Raiffeisen Bank International AG (RAIFF) Q4 2023 Earnings Call Transcript

Raiffeisen Bank International AG (OTCPK:RAIFF) Q4 2023 Earnings Conference Call January 31, 2024 8:00 AM ET

Company Participants

Johann Strobl – CEO

Hannes Mosenbacher – CRO

Conference Call Participants

Gabor Kemeny – Autonomous Research

Simon Nellis – Citi

Lee Street – Citi

Riccardo Rovere – Mediobanca

Alan Webborn – Societe Generale

Hugo Cruz – KBW

Marlene Eibensteiner – Deutsche Bank

Mehmet Sevim – JPMorgan

Gabor Kemeny – Autonomous Research

Operator

Good afternoon, ladies and gentlemen, and welcome to the Preliminary Results 2023 Conference Call of Raiffeisen Bank International. Today’s conference is being recorded.

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

Johann Strobl

Thank you very much for your kind introduction. Ladies and gentlemen, thank you for taking the time out of your busy day to join us today. We are happy to share with you our preliminary results for full year 2023 and it has been indeed a very busy year. We have made progress reducing our exposure to Russia and we will discuss this in just a minute.

Our balance sheet is as strong as ever. We have further improved our CET1 ratio, both as a consolidated group and more importantly in the pro forma full write-off in Russia. Consequently, our MDA buffer improved to above 500 bps and 475 excluding Russia.

Portfolio quality is excellent and despite some defaults in commercial real estate, I’m satisfied that Hannes has us in a great shape. While we cannot exclude further provisions and higher coverage ratios from there, there may eventually be room for releases when restructuring and workout is complete.

Finally, liquidity remains excellent and I will touch on this in a few slides time. Operationally, we have seen good revenue growth and costs in line with our expectations. While this might be very difficult to replicate in the coming year, I’m confident that we are starting the year on the right foot.

Clearly, the biggest frustration for us this year has been the large amount of provisions for litigation in Poland. Here, I can simply share that we are broadening our settlement program and targeting one more and more for us.

Settlement, of course, allow for a less negative outcome versus what we currently are providing for. We have updated our outlook for ’24, which I will discuss in a few minutes. Before we get into the numbers, let’s go through some important items.

First of all, the Board will recommend a dividend of €125 to be voted on at our Annual Shareholder Meeting on 4, of April. As it relates to the offer request for information, I simply wish to confirm that we have submitted everything that was requested and we await feedback.

We remain absolutely confident that our systems are robust and that we are fully compliant across the Board. Finally, I can confirm that the STRABAG dividend in kind is on track. Let us move to our next slide and look at this transaction in closer detail.

On December 20 of last year, we announced the acquisition of a large stake in STRABAG initially to be purchased using equity at our Russian subsidiary and subsequently to be transferred to Vienna by way of a dividend in kind.

Strategically, this allows us to significantly reduce our exposure to Russia and repatriate around €1.5 billion. This transaction does not affect the sales process nor does it change our stated goal of disconsolidating the Russian subsidiary.

Our participation in STRABAG will be managed as a long-term investment. STRABAG is one of the largest construction companies in our region with a leading market share across most countries in Central Europe and a very solid underlying business.

Considering the current limitations on dividends from Russia, I believe this is an excellent alternative. This investment will be consolidated at equity with our share of STRABAG profits reflected in RBI’s income statement.

It is no secret that the stake was previously related to a sanctioned individual and we spent considerable time and effort diligently verifying that the proposed transaction is compliant with all applicable sanctions.

We set a very high hurdle on this point and only proceeded to sign and announce the transaction after achieving sufficient comfort. We are now in the process of obtaining the required approvals and I can simply confirm that everything is on track and we have filed all the required applications.

We expect to close the transaction in the first quarter and the full impact will be visible at our next quarterly update. Let’s move to Slide 6. And this brings me to my next slide, which is an update on the Russian subsidiary.

As I mentioned, the STRABAG deal will help us to reduce our exposure to Russia while we continue to work towards the deconsolidation of our Russian unit. Perhaps it is also important to reiterate that the STRABAG deal has no impact on the sales process.

As I mentioned to you last time, we believe that the sale is still more likely than a spin-off. Both options remain available to us, of course. But for the time being, we are prioritizing the sale. A little more that I can say today, which you anyhow know everything already.

What I would like to focus on today is the priority risking, which we have executed in 2023 and will continue to do in 2024. On the balance sheet side, you are familiar with the reduction of the overall lending portfolio, specifically in euro and U.S. dollar loans to customers are now less than 500 million and will be run off completely.

Loans to banks at this point are mainly at MOEX and the CBR for ruble and to RBI for U.S. dollar and euro. We are actively steering a reduction in deposits both in local currency and in euro and U.S. dollar.

In ruble, this is mainly achieved by pricing on corporate deposits as well as in retail saving products, as well as restrictions were possible on new accounts. It should be mentioned that there are legal requirements specifically in retail, which were diligently abided by.

For euro and U.S. dollar, we have a bit more flexibility and we have made good progress. We have also been actively steering for a reduction in payments by number of transactions, we are back to pre-war levels, which is now the cap which we have set for ourselves.

By market share, we have now reduced our share by more than 50% from the peak. We have implemented strict country and industry policies, which also apply to our trade finance and export finance business.

