Raiffeisen Bank International AG (RAIFF) CEO Johann Strobl On Q4 2021 Results - Earnings Call Transcript

Raiffeisen Bank International AG (OTCPK:RAIFF) Q4 2021 Earnings Conference Call February 2, 2022 8:00 AM ET

Company Participants

Johann Strobl - Chairman & CEO

Hannes Mosenbacher - Chief Risk Officer

Conference Call Participants

Mehmet Sevim - JPMorgan

Izabel Dobreva - Morgan Stanley

Alan Webborn - Societe Generale

Mate Nemes - UBS

Gabor Kemeny - Autonomous Research

Olga Veselova - Bank of America

Andrea Vercellone - BNP Exane

Johannes Thormann - HSBC

Robert Brzoza - PKO BP Securities

Riccardo Rovere - Mediobanca

Hugo Cruz - KBW

Disclaimer*: This transcript is designed to be used alongside the freely available audio recording on this page. Timestamps within the transcript are designed to help you navigate the audio should the corresponding text be unclear. The machine-assisted output provided is partly edited and is designed as a guide.

Operator

0:02 Good afternoon, ladies and gentlemen, and welcome to the Full Year 2021 Conference Call of Raiffeisen Bank International. Today's conference is being recorded.

And at this time, I'd like to turn the conference over to Mr. Johann Strobl, Chief Executive Officer. Please go ahead, sir.

Johann Strobl

0:21 Thank you very much. Welcome to all of you on this 2nd February 2022 at 2 o'clock, see, I appreciate the favor of my colleagues did to me, sometimes we find numbers which we love, and I hope that you will also love the numbers what we report to you. It's our full-year, still preliminary results, but what you see from the numbers is, we have changed our processes. So we are definitely faster than what we had been in the past. And I'm very happy that we also achieved that.

1:07 The numbers €1.372 billion, this is above the pre-pandemic result and what we see is after a slow first quarter, we are encouraged by the progress shown, every quarter in lending and revenues and in customer acquisition and more importantly, the strong fourth quarter confirms the strong trends from Q3 and gives us a great momentum heading into 2022. The net-interest income increased by 7% year-on-year, reflecting not only the better rate environment, but also very strong demand for loans in both corporate and retail.

1:51 We also very pleased that with another record quarter in fee and commission income, which was €561 million, and this was driven by an excellent business trend. But a very good core revenues growth has brought our cost income ratio down to 53.5%. While we have some exceptional integration costs in 2022, relating to the acquisitions we made in ‘21. We continue to focus on scale and efficiency across the organization.

2:27 Loans to customer grew by 15% last year, with strong organic growth in all our key markets and this includes also the acquisition of Equa bank. We expect the strong loan growth to continue in 2022 or so perhaps not such a high rate. Our CET1 ratio stands at 13.1% and the consolidated return on equity is 10.9%, just below our mid-term target of 11%.

2:59 I now move to the next slide number 5. And in light of these good results, but also in consideration of the good growth prospects for the coming year. The board will propose a dividend of €1.15 per share at the upcoming shareholder meeting. This represents a payout of 28% on the consolidated profits. And so our last investor call we have announced the sale of our Bulgarian bank and expect it to close towards mid-year. This was not an easy decision. And we are very proud of the work done by our Bulgarian colleagues to build one of the best banking franchises in the country. We believe that we fully realize the value of our subsidiary in Bulgaria, and the capital generated by this transaction will allow us to accelerate our growth in other key markets.

4:01 I would also like to highlight the very good progress we have made in retail and specifically in driving to digital transition across our markets. We have reached or exceeded our ‘21 target and have now set ourselves further ambitious targets for 2023. We have over 7 million digitally active customers, many of which are active on mobile, and we now aim to reach 10 million by 2023.

4:31 Mobile penetration is in line with our target and more importantly, we have significantly increased the mobile penetration in our lowest scoring market. Our share of digitally initiated sales has continued to improve throughout ‘21 and more than half of our personal loans are initiated online by the customers. As we look ahead, we will focus on fully end-to-end digital sales across all core retail products.

Finally, in ‘21, we have signed the United Nations Principles for Responsible Banking. This is an important first step towards integrating ESG into the steer in our steering and risk framework. We have performed the impact analysis of our portfolio and we have chosen to focus on climate change and resource efficiency, as these are the impact areas most relevant to RBI. Next, we will set our targets in line with science-based targets in 2022. We will of course update you on our progress in this regard.

5:40 I will now move to the next slide. And here we have the traditional quarter-on-quarter results and I think what I should rather than talk a little bit more in detail on the next slide is on the net-interest income and then the net fee and commission income, I mean, what you also have seen here is substantial increase of OpEx, this comes from some stuff increases, but also quite a lot of marketing expenses in some of our markets, TV and online marketing. And of course we had higher consultancy fees given our M&A activities than what we usually have in the head office.

6:35 If I may move now to the next slide, then here, I have to focus your intention on the fantastic NII in the quarter. But yeah, we will have to be aware that after detailed discussion what we have within our finance division. We came to the conclusion that our preferred approach, so to account, the bonus, what we get from the TLTRO over the full period might not hold in any audit by the external ones. And so we came to the conclusion that the best way is to consume it. Unfortunately, I have to say in the fourth quarter. This had a positive impact of €61 million and this also means that €41 million which we're relating to 2022 to 2024. We already consume the – in the fourth quarter and one has to be aware that in addition to that, we had some positive impact like, effects this time was positive on the NII from rural and from the Caribbean (ph), we had a significant loan growth, which adds more than €20 million and of course, the rate increases were also contributing well above €30 million to the overall improvement.

8:16 The other thing, what we like very much is also the NFCI, where you can see that we are well above the pre-COVID level as Q1 2020 was still a year, we found the quarter, we found COVID. And so we are very happy that in all the areas, so we were able to improve substantially.

8:44 Moving to the next slide. Here, I have to report on the exposures what we have, which are related to the geopolitical tensions, what we face. I think this in a very, very, very positive environment is, let's say the focus point, which might somehow have a negative impact on the in the near-term future, we'll see. It's mainly about the sanctions, if they will come and if they will come – in which way they will come. So you are aware that we have over the years unfortunately, got quite a lot of experience how to deal with sanctions operationally, technically, currently, we can only monitor the sanction language what we see from the US and the Europeans. And on the other hand, of course, we closely monitor what's going on in the countries itself. That just is an update for you, we have a loan portfolio in Russia, which is €11.6 billion, and you'll see in the lower part of slide number eight, how it's split. So, we have considered volume in households and SME, we have half of it in the corporate private sector and if we follow the sanction language of international community, then you see that we also have some – some exposure with potential targeted legal entities in Russia.

10:42 Our own exposure, so RBI direct exposure is, as the bank in the country is fully funded, is mainly the capital, which is equity plus some additional Tier 1 and subordinated it's €2.4 billion, that bank in Ukraine is substantially smaller with loan portfolio of €2.2 billion, our equity exposure is €320 million, but here you have to be aware that 30% which is not included here, is owned by EBRD. Both banks, you notice from the numbers already, both banks have been doing very well in the recent years, and especially last year, contributing substantially to the overall consolidated profit of the group.

11:37 If we move to the next slide, then there is the second pain point what we have in our portfolio, which is the Swiss franc mortgage, in portfolio in Poland, here the current situation is and many of you are well aware of it, so the exposure is around 2 billion in Euro terms, it's close to 29,000 loans with an amortization of about €100 million a year, so long-term portfolio. The litigation got quite a lot of attention, the law firms and this fund – the funding units for these litigations, well-organized which leads to more than 7,000 cases already at court at the end of December and we see a strong inflow. So also for the coming quarters, months, so we expect another 300 per month.

12:48 This this huge inflow and some changes also in their rulings at court made us change our, our assumptions what we use. So we have a model and of course, input factors have to be adjusted from time-to-time. So we did it by the year end and this led to substantial increase of the litigation provisions by another €133 million in Q4, so the current exposure is now – so that the current litigation provisions to stop is now €364 million.

13:29 I mean, this is a substantial burden in the P&L, but also if we consider the provisions data from the impairments or the litigation, and they high, RWA impact what we have from the portfolio itself, but also from the related operates, this adds up to already €1 billion in total of capital, which is more or less allocated to this portfolio, which is substantial, and is especially substantial, given that the overall performance of the portfolio is still a really good one.

