Earnings call: Komerční Banka reports solid H1 results, eyes digital growth

Komercní Banka Group, in its earnings call on August 1, 2024, reported a robust financial performance for the first half and second quarter of 2024. The bank announced a total capital ratio of 18.95%, liquidity coverage ratio of 170%, and a net income of CZK6.3 billion for the first half of the year. Growth in deposits and assets under management were key highlights, alongside a focus on environmental, social, and governance (ESG) initiatives.

Despite a decline in net interest income and financial operations, the bank maintained strong asset quality and revised its full-year cost of risk guidance downward to 10 basis points.

Key Takeaways

• Komercní Banka reported a net income of CZK6.3 billion for H1 and CZK3.5 billion for Q2 2024.
• The bank’s total capital ratio stood at 18.95%, with a liquidity coverage ratio of 170%.
• Deposits grew by 6.5%, and assets under management increased by 26.2%.
• ESG initiatives were emphasized, including eco-mortgages and services related to obtaining EU subsidies.
• Net interest income declined by 2.4% year-on-year, while fees and commissions increased.
• The cost of risk for the year is revised to around 10 basis points.
• The bank expects a significant revenue increase in 2025 due to digital sales and retail transformation.

Company Outlook

• Mid-single-digit loan and deposit growth expected in the banking market.
• Revenue projected to grow low-to-mid single-digit; OpEx to have low-single-digit growth.
• Positive impact anticipated from the sale of a subsidiary, with net proceeds between CZK2.4 billion and CZK2.5 billion in Q3.
• Guidance for 2025 to be updated in the next earnings call, with a significant jump in revenues.

Bearish Highlights

• Net interest income and financial operations declined, with the latter decreasing by around 18%.
• The macroeconomic outlook has been downgraded, with higher key policy rates expected.

Bullish Highlights

• Strong growth in deposits and assets under management.
• Successful migration of clients to a new digital bank platform.
• Anticipated growth in net interest income in the second half of the year due to loan acceleration and improved deposit structure.

Misses

• Bottom line was down 21% due to weaker net interest income and financial operations.
• The cost of risk increased due to higher provisions, although it was revised downward for the full year.

Q&A Highlights

• Management discussed the impact of market interest rates on net interest income, stating that hedging operations offset sensitivity to short-term rates.
• The shift from current accounts to interest-paying deposits is expected to continue, contributing to deposit growth.
• The bank plans to maintain its dividend payout ratio, with a strong capital level supporting this strategy.

Komercní Banka (ticker not provided), in its recent earnings call, presented a mixed yet optimistic financial picture for the first half of 2024. The bank’s solid asset quality and strategic focus on ESG initiatives, coupled with growth in key financial areas, suggest a stable foundation for future growth. While facing challenges such as a decrease in net interest income, the bank is adapting to market conditions and leveraging digital transformation to enhance its revenue streams. The management’s forward-looking statements on the anticipated increase in revenues and cost reduction in 2025, due to the completion of retail transformation and increased digital sales, reflect confidence in the bank’s strategic direction. Shareholders and clients may look forward to more detailed updates in the upcoming earnings call, as Komercní Banka continues to navigate the evolving banking landscape.

Full transcript – None (KMERF) Q2 2024:

Jakub Cerný: Hello and good afternoon. Good morning, ladies and gentlemen. Welcome from Komercní banka and thank you for sharing your summertime with us today. It is the 1st of August 2024 today and we are going to discuss the results of Komercní banka Group for the First Half and Second Quarter of 2024. Please note that this call is being recorded. Our speakers today will be Jan Juchelka, Chairman of the Board and CEO of Komercní banka; Jitka Haubova, Chief Operating Officer; Jiri Sperl, Chief Financial Officer; and Didier Colin, Chief Risk Officer. Standing by in case of questions for them are Miroslav Hiršl, Head of Retail Banking; David Formánek, Head of Corporate Investment Banking; and Margus Simson, Chief Digitalization Officer. As always, we will begin with the presentation of results. This will be followed by questions-and-answer session. During the presentation part, all participants will be on listen-only mode. We would appreciate if you could keep your microphones muted during that time. So, now I would like to ask the CEO, Jan Juchelka, to hand over. Thank you.

