Erste Group Bank AG (OTCPK:EBKOF) Q2 2016 Earnings Conference Call August 5, 2016 3:00 AM ET
Thomas Sommerauer - Investor Relations
Andreas Treichl - Chief Executive Officer
Gernot Mittendorfer - Chief Financial Officer
Andreas Gottschling - Chief Risk Officer
Pawel Dziedzic - Goldman Sachs
Johan Ekblom - Bank of America
Benjamin Goy - Deutsche Bank
Gabor Kemeny - Autonomous Research
Riccardo Rovere - Mediobanca
Alan Webborn - Societe Generale
Johannes Thormann - HSBC
Kiri Vijayarajah - Barclays
Simon Nellis - Citi
Stefan Maxian - RCB
Riccardo Rovere - Mediobanca
Gilles de Bourrousse - Octo Finances
[Call Starts Abruptly] …a very warm welcome from Vienna to everybody who is listening in. We follow our usual conference call procedure. Andreas Treichl, CEO of Erste Group; Gernot Mittendorfer, the CFO of Erste Group; and Andreas Gottschling, CRO of Erste Group, are hosting this call. They will lead you through a brief presentation highlighting our achievements in the second quarter of 2016 and the first half of 2016, after which time we are ready to take your questions.
Before handing over to Mr. Treichl, I would like to highlight the disclaimer on forward-looking statements on page two of the presentation. And with this I hand over to Mr. Treichl.
Thank you very much, Thomas. Good morning, ladies and gentlemen. Good morning to our conference call. Let's start on page four. On the left-hand side you see the quarter-to-quarter performance, actually a very good one, net profit in the first quarter, €275 million and €567 million in the second quarter, which of course includes the Visa one off of €130 million pre-tax but operating income up vis-à-vis the last quarter and operating expenses slightly down. On a year-to-year basis, half year to half year, a little bit different; operating income slightly down; operating expenses slightly up. But of course a major improvement in risk costs and in the other result, therefore a 72.8% increase in net profit from €487 million to €842 million.
If you look at the ratios on page five, actually both our net interest income and the margins have kept up better than we had expected. So, it looks like we could manage to make up through our lending margins most, if not all of the lost NII from our securities portfolio. That will, of course, depend on the fact on whether loan growth continues to be as good as it was in the second quarter. The major improvements of course is on the risk side and also because the income ratio came back in the second quarter. But that's also partially due to the fact that the first quarter was loaded with extraordinary items that don't recur because we book deposit insurance and things like that in the first quarter.
Banking levies fortunately are on its way down. That doesn't include anything in Austria that is valid only as of next year. But you see already the reduction in the banking levy in Hungary. Overall return on equity, both on normal equity and on tangible equity, increased substantially. Our return on equity scratched the 20% mark in the second quarter and for the full year, for first half year, nearly 15%.
If you go to page six, balance sheet performance, you see net loans growing by €1.5 billion. Given substantial write-offs, that's a pretty nice result. So actually in the first half of this year loan growth really picked up vis-à-vis last year. And we still have, as you can see on the customer deposit side, a substantial inflow of customer deposits across the region. I think that is a very strong story to be told to the ECB and the effectiveness of its quantitative easing.
If you go to page seven, loan-to-deposit ratio stable. And really a great relief for us is the development of the NPL ratios. The NPL coverage ratio moved up to 65.6% and the NPL ratio dropped again from 7.1% to now 5.8%. If you look at our capital ratios, core equity Tier 1 up 12.7%, fully loaded at the end of the first half year, with core equity moving above €13 billion. Both our liquidity coverage ratio and the leverage ratios continue to improve with leverage ratio now being above 6%.
Page nine, looking a bit at the business environment in our region, it's not so bad. I think compared to the rest of Europe our countries are growing relatively well. And what's comforting to see that with the exception of Romania they're growing without any deterioration in the current account balance. Only in Romania you have minus 2%, but that's nothing compared to if you look back to 2005 or 2006, where they had current account balance of minus 14% or 15%.
