Edited Transcript of MONET.PR earnings conference call or presentation 31-Jul-20 1:00pm GMT

PRAHA Aug 1, 2020 (Thomson StreetEvents) — Edited Transcript of Moneta Money Bank as earnings conference call or presentation Friday, July 31, 2020 at 1:00:00pm GMT

MONETA Money Bank, a.s. – Chief Risk Officer & Vice-Chairman of the Management Board

MONETA Money Bank, a.s. – CFO & Member of the Management Board

MONETA Money Bank, a.s. – Chief Commercial Banking Officer & Member of the Management Board

MONETA Money Bank, a.s. – CEO & Chairman of the Management Board

* Anna V. Marshall

WOOD & Company Financial Services, a.s. – Co-Head of Research

Dear, ladies and gentlemen, welcome to the conference call of MONETA Money Bank. At our customer’s request, this conference will be recorded. (Operator Instructions)

And I’ll now hand you over to Tomáš Spurný, Chief Executive Officer and Chairman of the Board of Directors. Please go ahead, sir.

Tomáš Spurný, MONETA Money Bank, a.s. – CEO & Chairman of the Management Board [2]

Good afternoon, ladies and gentlemen. I have the pleasure to open our conference call. Throughout the conference call, we will refer to presentation that we published on our website this morning at 7:00 A.M. It’s titled First Half 2020 Results.

So let me begin. I’ll turn to Page #4. We have the pleasure to report that MONETA had become the most awarded bank in Czech Republic. We received 10 awards in fairly prestigious local competition called Golden Crown. The awards really focused on our digital banking and innovation.

Secondly, on Page #5, you see that we were upgraded by MSCI Index on environmental, social and corporate governance, I mentioned from BB to BBB, and we believe that to progress in how we are perceived as a quality company will continue to improve also over the next 12 months.

On Page 6, we would like to highlight the key developments of past quarter. If you look at this page from operating income perspective, the bank generated CZK 6.6 billion. This is obviously colored by the acquisition gain that we’ve made on entities purchased from Wüstenrot. Nonetheless, I believe we have good news on operating expense level. We have incurred costs of CZK 2.7 billion. This is spot on, 50% of our full year guidance. So we have a high level of confidence that we will fulfill the guided cost base.

On pre-impairment profit level, the performance of MONETA improved by more than 48%. This is a combination again of the acquisition and our underlying performance. On cost of risk, we have taken a position to really try to provision downside to the bank related to potential consequences of the COVID pandemic. We have incurred cost of risk of CZK 2.5 billion. This has 3 components. First and foremost, COVID-related charges stand at CZK 1.9 billion. We’ve also provisioned, under purchase accounting, the acquisition of the Wüstenrot. That was the second component. And third component is core risk performance of the bank, which actually stood at 40 basis points, so we have a bit of counterintuitive situation. Nonetheless, we have taken a very hard approach on trying to eliminate future risks from future performance of the bank. Net profit stands in this first semester at CZK 1.2 billion.

On Page 7, continuing with the highlights. The net acquisition gain is CZK 900 million. This is basically delta between what we’ve booked on excess of fair market value over purchase price, which came in at CZK 1.1 billion and the provisioning. So the net impact is CZK 0.9 billion. With respect to capital adequacy, the bank maintains a strong capitalization. We are at 17.4%. And later on, we will show you also evolution of our risk-weighted assets, where we believe we have done a good job in managing that dimension of the bank.

We also commend now excellent liquidity translated into LCR ratio of 217%. Apart from balance sheet strength, the bank has grown considerably. If you look at the lending portfolio growth that came acquisition combined with organic growth at more than 47%. And we maintain actually strong quality of balance sheet. As of today, we have nonperforming loan ratio of 1.6%. In absolute level, this translates to CZK 3.6 billion of nonperforming receivables. And in the second semester of the year, the bank plans to put on market CZK 1 billion face value of nonperforming loans. So this is actually not in the guidance that you will see later, but we are committed to maintain strong balance sheet.

Perhaps we can go now to Page #9. Just a few comments on the strategic KPIs that we follow. In building of the retail franchise, we are successful in a very strong development of the loan book. This is driven by mortgages, more than 135% growth and also strong performance on unsecured credit, 28%. Both numbers include the acquisition of Wüstenrot and obviously have the organic growth.

On small business, we continue an expansion. Nonetheless, the COVID pandemic slowed down the expansion. We grew year-on-year 20%. But like the retail, we have experienced significant drop of demand for our lending products, both on consumer unsecured and on small business.

In terms of SME banking, we have solid underlying growth of 14 — more than 14%, with a stable commercial yield and fairly good performance on incremental ROE from the franchise. Both on small business and SME later on in the presentation, you will see that we have been super successful in distributing additional liquidity to our clients through state-sponsored programs, which are covered by state guarantees. So we are also — we have made a very good progress and contribution to stability on those fronts.

On development of digital capability. Currently, we are close to 43% overall share on retail unsecured lending through our digital channels, and that is paralleled by more than 27% share in small business lending through our digital platform. So even though we’ve suffered lower demand, the digital channels are holding up and performing quite well.

On risk management, as a result of the anticipatory provisioning that we have made, we have very strong coverage, close to 145% of the NPL portfolio, whilst we have reduced the NPL level to 1.6% this quarter. And with the anticipated sale of NPLs, we hope to manage the ratio at a low level.

The cost of risk came on an annualized basis at 269 basis points. Normann will provide a lot of detail on risk management, but we have 3 components here. First component are COVID-related provisions that comes at 200 basis points. Then Wüstenrot purchase accounting at 28 basis points and 40 basis points relates to core performance of the bank. So the core performance of the bank actually counterintuitively improved year-on-year.

If you look at our capital position, 17.4% overall. The CET1 ratio stands at 14.4%. So we have super solid capital position, and we reduced quite significantly the overall RWA density and also the lending portfolio density. So the excess capital the bank is carrying at the moment stands at CZK 5.3 billion. So we are well equipped going into the rest of the year.

On cost, as I said, we came in with CZK 2.7 billion. This is respecting the previously announced cost-saving program of CZK 500 million, where we have reduced the guidance by CZK 500 million, trying to offset some negative development in the P&L, namely reduced NII level. And we have successfully — we are continuing to reduce the overall shape of the MONETA’s operating platform.

On Page 10, I would like to comment integration of acquired entities on commercial performance in the category of building savings product, the deposit savings programs, which are substituted by the states. We have actually improved the market share from 7.9% to 12.7%. This is due to fantastic performance that we have throughout our branch network. So the commercial performance, despite of COVID, has been quite good.

On front of rebranding, we have achieved legal rebranding. We have also integrated presentation of Wüstenrot into our website and clients of Wüstenrot can see their products through our Smart banka mobile banking platform. So we have done a lot on the client interfacing side in the first 3 months.

Additional to that, we have filed application with Czech National Bank to fully merge Wüstenrot Mortgage Bank into MONETA proper. And we trust that we will be able to achieve that at the end of 2020.

On synergies, we have reduced staffing of Wüstenrot from 280 employees that came with the bank to about 140 and decreased annualized compensation and benefits category by approximately 60% to 65%. So we are well on the way to achieve the target of cost synergy of CZK 300 million annually.