This brings us to Slide 7, and an overview of key figures for 2023. Group consolidated profit and ROE reflects another exceptional year in Russia and our CET1 ratio reflects both the excellent profitability and the RWA management this year.

More important, however, is the adjusted view, which we share with you on the lower row, excluding Russia and Belarus, the group earned just around €1 billion, for an ROE of 7.6%. Included here are €873 million of provisions for litigation in Poland.

If we were to also exclude these provisions in Poland and look at the underlying earnings for the bank or at least what the bank will look like in the future, we would have come to an ROE of around 15%. For the group, excluding Russia, the CET1 ratio is now 14.6%, up from 14% a year ago.

You might also choose to add 65 basis points for a further operational RWA relief, which would follow a deconsolidation of the Russian business. We will discuss this again on Slide 14. And of course, we expect a further 125 basis points or so from the STRABAG dividend in time.

Moving to Slide 8. I will again focus on the lower half of the slide and the figures excluding Russia and Belarus. Loans to customers are slightly down on the year. Also this is largely explained by low repo and money market volumes. For retail and corporate lending volumes are broadly flat on the year.

OpEx are in line with guidance, while the Cost/Income ratio remains around 50% driven by the excellent NII growth. Let’s look now closer to the core revenues this year on Slide 9, with NII up by over 26% on the year.

On the one hand, you’ll have a full year’s benefit of higher rates across the region and the continued tailwinds from euro rate tax. Also, in Q4, higher rates continue to feed through. And in Central Europe, we benefited from our treasury and hedging positions.

As we head into ’24 and expect different degrees of rate cuts across our markets, our NII guidance is expected to decline to somewhere between 4 billion and 4.1 billion. The biggest impact will be visible in the head office and in Hungary, where we expect to see the most rate cuts.

Fee income was strong in Q4. Well, on a yearly basis, it was broadly flat. In the head office, 2022 had benefited from higher volumes and margin on ruble payments and effects and this trend has largely reversed in 2023.

Moving to Slide 10. Again, we see the loan development this year, as mentioned the decrease on the year as well as in Q4 attributable to lower repo and money market volumes, while the core of the business remained broadly flat.

As we look ahead to ’24, we can already guide to a mid-single volume growth. Some of this will come from [Busan] ’23 projects and some will come from the combination of a better economic growth and lower rates.

With our very good CET1 ratio and excellent portfolio quality, we should grow in line or above the market average depending on products and countries. On the liability side, deposits have remained broadly stable.

Perhaps the only outflow worth mentioning are in head office in our group corporates and markets segment. As we discussed on our last call, we do some volatility. We do see some volatility in the very short dated, very price-sensitive deposits.

These have no liquidity value for us and we do not fund our business with these deposits. If anything, our rock-solid funding position means that we do not have to compete on price for these.

Which brings me to my next slide and the overview of the liquidity situation across the group. I will be brief there and simply confirm that our liquidity ratios are very stable at high levels.

This is true at group level at each of our subsidiaries and of course, in head office. We have monitored this very closely in recent quarters, attentive to the potential effect of higher rates, funding costs as well as spillover effects from the war in Ukraine.

In head office, where we are largely funded by corporate and wholesale products. We continue to maintain a sizable excess liquidity position supported by long-term funding activities.

As you might recall from our previous calls, we run a daily liquidity stress test in which we assume 100% customer and wholesale outflows for the next 12 months. Under these scenarios, we still would have around 5 billion of excess liquidity after 12 months.

To be clear, this is achieved by having a largely matched maturity profile on the asset side and assumes a similar run off here. This scenario is, of course, an extreme one, but it serves to confirm the solidity of our funding and liquidity profile.

Now let’s move to Slide 12, for the capital slide. Starting with the group CET1 development in fourth quarter, we improved from 16.5% to 17.3%. And I think I don’t have to run through the details here, but inorganic effects, Hannes probably would talk about it.

If we move to Slide 13, this is the outlook for ’24 for the group. We started 17.3% and we expect to end at 17.8. This comes, of course, largely from the good capital generation on the one hand. And the loan growth, which I have already mentioned, of course, some minor inorganic impacts will be also included here.

Moving to Slide 14. Pro forma CET1 assumption if we fully have to write off the Russian business. These assumptions are well known, we assume zero recovery on our equity in Russia.

There is no subordinated debt retained by head office and cross-border exposure is less than 40 million. We also deconsolidated credit RWAs in Russia and market RWAs in Russia and those booked in head office related to our Russian subsidiaries. This is how we come to 14.6%, up 60 basis points over the past year.

I mentioned before, there is further relief from operational RWA. This happens in a second stage following the deconsolidation of the Russian business and would provide a further 65 basis points uplift.

And finally, upon the successful closing of the STRABAG transaction, which we would expect to see this pro forma CET1 ratio increase by an expected 125 basis points at closing.

We also share with you the pro forma capital stack, including Tier 1 and total capital requirements for the group without Russia.

CET1 is pretty much fully supplied and we have took 23 basis points surplus on the Tier 2 bucket. Finally, the pro forma MDA buffer is now 475 basis points, including the STRABAG dividend in kind and the full operational RWA relief.

On the following Slide 15, please find our current capital requirements. At the start of the year, our SREP increased 40 basis points of which 12 basis points are from a higher Pillar 2 requirement and 28 basis points from the combined buffer requirement. Besides this increase in Pillar 2 requirement also leads to small increases in the Tier 1 and total capital requirements.