Jan Juchelka: Thank you, Jakub. Thank you very much for being with us. Good morning or good afternoon to everyone. It’s my pleasure to walk you through with my colleagues Jitka Haubova, Jiri Sperl and Didier Colin through the presentation of second quarter of 2024 and first half of 2024. Komercní banka remained very strong in its capital base and its liquidity base. Our total capital ratio totaled at a level of 18.95%. Liquidity coverage ratio, 170%. We are keeping excellent level of quality of our assets, which is translated into 13 bps of cost of risk on a year-to-date basis. Despite pretty dynamic growth of our loan book, we remain in very safe territory of 78.5% of loans to deposit ratio. The business performance is framed in strong growth of deposits, both Retail and Corporate, by 6.5% on year-over-year comparison, with the very latest trend of strengthening the current accounts, whereas the global picture was more in favor of saving accounts and term deposits. Assets under management, outside the balance sheet of the book, i.e., for us, solution delivered together with Amundi or our private banking solutions, grew by 26.2%, so very, very strong dynamism of growth. When you mix it together with pension schemes and subscribed investments in Komerční pojišťovna, KP Insurance business, the total growth remains double-digit, close to 14%. Clients’ loans, 3.7% overall and we will go to the breakdown of this number. It’s more driven by Retail than Corporate, but it’s growing in both main segments. All that was translated into first half financial results of CZK6.3 billion group net income, which is CZK33.6 per share, with double-digit ROE at the level of 10.5%, and potentially 11% if IFRIC 21 was linearized. Cost-to-income ratio, 51.7%. The second quarter contributed into the first half by CZK3.5 billion net income, ROE with 11.6% and cost-to-income below 50% at the level of 49%. So, we can move to the macro echo, where I will spend only a few seconds. We are still waiting for the decision of the Czech National Bank Board today on setting the new level, potentially the new level of two weeks’ repo rate, currently at 40.75%. The GDP is growing in a very mediocre way in the Czech Republic. It was in second half of, sorry, in second quarter of 2024 by 0.3% on Q-on-Q basis and 0.4% on year-over-year basis. In fact, the main, I would say, if not the only well-working engine here is the consumption of households. The tight — the labor market remains stretched with almost non-existing unemployment rate, whereas the inflation is back to normal at 2%. What is probably good to see is the evolution on Czech koruna, which landed at CZK25 per euro as of June 30, and we will see, as I said, what the Czech National Bank will decide today. The longer-term rates were sloping slightly, positively since January. Three months PRIBOR at 4.71%, which was down on year-over-year basis by 242 bps. 10 years interest rates were at 3.89%, five years interest rates were at 3.85%, and 10 years GABI [ph] is at 4.24%. Next page is going to our business performance on the side of financing. The loans grew by 3.7%. On the right-hand side, you see the breakdown between group lending. So it’s visible that what is growing pretty nicely is everything that is related to housing. Either it goes from Modrá Pyramida Building Saving Company or from Mortgages provided by the bank. Consumer loans are also pretty nicely growing by 5.1%, whereas businesses and other loans by 2.7%. When you break down those 2.7%, you see SGEF is one of the main con, let’s say, main contributors in the sense of growth. It was our pleasure to show our signed Memorandum of Understanding with SGEF International and SG Group on buying the remaining 49.9% and becoming sole shareholder of this company. We like it. We do believe that by becoming the sole shareholder, we will be able to cement our position as a leading bank in financing of Corporate clients. The housing loans grew by 42.3% on year-over-year basis and by a very strong 60.2% on quarter-over-quarter basis. So, we could say that, this is bouncing back with very strong power and we believe that we will be able to follow the market without making any price — without leading any pricing race or at least initiating them. So we can move to next page, which is the tombstones achieved by the transactions with our Corporate clients. Here you see everything the — everything that is framed in green is either ESG eligible or green bonds or green loans. It’s a nice mixture again between the public sector and private sector, between medium-sized companies and large companies. We are supporting our clients in their acquisitions and many others. So here we remain very proud of being a strong supporter of Czech Corporate clients. We can move to next page. Deposits grew by 6.5%. I already commented these deposits or assets under management outside the bank. So our cooperation with Amundi is pretty smooth and at the benefit of both sides, which is translated into 26.2% growth together with the private banking, not only Amundi but predominantly Amundi, 2% in life insurance reserves and another 2% in the field of pension schemes. The Group deposits in total grew by 6.5%. When you break it down, it’s mainly driven by business deposits together with Retail deposits, and let’s say, expected drop in or continuous slowdown in building saving. The mixture, not so much surprisingly, goes to remunerated deposits, so term accounts, saving accounts, a little bit less but still growing in current accounts on year-over-year basis. We can go to next page. Here I’m handing over to Jitka. Thank you.

Jiri Sperl: Thank you very much, Jan. Just before I start, I’m suggesting now to pass word to Jitka, who will cover for KB also very important area, i.e. ESG. So, Jitka, please, at least briefly.

Jan Juchelka: Sorry, it was my communication mistake, Jitka. I should have given the word to you already at the beginning. Sorry for that, Jitka and ESG. Sorry.