In terms of public debt, actually we have three countries that are, I would say, outstanding within the European context. That's the Czech Republic, Romania and Slovakia, with debt-to-GDP ratios in the 40s in the Czech Republic and Romania and around 53% in Slovakia. And the other three countries are slowly improving, Austria, Hungary and Croatia, but are in the European context acceptable I would say. If you go to the interest rate environment I have really nothing much to be said about low interest rates almost everywhere. And on the currency side really nothing to be talked about; very stable environment on page 11.
If you go to page 12, if you look at the market shares development very stable, but we feel very strong that on those items where we would like to gain market share now in our major markets, in Austria and the Czech Republic, Slovakia, Romania and, first of all, also including Hungary and Romania, if we want to bring market shares up, we can. We don't want to particularly, not on the retail deposit side, we're very restrictive. But still people tend to bring their money into our Bank.
If we turn to our business performance on Page 14, strong loan growth in the Czech Republic and in Slovakia. In Slovakia it's not a new story. It has been around for a while. And it's going to come back because we had strong loan growth for quite a while now, close to 10%. As you know, the local regulators decided that loan growth is too strong, that's why they imposed a countercyclical buffer on us. It's no problem with our capitalization. But what's very good for us is that loan growth actually picked up in the Czech Republic and in Austria, and of course also in Serbia, so they're not upset that I don't forget to mention them. On the deposit side, yes, we have a strong growth. We keep to our zero interest rate policy, our growth continues on the deposit side. Our ability to actually convince clients to move into asset management products had some success but, as you can see, limited success.
However, on Page 16, if you look at the details of development of net interest income and our net interest margin from business, it's actually quite comforting that we can keep up the margins at the level, as you can see. Only exception being Hungary, where the margin has dropped from 4% to 3%, but that, of course, has to do with us not being terribly aggressive and running down some of our lending business. That might change if we are starting now to feel more comfortable in the country. Operating income I've mentioned already. We're keeping up quite well, actually, in most of our countries. But that is, of course, a key issue for us in the future, both our ability to continue to grow net interest income and commission income. A bit -- a couple of details on the commission income, which is difficult given that people do -- are very risk-adverse in our region. So our fee income from securities is suffering, whereas asset management fees actually are slightly growing and payment services are slightly growing. And overall it is not a very brilliant performance. It's going to be pretty difficult to see on how we can substantially increase our commission income over the next quarters, but we're working hard on it.
On the expense side, you see an improvement in the second quarter vis-à-vis the first quarter. However, part of that improvement is actually based on the frontloading of deposit insurance fees. Costs are slightly up in the second quarter, partially due to investments in our systems that will continue and of course partially due to the fact that we moved all our staff from 18 different buildings in Vienna to our new campus. And so we had double running costs in the first half year, that's going to level off during the remaining quarters.
With that actually I think I can turn over to our Chief Risk Officer, who will continue on page 20.
Thank you, and a very warm welcome from my side as well. The risk situation has stayed reasonably under control with the release of €31 million of provisions in Q2. Risk has almost become a bottom line contributor for the first half of year. The main single event leading to release was a recalibration of the parameters in Hungary, which followed the end of the moratorium after the FX conversion. Still there is no corporate default to speak of, and mainly due to the refinancing opportunities of corporates almost everywhere, which is part of the implications of the ECB's interest rate policy. And savings banks as well as the Erste Bank Austria also provided some releases, underlining the benign Austrian risk environment currently.
Turning to page 21, we managed to get down the non-performing loan ratio a little further and are thus happy to have, for the first time, a five in front of our ratio in a long time. Now sales contributed significantly to this but it is noteworthy that the largest sale was derecognized only in Q2, which was the Tokyo project which you can remember was signed in the late days of the last year around Christmas. Therefore, this is not all sales that happened in Q2. The markets continue to be receptive to NPL disposals and therefore we hope to manage the ratio down just a little further in the rest of the year.