Let’s move to Slide 16. This is the funding plans for the year ahead. Our first priority is senior nonpreferred in order to support our credit ratings. We will also look to see new a preferred, so the absolute amount will depend on how new lending develops.

We will also be issuing out of our subsidiaries, in particular, the Czech Republic, Slovakia and Hungary. This, of course, is to satisfy the MREL requirements under the multipoint of entry approach and we are very satisfied with the market exist at our network banks have demonstrated.

Moving to Slide 17, macro-outlook. I think I do not have the rate, but we’re happy to see improvements compared to ’23 and this improvement will go even further better in ’25.

Moving to Slide 18. Our assumption on inflation and based on that assumption, the development of key rates, yes, the peak we have seen, we see some more or less reductions throughout the year in the various countries depending on where they start from and the development of the inflation.

Moving to Slide 19, the guidance. We assume a net interest decline compared to 23%. As I mentioned before, somewhere between 4 billion, 4.1 driven by lower central bank rates, lower rates, some ongoing restructuring of giant deposits to more expensive ones, reduced the positive impact from minimum reserve requirement interest and some higher funding costs per MREL issuance requirements.

We see some increase in fee and commission income to €1.8 billion and I mentioned the loan growth by around 6%. This is in the core group, so without Russia and Belarus, but you also see the impact then on total group level.

OpEx around 3.3 billion. We see some ongoing wage pressure and impact from the inflation. Hannes will talk about risk costs and based on all these assumptions, we see a consolidated return on equity of around 11 billion. And before the benefit of STRABAG in kind, the flat development in the CET1 ratio at 14.6%.

And with this, I hand over to Hannes.

Hannes Mosenbacher

Thank you, Johann. Ladies and gentlemen, thank you for being with us today. This has been a very busy year, but I’m satisfied that we finished the year 2023 in equally strong, maybe one even could say, stronger compared to 2022.

In line with our guidance, while talking about the guidance of the Q3 call we finished the year with risk costs of €297 million for the group excluding Russia and Belarus. The initial guidance, of course, was much higher and on the same parameters, we have increased our overlays by nearly €60 million.

We have increased our overlays in some areas while simultaneously using some of what we booked for commercial real estate. Going into 2024, we have €423 million of overlays available to us outside of Russia and Belarus, which translates itself into a one year’s worth of normalized risk costs.

Leaving the commercial real estate portfolio side just for a minute, the quality of the portfolio remains very strong and solid. With the average [PD] unchanged in 2023 despite the challenging backdrop environment.

In retail, delinquencies remain at all-time lows, supported by a very resilient labor market. Overall, our NPE ratio remains below 2%, which is — which I deem to be an excellent considering the trends in the commercial real estate space and of course, having a more in two of our countries.

In the course of 2023, our external ratings have been affirmed and we demonstrated very decent results to be modest here in the EBA’s stress test. We have belonged to the best third among the other market participants.

We could show once again the strength of our business model and portfolio quality, the resilient earning power of the bank and a forward-looking approach to provisioning. Moving to the fourth quarter.

Of course, commercial real estate was the main driver of risk costs and I talked about this in the third quarter already. It goes without saying that I will not discuss any individual names but I will, of course, comment on the overall portfolio.

So what has been the main drivers for the commercial real estate and we talked about this already more than one year ago, it’s the increasing yield environment. It’s the cost of build and for some subsegments of course, demand was also impacted, just think about the office market.

Well, you know and you’re well of, and I shared it with you that we have conducted two internal stress test on our commercial real estate exposure over the last 18 months. And we are confident that our valuations are up-to-date.

Many of our exposures are being backed by solid cash flows, which have also been confirmed in our internal stress test. Furthermore so, we are very confident and comfortable with the coverage of our defaulted exposure.

And as Johann mentioned in the introduction, we may still see some provisions in the coming quarters, including some additional overlays as we proceed with caution. In Q4, taking away one of your potential questions.

We made use of €74 million of commercial real estate overlays available to us and still have another further €83 million available just when talking about commercial real estate of overlays available.

Well, those of you who have followed us for some time will know that we are reluctant to sell nonperforming exposures and we prepare to restructure or work out the projects in-house. Our direct record shows that this achieves a much higher recovery rate and I expect this time to be no different.

Allow me one more last comment on commercial real estate. You have noticed the drop in our group coverage ratio and this is largely explained by the fact that commercial real estate of defaults usually require lower provisioning due to the collateral and guarantee we have.

We also benefit from other mitigants such as securitization. This simply means that the inflow commercial real estate defaulted exposure reduces the average coverage ratio to the portfolio. Let me add one more remark on this side.

We use — if we talk about coverage ratio, it’s just the coverage ratio of the default line, defaulted exposure compared to the individual loan loss provisions. So we are not including in this calculation or collaterals, nor do we include our guarantees nor do we include our overlays what we have created.

Let me have a look into 2024. Yes, of course, here and there, the one other challenging backdrop may still persist and we will remain cautious in our underwriting. We will continue to provision on a forward-looking basis and making full use of our overlays, reacting quickly as issues arise and focusing our portfolio quality.