14:10 If we now move to the next slide, number 10. You'll see that that also in the last quarter, loans to customer grew by another 4% and this was the positive impact I have been mentioning already before, what you see is a continuous improvement in the long-term corporate loan demand, what we face here is indeed more investments, but also at least anecdotally, the one or the other, who considers that high inflation and rather wants to have a little bit more of leverage, because of that reason. There is a very good and stable development in retail, unsecured and mortgage loans at relatively stable levels and historically also relatively high. Since a couple of quarters, a statement and where I have nothing to add that the liquidity situation is very good.

15:20 Moving to the next slide, you can see here our capital ratios given the very good loan demand, the CET1 ratio is at 13.1. Below two requirement as of February 1, is 2.2, the below two guidance of 1.25, now is solely covered by the CET1. I do not go into detail for the combined buffer regime. It's more for the reading. If you look at the waterfall to the capital, you'll see that a very balanced approach. We had this nice growth, we – in the loan portfolio, we had a couple of offsetting activities, like securitization, which you probably know quite well and retained earnings and help us to be positive 13%.

16:23 Moving to slide 13, here is an outlook what we expect in our issuing activities, that we are now in the process to build the MREL requirements. So what we plan to do in 2022, you see the five countries here, Czech Republic, Slovakia, Hungary, Croatia, Romania, and also the quality what we have – what we want to, and Romania could also be denominated in Iran and of course, also in head office function we will have some further activities. In the lower part again just for reading you see the current MREL ratio requirements.

17:15 Moving to the next slide 14, here we shared with you our current expectations on the loan growth in the markets, which are – is somewhere around 7% to 9% in the core markets, which gives us quite positive outlook also for this year. And next slide, this loan growth is based on solid GDP development and here I do not even have to go into the details. So more or less all the countries in Central Europe and South Europe are in the range of 4% to 5% and the East Europe is back to the growth potential at around 1.5%. Belarus suffering a little bit from the sanctions what we have already and hopefully Ukraine will do fine.

18:24 Moving to the next slide, we decided because of this special impact to differentiate between 2022 guidance and the medium-term targets. In 2022, we expect that also the NII will grow by high-single digit percent and net fee and commission income, we still believe that the mid-single digit percent is possible. I already mentioned the loan growth, which he will be in the range between 7% to 9%. We face pressure on OpEx for a couple of reasons. But for sure wage pressure or to some digital investments, what will still continue. And in addition to this high-single digit percent OpEx growth, you have to be aware that because of the integration of Equa and Credit Agricole, Serbia entity by additional €100 million. And so we expect that, if we would exclude the one-off integration costs, our cost income ratio could be again back to the 55%.

19:48 Talking about risk cost Hannes will talk in more detail about it here just to be complete, we expect around 40 basis points. And this would mean that the, if we consider also the sale that the proceeds from the Bulgarian sale, the ROE might be or should be above the 11%. And the CET1 ratio will be again around or above to 13%. And if we then move to my last slide is the mid-term target. So here I can only confirm what you know quite well. So the 55 cost income ratio, the 11% consolidated ROE, the CET1 ratio of 13% and the payout ratio in the well-known range 20% to 50%. And with this, I hand over to Hannes. Hannes, please.

Hannes Mosenbacher

20:42 Thank you, Johann. Good afternoon, ladies and gentlemen. From my side as well, let me be sure well warm welcome. And thank you for joining us today. I hope you're healthy and I know that you are looking forward to the end of this pandemic as much as I am. As you know, I would like to start with giving you an overview where we are and when reflecting on 2021. Risk costs amount, its €295 million in 2021 and this would translate itself to provisioning ratio of 30 basis points.

21:17 Stage 3 would consume one (ph) €73 million. So you see that we again made use of Stage 2 mainly, we have received the one auto release on Stage 1. Retail Stage 3 is consuming one and €40 million and very well supported by a very strong employment market and a very healthy consumer spending in our markets.

21:46 Looking at 2021, we also have increased our precautionary provisions for sanctions and geopolitical risk in Eastern Europe a €73 million. And additional we have added not at €81 million when it comes to potential COVID-19 effects. What is not important for me if you look at it, we have known accumulate stock €450 million of provisions, including €150 million for sanction in geopolitical risk and €250 million for non-retail book, it just to re-emphasize it. The quality of our portfolio remains very strong, measured posed by the record low NPE ratio of 1.6% into very prudent Stage 3 coverage ratio of above 60%. Having a very strong and low BD of our portfolio.

22:38 As you have heard from our CEO, we have grown our loan book nicely this year and I'm satisfied that this has been done without any compromise to on writing statements and standards. Since I may assume that anyway, there will be the one other question when talking about Russia and Ukraine. Maybe I could already cover the one of these questions upfront. And let us remind ourselves, and it very well, those who are following us closely. We always and we did, so the manage our overall exposure to Eastern Europe in a way, which is consistent with our risk appetite in terms of capital allocated, liquidity and risk management approaches.

23:28 Secondly, impose Russia and Ukraine. We started the year with an excellent portfolio quality, again measured by reduce in our loan portfolio and as well as you can see, with a very low NPE ratio, NPE is a good coverage ratio. Throughout the second half of last year, we have increased of accessing to protect our CET1 ratio from the FX volatility those without saying that in situations like this, you beef up your liquidity and business contingency measures are being introduced and executed. I have mentioned the additional provisions we already have taken for sanction to geopolitical risk and of course, we do regularly review our assumption for risk cost sensitivity to be just to remind in total, we have now a stock of €150 million in this specific bucket.

24:25 Lastly, I would also like your to give you a hint on what we have done since 2018. We have included in our loan documentation, also sanction clauses which would allow either not to further provide financing or even to accelerate the repayment.

24:47 Moving onto the credit outlook and listening to our CEO and macro forecasts forecasts, I can confirm the very positive grains I have shared with you last time. When talking to our custom – corporate customer, and also looking of course to industry surveys. We see continuous in good field order books also strong confidence. Supply chain disruption seems to have lower impact from time to time going on. When thinking about our regional portfolio, employment is back on the pre-pandemic level and in some countries, we are nearly at full employment. Consumers are spending and we expect to build up savings to continue to support demand in the coming years.

25:40 Those without saying and I am – I have to do this. Let me make you aware also of the wildcards, inflation, energy prices, and geopolitical tensions. Last word on the riskless guidance, of these 40 basis points they are being inspired and derived based on this very strong economic development. We do not consider in this 40 basis point guidance, any escalation and further attention on the Russian Ukrainian situation. Since we hope that this situation can be resolved through diplomacy and without any further escalation.

26:25 I would now move on to the next page. I'm now on page 20. And talking and spending a couple of routes when talking about ESG. What you may assume and expect from a bank in our size that we have, of course deeply analyzed our portfolio when it comes to ESG, and I can confirm that we have done an ESG scoring on the total portfolio level. You noticed four different quadrants when it about brown assets, transition assets and green assets, this is what we have done. This is available and this has been rolled out through what's in the RBI group.

26:25 Last year, my colleagues convinced me that it's good if we are in first mover, calculating of finance dimensions. It was a tough and a bumpy exercise, but we succeeded. We deployed and employed the new methodology for 2022 and you will find more when we are talking about our sustainability report also has announced we have signed and committed to the principles of responsible banking.

27:38 Let me move on to page 21 and talking about the exposure. We have currently an exposure of €232 billion demonstrating a nice growth momentum of plus 14.5%. I will not walk you through the details, because you anyway have already looked at them by yourself. Let me spend a couple more words when it comes to the RWA development. Of course consistent with the strong and solid loan demand. Of course, also RWA has increased. In addition, please consider that with the acquisition of Equa, which we're very happy about also €1.4 billion of RWA came in. At the same time in Q4, a securitization was conducted bringing us a relief of €1.5 billion.

28:34 Operational risk RWAs have been very much moved and motivated by the increased provisions we have done in this restring slot the situation. Market risk is stable and also on the effects side because of the strengthening of Robo US dollar [Indiscernible] has experienced an increase. IFRS 9 provisions in Q4 and also the full year. Stage 1, Stage 2, given this very strong economic environment have experienced an uplift in immigration up, completing two releases of provision year-to-date of €32 million, quarter-on-quarter by minus €39 million.

