OTP Bank Nyrt. (OTP) Earnings Call Transcript & Summary

Dear ladies and gentlemen, welcome to the OTP Bank Second Quarter 2020 Conference Call. This conference call will be recorded. [Operator Instructions] May I now hand you over to László Bencsik, Chief Financial and Strategic Officer. László, please go ahead.

Thank you. Good afternoon or good morning, depending where you are, and thank you for joining us today on the conference call. We continue the practice that we started last time that I won't be the only presenter. We have Mr. György Kiss-Haypál, our Head of Risk, Chief Risk Officer. He's going to elaborate on the risk topic and as a new participant on these conference calls, I will introduce Mr. Gergely Tardos , who's our Head of Research. He will elaborate on the macro expectations what we have. We follow the usual format. So we start with a presentation, a formal presentation. The new element is that those of you who join through the Internet, through Zoom can actually follow with me on the screen, the presentation itself. For those of you who joined in through the telephone line, just calling in, I will still tell on which page I am more or less in order for you to follow it in the presentation. The presentation has been put on the website. So it's available there. So for those of you who don't follow me on the online platform, hopefully, you have been able to download it and also follow. So Page 2, the overall summary of our profits. Basically, the second quarter was considerably better than the first quarter. We made HUF 82.2 billion adjusted profits and the accounting profit was HUF 78.8 billion, which is in stark contrast with the first quarter, but actually the accounting profit was negative and the adjusted one was HUF 31.8 billion. So it's clearly a different quarter than the first quarter was. If we go to Page 3, we can see the adjustments that we booked in the second quarter. And again, on this slide, we have a much, much smaller number than in the first quarter. So total adjustments were HUF 3.6 billion. Obviously, in the first quarter, we had 2 large items, which moved this number up to almost HUF 36 billion negative. One was the bank tax, the bank tax in Hungary and the other one was the moratorium in Hungary for which we booked for a negative present value change in the cash flow of flows due to the moratoria rules in Hungary, which did not -- or do not allow the interest -- on the accrued interest charge. On this and -- but in the second quarter, we see much lower number here, lower numbers of share. Basically, probably the most important is that we actually decreased the charge on the moratoria and there was some improvement here. And we continue to book expenses related to the integration merger projects and that you can see here, that was a -- this was a sizable negative amount. And this is something, which is going to continue as long as we work on these integration projects across the board. On Page 4, you see the composition, the breakdown of the major P&L items. And I think it's very visible that it was the risk costs, which drove performance both on a year-on-year comparison basis as well as on a quarter-on-quarter comparison. So if you look at the year-on-year, without acquisitions numbers, because if you just compare the pure data, then it can be somewhat misleading since we have actually included 3 more entities in the second half last year. Therefore, in order to get a clear picture, you actually have to look at the without acquisitions numbers. So if we compare the first half to last year first half, then what we can see is that revenues were pretty much flat, minus 1% FX adjusted. Operating cost was 3% up year-on-year. That's actually lower than what we had last year in terms of year-on-year cost growth. So it shows some cost containment without the acquisitions as well. And basically, it was the risk costs, which moved considerably the numbers. And if -- and this is exactly the same in the quarter-on-quarter comparison. So in the first quarter, we booked almost HUF 92 billion. And in the second quarter, slightly more than HUF 39 billion as risk costs. Revenues were more or less flattish as well quarter-on-quarter, with lower NII and fee income and higher other noninterest income. I'm obviously going to talk about this later on. Capital. There were various elements improving our capital ratios, most notably, the regulatory changes. There were 2 changes, which we incorporated basically. One is the increase by the regulator of the possible kind of write-back in the capital from Stage 1 and Stage 2 provision increases. This ratio increased from 70% to 100%. So basically, all provisioning increase in Stage 1, Stage 2 volumes can be then written back from the capital