Commerzbank AG (OTCPK:CRZBF) Q2 2022 Earnings Conference Call August 3, 2022 3:00 AM ET
Company Participants
Manfred Knof – Chief Executive Officer
Bettina Orlopp – Deputy Chairwoman & Chief Financial Officer
Conference Call Participants
Benjamin Goy – Deutsche Bank
Izabel Dobreva – Morgan Stanley
Johannes Thormann – HSBC
Stuart Graham – Autonomous Research
Jeremy Sigee – BNP Paribas Exane
Kian Abouhossein – JPMorgan
Tobias Lukesch – Kepler Cheuvreux
Riccardo Rovere – Mediobanca
Anke Reingen – RBC Capital Markets
Hugo Cruz – Keefe, Bruyette, & Woods
Manfred Knof
Good morning, everyone, and welcome to our earnings call. In challenging times, the team has made a good job in the transformation of the bank and delivered a decent financial performance. With an operating profit of €1.3 billion, the first half of the year has been very successful. Our customer business has been strong across all client groups from the Mittelstand consumers. Together with first benefits from rising rates, this has led to a large increase in revenues by 20%. At the same time, we have made further steps in our strategy execution and remain on track with our cost reduction measures.
But we have to acknowledge that the pressure from inflation on our cost base increases. However, we will stick to our strict cost management and ensure the success of our transformation. Based on the strong results of the past six months, we confirm our outlook to reach a net profit of more than €1 billion in 2022. As preannounced three weeks ago, this takes into account the additional burdens from credit holidays at mBank. The credit holidays granted by the Polish parliament provide relief for Polish consumers at the expense of the banking system. As pointed out with our press release, we will consider legal action against this unusual measure.
Looking into the second half of the year, we see bright spots and clouds. The transition to a positive rate environment in the Eurozone is clearly beneficial. However, the most difficult and most pressing question is about natural gas supply and GDP development. In our outlook for the full year, we have assumed no further deterioration in the economic environment in the wake of potential shortage and natural gas supply. Furthermore, we have assumed no material additional provisions for the Swiss franc loans in mBank. Overall, we are very well prepared for potential challenges ahead.
Let me underpin this with just 3 figures. First, our CET1 ratio stands at 13.7%, which is 430 basis points above MDA. Second, we have a top-level adjustment of €564 million available in our stock of loan loss provisions. And third, with a cost income ratio of 64% in the first six months of the year, we have improved our profitability level and our run rate capacity to handle potential credit losses, even if the ratio will increase towards at the end of the year. All in all, this makes us rather confident that we can manage any recessionary trends with our robust business model and our strategy. And this leads me to the good progress we have made in the transformation of the bank.
In PSBC, we have permanently closed further 100 branches and have already reached our target number of 450 branches in Germany. To ensure excellent customer service and advice and to reduce physical footprint, we focus on remote advisory centers and digital channels. To set up our 12 advisory centers with 24/7 remote advice is fully on track. Most recently, we have started the pilot for small business customers. And by November this year, all advisory centers shall be fully operational to serve some 8 million private and small business customers.
Regarding digital channels in PSBC, we have successfully relaunched our online portal, applying a stringent advisory and sales approach. For Corporate Clients, we have also made significant progress in the implementation of our future business model. The migration of 3,000 Mittelstand clients to our direct bank coverage model has been successfully accomplished by the end of Q2. The next 3,000 clients will follow until the end of the year. In 2023, we will have the full setup operational with 7,000 clients.
Regarding the streamlining of our international network, we are well advanced in the preparation to close further four locations by the end of this year. This is an important step to focus our international business, a long German trade corridors and contributes to the necessary reduction of complexity in the bank. Looking ahead, we will constantly review our international footprint to reflect changes in trade currents due to the geopolitical situation.
Reduction of complexity is also our highest priority in our infrastructure. And our trading IT serves as a very good example. We have already decommissioned 56 applications and another 22 will follow before we have reached our target set up for trading. These are all important milestones in our fundamental transformation, and I’m glad that our clients are supporting us on this journey. This is also reflected in the annual corporate client survey of German finance magazine. They have asked Mittelstand and corporate customers about their relationship to banks in Germany. Commerzbank scores overall #1 and also as a #1 house bank compared to last year. And in the middle of the transformation, the house bank score has even increased by 6 percentage points to 79%. This is a very good proof for our strong franchise.
Now let’s quickly look at the progress of our redundancy program. From the overall 10,000 job cuts on a gross basis, we have already locked in 7,700 at the end of Q2. These include staff which are already off payroll as well as employees who have signed the contract to leave in the next two years. We will further increase the number of contracted levers month by month and are making every effort to fix the remaining job cuts by the end of this year.
Let’s carry on with another very important topic, sustainability. At our second public sustainability dialogue in early July, we have presented our new ESG framework. It provides the greatest possible transparency on our approach to sustainability and serves as our road map to a sustainable future. It clearly defines the measurement of all products that contribute to our goal of mobilizing around €300 billion for our sustainable transformation by 2025. And our path to become net-zero by 2050, we have set clear SBTi targets for 2030 for the most CO2 intensive sectors. All of them are described in detail in the framework and reflect a strong commitment to very ambitious but absolutely necessary targets. As I said in the past, we have already made significant steps in the green transformation. And hence, our basic position is very good. In this sense, it would have been nice if ECB has disclosed the climate stress test results for single names.