29:24 I was talking about the sanction risk bucket, we have added in Q4 €46 million. In the full year, it would sum up to €73 million. And now you can ask yourself, hey, why is this guy talking about the €150 million. Now of course, you know that we already have done something in 2019 when it comes to the sanction risk. On the bucket when it comes to special risk factors in post model adjustments year-to-date, we would reflect €81 million Stage 3 I was talking about €173 million and on the Q4, we have seen the single default I always was talking about when talking to you and guiding. I was flagging that maybe we could see one up to three cases which would not yet be on our agenda.

30:25 On the COVID post model adjustment, I think the affected industries we have well flex to you is the hotel sector in some of the car suppliers. My final page before taking your questions is well known to you it's NPE and NPE coverage ratio, I would just repeat 1.6% of NPE ratio all time low, and a very solid coverage ratio of 62.5.

30:55 We are now more than happy to take your questions.

Question-and-Answer Session

Operator

31:02 Thank you gentlemen. Ladies and gentlemen, we may now start the Q&A session. [Operator Instructions] Our first question comes from Mehmet Sevim of JPMorgan. Please go ahead.

Mehmet Sevim

31:37 Good afternoon. Thanks very much for the presentation. And congratulations on the strong results. I have a question on NII, please. Can you please walk us through the assumptions behind your high-single digit percent growth guidance for 2022? And I'm asking because it does look a little conservative, given the country backdrop as well as the 7% to 9% loan growth expectation that you have for this year and also if you were to simply just take the 4Q NII and annualize it, that would already be some 10% growth on 2021. So if you have any more detailed colors on this, that will be very helpful. Thank you.

Johann Strobl

32:16 Yes. Thank you for the question. Yeah, the starting point is, is a very positive one. So here we fully aligned the door for us and yes, I mean the core question is, how will the, of course, the loan growth per se what I – what I have mentioned and if you assume a NIM of 2% or so should support us nicely and what you are also referring to is some tailwind from the – not fully covered in the Q4 results from other rate increases. On the other hand, I have to assume that in a couple of countries where the central bank rates are relatively high that and liquidity will be maybe an issue over time that margins could not be fully consumed by the banks. But given also the shared with the depositors, this might be the case in countries like Russia and Ukraine, also Czechia (ph). So, maybe you're right that at the end of the year, it will look a little bit conservative what we have set now, but I mean that had been and if you just take the Q4 then of course, you have a couple of special impacts what you already deducted as well. So, yes, there is some upside – there is some upside and maybe it's, as you said, it's conservative from today's perspective, it’s depending also a little bit on the competition, but we will see in the markets I have mentioned.

Mehmet Sevim

34:31 Okay, great. Thanks very much. And maybe just one follow up on Bulgaria, and your comments earlier. Do you have any specific plans on how to utilize the excess capital and, are you still looking at any M&A opportunities across the region? Or would that be more an idea of deploying this on an organic basis with your current franchise that you have?

Johann Strobl

34:56 Yes. It's, as you have seen the loan growth in the last year and also the good outlook. So I think it's, it’s relatively simply to use it organically. Nevertheless, if in one of the, let's say, two or three markets, what we always explored for M&A, the target would be available within let's say, the next 6 to 9 months, we would be ready to do so and to look at it and depends also on the competition, because consolidation now is in the interest or is a core focus of many competitors as well. So maybe it's also not so easy that you win the one or the other transaction, but the markets, what we are looking at is still checkout, so they are very busy. If the right fit would come up to the market, then it could be in Slovakia as well and Romania would be also highly appreciated if we could do so.

Mehmet Sevim

36:06 Great. Thanks, thanks very much for your very helpful comments. Thank you.

Operator

36:15 And our next question is from Izabel Dobreva Morgan Stanley. Please go ahead.

Izabel Dobreva

36:22 Hello, thank you very much for taking my questions. The firstly, I wanted to ask you a follow up question on NII and how you're thinking about the deposit betas or the deposit pass of the higher rates on to the depositors. Because the moment the forward rate outlook is a little bit mixed in that there is an overshoot of the policy rates over 2022 and then it kind of comes down back again. So how do you think that's going to drive the competitive behavior in the deposit beta? Is it likely that the positive betas might stay low as a result because the banks are expecting that the kind of policy [Indiscernible] not really sustainable, so that's the first question? Then on the fees. So it's similar to the earlier question that I, in that if you sort of annualize the fees very simply, you end up with a growth rate which is much higher than the mid-single digits that you have guided us through. So could you walk us through your expectations by product fee stream, and how you expect those to develop as we sort of normalized into 2022 after a very strong growth year. And then the final question I had was, follow up on the M&A, so you mentioned the countries where you would consider doing deals, but I wanted to ask you, are there any regions where you are open to disposals? Thank you.

Johann Strobl

38:02 Thank you for your questions, starting with your first one to the NII, so maybe we have to differentiate, and my rule of thumb is that what's going to happen is first, there is a new structure on the liability side, which will appear so the – in the last couple of quarters, most of the of the money was at the current accounts, because it's everywhere, zero. And what we see now is that the rate increase take Czechia, but they call to some others, it now gets more attractive for the customers to move into deposits and saving accounts. And of course, in the deposits, at some point, you're back into normalized way where you can keep a certain margin, but you have to adjust whenever then there is a further rate tag costs, it's a risk free, it's attractive to deposit, whatever you collect at a central bank, it does not have a risk weight, it you can keep some margin you fight for your customers and as long as you don't have too long maturities, and customers hear what I see except the 6 months, 12 months, then you can afford it to pay the what's required and then this is why, yes, the sensitivity now is back in some of the markets and I have mentioned already Czech Republic, Russia, Ukraine, probably in Ukraine and Russia also that given the overall environment and the Central Bank policy, then there is no over liquidity, but it's rather, yes, a healthy normal competition, what we have in this market. So I still – I still as a confirmed before, maybe the NII assumption is conservative, but on the other hand, don't expect too much anymore. Because of the competition in the larger companies what I have said.

40:41 When talking about the fees, then then what we have to be aware of is that there is seasonality in these numbers, the starting point given our regional footprint, but also the way private individuals as well as corporates Act is the first month in the year is slow, it's a slow start, usually and the second one is this, this element what we have, from the fees from the loan business, that – it's not – it's not – it does not always work that you that you link it fully, one to one to the loan growth, you'll always have some fees from early repayments. Given the higher rates, I don't expect so much early repayments anymore. So I think this pattern will change as well. I'm still positive on the funds business. I mean, of course under the assumption that the equity markets hold up as we all hoped for and yeah, [Indiscernible] spot which is an important element. It's, it's yeah, we will see I – but I assume it can hold so the of course the 5% if I make it very simple would mean – could mean at €2.1 billion of fee income.

42:22 And your final question was would we be also ready to sell. I mean, this is a quite natural question after we were ready to divest in Bulgaria, we never excluded it. We always said if in some markets, we get an offer and now the level is rather high what we achieved in Bulgaria, if we get any decent offer its obligation to the shareholder that we have a serious look at it. And as I explained in Bulgaria, it's always what is the potential of the market? What is our position in the market? And what is the competition and in Bulgaria, for example, we came to the conclusion that probably, we would not be the one who is the consolidator in that market. And if we are not the one then probably there is little left for us in the mid-term future. And if you take these thoughts to a couple of markets, then probably you might identify the one or the other, which I would not exclude but, it's nothing is at the table, so I cannot elaborate more – in more detail. Thank you.

Operator

43:52 Next question is by Alan Webborn of Societe Generale. Please go ahead.