Turning to page 22, as you can see, the stock of non-performing loans is continuing to drop with a pretty stable coverage ratio well above 60% as a quarter-on-quarter development. Year-on-year the dynamics of the [Czechska] and Slovenská still show the EBA definition change at the end of last year. And the recovery of Hungary from the FX conversion implication, which showed a significant drop there in the coverage ratio, which we have now made up for. The trend is a slight decrease of coverage from the NPL sales and an overall improvement in collateral valuations, in line with the macro circumstances.
With that, I hand over to the Chief Financial Officer.
Thank you very much, and good morning, ladies and gentlemen. We continue on page 26, a quick look on the asset and liability side. The loan-to-deposit ratio was a little bit down vis-a-vis year end, but stable at 97.9% and no significant moves in the distribution. On page 27 you see reflected the development on the non-performing loan stock. This was the most significant move in the last 12 months from a double-digit non-performing loan number in €10.1 billion, now down to €7.7 billion, and at the same time growing our performing loan portfolio by 3.7%.
Continuing on Page 28, the allowances in the last development, it was already mentioned that we have a reduced NPL flows. But one point to mention probably on this side, and this is the unwinding impact as a consequence of the disposal of NPLs. You see the quarterly results reported, second quarter '15, €47 million, first quarter '16, €35 million now down to €26 million. If you factor that in, in our net interest income, you see that basically our net interest income is pretty stable over the last quarters. And this non-cash item is going down hand in hand with the reduction of NPLs, so very positive effect on the business performance.
Continuing on Page 29, liquidity coverage ratio at 115.4%, a continuation of our outstanding liquidity position. No major changes and a continuous development, driven by our customer deposits and a very conservative investment profile.
Page 30, the continuation of the trend we are seeing since interest rates basically moved to zero negative. Customers are depositing more and more country and overnight deposits because there is no pricing difference left to term deposits, but a very stable and continuously growing performance.
Page 31, on our wholesale funding base, continuous buildup in sub debt and hybrids and a reduction in senior unsecured, and a slight reduction in mortgage bonds. As announced earlier this year and last year, this is a continuation of our funding strategy.
And if you continue on Page 32, you see the maturity profiles. Now we are in maturity ranges over the next couple of years well below €3 billion. Two, three, years ago we had maturities €4 billion, €5 billion, €6 billion on an annual basis and now we are down to below €3 billion. What have we done this year? We started in January with a €750 million 7-years mortgage-covered bond and in May we have done the first additional Tier 1 transaction, €500 million volume. And it was very well received by the markets, with more than 160 accounts participating and orders above €2 billion.
Continuing on the capital position, Page 33, a few highlights. Basel 3 capital, a strong growth in the second quarter, also a strong build-up on the CEE entity in ADIs. ADI build-up is basically happening in the first half of the year because there we received the dividends from the various entities. As of the end of half year 2016, our ADIs are at €1.7 billion, this is pre dividend and AT1 coupon, but a very nice and significant build-up. And if we look at capital ratios, it was already mentioned the fully loaded CET1 ratio. And on a phased-in, as of half year 2016, 13.3%, well above all the requirements that we are currently having and well above the requirements that we are seeing for us over the next couple of years.
And with this, I hand over to the CEO for the outlook.
Thank you very much. Page 35, well, briefly I think we feel increasingly comfortable that most of our countries due to many reasons be it taxation, labor cost, labor flexibility, investment climate and so on will continue to outperform the rest of Europe. And based on that, we are gaining confidence that we might continue to show sufficient loan growth to keep our net interest income not too much affected by low, by the reduction of income out of our securities portfolios. So we believe there's a good chance for continued loan growth, a very good chance that risk costs remain at very low levels.
So with our gaining some more confidence in countries where we had problems, like Hungary and Croatia, and the fact that it now seems almost certain that the bank levy in Austria will be reduced, it still has to pass the parliament, but the government has announced it. We are raising our ROTE and of course ROE outlook for 2016, including the down-payment on the banking levy which would then lead into our banking tax charge as of 2017 being reduced by more than €100 million. So slightly positive outlook, but not much has changed. And all we can say is good luck. Thank you very much.