Jitka Haubova: It’s very okay. Good afternoon. In the following moments, as was said, I would like to talk about ESG as one of the notable client experience enhancing philosophy, but also, let’s say, patiently debated and highly regulated topic. To be specific, I have selected one story, the story of ATMs sharing with other four Czech banks. ATM is an abbreviation for an automated telemachine, which is a self-service banking terminal for withdrawing and depositing money. I would like to go through all three levels from G, governance perspective and mainly client satisfaction point of view. Our customers can make three withdrawals from 2,000 ATMs and make deposits in over 900 machines, which represents 40% of all ATMs in the Czech Republic. And it is good to say that in the Czech Republic, over 60% of citizens still prefer to pay by cash. This service is our regulatory duty and the most expensive service also. So, logically, we try to reduce the cost. Concerning S, social aspect, clients now have better access to this 24×7 automated online service, thanks to moving dozens of machines to villages where there were none ATMs before and this has given to 150,000, 100,000 fellow citizens ATM access where they had none previously. In the Czech Republic, we have around 50% fewer ATMs than our typical phones throughout Western Europe and concentrated to the big cities. And from the environmental aspect, customers can see how we are able to save energy, how we can save money and how we are able to reduce our carbon footprint. Just generally, we have decreased our carbon footprint by 60% compared to 2019. Obviously, it is also a saving of money, because the majority of saving is driven by energy savings. And this has been also positively assessed by rating agencies. As you can see on the slide, all ratings of our ESG strategy are at a high level and we are ranked among the top companies throughout the world. Recently, KB has received also many other awards, which can be seen in the slide in the right-hand corner. I would like to highlight that we won Bank of the Year in 2023, including recognition for a bank without barriers. The most visible feature was the so-called Touch Cards for use by blind clients. We were also delighted to be granted the Green Crown Award in recognition of our Green Product, a loan for sustainable technologies. By the way, our share of new Corporate investment loans with the ESG parameters is around 50%, 5-0, and we have also lots of leasing, leasing for Corporate photovoltaic plants, and also we are providing eco-mortgages, we are providing also comprehensive service and advice on preparing ESG strategies, obtaining EU subsidies for our clients and also providing the energy audits. All of our ESG performance indicators can be seen here on the left-hand corner. I already mentioned the major ones. Finally, the last box shows the remaining regulatory activities. We presented Double Materiality assessment, which is important from the CSRD perspective. We presented so-called Business Environment scan to ECB, where we evaluated the climate risk. And also, finally, we are assessing our clients and transactions applying the ESG aspects, copying KYC procedure, because it is fundamentally very similar. To conclude, we are confident that ESG can be — can offer benefits not only for bank and our shareholders, but also clients. Jiri?

Jiri Sperl: Yes. Thank you, Jitka. Financial results. so, let me start with the big picture, i.e. the main drivers of profitability year-on-year, at the upper left part of the slide. Overall, the bottomline is, as already mentioned, by Jan, minus 21%, with weaker NII and financial operations, but at the same time with very solid fees and commissions. There is also a visible positive contribution of the regulatory funds at the level of almost CZK500 million. Otherwise, OpEx is growing, but still under control. And what makes the main difference year-on-year is the cost of risk, where this year, in 2024, after heavy releases last year, we created by almost CZK1.5 billion more provisions. So in the era of cost of risk, it’s clearly the base effect. From the quarterly perspective, that’s the upper right chart, there is a jump from CZK2.8 billion to CZK3.5 billion, influenced mainly by regulatory charges, of course, already in Q1 this year, as it is the obligation. But even if we adjust by this effect, there is a quarter-over-quarter growth, which is positive. True, it is influenced by positive cost of risk contribution. And still, it leads to the double-digit profitability indicators, as mentioned by Jan. To mention her — here, at least, a return on Tier 1 capital at the level of 13.3 IFRIC adjusted. Let’s move to the next slide, please, which is about balance sheet. So the balance sheet slowed down a bit, growing 1.1% year-to-date. But still, there is a solid growth year-over-year at the level of 4.5%, i.e., roughly CZK70 billion in absolute terms. On the liability side, still, the deposits are the main driver of the growth. On a year-on-year basis, growing by a strong 10%, while both money market operations and accounting capital went slightly down. Decline of the capital pre-series only as a payment of the dividends, last year’s profit dividends in Q2 this year. On the asset side, half of the new resources have been placed to the loans and the remaining part to the repo operations with the Central Bank. It’s visible that the liquidity remains still very high, very excellent. Jan was mentioning LCR at level of 170%, to complement also a little longer liquidity profile measured by NSFR is also at very safe level, i.e., 140% plus, when the regulatory limit is at 100%. Let’s move to the net interest income, please. Yes, thanks. And let’s start with the year-over-year perspective. Here, NII went still down by 2.4%, influenced mainly by, first, declining income from the deposits in still, I would say, challenging environment. Second, increased costs of senior and non-preferred loans. It is, let’s say, a regulatory-wise link to the MREL. Last year, we were still in this era for building — in the building phase of this regulatory obligation, while this year, the impact is transposed into the P&L NII already fully. And third reason, also the reason is the impact of minimum obligatory reserves, implemented or cancellation implemented as of October 1st last year, is also not a negligible impact. If we focus, however, more on the trends, i.e., the quarterly evolution, at the bottom right chart, we see that both income from deposits and loans have grown, not significantly, but the growth is there. And to say only categories declining are two categories, other NII income, and that’s mainly, that’s the pink color, that’s mainly because we paid dividends in 5th May. And the other one is NII from Investment Banking, which is, by definition, more well-timed. So having said this, I believe that I can say that fundamentals for the quarters to come are healthy in terms of core net interest income. This also transposed into net interest margin, as shown in the upper left chart, where there is a slight move up on a year-to-date basis and we think that the trend is to continue in the quarters to come. Let’s move to the fees and commissions. So they have grown solid pace, even, I have to say, a bit better than we expected. There are two main reasons for this positive evolution. First, it’s fees from cross-selling, growing year-on-year by a very strong 10%. And here to mention an important driver of the cross-sell fees is a dynamic evolution in the insurance business, where the gross premium written is growing on non-life plus almost 18% year-on-year, and on life insurance a bit less, but it’s subcategory risk life insurance by a very strong 12%. And the second reason for such a positive evolution of the fees and commissions is behind specialized financial services, where thanks to better income from private banking, bonds, insurance, custody, depository services, and in Q2 also loan syndications, it was growing by a super strong 21%. And this is bringing me to the financial operations. Thank you. So, here to mention after super high result in 2023, there is a correction, a clear correction down by roughly 18%. And this correction is solely influenced by lower Investment Banking income. What’s behind mainly is a weak demand for interest rate and FX hedging due to the development and expectations for check rounds, rates, both FX and interest rate. On a positive, much more positive note, much less volatile FX income from the structural book, the blue part of the chart, is running great, supported mainly by higher, much higher volumes of the transactions year-over-year, mainly cards payments, and also by some kind of adjustments in the pricing. At this front, I mean the blue part of the chart, we are expecting the trends to continue at least in Q3, but probably also in Q4 due to the seasonality. Q3 is typically the highest quarter, one of the highest quarters due to the traveling seasons. Last point before passing words to Didier is about the OpEx. So there are traditionally under control year-on-year flat and even a bit down minus 0.2. At the same time, it should be reminded, and I was touching that already at the beginning of my speech, that this chapter has been very much supported by much lower regulatory charges. So that’s the resolution fund and deposit guarantee funds that decreased year-on-year. That’s the pink color in the chart. On the underlying basis, without this positive effect, the growth of the cost would be whatever between 5% and 6%. And I will get back to that during the outlook for the full year. If you go briefly into the structure, personal expense is growing by 7% year-on-year, affected, of course, mainly by the regular annual increase of salaries and relatively newly by another element, which is kind of successful in sourcing activities in IT area. Not sure I was mentioning last time, but the bank is very successful in sourcing activities, i.e. replacing externals or third parties’ developers by the employees. And of course, it has on one hand side, there is increasing HR cost, of course. On the other hand, it is deducting from that part and it’s right part of the chart, flat and even slightly declining. So for, let’s say, comparison purposes, these two categories should be taken probably together. And finally, depreciation growing low-teens percentage points as a reflection of digitization investments and activation of these investments as a part of our transformation. Transposing to cost income ratio, that’s the bottom chart, IFRIC linearized, landed at 49.5% on year-to-date basis. And now it’s time for Didier Colin focusing on assets quality and cost of risk. Thank you.