Now let me provide you with my key takeaways for the first half of the year before I hand over to Bettina for the deep dive into the financials. First, we delivered a strong financial performance in the first half of the year. Second, we are fully on track with the transformation of the business model of Commerzbank. Third, we are very well prepared for potential future challenges arising from the macro environment. Looking forward and with the caveat on the further development of the economy and provisions for the Swiss franc loans in mBank, I can, from today’s perspective, clearly confirm our outlook to earn more than €1 billion in 2022 and to resume dividend payments.
And now over to you, Bettina.
Bettina Orlopp
Thank you, Manfred, and also good morning from my side. Yes, our businesses have performed well in the second quarter. This is clearly visible in the improved operating result of €746 million and the net result of €470 million. The main driver has been revenues, especially interest income, which is up 27% year-on-year. Costs have come in at €1.6 billion. This includes additional compulsory contributions in Poland that are higher than originally anticipated. Nevertheless, active management of our operating expenses and the improved revenues have brought our cost income ratio to 65% in the second quarter. This is a clear proof for the improved underlying profitability of the business.
However, in the second half of the year, we will face strong revenue and cost headwinds from the government decisions in Poland. Therefore, it will not be possible to maintain the cost income ratio for the full year. The loan book has been performing well in the quarter. The risk result come in at only €106 million. While we have used some of our top level adjustment to cover Russian defaults, we still have €564 million remaining that we can use in the next quarter. And thanks to the good result, our CET1 ratio improved to 13.7%. This strengthens our buffer to MDA to 430 basis points, a comfortable position given the uncertainties in the current unclear economic outlook.
Now let’s have a brief look at the Slides 9 and 10. Year-on-year, we improved in all key financial indicators, also including the benefit of exceptional revenue items. There are 2 exceptional items in the quarter worth noting. In Q2, we had a TLTRO benefit of €42 million. We have also released some of the provisions we put in place last year to cover the effects of the judgment on pricing in Germany last year. Repayments to customers are expected to be lower than originally anticipated. This leads to the underlying revenue, starting with the commission income on Page 11.
Net commission income has improved slightly year-on-year with all business segments performing well. As expected, it is lower than the very strong first quarter. Given the challenging market environment, we expect the next quarter to not reach the level we have seen in 2021. Also, future churn could have an impact. Therefore, the full year net commission income is expected to be around the same level as last year.
Now to NII and Slide 12. Underlying NII has been up €79 million from the previous quarter, thanks to mBank, continuing the trend of improved underlying performance on the back of rising interest rates. However, the Polish government decided to introduce credit holidays for mortgage holders. The resulting burden will be booked in Q3 and is a significant drag on revenues. In PSBC Germany, NII has also increased quarter-on-quarter. As usual, in Q2, we have seen higher early repayments of mortgages in PSBC.
As the interest rate of these loans were largely below market rates, this has led to a benefit in PSBC with the corresponding offset in others and consolidation. This is a group internal effect at the time of the closeouts. Treasury has anticipated early redemptions. The positive effects are realized in the market and accrued over time. This leads to the next slide with the potential positive impact of forward rates on NII.
The decision of the ECB to raise the deposit rate to 0 is obviously a positive step for our deposit customers. The economic benefit for us is partially offset by the fact that we now no longer charge negative rates on deposits. Assuming that the expected further rate increases materialize, this year’s NII from deposits should be around €300 million higher than last year. If the ECB continues to raise rates further, we will see additional benefits in the coming years.
However, as rates go towards 1% and above as predicted by the market, we expect to see some transfers out of current accounts to interest-bearing accounts, reducing the benefit for us. As we were in a zero to negative interest rate environment for a considerable period of time and customers were for the first time in history, confronted with negative rates on large deposits, it is hard to predict the future customer behavior and the overall reaction of the banking system. But it could well be that customers will be more conscious regarding interest on their deposits.
With these uncertainties in mind, we have prepared the scenario on Page 13. It illustrates our NII potential and how sensitive our interest income is to customer behavior. In this scenario, we conservatively assume a higher better for corporate customers than for retail customers. And that on average, for the whole portfolio across price and not priced deposits, we will pass around 20% of the deposit rate to customers in 2023. And for 2024, we assume further shifts into priced accounts, finding the deposit beta to 25%.
The corresponding NII benefits after the assumed deposit beta would be around €650 million in 2023 and around €800 million in 2024. The actual NII will depend on the deposit volumes, interest rates and the deposit beta. To give you an impression of the sensitivity, if the actual deposit beta is 1 percentage point lower, NII would improve by around €35 million per year. We will therefore very closely monitor customer behavior and our competitors with a clear focus on margins.
Having looked at our key revenue drivers, let’s move to cost on Slide 14. We continued with our cost management measures in Q2, reducing our H1 operating expenses to below €2.9 billion. The headcount reduction as well as branch closures and lower usage of external consultants have contributed. Despite ongoing headwinds from inflation, we are on track to reach our goal for operating expenses in 2022. However, compulsory contributions have again been increased in Poland. We had to contribute €83 million to the new institutional protection scheme in Q2. This might be partially offset by reduced contributions to the deposit guarantee fund, but will be a burden on a net basis.
