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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good morning, ladies and gentlemen, and welcome to the Commerzbank AG Conference Call. Please note that this call is being transmitted, as well as recorded by audio webcast, and will subsequently be made available for replay in the internet. At this time, all participants have been placed on a listen-only mode. The floor will be opened for questions following Manfred Knof's and Bettina Orlopp's presentation.
Let me now turn the floor over to our CEO, Manfred Knof.
Good morning, and welcome to our earnings call for the first quarter 2023.
We have had a strong start to the year. Our transformation is continuing and increasingly paying off. Our operating result increased by 60%, and our net result almost doubled compared to last year.
Good fee business and rates tailwinds have been main drivers for revenues. While additional provisions for Swiss franc loans in Poland put some strain on revenues, the overall high-quality of our loan book has once again been proven by continued very low credit losses.
Costs are on track with a cost-income ratio of 65% in the first quarter and capital is strong with a CET1 ratio of 14.2%.
On capital return, the ECB has approved our first share buyback, and, for 2023, we are accruing for pay-out ratio of 50%.
Regarding our transformation, the current focus is on enhancing the new business model in both customer segments. One highlight is the further expansion of our sector-specific advisory model for large corporates. In addition to around 90 German companies, which are already covered by the so-called sector approach, the model has now been extended to around 300 of our German and international major customers.
Furthermore, the new advisory center in PSBC has continued to improve its processes and is increasingly well received by our customers. It bridges the gap between the branches and digital banking.
All in all, we are pleased with the strategic and financial results of the first quarter, and are on course to reach our 2023 targets. This requires, however, the utmost effort and discipline from the entire management team. We clearly have to master some major business challenges.
On deposits, we are putting a lot of effort into striking the right balance between a reasonable funding mix and maximizing our P&L. Consequently, in light of client behavior and competition, we are managing pricing and volumes on an ongoing basis. The beta of 15% in Q1 has still been very benign, but will certainly increase over the next quarters. Bettina will further elaborate on our NII expectations and we have also added the liquidity slides to the appendix.
On assets, it's all about discipline. New business in mortgages is tough. Furthermore, extensions and rollovers at higher rates come with more intense client talks. The challenge for the teams in such an environment is not to give in on margins, and by no means to make compromises on credit standards. I'm convinced that there are plenty of lending opportunities in the German Mittelstand that meet our profitability criteria. And regarding mortgages, March has at least shown some recovery in new business.
And on expenses, we need to fight cost inflation. By means of ongoing efficiency gains in all divisions, we have to counter the impact of inflation on our cost base. At the same time, we have to prioritize our investment programs based on business cases and payback periods. Hence, we make sure that we will meet our cost-income ratio target of 60% in 2024. That is what is on the top of our daily and weekly agenda, as well as the further execution of our Strategy 2024.
This brings me to the next slide, and our good progress on ESG. Most importantly, our targets for the reduction of carbon emissions have been confirmed by the Science Based Targets initiative. This covers 85% of our finance emissions, and we are actually the first German bank with validated targets for 2030. This certification supports a core element of our sustainability strategy.
The second milestone in our ESG journey is the joining of TNFD, the Taskforce on Nature-related Financial Disclosure. Preserving biodiversity is undoubtedly extremely important for future life on Earth. By joining the TNFD, we commit to manage and report on environmental risks regarding biodiversity.
Number three of our recent achievements in ESG is our Impact Solutions Platform. This is a digital marketplace for business and corporate customers. Our clients can network with currently more than 80 providers from the green tech sector and can find innovative solutions for their sustainable transformation. This is an important building block to support our corporate clients in achieving their carbon emission targets.
Let me conclude with my key takeaways before I hand over to Bettina for the financials: first, our transformation is on track, and we have had a strong start to the year with a good set of results; second, by means of strict performance management, we continue to tackle the challenges on deposits, assets, and expenses towards our targets in '23 and '24; and third, our capital return plan is on track with the ECB approval of our first share buyback. The approval also sends a clear signal from the ECB that we are on the right path with our Strategy 2024.
And now, over to you, Bettina.
Thank you, Manfred, and good morning also from my side. I will now go through the financials of the quarter.
As Manfred said, we had a very strong start with an operating result of €875 million, leading to a net result of €580 million and a RoTE of 8.3%; clearly, a big step towards our financial target. The result is based on underlying revenue slightly higher than Q1 last year, excluding the effect from legal provisions for Swiss franc loans.
Underlying net interest income has continued to improve compared to Q4, nearly compensating the loss of benefits from TLTRO. Commission income has also developed well as the securities business has picked up in PSBC.
Costs have come in at €1.7 billion. This is in line with our target of €6.3 billion for the year. It includes higher accruals for variable compensation as a consequence of the good performance in the first quarter. With a cost-income ratio of 65% for the quarter, we are on track.