Didier Colin: Thank you, Jiri. Good morning, good afternoon to all of you. Turning to the evolution of our asset quality in the second quarter. I will briefly start with giving you an overview of our default rate evolution, not disclosed on this slide, but being a bit the anchor of our asset quality in three points. The first point is that our SME portfolio, which started to record some default rate increase in the first quarter, in the second quarter, stabilized. So this is a first piece of good news. And still in the Corporate segment, we continue to record near zero cost of risk level for the large Corporate portfolio. The second point concerns the Consumer loan and Small Business portfolios. And I will briefly mention it because, as you probably remember, those two portfolios were also a little bit under some default rate hikes in the recent quarters. And this past quarter, we continued to witness the stabilization of those two portfolios. And the last brief comment goes for our Mortgage loan exposure, where here we continue to see some levels near the 2022 historically low point of default rate. So, overall, a good evolution in the second quarter. The translation of this into the IFRS 9 risk classification gives you what is on this slide. Basically, with our exposure classified as to slightly down, again, being the reflection of a strong resilience of our loan exposure on the private individual segment, which more than offsets some moderate risk rating deterioration observed for the small business portfolio, as well as a couple of watch listing situations for our Corporate segment. And what is also a good persisting point is that the intensity of migration that we regularly measure between S1 and S2 continue to be in the second quarter at low level. The exposure classified default, the S3 part of our portfolio, also slightly decreased, simply being the direct impact of a positive resolution of the situation of one of our large Corporate clients, as well as being the mechanical result of our recurring right of campaigns, which we perform on small ticket exposures with limited recovery potential. So this gives you, as of the end of the second quarter, a stable S2 ratio at 15%, a stable NPL or S3 ratio at 2%, and a stable provision coverage ratio for our defaulted portfolio. How this translated in terms of cost of risk is on the next slide, where you see that for the second quarter, we booked a much lower level of provision compared to the first quarter, at only CZK100 million in net creation of provisions, with in fact two opposite pictures between the two main segments. Starting with the Corporate segment, we recorded CZK100 million in net reversal, like in the past, concentrated on a few client situations, and overall giving you the confirmation of a continued good level of our recovery performance for this Corporate segment. Going the other way, for the Retail segment, we booked a little bit more than CZK200 million in net provision creation, which is a level that is a bit higher compared to the levels recorded in the previous quarters. And here, this CZK200 million is made of two components. The first one, at CZK100 million comes from what we call the core cost of risk creation, being in fact cost of risk coming from the transition into default. And the second CZK100 million came from our decision to further build up our IFRS 9 provisions. This being split between our inflation overlay and our forward-looking macroeconomic reserve. Talking about those reserves, for the second quarter, we kept them flat at the level of CZK2.3 billion. In fact, this stable level is justified by the content — the context of the recent default rate hikes on the Consumer loans, Small Business and SME portfolios. And this is a stability for this reserve, which we expect to see until the end of 2024, given or taking into consideration the uncertainty of the macroeconomic environment. We also presented for the first time the structure of our year-to-date cost of risk at 13 basis points, which you have on the bottom right of this slide. I will not comment on it in detail, but what it tells you will be three points. The first one is the reconfirmation of the resilience of our credit risk profile, despite those recent default rate hikes on some of our portfolios. The second element that or second message that it conveys is the strong recovery performance, primarily on the Corporate, but to some extent also coming from the Retail portfolio. And the last point is our prudent approach to portfolio provisioning applied to the non-defaulted exposure. Now, taking into account, and this will be the end of this brief overview, taking into account the content evolution of our risk credit risk profile in the second quarter, we’ve decided to revise downward our guidance for the full year from its previous level in the range of 15 basis points to 20 basis points to the new level of 10 basis points. And this lower level, in fact, relies on three main expectations. The first one being the expected improved outlook for one of our, call it, large Corporate clients by the end of the year, for which there is a significant amount of provision. The second one is the lowering of our default rate assumption for the large Corporate portfolio, taking into account what we observed in the first semester. And the third assumption is the continued stabilization of the risk profile for those three portfolios that went through some default rate hike in the recent quarters, being Consumer loans, Small Business loans and SME. And on this, I will hand over back to you, Jiri. Thank you.