In this respect, we have also fully moved all of Wüstenrot employees into MONETA’s headquarters. We have been able to vacate the headquarters and currently are negotiating a sublease for the 5,200 meters of space that we no longer need.

On IT, we have discontinued both primary and secondary data centers of Wüstenrot, moved them onto our location. And we have a fairly detailed plan how to change the application landscape to MONETA standards over the next 12 to 24 months. So this is going fairly well. And I would say that we have accelerated the schedule somewhere between 3 to 6 months. And we have also enacted a retention program for 15% of new employees and are motivating them financially and otherwise to remain with us into the future.

On Page 11, just a brief comment on the shape of MONETA’s platform. Now we operate 160 branches of MONETA. This is close to 40,000 square meters. We have inherited net water footprint of 100 points, where Wüstenrot actually controls 40 of them. And we are enacting optimization program. So by the end of the year, you will see this number declining somewhat in search of synergies and creating, let’s say, consistency with our own network.

On ATMs, we have approved and are implementing a strategy of optimizing our ATM network to 550 machines. So we have a decline here. Whilst on the other hand, we are modernizing the network. So by the end of the year, on new ATMS, you will probably see an increase of 30 machines as we are trying to improve customer experience and eliminate certain risk of outdated equipment.

On customer base, with the acquisition and as a result of organic growth, we now command customer base of nearly 1.4 million clients. And you can see that, that is a significant 40% — almost a 40% improvement. So one of the priorities going forward will be cross-selling of our daily banking products into this customer base and seek to improve strength of MONETA on the basis of acquisition.

We continue to attract customers into our digital channels. This was somewhat the rate of growth, somewhat slowed down in the second quarter due to the lockdown measures and such. Nonetheless, the performance is satisfactory.

On the employment level in the bank, we have increased FTEs to 3,100. You will see this number coming down in the next 6 months below 3,000. And you can also see that MONETA year-to-year decreased — or improved productivity at a relatively good rate.

Now let me skip 2 pages and turn into the operating environment, where we start on Page 14. With respect to GDP forecast, we have used the forecast of 8% decline on the GDP. The latest number year-on-year shows midyear decline of 10.7% against market consensus, which was around 12% to 13%. So the performance of Czech Republic is slightly better, all considered, than what was expected by the market.

In 2021, we hope and pray that the economy rebounds at the level of 4% growth of the GDP. That connected with the macroeconomic indicator is the latest number. Numbers show that not only we’ve had highest historical drop in GDP, but we also have 4 consecutive quarters of falling industrial production, and the number in the second quarter is quite frightening. The drop in industrial production was at the level of almost 30%. We so far have seen slight firming up of the exchange rate against euro. And inflation so far remains at 3% level.

Unemployment has not popped up. This is due to the effort of the government to keep people employed through direct and indirect subsidies. So, so far, the operating environment has not really has not really shown any tangible worsening, but there are many reasons for concerns going forward.

On interest rate swaps, going clockwise around the page. You can see the dramatic movement of our interest rates. I will not comment this. This is pretty much similar to what we had used in the last quarter. And the like situation holds for government bond yields, which have declined very considerably.

Now going into evolution of the market on Page 15. If you look at the deposit market in Czech Republic, we have nearly CZK 5.4 trillion in overall deposit stock. MONETA now stands at nearly CZK 253 billion. This is almost CZK 100 billion increase in the last 12 months. So you can see that about 60% of the delta comes from Wüstenrot acquisition and 40% is of our own success in building the franchise of the bank.

The growth rate on retail, all-in, is close to 90% against market growth of 9.3%. So we have grown nearly 10x at this pace — against the pace of the market. And we also enjoy strong performance, 14.5%, on commercial deposits, where, as you know, we tend to focus our franchise on self-employed individuals and small companies. So our performance is actually quite good on the deposit side.

Then turning page to Page 16. You can see the performance on lending side, the Czech credit market stands now at CZK 3.2 trillion. MONETA stands at CZK 223 billion. Again, if you look at the absolute delta 12 months ago, we were at CZK 151 billion. So we’ve added about CZK 71 billion to the balance sheet. And of that, roughly 2/3 are coming from Wüstenrot and 1/3 is the organic performance of the bank. So on retail, against the market, which grew 5.7%, the bank shows almost — well, 13x level of market growth at 73%. And we also have done a very good job on the commercial, where we grew 15%. This is mainly due to our focus on the COVID state-guaranteed programs. And here, I would like to say that I’m tremendously proud that our participation with those programs far exceed the bank’s natural market share. We have around 13% to 15% share. In those programs, we have done more than the large — some of the large banks. I will not name them. And not only that we are helping our customers, but we are also fortifying the quality of collateral underneath our commercial book, and this will benefit the bank into the future.

On the next page, on the Page 17, we published, as usual, the pricing position of MONETA. We have May numbers here due to the fact that the market numbers were not available at the time of publishing. If you look at the consumer unsecured lending, we operated in May at — by May at a level of 9.4% against market rate of 7.8%. So significant premium. At the end, however, the volumes were half, and they were half due to lack of demand. We’ve also tightened our criteria. And this is the result of that.

In the third quarter, we anticipate to operate in the range of 8.1% to 8.3% price point due to the fact that we try to catch up some of the lost production in this current quarter.

On mortgages, we enjoyed 10 basis point premium against the market. MONETA did new business at 2.6%. This is the contractual rate against market average of 2.5%. Then on commercial deposit pricing, we maintained steady cost of funding at 15 basis points. And on retail, again, for the last 3 quarters, we have fairly steady position. You will see the 79 basis points coming down quite dramatically throughout third and fourth quarter as we are in the process of repricing about CZK 80 billion — of our CZK 187 billion of deposits, CZK 80 billion have been notified. And the impact will be visible in the third and fully in the fourth quarter of this year.

On COVID-related measures, I will skip the government and central bank as there is very little news apart from lowering of the countercyclical buffer. And let me go to Page 20. The consequence for MONETA is that we have made available loan repayment moratorium as mandated by legislation of the country. The total portfolio under moratorium is CZK 34 billion. Currently, in the month of July, CZK 18.2 billion of exposure should return back to service, repayment of debt. And in October, we face additional CZK 15.8 billion expiration of the moratorium. So far, the anecdotal evidence that we have in the third quarter indicates that we are not seeing any issues with — any significant issues with clients coming back to ordinary repayment of the loan. So there is some, let’s say, positive anecdotal evidence, but we have to wait till end of third quarter to see what happens on the first portion of moratorium that expires.

On the COVID programs, I mentioned it. We have done really very focused job. The bank worked over many weekends, and we’ve achieved excellent market share. What is perhaps more important than that is the government allocated to us CZK 10.8 billion of COVID-related guarantees under the COVID III program. So in the second semester of the year, the bank will push to seek to distribute this and improve the collateralization position that we have underneath commercial book.

On credit policy, we have reviewed the IFRS 9 model. We have also redone some of the staging algorithms, and we have implemented a very focused monitoring bottom-up so that we classify exposures according to the underlying reality. So we have done a lot of work on that. The last one that we were forced to cancel the Annual Shareholder Meeting that was supposed to take place in April. Now we have — we are announcing a new date. This will be 2nd of September 2020. And later on in the presentation, you also have the highlights of the program. Publication — the invitation will be published early next week.

