Erste Group Bank AG (OTCPK:EBKDY) Q4 2023 Earnings Conference Call February 29, 2024 3:00 AM ET
Company Participants
Thomas Sommerauer – Head of Investor Relations
Willi Cernko – Chief Executive Officer
Stefan Dörfler – Chief Financial Officer
Alexandra Habeler-Drabek – Chief Risk Officer
Conference Call Participants
Benoît Pétrarque – Kepler Cheuvreux
Gabor Kemeny – Autonomous Research
Mehmet Sevim – JPMorgan Chase & Co.
Johannes Thormann – HSBC
Riccardo Rovere – Mediobanca Group
Hugo Cruz – Keefe, Bruyette & Woods, Inc.
Chris Hallam – Goldman Sachs
Krishnendra Dubey – Barclays
Operator
[Call Starts Abruptly]
Year 2023 Preliminary Results Conference Call of Erste Group. My name is Caroline, and I’ll be your coordinator for today’s event. Please note, this call is being recorded and for the duration of the call, your lines will be on listen-only mode. However, you’ll have an opportunity to ask questions at the end of the call. [Operator Instructions]
I will now hand it over to your host, Thomas Sommerauer, to begin today’s conference. Thank you.
Thomas Sommerauer
Thank you very much, Caroline, and good morning to everybody who is listening in from Vienna. Today’s call will be hosted as usual by Willi Cernko, our Chief Executive Officer; Stefan Dörfler, our Chief Financial Officer; and Alexandra Habeler-Drabek, our Chief Risk Officer.
They will lead you through a brief presentation highlighting the achievements of the past year and also of the fourth quarter of 2023 and, after this, we will be ready to take your questions. As usual, my housekeeping remark on forward-looking statements you will find at disclaimer on Page 2.
And with this, I hand over to Willi.
Willi Cernko
Yeah, thank you. Ladies and gentlemen, good morning from my end as well and, once again, welcome to our full year 2023 conference call. To cut the long story short and I’m on Page 4 of the presentation, 2023 was an exceptional year that was marked by records. We posted record NII, record fees, record low risk costs, but to be fair also record expenses.
Most importantly, we achieved record net profit with an excellent return on tangible equity of 17.2% and consequently will be a record dividend of €2.7 per share, as indicated earlier. On top of targeting a second share buyback in the amount of €500 million, following the successful completion of our first share buyback of €300 million in the middle of February.
If we look at the fourth quarter in isolation, we have not seen any unexpected trends. NII started to move sideways as we have expected. Fees continued to go strong and risk costs benefited from releases of overlays and FLI provisions. And while we had some year-end one-offs, in other result that proven [ph] net profit, return on tangible equity still came in at almost 15% for the quarter.
So, overall, both the fourth quarter and the full year of 2023 were very strong, which underpins our optimism for 2024. But please bear with me, I will talk in more detail about our expectation for the current year at the end of the presentation.
Based on what I have just said about our excellent P&L performance and I am on Slide 5 now. Our P&L dashboard does not provide any surprises. Net interest margin continued to consolidate around the level of 2.5% in line with our expectations. The cost income ratio stayed below 50% throughout 2023, coming in at 47.6% for the full year and, with this, better than our upgraded guidance.
The risk cost ratio was at 0 for the final quarter of 2023 and on a 6 basis point for the full year, also significantly better than originally guided. And with all of this, we printed a return on tangible equity in the very healthy double-digits in all quarters of 2023 and, once again, above guidance for the full year at 17.2%.
When it comes to the development of the balance sheet, I am on Page 6 already. Trends were less pronounced than in P&L, but in light of a slow growth macro backdrop, still positive. Year-on-year we grew consolidated net customer loans by 2.8%. And if we look at our core retail and corporate business lines growth was actually better at the level of 3.7% and 5.6%, respectively. What dragged us down somewhat was a weaker performance at the minority-owned savings banks and the lower level of non-core business.
Customer deposits volumes increased by 3.9% year-on-year, with our core retail and SME deposits being broadly stable, despite consumers being challenged by inflationary pressures and also having ample, better yielding investment alternatives.
Moving to our key balance sheet indicators on Slide 7, all of them remain in excellent shape throughout 2023. At year-end 2023, a loan-to-deposit ratio stood at a very healthy 89%, with loans and deposit showing satisfactory growth, as already mentioned. As of quality continued to go strong even through the NPL ratio, ticked up a little bit to 2.3%, although from historic lows. This was mainly due to a mild increase in defaults in Austria, primarily at the minority-owned savings banks.
The decline in NPL coverage excluded collateral in somewhat exaggerated by the release of overlay and FLI provisions in the amount of €200 million. Our capital bring does not require any explanations. We reached a record CET1 ratio of 15.7%, thanks to strong profitability and muted risk weighted asset inflation.
Consequently, we have increased capital return and M&A optionality and have decided, as I already mentioned, to continue buying back shares. This time we are targeting an amount of €500 million following successful completion of our first buyback.
And with this, let’s now have a look at the operating environment. I’m on Slide 9 now. 2023 was not the greatest year in terms of economic performance. GDP growth was low, average inflation still high, and even though declining rapidly, internal and external balances at manageable levels in most countries.
Public debt remained at moderate levels when compared to EU averages. The bright spot was clearly the labor market that was broadly untouched in this EU region, despite the muted economic backdrop.
For 2024, we are cautiously optimistic. GDP growth should recover somewhat. Inflation is projected to decline further. The labor market should remain healthy, and internal and external balances should improve. This combination should provide room for central banks to cut rates in order to stimulate economic growth, providing a fertile ground for the return of tangible volume growth in CEE and beyond.
Talking about volume growth, I am on Page 10 in the meantime. Let’s have a look at the latest trends in our retail business. As for housing loan demand 2023 was a year of consolidation at low levels. While there were some positive trends in one or the other quarter, or one or the other country, no clear growth trends emerged, which is also not really surprising as customers wait for rates to come down somewhat.