The risk result was a low €68 million in Q1, and our top-level adjustment of €483 million is virtually unchanged on group level and remains fully available. Thanks to the good [profitability] (ph), the CET1 ratio has improved to 14.2%. This is after deducting the accrual for a 50% pay-out ratio from CET1 capital.
I will skip over Slide 8, which confirms that we have improved in all key financial indicators. This quarter, we had only minor exceptional items of €13 million. This leads to the underlying revenues, starting with the commission income on Page 10.
Corporate Clients have continued its stable performance with a healthy bond business compensating a weaker FX business in the first quarter. PSBC Germany has markedly improved the contribution from the securities business compared to Q4. The first quarter is always seasonally stronger with a higher number of transactions, but also the volume of securities in customer accounts has increased, both from market moves and new money.
Now to NII on Slide 11. In the first quarter, underlying NII has continued to increase by 4.5% compared to Q4. The main driver has been the effect of higher rates on floating rate and short maturity instruments. These are mainly held at Others & Consolidation, leading to an increase of NII by more than €100 million as their interest payments have reset. There are, however, hedging derivatives with offsetting effects that are reported in the net fair value result.
In the customer segments, there has been a slight decline in underlying NII. The reduced NII and PSBC Germany is mainly due to less benefits from the early repayment of mortgages. Looking at the deposits, the is still quite low beta did not yet have a big effect.
In Poland, central bank rates have been stable at 6.75% since September last year. In this environment, there has been a gradual increase of mBank's deposits beta, leading to the reduced NII in Q1. In Corporate Clients, revenues from deposits continued to increase. The decrease in NII is mainly due to higher funding costs in the trading book and slightly lower contributions from loans.
On the next slide, I will cover the expected developments in 2023 that reflects several dynamics. Let's first start with our assumptions and sensitivities to give you a clear picture of our base case and the upside potential.
We have adjusted our internal base case. It is now based on forward rates at the end of Q1. These are higher than what had been assumed in our base case in Q4. As a consequence, and including the contribution from the good first quarter, we expect an NII of around €7 billion for the year. This is substantially higher above the -- this is substantially above the €6.5 billion assumed at the beginning of the year.
Q1 clearly benefited from a benign deposit beta of around 15%. As we see an increase in the beta from month-to-month, we have assumed an average beta of 35% for the remaining third quarters of this year.
The trajectory of the deposit beta is highly dependent on competitors' and customers' behavior. A steady increase of the deposit beta during 2023 is clearly to be expected, especially as several established banks have started to offer attractive incentive rates for new money that we had direct, [too] (ph).
The sensitivity of NII to deposit beta remains high. If we manage to pass on 30% rather than 35% at slightly reduced volumes compared to Q1, we will add another €300 million to NII. Though, this is not our base case, it shows the clear potential upside until the end of the year.
Looking beyond 2023, we will start to benefit from the rollover of our model deposits. But this is a longer-term process. The benefits are not yet large enough to cover the immediate effect of a higher beta.
Poland is already further along the path of beta adjustments. As anticipated, first effects of higher beta are visible in the Q1 results. We, therefore, maintain our expectations for NII at mBank this year with a potential for further upside.
With that in mind, let's move to cost on Slide 13. With active cost management, we have successfully compensated headwinds from inflation and ongoing investments. We have cut occupancy expenses by reducing office space in the headquarter and closing branches. Personnel expenses benefit from our FTE reduction. Furthermore, we had less expenses for external personnel.
Operating expenses are slightly higher year-on-year due to increased accrual for variable compensation. Compulsory contributions are lower, thanks to decreased European bank levies. Here, the reduced growth in deposits helps. In total, we are on track to reach our cost target, and we will continue to focus on measures that can counteract the inflationary pressures we face.
The next two slides detail the risk result. The €68 million risk result reflects the high credit quality of our portfolio and the resilience of our customer base combined with the avoidance of a recession in Q1. The corresponding cost of risk on loans is only 10 basis points. We clearly expect an increase from this very low starting point for the remainder of the year. A lot will depend on the overall economic development. We continue to expect a mild recession in the course of the year while GDP in Germany has been stagnant in the first quarter.
Our top level adjustment has barely changed on a net basis during the quarter. On a segment level, it has increased in PSBC and decreased on Corporate Clients. In PSBC, we have made some adjustments to the assumptions for the impact of interest rates, inflation and energy prices, leading to a €42 million increase of the TLA. In Corporate Clients, there were some TLA-relevant downgrades, and it was accordingly used to cover these. In addition, there were some changes in the portfolio, allowing a small release of the TLA. In total, the TLA was reduced by €42 million. A TLA of €483 million remains available to cover secondary effects in the rest of the year.
I will now quickly touch on group results and the tax rate. The operating result reflects a good revenues, ongoing cost control and the low risk result. Having covered these drivers already and the NII and NCI in detail, I will now briefly cover fair value and other income.
