUR 1.2 billion is definitely not a cap.

We could do more on that front, and we will do more on that front. We're just going to be careful that this is not being offset too much by increased personnel expenses.

This is Anna Marshall from Goldman Sachs. A couple of questions on your outlook.

Just to clarify on NII front. You've mentioned the rate hikes in some of your countries.

Could you please indicate how many rate hikes are included in your outlook? And also you've mentioned that NIM could be flattish, but is there any opportunity for it to increase slightly?

And my second question is on loan growth. So you've mentioned that it should be mid-single-digit growth, but could you indicate which country should be the drivers, also keeping in mind that you have restrictive measures in some of them, Czech Republic, Romania, et cetera?

So NII, we have in our forecast. I think just one more rate hike in the Czech Republic, probably another 25 bps.

No other rate hikes are included in our forecast.

Yes. We see in the eurozone, not changing the data whole year, thus the potentially one in Czech Republic, the rest should remain stable.

And loan growth, I think, you should see pretty much the same picture as this year. And the only question mark, of course, so you should have relatively strong growth again in the Czech Republic and in Slovakia.

We also see in Austria, stronger loan growth than in most of the rest of Western Europe, also in Croatia and Hungary. A question mark will be, of course, Romania.

What will the government actions, whatever they will be, what will be the consequences of that on the investment climate and on the consumption in Romania. So big question mark in Romania.

Pretty much the same picture as in 2018 in all the other countries.

This is Amandeep from Deutsche Bank. I have a couple of questions, more of follow-ups is there.

First, in Romania, we understand this not clear yet and you will evaluate the situation, but do you still have to pay the tax in 1Q '19 as it was a quarterly tax? And my the second question would be on capital, that is, can you give us any guidance in terms of the impact from TRIM or IFRS 16 or any other regulatory inflation, including maybe Basel IV?

And my last one would be – is more a follow-up. Now that you have your Core Equity Tier 1 target met, how do we think about dividend in terms of – can we still expect to have the progressive dividends going ahead or you would move to some sort of maybe formal payout guidance?

Let me start with the last question, and then I hand over to Gernot on the dividend side. We're now in February 2019, I was proposing for 2018 dividend of EUR 1.40, and I can just give you our management view.

The way we look at 2019, we would be as a management pretty surprised if the dividend for 2019 would not be higher than the dividend for 2018.

On Romania, the question on the quarterly tax payments, we are counting that we have to pay the tax in the first quarter because we have included it in our outlook. And in April, we are counting with the first tax payment.

On the capital position, on the TRIM, we are currently having more than EUR 4 billion risk-weighted asset out of the green exercises. This is included in the numbers.

It's hard to say how that whole thing will develop, but then, in general, we are not calculating with Maastricht. A lot of – this is work in progress, and in some areas, we might even see improvements.

IFRS 16 is a new standard, will have EUR 0.5 billion risk-weighted asset impact. It's included in our capital planning and included in our outlook.

In Basel IV, we are not seeing any impact because – or a very, very low impact. So the capital position is solid and should not have any major impact from these three topics.

Giulia Miotto from Morgan Stanley. And a couple of questions from me, please.

So the first one on fees. You had good growth in 2018, but if I remember correctly, ideally as they want to get to EUR 2 billion, do you think that's a target achievable in 2019 already?

And which products and geographies are most promising here? That's my first question on fees.

Secondly, going back to the NII, what impact do you expect to hear from an MREL? And then finally, one more point on capital.

So 13.5%, is that the final target? Or do you think there might be some increasing countercyclical buffers in some geographies, which may ultimately result in you having to increase the 13.5%?

Okay. Fees, Andreas, you want to start on the fees or...?

Okay. Let me start on the fees.

I don't know whether we got to reach the EUR 2 billion this year, but this was my goal that we will achieve EUR 2 billion in fee income in my last year. So I'll be, first of all, really angry if we do not achieve the EUR 2 billion and I'm going to work myself on it that we get to that number.