Alan Webborn

43:59 Hi. Thanks for the call today. A couple of questions for me. Firstly, your target for sort of 22 ROE is to be, like above 11% mid-term targets and you say it's as a result of the one-off that you'll make from the sale of Bulgaria? Would you be above 11% ex that? And can you tell us how much that game should be? You've given it in terms of risk-weighted assets. But I'd be interested to see how confident you are on the current earnings in terms of your return for ‘22? That was the first question. The second question. I think you've guided that you think your CET1 will be sort of flattish for by the time you get to the end of 2022. And I assume and I right to assume that's after the 90 bps improvement as a result of the Bulgarian sale, I can see that you've told us about a couple of the RWA increments that you expect across 2022, including because of some of Poland. But could you just walk us through overall, how you get to that sort of that flat level? And are you happy with that or do you feel that you should actually have a slightly higher buffer? And it doesn't mean anything in the short-term about dividends? Maybe you want to be fairly generous with your 1.15 that you've given today. But I think could you talk us through your views of capital and how that relates to sort of the dividend targets for the for the mid-term and is that still the case for the 2022? That would be that one.

45:53 And then I hear what you say about that being one or two exceptional elements in terms of NII in 4Q, but presumably in in the markets where there are, we've seen further rate rises towards the year end and I'm thinking of the Czech Republic, in particular, presumably, you're expecting to see higher margins versus the Q4 level as we go through into ‘22. Thank you.

Johann Strobl

46:27 Thank you for your questions. It's very helpful, I think for clarification. So I think if we – if we start with your ROI question, it will be without Bulgaria, I do not assume that we would be above the 11% reason for that is and I had to indicate that the OpEx pressure where I saw their highest single digit is the first element, which creates pressure. Let me explain on that we build up in the IT area more headcount over the last couple of quarters. I'm – I tend to say that probably we do large extent, we have now hired what we need maybe in one or the other area, we still need to hire something more number of people more, but overall, it's, we have developed very well, and these people are highly paid, and you got the first sense in Q4 for them and the reason for that simple that of course, we’d like to talk about the digital developments. We like to talk about new services for our customer, but yes, it needs quite a lot of investment there. And definitely and probably if you look at 2019, sorry, 2020 and 2021, you see that if you add up bold the numbers, that in terms of print reduction and reduction in the back office of people, we achieved quite a lot, but yeah, these people are more expensive. So this is the one the second is that we are also developing a pure digital bank, which is built on a new technical infrastructure. It's in the setup phase. It not earning, so there are no revenues on it. And the third element is that compared to the cost base of two years ago, the investments in cybersecurity are increasing tremendously. So we are now in the mid double digit million amount what we are investing and if you add this all together, and if you then because we might also have – we probably also have throughout the year, higher capital pace after the sale of Bulgaria then and some slightly back to normal, not full yet in the risk cost and probably in without Bulgaria, it's rather 10 to 10.5 ROE, what we should expect than the eleven. So this was your first.

Hannes Mosenbacher

49:50 The second, which anyhow relates very much to that is to walk you through the CET1 ratio and probably was not very much in detail, but what you can assume is maybe it's twenty basis points higher than what we have now. We would come from, and this is rather effect of the envelope calculation, than any precise number, but to give you an idea you might add 90 basis points as you said from let's start with retained earnings. This could be 90 basis points from all what I have said. If you just take the gain from the sale of Bulgaria. So now I split the 90 basis points 50, you might as a capital build up. You have to [Indiscernible] and some others. So if I adopt these numbers, this could be 130 basis points one. But then if we assume a 7, just 7% RWA growth, which then as a loan growth, 7% to 9%, this might be €7 billion RWA which is 100 basis points and then I think we discussed several times that there are some inorganic effects as well. The regulatory requirement for structural hedges has changed. There is – this RP repair program and some other elements which are, might cost us 30 bps and then there is another, RWA requirements from the Polish litigations which is also another maybe 30 basis points. Yeah, the RWA what we have to do consolidate from Credit Agricole. Yeah, on the other hand, you have that the consolidation impact from Bulgaria, which will pay 40 basis points as we have €3.3 billion of RWAs. Yeah, we intend to have some securitizations. So overall, if we net this up, we have €110 from these many RWA impacts and so this in detail or in total is 10 plus 20. So yeah, it will be above it can even be that in the first quarter with this inorganic effect, we will be even below the 13% for one quarter, but this is not a headache for us and maybe also in the ROE, I did not mention that probably the story in Poland is not fully over. So, we added €270 million this year – the last year, but probably also we capitalized we are well covered P&L wise, it still might have a negative impact.

53:16 And your final question that was the NII – the dividends sorry, thoughts on dividends? You said as well?

Johann Strobl

53:25 Yeah, yeah, it with the 1.15, we feel pretty fine and of course, here it depends, you see that we are rather cautious. So, of course, we should have a stable dividend over the coming years. And, and as soon as we see, you know, that at some point there is this, this, as I said before, we have reached the level of IT development sources what we need, so they should stabilize, the investments should move into revenues as well and on the other hand, the one-time consolidation cost should disappear. So, in the long run, this should – you should give us over the time, more potential, if we talk – if we talk about several years now, so, for sure, we aim for higher than the 1.15, but this is also well, well-reflected in the rather broad range, what we have is a payout ratio.

54:40 And you have one more which is Q4, this increasing rates. Yeah, in the Czech Republic probably there. The more we see another NIM improvement by 10 basis points to 15 basis points, we'll see what we can get in Russia from the states rate hikes, not too much, maybe 20 basis points of Hungary. Yeah, another 20 basis points Ukraine, maybe a little bit more than this 20 basis points as NIM improvements.

Alan Webborn

55:18 That’s very helpful. Thank you.

Operator

55:23 Next question is by Mate Nemes of UBS. Please go ahead.

Mate Nemes

55:30 Yes, good afternoon. And congratulations, very strong set of results. I had three questions, please. First is on cost inflation or a follow up on cost inflation. You mentioned the reasons for the strong growth and strong expected growth in costs, namely salary inflation, digital investments and cybersecurity. Now, if I recall correctly, at the time of the Q3 conference call, you expect the cost inflation, an underlying basis of around 5% to 6% and at that time, so I'm just wondering, what has changed since then, presumably, you are fully aware of the digital investment needs and in cybersecurity. So I'm just wondering, is the delta essentially coming from higher than expected wage growth? Or is there anything else beyond that as well? And related to the cost side, I see the €16 million increase in costs quarter-on-quarter in Russia and apologise in fact, I missed anything. But if you could provide some color on that pickup.

56:40 The second question is on Poland. Could you perhaps help us understand if the current provisions that you've set aside now do cover the expected inflow of new cases? I think you mentioned 300 cases per month expected and in 2022. Or, if that is the case, you would still have some sort of baseline provisions set aside per month or per quarter. And then finally, just a qualitative question. I think the – in the second half of last year, we were talking a lot about the nature of new lending on the corporate side [Indiscernible] Eastern Europe. Mainly those loans were related to working capital financing and then shorter term in nature. I'm just wondering if you're seeing a change in that environment or the nature of the demand, are we seeing more investment type of loans? if you could comment on that, that would be really helpful. Thank you.

Johann Strobl

57:48 Yeah, thank you. Yeah, thank you for your questions. Indeed, what we what we had hoped for and what we said in Q3 is the €100 million I think this is what we confirm for the integration of the two entities Equa and Credit Agricole Serbia, so that this is has not changed. At that time the 5% to 6% the growth on the on the OpEx was, what we see two things is the one is yeah, in some areas like IT, in some countries, it's above the 6%. So, the average what we have built in all the countries, so, the 5% to 6% was an average over the cost base of all the wages we see in all the countries some more pressure, which makes us now more cautious and it's rather about 8% then then the six what we have indicated. So, this is additional pressure, which are – which what we feel in these days and the pressure is coming from almost all of the markets. So in most of the markets, we are rather at the upper end of the range, what we had in the in the Q3 call, or maybe even above that. And another example is Russia, which is – when you ask where did this huge increase come from several issues, so that the one is in Russia, we usually half or maybe this time more in the group as well, quite a lot of seasonality and just to give you one number, the Russians increase their marketing spend, so TV and digital marketing by €25 million just in that quarter. So, I mean, Russia is now the market where customer growth is a function of your marketing spend and the Russian operation in retail is from my perspective very successful. So, they on boarded the 750,000 new customers last year, and I think they can increase this number even further, but you need to spend in marketing.