The negative fair value result, primarily reflects the effect of higher interest rate on hedges and Others & Consolidation. As already mentioned, there is an offsetting positive effect in NII. The negative other income predominantly stems from the provisions for Swiss franc mortgages. The tax rate was 32%. [It is, of course] (ph), early and the tax rate can be influenced by unexpected external effects. But for the time being, I assume the tax rate of the financial year to be at a similar level.
The next slides cover the operating segments starting with Private and Small-Business Customers. On the asset side, we have seen a stabilization of the mortgage volume in Germany. There has been a pickup in demand through the quarter, albeit at slightly lower margins. Most likely the [trough] (ph) of Q4 is behind us, but we don't expect a strong pickup. Also demand for consumer loans remain subdued. The securities business has performed better than last quarter, both in terms of transactions and volumes. We have seen a net inflow of more than €3 billion, and also an increase in the sale of life insurance products.
The total volume of deposits is up year-on-year, but lower than in the previous quarter. The reduction is due to cyclical and seasonal factors. Customer face higher expenditures due to inflation, also annual payments like for insurance products are usually made in the first quarter. At the same time, customers are looking for higher yields as rates have gone up. This takes the form of shift from sight deposits to term and core deposits, as well as investments in securities. In addition, there is increasing competition for deposits. These factors will continue exerting the influence and contribute to a higher deposit beta over time.
This brings me to the performance of PSBC on Page 18 and 19. PSBC had a very successful quarter. All customer segments of PSBC Germany have improved revenues. Underlying NII is up 23% or €114 million, while provision income is only down 5% or €28 million compared to the exceptionally strong first quarter last year. Also costs are slightly lower year-on-year. As a result the pre-provision profit improved by 33% and the cost-income ratio reached 67%. The operating result improved by only 7% as the risk result was boosted by the increase in the TLA while there was a release in Q1 last year.
mBank also had a very successful quarter with their underlying business reaching an operating result of €262 million before provisions for Swiss franc mortgages and credit holidays. This represents an increase of 49% year-on-year. This was mainly due to better NII. As in Germany, the NII growth has, however, stalled due to increasing deposit beta. With the additional provisions of €173 million for Swiss franc mortgages booked in the quarter, mBank now has a very respectable coverage ratio of 61%. The volume of outstanding mortgages has decreased from €2.5 million to €2.3 billion as mBank was able to agree on more settlements with customers. The final cost from the Swiss franc mortgages are, however, not yet clear, and further burdens can't be ruled out.
The next two slides cover Corporate Clients. In Corporate Clients, active portfolio and RWA efficiency management continues. Average RWA efficiency has increased significantly from 6.1% to 6.7%. There was good progress in lowering the percentage of clients with an RWA efficiency below 3%. We are -- sorry, we are now at 23%, already below our target of 26% for the year. This is driven by increased cross-sell and the deposit business.
Volumes in the loan business were stable in the quarter. In this context, there was recently heightened interest in bank's commercial real estate exposures. We do not have any U.S. exposures, and have included a page on our exposures in the appendix for those who are interested. Additional information on liquidity is included in the appendix as well.
In the deposit business, Corporate Clients managed to increase volumes throughout the quarter, following the seasonal dip in Q4. As expected, more deposits were shifted to interest-bearing products, leading to increase in the deposit beta.
With an operating result of €539 million, Q1 was a record quarter for Corporate Clients. All customer groups have achieved revenue growth with the main driver being interest income that is up 36% year-on-year. At the same time, costs are down by 8.4%. This has led to a 74% improvement in the pre-provision profit and a cost-income ratio of 55%.
Finally, a quick look at Others & Consolidation. Others & Consolidation reports an operating loss of €54 million. This is to a large extent due to compulsory contributions and additional accruals for variable compensation. The additional accrual is booked in Others & Consolidation and will be allocated to the segments in the course of the year. As mentioned earlier, the increase in NII is mostly offset in the net fair value result. We stick to our guidance that we expect Others & Consolidation to have a relatively low contribution, positive or negative, to the overall results.
Credit risk-weighted assets have increased by €2 billion quarter-on-quarter. This is largely due to booking an overlay to anticipate the impact of adjustments resulting from the ECB audit of our internal credit risk models. We have built additional capital, thanks to the positive net result, more than offsetting the RWA increase and bringing the CET1 ratio to 14.2%. This translates to a buffer above MDA of 420 basis points, well above requirements.
And now to our outlook for '23 on Slide 24. Our outlook assumes a mild recession and is subject to the further development of burdens from the Swiss franc mortgages in mBank. For the financial year, we expect commission income on previous year's level and interest income at around €7 billion, with a clear upside potential in Germany and Poland. We maintain our target for group expenses at €6.3 billion in 2023. However, our key steering metric is the cost-income ratio. The risk result is expected to come in well below €900 million, assuming usage of the TLA. Further, we expect a CET1 ratio around 14%, and we expect a net result well above 2022 and target a pay-out ratio of 50% in line with our capital return policy.
