Raiffeisen Bank International's (RAIFF) CEO Johann Strobl on Q4 2018 Results - Earnings Call Transcript

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About: Raiffeisen Bank International AG (RAIFF)
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Earning Call Audio

Raiffeisen Bank International AG (OTCPK:RAIFF) Q4 2018 Earnings Conference Call March 13, 2019 9:00 AM ET

Company Participants

Johann Strobl - CEO

Martin Grull - CFO

Hannes Mosenbacher - Chief Risk Officer

Conference Call Participants

Anna Marshall - Goldman Sachs

Julia Matoshchuk - Morgan Stanley

Gabor Kemeny - Autonomous Research

Andrea Vercellone - Exane

Riccardo Rovere - Mediobanca

Alan Webborn - Societe Generale

Tobias Lukesch - Kepler Cheuvreux

Johannes Thormann - HSBC

Amandeep Singh - Deutsche Bank

Operator

Good afternoon, ladies and gentlemen, and welcome to the conference call of Raiffeisen Bank International. Today's conference is being recorded.

At this time, I would like to turn the conference over to Mr. Johann Strobl, Chief Executive Officer. Please go ahead, sir.

Johann Strobl

Thank you very much. Good afternoon ladies and gentlemen and thank you for joining us for this conference call. Today, I will present with Martin Grull, and Hannes Mosenbacher. Probably you are less interested in our annual results and our plans for 2019 in our anti-money laundering systems. Before I begin with the review of 2018, I would like to make a few comments on the current situation.

Our compliance processes are robust and our systems are state-of-the art. This is regularly confirmed by internal and external reviews and checks. Around 80 employees here in the head office alone are involved in the money laundering prevention. From today's perspective we firmly believe that no punishable offence was committed on our part and we do not expect any penalties to be imposed on us.

You will understand that due to confidentiality considerations, we are not permitted to provide any information about the individual transactions or customer relations, on which reports are currently circulating in the media. We have setup our own task force to analyze the individual client relationships on a case-by-case basis, particularly with regard to the historical issues mentioned in the media.

So far, our Chief Compliance Officer and his team of internal and external experts have not been able to identify any anomalies. The work being undertaken by the task force will take up to three months to complete. As far as the complaint is concerned, we know that the Public's Prosecutor's Office has received a complaint against unknown parties. And of course, we have read the various media reports, which clearly quote from that complaint. As the complaint is not directed at RBI we cannot inspect the files at the Public Prosecutor's Office and cannot comment on the content of the complaint.

I would like to state once again that in the past some of these allegations were already subject to intensive investigations at RBI on the part of the regulatory and legal authorities and confirmed to be unfounded.

Moving to the 2018 results. I'll start with the executive summary on page four of the presentation. Just to repeat, the consolidated profit is EUR 1,270 million, which is up 14% year-on-year. Even better news is that net operating income is up 4% year-on-year, driven by net interest income and net fee and commission income. Loans to customers are up 4% despite sale of Polish core banking operations. Disposals of core banking operations in Poland were completed on the 31st of October last year.

Now our CET1 ratio is at 13.4%, of course with a positive impact of 85 basis points from the disposal of the Polish core banking operations. Provisioning ratio is down again to a level of 21 basis points, driven by continued write-backs and low new influence of non-performing loans. The non-performing loan ratio decreased well under 4% and the coverage ratio was improved by more than 10 percentage points to 77.6%. Given the good results we will propose EUR 0.93 dividend per share in the annual shareholder meeting on the 13th of June.

Turning to the next page, a couple of more informations, most of which were covered anyhow already in the summary. I think good to note is that the general administrative expenses are only slightly up by 1.2%. And of course, this also was supported by the sale of the core banking operations in Poland. And this might be the most difficult target in the coming months to keep the costs development on a low level. I have to mention in addition that the total capital ratio is now at 18.2%.

Moving to the next slide, we see the quarterly development of the ROE the cost/income ratio, the net interest margin and the provisioning ratio. And of course, what you see is the seasonality pattern in the Q4, which has some tradition in RBI, but also the overall good developments on the year numbers.

Turning to slide seven, we changed this presentation slightly. You might remember that this was the page with the arrows and many countries we tried to put more information on these two slides giving you for the one overview a couple of information, one is the loan volume and the year-on-year development. But in addition to that, also the mix between loans to households and corporate and a couple of information on key initiatives. What you see is that overall, we have a very balanced portfolio, given that many of you follow RBI since a while given the different positions what we have developed over the years in the various countries, but overall it's a nice balance between retail loans and the corporate loans.

And what you also see is we have defined a couple of key initiatives in the countries and without running through the countries on one-by-one, what I can say is that after the very good development of the loan growth last year, we feel even more confident that we can substantially increase our customer base.

And therefore customer acquisition is in almost all of the countries the one key initiative in the retail area and other initiative is that overall we want to increase the share of digital lending. Again, of course this depends on the development of the various countries in some this is already a high ratio, in others we're just at the beginning.

Turning to the next slide. We wanted to share with you our approach to digitalization and I would describe our activities in five areas. Starting from the left, we built and are in the process of building throughout the network one integration layer, which will be the fundamentals for our open API strategy and for our capability to whatever we develop in one of the countries, on the customer experience, on the customer solutions we can easily introduce also in other network banks.

We believe that we are making very good progress in changing the way we work. So we are currently in a process of transforming our operations, our organization to an agile cross functional working approach. I would say we are close to half through that development and reassure that this approach will substantially improve our capabilities to innovate and to improve the customer experience.