and, therefore, don't decrease capital. So if you provision for these stages, the first 2 stages, it's regulatory neutral -- regulatory capital neutral. And this is what we introduced for the first quarter, actually. So we increased this ratio from 70% to 100%. The second item, which we apply is the lower risk weights on EU denominated currencies of the EU countries. Securities portfolios, and most notably the sovereign exposures. So these 2 together had a 30 basis points positive impact in the second quarter. Which was more or less kind of balanced by the treasury share buybacks, which we did. The good news is that there will be further regulatory changes implemented in the second half of the year. Which will -- or are expected to improve our capital ratios. So the one is the SME support factor, where below HUF 2.5 million exposure, we can apply 7% to 6% risk-weight. And above HUF 2.5 million exposure, we can apply 85% risk weight as opposed to the 100% as usual. And the other one is the softwares, the intangibles, which we have to deduct from capital at the moment, the treatment of softwares we're going to change. As far as I understand, the regulation has not been finalized. But nevertheless, we expect some visible easing here and therefore, improvement in our ratios just by these changes. And then we are in the process of selling our Slovakian bank. And as we have noted before, we expect 25 basis points improvement in our Tier 1 ratio, should this conclude. If we turn the page to Page. 6, this is probably the most exciting one out of the whole pack, and I hope it satisfies your interest and how we are going to perform during the year. Now obviously, we are in a very volatile and difficult to forecast environment. So we are very far from knowing exactly what is going to happen. And therefore, we wouldn't even call this as a guidance. It's basically our expectations. We recently updated our budget and these numbers reflect what we plan for this year. So first of all, the return on equity -- adjusted return on equity. We expect it to be above 10%, which is, I would say, not too difficult to believe and given that in the first half, we had 9.8% ROE. And in the second quarter, actually, we had more than 14%. So assuming the second point, which is the risk cost rate, to be around 125 basis points over the whole year, this doesn't seem to be a stretch target to achieve. And I very much hope that it will actually exceed the 10% visibly. And -- but for this, we need a normalization in the risk cost sales, which compared to the first quarter, obviously, started already happened in the second quarter. But our expectation is that the second half of the year will be even better in terms of overall risk costs and risk cost rates. And therefore, we can bring down this 173 basis points risk cost rate, which was the first half in 225 for the whole year. And the volume growth, last time when we talked, I said that we expect around 10%. Now this is somewhat mitigated here, and we expect somewhat less now 7% -- around 7%. It can be so and more. And I will elaborate on this when we go into the slide describing the slides -- actually 2 slides, describing the loan volume development so far. So higher than 10% ROE, 125 basis points risk cost and around 7% volume growth. The other hot topic, I think, across Europe has been at repay or don't pay or how much we pay in terms of dividends. Here, what we can say is on the chart that we -- the management is committed to paying dividends after 2020. And in terms of amount, it should be an amount, which also compensates for the dividends, which we did not pay out up to '19. You may remember that what we originally put aside for dividends for '19 were HUF 69.44 billion half. And what we say is that this amount plus an amount, which we consider paying for 2020 will be the ultimate suggestion to the AGM next year. Now the exact amount will obviously depend on our accounting profit, acquisition opportunities, the economic environment, some forward-looking expectations, and most notably, regulatory supervisory requirements because the reason we didn't pay dividend yet after '19 was due to the fact that it was not allowed by the regulator. Per se, it's possible. I mean, so far, what we have is a ban on dividend payments until the end of September, but BCP extended this until the year-end, so we haven't read about the Hungary National Bank changing this original guideline or not. But we will see what happens in terms of regulatory and supervisory requirements as well. In terms of our capital strategy or policy, it remains unchanged, basically. This range between 12% and 18% and targeting the mid-point of this range of 15%. Now there has been one change in the capital requirement, the