Jiri Sperl: Thank you, Didier. So, let’s continue with the capital. As Jan already mentioned at the beginning, the capital reclass is still very strong, despite the fact that we are accruing 100% of the profit for this year’s profit dividend. And it even slightly increased in the first six months of the year, mainly due to the slowdown of the loan growth in the Corporate. Currently, it is at the level of 18.95%, which is roughly 2.45 percentage points above the minimum requirements and even a bit above the management buffer for the capital reclass. It’s probably worth to mention here now that there were some changes in the minimal capital requirements recently. First one, the decrease of the countercyclical buffer by 58 basis points from July the 1st this year. And the other one, increase of systemic risk buffer by the same 50 basis points, but as of January 1, 2025. So, basically, these two changes are offsetting each other. There is also, let’s say, shift in the time. Which is bringing me to the last slide of the presentation. So, that’s outlook for 2024. It’s usually updated and there are some changes. I would say both directions, compared to the three months old guidance. Let’s start with the macro-eco. So, our expert downgraded a bit the GDP growth from, I remember, 1.4% three months ago to 0.7%. Now, Jan, was already commenting on that, so no more comments here. The key policy rates by CNB are expected to land at the end of the year a bit higher than we thought three months ago. At that time, it was 3.5%. Now, our macroeconomists expect 3.75%. And yes, in the meantime, I see that CNB Board already decided today. So, the decision is cut by 25 basis points, which is in line with our macroeconomists. So, that’s macro-eco front. In terms of banking market, there are no changes in this outlook, i.e., both loans and deposits are expected to grow mid-single-digit. For KB business outlook, we are confirming the outlook for the growth of the loans, i.e., mid-single-digit. Probably after a bit of a slowdown in H1, mainly in CIB loans production, I would add the lower end of mid-single-digit, but still mid-single-digit. On the flip side, we are upgrading the growth of the deposits from mid-single-digit to mid- o-high single-digit, thanks to the successful first half of the year at this front. The revenues, on the revenue side, we also confirm basically our guidance, i.e., revenues are going to grow low-to-mid single-digit, mainly supported by the growing business and improvements in the balance sheet structure. However, the same like for loans growth, the guidance has a bit changed to the also lower edge or lower end of the low-to-mid growth due to some elements observed in H1, mainly slowdown of Corporate loans and also slower shift in the deposit structure in favor of unpaid deposits than expected. No changes on the OpEx side, so we are confirming low-single-digit growth. And to be complete, we are improving the guidance for cost of risk, as already commented by Didier, so it’s from 15 basis points to 20 basis points, three months ago, to 10 — around 10 basis points. And finally, there is one positive FX impact into our P&L, which is extraordinary income from sale of Václavské náměstí 42 subsidiary, which is going to be booked in Q3 this year, as the closing was at the beginning of July. And in terms of the quantification, we still do not know exact impact, but it will be whatever between CZK2.4 billion and CZK2.5 billion. So, to be booked, you will see that in the figures in three months’ time. So, that’s it and I’m passing the word to Jakub.

A – Jakub Cerný: Thanks to all the presenters. Now, we will be happy to answer your questions. Ladies and gentlemen, let me remind you that this meeting is being recorded. If you have a question, please click on the icon with raised hand at the upper part of your screen, and then please wait to be called. If you are connected through a telephone, please wait for me to invite you to ask questions later in the call. So, it seems Mehmet Sevim from JPMorgan, which is to ask the first question. Mehmet, please go on.

Mehmet Sevim: Good afternoon. Thanks very much for the presentation and for taking my question. I have three questions, if I may. One, loan growth clearly tracking a bit behind your initial expectations and also lower than the sector trend. But clearly, as you also suggested, this is coming from the business segment more visibly. So, can I just ask, what is driving that? Is it a surprise to you or was it in line with your expectations? And when we think about the second half of the year, are you really comfortable that you can reach the mid-single-digit target? And maybe connected to this also NII, now given the quarterly drop driven by all these other segments and the IB business, looks like it will really need a big recovery in the second half to reach the guidance. Again, how comfortable are you on that? And finally, just on the sale of the headquarters building and the upcoming net proceeds from it, can I confirm that the earnings from that will be accrued for dividends in line with this year’s 100% policy? Thanks very much.