What we also like is the initiatives which we started on data analytics and artificial intelligence use, we have defined a couple of areas where I think the progress what we are making is very encouraging, we're building up the teams more and more and defining more and more use cases.

All these activities what I have mentioned to a large extent focus on customer experience, but of course the big potential of digitalization lies in the end-to-end process. And we're investing there substantially as well and believe that within two or three years we will see a positive impact, which then would support our cost development.

To encourage and improve our innovation capacity, we build up and some of you might have seen that a couple of initiatives, one is with our Elevator Lab are accelerate where we systematically cooperate with fintechs, which does not only support the fintech's community, but also creates a strong skills and view on innovation within our company.

I think moving to the next slide, I should mention as this is usually one of the focus points I should mention also with a couple first development of our entity in Russia. Raiffeisen Russia contributed substantially to the net profit after-tax. They on their own have $455 million profit after tax and this despite the ruble depreciation and it was even better than the year before. I mentioned, it already ruble depreciation was substantial with 13% year-to-date. And average of the year it was 11%.

What we like is the net interest income, which increased by 3%. Of course, it was all just [indiscernible] well we had a very good development, and also there was quite a strong competition in Russia, the NIM was only down 16 basis points to slightly below 6%.

Risk costs a little bit up, but still on a very low level. Loan growth I mentioned already and also the NPL ratio now is at the reasonable level of just 3% with a coverage ratio of 77%. I can confirm our strategy, which is - one which is built on a strong business model, on a strong customer base and with a good potential for the coming years as well. In the lower part of the presentation, you can see that the loan books are diversified in total, as well as on the retail level.

I'm now turning to the next slide, which is an update on Poland maybe the last one. I mentioned it already in the summary that we completed on 31st of October, the sale of the core banking operations, the agreed price was the PLN 3,250 million. And I already mentioned also that the positive impact of the sale was an 85 basis points improvement of the CET1 ratio.

We sold, we allocated to the core banking operations and transferred to the buyer EUR 9.5 billion of total assets and maybe more important the RWA had been EUR 4.9 billion. We had a negative impact on the sale on consolidated profit, which was EUR 120 million.

We did already recognized this in the second quarter last year and we had a capital neutral negative impact on the P&L of EUR 65 million by the recycling of foreign exchange differences. The remaining portfolio is now in an RBI branch in Poland. It is about EUR 3.2 billion, of which around EUR 3 billion are foreign currency mortgages. Out of this, I would say the asset quality is stable with EUR 364 million of NPL portion.

Coming to the next slide, we are discussing for a while a slowdown in the business sector, but still on a good level. Our forecast for 2019 is - and 2020 if I sum this up is around 3% in the CE and SEE countries and around 1.5% in Eastern Europe. Australia a little bit above the 1% and this is also slightly above the euro area.

Given this late stage in the cycle, we see already quite some wage growth, wage pressure in some of the countries and a very low unemployment rate. So this is positive and negative use very positive for the loan demand and for the performance of the retail portfolio. Of course in the OpEx it says a negative impact.

I'm coming now to my last page in this presentation, which is the outlook, we have only adjusted it a little bit. So we believe that we will achieve we can pursue a loan growth of mid-single digit number. We expect a slightly higher provisioning ratio, which would be around 45 basis points.

We expected NPL ratio can be further reduced and this was now adjusted, we want to achieve our 55% cost/income ratio in 2021. We want to confirm our ROE of 11% as a targets and our CET1 ratio target mid-term of 13%. And this would give again room for a nice dividends in the coming years.

I will now hand over to Martin.

Martin Grull

Thank you, Johann. Also good afternoon from my side. Highlights of the fourth quarter, I will do the overview very briefly I'm on page 15 now, net interest income lower, primarily because of sale of the Polish operation. Fee income very strong, however there is one-off item, which I will elaborate a little bit later on. Administrative expenses EUR 85 million up, there is as usual seasonality which was mentioned by Johann Strobl.

Probably the most remarkable highlight is the impairment losses on financial assets, here as we also mentioned back in February we did the fine tuning of the IFRS models to reflect parameter improvements, cyclicality and also events, which are not captured by our risk models.

Moving on to the distribution of pre-tax profit from a regional and segment point of view, Central Europe profit decreased year-on-year. We had higher impairment losses and lower releases in Hungary and higher provisioning in Slovakia.

Nevertheless very good result if you look at the individual country contributions, Czech Republic a record result, Hungary over EUR 70 million and also Slovakia our bank in - Tatra Banka our bank in Slovakia consistently performing extremely well.

Southeastern Europe very solid 30% growth of bottom line, we had higher net interest income, in particular in Romania coming from market rates, higher market rates, but also from nice development of loan volumes and at the same time also lower risk cost in that segment.

Eastern Europe consisting of Belarus, Russia and Ukraine also good development though slightly lower than 2017, partly resulting from currency depreciation, but also higher impairment losses. We had lower releases in Ukraine and higher administrative expenses in that segment. Significantly improved profit in the segment group corporates and markets. So this is the business generated out of Vienna, driven primarily by significantly lower risk costs.

Moving on to the revenue and cost slides, revenue as I said down 13%. The deconsolidation effect for the sale of the core banking operation in Poland amounts to EUR 35 million. So that is to be adjusted if you compare it with 2019. Fee commission income, particularly strong up EUR 12 million, despite the sale of the core banking operation. However, as I mentioned earlier, there is a one-off in the magnitude of EUR 10 million, which has to be taken into account.