60:39 And they hide a lot of people this this what I was also referring to they in a big transformation process. They now have 2000 people in IT already. So they added another about 300 or so and this what I meant is I now assume see what the market requires. But I now assume that that these people are that in terms of headcount, we should be there and and what comes in the future is probably more involved additional wage pressure. But these were the and as I said, one element. So not both by that neither the marketing nor the additional added people would explain everything. So, obviously also there was a seasonality in the licenses they have to pay they, it seems that the waited rather till the year end with paying so this is something, which is seasonality and you do not expect it every quarter.

61:51 So this was Russia and the huge increase and when talking about Poland, I said before the model what we have assumed so over the, it's somehow forward-looking and it assumes and two or three elements the one is the number of new cases we have stated that it's about 300 what we expect the month and then there is some adjustments in the ruling what we have seen so far. So currently it's that they're rolling in the first intense is rather negative for banks and also it goes into the direction of an element. There is quite a lot of uncertainty. What finally would mean an element, but it's reflected in the higher provision litigations.

62:56 And then there was your, the nature of corporate loans. Yes, Hannes will you a flavor on that.

Hannes Mosenbacher

63:02 Well, if you're talking about pressure, we see it split into parts are part of it – substantial part of it most was especially in the Q4 for [Indiscernible] short-term in the remaining board would go in a little bit longer-term, but definitely we would have – we have been willing to also provide longer-term financing, but what we have seen especially in Q4 is very much dominated by short-term loans.

Johann Strobl

63:35 And I understood your question was broader reflecting also to my presentation, and if you talk at the overall group, where you have seen the significant rise in long-term, so I think here, this reflects positive sentiment of our customers. Many of them now are again in an investment process. Some of them probably start to pick up. I mean, this is – that's not systematically what I say no, but anecdotally, I can share that that some customers who rather would not need long-term funding. They see some inflation pressure and they – for them to go rather long-term instead of short-term is one way to make use of this inflation as they stare asset base is rather – for the asset base is rather positively contributing in such an inflation environment.

Mate Nemes

64:47 Thank you very much. This is very helpful color.

Operator

64:54 Next question is by Gabor Kemeny of Autonomous. Please go ahead.

Gabor Kemeny

64:59 Hi. A few follow up questions from me, please. Firstly, on Polish FX mortgages, yes, if you could provide some color on this up to €3 billion RWA uplift, which is quite substantial, and I guess a large part of why you are not expecting meaningful capital this year. So what actions can you take to mitigate this RWA uplift and by my very quick calculations, it would mean that you would end up allocating at least €1.5 billion of capital to a portfolio of €2 billion, which is not profitable at all. So I guess not idea from a shareholder perspective, what actions can we take here? Have you considered potentially writing off some of this portfolio?

65:50 And the second one is on the macro overlay provisions? If you could remind us how much do you have and what kind of releases do us, you mean, the 40 basis points, provisioning guidance. And just a final clarification on NII, you talked about depository pricing, potentially, I think in Russia, Ukraine and Czech here on the retail side? Have you actually repriced deposit so far in these countries? Or is it something which you are just expecting to come later on? Thanks.

Hannes Mosenbacher

66:30 Gabor, well, I can start with the first couple of questions you raised to us. And I completely agree with you. That of course, this is a black hole when it comes to capital allocation. This is what we also always flecked that it's a triple counting. It's not just a double whammy, it's a triple counting. So we have this high on the line risk weights of 150% for the Swiss franc mortgage portfolio, right? If you would be in a standardized approach, this would demand up to 35%.

67:06 The second thing is that we had to edit these legal provisions. So financially, we already taking care about potential future legal claims and because we're doing this via grating operational risk and if it's been accepted the €1.5 billion but it's outlined by our CEO, you have seen what we already have allocated today. And we deemed it necessary to [Indiscernible] that because of this increase the provisionings we have allocated, of course we will also have an increase in op risk. Believe me at this time I would not like to give you any further insight, but of course, of course it's an hour on top of our agenda that we keep on working how we could further mitigate this strong dynamic on this part of the portfolio.

67:58 On the BMA, but it is very important, and you raised your [Indiscernible] on the BMA, let me reiterate what is currently attend. So we have €253 million on the non-retail side, €80 million euros on the retail side and some €114, €115 in total amount or is the sanction stock or you could say sanction in geopolitics in stock. What is now important these that in our guidance of the 40 basis points, this would be cross fingers. So they would assume that we would not make use of these payments. Some of the retail allocated BMAs of these €80 million. Some of them are self-consuming. What is the background of this €80 million, it has two main reasons the one is in Hungary, we again had also last year and not around of moratoria and therefore we have allocated some BMA? So to say let's see how these clients which then already would be for a very long period of time in a moratorium like situation. If there might be the need of having provisions allocated. At the same time, given this very good employment rate, this long rows and the salary grows also, maybe here we could see that some of these provisions even could be released, but the €253 million allocated to the non-retail and the €114 million we would only consume in the case and the guidance we have shared with you is cross. So this would be if there would be no consumption offer any BMA. I hope it helps.

Johann Strobl

69:56 And to your other question Gabor, the deposit repricing indeed, there was a repricing already. So in the Czech Republic and saving accounts to take just one product, there was already an increased by 90 basis points and we expect already in this month, another 100 basis points hike here. Got it. I mean, this is not probably the biggest portfolio and there might be some caps, even more sensitive term deposits, which you're we've already had a 200 basis point rate increase so check customers now are really get rates again and when talking about Russia. Yeah, 200 basis point increases in the savings accounts area, out there even products which are tied to most prime also, this is not a huge number, but just to give you a flavor, what's going on in the market and term deposits are relatively sensitive. So, of course here, it depends on the customer segments as well. But this is the reason why I said that there are limits after some central pain to great hikes where it to a large extent goes to the customers and maybe you benefit in timing a little bit, but not that huge. Thank you.

Hannes Mosenbacher

71:39 Gabor, I still owe you one more answer to your question. This is her the overlay on the non-retail would sum up to €29 million.

Gabor Kemeny

71:51 Got it. Thank you just a small clarification. Did you mention that in Czechia on term deposits, you raised rates by 200 basis points?

Johann Strobl

72:05 Yes.

Gabor Kemeny

72:08 Okay. Understood. Thank you.

Operator

72:11 And our next question is by Olga Veselova of Bank of America. Please go ahead.

Olga Veselova

72:16 Hello, thank you so much for the call and for [Indiscernible]. Yeah, few questions from if I may. My first question is about your issue plans, you mentioned that after Q1, you think about it issuing subordinated debt, I'm talking about additional Tier 1 given the poll date in December or do also consider adding some Tier 2 capital.

72:49 Second question is about group cooperates and markets divisions, fee and commissions to the year grew versus potentially 28%. So I was wondering, what drove that? Are there any big one also? Is it something like a new normal? And my third question, you just mentioned that many cases in Poland are resolved and favorably for banks. So how unfavorable are those resolutions? Is it like forgiveness of principal and interest? Or is it retroactive conversion into policy more say, of both interest and principal with maintaining the same low rate as was constructed in Swiss francs? So how bad is that?

Johann Strobl

73:53 Yeah, thank you. I probably will ask you then, once again, for your a second question. Maybe I was a little bit distracted when you're starting already thinking about the first question but let me answer first. The first question, so 81, of course, given the, yeah, what we see from the sale of Bulgaria, probably is in these days. Maybe not an urgent issue, I have to say, but I can't say more. It's not fully out of consideration. But maybe not in the near-term. Here too, there is something which is running off. So this might be considered but as I said in my presentation, the focus is what you for sure can expect is senior and covered funding, so this is the one.

74:58 The third question, I also got this this was the outcomes and the Polish courts, I think here the real uncertainty, what we have is that there are some courts who are deciding, and I hope, people in Poland forgive me when I say it like this, but sometimes it look like an automated decision. Also, it comes. It's a very quick process, and it ends with against the bank. This is something with if you look at the rulings over the last three to four years has changed significantly. And this is a big concern for us. Costs this then, yeah, raises a couple of more questions. I think the issue what we have is that these six principal questions, which have been addressed by the President of the Supreme Court to the full chamber, are not answered yet. So we don't have a clear direction in Poland, what finally, it could be what we are where is that, of course, these legal firms are going for more and more and more, they would prefer to have an element and no use of capital, as bankers say, in terms of, let's say, legal terminology, one might say, no enrichment by customers costs, they might have used the capital over 15 years or so. They have bank would have suffered from the inflation and whatever you have customers would have profited from the real estate is inflation, neutral or even inflation positive. So a couple of really substantial questions have to be answered by the European Court of Justice, as well as by the Supreme Court in Poland. And so that's a broad range and quite a lot of uncertainty, what we face in these days.