And, with that, we take all questions you might have.
Thank you [Operator Instructions]. And we will take our first question from Pawel Dziedzic from Goldman Sachs. Please go ahead.
I have two questions. The first one is on dividends. So in your outlook statement you again refer to continued dividend payments. But I was hoping if you can give us a little bit more color on that, in particular how your dividend policy may change with regards to payout. You clearly said that your loan growth is better, but it's still in a let's say reasonable mid single-digit range. You guide for returns above 12%, and I think you made a reference as well that you see your core Tier 1 now at the level which is above both current and future capital requirements. And then I would have a second question just on the remark you made about the impairments. You said that they are likely to remain low, but if you could quantify that for us to some extent, that would be immensely helpful. Obviously, going into this year, you said that the low levels should be below 50%, 60% -- 50, 60 basis points reported in 2015. This was much lower than that in a first half of the year. But if you could give us an idea what would be a reasonable run rate in the coming quarters of 2016 and maybe in 2017 as well, that would be helpful.
First on the dividends, we have not decided yet and -- on our proposal for 2016 and we will not decide before the announcement of the third quarter. All I can tell you is that we have reserved in the first six months for a dividend of a maximum payout of €1.10, which is about 20% -- a 20-basis-point reduction of the CET1 ratio. So it would have been 12.9% instead of 12.7% without that. But having reserved for €1.10 doesn't mean that we're actually going to propose €1.10. We would like to wait and get more insight on the development of the results in the second half of the year. Impairments?
And on the risk-cost side, as I explained in the first quarter, the environment on the retail side, this is benign but it's not that much deviation from the predicted run rate. On the corporate side and commercial real estate, it's of course a completely strange game due to the interest rate policy and the LTROs, which allow everyone in the corporate world almost to refinance anything right now. That's why we're seeing no defaults. This has been the main driver to us because it's always an opportunity somewhere else to get off a bank's books and onto another bank's books right now. So, I would not be able to guess what the corporate default is, because that will depend on entirely on that. On the retail side, I would expect the run rate that is lower than 50 basis points right now going forward for our retail book, but that's only for the retail book.
Can I just follow up on the dividend policy? You mentioned that you want to wait to see the developments of the second half. Can I clarify that this is -- that this relates more to the operating trends or should we do -- are you waiting anything to be clarified on the regulatory side? So in other words, do you expect an increase in the capital requirement for the Group on the back of maybe countercyclical buffers introduced in some of your countries? And do you have a clarity now on the IFRS 9 that could perhaps change the way you think about your capital position?
We have clarity on IFRS 9. That's not changing our view, we have no other markets where loan growth is so strong that we see the local regulator imposing a countercyclical buffer. The only country where it could happen given recent loan growth is the Czech Republic. But there it wouldn't that, like in Slovakia, it would mean nothing to us because we're way, way, way above any cyclical buffer. And I would say that given recent experiences we'd rather have confirmation of the SREP ratio, although we don't believe it will change. All that we heard so far is that it will remain stable, but we'd rather have it in writing before we make a decision.
And now we’ll take our next question from Johan Ekblom from Bank of America. Please go ahead.
Just two things, coming back to your ROE outlook, clearly you have some pretty good visibility for this year. But when we think about more forward-looking ’17, ’18, how do you see the profitability developing? Should we expect stable trends from what we're seeing this year or will it be hard to compensate for some normalization in loan losses going forward with growth? And then secondly, just given the strong capital trend and the strong ADI, should we expect more AT1 issuance this year or is this something that is more of a long-term plan?
So on the ADI, we are not planning to issue anything in addition this year. We will decide once we've received the SREP ratio and the MREL target and then we will adapt our funding plans and our capital planning accordingly. Right now I think it's just simply confirmation what we've said on our road show on the AT1 that we believe in a strong build-up in ADIs, especially this year and we're happy that we've delivered on that.