Cost - I am now on slide 18. Also, this was mentioned by Johann Strobl that we have this traditional seasonality driven by campaigns, pre-Christmas campaigns invoices are coming in towards the end of the year. But also I have to say we had seen already increase of costs driven by wage inflation and also higher number of staff in some countries.

Moving on to the balance sheet, I am on slide 19 now. So the most remarkable highlight here is the 4% growth of customer loans, where did we particularly grow strongly in head office roughly slightly more than EUR 3 billion, this is a very remarkable growth investment and project finance were the biggest driver here. Czech Republic roughly EUR 1 billion or 10%, Romania close to EUR 1 billion or 19%, Slovakian EUR 700 million and also Russia despite the already mentioned ruble devaluation about EUR 600 million net growth of customer loans.

Regulatory capital view, I think this is quite obvious starting from 12.7% at the end of 2017 then we had the cliff effect coming from the change in IFRS9 roughly 100 basis points credit risk, which is loan growth and the already known 85 basis points deconsolidation of the Polish operation retained earnings is leading to 13.4%.

Next slide, I am now on 21. Shows you that our buffers, internal management buffers are very high given the 11.5% minimum requirement as you may know the ECB not changed their strap add-on so we have 2.25% Pillar 2 requirement and 100 basis points as in the past. Pillar 2 guidance, the combined buffer is now fully loaded, consisting of 2.5% capital conservation to the Austrian systemic risk and also a little bit counter cyclically buffer 25 basis points. So all-in-all 4.75% leading to 11.5% total minimum requirement against 13.4% at the end of 2018. So a very sufficient buffer.

Also the - as a result the buffer to MDA trigger is very strong 1.85 percentage point as you know, due to the very successful placement of our second ADI we have now fully covered the ADI requirement ADIs have gone up to slightly over EUR 2 billion.

Coming to my last slide, which is 22. Funding and liquidity very stable development stable NSFR 114, loan deposit unchanged despite the sale of Polish core bank operation and liquidity coverage ratio 134% unchanged also the diversification of our funding source is roughly 60% coming from customer deposits.

I will also elaborate little bit about MREL resolution strategy, unfortunately there are not that many news it's still work in progress. However, we believe that the respective authorities will make up their mind relatively soon.

Now, as you know, we are aiming for the multiple point of entry resolution strategy, which means that each network unit forms a separate resolution group. And consequently each resolution group is expected to meet its own binding MREL targets. As I mentioned before unfortunately we have not yet received any final targets only preliminary indications, which unfortunately I cannot yet share with you.

The instruments to cover the shortfall will be the non-preferred senior issuances and other eligible liabilities. On the bottom side you see the risk weighted assets in the various resolution groups and also where we stand with regard to total capital in these countries, which are relevant for the resolution strategy.

Last slide 24, MREL nothing really to report on that side. We of course are getting prepared to issue NPS debt instruments. There's no final decision technically, we are prepared of course this finally depends how much the minimum requirement will be, as of today I do not expect a huge gap. And furthermore, we should assume that the transition period of close to four years might be given to us.

That's all from my side. And with that, I would like to hand over to Hannes.

Hannes Mosenbacher

Thank you, Martin. Warm welcome also from my side, when reflecting on 2018 when talking about risk and risk cost, having a risk cost of EUR 166 million whereas we clearly earmarked EUR 159 million belonging to an IFRS fine tuning I think it's more than fair to say well, this was a real good year achieving an NPR ratio of 3.8%, having a coverage ratio of 77.6%, and last but not least, I know that it's only some three or four months back in history, but we also perfectly performed on the EBA stress test.

On the other aim side, this was also the motivation for us in 2018 to open up our mind when talking about IFRS9 fine tuning. I think it is fair to say that we have seen the peak in the macroeconomic development, we see forecast reflecting slower GDP development. And we also see in some indicators that the confidence will now be slightly lower than one or two years ago.

I'm on page 26, talking about RWAs, we have seen nice growth on the credit risk RWAs by about EUR 1 billion. Please mind that this of course completely reflects our sale of the Polish entity and the remaining part of the Polish entity this is a - these are the retail loans, which were always clearly identified and earmarked that those will stay with RBI Group.

And on the market risk side, we have seen slight up lift on the RWAs, because we have increased or hedging to some of our exposures in connection with the network banks and subsidiaries, but also of course because of the Polish sales execution.

Let us move on to the next page, talking about NPL and provisioning ratio. Well NPL ratio at 3.8%, NPL coverage moving up by 10.6 percentage points summing up in total to 77.6%. I think we can easily and very comfortably compare ourselves on an European level. And I think this is also good occasion when talking about this NPL coverage to talking about our IFRS9 fine tuning. And when IFRS line was introduced some very principle observation were made. It's cyclical approach and it's very much relying on very specific methods.

We have opened up our mind in Q4. I have indicated this in the last quarterly call. We have taken the cyclicality, we have also appreciated and take into account that we have good models, but also accepting that there might be the one other circumstances where a quantitative approach is also needed. And finally we also just did an updated one other parameter accordingly.

If you would like to know how we split up this total EUR 159 million so I may expect this question later on. So I take it already now. So you can take it by one-third each of the three sub components talking about the cycling, talking about the quantitative approach and also about the parameters. Leading us on a full year basis to 21 basis points of risk costs.