We are more optimistic looking ahead as clearly interest rates have already entered or will enter a downward path in underlying demand drivers. such as a solid employment outlook are fully intact. As for consumer loans last quarter, I reported to you that trends were encouraging and, today, I can confirm that volumes remained at good levels also in the fourth quarter. New business volumes for consumer loans are on track to recover to pre-2020 levels.
On the liability side, our retail deposit base was broadly stable quarter-on-quarter as well as year-to-date. As regards deposit pass-through, retail pass-through rates continued moving up, but still at moderate speed. And customers while continuing to shift some overnight deposits into term and savings accounts. And to investment, of course, still maintain more than 50% of their deposits in current accounts. This notwithstanding, we continue to see strong growth in the stock of security savings plans, confirming the positive trend that started in the second half of 2022.
Moving to the corporates and markets business on Page 11. Loan growth slowed markedly in 2023, but at north of 5% was still satisfactory considering the exceptional growth performance in 2022. While all business lines in the corporate segment managed to grow their loan books year-on-year, we saw the averaging patterns in the fourth quarter with demand being weak, particularly in the large corporate segment. But this sub-segment tends to be more volatile. Corporate customer deposits were also up year-on-year, but slightly down quarter-on-quarter completely in line with usual volatility.
The markets business also performed well. We were involved in the issuance of €153 billion worth of bonds and generated healthy income growth in both retail securities and corporate treasury sales.
Our asset management business also enjoyed a good year, with assets under management growing by almost 13% to €78 billion. Thanks to strong net sales particularly in Czech Republic and Hungary. This is good news for our fee performance.
And now I hand over to Stefan, for the presentation of the quarterly operating trends. Stefan, please.
Stefan Dörfler
Thank you very much. Analyzing the loan volume trends on Page 13, it helps to look at business as well as geographical segments. As Willi mentioned, the core lending business lines retail and corporate more or less delivered the growth guidance with 3.7% and 5.6% year-on-year increase, respectively. When it comes to the performance and developments in specific countries, we have seen moderate, but balanced growth in almost all countries quarter-on-quarter, while year-on-year the growth driver was clearly CEE. Growth in Austria was somewhat subdued in 2023. This was driven by higher interest rates but also regulatory measures which limited demand and supply at the same time.
Now, looking into 2024, we are slightly more optimistic for consolidated loan growth as both lower rates and the expected moderate economic recovery should help us in reaching our growth target of 5%.
As for deposits, and I am already on Page 14, we effectively have not seen any significant changes in trends in the past quarter. Our core deposit base which includes retail, SME and savings banks business lines etched up slightly quarter-on-quarter and actually remained stable year-on-year. Large corporate deposits were up 7% year-on-year, so that overall our consolidated customer deposit base grew by 3.9%. The retail deposit mix also remained favorable.
We have seen a further drift towards term in savings accounts, still 55% of retail deposits were held at current accounts. And this fact, even with short-term interest rates expected to come down, will result in a continued healthy NII contribution of our deposit base.
This brings me to Page 15 and the net interest income. 2023 was the best year for NII ever with our key income source surpassing €7.2 billion. This was on top of the 2022 record performance. And, clearly, higher interest rates made a big difference. Moderate deposit pass-through rates and loan growth also helped, as did significantly higher income from our bond portfolio.
In the fourth quarter of 2023, we saw the first signs of consolidation with deposit pass-through rates slowly moving up further. We also posted some modification losses in Hungary and Serbia in the amount of total €20 million.
Now, two final backward-looking remarks on NII. First, please take into account that for the fourth quarter of 2023, both the ECB and the Czech National Bank, stopped the remuneration of minimum reserve, resulting in a €28 million quarter-on-quarter effect, just as expected. And the relatively weak quarter 4 in Austria, other, this is the basic either holding, was due to lower money market profitability for the part which isn’t any way offset in the segment other.
Now let’s look into 2024. Given all the moving parts, our best estimation currently is that NII will decline by about 3%. We will certainly benefit from some tailwinds such as loan growth and bond income. However, the key headwind is clearly the timing and magnitude of central bank rate cuts and its impact on deposit pass-through and other factors.
In light of falling inflation, cuts have picked up speed in countries like the Czech Republic and just yesterday, again, Hungary. And with the muted economic outlook for the euro zone, it is only a matter of time when the ECB will follow, most likely in the course of the second quarter. Still looking at all components and based on the macro assumptions as explained by Willi, we see good chances to deliver the big figure 7 in our NII also for 2024.
And finally, one important remark. As far as the bottom line impact of our 2024 NII performance is concerned. The savings banks were major NII beneficiaries when rates went up, benefiting on both the asset and liability side. And, consequently, we also bear the brand on the way down.
Let’s go to Page 16 and fee income. We can conclude that all geographical segments and all fee types have been growing with encouraging trends 2023. This gives us confidence that we can also grow fees at the mid-single-digit level in 2024. As you know, sustainably growing our net fee and commission income generating business is a key strategic goal of Erste Group.
Hence, let me share a little review of the last 5 years since printing exactly €2 billion fee income in 2019. The result for 2023 represents a compounded annual growth rate of more than 5.7% over this period. And one can easily calculate what an extrapolation of comparable growth rates means for future results. Exactly that is our ambition.
Let’s move to costs on Slide 17 now. Fourth quarter costs came in on the high-end. As we had some seasonally higher marketing spend, as well as higher consultancy and legal costs, personnel expenses were also higher on increased accruals for variable pay. In 2024, cost inflation should definitely decline from 2023 levels, as wage inflation pressures should ease, especially in Central and Eastern Europe. In Austria, wage inflation will still be pronounced as wage adjustments follow a backward-looking approach. But even with this, we are targeting to limit the cost growth to about 5%.
Moving to Page 18 now. The strong revenue momentum by far outpaced the cost inflation, leading to a cost income ratio at 47.6% for the full year 2023. Quarterly operating profit declined in the fourth quarter, as revenue momentum slowed somewhat on the back of consolidating NII, fees performing exceptionally well, and net trading and fair value result benefiting from lower interest rates, while costs were seasonally higher, as just discussed.