In Q3, we also expect to pay around €30 million to the distressed borrower fund. These additional not anticipated burdens required the increase of our 2022 cost projections by €100 million to €6.4 billion. However, the cost income ratio will be better than originally planned, thanks to higher revenues. For the full year, we currently expect total compulsory contributions of around €650 million compared to €467 million last year, a nearly €200 million increase. And please keep in mind that they would be even higher had we not started to use payment commitments last year.
Let’s move to Slide 15 at the risk result. The base risk result was only €27 million in Q2. On top of this, we had €228 million Russia-related defaults, which could largely be covered by €149 million from our Russian top level adjustment. Net, we had a low risk result of €106 million, reflecting our good asset quality. We now have a remaining top-level adjustment of €564 million. It is covering potential direct effects from Russia, supply chain disruptions, elevated energy prices and an anticipated economic slowdown. So not the potential fallout from a complete stop or a significant reduction of natural gas deliveries from Russia. If the Russian gas supply remains at the current low level, we will review our TLA during Q3.
On Slide 16, we have an overview of the nonperforming exposures and the cost of risk. The cost of risk on loans reduced to 42 basis points and includes the increase of the TLA in Q1. Our Russia exposure has been actively reduced further during the quarter. By mid-July, our net exposure is down to €1 billion. This is due to further reductions and repayments but also the defaults. We continue our strategy of no new business while supporting our existing customers.
Let’s carry on with the overview of the group operating result on Slide 17. Having covered NII and NCI already, I will quickly touch on fair value and other income. The fair value result is significantly lower than in the first quarter. This is mainly due to the partial reversal of valuation effects that were very strong in the first quarter. Other income is largely driven by provisions for Swiss franc mortgages in Poland. Concerning the tax rate, this was 34% in the first half. From today’s perspective, a tax rate at around this level is likely for the full year. With the net result of €768 million in the first half, we are on track to reach our target of more than €1 billion for the year.
Let’s carry on with the operating segments, starting with Private and Small Business Customers on the next 3 slides. The securities business has been impacted by lower markets, reducing securities volumes by net €22 billion. On the bright side, we continue to attract inflows of €2.5 billion net new money in the quarter. Nevertheless, lower volumes will have a negative effect on commission income in the next quarters, but is unlikely to be compensated by trading volumes. Mortgage volumes have increased slightly this quarter. Given the higher level of interest rates, we no longer expect an increase in net mortgage volumes for the rest of the year.
In the deposit business, we have again made good progress increasing the volume of deposits by €2 billion. In Q2, for the last time, deposit pricing contributed €26 million to revenues. We have stopped charging our retail customers from July 1. Our focus is now on transitioning to the positive rates environment where our current strategy stance is probably best described as late follower when it comes to passing on rates.
This brings me to the performance of PSBC on Page 19 and 20. PSBC improved its operating result to €481 million, of which the German business has contributed €377 million. The improvement has come from better cost income ratio with lower costs and higher revenues year-on-year. The increase in revenues have been supported by one-off close-out benefits from early mortgage repayments and the only moderate churn experienced so far. In the next quarters, we do not expect this positive revenue trend to continue. The one-off close-out benefit will not be repeated, and commission income from the securities business is likely to be lower.
There will be a positive effect from higher rates, but this will take some time to materialize and is dependent on further rate rises. The next months will also be crucial for the churn. We have now reached our target range number and the remote advisory centers are being ramped up. You will see how customers have closed branches who are reassigned to advisory centers all react to this.
The picture is different at mBank. mBank has continued to strongly increase revenues, thanks to higher rates in Poland. However, at the same time, compulsory contributions have been raised substantially partially offsetting the revenue improvement. In the next quarter, further burdens will have to be absorbed, both on the revenue side for the credit holidays for mortgages and on the cost side with additional compulsory contributions. mBank, therefore, expects a loss in the third quarter. We will also review our provisioning model for Swiss franc mortgages together with our auditor that might lead to adjustments. With the politically imposed burdens, mBank will likely not contribute significantly to the group result this year.
Now let’s move to Corporate Clients on the next two slides. In Corporate Clients, we have continued our active portfolio on RWA efficiency management. Known volumes in Mittelstand have grown an average RWA efficiency increased to 5.5%. In the deposit business, volumes are back on the level we had last year before we applied our year-end management. Pricing discipline has been maintained, and we had around €150 million interest income from the deposit pricing in the first half. With the ECB’s deposit rate at 0, we will end deposit pricing. Therefore, the Corporate Clients segment will only start to benefit when rates are in positive territory.
With €325 million, Corporate Clients reached its best quarterly operating result since 2016, as in PSBC Germany has manifested itself in an improved cost income ratio, which was 57% in Q2. Revenues have improved in all customer segments year-on-year. In particular, strong transaction banking and FX in capital markets contributed to the good performance. The effect of churn has again been only modest this quarter. Costs have also meaningfully came down. For the second half of the year, we expect revenues to be burdened by the cloud year economic outlook, while lower costs should help to keep profitability at last year’s level.
Let’s move to Slide 23 and the development of others and consolidation. The operating loss of €59 million in others and consolidation reflects lower revenues quarter-on-quarter. This is due to the partial swing back of the very positive fair value result in Q1 and the close-out compensation for early repayments of mortgages to PSBC. As a reminder, the positive fair value result in Q1 came to a significant degree from our hedges and foreign currency funding transactions for the commercial book. Less positive valuation effects of the interest hedges reduced the fair value result in Q2. Additionally, basis effects of cross-currency swaps used to refinance commercial business in foreign currency had moved in our favor in Q1, which has now reversed. For the full year, we continue to expect a slightly negative or balanced operating result.