We will proactively look to engage with our customers when needed and as mentioned, restructure and work out in-house. Having said all this, this lead us to a risk cost guidance on the entire group of 60 basis points. And if you would exclude Russia and Belarus, we would come to risk cost guidance of 50 basis points.

Let me move on to the next page. Well, you can recognize some small changes in Stage 1 and Stage 2 with some benefit from model updates in retail portfolio, while at the same time, we took a few additional provisions here in the nonretail part.

The improved outlook across the region, mainly in sea allows us to release some provisions. As you mentioned — as just mentioned, we made use of some €74 million of commercial real estate overlays in the quarter. In essence, releasing them here and booking an equal amount under Stage 3.

At the same time, we also booked additional overlays in Ukraine and to a lesser extent in Hungary, where despite the improving outlook we choose to exercise caution. Finally, Stage 3, here largely reflects commercial real estate and provisioning.

And as mentioned, the €256 million should here include also the use of overlays. If we take a look at the full year provisioning composition as expected, Stage 3 was the primary driver, but nicely offset by some macro releases.

More importantly, our stock of overlays is untouched and still fully available to us in the future. Let me move on to Page 23. You can see that our risk-weighted assets have developed from €97.3 billion down to €93.7 billion.

And I would just like to earmark two very important pillars in this beautiful chart. The one is the inorganic relief. So where does this inorganic relief come from? We have benefited from the final approval received when we have introduced an IRB approach to Bausparkasse.

We also changed our IRB model from the sovereign model, we will switch back to a standard approach. And on the op risk, you see an uplift of €2.5 billion. And this comes just with the point on how op risk RWAs are being calculated.

You take the 3 years observation period so we lost one year of observation period. We added another one, meaning 2023, having this very strong GI dynamics, this is causing the higher op risk RWAs.

Well, we talked very much about our Swiss Franc provisions we had to grade on the Swiss Franc Poland portfolio. So I’m now on Page 24. So if you look to the total amount of litigation stocks available, we have now piled up €1.6 billion.

We have, in total, CHF 25,800 loan cases outstanding, whereas already 13,600 are being under litigated cases. We always look, of course, also what is the CET1 equivalent, what is being held against this portfolio.

So you go with the one hand side with the litigation provisions being available to us and also what deal of capital consumption comes from credit risk RWAs. We are in the market with a settlement offer, which goes very much in line with the KNF proposal.

Well, Page 25, is well-known to you and it’s more for documentation issues. Having said all this, we are now eager to take your questions. Thank you.

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 Gabor Kemeny with Autonomous Research.

Gabor Kemeny

Hi, thanks for the presentation. My first question is on loan growth, please. You expect loan growth to accelerate, I guess to 6% excluding Russia, Ukraine. Can you talk a bit about the trends you see here the dynamics in new originations across your markets? Then my second question is on the ROE guide excluding Russia and Ukraine, 11%. I mean this suggests that consensus is rather on the conservative side right now whereas if I look at the individual P&L line and what you guide there, the only meaningful difference I see is on NII, where you are actually guiding to €200 million less than what consensus had. So perhaps can you help us understand the discrepancy here? And the last topic would be the STRABAG deal. I mean, what likelihood do you see of finding further such transactions, which could potentially drive a meaningful reduction in your Russia exposures? And on the back of that, I guess, a broader question, you might be able to touch on the point of how driven are you to actually proceed with the sale of spinoff if such alternatives are available? Thank you.

Johann Strobl

Thank you, Gabor. I think this 5%, 6% growth of loan growth what we have indicated, it comes across the various markets. I think assuming that we see some improvement in the macro environment and on the one hand and decreasing central bank rates on the other hand. I think this is an achievable number what we should.

Of course, we have, if we differentiate a little bit between the various markets than some markets, which have shown a strong growth rate over the past years will probably continue also in the coming year.

But the point is in the bigger market we would like to grow with the market or slightly above maybe 5% in the Czech Republic in Hungary definitely lower than what we have had so far. But — so I think it’s not a big differentiation, I would say in the core market and I can add a little flavor to what you anyhow would see from the overall forecast.

When talking about your second question, do the 11% RWA, I think some elements are relatively clear. Some — yes, trading income with some volatility, but also some income from associates and, yes, we have figured in some income also from the STRABAG has its own forecast of profits and with around a 25% stake. Part of it will come as a dividend.

In the last year, they always had around 2%, which might be around the slightly more than €50 million. But then as we have an equity participation, we also would consider our profit share then, yes.

So what is important to add is that we — or so we have changed our model to an infection model to get an idea of potential litigation provisions. And we have now reached a high level.

We rather than based on the model, rather on a gut feeling, we believe it’s not over in Poland and to be cautious in this 11% another €340 million of litigation provisions included as well.

To your third question, no similar transaction is currently shown to us. So here, I would be happy if we can close that one. And given all that, I stick to what I shared several times that we work on options, on ways, try to find ways to deconsolidate the Russian activities, more likely via resale of, let’s say, big enough portion so that we can deconsolidate still not totally off the card, but with significantly less probability at this point in time by a spinoff. Thank you for your questions.

Gabor Kemeny

Okay. Thank you, Johann.

Operator

Our next question is by Simon Nellis with Citi.