And now let me turn to guidance. The guidance is set forth on Page 22. If I simplify the pre- and post-COVID guidance on a cumulative net profit level for the years 2020 through 2022, the COVID, we anticipate to cost the bank CZK 5 billion at the level of net profit. Specifically with the updated guidance, the minimum, and I would like to overemphasize, underline, bold, the word minimum target for this year is to deliver CZK 2.1 billion; next year, CZK 2.7 billion; and the year after, CZK 3.8 million. If you look at cost of risk charges, we effectively believe that this year, even with the heightened midyear charge, we will fit into below the 200 basis point ceiling on combined portfolio of the bank, and we will front-load enough provisions to absorb whatever formation of NPLs we might have in 2021. So in ’21, we estimate the range to be at 80 to 100 basis points. And in the following year, hopefully, the situation will normalize to 40 to 60 basis points.

On operating income, the first year of the forecast or of the guidance is colored by the CZK 1.1 billion extraordinary gain from acquisition of Wüstenrot. So from organic or core performance perspective, there is actually growth built into the number, if you eliminate the impact of the acquisition.

On cost base, we are committed to manage the cost base at maximum of CZK 5.4 billion. This should be assisted by extraction of synergies from the acquisition, countering inflation effects that we will certainly experience over next couple of years.

Additional to that, this year, and we will continue in the practice, we are recognizing only 20% of our quarterly earnings into regulatory capital. We are accruing 80% dividend. So we do believe — or we try to believe that next year, we will come back to normal and we will settle dividends due for 2019, and whatever, 80% payout on the year 2020.

So I thank you very much for your attention, and I will turn it to my colleague, Jan Fricek, who will provide you with highlights of the P&L and with a bit more detail on the P&L line’s development.

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Jan Fricek, MONETA Money Bank, a.s. – CFO & Member of the Management Board [3]

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Thank you, Tomáš. Good afternoon, ladies and gentlemen. I’d like to walk you through the profit and loss development starting on Page 24. Tomáš provided some key numbers of our financial platform. And hence, let me just add a couple of comments. Our revenue-generating capacity remains strong, accompanied by focused cost management and prudent provisioning. With respect to changed interest rate environment and very strong liquidity position, we started with the repricing of about 1/3 of our customer deposit base, which would help to partially offset pressure on the interest margin. I will comment on this in more detail later in the deposit section.

Page 25. Continue with the composition of the net interest income trend. The main driver was 25% growth of lending interest income, amid our loan portfolio expansion, further supported by acquired entities. The income growth was partially offset by a higher cost of our customer deposit base, which expanded by 63% over the last 12 months.

On the next page, we provide you with the evolution of net fee and commission income, reaching CZK 457 million in the second quarter, which is by 5.6% less comparing to the last year. This drop was primarily driven by the income side going down by 9%, which I will further comment on the following page, and was partially offset by lower fee and commission expense.

On Page 27, we decomposed the income side into 3 parts. If I go from the bottom up, declining trend of the servicing and penalty fee income was reversed in the second quarter into a year-on-year growth of 5.4%, positively impacted by acquired building savings products generating monthly servicing fees. Drop of transactional activities since the COVID-related restricted measures were put in place, together with the regulation of cross-border payment fees, resulted in a 23% decrease of income year-on-year.

And in the second quarter, we reported a decline of the third-party commissions by almost 10%, where primarily the distribution of insurance products and specifically payment protection insurance was severely impacted by lower new production of unsecured credit, amid pandemic-related uncertainty and loan payment moratorium.

Now we move to cost base development on Page 28. There you can see a 13% year-on-year increase predominantly driven by running cost base of newly consolidated entities plus the initial cost of the structural integration in MONETA. The pre-acquisition perimeter, we achieved 2.5% cost reduction through savings from discretionary expenditures, a revised investment plan for this year and also further productivity improvement. Our cost-to-income ratio for the second quarter stood at exceptionally low level of 37%, positively impacted by one-off gain on acquisition.

And on top of the last page of this section, you can see development of our brick-and-mortar distribution. It’s worth mentioning that these numbers do not reflect the acquired tight engine network operating slightly different distribution model with 103 office centers. In the bottom chart, you can follow evolution of the workforce. At the end of June, we employed 3,112 FTEs, which is broadly flat year-on-year. However, in the meantime, in the second quarter, we added to the group 280 employees of mortgage and building savings banks. And as Tomáš already mentioned, we are now focused on further productivity improvement through structural integration of both acquired entities and leveraging existing capacity in MONETA.

Now I will hand over to Andrew, who will continue with the balance sheet development.

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Andrew Gerber, [4]

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Thank you, Jan. So if we can go to Page 31, I will quickly go through the development on the balance sheet. On Page 31, we present the balance sheet development, where you see strong growth of 52.9%, driven by the continued organic expansion, but also, obviously, the impact of the acquisition, which we’ve already discussed and which added CZK 57.6 billion in customer loans. In investment security, you see 10% increase to CZK 24.1 billion with the yield of 0.9%. And in cash and reverse repos, you see growth of 103%, which is driven by the deposits acquired with the — with Wüstenrot as well as organic deposit gathering activities.

On the liability side of the balance sheet, we then see the impact of the acquisition with customer deposits increasing 63.2% year-over-year, with the acquisition adding CZK 58 billion. But at the same time, we saw strong continued growth on the — on an organic basis with CZK 41.2 billion added organically, which is 26.2% year-over-year growth on the organic portfolio. You can also see that the issued bond doubled in the quarter to CZK 9.8 billion, and this is driven by the addition of CZK 5.1 billion of mortgage-backed bonds issued by Wüstenrot’s mortgage bank.

Very briefly going to Page 32. We have the gross performing portfolio in detail, where you see 47.5% growth year-over-year, driven largely by retail, which was up 73.8%, supported again by the acquisition. On the lower half of the page, you can see the changing composition of the portfolio, where we now have small business and retail together accounting for roughly 68% of the overall portfolio, as we continue towards our target of having 75% in these 2 segments.

On Page 33, we cover the yield development. Overall, you see the yield — the portfolio yield decreased from 5.1% to 4.4%. And this is driven primarily by the change in mix as we added a significant mortgage portfolio with the acquisition, and this brought the yields down. And you see that reflected in the retail yield dropping from 5.9% to 4.7%. Whilst in the commercial portfolio yield, the drop is driven by the interest rate environment.

Going on to Page 34, we show the detail of the retail loan portfolio, which, as I said, grew 73.8%. The underlying organic growth was [13.6%], which is obviously slowing, and this is deliberate in the face of a very uncertain environment that we face at the onset of the pandemic.

In consumer lending, we grew 28.2%. And again, this is driven by the acquisition with the underlying organic growth actually declining 0.5% as we took very conservative positioning with the onset of the pandemic. The only other comments would be that in auto, we were — the business was affected by the virtual closure of the entire dealer network that we distribute through. And in credit cards and overdraft, the revolving products, we saw dramatic reduction in consumer spending and consequently higher balances on current accounts affecting overdrafts and the credit card portfolio.