Thank you very much for your attention. Manfred and I are now very happy to take your questions.
[Operator Instructions] And first up is Johannes Thormann from HSBC. Over to you.
Good morning, everybody. Johannes from HSBC. Three questions from my side. First of all, on your deposit beta, you say, you expect an increase to 35% until year-end. Can you give a breakdown to retail? And also probably how much of your corporate sight deposits are interest rate bearing and what would be your corporate deposit beta?
Secondly, on your loan book in retail, your mortgage book declined a bit. Can you give us a feeling how the new business has developed in the past quarters looking at the market? And also on the consumer loans, a bit surprising that the book dropped despite more difficult times when people would probably go for [niche] (ph) customers. And as you didn't have the big increase in better times as well, is your product positioning in this product the right one?
And finally, on your Polish FX mortgages, you said, 61% coverage is a nice one. What is your final expectation? How much coverage do you really need? Thank you.
Yes, thank you, Johannes. So, let's start with the first one on the deposit beta. I mean, we have seen in the first quarter, 15% after just, as a reminder, we have seen 9% in the fourth quarter and -- or in January I think, that was the one. In any case, I mean, this is always a blend, also the 35%.
So, we see already today also a higher deposit beta for Corporate Clients, because as we all know, corporate treasurers turnaround and negotiate their share right after interest rates move. So we also pay on sight deposits, but a small share. And for Corporate Clients, we do not pay for sight deposits for private clients. And then clearly, the core money is lower pass-through rate and it goes up then for term deposits.
And what our assumption now is that, in the next three quarters, we will see the 35%, that's the basis for the €7 billion. Equally speaking, we are now mid-May, I would say, it will be pretty tough to reach 35% for the second quarter. So, I am rather optimistic on the so-called upside potential here.
On your second question, loan book in retail, I mean, we are now growing exactly according to market. Market has been down. The absolute trough, which we have seen in November, December is gone. So it has recovered, but it is not -- it's not -- they are not the same numbers as we have seen in previous years. And we also do not expect a recovery to that, at least not short term.
And for consumers loans, I mean, there are two sides of the story. You could say you could use the times now where people need more money to do more consumer loans. If you come from a risk management perspective, you probably are rather cautious on that. And therefore, I mean, clearly our expectations would be to, at least keep the consumer loan book, but we also want to keep our conservative risk management approach. So, therefore, I would not expect too much change here in the coming months.
And on FX mortgages, I mean, that all depends whether this coverage ratio of 61% is enough, all depends on the future verdict or rulings from ECJ first and then the Polish courts second. And if I assume for a moment that the proposal of the KNF Chairman, the so-called [JJ] (ph) proposal is still a valid compromise, we would be fully covered. If we think about the statement of the general attorney, in February, he'll start -- he doesn't see any compensation of the banks for the 10-year loans they gave to clients, then damage would be higher and there would be some further burdens to come. So, I think we all need to stay tuned until the ruling on 15th of June.
Okay. Understood. Thank you. One follow-up on your deposit beta. If we even assume a share of 25% of corporate deposits to be interest-bearing, you still have 65% overall non-interest-bearing deposits, something like this, so the deposit beta of the rest of the book must be one at the end of the year. So while it would be nice for customers, I doubt that you're that generous, or should we rather expect that future increases all go to the customer?
Well, first of all, I mean, what you see and you have seen that also in the past months is that, you will see a shift from sight deposits to term and call money. You will see that still on the corporate client side, but also on the private client side. That's number one. And number two, if you just go back in history, when we had positive interest rate environment, a pass-through rate of 90% was very common on the term deposits, for example, on the term money.
Okay, thank you.
Next up is Benjamin Goy from Deutsche Bank. The floor is yours, Benjamin.
Yes, hi, good morning. Two questions, please. For the first one, please, on net interest income, I guess, we had this question last two quarters, the same one again. Is Q1 now the peak, because [it seems to be] (ph) replacing your full-year guidance?
And then, secondly, on the 50% pay-out, can you explain a bit more on the mix between dividend and buyback? And would you also look into a second buyback maybe with Q3? A lot of conditions might apply, and I guess, your profitability remains good and capital ratio as well. Or is it more like you wait for full year results and would then execute another buyback only in '24? Thank you very much.