regulatory minimum. This was decreased by 2 percentage points for '20 and '21, and it will gradually increase in '22, '23. This is the OSII buffer. So it went down to 0% from 2%. And therefore, in fact, our capital requirements decreased and the Tier 1 requirement, which, in our case, is the same as the common equity Tier 1 requirement, as we don't have a Tier 1 instrument. So it's basically 9.7%. So that's the regulatory minimum what we have to meet. And therefore, short to midterm, maybe the 12% to 15% part of this range, so the lower part of the range is more probable, given that our capital requirements actually decreased by 2 percentage points. But that's just a small add-on the caveat on the fundamentally unchanged capital strategy or capital policy, what we have. Going a bit more into detail on Page 7, the profits -- the half year profits. On the cumulative basis, Russia and Slovakia were still negative. But in the second quarter, they were already profitable. So the good news is that in the second quarter, all of our banks have posted positive results. But obviously, we see decline year-on-year due to the more difficult environment what we have. And as usual, we go into the P&L lines one by one and look at the cross-section of countries. So on Page 8, we see total income. And the overall quarter-on-quarter change was basically the 0 and this is the FX unadjusted, and year-on-year, without acquisitions, it was 3%. The quarterly changes. We have positive improvements in Hungary, Bulgaria and Croatia, and we have negative numbers in Ukraine and Russia, and those 2 balance each other out. Just a bit more flavor on the composition of the revenues of income. Net interest income on Page 9. So we have remarks for 4 clients here. The first one is the Hungarian OTP core, where we had 1% increase. This is related to the relatively dynamic volume growth, which is adjusted towards retail and within retail to consumer loans, and that resulted in this improvement. In Bulgaria, we had minus 3% quarter-on-quarter. And this is related to one regulatory tightening in the second quarter during the special wire situation, penalty interest were banned, so we could not charge penalty interest on the overdue loans. And this amount had to be also booked in the second quarter for the 2 weeks, which were still in the first quarter. So this had a negative impact. This is not going to be expected in the third or fourth quarter. It's already ended for the end of May, special time frame. And then where we had basically fundamentally negative NII trends that was in Ukraine, and in Russia. In Ukraine, there was a precipitous fall in the rate environment, and therefore, margins declined considerably. And in Russia, we had a much lower business activity in the second quarter. And since in Russia, we have short term -- typically short-term consumer loans, this already had a huge impact on the volumes -- on the interest-bearing volumes, and therefore, we had lower NII. These changes, movements you see on Page 10 in more detail. So Bulgaria, sharp drop quarter-on-quarter in the net interest margin. As well as in the Ukraine, we see a sharply declining trend. And if we want to understand the group level change of the net interest margin, which declined from 3.88% to 3.63%. So basically, 25 basis points. Here, you can see the decomposition starting with Bulgaria. This can come back, part of it is, actually, what we experienced in Bulgaria. As I said, this was more technical. Unfortunately, the others are not going to turn around. And all in all, we expect further pressure on margins, basically, resulting from the slower -- typically lower rate environment that we experienced. So the pressure continues, but we don't expect similar level of decline. So the kind of -- on a forward-looking basis, the decline -- further decline the margins, if any, should be much less than what we saw in the second quarter, so it should be much less than the 25 basis points what we saw there. In terms of volumes, the second quarter was flat of performing volumes, which we define as Stage 1 and Stage 2. And if you look at the countries, there's a huge mix, right? In some countries, Hungary, Croatia, Serbia, Romania, Albania, we actually witnessed increases. And in some countries there is quite a sharp decline especially in Russia and also in Bulgaria and in Ukraine and in Slovenia. Now these are the countries where there's either no moratoria or the participation rates are very low, like in Bulgaria. So in these countries, we typically experienced negative volume trends. And this has been exacerbated in Russia by the fact that, again, typically, the portfolio is short-term consumer loan, so changes in new production there results immediately in sharp decline of