Going on to the detail of the retail portfolio yield on Page 35, there’s not much to comment on here, which is broadly stable. We’re continuing the trends we saw historically.

So I will, with that, hand over to Jan Novotný, who will take you through the portfolio.

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Jan Novotný, MONETA Money Bank, a.s. – Chief Commercial Banking Officer & Member of the Management Board [5]

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Okay. Thank you very much, Andrew. Now please let me cover the development of the balance sheet and profitability of the commercial part of the MONETA group. On the Page 36, you can see the evolution of the asset side. You can see that, overall, we have reached the level of almost CZK 76 billion of commercial portfolio, which represent very good 14.7% year-on-year growth. This was mainly driven by 2 factors: first and the biggest impact is the acquisition of Wüstenrot, where there was a small portfolio of commercial loans to housing association and cooperatives; and the second is the increased disbursement of working capital loans, especially the loans that are guaranteed by the state subsidy schemes.

Now let me move to the Page 37, the next page, where you can see the portfolio yields for the commercial segment. You can see on both upper charts, the drop of average yields, which is a direct result of a drop of the driver, a significant portion of investment loans and working capital loans are based on the flow rates. You can see that this has no impact on the small business portfolio, this is the bottom left chart, as this portfolio is purely on a fixed rate. And therefore, we kept our average portfolio yield at the level of 7.6%.

Now please let me suggest to skip the liability pages and to move to — directly to the risk section at the Page 45.

So let me hand over the words to Normann.

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Carl Normann Vokt, MONETA Money Bank, a.s. – Chief Risk Officer & Vice-Chairman of the Management Board [6]

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Okay. Thank you. Good afternoon. We are now on Page 45 with an overview of cost of risk. As a result of the significantly worsened macro outlook compared to what we knew or anticipated that in the first quarter as well as the introduced payment moratorium, adjustments of the key macro variables and in our IFRS 9 provisioning models were made, which led to a significant increase of cost of risk in the second quarter.

As a result of that, the first half of the risk amounted to CZK 2.5 billion or 2.69%. As far as macro variables are concerned, which go into our IFRS 9 models, for the GDP, we assumed to peak at a negative level of minus 10% in the second quarter. And as far as unemployment rate is concerned, it’s expected to move a tick above 4% in Q4 this year.

If you look at our 2 key customer segments, retail cost of risk amounted to 2.68%; and commercial, 2.7%. The impact of COVID-19-related measures like the payment holiday adjustments to the macro indicators and portfolio monitoring activities amounted to 201 basis points. Moreover, there was a one-off impact related to the Wüstenrot acquisition in the amount of 28 bps.

If you exclude these 2 factors, then the cost of risk amounts to 40 basis points, which, in fact, is an improvement compared to the same period in the previous years.

This, in turn, clearly shows that the core performance still holds pretty well despite the worsened macro outlook. At the same time, within our IFRS 9 models and the overall provisioning approach, we have taken a prudent and conservative stance to front-load provisions in line within the IFRS 9 principle, which shall provide protection for potential losses in future periods.

In addition, as a result of the significant book-ups, also, our total NPL coverage increased from around 109% to almost 145%.

Moving to Page 46. Here, we share with you a more granular view on the CZK 1.9 billion book-ups due to COVID-19 macro changes and portfolio monitoring activities. There are basically 4 categories which drove the book-up. The biggest one stems from macro changes in the models, as outlined before, almost accounting for CZK 1 billion. Another one is close to CZK 700 million, which is related to migrations of parts of exposures covered by the moratorium, which were moved either to stage 2 or 3. CZK 48 million book-up is connected to a portfolio reserve for industries most likely endangered by the pandemic, like restaurants, hotels, travel industry and so on. And the further CZK 100 million — close to CZK 180 million book-up is related to so-called individually managed commercial exposures like SMEs, where we have conducted a bottom-up portfolio monitoring exercise based on dedicated questionnaires to single out customers with a potentially increased credit risk.

Going to Page 47. Here, we have an overview of gross loan portfolio and NPL balances. While the gross loan balances increased by more than 47%, which is driven both by the acquisition and organic growth, our NPL ratio dropped from 1.8% a year ago to 1.6% at the end of Q2. And when it comes to off-balance sheet NPLs, these dropped significantly by around another CZK 80 million to CZK 108 million, which constitutes a drop of more than 42%.

On Page — on the next page, Page 48, you can see the quarterly development of our NPLs since June 2019. During this entire period, the NPL stock increased from CZK 2.7 billion to CZK 3.6 billion. The increase in the second quarter is influenced by the acquisition. As for the new NPL formation expressed as a percentage of average performing receivables, here, we observed a continuing stable development, where the values oscillate between 0.5% and 0.6%. This clearly demonstrates a fairly healthy relation between new formation of NPLs and collection of receivables.

I think the next page, Page 49, is fairly important since it shows that the core performance with respect to delinquencies, which itself is an undisputable indicator depicting credit quality, has been very stable throughout the last 5 quarters, both in terms of 30 and 60 days past due. That in turn means that the overwhelming majority of the CZK 2.5 billion book-up of provisions is driven by model and monitoring considerations rather than core performance developments. This is a very critical aspect to emphasize.

On Page 50 and the following 3 pages, we have an overview of the development of our gross loan portfolio balances and the underlying provisioning balances and coverages for the last 5 quarters. The numbers shown on this page show the entire portfolio of MONETA Group, including the recent acquisitions. The changes in balances and coverages, both in stage 1 and 2, are largely driven by COVID-19 and anticipated worsening of the macro indicators, which both led to higher PDs within the IFRS 9 models. The biggest changes obviously can be noticed in stage 2, where we saw a significant inflow from stage 1 to stage 2. Since the end of ’19, stage 2 balances increased by almost CZK 12 billion and reflect a fairly conservative approach taken. The underlying provisioning balances in stage 2 increased to CZK 1.7 billion.

When it comes to stage 3, here, the coverages have been largely stable over the last quarters and stood at around 56%.

As for the next 3 pages, which is Page 51 to 53, I will not walk you through each of them, as they show just a more granular detail per product, both in retail and commercial. Basically, the evolution of stage 2 and provisioning balances are all driven by the COVID-19-related measures, as outlined before.

Let me move to Page 54 and 55. Here, we have an overview on the penetration of the payment moratorium in our portfolio. Overall, the penetration stood at 15%, both for the commercial and retail loan book. The highest share we observed in consumer loans with a penetration of 20% and small business loans with a penetration of 26%. The total amount of loan receivables covered under both the voluntary and state-sponsored moratorium is around CZK 34 billion at the end of June this year.

And on Page 55, you see a split into the major product categories, including a breakdown between the voluntary and state-sponsored moratorium. In absolute amounts, residential mortgages, consumer loans and investment loans accounted for the bulk of receivables covered under the payment moratorium. Moreover, from what we have seen so far, customers having been covered under the 3 months state-funded or the voluntary moratorium and have not opted for the 6 months moratorium ending in October, they have resumed payments under the installment schedules, which is actually a fairly positive sign. We will obviously carefully monitor the payment behavior in the forthcoming months. And should we observe a continued positive trend, we will reflect this in our models.