So, Benjamin, on your first question, yes, I mean, the NII in Q1 is probably the peak, because if you take the base case and even also the upside potential, if you would multiply on first quarter times four, you would come much higher, and we don't believe that as long as the ECB is not surprising us and is planning some further rate hikes, which we haven't assumed because we stay cautious and we just assume that there will be one further interest rate increase by 25 bps. Clearly, if there is more, then this would change. But besides that, we would see that there will be further pressure on the deposit beta, and therefore, you will see a slight decrease. But still, I mean, taking a number of €7 billion plus, it's a huge number compared to the previous years. And as a reminder, we started the year with a base case of €6.5 billion. We are now at €7 billion, that's an increase of €500 million, which I think is pretty decent.
On your second question, with respect to the 50% pay-out, I mean, you have seen that now for the 30% of 2022, we did a nice split, that is something which we would decide. You also know how our capital ratios are, they are very decent and we will now start with our first share buyback as it is improved after the AGM in June. And then, we clearly will take it from there. And after the second quarter, we will be smarter, and then give you an update on that. But share buybacks, given the undervalued situation of our shares, I would say is always a good option.
Understood. Thank you.
Next up is Stuart Graham from Autonomous Research.
Hi, thanks for taking my question. I had two please on NII again. First, can I just check my understanding on your interest rate hedges? I believe the book of model deposits is around €130 billion, but it has an average running yield this year of around 1%. And then the portfolio rolls around 20% a year. Are those three numbers right, €130 billion, 1%, 20% a year?
And then the second question is group center NII is usually at €100 million a quarter, but it was €229 million in Q1. What are you assuming for group center NII Q2 to Q4 in your €7 billion guidance, please? Thank you.
So, I mean, on the -- I'll start with the second question on the €229 million, there is approximately €100 million, which is due to the fact that we have here -- that we swap our banking book bonds to floating, and that treasury then invest excess liquidity in money markets instrument, that is good for €100 million additional NII, and the interests are shown under NII, whereas the results of the swaps are shown under net fair value. So, there you have basically this offsetting net fair value versus NII. So, we have assumed for the coming quarters a normalized thing here again.
And on the -- on your first question, I would say, the 20% is probably a little bit too high. It's something around 10% to 20% dependent, yes, on the tranche, and the 1% is -- sounds good and also the volume itself sounds reasonable.
So that -- I mean, to state the obvious, that should give you a big benefit in 2024, 2025 and beyond. Does that -- I mean, 1% versus the current 3%, I mean, there is a massive reinvestment benefit coming. And I know it will take time to phase through, but it's there, yes?
Yes, I mean, that's exactly what I also said in my speech that, I mean, we will benefit from the model deposits, but it takes time. And the development of the deposit beta is a little bit faster than what we see coming in as a result of the modeling. That's absolutely the case.
Thank you for taking my questions. Thanks.
And our next question comes from Jeremy Sigee from BNP Paribas Exane.
Good morning. Thank you. Could you talk a bit about the deposit volumes in Germany? You mentioned having to balance, keeping a strong funding position with optimizing the P&L. You've seen a reduction in average deposit balances. Could you talk a bit about what sort of balances those are? And how you see that optimization going forward? That would be very helpful.
And then a different question I had was just on RWAs over the remainder of the year. You mentioned that you've increased RWAs a little bit here, anticipating ECB model review. I just wondered if you expect any further methodology impact over the remainder of the year on RWAs?
Thank you. So, on deposit volumes, I mean, we assume pretty much a stable development for the remainder of the year. We also expect that there will be further shifts from sight deposits into call and term money. Besides that, I mean, it also depends a little bit on the development of the inflation, because we have seen that there is a decrease in liquidity of retail customers due to the fact that inflation is ongoing.
But on the other side, you also see then the flip side, on the corporate side, because they are most of -- in most of the cases on the receiving end of it. But clearly, some of the movements, but we also, I mean, analyze and monitor the market very carefully. And then also come out with product offerings for our clients to stay competitive. We now have a call money out there for comdirect clients, and we also have a very attractive call money offer out for our Commerzbank clients.
On the RWA side, the €2 billion is really the only thing which we expect for this year. I mean, there is -- at a certain point in time, there is Basel to come with some effect, but that is still some time out. But for 2023, it's basically the €2 billion, which we see on the credit risk side.
Can I just follow up, ask you on the deposits, the outflow you saw here? Can you sort of -- is it any particular type of deposits, or was it sort of large ticket clients, or was it sort of broadly spread across the base?
No, I mean, we clearly benefit from a very, very fragmented deposit base. Just look on the numbers, we have 90% of our deposits are insured in Germany and of which 65% are insured via the statutory protection scheme, which means they are below €100,000. So we have such a high fragmentation. And clients do a lot of different things. We also have seen an inflow into securities. They also go into some other papers with high yields. So, it's very different stories. For us, it's clear that we keep or we want to keep the volumes in-house, but we're also very happy if clients want to do more securities business with us.
That's very helpful. Thank you.
The next question comes from Vishal Shah from Morgan Stanley.