This is a clear target of mine, and I just want to reach it. I can't promise that we will, but I'll do my best to whatever I can do on that front.

On NII, MREL will have an immaterial impact. This is – this is actually the effect that we are still waiting for getting the last inputs, but as far as we look at it right now, it should not be a major issue.

And on the capital, any countercyclical buffers, it's definitely possible that we can have countercyclical buffers in one or the other geography, but I think we have already absorbed a lot in this 13.5%, and I think if I look at other banking groups on target capital ratios, I think we are reflecting the risk that our business model is having, and I'm confident that we will not see too much of initiatives there or you can never exclude it.

Can I just follow up on the MREL point? Can you give any guidance on how much senior loan preferred to your planned ratio or is that still too early?

It's still too early. Well, as soon as we have everything in place, you will see us in the market.

It's Gabor from Autonomous Research. Firstly, I wanted to follow up on NII.

Can you remind us why did your net interest income drop in Romania and a bit more – in the fourth quarter? And a bit more broadly on the 2019 guidance, you guide for roughly stable NIM and mid-single-digit loan growth, shall we then expect roughly mid-single digit NII growth?

Or are there any other factors to consider?

So that drop in Romania is based on a one-off positive in Q3 of EUR 6 million. Other than that, this situation was stable.

And, yes, stable NIM with loan growth should slowly start to show parallel development on net interest income. We still have a little bit of headwind from government bond portfolios, but not material anymore to low double-digit million number.

Okay. And just a follow-up on the dividend.

You're guiding for at least or higher than 11% ROE. And mid-single-digit loan growth.

This would leave you with 50% to 60% potential dividend payout. Is this the right way to think about it?

Or shall we consider anything – any other movements in your capital requirement for buffers?

No, you should not consider any other movements. And you should just accept the fact that we, as a management of the group, early on in 2019, the only message that we give with regards to dividends is that we, as the management of the group, would be very surprised if the 2019 dividend wouldn't be higher than the 2018 dividend, but we are only here to propose it.

This is up to the general assembly then to finally approve it. But we'd be really badly surprised if the 2019 dividend wouldn't be higher than the 2018.

Let's keep it at that, please.

Johannes Thormann, HSBC. Two follow-up questions, please.

First of all, on your growth in personnel expenses, are you quite happy with the decline in year-on-year growth over the quarters of the year or do you have any stronger counter measures planned for the rest – for the next years? And secondly, on NII, should we expect that Q1 is again seasonally weaker due to the less calendar days?

Or do you think that the recent rate increases in Czech Republic can compensate for this?

Yes, the calendar days effect is there. It's seasonally weaker.

Little bit helped by the fact that last rate hike was relatively late. And the first question was on personnel expenses development.

Yes, I mean, as already mentioned, collective bargainings are still ahead of us, and we are seeing in some of the geographies quite significant wage inflation. Due to the fact that we have full employment, remains to be seen how will be the outcome.

We tried our best last year, and I think have shown a solid cost development. It will be a continuous struggle and a continuous effort to keep the cost growth at reasonable levels.

It's Alan Webborn from SocGen. Is your 11% ROTE target, including the sort of full, what you'd say, worst case of the Romanian bank levy because it does look as if it's a relatively sort of maybe low number given the starting point at the end of the year and given your guidance?

And why are you being so conservative? Is it because you're quite concerned about the collective bargaining?

Could you give us an idea of what your thought process was in terms of coming up with a lesson as opposed to 12%, which frankly ought to be achievable from where you are today, so that would be interesting? And where are the areas that you are maybe seeing the sort of biggest slowdown in terms of volumes compared to some of the very strong volumes that you've seen in 2018?

I mean, I appreciate that you've got the sort of mid-single-digit loan growth for 2019. But I also wonder does that include a slowdown in Romania that would be consistent with the payments of the bank tax.

So that's – a little bit more color on that would be helpful. And I think we did notice that in the – in your asset quality disclosure, there seems to be quite a jump in substandard loans in the fourth quarter.

I guess, it's IFRS 9 related, but maybe I'm wrong. Could you perhaps tell us where that came from?