Summarizing the risk section, one can conclude that the significant CZK 2.5 billion provisioning charge is a result of a conservatively and consistently taken and applied approach under the IFRS 9 reserving regime. The created and front-loaded reserves shall provide a cushion for potential, and I have to emphasize, potential credit losses in future periods. We obviously will observe the payment behavior of our customers in the forthcoming months, alongside the economic development in Czech Republic, and we’ll take actions where necessary.

Last but not least, I also would like to mention that we intend to continue to monetize up to CZK 1 billion of nonperforming loans, both of MONETA Money Bank and the acquired 2 entities later in the year, which shall help to proactive manage our NPL ratio, but we also hope, subject to market response, to generate P&L gains, which will help the cost of risk line, which is not yet factored into our current plan.

With that, I hand over to Tomáš Spurný.

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Tomáš Spurný, MONETA Money Bank, a.s. – CEO & Chairman of the Management Board [7]

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Let me turn to the capital section. The capital section starts on Page 57. The most important message is that management of MONETA has reviewed the capital requirements, and we are lowering the management capital target from 14.9% to 14.4%. This is on the basis of the Central Bank further lowering the countercyclical buffer and that comes — as you can see, from the top of the chart, that comes into effect in the third quarter of this year. So again, we have a very strong position. We fulfill the allowable capital structure, and we are well equipped to compete and to also, in the future, provide shareholder distributions.

On Page 58, I think is a quite remarkable page because if you look at the accounting equity, we have quite considerably increased the size of the MONETA’s franchise and its potential to generate earnings. Nonetheless, the accounting equity stays virtually unchanged. If you look at the regulatory equity, the main impact on regulatory equity were the 2 subsequent issues of Tier 2 bonds: one in September of last year, and one in January of last year. So we have begun the previously announced optimization of our capital structure.

With respect to lending portfolio, RWA density. You can see that since 2017, when the density was at 72.5%, we have actually changed the shape of the franchise through product mix to 56.6%, and we believe this is a solid achievement on the RWA.

With respect to the total capital adequacy ratio, we are standing at 17.4%. We have already implemented the release — the support release factor, which was approved by the European Parliament late in June. So this is reflected in the numbers, took us a lot of effort. And on CET1 ratio, we have strong 14.4%, again, fulfilling and exceeding regulatory requirements.

On Page 59, we show you evolution of our excess capital against the legal requirement, the regulatory requirement. If you look at the left-hand side of Page 59, we commend excess capital of CZK 5.3 billion. This number will further be supported by the lowering of the capital requirement by additional 50 basis points. So this will go from 13.9% to 13.4%. So we are in a very solid position with respect to capital.

And if you look at the chart below on RWAs, RWAs grew at rate of 22%, whilst the loan portfolio is growing at a rate of close to 48%. So this is the result of our strategy. It is also a result of our effort to manage capital very, very carefully.

Now on Investor Relations, if you please turn to Page 61. We will hold a shareholder meeting on 2nd of September 2020 here in Prague. Then throughout the last month of the third quarter, we will engage in 4 conferences, which are organized by various banks in order to maximize our shareholder interaction. And the third quarter earnings call, we will do on 30th of October. So we are also shortening the length of the — or we are forwarding the date of our reporting as the bank is more confident and solid in its processes.

I will end here. Just summarizing perhaps a couple of the most important points. We are spot on cost management, and we will continue to perform well. As the team has done an excellent job on integration of Wüstenrot, and we have many initiatives across the franchise to maintain the cost discipline.

On operating income generation, we have taken action on the deposits, and we will reprice deposits. This will help us to roll back some of the negative impact of the lower interest rates. And we are seeking to enhance our revenue, our fee income also through rapid development of asset management distribution capabilities through bank assurance, and we have excellent results, namely on asset management capability. So aside from lowering the rates, we also seek to convert some of our retail deposits into asset management distribution, and this is proceeding way above our expectations actually.

On the cost of risk, if you look at the numbers that we guide, we want to be quite transparent that we expect that we could book up to CZK 4 billion of a risk charge this year. What is important with that respect is that we are more than 60% through that number as of midyear. So we, as management, expect that the performance will be improving even in a difficult scenario, and we are hoping that we have been conservative and that things will be better than we’ve expected.

Nonetheless, the minimum target for the management is to deliver profit this year of CZK 2.1 billion, and we believe that we are on a good way to do that. And hopefully, we will exceed that number. And we are also emphasizing the long-term sustainability of the franchise. So that’s why we are doing the things as we have done, and we will continue to do so.

I will end here. And we ask you for questions, and we would like to have a good discussion entertaining, answering questions you might have with respect to our results and plans going forward.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And the first question we received is from Anna Marshall of Goldman Sachs.

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Anna V. Marshall, Goldman Sachs Group, Inc., Research Division – Equity Analyst [2]

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Firstly on dividends. So just to clarify, when you’re mentioning your hope to pay out dividends remaining from 2019’s earnings and on top of that, from 2020 earnings in 2021. Would that be the full CZK 3.35 [PPS] per share that was originally planned from 2019 in the second half or a smaller amount? And also, is there a special procedure required to [have the] same approval from the regulator for payouts more than 100% of a given year’s profit? So that was my first question.

And my second question is on loan growth. Could you please share your assumptions behind the outlook both for 2020 and in the medium-term as well, particularly by segment?

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Tomáš Spurný, MONETA Money Bank, a.s. – CEO & Chairman of the Management Board [3]

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Marshall, I will start with the easier one. Loan growth is actually published on Page 70 of the deck. We estimate the growth to be at 14.4%. This is 2019 to 2022. That’s the CAGR on the loan on deposits, we have CAGR of 14% in the business plan, and it’s published on Page 70.

On the 2019 dividends, we intend to pay the remaining CZK 3.35 per share as soon as possible because this is what we’ve committed, and we believe that our capital position enables that. So when we talk about 80% distribution, we referred to year 2020 and then we also refer to settling the remaining dividend, which was committed by the management prior to COVID. So this is the mindset. On the more than 100% distribution we have paid, I believe, for the year 2016 in April 2017, we declared approved dividend of CZK 5 billion, which was actually higher than 100% distribution, if I remember correctly. There is no special procedure per se. As always, we had discussed that with the regulator. And at that time, we received a nod of acquiescence, not formal approval. So based on previous experience, it is possible. There is no specific procedure for that.

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Anna V. Marshall, Goldman Sachs Group, Inc., Research Division – Equity Analyst [4]

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Just to follow-up as any — on the loan growth. Could you please [indicate — bring more detail, this bit] into consumer and mortgages? So far consumer on organic basis has been lower. But how do you see for the rest of the year, for example, and [the personal term]?

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Tomáš Spurný, MONETA Money Bank, a.s. – CEO & Chairman of the Management Board [5]

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We basically have not disclosed the product category growth in our business plan, and this is not that we don’t want to talk about it, but this is more or less for competitive reasons. We, for the rest of the year — for the rest of this year, I would say that we expect slightly higher organic growth than we’ve had in the first half of the year. And this mainly comes from — consumer lending will be in the single digit. Overall, mortgages will continue to be in low teens. And that’s basically the view right now based on our credit policy, based on the demand. That’s what we expect by the end of by the end of 2020. So there should be continued growth, but it will be significantly slower than what we had in the past due to the situation and also due to the fact that the balance sheet is significantly larger than it ever had been. So it will be slower.