Hi, thank you so much for the presentation. My first question is on NII. Looking at the trends of the core businesses, I am a bit surprised that you had lower NII Q-o-Q just given the fact, looking at the system trend, the deposit beta still tracked very low in Q1. And just peers have performed much better in terms of NII as well. You do mention some reasons for German retail, i.e., lesser prepayments on mortgages, on corporates, higher funding costs on the trading book. So it will be great if you could give a bit more clarification or color on the trends by division.
And this question also goes for the mBank NII, where you said deposit betas are increasing, which caused Q-o-Q NII to sort of decline. Again, looking at the peers, most of the peers have grown NII Q-o-Q, and the deposit beta on the system level has barely moved. So, a bit surprised on that trend as well.
And just in terms of the deposit or the rates being offered, can you give a bit more color on what are the rates offered right now by Commerzbank? And why is the mix shift that you've seen this quarter? I calculate about 5% more in term deposits in Q1 versus December. This is higher, much higher versus the system level mix shifts. So just wondering why that shift is much higher at Commerzbank, and then what sort of rates are you offering right now? Thank you.
Okay. Let me start with the latter one, the rates being offered. So we -- I mean, we have individual agreement on the term deposits. But on the call money, which is the most prominent one, we have an offer for comdirect at 3.05%, and for Commerzbank, 2.5%. While we have seen a higher movement into term deposits, that's probably due to the fact that we have just started on Commerzbank with a call money of 2.5%. So before that we were at a level of 0.6%. And then clearly, if you don't need the liquidity then term money has been more attractive for clients. And that's, I would say, the main reason it should become now more attractive also to get into call money apparently.
On your first question on NII, I mean, it's -- I don't think that we have a different movement on deposit beta than the rest. I think on private clients, as said, the deposit beta also didn't have a large impact on Q1. It's rather more that we changed a little bit how we show the benefits from early repayments because that is basically also an offsetting factor because what you have shown on private clients, you have shown the flip side in Others & Consolidations, and we decided to just take that out. That's the main reason here. But as such, I mean, we see some movements on the deposit beta now in private clients, that there will be an impact on NII here.
And on Corporate Clients, we have seen an increase. So the NII from deposits has increased despite also an increase in deposit beta. And it was more the funding costs which had -- and had an impact here. So not the core business.
And on mBank, I mean, if you look on the mBank development, we have an environment here where you have 6.75% as a rate since September. It was absolutely clear that a certain point in time there would be a certain increase in deposit beta, but still we are very confident to show here very nice numbers and a €1.7 billion is a very good number for mBank, also assuming that there is even some upside potential. And just as a reminder, if you take -- if you exclude the Swiss franc burden out of it, they made more than €250 million in the quarter. That's, I mean, pretty convincing for a bank of this size.
Okay. Thank you very much.
The next question comes from Riccardo Rovere from Mediobanca.
Good morning to everybody. Thanks for taking my questions. Sorry to get back again to the deposit beta. Bettina, correct me if I'm wrong, in Q4, you set the deposit beta at 30%, and the 30% was based on the evidence, the experience you had last time rate started to go up in the euro area ages ago. Now, in the first quarter, you say, you have experienced 15%. Now, one quarter at 15%, and then three quarters at 35% by magic, and again a 30% on a weighted average basis. So, the question here is, is 35% a number that you have chosen to maintain the original 30%? Because if you start at 15%, you need to go higher. Or is 35% a number that you see on the ground? What's happening in the branches and so on? This is the first question.
The second question I have is on -- I think it relate a little bit to what Stuart asked before, the €100 million NII traffic between NII and trading is something -- is the €100 million mentioned by Stuart referring to that? Or is something that I completely misunderstood? And if that is the case, is this, let's say, €100 million contribution to NII something that is going to stay there or may eventually keep moving up and down?
And the third question I have is on the credit losses. Your base scenario is mild recession, right, wrong, no one knows. But, let's say, if you look at most recent market forecast, maybe recession is not exactly the central case. If -- did you have -- would you be able to share with us the €900 million, what that would like -- would look like if instead of a mild recessions, we had a mildly positive GDP? Would that make a big difference? Thanks.
Yes, thank you, Riccardo. So on your first question, you did the math absolutely correct, that the 15% in the first quarter and then the subsequent quarters of 35% and up again with the average of 30%, which we reported in the last quarter is our forecast for this year. And we also said that in 2024, we would then expect a 35% because we feel that this is a good deposit beta in a stable interest rate environment, always assuming that there's not further large increase or decrease of that.
So, I mean, as I said, the 35% is something, which we believe we will most likely end up. The only question and that's the rightful question is, when do we do that? And as I said, probably it is very unlikely from current standpoint that we will end up already at a 35% for this quarter, which is that there is probably already today some upside potential realized. That's number one.