Well, the last thing that PD harmonization, so that's a structural issue, it's not a deterioration in the credit quality. So going back to the 11%, I – you might call it conservative, but we need, I think, to be conservative because the effect of the banking levy in Romania might have much broader consequences than just the direct hit on our P&L.

And yes, the 11% include a bad case scenario in Romania because if that actually becomes effective, this – in the way it has been proposed, this will have serious consequences for quite a number of local banks in Romania, particularly those banks that only have operations in Romania. And this could end up in much worse situation in Romania than just the tax effect it has on our P&L.

So until we get a clearer picture of what the outcome in Romania actually will be, which actually I don't think we will see before April because knowing the Romanian government, they would be just delaying any decision even if it was sort of positive, which we hope, until they have made the first collection on the first quarter in April. So hopefully, we can give you more light on that with the announcement of our first quarter results, but not much before that.

Okay, but excluding that, would you be – would you come to us today with a higher ROTE for '19?

Yes.

I'm Brajesh from SocGen Credit Research. Well, just a quick one on your issuance plan, you mentioned on Slide 31 that you intend to fill 1.5% bucket by end of 2020.

So does that mean your AT1 plan is off the table for this year? And on nonpreferred senior, is there any regulatory hurdle still?

Or technically if you want to issue it today, can you do it?

That doesn't mean that AT1 is off the table, but it will be anytime between tomorrow and end of 2020. This is the meaning of that point on Page 31, I think, reveal.

And nonpreferred senior, we are still waiting for some clarification on the legal side, and before that, we could issue at the moment, but we might see then some changes that we are not expecting as of today, so we wait until we have the final clarity. I don't think that we will – you will see us in this quarter, probably the next reserve is a nonpreferred senior.

Okay, fantastic clarification. Okay, fantastic, got it.

And just one clarification. Do you intend to issue any preferred senior or will it just be nonpreferred from this year?

This year, we have not finally made up our minds because we did not issue for quite a while senior. So at the discussion at the moment is that we just would go out with nonpreferred, but as I said, we did not close the discussion.

So that's – we are having an intensive discussion about the advantages and disadvantages.

Stefan Maxian, RCB. Just three questions remaining.

One on the risk cost development in the Czech Republic, so we had a hike here in the fourth quarter. Is that related to an isolated case or what's behind that?

And then with regard to the guidance, I mean, first, can you share the actual number of the Romanian banks tax that's included into your 2019 guidance? And second, you flagged corporate income tax below 20% for this year.

Is that also your mid-term tax rate assumption? Or do you foresee tax rate again to get up above 20% in the following years?

Really under – we had the single case at the Czech Republic – a few single case is in Czech Republic is not a big drama. Romanian banking tax is included in the outlook, it's above EUR 100 million, and we're calculating it based on the current numbers available, current overall numbers.

So we think it will be above 1%. This is the current calculation.

And then, the tax ratio, this is depending on the corporate income tax development. There was a discussion in Austria about the potential reduction in the tax reform.

So giving a mid-term outlook is difficult, as we see at the moment discussion around the political front. We don't see an increase in corporate income taxes, but remains to be seen because August [indiscernible] will depend on the budget developments in various areas.

I mean, we'll be always having a tax rate around 20%. This year, we'll be lower.

And in the future, as I said, will depend on the earnings mix on the one hand and on – if some of the announcements are materializing.

Just maybe to rephrase it, but there are no positive deferred tax effects included in the guidance.

For 2019, no.

Thank you.

It's Hadrien from KBW. Just a quick question.

Was there any one-off in the NII of the fourth quarter?

No, no, there was no one-off in the fourth quarter. No material ones.

I mean, you obviously have one or the other thing of it plus immaterial.

Okay, thank you very much, ladies and gentlemen. Thank you very much for your interest, thank you very much for your questions and listening in.

Our financial report will be issued on the 29th of March, and we will have our next conference regarding the first quarter of 2019 on May 3. All the best to you.

Have a good day. Thank you very much.