And I’m sorry, I don’t mean to be — don’t mean to avoid the question, but we are being also very conscientious of the competitive situation and we don’t want to disclose these expected numbers.

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Operator [6]

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And the next question received is from Marta Wasilewska of Wood & Company.

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Marta Jezewska-Wasilewska, WOOD & Company Financial Services, a.s. – Co-Head of Research [7]

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I have a couple of questions with some additional details that I want to learn. You have booked quite a substantial drop in your origination volumes in the second quarter. Maybe you could share a bit of more flavor, what was the split of actually lower client demand? And how much of this drop was dependent on your cautionary approach? And can we get a bit of flavor on how the production levels are looking like in July or in late June after the lockdown expired? That would be my first question.

The second question…

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Tomáš Spurný, MONETA Money Bank, a.s. – CEO & Chairman of the Management Board [8]

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But can I react to that, so that we settle this. In 2019, in the first half of the year, we did production of CZK 13 billion with the new volume production. In the first half of 2020, we did CZK 10 billion. If you look at — if you look at production in retail, it went down by 40% in 2020 compared to 2019. If you look at our SME, small business combined, the production increased more than 20% in the first semester of the year 2020. Majority of the drought is driven by lower demand. We’ve experienced during second quarter production in consumer loans, which was at 50% of a 52-year — 52-week average. And the second source of the lower production comes from approval rates. We are currently operating an approval rate on consumer credit somewhere between 40% to 45%, whereas pre-COVID, we were operating at 50% to 55% approval rate. So we have tightened the credit criteria in relative terms by about 20% and letting in less business into the bank conscientiously trying to avoid to take on the balance sheet other people’s risk. So we have become a bit more strict.

In the third quarter, what we experienced is that consumer lending is between 80% to 85% of pre-COVID level demand on the comparable basis. So the situation in the third quarter has improved quite considerably. We actually see increase of production and demand on mortgages. So all of the drops in demand were either consumer unsecured automobile finance or, as Andrew mentioned, on overdraft and credit cards where the balances were being wiped out by higher current account balances. So this is the situation on retail.

On small business in the second quarter, we experienced drop of demand of about 40% and the credit criteria tightened by — again, roughly in relative terms by 20%. If you look at the approval rate, we were somewhere at 35% to 40% as opposed to 40% to 45% pre-COVID. So in the third quarter, we experienced renaissance of demand, which is partially driven and pulled by the state guarantee programs where the bank is willing to assume more risk. Because at the individual level, we covered at 90% of the exposure, single exposure, and at portfolio level, the stop-loss through government guarantee is at 30% portfolio volume. So again, now we are seeing improvement in the demand and in fact, we will run a fairly aggressive campaign in the third quarter to support self-employed and small businesses on the basis of the COVID III guarantee program, which we have industrialized, and we are very good at distributing this on the strength of the government guarantees. So from ROE point of view, again, this is a bit of an absurdity coming with COVID, we are actually able to get a lot better incremental ROEs on these exposures than in pre-COVID times, and this is simply a function of the state guarantee collateral underneath new exposure. So I hope I covered the first question.

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Marta Jezewska-Wasilewska, WOOD & Company Financial Services, a.s. – Co-Head of Research [9]

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Oh, that’s brilliant. I was wondering if you could share also what was the kind of comparable level of net interest income. So my question is basically [on season] commissions. So my question is basically focused on how much of the drop have you seen because of the rate cuts? And how much of it is still to be experienced in the following quarters?

And just to fulfill the core revenue’s questions, you have mentioned during your presentation that you plan to cut deposit rates. And I can see that there is quite a bit of room to do so. And my question is more to what extent this action is being reflected in your medium-term revenue guidance for ’21 and ’22 and maybe to some extent for 2020. But actually, my key interest is like how much of it have you reflected in the medium-term outlook.

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Tomáš Spurný, MONETA Money Bank, a.s. – CEO & Chairman of the Management Board [10]

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Marta, I will turn it over to Jan Fricek. And before he gives you very precise answers, it is reflected with the level of conservative margin on the impact of the repricing. So there is some upside from the decrease of cost of funding because we basically did not want to be too aggressive on that. And Jan will answer the particulars that you have on the NII and on the rest of it, [so — on the premium].

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Marta Jezewska-Wasilewska, WOOD & Company Financial Services, a.s. – Co-Head of Research [11]

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Hello?

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Jan Fricek, MONETA Money Bank, a.s. – CFO & Member of the Management Board [12]

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Sorry. I will start with the first part of the question asking about the impact on NII through the rate cap, and I have to say that the impact is very minor. As it impacts on the portfolio with the rate of more than 8% and only portfolio that were provided with the state moratorium. But in our case, more than 50% of the portfolio and the moratorium both provided with our voluntary moratorium under rate — the rate cap is — was not implemented or it was without any rate case. So bear in mind, I have to say.

If you please, can you remind me, what was the other part of question?

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Tomáš Spurný, MONETA Money Bank, a.s. – CEO & Chairman of the Management Board [13]

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What was the decline of net interest income based on the rate cut on the preconsolidation basis [on the parameter]?

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Jan Fricek, MONETA Money Bank, a.s. – CFO & Member of the Management Board [14]

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Yes. If we — yes. Before the rate cut, we expected that 2% impact would cause a loss on the net interest income about CZK 1.1 billion on an annual basis. And this will be offset within the next 12 months, as we already mentioned, through the repricing of deposit base. What we expect is that through the repricing, we will be able to offset about 2/3 of the initial — of the pre-adjusted, pre-offset impact. So altogether, about CZK 500 million maximum — CZK 400 million to CZK 500 million would be a net impact on the NII coming from the repricing.

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Tomáš Spurný, MONETA Money Bank, a.s. – CEO & Chairman of the Management Board [15]

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And that’s all projected into the guidance. So both the change of interest rates and corresponding impact on net interest income received, plus the mitigation through the repricing is fully in the guidance. We might have slight upside, but the upside would be CZK 150 million, perhaps CZK 200 million, something like that on the NII of 2021.

We will take the next question.

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Marta Jezewska-Wasilewska, WOOD & Company Financial Services, a.s. – Co-Head of Research [16]

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Can I — just one last question, if I may. Because you mentioned that the new production yields in particular products are quite stable in the sector. But given the circumstances and given the higher cost of risk, do you think that there is a bit of room for the banks to widen those margins? Or do you see that all the guarantees, support program and bank’s willingness to restore the business is going to keep the rates low? Is there any chance for the environmental improvement in your assessments?

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Tomáš Spurný, MONETA Money Bank, a.s. – CEO & Chairman of the Management Board [17]

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Not on retail. If you look at the numbers that we have given, the average price on retail unsecured is now 7.1%. So it continues to erode quite considerably despite of the risks presented by COVID. We operated in May at 9.4% contractual rate, and we expect that the reported rate for third quarter will come in a range of 8.1% to 8.3% for MONETA and that the market most likely will go below 7%. So there are absolutely no signs that the pricing is stabilizing. And given the decline in the overall interest rates, banks are pretty, I think, desperate for looking where to place excess liquidity. So it will certainly not lead to widening of the margins.