Simon Nellis

Hi, thanks. Thanks for the opportunity. I guess, a slightly similar question to what Gabor asked, just on the 11% ROE outlook ex-Russia. I mean, how much confidence do you have on that? I mean, at the end of the third quarter, you had reiterated your 10% ROE guidance for the group ex-Russia, you delivered well below that 17.6%. But I’m just wondering maybe what drove the big change in ROE in the fourth quarter other than Polish provisions? And what are the risks that you missed on this guidance, again? Thank you.

Johann Strobl

For me, it’s a fair guidance what we have. We had — if we compare Q4 with Q3, we had some volatility in the overall valuation areas that is has some volatility on a quarterly pace also in the future.

And of course, if something very negative would happen in Poland, which is beyond what we see now then maybe even the gut feeling of the 340 might not be enough. This year, I cannot — I do not want to discuss and I see your concerns, but this is the best what we can do.

We have assumptions on the tax and windfall taxes under various countries, which are well known and these are figured in this 11%. Of course, again, I would not dispute that you always have in these years the risk of additional tax burdens. But all what we know is part of this 11%.

Simon Nellis

Okay. Thanks. And then maybe just one more on the large increase in the NPE ratio at the Group Corporate & Markets division. I don’t know if you can elaborate a bit more in I think it’s largely commercial real estate related. Is that the case? And I’d just be interested in knowing whether you think you’ll be able to rebuild some of the provision coverage lost, maybe the risk cost guidance that you have? Or are you happy to keep the provision coverage at a lower level that you’ve seen in the fourth quarter in that division?

Hannes Mosenbacher

Simon, yes. And I think I got your question, yes, indeed. So we had — and here, we tried to flag it already in our Q3 call that we would now see this increased in this at the same time, provision. I think as usual, we have been very mindful in as I also tried to flag in the — in my introductory statement, we will do, of course, a decent workout strategy and not fire selling any of these exposures.

So part of the provisions which were necessary today, we could potentially see them also as a write-back. This would be my assumption as of today. But of course, as I said, usually, I prefer having not being behind the curve whenever it comes to provisioning rather than reporting to the market that we were capable to release the one other provision here and there. And you’re right. Yes, the biggest part comes from this commercial real estate. Hopefully, this helps.

Simon Nellis

Thank you.

Operator

Our next question comes from Lee Street with Citi.

Lee Street

Hello, good afternoon, and thank you for taking my question. A couple for me, please. Firstly, the guidance of 50 basis points cost of risk excluding Russia and Belarus in 2024. Is that something we should see as a more normalized run rate as we look ahead from going forward beyond 2024? And then secondly, obviously, it was a low year for cost of risk this year and it’s higher next year. How do we reconcile the higher cost of risk guidance next year with the much better macro-outlook. Should we just read into that you’re expecting more single name sort of credit issue, shall we say? And then on a separate pocket, as it relates to the additional Tier 1, it looks like the economic to call the outstanding 8.659% one now. Is that something you’re looking at doing and replacing it with a new deal? How are you currently thinking about that? That would be my three questions. Thank you very much.

Hannes Mosenbacher

Well, if I may start with the first two of them, Lee, thanks for raising them. And as I said, also in one of my introductory sentences, last year, we guided for around about €800 million for the entire group and we finished the year with around about €400 million for the entire RBI Group.

At the same time, we are having two markets in war, Ukraine and Russia. And therefore, I was so mindful in flagging last year. And I also thought that commercial real estate will kick in already a little bit earlier.

That was the thought for 2023. The thought for 2024, yes, you’re right, this 50 basis points and this is important for me. This is a gross number. So it does not conclude any use of overlays just to be also precise when talking to you and communicating. So how are these 50 basis points are being derived?

You could say about one third would be the usual run rate in the retail portfolio. And the other one, the other two third would come from the corporate part. Why then still using this normalized level, which is around about the through-the-cycle risk costs is because we still believe that we could see some lagging defaults from the very pronounced interest rate increases.

Usually, what we can see out of our models is that default is not immediately picking up when interest rates are increasing. You have here a lagging effect between 12 to 18 months. And this was the main reasons.

At the same time, as I said, the portfolio performed extremely stable, also in 2023. So this was our thought that we could see a certain delaying factor, is it in the commercial real estate or is it in some sub industries.

And also, if you look, the macro numbers coming out of a recessionary environment. But if you look at the forward-looking indicators like the BMI some of them still look very much challenged.

And yes, indeed, maybe we also have been very much impacted by the geopolitical dynamics around. Thanks for the question.

Johann Strobl

And to your third question, of course, we are monitoring the AT1 market and take note that it has become much more attractive lately. We are grateful to our investors in the 8.659% note, and appreciate your patience. There is little more I can say today. Thank you.

Hannes Mosenbacher

Fine. That’s very helpful. Thank you both.

Operator

Our next question comes from Riccardo Rovere with Mediobanca.

Riccardo Rovere

Thank you. Thank you for taking my questions. I have a couple of questions, Slide 18 and sorry, I have to miss the start of the call. In your guidance, high margin on NII, especially on NII, actually, for RBI core, I imagine the guidance is based on the rates that you show on Slide 18, which for euro goes for a 50 basis point cut in 2024. Right or wrong forward curves today embed much more than that, than only 50 basis points. The number I have in the back of my mind is actually 150 and then another 50 in ’25. So the question is whether the guidance is based, first of all, on this rate? And second, if forward curves and not this slide, were correct, would you be in the position to give us an idea of what would be sensitivity of NII in case rates found more than this slide indicates?