Now, we have talked about most Q4 developments already, one topic is still worth mentioning, the net trading and fair value income. Please remember that we have always named those income lines as kind of joker for 2023, due to the interest rate developments in the years 2022 and 2023. And to be honest, with the enormous interest rate moves in November, December 2023, the final net trading and fair value result of almost €450 million was even overshooting our expectations.
Putting all pieces together for 2024 compared to 2023, positive operating jaws are not realistic. However, a very solid operating performance is expected. Hence, we are guiding for a cost income ratio around 50%.
And, with this, over to Alexandra for more information on credit risk.
Alexandra Habeler-Drabek
Thank you, Stefan. Again, good morning from Vienna. And I continue now on Page 19. As Willi has already mentioned, risk costs were again excellent. For the fourth quarter and the full year, it’s 0 and 6 basis points, respectively. And, with this, we comfortably delivered our upgraded 2024 guidance. The first quarter performance was supported by release of FLI and overlay provisions in the amount of about €200 million. This helped mitigate higher allocations, especially at the minority-owned savings banks, as a result of increased NPL inflows, which we have expected for some time.
The other segments continue to perform well with the other Austria segment benefiting most from the release of overlay provisions. Looking into 2024, we believe that risk costs will rise, but only moderately so. Our best estimate currently is for a booking of up to 25 basis points.
Let’s now have a look at asset quality on Page 20. After many quarters of record low NPL ratios, we have seen some more meaningful NPL inflows, as I said, especially at the minority-owned savings banks, and they are primarily driven by smaller, but well-collateralized real estate projects. This pushed up the NPL ratio to 2.3%, which by historic standards is still a very benign level.
NPL coverage was dragged down, first by the release of FLI and overlay provisions as already mentioned, and as is in particular visible in the other Austria segment, as well as new NPL inflows with lower than average provision coverage, but better collateralization. For the full year 2024, we expect coverage to go up again and then remain around comfortable levels of 90% for the year – by the end of 2024. Of course, this is depending on the structure and the collateralization of the new inflows.
Let’s now move on Page 21, and let’s have a quick look at our real estate exposure, as it once again is a focus of investors. We are talking about an exposure of €45 billion, which equals 12% of Erste Group’s total gross exposure. This figure does not include our mortgage business with private individuals buying houses or apartments. This is another €73 billion, which is reported under private households. We do not see any issues with this business whatsoever, as our customers have jobs, labor markets are strong, and generally speaking, our customers use these properties as their first residence.
So I will leave this aside now and focus on real estate. First of all, almost 40% of this exposure belongs to minority shareholders. Notably, this business typically relates to smaller ticket real estate projects, which are executed by smaller companies who do not have as deep means to withstand major market disruptions as larger diversified operators.
Secondly, residential real estate exposure accounts for more than 50% of total real estate exposure, and this business is almost exclusively an Austrian business. With an additional risk mitigating element that almost one-third is related to very low risk or the fact of zero risk non-profit housing associations. And importantly, of this low risk business, Erste Bank Österreich owned 75%.
Thirdly, commercial real estate, accounting for more than one-third of exposure, is tilted towards lower risk countries such as Austria and Czechia, and also very well diversified among asset classes.
And finally, I would like to repeat what I have mentioned several times in the previous quarters and years, we have been adhering to sound lending standards. Most of our exposure is income producing. Our projects are fully ring-fenced with LTVs in a conservative range of 50% to 60%. And also when looking in detail at our top 20 exposures, we see sound deal parameters with debt service coverage ratios at very comfortable levels of around 160% and LTVs on conservative levels in the range of 50% to 60%, as I’ve already mentioned.
Consequently, we remain confident about the quality of our real estate portfolio, even if some smaller operators are facing a more challenging business environment.
And with this, I hand it back to Stefan.
Stefan Dörfler
Thank you very much. Please follow us to Page 22 now. The fourth quarter other result came in weaker at minus €279 million, as we had a number of year and one-off items to mention the most important ones. We sold some bonds and reinvested the proceeds into higher yielding assets. This cost us about €140 million. In addition, we booked a number of smaller impairments on such items as software, mostly in Czech Republic and real estate in Hungary and Austria, which added up to another €60 million.
Looking into 2024, other results could actually improve, should thus such one-offs not require. We should also benefit from lower resolution fund contribution as the single resolution fund has reached its target level at the end of 2023. This alone will mean a saving of €50 million in Austria. What will work against us? Though are the newly charged banking taxes in Slovakia and Romania. All-in-all, with this, we should be a good – there’s a good chance that other result will improve in 2024.
Since Willi has already informed you about the final return on tangible equity of 17.2% for 2023 and our guidance for 2024 remains unchanged from the Q3 recall at 15%. We can skip Page 23 and jump to Page 25 to look at funding and capital.
The overall wholesale funding was stable over the year 2023. Debt securities increased quite substantially, mostly attributable to increased MREL issuance in the form of senior preferred and non-preferred instruments. The decline in interbank deposits was attributable to decline in TLTRO balance in line with the repayment schedule. Overall, we maintain a very strong funding profile built primarily on retail deposits as discussed earlier.
When it comes to our most recent funding and MREL issuance activities, and I am making reference to Pages 26 and 27, I would first highlight the Q4 and Q1 transactions in the Czech Republic, Slovakia and Croatia. All of those contributing to the fulfilment of our fully loaded binding targets in the respective MPE resolution groups.
You find the summary of the key benchmark transactions in 2023 by the holding below the updated debt maturity profile. We are on Page 27. The funding spread of mid-source plus 50 basis points in our January 2024 covered bond transaction reflects the wider levels in this asset class you are certainly aware of. The lion’s share of the remaining TLTRO balance of €6.35 billion at year-end 2023 will be repaid until June the bigger part already in March.
CET1 capital and we are on Page 28, is up on half year to profit inclusion with minority profit from savings banks also making a significant contribution. RWA is increased only moderately in 2023 and were actually down quarter-on-quarter. The later was primarily the result of optimization measures that were targeting improved RWA accuracy. While the business growth induced RWA increase was mitigated by the RWA decline from migrations to default.