On mortgages, in May, the market price was 2.5%. We wrote business at 2.6%. Currently, the market based on HiPO index in Czech Republic in June, it went to 2.2%. So we see significant erosion and the market average was at around 175 basis points when the rate was at 25 basis points in 2017. So there will be significant erosion of the contractual price on mortgage production, where we have quite significant differences in our commercial franchise based on small business and based on service to SMEs. As we receive the state guarantees now, we are actually on risk-adjusted basis able to widen — to improve pricing, namely with respect to incremental return earned on those assets because the state guarantees limit capital deployment. Nonetheless, the absolute pricing, you can expect is really going down, and this is visible, namely on the working capital category. This is published in the presentation. And it’s also visible on the investment loans. So all in, we and everyone else will be under a lot more intensive pressure than in the last 12 months to maintain oil and to achieve cost efficiency going forward in the next 12 months. This is the reality. And there is very little upside in — it’s actually nonexistent and the margins improving in the next 2 quarters or 3 quarters down the line.

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Operator [18]

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(Operator Instructions) And the next question is from Andrzej Nowaczek of HSBC.

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Andrzej Nowaczek, HSBC, Research Division – Analyst [19]

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I have a couple of questions, first on cost of risk. Your underlying cost of risk in Q2 was relatively low, as you said. Are there reasons why it could be higher in the second half?

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Carl Normann Vokt, MONETA Money Bank, a.s. – Chief Risk Officer & Vice-Chairman of the Management Board [20]

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I think that, look, the main risk we see is obviously how the unemployment rate is going to develop. Right now, people — customers benefit from the support from the government [could provide scale], which they receive through their employers. Should that change or should we see a second wave in the second half of the year, which would again lead to a potential lockdown in the economy and, in turn, would close businesses and then, again, in turn, would mean mass redundancies would occur, this could mean a downside pressure on the cost of risk side. I think the hour of truth will come probably by the end of this year when the 6-month moratorium will end. So in December and in the first quarter of ’21, we will see how many of the customers who have benefited from the 6-month moratorium will ultimately either resume payments under the installment plans or will become delinquent. So I think that’s the moment when we ultimately will see what is going to happen. Unless beforehand, we will see a second wave under the pandemic, which could accelerate things. If not for that, I would say, it’s the GDP, but I think that the worst we have behind us. As a matter of fact, today, the statistical office published preliminary Q2 numbers, with a minus 10.7%, which came in a bit better than initially forecasted. So assuming that the forthcoming quarters will end up better. So I think we are on a positive trajectory.

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Tomáš Spurný, MONETA Money Bank, a.s. – CEO & Chairman of the Management Board [21]

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Maybe just to complement, Norman, if you look at the guidance, we have now done the downgrade on the IFRS 9 macro assumption. So if that holds, we have — and assuming we come in at or below the CZK 4 billion overall risk charge, what we are assuming in our business plan and in the guidance is that the NPL level in the bank could double effectively from the absolute number that we have today, this is in the business plan. So if that doesn’t happen, we will perform better and we will come in at the guidance, but it will be more related — the further provisioning will be more related to actual formation of NPLs because that is the second assumption inside of the business plan. So it should not, unless very dramatic negative thing happens, we should come in at or below the guidance. However, the core performance is assumed to worsen in the second half of the year because the implicit assumption in the business plan is that what’s under the moratorium portion of that will default, and we will have to cover those losses in the second half of the year. This is the logic of the business plan.

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Andrzej Nowaczek, HSBC, Research Division – Analyst [22]

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Okay. And my second question is, can you talk about how the Wüstenrot part of the business is coping with the current situation? I realize it’s not a part of MONETA, but had it still been a stand-alone entity as — actually, as a balance sheet item, in what way would it be different? Going to be more effective? Less effective? And why?

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Tomáš Spurný, MONETA Money Bank, a.s. – CEO & Chairman of the Management Board [23]

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Yes. It’s actually less effective than us because if you look at the product penetration rate, their product penetration rate is lower, namely on the unsecured quasi consumer lending. They have something called bridging loans, which are typically transactions, helping people to put together monies to purchase property or reconstructive. The difference between bridging loan and consumer unsecured loan is that the bridging loan typically in companies, mortgage and it’s long term. The tenures are between 15 to 20 years. And these loans are a lot less affected by the moratorium. They are being serviced properly and the penetration rate is at level 6% to 7%. So that’s the first aspect. The second aspect is that Wüstenrot mortgages seem to be operating at, again, somewhat lower moratorium penetration rate, and this is a function of geographical distribution. They were relatively limited more to large cities, where you have wealthier population. Perhaps this is one aspect. Second aspect is that the company prior to us taking it over, didn’t make it exactly very easy to apply it for the moratorium, where we were very forthcoming to clients with respect to the voluntary moratorium because we believe that providing the release will actually mitigate credit losses. So we were at the vanguard of the banking sector in automation of that process. So they had a very — how to put it, obstructive process and we fixed it only at the end of May because we took control of the company in April. So this was one of the first things we did. However, by end of May, the show of applying for a moratorium was largely over. I don’t want to speculate how they would do on their own, they were profitable to the tune of CZK 550 million for the full year on quasi consolidation of building society and Mortgage Bank. How they would do in this year, it is difficult for me to speculate on that. Nonetheless, what is very key to get across is that so far, knock on wood, we are very happy with the quality of the underlying assets that we have purchased from Wüstenrot, and we believe that this was exactly the right thing to do prior to COVID. Obviously, we didn’t know that this thing would happen, but I cannot tell you how they would do on their own.

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Operator [24]

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And the next question received is from Simon Nellis of Citibank.

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Simon Nellis, Citigroup Inc., Research Division – MD [25]

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I actually joined late, so apologies if you’ve already touched on some of my questions. The first one would just be, if you could give us a view on how many of the clients under moratorium have actually come off moratorium. I think you said in the — somewhere in the release that 50% ending July.

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Tomáš Spurný, MONETA Money Bank, a.s. – CEO & Chairman of the Management Board [26]

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Simon, it’s in the presentation, CZK 18 billion out of the CZK 34 billion are coming off in July. And I said in the beginning that so far, we have anecdotal evidence that there is no great tragedy in making. We are experiencing fairly ordinary behavior on repayment of the balance that came off the moratorium.

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Simon Nellis, Citigroup Inc., Research Division – MD [27]

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So you won’t have to — some people aren’t kind of recharging into the state program? Could you…

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Tomáš Spurný, MONETA Money Bank, a.s. – CEO & Chairman of the Management Board [28]

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We have no evidence of that. We have 400 applications or such per week, [it’s knocking along]. So it’s very subdued and very marginal to the big number.

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Simon Nellis, Citigroup Inc., Research Division – MD [29]

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Good to hear. Just a clarification on the dividend. So you’re accruing 80%. Now just so I understand for sure, that 80%, you’re also looking to pay out the CZK 3.35 kind of remaining from 2019. But is that 80% accrual basically being used to pay out that CZK 3.35? Or are you going to try to pay out the CZK 3.35 plus the 80% from this year’s earnings?