Johann Strobl

Yes. Of course, we use the forecast what we have shown here. So we — whatever we plan to decide that our own research is the core source, of course we read other forecasts as well. But whatever we state today is based on what we have.

Overall, the reduction comes from a couple of countries. Of course, Hungary is the biggest one to mention. Our forecast would imply that we at least reduced by €100 million to €120 million NII coming from Hungary.

When talking about euro, I think in the head office, one has to be aware that this is to a large extent, based on or close to capital markets as deposits are coming from large corporates, some money is on current accounts where we would lose a little bit from the reduction in rates.

You have to consider that we also keep minimum reserves where the changed policy of remuneration has an impact on group level. And finally, we had issued quite a lot of bonds in recent years at higher cost, which what came last year fit in also.

So sensitivity is less important on head office, one can say. And yes, mainly in Slovakia, here, one would consider that it has an impact, which in euro terms is because Slovakia of course, euro and Croatia.

These are also significant areas we’re adding all together, might require another €60 million for these two countries, Czech another €10 million, €15 million. So if you add up the various countries, this gives an indication why we believe it’s somewhere between €4 billion and €4.1 billion as the loan growth will only come in the course of the year. And not contributing too much, that’s the current assumption. Thank you.

Riccardo Rovere

Thanks. Thanks a lot.

Operator

We’ll take our next question from Alan Webborn with Societe Generale.

Alan Webborn

Hi. And thanks for taking my questions. Have you had any direct contact with the Russians over — the Russian authorities over this scheme? I mean you say that you put all the papers in that you are waiting for approval. And they’re not removing dividends for companies that wanted to get out of the country was designed to keep the capital in the country, and this is a very clever way of getting around it. But have they worked that out? And I just wonder, how confident you are that it’s just the law is different, but the effect is the same? So I just wondered how you feel about that? And I’m not denying it’s a clever thing to do, but I’m interested because it has the same results as something that is frowned upon. That was the first question. The second one was if you do achieve this and you get the 125 bps of extra capital, do you think of it as excess capital? And if it is excess capital, what do you intend to do with it? Or is it not excess capital and you feel it needs to be kept within the group to reflect higher regulatory needs, et cetera. So where are you on that? And I guess, sort of final question would be surely you don’t want to be a shareholder of STRABAG for any particular length of time. And certainly, banking shareholders wouldn’t want you to be, I mean, I understand that you need to have it on the books for some time because otherwise, it would just look as a way of getting cash out again, but seriously, is it not just a short-term path before you actually float that stake? Maybe, you can’t tell us anything about that at the moment, but it just doesn’t seem logical that that’s the way that Raiffeisen will be going. Thank you.

Johann Strobl

Thank you. So starting with your first question, of course, also, it’s not a personal contact by me with the various rational authorities. We have big teams working on this topic and they will learn over the time how to read the messages, what we receive from the authorities.

And based on the messages what we have received, we are very confident that — so as of today, I’m very confident that the approvals from the rational authorities are there or will be there.

So, you know, usually, it takes between the decision and the minute some while. But here, we are fairly confident. And yes, I — and the idea was introduced to us to do such a transaction as a dividend in kind. And the assumption of this progress, however, I should call it, seems to prove right that this gives an opportunity for an approval.

I have to say that other companies, banks as well has got approval for dividends. So we did not go along that route till now. So — but overall, yes, I strongly believe that we get the approvals in Russia and it will work.

I have to say that we also need a couple of approvals in the European area. And here, it will take some time, until we get it still, I’m confident that by still in Q1, I hope and I’m confident that we get the approvals.

Otherwise, we wouldn’t have gone in this direction. But I — probably for Russia, this kind of transaction, which for people might less be dividend than something like a share swap or equities asset swap whatsoever.

So there might be different use to look at these transactions, let’s put it that way. When talking about, hopefully, if it closes the 125 basis point excess capital, this is what we have at the beginning.

Of course, over time, the RWA requirements on that topic will increase and then will then be less favorable than it is now. So over time, we have the very attractive cost. I think on its own, if you look at the income potential and the RWA weight, then I think it’s a very — could be or will be a very attractive investment for a while. So there is no pressure to run out.

And of course, divesting from such a big stake also needs another good idea, which I’m sure somewhere in the future we will find it. But we have no hurry to divest. So it probably will remain a while with us. We are not in the — so we have no restrictions in selling that way.

Alan Webborn

Okay. Good. Because I mean, in a way, we’ve focused on Russia for far too long and yet prior to this issue, your strategy was to expand in core markets and you’ve made a good start on that. And I just wondered whether if you get this transaction sorted out, you feel that you will be able to go back to a strategy of growing your bank as opposed to fighting fires, which unfortunately, you’ve had to do for the last couple of years. Do you feel that, that could be your next move?

Johann Strobl

Yes, you’re right. I think what we will — for sure, will do and also share with you if we can, as soon as we can close the deal and hopefully, later when we talk about the Q1 results. And if it then has closed and we have this 125 bps, how to reallocate that.

Yes, I think we are overall observing, monitoring what the new benchmark for capital should be with other banks. Of course, we have seen that other banks have been successful in some share buybacks.