Jan Juchelka: Thank you for the questions. I will start and probably at least for first question, my colleagues from business lines will complete me. So, in terms of the loan growth and whether it was in line with our expectation or not. I would say not fully in terms of Retail loans and more concretely Mortgage loans, it was in line. And even if you have a look on the sales side in Q2, it was a huge recovery, which is not in the balance sheet yet. So, it is coming in second half of the year. We were expecting a bit more dynamic growth for Consumer loans, but it seems that the market a bit slowed down versus our original expectation. So, at the end of the year, probably we are going to grow a bit slower than expected three months or six months ago. And I would say the biggest kind of miss is coming from the CIB loans. We were a bit declining and that’s something where we need to get back to the dynamics. Maybe to mention what is the expectation for the full year. So, I was probably mentioning last time, but the growth should be generally driven more by Retail, as we are already somehow benefiting from the almost completed transformation. So, for Retail, it is mid-single-digit plus and supported mainly by the recovery on mortgage loans. In terms of Corporate, our guidance is now rather, let’s say, low-to-mid. And that’s offset a gap from the first half of the year. I don’t know whether my colleagues, Mir and David, would like to comment on that.

Miroslav Hiršl: Yes. Just a short comment from my side regarding the business or Corporate financing. Generally speaking, the sentiment of the Corporates, especially the industry, is kind of hesitant. And the companies are reviewing their options and being postponing some decisions regarding further investments. Also, given the economic situation in Germany being the largest export market for our companies. Nevertheless, we record a number of quite interesting projects in the pipeline, also on the side of the large companies. Not only investments, but also in the area of acquisition, financing and real estate. So, basically, this gives us confidence for the second half of the year to be stronger in the generation of new loans, and especially a generation of new assets.

David Formánek: And if I may, I’ll just use one sentence to say that I share the optimism on Mortgages. I see the pipelines that are pretty full. The market has been growing 80% compared to the last year in the first six months and we should be soon after the one mortgage factory implementation in a shape to take even more than we did in the first six months of the year. So, a rather optimistic side there.

Jan Juchelka: Let me add one sentence, if I can, from my side on that front. We have made a tremendous move in migrating clients in the Retail part of the New Digital Bank from the old world to the new world, whilst onboarding new clients. So, we are now having in our relationships 47,000 more clients than we had to. And then, we would love to have them banking with us in larger scope than only with the initial bank account opening, and let’s say, debit card. So, we are building another part of foundations for growing further on the side of Retail. The tendency of selling of new — sales of new mortgages is pretty promising. We will gain further on our side of processing them after building and putting in place the new one mortgage factory. And in parallel with that, and this is outside the NII, but more on the side of fees and commissions, we do believe that we will continue selling the non-life part, as well as life part of our insurance by double-digit, as it was the case on a year-to-date basis. So, on both NII and fees and commissions, we see a rather promising horizon here. And, let’s say, underlined probably by today’s decision of the Czech National Bank.

Jiri Sperl: Yes. And I think that’s the first question. The second question was related to; I want to refer more that [ph] to the comfort of the management to deliver NII in the second half of the year. Well, we are not saying it is not a challenging target, but we strongly believe that it will be delivered. And I can list several reasons why we feel so. So, first one is, and I was touching that even before, it’s a kind of acceleration of the loans in second half versus half one. So, that’s clear. The other reason is that we are expecting that deposits, spreads are going to continue slightly up. Maybe here it’s worth to mention that Q2 this year was the first quarter after, I think, six or seven, when the cost of deposits went down and we are expecting this time to continue. Third point is also back, and Jan was touching this point during this part of the presentation. But, as a matter of fact, during the Q2, the structure of the deposits improved, and after some time, current accounts, one of the most profitable products in the bank’s portfolio, was growing faster than the pay deposits, at least quarter-over-quarter and we believe that this is going to continue even in the quarters to come. Maybe here, one technical detail of the change of this, let’s say, structured pay versus unpaid has happened rather at the end of the quarter. So, you don’t see in the figures the impact yet, which is increasing our comfort for the quarters to come. Third, maybe it’s also kind of a technical base effect. But it’s also necessary to take into account that the first three quarters of this year, on a year-over-year basis, was — were hit by the cancelling of the minimum obligatory reserves. And yearly impact, as I remember well, was around CZK1.1 billion. And on a base effect, it will not be the case of Q4 this year anymore, right? So, because this happened with the validity October 1st last year, so Q4 this year will be, for the first time on kind of a very comparable like-for-like basis. And a last point to mention is, and again, Jan was touching the point, but we are growing number of the clients significantly. And this trend is expected to continue even by the end of the year. And naturally, the new clients, of course, with some delay, but are also, among others, bringing their deposits with them. So that’s kind of a list of around four or five reasons what is behind our guidance. Thank you. And there was still a third question. Head office building, well, to say the capital level, as I was commenting on that, is still super strong, even we are accruing 100% of the profit. So we do not tend to change the dividend payout ratio. In other words, I do not see any reason not to pay it also as a dividend. Of course, I have to say subject to approval by the general meeting. But again, I do not see any reason why not. I think we covered all three, right?

Mehmet Sevim: Yes. Yes. Yeah. Thank you. I really appreciate the comprehensive answer.