And this would bring me to my last slide, NPL distribution by country. So we have reduced NPL stock but EUR 1.4 billion. Maybe some further highlights on this page not running through the full table. You can realize that in Croatia, we were capable to bring down the NPL ratio from 13.1% to 8.1%, you know the case I'm referring to another very nice success we achieved in Ukraine, where we are now on 11% only. And Russia, the last country to be mentioned, we have now an NPL ratio of 3%. At the same time having a coverage ratio of over 70%.

This will be my report, and we are now waiting for your questions.

Question-and-Answer Session

Operator

Thank you, gentlemen. Ladies and gentlemen we may now start the Q&A session. [Operator Instructions] Our first question comes from Anna Marshall of Goldman Sachs. Please go ahead.

Anna Marshall

Good afternoon. Thank you for the presentation. I have a couple of questions, please. The first one is on your loan growth, so part A of that is organic growth and specifically given that the slide with the arrows is no longer there. I wanted to confirm, if there has been a change in your target countries, specifically Czech Republic, Slovakia and Bulgaria? And part B of that question is more on the M&A front. Could you please provide an update on M&A target characteristics and potential timing of any move?

And the second question is on your digital strategy and costs. So in particular, what is the magnitude if you may specify of required investments to implement the initiatives that you've mentioned in the presentation? And also, could you please elaborate on the potential cost savings that I think you mentioned kind of in the two to three year horizons in terms of what exactly the sources would be and mandate as well? Thank you.

Martin Grull

With regard to the loan growth, yes, we have not changed in principle our strategy, we expect Slovakia to grow. Hungary is probably a little bit surprising. I mean, I must say it's not a very huge balance what we have EUR 3.6 billion, but also Hungary seems to be sort of recovering a bit more than expected.

We have Czech Republic, Bulgaria EUR 2.7 billion balance. No, sorry, EUR 2.4 billion balance at the end of 2018 might also grow a bit more than expected. Russia also, as we announced many times before, Romania set to grow unless we have - and this was already mentioned that Romania might come under sort of review. But depending on the outcome of the bank tax discussion, we should also have growth in Romania, Vienna so the markets and corporates division will most likely not grow as fast as 2018. But nevertheless we would see a growth there.

Johann Strobl

Yeah, I take over other questions, which is the digital, I think it's difficult and sometimes artificial to allocate what is digital and what is supporting very traditional businesses. What I can say is that we increased substantially the number of people. Again, they're not all of them working in the digital area and I think what we can say on average in the smaller countries we spend single mid-digit millions on digital investments and in the bigger countries, it's substantially more. So I think this part is easy then to somehow I just didn't calculate.

What we believe is that in a couple of areas by getting more digitized, we can take out cost on the - throughout the value chain from the front end moving to more digital sales with loans to the back office by being fully digitized. So, without stating a number, I think it's important that in 2020 and 2021 we get the rather slow or stable cost development to reach this 55% what we believe we could do.

Anna Marshall

Okay, thank you. And on inorganic expansion.

Johann Strobl

Yes, I think I cannot share anything, which you would not know but let me comment. We really closely following the activities in some countries. I think at least this is the way I observe it is that activities in Romania had substantially slowdown because of the uncertainty of this bank levy discussions. We believe that in Serbia it might take a while though the current owners of the one or the other bank will make their decision on the process and yes, I think that's what I should mention.

Anna Marshall

Thank you very much.

Operator

Our next question is from Julia Matoshchuk of Morgan Stanley. Please go ahead.

Julia Matoshchuk

Hi, good morning. Thank you for the presentation. A couple of question from my side. So the first one would be on Romania. What is the latest according to your understanding on the bank tax? And how do you plan to change if at all your business in the country, reprise deposits, slowdown growth, increase margins, et cetera.

And then my second question would be going back to loan growth. Of course you have given the outlook, you mentioned the areas that are growing the most, but I was wondering the macro data year-to-date has been quite disappointing and on top of that Czech Republic and Slovakian has imposed some restrictions. Well in terms of countercyclical buffers, but also some restrictions on characteristics for lending to households. Do you see any slowdown in these regions or actually loan growth is still fairly robust? Thank you.

Johann Strobl

Yes, coming to your questions. Bank tax in Romania, we closely observe the discussions there. We had been and this I have to restate, we had been surprise at the end of last year how fast that without discussion this bank tax was adjusted. So we get a better feeling now in a sense that obviously and discussion was started.

And so the big hope is that the bank tax will be reduced substantially and this is the minimum what we hope for and what we expect of course it would be much better if it would be avoided at all like any other specific industry taxes cost. I think this skews the development of the country, which we would not like as Romania had such a nice development over the many years.

What we hear is somehow have public discussion on what should be the tax base is it the total balance sheet as very simplified it is the case in the current proposal or if there will be a couple of exemptions. And I think this leads also to your second question, how would we react on that? I mean, yes, it depends if the - if for example government bonds would be exempted or if the state tax and a couple of others.

The way the bank tax is built leads in the direction of deposit reactions. Because usually these are more short-term and you might easier start to see an impact then on the loan portfolio. But also in the loan portfolio, I think it will be carefully reviewed and probably those loans, which have smaller margin might not be financed in the future. So reactions could be on both sides, but it's too early to say. And we will see what the outcome is and when the bank tax will stop, but we appreciate that there is now this discussion.