Last but not at all least, let’s sum up all of this with Page 29 and the annual CET1 ratio waterfall. With capital growing strongly and risk weighted assets only moderately, our CET1 ratio developed very favorably in 2023. In fact, we added almost 150 basis points to our CET1 ratio to end the year at 15.7%. As a result, our options for capital return and M&A have increased. Consequently, we have decided to go for another round of buying back shares this time in the amount of €500 million.
Subject to the approval of the ECB, we target to complete this transaction by year end 2024. And, of course, as already communicated we plan to pay a regular dividend of €2.7 per share for the year 2023.
Before handing over to Willi, again for the financial outlook, let me also provide you with the details on the €300 million share buyback we just completed. In total, we bought back almost 8.9 million shares at an average price of €33.76, all of which have already been cancelled to bring down our share count to about €420.9 million.
And with this, over to Willi.
Willi Cernko
Thanks, Stefan. I’m concluding this presentation with our detailed guidance for 2024. I’m on Page 30. A quarter-ago we provided headline guidance for return on tangible equity of about 15%. We are still happy with this guidance, so no change is there.
Let’s have a look at the NII now. Our projection currently is that NII will enter a phase of consolidation after the historic upswing of the past 2 years. In fact, we expect a small decline of about 3% for 2024. As Stefan already explained, our assumption is that there will be further material rate cuts in the Czech Republic and Hungary, and in the coming months, and that the ECB will join the fray sometime in a second quarter.
Having said that, we will also benefit from tailwinds like mid-single-digit loan growth and increasing bond income. We are confident that fees will continue to their growth bars, increasing by about 5%. Cost inflation should slow materially to about 5%, and with this cost income ratio should also remain at a strong level of about 50%.
We again expect risk costs to be moderate at less than 25 basis points in 2024, benefiting from further releases, and impacted only by a small deterioration and asset quality. There’s a good part of any operating income, and risk costs impact is expected at the minority-owned savings banks. We still forecast that return on tangible equity will come in the area of 15%, unchanged to what we said 4 months ago.
In terms of capital return, we confirm our plan to pay a dividend of €2.7 per share, and we target another share buyback in the amount of €500 million, following successful completion of the first buyback in the amount of €300 million just 2 weeks ago. Any further capital allocation decisions will be led by my successor Peter Bosek, who will take over on the 1st of July later this year.
And this, ladies and gentlemen, concludes our presentation. Thanks for your attention. We are now ready to take your questions.
Question-and-Answer Session
Operator
Sure. Thank you. [Operator Instructions] We will take the first question from the line of Benoît Pétrarque from Kepler. The line is open now. Please go ahead.
Benoît Pétrarque
Benoît Pétrarque from Kepler Cheuvreux. Yes, first question will be on net interest income. So you go for a down 3% on NII in 2024. It’s about €200 million, if I’m correct. I was wondering how much is coming from the savings banks versus the rest of the business. So if you can speed the 3%, please. And also which type of a level kind of interest rate do you expect by year end 2024 in the different regions that will be useful? And, on capital, so you go for an approval – you have an approval in Q1, I guess, the execution will be mostly in H1. Could you talk a bit about your intention to go further than the €500 million for the rest of the year? And also what is your kind of M&A ambition and do you see more M&A files coming in recently?
And then, just finally, the 15.7% CET1 ratio is a very strong level, obviously, there’s a big benefit from the savings banks in that ratio. So how can we actually assess the true excess capital at Erste Group for the kind of shareholders and not related to the to the savings banks? Thank you very much.
Stefan Dörfler
All right. I would kick it off with the NII question, and give you a rough number round about €150 is what we have in the projection for 2024 compared to 2023 NII for the savings banks segment. Interest rates end of the year, our current house opinion is that the ECB will do a first rate cut in the amount of 25 bps in June, and then follow-up with another 3 cuts this year so meaning a total of 100 basis points is our current expectations, I think, it’s needless to say that all of that is very volatile you are following the markets as much as we do. So this is our current estimation by the way combining that with rate cut in May as our base case.
Then, you were asking about our projection for the end of year, I guess, also for the other currencies. The current expectation for the end of year key interest rate levels is as follows. Czech koruna, 4%; Hungary, between 6% and 7%, very hard to predict, 6%, 6.5% at the moment, but between 6% and 7%, I would dare to say. Romania right on the high 5 levels, I mean, 5.75%, 5.50% to 5.26%. And last but not least also to be complete, Serbia, we expect to go down to the lower 5-ish areas of 5.25%. These are our current expectations for key rates in our geographies.
And then one comment before I hand over to Willi on the M&A. Share buyback, look, I think you are very optimistic with your timeline. We will draft the application to the ECB in the next day since we just finished the €300 million as reported. And then there is a time of between 3 and 6 months usually to be expected until the ECB improves since we have already kind of experience with it. We hope it’s on the lower end, but it’s not very likely that we will start already early in the second quarter. Of course, this is completely subject to the regulators decision.
And with this, I hand over to Willi.
Willi Cernko
Yeah, thank you, Stefan. I want to come back to your question with regards to M&A, and additional share buyback potentials beyond, we already announced €500 million. I think it’s well understood. And I mentioned it during my presentation when we were looking at the outlook for 2024. I said any further capital allocation decisions will be led by my successor, Peter Bosek, who will take over as of 1st of July. I think it’s well understood to leave room for the new management team to create, let’s say, further steps. And it is expected that this is the only thing I want to add to that is we are totally committed to growth.
Stefan Dörfler
And, I think, I forgot to answer your question regarding the savings banks impact on capital. Yes, you’re absolutely right. Since the savings banks capital is fully consolidated in our capital ratios, they had a good contribution in the year 2023. And in terms of how it works, also going forward, everything that the savings banks plan to do with the surplus and all these kind of things are fully incorporated in our plans. And we are very closely aligning all capital activities with our colleagues in the savings banks. So everything we talk about is always also reflecting their plans, decisions, and projections.
Benoît Pétrarque
Great. Thank you very much.
Operator
Thank you. We will take the next question from the line of Gabor Kemeny from Autonomous Research. The line is open now. Please go ahead.