But also we have some ideas in the core countries where we are in organically but also inorganically new opportunities might come and you are well aware of our countries, which I repeat now, Czech, to some extent, Slovakia, Romania, for sure, Serbia maybe, Hungary, we would like, but difficult.

Alan Webborn

Okay. That’s very helpful. Thank you very much.

Operator

Our next question comes from Hugo Cruz with KBW.

Hugo Cruz

All right. Thank you very much. Three questions, please. First of all, on the NII sensitivity to rate cuts, I just wanted to clarify. I think you mentioned €60 million hit on Slovakia and Croatia and €15 million on Czechia. Should I understand that that’s for 100 basis points rate cut? Or it’s what’s already reflected in your guidance?

Johann Strobl

Yes. That is a sensitivity for 100 basis points rate cut, indeed.

Hugo Cruz

Okay. Thank you. And then my other two questions were about the Polish FX issue and dividend policy. So on Poland, I mean, I understand you book — you’re assuming another €340 million in 2024. But without talking about numbers but timing, when do you think we’re going to have clarity on this from either the government or the Polish Court, do you think we could have that clarity around what the banks need to do anytime soon? Or is the continuation of what’s been going on over the last few years? And then on dividends, you now have — if you’re going to do the one year, ’25, so it’s been — what’s the dividend policy now, assuming that Russia, nothing else happens in Russia, can you continue to pay a dividend every year? Can you kind of firm up a dividend policy in that scenario? Or are we still dependent on always kind of one-off approvals from the regulator? And if there is a dividend policy, what are you aiming for right now? Thank you.

Johann Strobl

Yes, concerning to your question about Poland, of course, we would love that either the government or the parliament or the judges, the Supreme Court will make a decision on the topics.

And I think all the three would have it in their hand. And of course, I’m here a little bit biased, but if I just look at the thousands of litigations just in our portfolio and then the many more — so the courts are overburdened and I think it’s really a waste of energy for a country and creating uncertainty.

So it’s also not good for the development. So I’m hoping for. If you ask me with this recent change in government, if I have seen more activities, unfortunately not. So here, we still hope that in the course of the first half year, that something might happen, but it didn’t seem that top priority for the government also.

I think it would be very good. Yes. It would also be good if the — because we have seen some very — from my point, very well understandable decisions by Supreme Court, but only in the small chamber with three judges, which addressed all the questions which somehow also have been addressed earlier by the president when there was the idea of have the full chamber of decisions.

But again, if you ask on the timeline, I cannot get clarity, but just my research. When talking about your third question, which is the dividend. Yes, what we understand, of course, our shareholder base lost dividends.

So this is what we have to clearly state and we will do our best to continue and to have a steady dividend policy. Yes, I think the lower the exposure to Russia is, the less exposed we are to supervisory thoughts.

On the other hand, we are looking forward, I understand that the dividend policy is anyhow a topic on the European Central Bank, so for that, I should rather say, by the supervisors. And so we will learn, I would say, still in the first quarter of this year in which direction they are having.

But with all what we have achieved, I think we are less dependent on regulatory expectations and moving back to a steady dividend policy.

Hugo Cruz

Thank you very much.

Operator

Our next question comes from Marlene Eibensteiner with Deutsche Bank.

Marlene Eibensteiner

Hi, good afternoon. And thanks for taking the question. Maybe firstly, touching on deposits. Could you please touch a bit on the trends you’re seeing also in terms of pass-through rates, competitive dynamics, but also deposit details? And also, if you have expectations of mix changes going forward. And secondly, maybe touching again on your commercial real estate exposure. Would it be possible to get an update also across the subsegments, maybe in terms of LTV developments and expected provisioning needs? Thanks.

Johann Strobl

Yes. When talking about your dividend — sorry, deposit expectations. I think what we can say is that the — in some countries where they raised — the hikes have been quite a while, started ago and came to an end for a while.

I think what we can say here is that this the structural change from on accounts only to having it also on the term deposits and saving deposits this has to a large extent come to an end in many countries. In those who started who are later in the cycle, it’s still going on.

I think the competition from within various markets is, I would say increasing. So we see reactions. We only see the one or the other bank who is consistently aggressive and outbeating the others, but it’s not broad, but we definitely — the less liquidity is available in the market. So it depends on the market, the more this will come.

Yes, I think in most of — let’s say, in Central Europe, I would say, for the time being, we have reached a level where deposit rates will follow the mix of capital market rates and money markets.

So central bank rates, in some countries like Hungary or in Southeast Europe, there was less transfer to deposits and saving accounts and more money left on the accounts, which have little to no interest. So here, we will see when rates are coming down, we will also see a decrease in the net interest income. Hannes, maybe.

Hannes Mosenbacher

Thank you, Johann, for giving me the time to get this far-reaching questions being prepared. You have some details, Marlene, on the — on our presentation when it comes to the distribution of the different subsegments on Page 31.

But let me now also walk through in these metrics and I will be very — I try to be at least focused and decent on what is our LTV. So if you look to all our different subsegments, is it office? Is it residential? Is it retail? Is it hotels and so forth.

We have over 93.3% of all our special lending credit commercial real estate exposure with an LTV below 80%. Below 80% with actual value means collateral evaluation 93, having an LTV below 80%.

But what is also very important is what is the debt yield, meaning what is your repayment capacity. And here, we have for only 5% of this portfolio does have a debt yield below 5%. So I think that’s very important to consider.