Let’s move to Slide 24 and the risk-weighted assets. RWA has been stable compared to the previous quarter. There has been an increase in credit risk RWA. This is mainly due to the already anticipated effect of model adjustments in the context of IRB repair. This has been offset by lower market with RWA. The increase in CET1 capital reflects a net result of €470 million and brings the CET1 ratio to 13.7%.
Now to our outlook for ’22 — sorry, now to our outlook for 2022 on Slide 25. Our outlook is based on the assumption that there will be no large extraordinary effects in the second half of the year. This, in particular, concerns provisions from Swiss franc loans as well as Russia and energy-related effects. For the financial year, we expect overall revenues higher than last year despite the burdens from Poland. Revenue growth will be driven by higher underlying NII. We stick to our target for operating expenses. Additional compulsory contributions in Poland lead to a total cost target of €6.4 billion, however, at an improved cost income ratio.
The risk result is expected to come in around €700 million, assuming usage of the TLA. Further, we expect the CET1 ratio well above 13%. And we continue to expect a net result of more than €1 billion. And last but not least, we intend to propose a dividend with a payout ratio of 30% of the net result after AT1 coupon payments for the business year 2022 nearly subject — clearly subject to the development of the economic environment and Swiss franc provisions in mBank.
Thank you very much for your attention, and Manfred and I are now very happy to take your questions.
Question-and-Answer Session
Operator
[Operator Instructions] We have received quite a few questions and the first questioner is Mr. Benjamin Goy of Deutsche Bank.
Benjamin Goy
Two questions, please. First, you mentioned the TLA review in times of gas shortages. Can you maybe quantify a little bit what numbers we are talking? What’s the risk in addition to your guidance? And then secondly, you lost around 90,000 customers. I was just wondering how many of those are really revenue relevant primary customers.
Bettina Orlopp
Thank you, Benjamin. So on the top level adjustments, we also have a statement in the interim report, so you can read it there. So there is a stop of gas supply. We assume that we would book something around €500 million to €600 million of top level adjustments. This translates roughly into 20 basis points of cost of risk. And it is assuming that there will be some governance measures, that’s number one. And number two, yes, indeed, we lost 90,000 clients. However, we haven’t really seen that in the revenues. So the loss in revenues was a very low single digit million euro number. So basically neglectable.
Benjamin Goy
Yes. And I guess still early. The obvious follow-up is, then what does it mean for your churn guidance which was quite significant in terms of revenue loss out of…
Bettina Orlopp
That’s true. I expected that one. I mean we assume that we would see in the first half, something like medium-sized double-digit million euro number in revenue churn. Apparently, we haven’t seen that. For the full year, we expected something around a small three-digit million euro number. The key question now is how clients are reacting because they are always reacting with the time lag. We now are, as I said, on the target number with respect to the branch restructuring and the advisory centers are currently ramped up. They will start — I mean we have the pilot center already up and running, but the other ones are starting from September on, and we will see how clients react to that. So it’s too early to tell, but there is a likelihood that we will not see the full churn than we originally anticipated.
Operator
Next, we have Ms. Izabel Dobreva of Morgan Stanley.
Izabel Dobreva
My first question is your NII guidance for 2024. In slides today, it says that there is €800 million NII upside versus 2021. But this is assuming that the deposit betas are 20% to 25%. And I wanted to clarify this guidance and how it compares to the guidance of the last quarter, which was the €1 billion, but with no deposit beta. On my math, if I adjust to this changing assumptions and put it on the same basis, it looks like your sensitivity is actually up to just over €1.5 billion. But I wanted to confirm that and if you were able to give us the NII upside run rates by 2024, but on the same deposit beta assumption of last quarter, that would be great.
Now my second question is again on the deposit beta assumption and how you arrive to 20% to 25%. Because I think from past experience, we would expect betas to stay quite low until we reach the 1% tipping point that we have seen in other geographies. So in that context, 20% to 25% does sound quite high. But I was wondering how did you arrive to that. And do you see any upside to the assumption? And then my last question is on the risk costs. So if you use up your overlay for this year and then book another €500 million to €600 million from next year for the gas cutoff, I guess it works out that to a gas cutoff cost of about 40 basis points cost of risk. Could you just expand a little bit on how you arrived at that number? What was your process and what are your assumptions?
Bettina Orlopp
Okay. Izabel, I start on — so indeed, I mean, good spots on the NII, we changed the model given that we wanted to — yes, to include deposit beta in the calculation. So if you would take exactly the same approach as we have done in the last quarters given the development of forward rates, you can assume that you would see a double sensitivity. So your €1.5 billion would be exactly the right number. So even substantially higher than last time’s €1 billion. But I mean, also you see in the rates that we would reach 100 basis points and above. So we thought it would be prudent to include some deposit beta into it. And that’s the key question. I mean we now put in a blend 20 basis points to 25 basis points, that is concerning Private Clients and Corporate Clients. We assume that there will be a higher beta for Corporate Clients and a much lower one for Private Clients.