And on the outlook on 2017 and ’18, I think a couple of issues. So we might be maybe a bit more positive than previously on the net interest income side. On the fee and commission side, it's going to be difficult to show substantial improvement. On the operating expense side, we've said before, we see them still slightly increasing due to our heavy investments in data and IT, which will continue through ’17 and ’18. But as you know, we will work on that in order to have the ability to substantially cut costs in the future. We're getting more positive on that, but not in ’17 and ’18.
And then you have the risk line where we're positive. We're not going to show the kind of reductions we showed this year because then we would end in huge write-backs, but we believe risks will remain low. And then you have the other operating line. So with the exception of a couple of issues that you know, like the Law 193 and the walk-away in Romania where we could still have some negative surprises, but this is not really substantial. So the volatility of our other operating income line will continue to be substantially lower than in the past. And the political charges that we experienced during the last years, which were very, very substantial, are going to be substantially lower. What that means to our returns, we're not prepared yet to give an outlook for that. We might do later this year.
And we'll take our next question from Benjamin Goy from Deutsche Bank. Please go ahead.
A couple of questions from my side. First, you mentioned Slovakia and basically the regulator becoming a bit more cautious on loan growth, which is something you could expect from the Czech Republic as well, and how you should and how you expect it to play out on loan growth there. And secondly on the loan loss provisions, could you give us a bit more insight into releases in the quarter? Obviously there were a number of geographies with a positive number, but I'm also interested in the ones like Romania, and whether you had significant releases and how long this could continue before we see an underlying run rate again.
On the releases, we don't expect to see continuing releases through the second half of the year there. And, as I mentioned, the Hungarian thing was much more of a methodology-driven one. And therefore we don't expect to see something of that magnitude repeatedly. That was due to the moratorium which had basically built up a pent-up tension in the parameters. From the workup side, I would hope that it continues to be benign to positive in the sense that the asset valuation has gone up in the past year for many assets. And therefore when we do have successful workup cases, those are reflected in AT in Austria, other where the commercial real estate is booked and so on. There the provisions versus the releases showed that the workup cases were successfully closed, provided some write-backs and, in comparison, due to better valuations than previously. But this is a sign of the macro climate currently. And I don't think this has infinite continuation. Romania, I don't expect the second half to be like this. And Austria, it will probably be still benign by the end of the year. That's as far as I would go.
On Slovakia and the question on loan growth, respectively the Czech Republic, the growth driver at the moment is the Czech Republic. Slovakia we see a little bit lower -- slower development already taking place. And we've seen last year quite significant growth on the mortgage business and stable price development on the real estate market. But this year we see prices in the real estate going up. And naturally this will lead to lower growth rates than we've seen in the past. And in addition we have a higher basis where we're starting off for this year. So naturally we see a slight lower development but overall still very nice growth rates in both countries.
And we’ll take our next question from Gabor Kemeny from Autonomous Research. Please go ahead.
I'd like to follow up on NII. You mentioned you are a bit more positive on loan growth now. If loan growth remains where it is, do you think you can gradually grow your net interest income or would you need quicker loan growth for that? And now I see that your performing book is slightly growing in Romania and Hungary. How much of a difference do you think it makes? And my second question is just on the stress test result. Does this change in any way on the way you think your capital requirements could go next year?
So on your second question, the stress test results don't change anything for us. It just confirms our view of the value of stress testing. With regards to the net interest income, yes I think if loan growth continues as it is and the run-off of our securities portfolio continues as it is, yes, we can grow it slowly. But unfortunately the run off of our securities portfolio during the next quarters is speeding up a bit, so it will be a bit more difficult. So to keep NIIs flat, we need slightly stronger loan growth at slightly higher margins. So if we experience loan growth in Hungary and Romania, it will be very helpful.
And our next question is from Riccardo Rovere from Mediobanca. Please go ahead.