Gabor Kemeny
Hi. Thanks for the presentation. The first question is on loan growth. You target 5%, can you elaborate on how you see the dynamics separately in Austria and in CEE, please? I presume you expect quicker growth in CEE, but some color here would be helpful. On the NII guide for 2024 the 3% decline, can you give us a sense how much terming out you have budgeted? I think your share of demand that was dropped 5 percentage points to 55% last year. It would be useful to have a comparable figure.
And then my last question is, I understand much really depends on the priorities of Mr. Bosek later this year, but just looking through the region, do you see a potential larger asset which might be relevant M&A targets for us? Thank you.
Willi Cernko
Gabor, let me start with your first question, the loan growth we would expect. I want to focus on two regions. When it comes to the CEE region, definitely we expect, let me start with that. Our guidance had clearly, let’s say, outlined, we see a loan growth of around 5%. When it comes to CEE, we see predominantly a loan growth that is supporting us within the SME business. This has a lot to do with the transition of the economy. Here, there is definitely a need that we are present as a liquidity provider, so we see here loan growth.
When it comes to Austria here, first of all, I see further growth opportunities in mortgage business. I think you are aware about the fact that the Austrian government just recently announced a huge package to support the construction industry, and by that also to support the mortgage business with private households. So we see a strong stimulus, especially, in the second half of 2024, also supported by to be expected rate cuts.
Stefan Dörfler
Thank you very much, Willi. I will address the question, I hope I heard it correctly, Gabor. I think your question was about further development of the ratio between current accounts in term deposits. I think it’s a fair answer to simply say we expect more or less a continuation of the latest 2023 trend. So that’s what we expect. Obviously, once the curve so to say turns to sharper rate cuts, we will revisit it and we will certainly report in Q1 or later Q2 about what we expect.
And then, I would like to mention regarding the loan growth, just adding to what Willi has just been elaborating on. Of course, the further we go, the more important, the loan growth and loan volume will be for our NII development, that’s needless to say. So I would say that the end of year 2023 volume is the basis of our current assumptions. Going further into the second half of the year, it will be important to see how the volumes and, of course, also the net interest margins will develop and we will talk about it and report later on. So that’s the statement I would make at this moment.
Willi Cernko
Yeah, I’m coming back to the M&A question. I simply want to refer again to that, what I said at the very beginning, I want to leave it to the new management team led by Peter. So, I think, it’s well understood, we are screening the market, but there is nothing concrete right now.
Gabor Kemeny
Understood. Thank you.
Operator
Thank you. We will take the next question from the line of Mehmet Sevim from JPMorgan. The line is open now. Please go ahead.
Mehmet Sevim
Good morning. Thank you for your time. I have a couple of questions, firstly on NII coming back to the guidance for 2024. Are you able to give us a sensitivity to various interest rate cuts across the region, and especially breaking it down by country, given the different moving, the different cycles in different countries, and particularly for example, places like Czech Republic where initially rate cuts may be positive and then may turn negative, et cetera. So any color you may give on that will be helpful. And similarly maybe on that topic, the Czech NII seems to have expanded quite nicely in the fourth quarter, and that’s despite the impact from minimum reserves. So could you give us some color on what has driven that and how do you see the trajectory there going forward?
And maybe two more, if I may, one on the NPL ratio, I understand, obviously, that that is mostly driven by Austria, but can you give us any more color, what’s driving this, what segments maybe, and is that related at all to the CRE portfolio, particularly in the savings banks? And it seems like the cost of risk guidance for 2024 has some impact coming from savings banks as well. So if you could give us any further color on that? That would be very helpful. Thank you.
Stefan Dörfler
Yeah, thank you, Mehmet. Let me address the NII sensitivity question right away. I think what is very important that we distinguish between country indications and currency indications. Why is that? While, of course, the Euro countries, Austria, Slovakia and Croatia are clearly all euro, or I would say 95%, 99% euro if we consider the dollar exposure and holding. In the countries, which have their own local currency, on the corporate and wholesale lending, there is a significant euro share. So, therefore, let me be very specifically distinguishing between country indications and currency indications. So when it comes to the currency sensitivities, I already was referring to the savings banks, so nothing to add there.
The total sensitivity, including this round about €150 million projection in the year 2024, for savings banks is for around €300 million for a full percentage point annualized. It’s very important to mention, because depending on the timing of certain cuts in the ECB, you have to then calculate the respective impact on the year which is anyway clear to you.
You are right with your assumption that the effect in Czech currency is in principle positive, so the dimension is around €60 million to €80 million. However, it’s very important also how the pace of the Czech National Bank rate cuts actually materializes. I think it’s for obvious reasons, because the adjustment of the respective business interest rate is not always at the same speed as the key rate, so I don’t know for example Czech National Bank placements are reacting immediately, while our current account in term deposit in particular are not immediately reacting.
So the point I’m making it is net positive, clearly net positive. I’m in general optimistic for the Czech NII for 2024. However, the pace might be here and there favorable and here and there not so favorable. Q4 Czech NII, I think the main feature and also the stuff you have to watch going forward is that the migration from current to term accounts more or less has stopped in Czech Republic for obvious reasons. Rate cuts have been starting. Those people who shifted their money have done that in the course of the year 2023. And, we clearly see a stabilization and actually a growth of the NII now on the upcoming months will not go in one linear line, but we are quite optimistic for the Czech market.
Just to round up the picture all the other currencies in particular lay in Romania, Hungarian forint and other currencies are playing a minor role compared to the numbers I gave you.
Alexandra Habeler-Drabek
Then to your questions on risk costs, you perfectly described it already on the influence of the Austrian real estate financing which is especially financed in the savings banks. I would like to draw your attention once again on Page 21, where you can see the exposure distribution and there you can see that on real estate €16.1 billion is booked in the minority-owned savings banks. So this is the explanation why we see the impact mainly there, the impact as I already briefly indicated in my presentation is in smaller- and medium-sized real estate developers in the area of residential real estate, but really smaller- and medium-sized companies which do not have as strong ratios as the bigger players which we are financing in other areas.