And the thing is we simply don’t know. So it is an assumption, and we will only see over the next months what really the customer behavior, competitors’ behavior, et cetera, is. And you see also the sensitivity is why we gave you the number. If you just assume that really, we have 1 percentage point lower, that’s €35 million. Take 5 percentage points lower. We already talk about €150 million. So it’s — there’s quite some volatility in there. So I’d say we are rather on the lower end in our guidance. I’m very prudent, you could say, too prudent. But we feel, as you know, most of the time more comfortable with a prudent approach and provide some surprises. But the number to remember is 1.5 if you compare it to last quarter.
And on the cost of risk, I mean the €500 million to €600 million, we would only really book if there is a gas stop, let’s be very clear. So we will observe the situation, especially in the third quarter. And the assumptions are based, again, on a portfolio review. They also assume that we would see basically a scenario where we would see a minus 2.7% GDP already in 2022. That’s one of the key assumption in that. But we also would assume that there are some government measures put in place. So it will be very much on the third quarter to see how things are developing. And the way and then I’d say the 20% is not great. So hopefully, we will return rather to a gas supply of something around 40%. But yes, it’s too early to tell.
Operator
Next, we have Mr. Johannes Thormann of HSBC.
Johannes Thormann
Johannes Thormann, HSBC. Some questions from my side as well. First of all, on your cost guidance. How you mitigate the cost pressure via additional branch closures? And then how much have you seen rental payments being increased from landlords or how much branches do you have? And then how much can you offset additional salary increases versus your plan by additional headcount costs? That would be my first question.
Second, mortgage business. You assume you have further growth, but we actually have seen in the last weeks [indiscernible] future to drop quite heavily. And I don’t know what you see about margin pressure. So I’m a bit — I would see some easing again in the new business. So I’d like to see what’s your thinking behind that. And one follow-up on the [deposit] beta. Just wondering with your high share of retail current account deposits and which have been not sensitive to pricing at all. I’m a bit surprised to have such a high deposit beta. Why is that?
Bettina Orlopp
Yes, on the — I mean, on the cost guidance, actually, we don’t see really rental increases because we have very long-term contracts. So that is not really the problem. We rather see it on the energy cost side where we also see the increases. And clearly, on the salary side, for 2022, as I said already before, we feel comfortable to keep the cost guidance because we kind of really observe that in the next years to come. I mean, there will be most likely additional measures to compensate some effects, but this will not be fully possible. So we will rather also, I mean, see the flip side, the positive side, the revenue increases.
So what we currently see is that we can stick to our cost income ratio target of 60% in 2024, and that I think is the important message here. And if revenues are not developing as planned, then clearly, we also need to implement additional cost measures. But for the time being, for us, the most important target is the 60% because that also leads then to the ROTE target, which we have promised and probably we even see here a slight increase on that one.
On the mortgage business, I mean, indeed, we had in the second quarter, again, a slight increase of the net volume at, I’d say, a margin little bit lower than average. Our margin is recovering now, but we also believe that there will be a slowdown in mortgage business for the second half of the year. So overall, we do not expect to see an increase, rather flattish development or even a slightly negative [indiscernible].
And then on retail current accounts, yes, indeed. I mean, in the moment, we have a very comfortable situation there. But the problem really is that we have been so long time in a negative rate environment, we simply need to see how clients are really reacting. And as said, this 20 to 25 basis points is the blend. It’s just an assumption. So we assume anyhow a much lower deposit beta on the retail client side. And the rest, we will see in the coming months how clients are really reacting and how much movement we will see.
Operator
Next, we have Mr. Stuart Graham of Autonomous Research.
Stuart Graham
I had two, please. The first one is on the deposit betas again. Have you actually seen any changed behaviors from competitors which have caused you to take this more conservative view? That’s the first question. And then the second question is back in the gas switch-off scenario, you say €0.5 billion to €0.6 billion with government help. How much would it be without government help? And then later in the interim report, you talk about an extra €0.9 billion in a pessimistic scenario where the U.S. also goes into recession, but I think that’s just stages 1 and 2. So just to confirm, if U.S. also enters in a recession, it’s an extra €0.3 billion to €0.4 billion just on stages 1 and 2. And then whatever else in terms of specific Stage 3 results, is that the right way of thinking about it?
Bettina Orlopp
Okay. So on deposit beta, no, I mean, in the moment, we have not really seen a change of behavior. I mean, we have seen some competitors being very, very quick in announcements and stuff like that. We also see in other countries, public statements as in Poland about deposit beta and what politicians are expecting, et cetera. Nothing of that we have seen yet here. But we just — given that we are now having the assumption that the reference rate will be above 100 basis points by middle of next year, we just assume that the likelihood for deposit beta is increasing. And as said, how much, we simply don’t know.
And the €300 million, which we have assumed as additional benefits for 2022, there is no deposit beta assumed, for example, because there, we believe we are still at levels where we don’t really see it with 75 basis points at the end of the year. So time will show as such. I think with the number which we have shown in the analyst presentation, we have defined the lower end of our expectations clearly.
On the second part, with the minus 2.7% GDP development for 2022 in this gas stop scenario, we really have covered everything. So that would be the thing. I mean if there is no government support then clearly, it’s very hard to predict, right? I mean, that number can be higher, but the question is really that it’s very tough to touch now because I mean, we speak a lot to our Corporate Clients. They feel still very comfortable in the situation with respect to their liquidity situation and stuff like that.