Just one question from me, I understand you're a bit reluctant to provide guidance, so I would like to put the question another way. With the current level of rates in Austria, and this is something that we see basically across the whole continent, corporate credit losses are definitely low and would probably continue to stay low because rates will stay low. You're not exposed to sectors which are not living exactly glory days, like shipping or oil or stuff like that. In Romania your NPL ratio is going down systematically quarter after quarter. NPLs are covered 80%. According to your slides, GDP in Romania is going to grow 4%, average of 14% in ‘16 and ‘17. So there should be all the conditions to have maybe not write-backs but a very low risk cost in Romania too Hungary, maybe the corporate ratio could go up a little bit on NPLs but it's more or less the same thing than in Romania. So what could prevent Erste to have risk cost at Group level very-very close to the one of some other peers like, for example, KBC, so let's say, maybe 20, 25, 30, 35 basis point at Group level, because, to me, all the conditions seem to be pointing in that direction. And connected to that, are you going to -- your target for ROTE this year is 12%. Next year you might have the benefit from the lower banking cuts. So what could be -- what could work against you not to have a similar return also in 2017? What do you need, especially with the kind of outlook you are depicting for NII and the relatively positive tone you have on risk cost, what could -- because it looks like that something should go really wrong for you not to hit a similar return on tangible equity. If you listen to this question, would you consider these arguments stupid?
No, that was not at all stupid. It was very convincing, what you said. You are just maybe in a bit more of a positive mood than we are in. And maybe I agree with you that we might be a bit too cautious. But given our experience from 2009 to 2014, I would beg for your understanding that we continue to be cautious and rather come up with positive surprises, as you have just mentioned.
And all it takes for us not to reach your proposed target is one large corporate or one large real estate default. Then it's over.
And we'll take our next question from Alan Webborn from Societe Generale. Please go ahead.
You seem to be getting some slightly better loan growth in Austria, and not just on retail but also on corporates, if I've read properly. What -- is something changing? Is it just your appetite? Is there a bit more demand? And when you say that corporates can go somewhere else easily and refinance easily, are you being able to put new business on that is profitable for you in that environment? I would be just quite interested to see where this new demand is coming from because you've been relatively downbeat about the Austrian economy and the opportunities there, so that would be interesting. And also if you feel, more generally, in terms of loan demand, has there been any change, in your view, in your core markets between Q1 and Q2 in terms of better demand, because clearly you feel a little bit more confident. And could I just pick you up on one small point? You talked about the Romanian non-recourse law and said possibly there could be something to do on there, but you don't know. Now some of your peers have decided to take provisions against that law in Q2 and I just wondered why you made a decision not to, if you think possibly there's a problem.
We have taken provisions to -- we just mention it a bit, we've taken about €27 million on that in the second quarter. And with that we, I think, adequately cover on what could happen there.
Yes, it's correct that the loan growth is surprising us a bit on the positive side, particularly in Austria and in the Czech Republic. But the appetite of our competition to book risk assets is relatively strong in our markets and we are not the most aggressive bank around. And I don't think we will change that stance. We, I think, are very, very, very cautious on making sure that we get the appropriate returns on the appropriate risk ratings. And if that doesn't meet our expectations, we're not going for business. So we are...
So it does suggest you are seeing some demand that's meeting your expectations, more than you did in Q1. Is that right?
That is true, that is correct, definitely a bit stronger in the second quarter than the first. Yes.
[Operator Instructions] Our next question is from Johannes Thormann from HSBC. Please go ahead.
Johannes Thormann, HSBC, some follow-up questions for someone. Could you give us an update how much you estimate the headquarter move will have cost you and how much the costs could drop in H2? And secondly, the underlying cost of risk as you separated it around 50bps. Which countries will be more difficult and then where you see even cost of risk far lower? And the last but not least, probably in terms of countries, in which country were you most satisfied with the performance this quarter and where you're still most concerned? Thank you.
First question on the cost of the move and rent payments that we had in the first and second quarter, it's €9 million extra for the first six months that should be not repeated in the second half of the year.