overall volumes. Whereas there's another group of countries, Hungary, Croatia, especial Hungary and Serbia, where we have a high participation rate -- relatively high participation rate in the moratoriums. So in these countries, coupled with Croatia and Romania, we actually see relatively dynamic volume growth in the second quarter, especially mortgages. So if we take another view and we look at the product mix in terms of growth, then clearly, it's mortgages where we continue to see growth. And it's consumer loans where we see adjustment with some exceptions. In Hungary and in Serbia, we continue to see relatively strong growth in consumer loans. In Hungary, it is partially explained by the baby shower loan, baby loan program, which continues. But even we add the baby loan, we had 5% quarterly growth in cash flows. And in Serbia, Serbia is a country where -- which is the least impacted, so to say, so far, by the virus situation in terms of growth. So there, also, we see a relatively strong consumer lending growth. And mortgages continue to grow. And that's -- I think, it's very encouraging because it means that people are still optimistic long term. So if I'm -- and for instance, in Hungary, the year-on-year, if you compare the first half of this year to last year, there was 27% increase in our disbursements of mortgage loans. So that means that people haven't given up on their long-term plans and they're willing to invest long term, actually willing to take a very serious commitment and investment decision. And that means that they fundamentally are optimistic and probably look at the situation as a short-term negative and clearly see the mid-to long-term more positively, otherwise, they would not commit to taking mortgages and buying new property. Corporate was also mix. And in corporate, we see similar trends. So basically, those countries where there is no moratoria, typically negative numbers and where there's a high participation rate in different moratoria as we see flat or somewhat negative numbers. And there's one more information here, I would like to share with you that. Actually, the whole quarter on a group level was 0, so flat, but June was already 1% up. So it seems that we had -- that the volume trend bottomed out somewhere in April, May. And in June, we already decided to see a growing portfolio. So master growth in June was 1%. And that encourages us to believe that the second half of the year will be substantially better. And if you look at short, monthly or weekly indicators, in terms of new loan disbursements, this is clearly the case. In each country, we see an increasing level of new production, starting from April. So April -- in April, we saw a huge drop. And then since April, we have been witnessing increase basically in all product segments in all countries. Therefore, we believe that at least 7% growth, we should see for the whole year. And that compares on Page 12 to 2% growth in the first 6 months. And then if you look at just the first 6 months numbers, we see a similar pattern what we saw on the previous page on a quarterly basis that where there's no moratorium, we'd rather have negative numbers or we look at this low participation. And where there is moratoria with higher participation, typically, numbers are more positive. On Page 13, the following page, you can see the different moratoriums. We try to share with you some background information on the nature of the moratoria and the duration, the time lines of the moratoria. But I think the most interesting number is the column on the right side, that is the participation ratios. And most notably, in Hungary, we have 43%. Household launch was 53%; and corporate loans, 31% participation rate. And this is lower than what we showed you on -- what we talked about previously. And therefore, the HUF 2 billion release what we saw on Page 2 of the NPV effect. So it was HUF 2 billion or less negative expected impact coming from this. The other country where we have high participation rate is Serbia. The overall participation rate, there is 60%. And they actually introduced or expanded the moratorium until end of September, originally, and there's another difference. Originally, interest on accrued interest is allowed. And now it's not allowed. So they are joining the majority of the other countries, other policies where interest and accrued interest is not allowed basically. And then for the rest of the countries, we have relatively moderate participation rates, which actually goes in line with the fact whether the structure is opt-out or opt-in in Hungary. And in Serbia, we have opt-out structures. So customers, our clients have to ask us for not taking the moratoria. Whereas in all the other cases, they have to ask for being