CEE also now derived from Page 22 with a very low share on real estate in our bank and also no troubles so far that we see there. So, savings banks impact on the NPL increase in 2023 was considerable. So, the net new NPL inflow was even slightly above €900 million from the savings banks alone.
On risk costs, the share in the Erste’s figures 2023 was also very high from the savings banks for 2024 going forward. When you take our guidance of up to 25, savings banks would be included with basis points above this figure. So, CEE lower, savings banks higher.
Mehmet Sevim
That’s very helpful. Thank you.
Operator
Thank you. We will take the next question from the line of Johannes Thormann from HSBC. The line is open now. Please go ahead.
Johannes Thormann
Good morning, everybody. Some follow-up questions on the net interest income. First of all, net interest income, you only talk about the risk for this year of going down. And, sorry to say, but your guidance has been initially wrong in all of the last 3 years. So, could you elaborate a bit more on the upside risk for NII? What could happen to deposit flows if they grow stronger than expected? Or you also argued that you took some losses in Q4 to invest into higher yielding assets. What’s the impact on this? So, that’s the first question.
Secondly, on the uptick in NPL by industries, could you elaborate a bit on which industries you have seen the uptick in and what has been driving this and also on your 25 bps risk costs guidance, which is basically above the average of the last 5 years, not seen in any of the years in the last 10 years, except for 2020, what needs to happen to get to 25 bps, especially as you just described, the real estate risk of probably being a minor risk for your group? Thank you.
Stefan Dörfler
Yeah, Johannes, thanks very much for your question and you are about right. We have been below what actually we could deliver in 2022 and 2023 in the respective beginnings of the year. That’s correct. We have been adjusting then over the year to the very dynamic interest rate development. Now, I think it’s fair to say that we are in a different situation now, when it comes to development of interest rates in terms of direction, as well as in terms of margins, most likely.
But, yes, let me name the positives, of course, you are perfectly right that there are a couple of potential tailwinds. I mentioned already in the presentation. One is, and again, very, very good development in the interest rate, interest in our investment book. We are talking about €1.5-billion-plus in the meanwhile. You remember we were below €1.5 billion before the rate cycle started.
Second element is definitely a loan growth, which picks up more swiftly than we would currently anticipate. This is something which would help not only for the later part of 2024, but certainly also for projections going into the year 2025.
And last but not least, I followed the programs of the usual broadcasters this morning. There is a huge discussion currently about weather, for the reason that they have to wait for data on wage inflation, the ECB might be inclined to wait until Q3. Should this happen, you can immediately add a couple of, let’s say, €50 million, €100 million, €150 million, €200 million to our NII, and then we would be flattish, definitely a projection that is also not out of bounds. Yeah, that’s where we are. That’s why we used a very precise wording that given current assumptions, given current anticipations, this is where the numbers lead us to, but that there is a certain range around this base case is absolutely correct, and I can only confirm this.
Johannes Thormann
Okay, thank you.
Alexandra Habeler-Drabek
On the NPL uptick, it’s not only, but to a considerable extent, this we expect to be driven by Austrian real estate business, which usually has higher volumes, but a very good level of collateralization. So the impact on risk costs from real estate, yes, there will be some, but not to the extent as we expected for the NPL volume overall. Retail currently still very strong, also given the strong labor market. So on retail, we would not expect a major change in a very, very healthy portfolio, but also with, of course, some prudent assumptions for 2024 for our guidance. And then it’s a mix. As you know, we have, for a good reason, built stage overlays for the cyclical industry, which we still have in our books.
Some smaller construction companies, as we all know, are struggling. So a mix of the, let’s say, usual suspect industries in such an environment. Further comment on the 25 bps on top, what I’ve already said, this is really very difficult. It’s very early in the year. And as you have seen, we are guiding for below 25 bps, or up to 25 bps, which, yes, you’re right, is above the recent years. However, once again, it’s very early in the year. Macroeconomic outlook is not as volatile as it has been, but we think it’s good to remain cautious.
Stefan Dörfler
Thank you. [Operator Instructions] We will take the next question from the line of Riccardo Rovere from Mediobanca. The line is open now. Please go ahead.
Riccardo Rovere
Thanks for taking my questions. One to start with on NII, just correct me if I got it wrong. You stated, Stefan, that you expect the trend that you have seen in switching from current accounts to term deposits in Austria in 2024 to go on more or less as you have seen in 2023. While in Czech Republic, you stated the deposit rates are being cut. You see this trend having stopped and the situation is somehow reversing. Now, provided I understood it correctly, my question here is why, given the rate will go down at some point in the euro area too, why the Austrians should behave completely different than the Czechs? Why the Czechs are not moving to term deposit, because rates are being cut and why should the Austrians keep doing it, when rates are being cut in the euro area too? That’s the question.
The second question is, these modification losses that we have seen in Hungary and Serbia are those one-offs or something that may happen from time to time. Another question I have is for Alexandra. In the 25 basis point, risk of guidance, is there any use of FLIs allocation out of the €740 million that are still left on the balance sheets?
And then I have a question on RWA optimization. You, Stefan mentioned that you keep calling, you want to keep optimizing RWA, if you’re working on them, is there anything that may have a material impact on RWA? And then if you can give us an idea if there’s going to be any impact on Basel 4, and that’s the beginning of 2025 on the first application of Basel 4. Then the €2.7 dividend that you mentioned in your slide in the guidance, sorry, I did not get any. Does that refer to 2024 too, or is just a reminder of what you paid in 2023?
And then again on capital, I mean, you start from 15.7%. Your payout is going to be 40% to 50%. The buyback will consume 30, 35 basis points. I mean, you will continue to stay well ahead of the above 14%, which to me means 14 point or something. What’s the real commitment of the bank to bring this number down to 14%, because with 40%, 50% payout, that number will continue to go up indefinitely forever. So I was wondering what is the real commitment here of the bank to bring it to a more normal level? That’s it. Thanks.