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Tomáš Spurný, MONETA Money Bank, a.s. – CEO & Chairman of the Management Board [30]

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We will try to pay the CZK 3.35 per share from 2019 profit, which is booked as — assuming our financial statements will be approved by shareholders on 2nd of September, that will be in a category of retained earnings. And that will come out of the accounting equity, and it will be on top of the 80% of the profit that we will generate in 2020.

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Simon Nellis, Citigroup Inc., Research Division – MD [31]

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Okay. So — and then the dividend out of 2020, I mean, assuming you’re allowed to pay, when would those happen? I guess — because usually, you paid an interim, right? So I guess you will forgo a formal interim this year.

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Tomáš Spurný, MONETA Money Bank, a.s. – CEO & Chairman of the Management Board [32]

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Yes. We will not pay interim because this — we have discussed with the Central Bank, we have discussed the 2019 settlement, and the answer is clear no, not this year. So the first occasion when we would have told the 2 items, which is 2019, would come out in April 2021, assuming that by then, ECB changes its position, the European Financial Stability Board allows paying dividend in Europe, in Continental Europe, and we will hope they — that the Czech National Bank will heed that policy.

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Simon Nellis, Citigroup Inc., Research Division – MD [33]

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Got it. Okay. So you basically pay out CZK 3.35 billion, which is basically from 2019. But on top of that, roughly a similar figure, right? So 80% of the CZK 2.1 billion of forecasted profits?

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Tomáš Spurný, MONETA Money Bank, a.s. – CEO & Chairman of the Management Board [34]

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That’s correct.

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Simon Nellis, Citigroup Inc., Research Division – MD [35]

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Yes. Got it. Okay. I just want to make sure I didn’t miss anything. And then last, just on Wüstenrot, can you tell us what the contribution was to the second quarter, excluding the one-off gain, just kind of the underlying operating number? If you haven’t told us already.

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Tomáš Spurný, MONETA Money Bank, a.s. – CEO & Chairman of the Management Board [36]

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The profit for the first half was CZK 229 million, which is the subconsolidation of the 2 entities. And I think in the second quarter as we created provisions, it was probably — it was loss-making because we created provisions. So the only contribution was through the extraordinary gain as we have provisioned the company.

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Carl Normann Vokt, MONETA Money Bank, a.s. – Chief Risk Officer & Vice-Chairman of the Management Board [37]

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Yes. If I may, on the revenue line, the incremental revenue was CZK 257 million coming from the Wüstenrot. And this is adjusted for the acquisition gain, CZK 257 million…

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Simon Nellis, Citigroup Inc., Research Division – MD [38]

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Okay. So CZK 257 million revenue. And costs, what was costs?

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Carl Normann Vokt, MONETA Money Bank, a.s. – Chief Risk Officer & Vice-Chairman of the Management Board [39]

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What was cost? Close to CZK 200 million.

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Simon Nellis, Citigroup Inc., Research Division – MD [40]

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Close to CZK 200 million. I mean going forward — I mean — yes?

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Carl Normann Vokt, MONETA Money Bank, a.s. – Chief Risk Officer & Vice-Chairman of the Management Board [41]

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Going forward, this will go down, because this CZK 200 million includes a part of the integration costs.

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Simon Nellis, Citigroup Inc., Research Division – MD [42]

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Got it. And the revenue should be reasonably stable? Or I guess would it also be under pressure from rates?

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Carl Normann Vokt, MONETA Money Bank, a.s. – Chief Risk Officer & Vice-Chairman of the Management Board [43]

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Hope it will go up. But for some time, it will be progressing because we have to improve the performance of the bridging loans that are the most profitable product.

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Operator [44]

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The last question from today is from [Martin Walsh of Allianz].

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Unidentified Analyst, [45]

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And my question is regarding the mortgage securities to Wüstenrot. So my first question is — actually, I just looked today on — in the afternoon, it was announced that the bondholders agreed on a Friday meeting to give the option to call the bonds before maturity at par value, not at market value. And so my question is if monetized funding could do that with the NBS [or Western Europe]. So…

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Tomáš Spurný, MONETA Money Bank, a.s. – CEO & Chairman of the Management Board [46]

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Absolutely, on Friday, we were able to go through repayment of [3 assets], and we will call them as quickly as possible because the total issued bonds are CZK 15 billion, CZK 5 billion are out in the market, and we’ve already paid the bonds. Some people call it ungentlemanly. We have a view that we have fiduciary duty to MONETA to maximize its profitability and not pay ridiculous interest rates on those bonds. So that’s exactly what we are going to do.

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Unidentified Analyst, [47]

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Okay. Maybe just to recommence because I was just looking through your notes and correct me if not, but the only bondholders present at the meeting was — from within the MONETA group. So do you have any comment on that, why there are no other bondholders present?

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Tomáš Spurný, MONETA Money Bank, a.s. – CEO & Chairman of the Management Board [48]

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I must say I really don’t like your question because we have published it. We have used Allen & Overy to set up the process. We have published it according to the law. Nobody showed up. And we have voted. And we have won the vote.

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Unidentified Analyst, [49]

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I see. Okay.

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Tomáš Spurný, MONETA Money Bank, a.s. – CEO & Chairman of the Management Board [50]

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If you want to criticize us with that question, I would appreciate if you were more transparent because if you ask me, if I’m a gentleman, I’m not. I protect interest of MONETA and its shareholders. So whoever wants to criticize this, they should rewrite the law and put in a clause that I have to call everyone for them to show up on Friday afternoon.

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Unidentified Analyst, [51]

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Absolutely. And my last question is if you plan any further Czech koruna issuance this year. Do you have any guidance on that?

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Tomáš Spurný, MONETA Money Bank, a.s. – CEO & Chairman of the Management Board [52]

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No. We plan no issuance this year because if you look at the numbers, we have excellent liquidity. We have excellent capital position. So we are not planning any issuance immediately in the remaining part of the 2020.

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Operator [53]

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As we received no further questions, I hand back to the speakers for closing remarks.

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Tomáš Spurný, MONETA Money Bank, a.s. – CEO & Chairman of the Management Board [54]

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Excellent. We are very thankful for your participation. In the future, we will seek to position the conference calls more or less into the afternoon. So as 20% of the bank is owned by U.S.-based shareholders, we want to create an opportunity for them to participate and now they have to wake up in the middle of the night.

From — our perspective on the quarter is that on the operating income on cost base, we are spot on with what we have said previously. On the cost of risk, we have tried to communicate very clearly that the main course with respect to provisioning would come in the second quarter on the basis of macroeconomic forecasts, which were provided by Czech National Bank, Ministry of Finance. So I think we also sought to follow through on what we have said previously.

With respect to the end of the year, we believe that our performance will be improving unless something terrible, unexpected, again, happens. And we believe that the minimum target we have published in the post-COVID plan are coherent, concise. And again, I would like to emphasize that the management’s objective is to overperform these targets, and we will do our best to do so.

We are tremendously grateful for your participation, for your time, and we are looking to speak with you again on October 30, 2020.

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Operator [55]

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Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.

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