77:17 And now I come to your second question, where I have to say I was distracted, so maybe you could repeat it.

Olga Veselova

77:24 But yes, yes, of course. So, in the corporate financial segment, you have very large increase in net fees and commissions a year-on-year, like 28% for the full year 2021. So I was wondering, there are some one-offs in that segment or is it sustainable that you will be earning that much like north of €500 million in fees and commissions just in the corporate market?

Johann Strobl

78:07 Yeah, we had, let me look it up in, we had a very positive issuance activities. We have green bonds and a couple of others. So this was substantially good, but also in the guaranteed business we, we had done exceptionally well. Yeah, I think what one also has to consider is we had some reclassifications in the business. I hope this answers at least popular your question.

Olga Veselova

78:51 Yeah.

Johann Strobl

78:55 Let me one second. Yeah and what I should also mention is that, that we had a couple of repayments, which are yeah, there are then some fees, which we which we collect as soon as early repayment happens, they're usually the fees are amortized over the lifetime of the loan. But if the, but this is an accounting issue, now, it's paid anyhow, at the inception of the loan or when you contract it, but if there is early repayment, then then of course, it's accounted for the day of the early termination. So this is a well amount, a big amount as well.

Olga Veselova

79:50 Okay. Thank you very much. It helps a lot. A very good follow up on issues. You mentioned that you're covered and the senior bond – senior preferred. So you're not learning anything non-preferred for 2022?

Johann Strobl

80:06 Not on head office level.

Olga Veselova

80:09 Okay. Okay. Good. Thank you very much.

Operator

80:14 And our next question comes from Andrea Vercellone of BNP Exane. Please go ahead.

Andrea Vercellone

80:20 Good afternoon. Two questions on my side. The first one is just a clarification on the restructuring charge €100 million. I just wanted to make sure that is purely a restructuring charge and not a restructuring charge plus the extra cost of Credit Agricole, Serbia and regardless of what the answer is, can you remind us? What cost savings do you plan to unlock in future years because of this restructuring charge? €100 million to me, it's quite a lot, given that these two businesses are not gigantic, let's say.

81:05 And then it's a second question. I just wanted to go back to the operational risk link to switch from mortgages in Poland. You already have some, you flag that there are €3 billion more RWAs coming? Can you just explain us a little bit the mechanics? How long do they stay on your balance sheet? Because it's a lot. So this is a very long tail portfolio. So is it €3 billion forever? Or for 20 years? Or when does he start to fall off? Because it does make quite a bit of a difference.

Johann Strobl

81:54 So let me start with the integration costs. So the €100 million are to understand the total impact in 2022. And if we, if we look at it in detail, then it's about €58 million, which is related to Accra (ph) and you have to be and you are aware that in Accra, we consolidated half year, and so you have to add an additional €28 million running costs and the difference to the €58 million to €30 million these one-time integration costs, mainly IT, but also some costs for layoffs. So 28 additional running and if we talk about Serbia, then it's okay. They come in newly, it's about €30 million running costs and I think you have considered this as well. And you have €12 million of integration costs in Serbia. So if I may add up for the two banks, you add €58 million in total as running costs, and you have this €42 million one-time integration costs. And what you save on the running, it's about 30%, 40% of what we have from the smaller cost base, usually, I think, here you can work with the basic assumption, what you usually have in or up to 50% in, in most of the integrations as a rule of thumb, and we will report on that, of course, ongoingly and op risk, I mean, it's a tough question. I mean, here, I would assume that it definitely will not stay forever. I now having an interest for the bank, I hope it falls off, as soon as we have solved the issue. Because if you say, it's a very specific element, which is Swiss franc mortgages, which is gone. I mean, I don't hope that anyone comes with an idea and says, guys, this is unrelated to any activity, and this is just because you exist or so not a bit cynical. But I would assume there is a fair chance that as soon as we have solved this issue, then it's also taken off.

Hannes Mosenbacher

84:59 And just to be added besides that there, because it's very specific on this portfolio. And of course, it would not be representative to the remaining of the RBI portfolio. As you know, many other Swiss franc issues have been sorted out and latest with the introduction of the new Basel four rules, we believe that there is a new method and a new approach to be conducted and here we would expect, changes on how these cases needs to be reflected, as I said, for me, it's a triple counting in the underlying having high risk weights, then doing the provisions and then being also scrutinized on having these elevated op risks to be allocated.

Andrea Vercellone

85:49 Is it as simple as saying as to say that if the rules don't change, as long as you have the Swiss franc loans, the risk-weighted assets – the extra risk-weighted assets stay or is not as simple as that.

Johann Strobl

86:10 I mean, debt that's now guessing, but I assume it's not the simplest they stay, as probably regulate, at some point will, will acknowledge that the risk is gone and then it's adjusted, but clear as long as you neither have a ruling nor whether but, at some point, I also assumed that look, my – to make it very simple. My basic assumption is that at the end of the day, it will be perceived as, as a portfolio with various risks. And I think if I follow the way I followed the discussion in Poland, where the RWAs are already these cars. So here, I would say that's exactly the approach we can expect that at some point in time having more provision than their outstanding probably is not expected.

Andrea Vercellone

87:19 Thank you.

Operator

87:24 Next question is by Johannes Thormann of HSBC. Please go ahead.

Johannes Thormann

87:30 Good afternoon. Just some follow up questions on my side. First of all, on the Polish provisions, if we take a simple calculation, this is a coverage ratio of 18% of the portfolio, which seems low compared to some of your peers at least, which have doubled, the coverage ratios and then the remarks about those court verdicts are going against you or going against banks at least, do you still feel comfortable with such a low ratio or do we have to expect something like the same burn we've seen this year as Polish of ethics provisions of €287 million also in the next year?

88:13 And secondly, on your payout ratio? Do you rather go for stable dividends and then the stable payout ratio or could you also envisage an acceleration of the payout ratio to come to the upper end of your payout range? Thank you.

Johann Strobl

88:35 Yeah, talking about Poland, I think the difference is that some of the banks with a higher coverage ratio, they offer settlement agreements, to a broad base of customers. We only do it for some customers, which where we also already have pending court cases. So this is the big difference. Could it be or will it be? I don't know. But could it be that maybe not at the same level? I don't hope so. But could it be that also in the next two years? We need further litigation provisions? Yes, I, in answering my question also of the potential ROE, why not better that was somehow included that if there is not the substantial changing rolling and what we see as and further inflow of new court cases, then we have to do expect maybe or the next two years or so, maybe not at that level, but significant amounts of litigations, if that happens, we'll see. But, you know, as long as we do not come with a settlement offer, I think it's you have to use a model to calculate this litigation and as I explained, this is the model which we agreed with the – with our auditors and yeah, we would.

90:11 If we change the approach, then then we would also have different litigation provisions. But currently, we keep what we have. And the reason I mentioned earlier, is that we tried to do some settlements, but we don't feel that any settlement even if customer agree, we'll give us legal certainty what we aiming for. So I mean different to others, we would like to get a different legal framework in Poland, before we become with a broad settlement proposal to customers.

91:01 And for your payout ratio. I mean, here, as long as we have good growth opportunities, I think we want to keep that range. I mean, if you look at midterm planning, and you say that loan growth, because we are moving back then to a less exciting world with maybe loan growth rather 5% than what we see now. So little potential then this would mean that we could increase the payout ratio as well. But I mean, as long as we feel that, that we can create value by growing the loan portfolio and this is in essence what we tried to do and how we sold Bulgaria because we think adding more loans and business to the current infrastructure in some of the markets is also a way to scale up our business and should be value a creative and, but this is the range of thinking.

Operator

92:24 Our next question is by Robert Brzoza of PKO BP Securities. Please go ahead.