Stefan Dörfler
Okay, Riccardo, I really tried to follow all the points you were making and you simply jump in once more if I forget something super important. Number one, behavior different between Czech and Austrian clients. Well, I think there are three effects which are simply distinguishing the two country situations. Number one, it’s 7% versus 4%. I think it’s simply a big, big difference in terms of magnitude. So the attractiveness of term deposits in Czech Republic, especially in the longer maturities, is in the meanwhile for the customers already quite low. We are watching this really and monitoring this on a client level.
The other point that comes into that, there is still a significantly higher volume in current accounts in Austria. So there is simply more volume still to be shifted. And last but not least, we simply believe that people will react to the expected, so to say, rate cut discussion, which is of course also in the Austrian press and move certain volumes that they still have not moved. This will certainly then also slow down once the offerings are either coming down, partially as it already happened, or the rate cuts really materialize.
Modification losses, look, yes and no. It’s clearly a one-off for now, but it’s very hard to predict what kind of interventions, especially in the countries you were mentioning that I was presenting, might happen also going forward. So if there are moratoria, if there are certain caps be it on the retail or SMEs area, then we have to provide for it, then we have to follow the respective accounting rules to book it. So in that sense, it’s a clear one-off, but whether this might, on the political front, repeat and force us again in the future to certain bookings, it’s very difficult to predict.
And let me, I think there was a couple of risk points. I hand over to Alexandra in a minute, but let me finish my part. So €2.7, of course, 2023. So we don’t make any statement for 2024 yet. You can image – you can definitely expect us to fully stick to our overall dividend policy, but when we will communicate is also clear after the half-year numbers, we will communicate our intention for the dividend 2024.
RWA accuracy, this was mainly an exercise of data quality. We have improved data quality on all fields in all countries, in all data components, and that helped us a lot. No, the answer is you don’t expect any leapfrogging jump anywhere. Our projections are very optimistic for our capital build, but not for any kind of huge, so to say, changes there on the accuracy front. Which brings me to the last point, which is expected that you would be asking that, we will definitely still after paying out the dividend, after hopefully then also executing the share buyback as intended, we will have surplus capital and beyond the 14%. This is a fact you are completely right.
And as we already mentioned, this will be up to Peter Bosek together with us to formulate statements in this direction, what he is intending to do regarding potential M&A considerations or maybe other use of surplus capital.
Riccardo Rovere
That’s clear. Just a quick – on Basel 4?
Alexandra Habeler-Drabek
Yes, let me compliment what Stefan said on RWA with Basel 4. So we can, once again, confirm our expectation for Basel 4. Do not at all expect a negative impact, rather even a slightly positive one, taking everything into account, market risk, op risk and credit risk. And the slight relief that we expect is driven by credit risk RWA. On – yeah?
Riccardo Rovere
Finish your part, please.
Alexandra Habeler-Drabek
And on your question on risk costs, I can be very brief. Yes, we are expecting also for 2024, a partial use of FLIs and overlays, roughly in the range of this year of €200 million, maybe up to €250 million, but quite similar to this year.
Stefan Dörfler
And since I tried to run through all the points you mentioned, I forgot to mention one very important element. I think we have discussed a couple of times the granularity of our deposit base. And here, of course, is a big difference between the Austrian client base and the CEE client base. So simply the amounts that single customers are holding with us are higher, which leads us to the expectations that they might be more inclined to shift to higher yielding allocation. That’s another argument which has been proven right in the last 2, 3 quarters. Thank you.
Riccardo Rovere
Thanks a lot. Very clear. Thanks.
Operator
Thank you. We will take the next question from the line of Hugo Cruz from KBW. The line is open now. Please go ahead.
Hugo Cruz
Thank you very much for the time. I have three questions. The slide on fee mentioned some repricing on payment fees. I wonder if you could quantify that repricing and if it’s something that could be repeated in 2024. Second question, on your OpEx guidance, what wage inflation do you assume for Austria and for CEE?
And third question, I think when you gave the NII sensitivity of €300 million, I understood that was just for the savings banks. If that’s the case, can you give a euro sensitivity for the entire business? You mentioned a lot of the loan book in CEE is also in euro. So what would be the sensitivity overall for rate cuts in CEE in euros? Thank you.
Willi Cernko
Let me start with the first question, repricing on payment fees. This is done, let’s say, country by country, simply an inflation adjustment. That is embedded.
Stefan Dörfler
Thanks, Hugo, for asking again about euro sensitivity, because this reduces the risk that I misunderstood. The €300 full year euro annualized impact is of course for the total, total group. Yeah. And 150 out of that roughly, 140 to 150 is coming from savings banks. That’s what I wanted to bring across. So thanks for the clarifying question.
Did you have another point? I don’t remember now.
Willi Cernko
OpEx?
Stefan Dörfler
OpEx, yes. Thank you very much. Wage inflation. Yeah, thanks, Willi. The OpEx includes an expectation to land on the Austrian bargaining round about the average inflation of the year 2023, which was 7.8%. Currently, the bargaining is ongoing. We have signals from the updates that we get. I think, Willi, you got one this morning, that we will probably land somewhere there, plus, minus 0.1%, 0.2%, of course, it’s not yet finished. So we can’t say anything for certainly. This will just as a reminder, this will kick in with April 1. So we have about 75% of this impact you have in the OpEx costs in the year 2024 in Austria. Thank you very much.
Hugo Cruz
Thank you very much.
Operator
Thank you. We will take the next question from the line of Chris Hallam from Goldman Sachs. The line is open now. Please go ahead.
Chris Hallam
Yeah, good morning, everybody. So the first question is on the speed of the buyback. The previous €300 million buyback took 6 months. So, I guess, we could assume a €500 million program would take about 10 months. You’ve mentioned 3 to 6 months for ECB approval, so that gets us to early 2025. So there’s €500 million to be completed. Is that fair? Or do you intend to run a faster buyback program this year compared to last year, which would then obviously enable a second translator in 2024? I know the next capital deployment decision you mentioned is for the next CEO, but I think the intended speed on the €500 million is something you would probably already be planning on.