Cost of risk I hand over to Andreas.
Yes, and I mentioned that I see the cost of risk, with the current environment for the retail portfolio, south of 50 basis points. And for the corporate and real estate I gave the explanation why that is pretty unpredictable currently. And that was also subject to the previous discussion. Therefore, I don't see how we can get an underlying cost of risk without having a different interest rate environment that makes that more predictable. On the country side, we will see how Hungary will fare out, because as you remember there was a change in the regime through the FX conversions and now there is a more normal market there and it has to go and find its equilibrium. Then we will see how the Romanian market will fare, given, as I mentioned, laws and changes that consumer protection has imposed there.
And in Croatia, this will also remain to be seen because of the political situation that has changed several times, how the consumer confidence will figure in loan demand and in which specific products. One should not forget that the mortgage directive in some countries has changed the business environment through the demand significantly.
And our next question is from Kiri Vijayarajah from Barclays. Please go ahead.
Just on the introduction of countercyclical buffers in Slovakia you mentioned, do you see that as having much of a market impact at all in terms of volumes and maybe even pricing? And then looking more broadly and further out, are there any other markets where you think the local regulators could introduce some macro-prudential measures, or for now is Slovakia really just a bit of an outlier across your portfolio of businesses?
As I mentioned, the only other country where, given the loan growth, it could trigger action like that would be the Czech Republic. But there it would have exactly the same, no effect as in Slovakia given that the CET1 ratios of the local banks are way above the levels that could be imposed by a countercyclical buffer. And we're talking way above. I don't know the CET1 ratios of our competitors in the Czech Republic in so much detail, but I would figure they're all north of 17%, as in Slovakia. So whether you have a 100 basis point countercyclical buffer added on or not really doesn't play any role.
And our next question is from Simon Nellis from Citi. Please go ahead.
Just one quick question. You said that you had clarity on the impact of IFRS 9. Could you share with us that impact in terms of the capital that you expect?
It's manageable. We are not specifying it at the moment because we have our calculations. We've reported the impact on the EBA exercise and we are disclosing it probably next year. It's too early.
Our next question is from Stefan Maxian from RCB. Please go ahead.
I have two questions, if I may. One on Romania. You were a bit afraid in the past of the Romanian walkaway loan, that this will have an impact on future loan growth. How would you see that right now after some months have passed? And the second, you issued an AT1 of €500 million and you were targeting for more. Given that you have now stronger capital position, would you go on issuing AT1s even if it's quite costly, or would you rather say, okay, we're not being aggressive on the dividend?
Well on the AT1, you're right; for the moment we put considerations about further AT1 issues aside. That's right. On Romania, yes, you're right, and we haven't changed our view. It has not been particularly painful to us given that the keys that were handed back to us so far were mostly loans that we had written off anyway. So it doesn't hurt so much the banks; it hurts the business in the country. It's really annoying because it's one of those stupid populist measures that are, basically politicians believe makes them popular. And all they do is harm the business environment in the country. And in Romania particularly, young people will find it more difficult to get mortgage loans. So it's a clear negative and I hope those guys disappear soon.
And our next question Riccardo Rovere from Mediobanca. Please go ahead.
With such strong capital generation in six months, I remember your previous comments on M&A that you sounded pretty reluctant. Has anything changed? So potentially maybe you like Poland, but no interest at the moment is still the case?
That's still the case. I'd like to refer back to my previous comments. You really want to go and pay a premium in a country for a bank where you have your politicians around who talk about nationalization and crap like that? No way. No way. We're going to wait before the political situation in Europe normalizes. And we're definitely not going into countries where one election can change the fate of an economy to the negative in a way it happened in Poland. So clear no, at no price.
And if I exclude Poland, is it fair to say that eventually opportunities in other countries that are not Poland would not be large enough to reshape remarkably your current fully loaded Core Tier 1 ratio.