Jiri Sperl: Pleasure.

Jakub Cerný: Thank you. So let me remind you, if you wish to ask a question, please raise the hand button. The next question is coming from Michał Łoniewski from EnBank [ph]. Michał, please go ahead.

Unidentified Analyst: Yes. Hi. Thank you so much for taking my questions. I just wanted to confirm. So it is still possible that Komercní may pay out 100% next year if I heard correctly. And secondly, maybe I would like to once again ask about this net interest income guidance. Because if I’m calculating correctly, if we would assume even that net interest income would grow by 1% year-on-year, this would mean that the current net interest income — quarterly net interest income run rate should increase about 9%. So this is a lot, I would say. So this is very, very optimistic guidance, I would say. And thirdly, I would like to ask if your assumptions regarding the base rate for the end of the year will somehow support this NII outlook. This is, I guess, yes, if I’m not mistaken, 25 bps higher right now the base rate at the end of the year than you expected a quarter ago. Yeah, that’s all from me. Thank you. And maybe one more question, this one-off in the third quarter is CZK2.4 billion and CZK2.5 billion, this is gross or net amount? Thank you.

Jiri Sperl: Okay. So question number one, the answer is, yes. That was about SGEF and SG dividends, confirmed, understood well. Question number two, again, touching the relatively expected huge and significant growth in our NII. You’re saying 9%, my figure is rather 7%. I’m confirming that this is our guidance. I’m confirming it is a challenging target, but deliverable. And maybe to add one more, one last comment is that, that’s true that it is rather sensitive for some, let’s say, assumptions used. And probably the most important assumption here is again and again. And we are touching that three months ago, six months ago is the structure of the deposits. So once this assumption is confirmed, it will be there. And the third point is, I didn’t get it fully. So it was something about base rate was our expectation of base rate. I think I was touching that during the outlook part and the guidance of the bank is 3.75% at the end of the year. I mean, the two weeks repo rate of the Czech Bank. Was this the question or?

Unidentified Analyst: Well, a quarter ago, there was a guidance for 3.5% base rate. So the Central Bank will cut the base rate to 3.5% versus 3.75%. I know this is a very small difference right now, small change in the forecast. But I was wondering if it will impact net interest income in any way.

Jiri Sperl: Okay. Okay. Sorry, I’ve got it now. Well, not really, because the structural position of the bank hasn’t changed. Meaning that the bank is basically neutral to whatever moves of the market interest rate. So, yeah, the shortest answer is no.

Unidentified Analyst: Okay. And actually a question about this one-off, if it’s gross or net, the impact you presented. And one more question, maybe regarding the outlook for 2024. Let’s say that Komercní banka will not be able to deliver NII growth for 2024. Let’s say it will be flattish. Would you then try to make any effort to cut costs to maintain cost to income guidance? Yes.

Jiri Sperl: Yes. So two follow up questions. First one, one-off, whether it is a gross impact or net impact. I’m not sure I understand fully, but the impact — net impact into the P&L of the bank will be CZK2.5 billion. So probably according to your definition, it is net, right? So it is selling price basically minus the book value, so net. And outlook for 2025. Let me be less concrete, because we are going back to the outlook for 2025 during the next earnings call. Of course, if the bank is not delivering, let’s assume the result on the revenue side. We would do the best or some corrections, adjustments also on the OpEx side. Yes. Go ahead.

Jan Juchelka: I think Jiri, Michal was more in 2024 still.

Unidentified Analyst: Yes. That is correct.

Jan Juchelka: But the answer remained the same.

Unidentified Analyst: Okay. Thank you so much. Thank you.

Jakub Cerný: Thank you. So the next question is coming from Vikram [ph]. Please go ahead.

Unidentified Analyst: Hi. Thank you very much for the…

Jan Juchelka: Sorry, I cannot hear you at least.

Unidentified Analyst: Hi. Sorry. Yeah. No. I got muted. I’m sorry about that. My question is on the impact of market interest rates on NII. When we think about it, which rate matters to your NII profile more? Does it — is the repo rate the key rate for you or is it the 10-year yields? And if this — those two diverge, meaning the repo rate goes down, but 10-year yields don’t, as it oftentimes happens. What would be the impact on NII profile from loan deposit or your hedges perspective?

Jan Juchelka: Well, naturally, the bank is more sensitive for the short-term interest rates, as we have really huge amounts invested into repo loans. At the same time, hedging operations are more or less offsetting that more or less fully, i.e., if we — and I was commenting on that like six months or nine months ago. We adjusted our hedging policy and focused more on NIM hedging, net interest income, i.e., shorter impact, but only partially. The impact of longer term rates is lower. But if I’m talking about, let’s say, neutralization of the structural position in terms of interest rate risk, of course, yeah, I think, we are hedging both elements, short- and long-term.

Unidentified Analyst: Understood. And my second question is on the mix of current accounts in the total deposits. We see, of course, we saw migration from current accounts to interest paying deposits as the rates rose. Now, on the rates going down, how do you see this mix evolving? Do you see the current accounts as a percentage of deposits going back to where it was before rates rose or do you think there is reason to believe that the customer behavior has changed and maybe the clients might put money in term deposits or mutual funds, et cetera, and the car ratio can actually come down?