Coming to your third question the loan growth. I mean, the loan growth as we mentioned last year was above our mid-term target. We had if you compare like-for-like, Martin mentioned that we have the loan growth of around 10%. So by expecting now in the - this year, next year's single mid-digit loan growth. So this is I would say very reasonable adjustment to the slowdown of the economies.

On the other hand if you look at our at least from Raiffeisen Research the forecast what we presented today. If you take 3% you want to simplify again a 3% real GDP growth. You add some percentage for the inflation and if you then consider also that the countries are not really impacted.

Okay, you might say the one or the other is, but if you compare most of the countries with the developed more you will say that their current indebtedness is at least according to their development level of even below. The restrictions what you - what had been imposed, yes, they have an impact we've seen some countries a slowdown of 20% to 30% in the new business, but this should be good enough to - or it's not so bad for our lowered loan growth target.

Julia Matoshchuk

Understood. Thank you very much.

Operator

Our next question comes from Gabor Kemeny of Autonomous Research. Please go ahead.

Gabor Kemeny

Hi. I have a few questions on compliance and then a separate one on the provisioning guidance. So on compliance, can you talk a bit about the cost implications of your higher focus on compliance you mentioned there through internal investigation. And also can you give us a sense of higher compliance spending and headcount have developed in the last two years? And what is your budget for 2019?

And then secondly, after the money laundering allegations you mentioned that there are regular external reviews of your compliance processes. Can you give us a sense of who these external parties are and since when have they been looking at your processes?

And finally on the AML [ph] topic regarding Russia it has clearly been a driver of growth. I think if we adjust for ruble evaluation it will growing well in the double digits. So how you think about expanding your Russian business given this higher compliance scrutiny around the country?

Johann Strobl

Compliance is a broad range of activities. And, of course, the changing standards and there had been all past a couple of areas where we invested in technology. So there have been an increase overtime also. I would say this is - I would not only allocate this to the anti-money laundering but broader to miss it and whatever you have seen.

The specific audit what we did will do, are we in the process of doing is mainly done by own people. Let's say two-thirds are internal people which we all the time will be in the next two to three months allocated to them. This is a mixed team of, of course, given the big quantity of data. These are IT people, data analytics people, but also AML specialist they work together. But we will also spend EUR 300,000 to EUR 400,000 for external ones, who will support us and also supervise. So that we have a real neutral picture on that.

When referring to historic audit. What we do is we have, of course, our internal audit, which over many years had carefully scrutinizing our systems and our approach there. But of course, and you might remember also that whenever, there is something in the public, we see in addition to the regular review.

And we have a review by the SME, because this is the responsibility of the Austrian SME and they do this review not only in Austria, but also in network banks. And what they do is they review the systems, the approach. But in addition to that also whenever there is something in media whatever then they also have a look at seeing the cases and then we also get their feedback. And system wise that's why I'm so convinced, we got the positive feedback throughout the last couple of years.

So that's why I am more confident than you might expect after such accusations. And yes, I have to make you aware this is the real issue in two areas. The one is KYC where we spent quite a lot of efforts not only from the compliance people, but also from the others. And then there is the transaction monitoring where we have I'm sure a state of the art system, which is also used by other banks and which gives us the opportunity to filter all the transaction, this is used group wide.

So we make use of the - of all the experience what we have, but of course it's not the manual approach, it's a filter approach with technology and only if we then get the transactions, which are significantly different than what we expect and there is a manual review by real people.

Referring to your question in Russia, I think at least this is my perspective Russia on its own in addition to what we have from group level, the Central Bank there also have developed quite a junk anti-money laundering or tax evasion or whatever. So they have a strong approach as well and they also have a good system. So also in these days, I'm not worried that the system in Russia would show any weakness.

Gabor Kemeny

Okay. So just to follow-up on the compliance spending, so if we think about the increase in the compliance budget in 2019, should this be in the double-digits euro million range or other rather in the single-digits?

Johann Strobl

On head office level only, we spend EUR 20 million to EUR 30 million for compliance and this is only the head office number. And of course the compliance activities in the countries are huge as well. So you can imagine that in total this is a huge number and many, many people what are involved in compliance activities.

Gabor Kemeny

Okay, thank you. And just a final one, on the provisioning guidance, so you guide for 45 basis points provisioning, which is a quite significant increase although you expect the NPL ratio to drop further from here. So can you give us a sense of what the guidance assumes in terms of provision write-back, especially in the group corporate segment?

Martin Grull

Well, since I have read the notes from you, I was expecting this question. The NPL ratio of course has two components, it has the nominator, denominator and as we have indicated we still believe that we can show a nice growth. So this by applying the ratio would give me a further comfort on decreasing NPL ratio.

And the other one is we have three components it's the inflows, the coverage and the potential write-back and what we have done in this guidance that we have assumed some 5 to 10 basis points on write-back. This is very difficult to forecast and also to guide because we have some cases where we are pushing for at least for two three years, some benefits seven, eight years where we are pushing very hard. And then finally we succeed and have the appropriate write-backs to be reflected in our numbers.

But in the guidance, shared with you we have considered some 5 to 10 basis points on potential write-backs. You might be more positive for your share of view, this is what we have done and what is also maybe important what this 45 basis points also to consider is a default of a mid-single - a mid-size concentration risk. So this guidance we gave with you would also nicely cover. If any of these mid-size concentration risk would fall into troubles. This is the way how we came to this 45 in total.

Gabor Kemeny

Understood. And when you say 5 to 10 basis points in 2019, how does this compare with the 2018 figure? So what was the net write-back in 2018?