Number two, the €100 million, it's hard to predict, but this is why we say it's net effect or net zero effect on group level, and there will be up and downs. But, I mean, the €100 million is something, as long as the interest rate level is not totally changing, that you could -- you might see also in the coming quarters.
And then, the third question on credit loss. I mean, if you combine the €900 million plus the €500 million, it's €1.4 billion. That's huge. I think we all agree to that. So the whole question is, where do we end? Do we have some top level adjustment, we would still take then into 2024 as we have seen that also in the shift from 2022 to 2023? I chose my words carefully when I said that, I expect already today a risk result well below €900 million because my fantasy is not that big that I really believe that we will end up this numbers, always assuming that we will also use some of the top level adjustments.
I mean, clearly, if we see a complete surprise and we will even see a positive GDP growth that will then also definitely have an impact. And then you will even see lower risk results, but there we tend to stay a little bit cautious because of the year is long, and the consensus between among corporates is also, I would say, mixed reactions. So we just wait and see how the next quarters are developing.
Thanks. Thank you very much.
Next up is Tobias Lukesch from Kepler Cheuvreux.
Yes, good morning. Three questions on my side as well, please. Again, I have to touch on the NII. If I do the math really with the margin plus, we see basically with a quarter in Q1 that had basically the lowest day count. I'm really wondering, right? I mean, how much of the impact is really down to the deposit beta increase? And you elaborated on it a couple of times, but could you maybe tell us where the year-to-date deposit beta on a group level is as of today? I mean, that would be very interesting to really understand how much caution you applied basically to your increase -- nevertheless increased NII sensitivity outlook.
And then coming -- or with regards to the fees, I think earlier on, you mentioned very good payments. You also mentioned the fact that some of the deposits were shifted into securities. And you kept your guidance with a flat net commission income. And consensus is way below that, I think, 10% below that from the latest consensus you collected. So I was wondering, like how much comfort you actually have on that fee and the payment side, if it stays at really a good level of around €800 million for the quarters to come, or if you see some fluctuations there?
And lastly on the distribution again, I understand that you have this total pay-out outlook of 50% basically. I mean, if we apply that really on the consensus forecast, we get to a kind of cumulative pay-out of around €3.5 billion basically over the next years, which is considerable with regards to your market cap of €12 billion. So I was just wondering like has that potential further upside, or how do you see the chance that you are returning kind of above 30% of your market cap in the coming two to three years? Thank you.
Yes, thank you, Tobias. So on your first question on NII, I mean, the volatility or the impact of the deposit beta is really high. If you look in -- on the slide, you see that 1 percentage points equals to €55 million. So it really makes a big difference where we end up. And as I said, for the second quarter, we are a little bit -- we were in the first quarter, we were at 15%, we have now seen some increases, but we are slightly above now the 15%. So this is why I believe that probably the 35% will be difficult to reach in the second quarter.
On your second point...
Bettina, sorry. If I may, I mean, if you say you're slightly above the 15% currently on the group, right, and you had 15% for Q1, that would mean that there was really little incremental deposit beta increase in that quarter, and we have seen half of the quarter. So that means, I mean, in a very conservative way you could argue for maybe on average kind of 20%. If I then go with Riccardo's calculation, I mean, that would mean an immense increase towards the year-end basically to get to an average 30% irrespective of the 35% you're basically assuming in your modeling. So either you are way too cautious this year or next year, right? I mean, is the downside more next year that you rather think 50% deposit beta is more likely, or is it more a 35% in '24?
So first of all, we think that as long as we do not see further increases in the interest rate levels of 35% is a fair guess as a target state where things could stabilize with respect to the deposit beta, first thing. And as such, I mean, we are very optimistic for the years '24 and '25 to come, given that we have a high share of model deposits where you will see the benefit coming in over time. And, I mean, that's what we said.
I mean, the 35% if we just assume that for all three quarters, we will only end up with a 30%. So after 15%, 30%, 30%, 30%, then you will have €300 million more as net interest income. So, yes, I mean, we said the €7 billion is the base case, and there is clearly upside potential, and it depends on the appetite on how fast you believe you will see an increase in deposit beta. In the moment, our activity is pretty high. We just came out this week with a 2.5% call money for our Commerzbank clients. But still, as I said, very optimistic for the second quarter.
Now, to your second question, net commission income. We also are rather optimistic that we get at the same level of last year. So we think that there probably analyst expectations are a little bit too conservative. I mean, all depends on markets as we all know, because 50% of our net commission income at least on the private client side very much depends on market development. If we see crush in DUCs, we will also see it in our net commission income. But assuming that we see at least a normal development, and we follow the expectations of everybody on the DUCs, then we should see that.
I think from a guidance point of view, we probably are -- only think that on the fair value result, the expectations are a little bit too positive. So if I would be in your shoes, I would probably review rather the fair value estimates because they are a little bit too high, while NII and NCI feels not too bad with respect to the consensus.