Jan Juchelka: Exactly. You are perfectly right. And this was already happening during the last quarter. And we strongly believe that it is going to continue.

Unidentified Analyst: Okay.

Jan Juchelka: In our projections, that, of course, we see and know the behavior of the clients from the past through all different cycles. So we believe — we see and believe that these shifts are continuing. At the same time, we are not very aggressive on that front. What I mean is that our expectation in the planning documents is that this paid versus unpaid ratio will not get back to the original levels, because currently, simply, the world is a bit different and with the continuing digitization, of course, the clients manage their liquidity, i.e., let’s say, current accounts versus the paid deposits much more efficiently. So there is expected increase or improvement in that regard, but not as fast and high as was the past.

Unidentified Analyst: Yeah. Thank you. Maybe one last quick question, if I may, on the New Digital Bank. As we see a very fast client growth, once these accounts — can you comment on how — what would be the deposit ticket size of these accounts compared to traditional Komercní banka clients? And do you expect, maybe in one or two years’ time, a kicker to come in the form of deposit growth as these digital bank accounts get funded? What is your expectations on those things? Thank you.

Jan Juchelka: If I may take the first part of the answer, what we see on the inflow, which is quite high, is that the characteristics don’t look too different from the clients that we have been acquiring, I would say, before this campaign and before NDB was launched. On the other hand, it is probably rational to expect a bit higher churn after some time. We included the assumption into the business case, we say probably 20% of clients acquired this way will not stay with us. We believe that for the rest, they will start behaving more or less the same way as standard KB clients always are. But this is still to be tested because it’s a bit too early to conclude. For the moment, I have to say that what I see from the behavior of this sample of clients, there are no major deviations from what we expected. Does it make sense? Am I reacting to what you wanted to know?

Unidentified Analyst: Yes. Yes. Thank you very much. Yeah. That’s helpful.

Jan Juchelka: Thank you.

Jakub Cerný: Thank you. So, I would like to invite participants who are connected through a telephone. [Operator Instructions] And we have one coming from Kamil Slovski or not [ph] [inaudible].

Unidentified Analyst: Yes, we have. Yes. Sorry for that.

Jakub Cerný: Thanks a lot, Kamil. Yeah.

Unidentified Analyst: I have just one question about the 2025 guidance and your targets of the strategy. From what I understood, we were supposed to see like this accelerated improvement in cost to income starting from 2024 and going into 2025. This was supposed to be a result of this rollout of the New Digital Bank. My question would be, would we see something still this year, is this delayed or rolling out or is this guidance valid for the cost to income?

Jan Juchelka: Okay. I will start. The first comment is probably I touched it a couple of minutes ago. Let us comment and update — potentially update the guidance for 2025 during the next earnings call, which will be the dedicated session. Still, we are sticking to the fact that in 2025, there should be rather significant jump in revenues. Why? Because of benefiting from the completed Retail transformation and monetizing on that. Which in the combination with the increase — significantly increased number of new clients and increased digital sales will significantly improve the picture. On the OpEx side, I can probably indicate already now that we are expecting even decline of the costs in 2025. One of the reasons, on top of the increased efficiency, is also the regulatory-wise impact. I mean, further decrease of the resolution fund charges. That’s probably what I would mention now and to stop now. And if you don’t mind, to give you more details in three months’ time.

Unidentified Analyst: Yeah.

Jiri Sperl: We will definitely — Kamil, we will definitely come back to you with more detailed breakdown of how we are doing in the field of implementation of the strategic plan. But please, just a small reminder that the fact that we have in the first stage reshaped pretty massively the organization of the headquarter here in KB. In the second step, we have been investing into the new technologies. We are expecting that there will be twofold effect. The first one is that we are massively simplifying the client’s proposition and everything what is behind that. So, let’s say, everything what is not visible for the client. So, our internal processes, and hence a higher level of end-to-end digitized sales. On the other hand, or let’s say as a consequence of that, we need less branches, we need less people inside the bank. And here we have been delivering so far what we promised as far as the number of branches is concerned and as far as the trajectory of FTE is concerned. But we will come back to you with a detailed breakdown. For — the statistics are not complete yet because we have 0.5 million users of the new bank application, out of which almost 50,000 completely new clients. So, we believe that next quarter we will be more comfortable to give you more like a 360 view.

Unidentified Analyst: Excellent. Thank you.

Jakub Cerný: Thank you, Jiri. As we don’t seem to have any question now in the queue, let’s wait a few moments if one comes. It does not seem so. So, I would like to hand back to Jan for a conclusion.

Jan Juchelka: All right. Thank you very much for being with us. Thank you also for your very concrete and straight to the point questions. We very much appreciate it. I would like to thank all my colleagues who presented or who answered your question. We do appreciate the courage of KB share from your side and we obviously stay at your disposal for any questions you might have in between, and we are very much looking forward for the next quarter presentation with you, which will be enriched, as we have just ended with that, also by a bit deeper dive into the deliveries of our strategic plan. In between, enjoy the rest of the summer season and have a good afternoon. Thank you very much, everyone.

Jiri Sperl: Thank you. Bye.

Jakub Cerný: Thank you. This has concluded our meeting today. You can now disconnect. Thank you.

Didier Colin: Thank you. Bye-bye.

Jan Juchelka: Bye.

David Formánek: Bye.

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