Martin Grull

Give us a second that we really can give you an appropriate answer, but you have it seen any way that we had there in total some EUR 700 million of new inflow. We had risk cost of EUR 70 million, I got it right now. Hang on for a moment. This is just the NPL sales. We would come - I'll revert back to you in a second on this question. Okay.

Gabor Kemeny

Thanks very much.

Operator

We will take our next question from Andrea Vercellone of Exane. Please go ahead.

Andrea Vercellone

Good afternoon. Four questions. The first one is one cost, are you in a position to give us some guidance as to what the growth in 2019 could be on a like-for-like basis, i.e., excluding Poland in both years? You mentioned before you see cost as a bit of an area of concern at least near-term. You didn't face it like that, but that's what I understood.

The second is just the clarification, you mentioned there is a EUR 10 million positive one-off on the fee line, can you tell us what is booked and what is isn't? The third one is on capital, if you foresee any positive or negative impacts in 2019 driven by regulatory changes, IFRS16 model changes or whatever else.

And the final question is on Poland. Anything you can share with us as to what the situation vis-à-vis the legislation on FX mortgages currently is? And my understanding is that there are discussions about fund to help customers to convert and banks have been asked to contribute to this fund then we can debate what the percentages are. If you're asked to contribute will you have to book the charge in the P&L? And if you fail, do you lose the money you contribute or not? Thank you.

Martin Grull

Thank you for your questions. Let me start with the cost guidance. To do a like-for-like comparison, you would have to take the actual total OpEx of the entire group, which was EUR 3.48 billion then you would have to deduct 10 months of Poland. So the core banking operation for Poland which is 207. Then you have to add EUR 19 million this is roughly the cost, which we would have in 2019. And also the EUR 4 million, which we incurred already November-December out of the branch would also have to be reflected.

So the new base would be then EUR 2,856 million, and then is the magic question how will the cost develop in this year? As I said the times of stable development is clearly over, so we might assume that we have somewhat a mid-single digit growth in the total OpEx for the entire group.

So the consensus is relatively close on the OpEx side. So the EUR 10 million one-off was related to the building society where certain provisions were accumulated, and due to the change in the system, there was a release of this commissions and this is why, this is to be considered clearly as a one-off not to be repeated in the coming years.

We do not expect this is not a question number three, any major negative or positive changes coming from the regulatory side with regard to the capital as I mentioned before, disrupt on has not been changed for 2019.

On Poland the situation is still unclear. As you may know there is a law which foresees actually two funds. One fund is also for conversion. The conversion would work as follows, the banks have to contribute a percentage, which is to be decided by the financial market authority or by respective council controlled by the state, it could go up to 0.5% per quarter.

And the money can then be used by the banks who are contributing to this conversion fund for settlement. I mean, obviously, the banks would use this money for weak borrowers or travelled or distressed borrowers first. So you may say there is anyway certain provisioning level of distressed borrowers and of course this will be used first.

And then the big question is whether there is a redistribution of money to other banks. I mean the amounts which have not been used by the banks. Since the law would foresee a relatively short period of six months. And this is still open, legislation is in the process. It has been forwarded by the Public Finance Committee to the lower chamber.

We don't know when this would be on the agenda of the lower chamber as you may understand and possibly also have heard the banks are protesting against this law in particular because it would also violate EU law in particular with regard to state aid and respective discussions also have been held at the level of the European Commission.

This is all what I can tell you at this point of time. And as soon as we know more, we would certainly share or it would anyway come on Bloomberg, right to other news.

Andrea Vercellone

Excuse me. Thank you very much. Just one clarification is - are these contributions potentially endless or one could foresee one, two, three years and then that's it?

Martin Grull

This is a very good question. The law is called Distressed Borrower Law. So this would suggest that the money should be used only for those who are in need and have a distressed situation for whatever reasons. Formerly, if you look at the draft and the text of the law, there is no limitation. And this is also why, it would violate EU Law, because if you then without any reason unjustified, without any social filters carry-on. And also have the millionaires, who also have taken Swiss franc loans benefit of this, that would be another violation of actually local and also EU Law.

So this is the big question, if it is only designed and addressed to travelled distressed for us, I think that would be okay. Because this is what we are doing anyway in our collection and work haul process. If it is unlimited and everybody might benefit this would be unacceptable.

Andrea Vercellone

Thank you.

Operator

We will now take our next question from Riccardo Rovere of Mediobanca.

Riccardo Rovere

Good afternoon to everybody. Just a couple of follow ups, if I may. The first one is again on both Poland and Romania. We are right at the let's say in the middle of March. And theoretically the quarter is going to end up in 15 days. What will you do in let's say, when you will have to, let's say, to wrap up all the numbers of the quarter. Will we see an impact in Q1 related to the Romanian tax and the Polish law or it's something that we will eventually see in the future, when the situation is going to be clearer? This is the first question.

The second question I have is, this morning if I have seen correctly in Bloomberg it stated that you don't see financial charges on laundering. Just to be clear does it mean you expect no fines and nothing on the back of what we read on the press or media? And the last question I have, maybe it's just to kind of follow-up on what Andrea has just asked with regard to IFRS16 three months changing models, do you expect any of those to have an input on RWA? The answer before was not clear to me. Thanks.

Martin Grull

On number one, the Romanian tax we are observing developments on a daily basis. So far to our understanding this so called emergency ordinance has not been validated by the parliament. The reason is that there are intensive discussions taking place between ECB, the local National Bank, even Standard and Poor's.