And then second, I know it’s very, very early to be asking about 2025 NII, but I guess I’ll try anyway. If we think about the guide for €7 billion-ish this year, is the H2 or the Q4 run rate implied in that number, the right figure to use as a starting point for 2025?
Willi Cernko
The last sentence once more?
Chris Hallam
Just about the run rate for 2025 NII. So if we take your 2024 guidance and think about what that implies for the second half of this year, if that’s the right starting point to go for 2025 NII modeling?
Willi Cernko
So, share buyback, so to say, speed first. Very clear statement. That’s why I said it in the presentation. We want to finish by Q4. Why are we so, so to say, cautious with the timeline? We can’t and we don’t want to influence when any form, the regulator and his decision-making process, they will deliver a decision, most likely somewhere between 3 and 6 months’ time, and then we will execute, there is no RFP yet drafted, how we will change potentially the execution patterns, but the clear goal is to finish within this year.
Again, anything much, much earlier than Q3, Q4 is simply not realistic given the timeline of the events. In 2025, well, it’s simply too early, let me just give you run rates for what we can observe. Q4, as you know, was impacted by one or the other. One of, we would see the kind of regular NII run rate for the quarterly Q4 at 18.20 to 18.40. That’s probably a realistic starting point as long as we don’t see euro rate cuts around, and this is kind of what we are looking at currently in the first quarter, always considering, of course, certain events around day counts, [bit by bit] [ph], but that’s a good run rate you can count on for time being, but 2025, sorry, please ask you for understanding, that’s really too early, later in the year we will talk about it.
Chris Hallam
All right. Thank you very much.
Operator
Thank you. We will take the next question from the line of Krishnendra Dubey from Barclays. The line is open now. Please go ahead.
Krishnendra Dubey
Hi, thanks for taking my question. I have a couple actually. So the first one is on the NII. I just wanted to check if your NII guidance of minus 3% down, does it include the MRR for euro as well as the Czech Republic at the same level? Or are you being conservative and you’re assuming a slightly higher MRR? And aligned question on the NII, I guess, in the Hungary, there are interested caps which are being there on the market. Given the rate cuts are currently happening, do you see a positive sign for your NII on this?
And second question I have is on the risk weighted assets. Is there any model update impact that we should be aware of for this year? I believe you’ve already talked about there is no Basel 4 impact that you’ve talked, but I guess is there anything which we should be aware of, any positive or negative impacts on the RWAs?
Stefan Dörfler
Okay. Thank you. First of all, minimum reserve requirements, remuneration, we expect to be on the same level as we currently have. No improvement, no deterioration. That’s our assumption. Should there be a change? Obviously, this will have a certain impact. We will immediately quantify in our communication to you.
Second thing on RWAs. No, nothing spectacular. I think, we have communicated multiple times, and I’m sure, Alexandra, would confirm that we are among those who will not be negatively informed by Basel 4. On a net basis, we are still cautiously optimistic that we will have even a certain relief, but nothing which will change the overall picture substantially.
Alexandra Habeler-Drabek
And just that also not from any other area as a special model assumption, so nothing special to expect on this front.
Stefan Dörfler
Yeah, and then Hungary, the interest rate caps don’t have a huge impact on the situation. To be honest, I’m not dramatically positive on Hungary in NII, to be honest. The Hungarian result overall was fantastic in 2023. It was mainly on the back of the fair value loans, as you know, this famous baby loan. Hungary will for sure deliver a solid result again, but it’s not the country where we expect the NII to rise strongly.
Krishnendra Dubey
Thanks. I just have two small follow-ups actually. I think it’s just a follow-up from the previous questions actually. So one on the collective wage agreement, I guess if I’ve missed, did you guide to any number for Austria or no?
Stefan Dörfler
Yes, guiding is maybe the wrong word here. We are just watching, we are not involved in that directly, of course, as a board. We are watching the negotiations. There was a press communication yesterday by both the employers and the unions. From our experience, this is all kind of circulating around the expected level of the inflation rate of 2023. So that’s what we currently expect. Willi is updated on an ongoing basis on that, and that’s what he told me in the morning. I think it’s a realistic situation.
Willi Cernko
Yeah, so that’s an expectation. [They should come to a result to an alignment latest next week.] [ph]
Krishnendra Dubey
Sure. Thanks a lot.
Operator
We will take the next question from the line of Riccardo Rovere from Mediobanca. The line is open now. Please go ahead.
Riccardo Rovere
Well, thanks for taking my follow-up. Just a quick one. On the bank levies, what is embedded in your guidance, especially with the resolution fund, do you expect this to go away at least partially? In general, what should we expect on this next?
Stefan Dörfler
Well, everything we know at this moment in time, Riccardo, is in. So the full impact of the Slovakia, Romanian, of course, already existing Hungarian banking tax, as well as the Czech and Austrian situation is all fully in. And, yeah, everything that is known at this point in time is involved, included in our communication as of today.
Riccardo Rovere
And, Stefan, sorry, the resolution fund, the contribution to the resolution fund is, what do we stand here with respect to stay unchanged?
Stefan Dörfler
No, no, no, that’s what I said in my presentation. That’s why I said we try to incorporate everything we know as of now. We got already an official letter from the single resolution board that for the Euro single resolution fund, there are no regular payments necessary in the course of the year 2024 for the reason that this has been completely filled. That was the €50 million I mentioned in the presentation that we have as a better other operating result here. How this will turn out in the other countries/other currencies we don’t know yet, because we don’t have any official information about any changes. So could be that there is a little bit more upside for us, because there is very, very unlikely that our contribution would be higher than last year. This is nearly impossible, but it could be lower, but we don’t know yet.
Riccardo Rovere
Okay. That’s clear. Thanks.
Operator
Thank you. It appears no further question at this time. I will hand it back over to your host, Mr. Willi, you can go to for closing remarks.
Willi Cernko
Yeah, thank you. Thank you very much. First of all, thank you for attending the conference. And then I should not forget to mention we are going to present our first quarter results 2024, end of April, concretely on the April 30, 2024. Thank you. Have a nice day. Have a nice week.
Operator
Thank you for joining today’s call. You may now disconnect.