Robert Brzoza

92:34 Good afternoon, everyone. And thank you for the presentation. I have just one question as most of other issues have been answered so far. This is on the potential sanctions against Russia regarding the talking of the Russian banks on the SWIFT, transferring system, can you provide us with an estimate roughly, what percentage of transfers and possibly FX exchange business would be affected in such a case and secondly, whether you are preparing for an alternative solutions? For example, would you be able to utilize the Russian system of financial messages just in case the SWIFT was cut off? What's your view on the topic? Thank you.

Johann Strobl

93:31 Well, let me start there. And it's a far reaching topic anyway and I'm sure you all know that SWIFT by itself is a messaging system and as we always claimed, of course, the financial institutions are being an integral part of the economic dynamics interactions. And SWIFT is a very helpful and well-established messaging system, it's not the payment system. So I think we could differentiate between three different circuits of payment, the one is within the country, and I'm sure you're aware of that the Russian Central Bank most introducing a payment system for the Russian market, first thing.

94:19 Second thing is, when it comes to standardized payment orders between RBI and ref hasn't been Crusher, we could use our internal payment system, but then there remains the vast majority of the international payment flows. But where do these payment flows come from? We have an economic interaction with Russia and goods being exported from Russia to the rest of the world between €250 billion to €300 billion. And these goods must be paid and currently, the industry is using SWIFT for this. So when talking about alternatives, and I was flagging, two of them was in the country in when thinking about our own network bank, our own subsidiary, but of course, I think it would cause a tremendous impact to the entire financial world, if you would go very, very, very broad on this SWIFT topic.

Robert Brzoza

95:32 And what is roughly the share of the Russian related business overall [Indiscernible] very like approximate figure it is like 20%, 30% of your total higher?

Johann Strobl

95:47 I do not fully get it. So what I have to confirm with Hannah's said is that of course, Raiffeisen Bank, Russia is fully integrated in the Russian payment system and messenger system. And, in that way, they could deal with it and then there, I don't expect any big issues maybe in today's still the loan to customer switch to it. But this is like any system change what you have. I think what Hannah's indicated is it's more about the cross border payments where it would take probably weeks still, they'll then use systems if the word can work, but this would really be an issue. So for a huge number of transactions. So maybe the smaller amounts, it will – there will be delays, though operations are set up in a different way. That important big warns you can deliver much easier and they're also within the group there are some alternative ways not for mass, but there are. So to some extent we are prepared, but not in a way that that we switch from one messaging system to another overnight and one would not feel any, any delay or disturbances or problems. I mean, if that would be the case, then probably no one would talk about sanctions at all. So here you probably this is the powerful part of it that that it will create problems.

Hannes Mosenbacher

97:42 And then the FX business of course it depends if it's within RBI and if it's main pressure or if it will also include an impact data bank. So I think this topic by itself would create all these these [Indiscernible] entities, topics we have mentioned. So the impact on the [Indiscernible] FX business, I think is not the most dominant and important factor.

Robert Brzoza

98:11 Okay. Thank you very much.

Operator

98:16 Next question is by Riccardo Rovere of Mediobanca, please go ahead.

Riccardo Rovere

98:22 Thanks and good afternoon to everybody. Getting back one second to the last topic. Maybe this is a question for foreignness. If you had to throw a ballpark on Russia and Ukraine, and if I asked you, what will be the worst case from risk management perspective, what would be the case of just wiping away the whole equity you have in Russia and Ukraine. Because at the end of the day, maybe this is the way the market approaches. Just to find out what the worst case might be, and then eventually touch into mobilities to events. But if you could share some thoughts on this.

99:13 Second question I have is, in the previous presentation, you provided a useful table with NII sensitivities to write in Q3, which haven't seen in this presentation might have missed it [Indiscernible] the numbers that you provide to Q3, are those still kind of valid? I would imagine so, but I want to hear that for you from you. Another question I have is on ticket notification when you provide the 40 basis point off the – risk of the just guidance, but doesn't in ’22, I understood that this does not include any forced modal adjustments, the location, the use, or location or eventual release of post modal adjustment that you charged in mostly in 2020. I just want to be sure I understood correctly. And if this is the case, I remember once I read in one of your reports maybe was full year 2020, that according to your policy, those post modal adjustments should stay there for maximum a couple of years. So I was wondering whether this is the case and can those be rolled over into 2023 and eventually, even beyond 2023.

100:47 The other question I had is on just with connecting to a previous question, I think from – I think was from Isabel (ph), when she was trying to get a sense whether you consider your fee income guidance for 2022 as kind of conservatives, you state that there is some level of conservatives in your guidance. It's not clear to me whether you can see that the guidance you gave us on fee income and begged in some level of cautiousness to and last thing I wanted to ask you is on the Bulgarian capital gain that you will look at some point. What is more or less the amount? And would it be tax free or tax deductible? Thanks.

Hannes Mosenbacher

101:41 Ricardo, you gave us a nice list of deep questions and if I would start and believe me, I know that many people are currently eager to explore this worst case estimate, for me the worst cases would be if people human beings will be physically are impacted by this very, very challenging situation.

102:06 Coming to the financials, this was one of the reasons why we have added again and reminding ourselves what is the current equity position and the things what we are demonstrating here is summing up the core capital CET1 and Tier 2 to Russia was €2.4 billion euros. This is one part of the equation. And there's a good research out there. Also, of course saying well, if these worst case come in, you would not just maybe lose this €2.4 billion euros in CET1 terms, but at the same time, of course, also your auto plays would be gone. And what we did not talk too much about today and I was indicating it in my introduction, of course, we have also heavily increased our hedging over the last couple of weeks, and here we are now on the size of €1.4 billion.

103:08 So, this is you know, if somebody starts playing around with this worst case assumption, please bear in mind, the one is the equity, the other one is sizable hedging amount we have this developed and established also RWA would be gone. And in addition, you could of course, ask, how much of cross border financing are you doing? And in this specific case, I would believe, you know, it is really just about those loans, which are being provided from head office or from the [Indiscernible] to Russia to the country. And here we are talking low, triple digit numbers when it comes also to the gross border, on the corporate side. So for me, this is the, the maximum loss scenario if you try to explore on this one.

104:03 And if you allow me, I would also take the next one on this 40 basis point Briscoes use of BMAs, how long can we keep them? Yes, you're right in, then I'm very happy that you're so careful in reading our material and of course, you're right, that usually, the auditor would say, guys, listen, if there's a specific risk factor, what you would like to employ, where you say, hey, it's not yet in your model, then you have two possibilities, either you included interior model, or it materializes. And but I think, given this current very specific environment, and when we talked last time, I think nobody will thinking at least not hoping that we could see or another lockdown in Q4 that we have now a virus with Omicron, which is causing high effect numbers. So we found straight in easy agreement with our auditor, that I think we would be well advised still keeping also part of this BMAs and the second big part of this BMA is going with the supply chain topic. And also here, we are not yet done. So the one to two years, this was when we when we were reflecting this are in our notes, saying usually we shall not have them longer than one or two years. But like you, I think, given these circumstances, which we are facing in all stakeholders are well-advised that we can still keep them.

105:47 As soon as we see that the underlying factors are mitigated. Meaning we would see that there is a good booking order on hold, believe me, I'm happy being one of the first one having had a release here in there. So again, the 40 basis points would be the gross amount. Part of the BMAs mainly on the retail side, I was flicking them this €80 million part of these BMAs would be self-consuming. Because, if moratoria clients which are currently still under moratoria would not default I would have to and I can and I shall release these BMAs and as we also have done already wants in check here we were allocating some BMA because of the strong increasing yields, that we are financing on a fixed rate basis. And usually we do mortgages on the first five years on a fixed rate basis. So, you could say 1/5 of the portfolio is running off our each and every year and of course, given this new interest rate environment, we also have higher monthly installments, what is the mitigation, higher salaries. And, on the portfolio level, we have allocated here a little bit of these BMAs.

107:09 So as soon as declines are, get risk, have these new rate and they're performing also have to release this BMA over the next two to three years. This would be my answers to this worst case estimate in 40 basis points of risk costs, Johann.