I understand got somehow involved. So we actually don't know whether this 1.2% on financial assets finally will be applicable. We will have to decide on the 31st of March, what is the situation, what's the likelihood, what's the magnitude and then we can finally decide.

But of course, rest assured if there is a high likelihood, we will definitely have to book this tax. And it's the same with Poland, there is no law yet, it's also being discussed. We have to evaluate this on an ongoing basis and decide whenever facts are available.

Johann Strobl

Coming to your question on the AML issue, we - I mean the point is like this. So we read the media that's the only information source what we have. We analyze that, we see what is the - which customers which are mentioned in the media are customer of ours and we check that. And then, of course, that is historical data, it will take some time to run this historic data also through the current systems. And to see if there are any significant transactions.

So given the status where we are now, we have not found any activities, which would be seen as punishable offense. And there this is the reason why we also do not expect penalties.

Riccardo Rovere

Okay. Thanks. And on RWA if I may?

Martin Grull

Yes. So I will start with the IFRS16, we would expect around EUR 500 million increase of our balance sheet and an insignificant impact on our capital.

Johann Strobl

Well, talking about the TRIM the thematic review of the internal models, we had already now experienced three of those TRIMs in the retail on the high default portfolio meaning SME part and also market risk. We also have now a TRIM on the low default portfolio, but this is one of the portfolio we have just refurbished last year and found regulatory approval. So far I'm happy to report that with none of the TRIMs we had a single euro impact on our CET1 quarter.

Martin Grull

Maybe I can also answer the previous question raised by Gabor. So going back to 2018 what we can see is that we had a positive P&L contribution out of the provisioning and the NPL stock out of sales was EUR 116 million and had a EUR 135 million positive contribution to the bottom line of EUR 135 million and since without IFRS fine tuning we more or less had zero risk cost. I think it's fair to say that our new booking of provisions sums up to EUR 251 million. This is what we have done specifically on the back of an envelope calculation. But we will revert to you tomorrow, if we find some other way of looking at the whole story.

Operator

We will now take our next question from Alan Webborn of Societe Generale. Please go ahead.

Alan Webborn

Just a couple of questions, if I may. Firstly, could you just detail a little bit more the level of provisioning that you took in Russia in Q4? I mean, from the statement you make in the slide on Russia clearly this is partly related to sanctions on the basis that it's not captured by the risk models. But could you give us an idea of a little bit of what was actually going on there, how much of that - those risk costs related to those one-offs? And then just perhaps a more broader view of how you see asset quality there? So that was one point of detail.

The second one was also I thought the provision charge in Poland in Q4 was looked quite high. And could you also just detail what was that related to? I mean, clearly it must be related to the end of selling the core business or whatever. But could you just tell me what that is as well? So that would - those are the two points of detail.

Third question. Are you actually selling cash loans digitally in Russia today? I mean, is the system there? I mean, clearly, it's an aspiration to move out of the Moscow region and do it largely digitally, but I just wondered like, do you have the infrastructure in place are you doing it now? And how do you think about it in terms of managing risk because clearly it's a new departure. And I wondered how big you think that could become as an overall part of the business. That was another question.

Also on Russia, clearly, funding costs have been going up for the big banks in Q4. Did you see that? How do you expect that to progress as we go through 2019? That was Russia. And then, I guess finally, in terms of your guidance, you purposely have moved your 55% or below 55% cost/income ratio in the mid-term to a 55% cost/income ratio in 2021, but you've left your rolling 11% ROE target the same and I just wondered why you didn't put 2021 on your 11% ROE target and perhaps you could let us know why you left that as a rolling target? Thank you.

Johann Strobl

Well, if I may start with the questions you have raised starting with Russia. And what was allocated to the IFRS9 fine tuning. Especially for Russia, we were using as I have outlined we have three pillars, one covering with the cyclic impact, the other one was a qualitative impact, and you could also call it holistic, but on the qualitative part, almost half of the entire increase, a little bit even more than half of the number you see on a Q-on-Q increase so 60% that are coming from our IFRS9 fine tuning.

And also as yet part of a qualitative part, and the other thing is we see in - I could say in almost all of our countries super stable risk development on retail you know, you use 30 plus, 90 plus, they are really on a historic low. They are really on a historic low and this also holds true for our Russian entity. When talking about Poland, we have a couple of effects to report, the amount on the Q-on-Q comparison, I would say part of it can be allocated to the IFRS line, not as pronounced as with Russia, of course.

And then there have been one or two specifics what I would like to share with you at this moment. When there was the split of the diversion Polish branch and the remaining entity, we had to change our account numbers where the client can honor their obligation. And some of these clients had difficulties to make use of these new account number.

What does this mean for me is the risk manager that I get artificial delinquencies. And it's just structurally a systemic issue, but we have solved this now, clients can honor their obligation. And - but models do of course immediate react because it purely formally it looks like a delinquent account. So this is one part of the risk cost development we have seen in Poland.

And the other one is I have reported once on our Green Energy Project in Poland, and here we have slightly increased our provisioning levels. Because we maybe still different restructuring strategies than we have pursuit before changing the legal structure in Poland. So this would be my impact on the risk cost development.

Maybe last thing then handing over to my colleagues, when talking about the risk costs with digital distributed exposures. We do transactional score carding, we do income modeling. So we do sort of pre-approved lending. And so we have already before approaching client a very, very good feeling on the credit risk we're talking about. And these are existing clients of RBI Group.