And I even can’t imagine that there will be not government measures like a follow scheme and things like that because they have proven to be very efficient during corona pandemic, and I do not see any reason why you shouldn’t have these measures also in place if there is a gas stop. Same holds true for the KfW programs, which have also proven to be very helpful and supportive.
Stuart Graham
And on the U.S. angle, the GBP0.9 billion figure you gave?
Bettina Orlopp
Well, I mean, this is — I mean, we are more concentrating — given also our business model, we are more concentrating on Germany and Eurozone. And with our scenario here, which is also described in the interim report, we would see that’s covered.
Operator
We have a couple of more questions. The next questioner is Mr. Jeremy Sigee of BNP Paribas.
Jeremy Sigee
A couple of quite small detailed questions actually for me. The first one was just on the NII point. If you could just talk us through on a very sort of short-term basis, what we expect in 3Q? You mentioned, obviously, no longer charging on deposits. So that falls away. You save on deposits at ECB. So I just wondered if you could talk us through — quantify the moving parts so that we know what to expect in 3Q. So sorry, that’s very short term, but just to sort of manage our expectations. And then the other question I had was on mBank. You mentioned the expectation of further burden in subsequent quarters. I just wondered if you could quantify that how much you’re expecting, the point you flagged on Page 20, Slide 20.
Bettina Orlopp
So on the NII development for this year, I mean, we expect clearly higher NII than last year. We said that before. You can take the consensus, which is currently out there, which sticks at the €5.481 billion. And I would say that in this one, the €300 million benefit from higher rates is not fully baked in yet. So that, I think, is the first guidance I can give you. And otherwise, I would say that for the segments, the Q2 results serve as a good guidance also for the quarters to come. That would be on NII.
And on mBank, I’m now looking what Page 20 is. I mean, mBank, we expect, as said, a loss in Q3, and that’s due to the €210 million to €290 million of credit holidays we expect to book. That’s very much dependent on the acceptance rate by clients. This is assuming 60% to 80%. The program has just started. So we will know in Q3 how the overall acceptance rate is and then book accordingly. And the second point is that we have a €30 million compulsory contribution for the distressed borrower fund in addition. We have already booked the €83 million for the IPS institutional protection scheme.
What we simply don’t know is what will be the result of the WIBOR topic, which is also currently in discussion in Poland. And what we also do not know is how our Swiss franc thing is developing. And I just said that we will have a model review. We have a new auditor and we’ll see whether this has an impact on our current provisioning. Current provisions for Swiss francs stands at €940 million. And yes, we will have a look on that in Q3.
Operator
Next question comes from Mr. Kian Abouhossein of JPMorgan.
Kian Abouhossein
The first one is, if you could just briefly talk about asset spreads and new versus back book on the mortgage side and the Mittelstand work. The second question is just going back to the provisions. Now considering that you’re assuming 2 years of negative GDP in Germany and you kind of stressed gas scenario, we’re talking about 45 basis points normalized provisions — sorry, 25 plus — 20 roughly. So 45 in that scenario. Can you just flash that out a little bit more around bottom-up industries? How you get to the 45, especially the 20 extra?
And also, if you could maybe just come back to the discussion around government intervention without. I assume your starting point has been without government intervention. So we just get an understanding what growth versus net is, if you can just give us a bit of a magnitude. And lastly, your Stage 3 coverage on Slide 31 is declining. How should we think about comfortability around coverage and the usage of TLA in that measure?
Bettina Orlopp
So asset spread is actually have been pretty stable. I mean, we have seen some volatility on the mortgage side, but overall, rather the stable ones. On GDP side and the industries you are asking for. If you look in the appendix, we always include the industries. We have done that already during corona pandemic. We always include the industries we think are most exposed to the current situation. And you find there the industries we believe will be most exposed. And I mean, it’s tough to say with the government measures without or with government measures.
I mean, as such, we are convinced that there will be some government measures and a scenario of minus 2.7% in 2022 is already quite a negative one, given that we are now beginning of August. And this is really only the case if you see a full gas stop, which I think — yes, I mean, there’s always a chance for that. But I would also say that every week where we have gas delivery where we can put a natural gas in our stock, et cetera, will help to manage the situation also over the winter.
And on Stage 3 development, I mean, the — I mean, first of all, we now took into account the Russian defaults. This is why also the Russian exposure, which you can also see in the appendix we have included a page there has decreased. And I mean, I think it’s always worth to look at our NPE ratio at 0.8%, which is very, very stable. So we feel pretty comfortable with the coverage specifically because we still have this top level adjustment out there of €564 million covering clearly also some Russian exposure, but also delivery chain problems, energy topics and also the slowdown of the economic environment.
Kian Abouhossein
And just to clarify, the €500 million, €600 million is over 18 months, I assume, on the stress scenario.
Bettina Orlopp
Pardon. The €500 million to €600 million is really the stress scenario. This is really if we see a total — a complete gas stop very importantly and followed by a deep recession, which I would say is at minus 2.7% GDP in 2022. That’s the deep recession.
Kian Abouhossein
That’s over 18 months, right? Sorry, just to be clear, it’s over 18 months? Year-end ’23?
Bettina Orlopp
Yes. Yes, yes.