And then, last but not least, on the pay-out ratio, I mean, we have in the capital return policy, we have the 50% and we want to definitely stick to that one. We said about share buybacks can be part of the 50% or could come on top. That's still valid. And that's clearly dependent on the future progress in our profitability. But I think we have a lot of flexibility if we achieve our targets in 2024, which we intend to do, which means we will see a 60% cost-to-income ratio and RoTE, which is clearly above the 7.3%.
Thank you.
And the next question comes from Amit Goel from Barclays.
Hi, thank you. I guess, a lot of questions on NII, but I'll then ask a different one. Just in terms of the capital return and the buyback, so you've got the approval for €120 million or so. I just want to check now in terms of the process with the ECB, in terms of further capital return, does this now make it a bit more straightforward? What's the process entail? How quickly can you increase the amount you return? And what are the various kind of steps required? Thank you.
The process has not changed. I mean, we have the approval and we will reconfirm that by the AGM, end of May, with respect to 10%. So that's there. And then, we need to have approval from the finance agentur, as they are the representative of our -- of the federal state of Germany as a key shareholder. And ECB has clear regulation about the application of -- for share buybacks, and that is something which takes between three to five months. And that has not changed. But clearly, we'll have now tested the process, and we got the approval. And so, therefore, we will plan accordingly. And we know what the preparation time is for something like that.
Okay, thank you. And could you say after Q2, there will be some sort of update? Is that...
Okay, I didn't get that one.
After Q2, maybe I was looking at Bloomberg headlines sort of, but some sort of update to come?
Absolutely. I mean, we now concentrate on, first of all, completing second quarter and secondly doing the first share buyback of €122 million and then we move on.
Okay. Thank you.
The next question comes from Anke Reingen from RBC.
Yes, thank you very much for taking my question. Sorry to just come back on the deposit beta, but just one question. I guess, your deposit pricing strategy plays a role, and I just wanted to make sure you're not becoming like a price leader on deposits, so we end up with the targeted deposit beta even at the lower end.
And then second, in terms of the costs, can you help us with what level of bank levies we should expect for 2023 that feeds into your cost target? And is that the run rate going into '24, of which we then take off the Single Resolution Fund contribution? Thank you.
Yes, I mean -- Anke, thanks a lot. I mean, we do not intend to be the price leader on deposit pricing, that's for sure. But we clearly monitor the situation. And it always a fine balance between keeping our profitability, but also meeting customer requirements, and that's what we do. And we will follow-up on this strategy. So I'm -- I think we are the last ones who would not like to end up with the deposit beta of 30% instead of 35%. But as said, it's very much dependent also on customer and competitor behavior.
In the bank levy, our expectations for 2023 is a little bit less than €500 million, that's the latest guidance from us.
Thank you.
And we have room for one more question, which comes from Borja Ramirez from Citi.
Good morning. I have two quick questions. Firstly is on the deposit migration. I would like to ask what proportion of sight deposits to total deposits we should expect going forward? I think in the Q4 results, you may have mentioned above -- over 50%.
And then, my second question is on NII 2024, just if you could kindly provide some indications, some consensus expect -- some growth?
And then, lastly, if you could provide some clarity on the mBank NII? I think -- so, on the adjustment between the local reported NII and the NII reported in Commerzbank accounts, I think there may be some adjustments there. Thank you.
Yes, thank you, Ramirez. I'm not totally sure that I got your first question right. What were you referring the 50% to? I'm sorry, can you just repeat that one?
Sorry. Of course. My -- so the 50% is related to the contribution of sight deposits to total deposits, which I think this target may have been mentioned in the Q4 results.
No, it seems to be rather low, I mean, in the moment, we are at two-third sight deposits, one-third term and call money. And clearly, I mean, we expect further shifts, but we didn't mention a 50% share. Actually, I would definitely target to stay a little bit higher with respect to the sight deposits, at least for private clients. Also given the segmentation, which we have in sight deposits.
And on your second question, with respect to NII 2024, I mean, we are in the middle of 2023, and given all the development and we just see that, it's already tough. It's pretty clear that we will see further increase, and that's our expectation also because of the model deposits, always assuming what we do that the interest rate levels will stay at the level, which we currently see. So that's the main assumption. And then due to the modeling approach, we would see further increases for the years after 2023.
And then, last but not least, mBank, I mean, right question. I mean, you -- first of all, you have differences because of FX, and that's one of the key things. And then you have some things, which are applied differently in mBank accounting and Commerzbank accounting, versus back to either allocating it to NII or fair value, that's key differences.
Okay. Then thank you very much. I will take the opportunity to thank you for your questions. And as always, Bettina and the entire team is ready to answer your questions and your follow-up discussions over the next days and the coming weeks. So, we say thank you very much for your participation and question, and looking forward to seeing you again soon. Thank you. Bye-bye.