in the moratorium. So that makes a huge difference. I'm sure there will be a lot of questions what we expect after these moratoriums and also whether other -- whether this policy will be lengthened or changed or what to expect for next year. And I'm sure there will be some lively discussion around those topics. But fundamentally, we just don't know, right? And so we don't know what the regulators will do. And we will share with you what we think about the economic environment. Because, obviously, if there's a sharp coming back, if the recovery is relatively fast next year, and this is what we expect, then there is clearly no need for extending moratorium regimes for all the clients for overall, but then banks can easily find the best solution on a client basis. So then I'm sure all the banks will come up with restructuring programs where they can target exact customers and curtail their programs exactly to their needs. I think that -- and then it shouldn't be a big deal. So that's a good scenario, right? For some reason, and we hope not, but the recessionary environment continues into next year. And we still believe that it's going to be a temporary situation than maybe an overall moratoria extension with a few months -- a few more months might be the right solution for a given country. But we just don't know yet if this is going to be the case or not, we hope not. In terms of deposits. We had second quarter 2% increase, and this is very typical then when this -- when in a recessionary environment, spending decreases and saving rates increase, and that's what we have seen here. So basically 2% increase in one quarter in deposits. And therefore, our liquidity coverage ratio actually increased to 190%, so almost 200%. And the net loan-to-deposit ratio declined to 7% to 9%. So we're quite liquid. And if we look at the countries, basically, in Croatia, there was negative. It's seasonal, right? There is summer season is typically negative in terms... And then in Ukraine, the good news is that because -- I mean previous -- those of you who remember what was -- what the topics were 10, 12 years ago. One was, for instance, the group funding to Ukraine, right? This was a huge topic used to be. Now the good news is that actually now Ukraine is a net contributor to the group. So Ukraine is very financing the group with a small amount, I mean, albeit. But nevertheless, it's important that we don't have a group exposure there. And Russia is also self-funded. So the reason that we have lower volumes here in terms of deposits is not because deposits wanted to leave us, it's because we just don't want to pay for excess deposits expensively, why the loan volumes decline. And NIM, year-to-date, 3% increase. So the -- that basically, the second quarter was 2%. The whole 6 months was 3%. That shows that we have an increase in deposits. So that is the phenomenon I just referred to. Okay. Leaving NII and the composition of NII, we've reached into net fee income on Page 16. This is a revenue line, which is potentially the most exposed to the economic environment and the changes of economic activity. And this is what we see here that it was minus HUF 3 billion. So basically 4% minus in quarter-on-quarter. Now the reason that it was not less, so the decline was not minus 10%. It's basically just we have some technical items in Hungary, and therefore, Hungary was flat. But if you read the note here, on the right side of the page, you can see that we had HUF 4.1 billion equivalent of one-offs positive quarter-on-quarter. And without those, Hungary had been minus close to 10%. So with some exceptions, all countries contracted here and this is clearly not surprising, given the fact that in most of these countries we had locked down, so people were not transacting. They were not taking consumer loans. And therefore, that fee income declined considerably. We very much hope that net fee income actually bottomed out in the second quarter and that for the third, fourth quarter, it will be higher, in line with more intense, more lively economic activity transactions, ATM withdrawals and so on and so it should be stronger in the coming quarters -- in the third and fourth quarter than in the second quarter unless something unexpectedly bad happens. Page 17, outlines the other income lines. And here, we had another technical item, which bolstered revenues in the second quarter, and that is the Visa shares. The accounting treatment of those changed and now we have to recognize them in the P&L if the Visa shares valuation change. And basically, retrospectively, we had to show this number in the P&L as opposed to directly to capital. And then -- so the gain is HUF 5.7 billion. This is a one-off item. So it's not going to be repeated. There