Operator
Next, we have Mr. Tobias Lukesch of Kepler Cheuvreux.
Tobias Lukesch
Also three questions, please. First on Russia and the defaults you’re talking about. Could you maybe elaborate quickly on the type of default, i.e., is there any chance of a reversal of that booking basically going forward? And secondly, on any further bigger IT projects. I mean, we had this outsourcing project with HSBC in the past, some difficulties there, still people waiting basically for the tax information of last year. I was just wondering, is there more of that kind of problems you currently see? Or is the way cleared basically until year-end? And lastly, maybe you can quickly elaborate on your CapEx spending. I mean, how is this developing and will develop over the next 12, 18 months?
Manfred Knof
Yes. I think the investments are all in line. This is what I can say here on Russia. I mean, it’s clear that we have reduced the group exposure net of ECA and cash to €1.1 billion. Additionally, our Russian company holds domestic ruble deposits of €600 million. And if you see that there is sovereign — an increase of sovereign exposure, it’s only due to FX rate development. And if you ask how we’re going forward, I mean, this is all not that easy being compliant with all the sanctioned regulations. But I think we are continuously working on the reduction of our program.
On the IT projects, I think we are fully in swing of getting all this IT project from HSBC back on board. It’s true that we are late with some customers with the tax confirmation. But for the overall majority, the customers have received and we’re working very hard to finish it.
Tobias Lukesch
Okay. So no quantifiable impact on that. And if I may touch again on Russia. My question was more around the type of default here. I mean is this really cash not coming? Is that a kind of potentially just a covenant bridge? I mean, how should we think about that? Is this — is the reversal possible? Or is that money done?
Bettina Orlopp
Payment sum, I mean, partly, it could be recovered as always, but we’ll see because it also depends on, again, on the sanction environment and how things are developing in the next month.
Operator
Next question comes from Mr. Riccardo Rovere of Mediobanca.
Riccardo Rovere
Three or four, if I may. First of all, I want to get back to the first question during this call from Izabel, again, on deposit beta. The numbers that you’re providing today are based that you say in the slide on the forward curve for mid-July. While the previous guidance was, I suppose, if I remember correctly, it was supposed on forward curve seen in May, I would imagine. So how are the two numbers kind of comparable given that forward curves keep a moving, they go up and down every single day? The second question I have is that it’s not clear to me whether the 20%, 25% deposit beta is the same for Private and Corporate Clients. Or this is just a — is an average of the two. And if it is an average of the two, what kind of assumptions you have used for the two clustered clients?
The second question, the other question I have is you’re considering to move, given that you mentioned it during the call, more and more often to a cost income target rather than anything else that an absolute number on costs, also given what’s happening in Poland. And again, on Poland, just to be clear, your [indiscernible] seems to be out of control in terms of compulsory contributions and stuff like that. Can you provide us a list of what should happen in terms of IPS, then you got a moratoria, then you mentioned possible review of the model to charge provisions related to FX? And then you mentioned €650 million compulsory contributions for 2022. Is this number going to stay the same, provided nothing changes in Poland for ’23 and maybe 24?
And then I have a question on Poland, again, probably two months, right. I mean Commerzbank, at some point in past years, wanted to sell Poland because that was seen as a way to finance the turn around. Then you realized you didn’t need to. But in the meantime, the country has becoming a headache or maybe even more than that is becoming, if it goes on like that, it’s becoming a liability. Are you kind of changing your mind on whether to be present there or not? Because as you mentioned before, if I got it correctly, U.S. packed BCR, technically no contribution from mBank, if I understood it correctly. So I was wondering, if anything is — when your patience is going to be over on all of these things?
Bettina Orlopp
Good. Then I start with the number question, then Manfred comes on mBank. So on the deposit beta, again, so last quarter, we based our scenario calculations which then led to the €1 billion additional revenues in 2024 on the forward towards by end of March, if I recall that correctly. At this time, we used the one of — we used an average of July, but it’s probably comparable to end of June. And if you would just take — just to repeat me, if I would just take the exact same assumptions we have taken in the first quarter. So no deposit beta. Instead of the €1 billion, you would see €1.5 billion, €1.6 billion approximately. So that’s on the overall assumption.
On the deposit betas, the 20% to 25% is indeed a blend. So it’s a mixture of what we expect for Private Clients and for Corporate Clients, and we expect a much lower deposit beta for Private Clients and a higher deposit beta for Corporate Clients. On your question on cost-to-income ratio, yes. I mean, cost-to-income ratio always has been a very important target for us. And the 60% is very much set in stone. So we will not change on that because it is an important prerequisite to also reach our target to really earn the cost of capital for our shareholders, and it is related also to our [RTE] target for 2024 of more than 7%.
And on the compulsory contribution side, what do you expect for ’23 and ’24. I mean, obviously, we also didn’t expect the number, didn’t expect the number, which we now see for 2022 because the €200 million more, if you make a year-on-year comparison, we definitely didn’t expect. It’s not only Poland and the majority is Poland, but there is also some headwind coming from the European bank levy. So ’23 to be probably on the conservative side, you need to assume something between ’21 and ’22. I would expect that it comes down because at least something like the IPS and the distressed borrower fund should not be repeated.
On ’24 compulsory contribution should come down significantly given that then the European bank levy fund should be reached its targeted level, and then you would only see any increases in contributions for any additional growth. And now I hand over to Manfred.