So, because you have to look at both angles, what is the cash flow capacity of the respective project and what is devaluation. So I repeat, 93.3 having an LTV of below 80% and only 5% of our specialized lending exposure in the commercial real estate area do have a debt yield below 5%.

The other thing is, of course, what is your occupancy ratio? Here on the office part, we have an occupancy ratio close to 90% and for retail and for warehouse, we have an occupancy of above 90%. And of course, you have seen that the investment volumes in the different subsegments — look at Germany, for instance, really have suffered very much in 2023. Hopefully, this helps for your guidance.

Marlene Eibensteiner

Yes, thanks a lot.

Hannes Mosenbacher

You’re welcome.

Operator

We’ll go next to Mehmet Sevim with JPMorgan.

Mehmet Sevim

Good afternoon. Just one clarification on the cost of risk guidance, please. You mentioned in your opening remarks that you can’t exclude further provisions for the defaulted CRE portfolio. So can I just confirm whether this 50 basis point cost of risk guidance already accounts for this? Or would that be an additional risk? And maybe can you also tell us what level of coverage you now have on this portfolio? I do appreciate your optimistic views, but there’s been a visible decline in your overall coverage now. So it would be good to understand if this is the new normal or how we should see it in the coming quarters? And maybe just one more clarification. That will be the Czech tax expense this quarter, which jumped quite visibly. Is that — anything related to windfall tax or anything like that? Thanks very much.

Hannes Mosenbacher

Mehmet, if I may start with your question, I think it goes very in line with the previous question, what is our loan to value and what is our debt yield. And as I said, for a big part of the portfolio, we have a loan to value of below 80%.

And our entire commercial real estate guidance — risk cost guidance of the 50 basis points. Of course, we have included whatever we may need also in addition for commercial real estate.

If you ask me as of today, maybe some 10, 15 basis points we may still need when talking about commercial real estate and what is important, Mehmet, to consider is it’s not just only the default, we could also see here and there the one or other migration to Stage 2, but you could also see here and there the one other adjustment when it comes to the collateral received.

So that was the reason why we are at 50 basis points and why I was flagging it for the guidance. But the commercial real estate, the risk cost guidance does include this potential further need what we have in the commercial real estate part.

I think that’s the most important one. Please let me not talk about individual coverages on certain sub-portfolios on commercial real estate. In total, we have just to repeat, we have about €400 million of provisions — risk provisions available Stage 1, Stage 2 for the commercial real estate.

And please bear also in mind that we have securitized €1.8 billion of the commercial real estate portfolio going back to the years of 2020, ’21, 2022. So this is also important when talking about our risk provisions. For the commercial real estate, we have still overlays available of €82.6 million. Hopefully, this helps.

Johann Strobl

Mehmet, to your other question, the impact on windfall taxes in Raiffeisen Czechia is €26 million in 2023. And there was in the Czechia question, which it’s difficult that I comment — the core shareholder Raiffeisen Niederosterreich-Wien is in the process of increasing its participation to 25 plus one shares.

And it was mentioned that this is an important threshold on the corporate law in Austria. This I fully can confirm. For me, it simply means that they want to express their strong relation with RBI and their ongoing interest.

But I guess the question goes on, does this have any impact on the decision for Russia and here, I haven’t seen any impact from that decision to our strategy or anything else. All right. Thanks. Thanks to you.

Operator

Thank you. We’ll go next Gabor Kemeny with Autonomous Research.

Gabor Kemeny

Hi, again. A small follow-up from me, please, on Polish FX. You mentioned that €340 million assumed provision for 2024. And now starting from the 92% total coverage, I guess, this would get you to around 110% on the loans outstanding. So shall we read this as those who repaid their loans coming to sue you. And if that’s the case, how did you pick the 110 number? Any color on that would be useful. Thanks.

Hannes Mosenbacher

Gabor, you’re right in your assumption. So, because usually, when we looked at the coverage on litigation provisions built, we were always looking at the current amount outstanding but you could, of course, also have the one other who may feel inspired by this current ruling practice already repaid.

Gabor Kemeny

Okay. So, any comment on the magnitude of those to repaid coming to you —

Hannes Mosenbacher

No, well, I think this was — this is included in the guidance received on the €300 million, €300 plus million. This was exactly when Johann said this is difficult. We don’t see it yet in the model and are picking this was when we overruled the model with our guts and saying, well, hey, if also this part of the portfolio would come in addition, we might be need — we might forced to add another provision.

And as it was also stated before and I think it was Simon saying that, listen for Q3, you gave us an outlook this 10% than we have seen in the last 2 years, that on the Swiss Franc portfolio, we had to allocate substantial amount of litigation provision. So that’s the way of thinking, and that’s the gut feeling within the model.

Gabor Kemeny

I see. Thanks.

Johann Strobl

But if I may add and I think our — at this point in time, one can assume that or it would be rational that not so many rush into that. So, because you start with a payout to do your lawyer and nothing to compensate at the beginning. But we will learn about it in the course of this year.

Gabor Kemeny

Yeah, we’ll have to see. Yeah. Thanks.

Operator

Thank you for all your questions. [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. Thank you for all your questions, your comments for your time. I wish you a good afternoon. Thank you. Bye-bye.

Hannes Mosenbacher

Thank you, bye.

Operator

You may now disconnect