will be small pluses and minuses probably as the Visa share price changes, but not at this magnitude. But the difference between the HUF 9 billion and this HUF 5.7 billion, one-off, that's basically trading income through our treasury. People were quite successful in the second quarter and managed to make gains from the high level of volatility, what we experienced on markets. So that's the reason why we had higher quarter-on-quarter, also fundamentally higher other income level than in the first quarter. Operating costs increased year-on-year. So here, we compare the first 6 months to last year. FX adjusted increase was 2.6%. Some of -- this also includes the COVID situation-related extra expenses, which we -- which is around HUF 3 billion across the group, and most -- a 2/3 of it actually manifested in Hungary. This -- we have been giving donations to hospitals. And we, obviously, had to incur additional costs in order to adopt to the environment and serve our clients and customers in the best way during this period. So that somewhat increases the -- especially the second quarter -- obviously, the second quarter numbers. The other interesting part is what you see in Bulgaria and in Serbia. These are 2 countries where we concluded mergers. In Bulgaria, we just finished the merger in the second quarter this year, in May, and you already see, on a year-on-year basis, minus 1% decline in operational costs. But probably the most -- the more interesting is the Serbian line here, where without the new acquisition, where the merger is still ongoing, the year-on-year cost number was 14% less than last year. And this shows the results of the first acquisition, you may remember that in Serbia, we have actually acquired 2 banks. A smaller bank, Vojvodjanska and a bigger bank from SocGen. And this is the impact of merging Vojvodjanska banka into our existing bank there. And the cost saving of that was 14%. I'm sure this is another topic you are keen to hear about, the potential cost synergies and cost savings related to acquisitions. And here, you have a good example. If you -- but if we kind of expand our time horizon, the first acquisition from this series what we have concluded with the SocGen transactions was in Croatia. And there in Croatia, we realized 13% cost saving after the merger was done. So this is kind of 13%, 14%, seem to be the case, in -- for the Croatian and Serbian acquisitions. Obviously, each situation is different, and it depends on many, many factors, how much we can actually realize as cost synergy, but these are 2 tangible examples of this. Where we have had bigger increase in OpEx? It's Romania. In Romania, we are executing very aggressive organic growth strategy and that entails hiring more people and spending more money. So that's perfectly in line with our strategy there. And it actually bears fruits in terms of increasing market share and quickly growing volumes as well. As usual, a few highlights about our Hungarian operations, which is still the most dominant and roughly 50% of the total. Without going very much into detail, I think the market share numbers are clearly interesting. So in mortgages, we managed to increase our market share -- continue to increase our market share, and we are actually 1/3 of the market. And in the consumer loans, we managed to keep up the above 1/3 of the market share to 35% share. The baby loans continue, as I referred to earlier. Obviously, this is a lower and lower number each quarter, given that there's less and less eligible potential clients for this, as they have taken up the program. But it's still quite fundamental and continues to be strong and it will take a while for this to phase out in terms of new volumes. Corporate. Market share relatively stable around this, between 15% and 16%, and we have been active in the new program of the Central Bank. So this funding for growth Go scheme, which is the most recent one, which provides liquidity for the banks and lower rates for potential -- for clients. And as you can see, our participation rate from a very recent program was 23%. So it's much higher than our share in the -- in total corporate lending, and that shows our commitment and also how fast we managed to react because some banks -- for some banks, it took much longer to adopt this new structure and we were one of the first banks to participate in this. So that was the part explaining second quarter results and giving some guidance. And now we have 2 other parts to discuss. One is the economic environment. Our expectations related to the economic environment. And it's Mr. Gergely Tardos who's going to tell us in 8 to 10 minutes what we expect to happen. So please, Gergely, I pass the mic on. So the strange noise you hear is related to that.