Manfred Knof
Yes. Thanks. I mean, in — I mean, we have to state clearly that mBank is a very strong brand in the bank. And in the past years, mBank has been very important also as yes, for the growth of the Commerzbank Group. And there’s no doubt about this is one of the most innovative and digital banks in Europe. And so we are very happy with the operative performance of the mBank, but it’s true that you need — yes, yes, a good framework of legal environment. And with the credit holidays and the other measures taken by the Polish government, it’s a difficult situation, and that’s why we also consider legal steps against those.
On the other hand, it’s absolutely clear that the Polish market is non-investable. And so therefore, we are focusing now and see what we can do because those measures in Poland which are not good for the bank. And going on the backdrop of the banks, I think we believe it’s not okay with European law and that’s why we are taking measures. But important is that mBank is a strong bank and is one of the most innovative banks. And I think that’s all what we can say here.
Operator
And the next question comes from Anke Reingen of RBC.
Anke Reingen
Two questions, please. First, on the — sorry to come back on the gas, the €500 million to €600 million. I mean, within your report, you talk about how the gas shut-off had similar situation to the financial crisis yet, it’s only €500 million to €600 million impact. Is the difference the government support or so the TLA? Or is that structurally you think the corporates and [how so] it’s just in a better place so that the provisions are not shooting up more? And then secondly, a bit of a different question about your efforts with respect to sustainability. And obviously, there might be a scenario where you might be supporting not so sustainable economies. Like would you be supporting coal financing? How do you basically balance the transition to a more sustainable economy versus energy security?
Bettina Orlopp
So Anke, thanks for your question. I mean, on the natural gas stop scenario, indeed, the difference is that, a, we have — we assume government support. And the second thing we should also not forget, we still have out there, €564 million of top level adjustment as a buffer. So we have two things. So adding the two things together, we are talking about more than €1 billion, which you would then have for things like that. And I now hand over to Manfred on the…
Manfred Knof
Yes. Thank you. I think we have just presented our framework here on ESG, and there’s no reason to make any changes to that. And I think the actual situation makes it even more clear that we need a transformation of the economy to a green economy. And therefore, we are very clear on what we are doing and what we are not doing. And I mean we have put that in our framework, which is really transformed on the table, and there’s no change in our strategy, and we are very clear of what we want. And this difficult environment, unfortunately, the war has not changed on any of our ambitions to follow our transformation of the economy and the bank.
Operator
And we have room for one more question, which comes from Mr. Hugo Cruz of KBW.
Hugo Cruz
Actually, sorry, I have a few questions. On the gas scenario, I just wanted to understand your thought process a bit more. First of all, why did you release parts of the TLA in 2Q, if you’re worried about this gas situation? And everyone is worried about the gas situation. Second, you give this guidance. I know it’s a stress scenario, the €500 million to €600 million. But then if we actually have a shutdown, how do you expect to deal with it? So will you book upfront a big TLA probably in the amount of the €500 million to €600 million? Will you book it over time? It’s not clear to me what your plans there. And then what would this mean for your dividend payout target? So that’s on the gas scenario.
Then on Russia, can you just tell us what the amount of equity you have in the Russian subsidiary and split the impact of the currency reserve as well? And finally, with all these one-offs in Poland, do you expect to see an increase in your op-risk RWAs for the group?
Bettina Orlopp
So on the gas scenario, we didn’t release any top level adjustment in Q2. We used on parts of the Russian-related top-level adjustments for Russian default. So that was a clear reference to each other. And what we did with the rest of the top level adjustment taking it a little bit away from the Board definition of corona pandemic and more into the decision of targeted for supply chain problems, energy prices, slowdown of economic development. And — so how would we do that? If we really see a gas stop, then clearly, we would also book a top-level adjustment in this quarter, but only then. That’s also for sure.
I mean we would need to see that gas stops will not be picked up again and then you would see a booking. That’s accounting standard that whenever a situation, yes, comes, then we would also book something, at least as a buffer. And then, I mean, it’s too early to tell what happens with the dividend because it clearly depends on how everything else is developing and the dividend is decided after the full numbers in February by Supervisory Board. And then finally, by the AGM in May. So we will then have a close look whenever we have the numbers. And in the moment, let me remind you, we still believe that we will see the €1 billion.
And you asked for the amount of equity in our Russian entity, it’s €300 million. The currency reserve was — is now currently a negative one-off €100 million due to the ruble development. It was higher after the first quarter, where we had it around €200 million. So therefore, that has development — developed again rather positively.
Hugo Cruz
Sorry. And the op-risk, do you expect an increase in op-risk RWAs because of all the one-offs in Poland?
Bettina Orlopp
Sorry. Sorry, I forgot the last one. No, we don’t. Our op-risk model is now different. We do not expect that.
Manfred Knof
Yes, then I would like to say thank you very much for all your questions. And as usual, if there are follow-ups, Bettina, myself and the team are ready to take your questions. I just would like to confirm that, yes, even if it’s a difficult outlook here and there, we still believe that the government will do something and we stick to our €1 billion outlook. Even if some things are difficult, we have also some kind of the optimistic side. And I think the bank is resilient. And yes, we can manage that. Thank you very much. And yes, looking forward to see and talk to you in the follow-up meetings.
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