Johann Strobl

107:31 Okay, thank you Hannes. I think the other questions one was the NII sensitivity. We talked about already that in a couple of products, quiet a lot of these rate increases will be passed on to customers passed on to customers. I mean, as a rule of thumb, one might say that if you have a 50 basis point increase, then probably the least pass through is on some of the retail accounts, the current accounts where you might assume, maybe 25% to 50%. Whereas for corporates, it's maybe 50% or more, what do you have to pass on in the other products, as I said before, so deposits and term deposits, it's rather a significant part what you have to pass on and, and similar to Romania. So let's assume that if you have a 50 basis point increase, then then quite a lot of this, this will be passed on as well. So this why I was rather cautious when talking about what you might see as conservative fee of one has, it depends on the competition as well. But that's to the sensitivity in addition to what we have said before, and I've CII guidance, the question, is it conservative? Yeah, as I said before, assuming that we have a nice market activity, then the 5%, what you add to what we had last year, this is, I should be more careful, if we assume we have for 500 in Q4. So this would then be €2 billion and if we then add up to 5%, then it's yeah, it's significant. Given that maybe the repayment fees what we have in the corporate loan area, what we discussed before, which probably might not come again, given that everyone is rather expecting that rates will increase and probably it's better to keep it in terms of your final question. The gain of some €400 million, of course, it's taxed, but as we have a loss carry forward, it does not have a direct impact on that. So this will also improve this year, our tax ratio.

Riccardo Rovere

110:37 Okay, so basically on the capital gain, on the cap, the capital gain will allow you to, to use the BPAs, forget it, right. So the BPA is also on the capital side, sugar down. The deduction related tax loss carry forward, said, do I get it right?

Hannes Mosenbacher

111:02 More or less? Yes. I think here probably we take the time in the aftermath, you talk to our experts here to John and to really have a longer conversation then what we usually do here as this goes in detail, but to a large extent.

Riccardo Rovere

111:20 Okay, that's fine. That's fine. Okay. Thank you very much. Very, very clear. Thanks.

Operator

111:28 Next question is by Hugo Cruz of KBW. Please go ahead.

Hugo Cruz

111:34 Thank you for the time. So three quick questions. When you guys are trading below book value, despite a very good IoT. Why would you not prioritize buybacks instead of the dividends, or at least have some buyback rather than just to live in. Second on Poland, for moving the price, I understand you started the pilot settlements for this SWIFT frank? You have an estimate for the timing of the pilot, and also be successful, what will be the financial impact compared to the killer proposal? And then you mentioned on the call that you've been investing on what's in the new digital bank? When can – can you give some numbers on the amount of the investment and when could we see a decline in the cost base as the investment runs out? It's not a decline in the cost [Indiscernible] returns, a recent decline in the growth rate of the cost base will be helpful to know. That's it. Thank you.

Johann Strobl

112:47 Yeah, as long as we as we believe that we have a good loan growth, which is supporting our development, due to an ROE of 11% or above buybacks is probably not on our agenda. If that growth would stall, and they are then then this could be an alternative. I mean, but it's not discussed. Now, if you would ask me, would you have technically something in the drawer? I would say yes, is it strategically on our list, then I say no, in terms of settlement in Poland, timing and financial impact as I tried to explain before, we would consider settlement if the Legal Certainty is created, which currently is not at all the case, that's my view, but also the view of our company.

113:58 So even if you settle now, you will have to, if whatever happens then in the future, which are, which customers might receive again is negative, then then they find ways to reopen it, we had the assumption with a couple of adjustments, which we added to the annexes of the contracts when we adjusted the contract to new legal developments as well as agreements with the customer. So here, we did this and under the assumption, of course, that then it's a safe environment, and nobody would discuss it. Nevertheless, we are back to the very beginning that people say whatever we agreed in the past, if at the very beginning of the origination of the loan that clause at that time, where you now have agreed that it's not any more relevant, if you at that time, it was unfair, then then we're still can go for an annulment, and this is not, not on our agenda today. I mean, where we do is at court issues, we of course, here this is we try to reduce the workload and also the time limitation is an issue. You're probably aware now, if you have a very specific situation that after three years, after a case is brought to the court, if a decision or not time limitation is reached, you either act or without knowing what the outcome from the legal proceeding would be you have to act and offering a settlement is one way to do so.

115:56 Talking about financial impact, as I said, it's only possible if we get clarity, either by the Supreme Court or something similar, so that we have a clear direction. The digital bank, this is this is a double digit amount what we are going to invest, this is like a start-up one might say fully fledged, it usually takes five years, there's such a thing is break even what I wanted to say is we have investments in two areas, one is the digital bank, which comes in addition to what we to do there, but in the other areas, the benefit in the in the OPEX we see over time already now not when talking about the digital bank, but when talking about other investments, which is the core of our investments, we see it gradually coming in as well and I mean if you look at some of our countries, where we have reduced already the people in the back office by 30%, 40%. So here will see when you talk about number of branches we have considered a very reduced it and this process will be gone for further. So I think we are on a good track and it's this combination of some new investments and this consolidation of others. But as I said, already next year we assume that we are back on the 55 level, so cost income ratio and over the next two, three years, it should go lower than this.

Hugo Cruz

117:56 Okay, thank you.

Operator

118:00 Next question is by [Indiscernible], please go ahead.

Unidentified Analyst

118:06 Hello and thank you for the presentation. So my question were more related to the potential contingency plan related to the sanction within the SWIFT bank messaging system, but I guess you also most of them that maybe another one, then it's more on the presentation you made on page 8, were related to exposures to Russia. So you mentioned a total exposure of more than €22 billion with sanction risk representing only 9% potentially. Can you maybe give us more clarity exactly on this point? Maybe I need to understand that I want to make more insights and information about what it represents exactly. And what are the main sources of sanction and potential impact on this side?

Hannes Mosenbacher

119:09 Well, let me start with the first part of the question. And the SWIFT suspension. I think what I was sharing with you, and I think the reason why so much, there's so much discussion about the SWIFT is, that it will cause her a big headache for the – in the financial market. If not, it would not qualify itself for any of the sanctions. So I was flagging to you two or three of them, the one is or in this, of course, depends very much who would be impacted by this SWIFT suspension, easy to sync account about in the country? Is it a consistent cohort of counterparts within the country? Or is it the full industry, depending on which scenario you would like to bend, of course to contingency plan look different. By all means, it will create a big hassle and challenge to all participating in order to execute payments, which are being needed in order to reflect real economic good transfers. So why is there a payment, there is a payment because there was a delivery of goods, and suddenly this payment cannot be executed. So as long as the counterpart is using RBI as a bank, we would have our internal payment system and based on our internal payment system, we could wire the money not using this standardized payment, messaging service. That's the one thing what we're doing. And we also believe that we could use this in a broader extent together with our Russian colleagues and if hasn't been Crusher for a broad audience.

121:01 Then there is a local payment system in Russia. But by no means, those two thoughts I was now sharing with you, will mitigate all the SWIFT messages, which are flying around there on a daily basis. This is what I can share more or less reiterating what I was telling beforehand. And when talking about this, or this one page, when it comes to do exposure to Russia in sanction, like counterparts, so what was our motivation to look at this one enter or how we did it, we derived this number. The way how we have derived this number is, that on the US side, on the US administration side, there are some rambling lists running around where you could say, okay, he said, there are the names, which are named on this, on this preliminary list. If you look and listen to the Congress, what are the proposals? This is where we have super short-term business outstanding. This is the reason why we call them up to 3% to €22.8 billion. This is very important. This is our local asset base. Comprising also to a big part two was our retail portfolio and also to our corporate portfolio.

122:32 But what we believe as of today, that also the National Bank or Central Bank which is our last lender to store liquidity is on the blades or is also on the sanction list? No, we would not. So just talking about your corporate, this is what we have. This is what we have in mind when talking about these 3% of targets. Hopefully, this helps to give you a little bit of color. So [Indiscernible] derived from this list of the Congress what is being brought forward to the administration where there are certain proposals you can find named errors, and we are now assessing internal high likelihood and high impact, and this would sum up to this total of this 3% we have flagged here.

123:25 Ricardo, you're still in the call. My experts told me, I was even too pessimistic when telling that we use up some of the losses carried forward. Obviously the tax structure what we have is that it's the gain is totally tax free. So let me confirm that. Thank you.

Unidentified Analyst

123:52 Okay. Thank you.

Operator

124:00 Sir, there are no further questions at this time. We will now conclude today's conference call. Thank you for your participation.