Alan Webborn

Thanks.

Martin Grull

Maybe I can comment, we have changed the ROE target from in the mid-term into - in the coming years. So there is a difference. Anyway as you know, we achieved it, we overachieved the 11%. And this is what we expect for the coming years, 2019, 2020, 2021 and so on. So I think there is a change to our previous target with regard to the ROE.

Alan Webborn

Sorry. I was just going to say you think the terminology is that you should be able to achieve 11% ROE in 2019, 2020 and 2021 is that what you're saying?

Martin Grull

Yes.

Alan Webborn

Good, thank you.

Johann Strobl

To your question on digital loan sales in Russia. We call it or what we can do is we have do we have a one quick loan application for customers of the bank in Russia. It's at least at that moment not allowed to sell with the one click approach loans to new to banks. So there you need sort of identification, which is done usually in Russia with the support of agents.

Alan Webborn

Okay, thank you.

Operator

We will now take our next question Tobias Lukesch of Kepler Cheuvreux. Please go ahead.

Tobias Lukesch

Yes. Hi, good afternoon. Two questions from my side. Firstly on the risk provisioning. You seem to be quite convinced that 2019 should look still quite reasonable. However, if you were to point or to finger point one or two countries, where you might see some more heightened risk, yes, could you maybe point to that?

And secondly more generally speaking, I mean, if we talk about potential renderings of former RZB, what do the merger documents actually say in terms of bearing losses? Is there a chance that only the former shareholders of RZB are liable any potential fines?

Martin Grull

If I may start with the first question. 2019, 2020, there is none of the countries where would now say, you should you should take into account an accelerated risk provision. In some of the countries, we have really super, super, super low risk costs also slightly mitigating, because we have nice write-backs. And I think this is the most important thing that also in 2018 we have experienced that I have reported previously some very nice write-backs.

So risk cost may increase just because we have not anymore these super nice write-backs experience. But there is none of the countries where I would now like to highlight or earmarked, so while pleased where we are and what charge for this and that country, this could be more striking.

So in our internal planning, there is none of the countries where we would say this is way beyond long-term average is the one thing. But of course, as we also have seen in the last two years, there's always good for surprise, if suddenly you're seeing it borrower makes it to the headline and suddenly we have direct from a risk management, but this is of course difficult to predict, but no concrete to especially highlight at this point in time.

Johann Strobl

Coming to your legal technical question. So, we had two mergers I should say, one was the merger of the core business, which if I remember correctly happened in 2010 or so. And the other was the merger of the legal entities much later. But what you are referring is that this business was merged already quite early. This happened as we usually do it in Austria probably also in other countries by general succession or we call it here only vassals. So this means that the one who takes over, takes over all the rights and obligations. Yes, I think that's what I can state as of now.

Tobias Lukesch

Okay, thank you.

Operator

We will now take our next question from Johan Thormann of HSBC. Please go ahead.

Johannes Thormann

Good afternoon everybody. Johannes Thormann from HSBC. Two questions just from my side. First of all looking at your loan growth and your loan portfolio in Russia, it seems that the corporate share has been growing stronger than the retail part. Is there any strategy behind it, especially in the current political environment? Or will this continue or will this reverse again in the next quarters? What do we have to read in that numbers? And then secondly, just a follow-up, under which conditions would you be interested in doing M&A in Hungary? Thank you.

Martin Grull

In terms of Russia, yes, we had a very good year in the corporate banking division in Russia. We would expect going forward that retail and corporate banking would grow at the same pace.

Johann Strobl

To your question on Hungry, what I say it has to be seen with the historic experience and it's - we have seen a strong reach in Hungary to keep the majority of the banks in Hungarian ownership as it was called. So for us it would be very important to get signals that this attitude changes. If this attitude changes then I can confirm that if you're referring to Budapest Bank this is a good thing. But it's also important to have the right political environment and the right mood.

Johannes Thormann

Okay, understood. Thank you.

Operator

Thank you all for your questions. [Operator instructions] We have a question from Amandeep Singh of Deutsche Bank. Please go ahead.

Amandeep Singh

Hi, this is Amandeep from Deutsche Bank. I have two questions please, one a follow-up. On your 11% ROE target we want to know does this include any impact from Romania or for that matter say and if anything comes up from Polish ForEx mortgages. And second question would be now that most of the rate hikes are behind us say in Central Europe and SEE in the near-term, so how should we look at the NIM is progressing this year? Thank you.

Martin Grull

The 11% target does not yet include neither the Polish nor the Romanian possible new loss. And the other question was on the NIM. The NIM guidance, as we said in the past stable and actually this is also what materialized. We not expect any significant change. We all unfortunately have to accept that ECB is not going to move as expected.

On the other side, as you know, we have only two countries Australia and Slovakia in the Eurozone. So we might still benefit from interest rate developments in Romania, Czech Republic also in Russia, we will not expect any deterioration of the NIM neither in Ukraine. So all-in-all, I'm confident that we can keep the net interest margin across the group stable.

Amandeep Singh

Okay, thank you.

Operator

[Operator instructions] As there are no further questions at this time, we will now conclude today's conference call. Thank you for your participation.

Johann Strobl

Thank you for participating. It was a pleasure and maybe some of you we might meet tomorrow again in London at our Investors Day. See you tomorrow. Thank you very much. Bye-bye.

Martin Grull

Bye.

Operator

You may now disconnect.