I like that formulation. Well, we would love if we could change our view, particularly on Poland because we haven't changed our view that actually one day that's a place where we would like to be because it's an important part in our region. But we need to have a stable, predictable political environment before we invest. We paid -- we learnt our lessons during the last years and we learnt them in a very painful manner. That's number one.
Number two, if we would move into more countries or smaller countries. As I mentioned before, our number one job for the moment is to make sure that we have an absolutely perfect data management. And we are on a very good track to get there. And it is our firm belief that only those banks that can deliver it will be able to survive. And we want to get there as soon as possible. Any acquisition makes it more complicated. So we want to keep focused and on track. I'm not saying that we are -- we have a chastity belt for the next 10 years. But we are very well on our way on being able to prepare ourselves that in the future we could buy something and integrate it at the speed of light. And that's what -- when we get there, then we're ready to go.
And our next question, Gilles de Bourrousse from Octo Finances. Please go ahead.
Gilles de Bourrousse
I have just two questions, please. The first one is on the MREL. As far as I know, the MREL numbers are to be communicated to banks by end of 2016. I was wondering if you had done your own estimates and if you can share with us your numbers. And the second question was on the NPL ratios. Do you have any target or is it just a function of the investors' appetite for your NPLs?
The NPL ratio, we don't have a firm target in mind, but a little lower is always a bit nicer apparently.
On the MREL, we have our calculations but we're now starting the discussions with SRB. And we will see -- we hope we will get a number in the course of this year and then we will know the implementation time that is given to us. Given the current capital position, given the current buildup, we are very positive that we will be again early compliant and this will not cause any meaningful stress on the organization. We will see where we end up. I think we have a -- we have created ourselves a very solid starting point and we will probably give an update with the Q3 results.
And we'll take our next question from Pawel Dziedzic from Goldman Sachs. Please go ahead.
Just one follow-up question from my side, and it's on the fee income. You mentioned in the Q&A session that essentially you don't see much improvement in that line going forward. And I was hoping to get a little bit more color on that. Your volumes and presumably client activity is up and it's higher. And at the same time, in the past I think you made a number of references to some initiatives that you're working on to boost fee income, in particular in Czech Republic and Austria. So would you be able to give us an idea why the outlook for fee income is perhaps not that good and where do you expect to see most pressures, both in terms of geographies and perhaps product?
Well, we had a couple of cases, particularly in the Czech Republic, where consumer protection activities seriously reduced our fee income. Given that, I think we stood out relatively well but in principle, I think we’re pretty comfortable on loan fees and payments fees. And as you saw even the asset management fees have kept up relatively well.
So the key question actually is will we be able to produce products for the mass affluent, products where we don't sell hundreds of millions but billions of asset management products that we actually feel comfortable to sell to middle-class retail clients that offer returns of 50/75 basis points plus, without undue risk for the buyer. We are not bad on that front. But as you can see from our deposit growth, volumes are not strong enough yet that we can really see fee income growing. So this is one of our -- could turn into a positive, but we're just not there yet. That requires a lot of work and that requires a lot of, a good sales job. But we've got to be very cautious on not selling something where then it turns out that we ill-advised our clients. So it's not something that we can change from today until tomorrow, but we're working on it. And we're still hopeful that we'll manage.
And I think in the past you mentioned that second half of the year could be decisive to understand the sales initiatives pick-up. Do you still see it in the same way?
Yes, we have a couple of initiatives going in Austria. We are working on the products. We're working on the pricing. We're just cautious. We live in a cash society, where retail clients are very reluctant to invest in securities and paper. And we don't want to rush our clients into something and then one day they wake up with a bad surprise. So, we're getting there step by step. So you're not going to see dramatic increase in fee income from one day to the other. But we're not negative on our ability to generate decent long-term, middle-class income asset management products that can offer a little return for our clients.
Thank you very much.
Ladies and gentlemen, it seems there are no more questions. Thank you very much for your interest. Have a great summer and we'll be back on November 4, hopefully with more good news. Thanks very much. All the best to you.
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