Have a nice day, everyone. I'm Gergely Tardos, Head of Research in OTP Bank. In the next few slides, we will give you some insights about the macroeconomic assumptions using the provisioning calculations. On Page 22, you can see the main highlights. First, all countries within OTP universe will recession in 2020. About the shape of GDP trajectories, high-frequency indicators suggest that after the very sharp fall in the second -- in the beginning of the second quarter in economic activity, recovery has started in May and June. So the recovery is going on. Third, compared to our forecasts we used in the first quarter, our baseline scenario deteriorated modestly in the second quarter, roughly by 1 percentage point on average regarding GDP growth for the year as a whole. For 2021, now we expect a recession of 1% to 6% in the region with an average just above 4%. This may look somewhat optimistic compared to the consensus, which is, let's say, 1 percentage point lower on average. So I will try to give you some hints why we think that our scenario is realistic. But no doubt this calculated somewhat to the downside in 2020, as there is a new wave of infections in many countries, and we see the very sharp recession in Western Europe, which can be of regular exports. However, for 2021, we expect a growth of, let's say, from 3% to 6% and 4.5% on average in the region. And it's very important that regarding next year, we see upward risks, especially in those countries, which are the member of the European Union. As next year, they can benefit, not only from the funds -- from the next EU budget, but also from the funds, from the Recovery and Resilience Facility. And you should know that we will update our forecast once the second quarter GDP set will be published. Regarding risk cost calculations, it must be emphasized that the probability of the negative scenario will be used in these calculations, so the probability of this scenario decreased significantly. In our negative scenario, we used 20% fall -- annual fall in GDP for the second quarter, which could not be ruled out. Let me remind you what happened in France, Spain and Italy. But in the region, based on high-frequency data, already published, we can say that the annual fall in GDP, in the second quarter, could be smaller, very -- let's say, much closer to 10% on average. And the probability of the negative scenario is also decreased by the fact that there was no capital flight in the region. And this led financial conditions to remain loose, and the government can run higher deficits. Central Bank would cut rates and use unconventional measures, in many cases. And this, on one hand, mitigates the recession, on the other hand, it also supports the recovery. And finally, the labor -- about labor market issues. So far, the labor market reaction, the rise in unemployment, was smaller than what we expected. And looking ahead, the labor market relief packages could also mitigate the rise in unemployment. Going to the next slide, you can see our forecast for Hungary. We calculate with a 3% fall in GDP for 2020, which can be followed by a bounce back of 4.2% in 2021. For 2020, we see risks on the downside. And for the next year, we see upward risk to be stronger. We expect consumption practically to stagnate, but the investment ratio will moderate. Regarding the budget, we expect a 4.8% deficit for this year. Risks are for a bit higher deficit because the government does a lot to mitigate the recession pressure. About the unemployment rate, we expect 4.6% on average for this year. The year-to-date number, so the first half of the year is 4.2%. The last data was 5.1%, but it should -- you should know that employment already bottomed out. In June, it started to grow. So looking ahead, we expect, let's say, stagnating or gradually decreasing unemployment rate in this year. On the next slide, on Page #24, you can see our forecast for the major group member countries. In that case, we calculated a recession of 1% to 6%. Serbia would be the best performer, due to a strong growth momentum based on solid macro foundations and the FDI-related investments in the pipeline. Serbia already published its second quarter GDP data, which was minus 6% year-on-year. It's much better than the expectations, actually 2 percentage points better than what was expected. And it was also hinted by authorities that in June, the level of GDP actually reached the level of last year, which led us to be optimistic on Serbia. The worst performance is expected on Croatia because of its very strong dependence on tourism and in Slovenia because of the very strong ties to Italy. And regarding Croatia, we see also sizable downward risks regarding the GDP trajectories. And on the next few slides, we collected a few statistical and anecdotal evidence supporting the recovery story in these countries. First, Hungary. The strength of domestic demand is reflected in the return in demand for real estate. I'm dealing with real estate for many, many years, and believe me, that's a very good compass to underlying consumer confidence. It's also important with retail trade in Hungary, just like in Serbia, Romania, Slovenia and Ukraine, gets closer to or even exceeded last year's data. And in Hungary, what we see that domestic tourism is very strong, it's bouncing back. Actually, the number of visitors at the main domestic tourist destination at Lake Balaton exceeded last year's data. Bulgaria. Our high-frequency indicators in Bulgaria remained weak. So we feel that around the world, this can be stronger in the case of Bulgaria than in the case of other countries. However, what is a good sign that employment looks to hit the button, and it's also important that the recent business surveys points to a bit more rosy picture for the near future. Croatia. What is surprisingly good that the number of tourists in July reached 61% of last year's data, up from practically 0 in a year period. Serbia. I already spoke about the promising within quarter GDP trajectory. Regarding Russia, the GDP pattern within quarter is very similar, albeit growth rates are lower. But in July, the composite purchasing manager index bounce back above 50, which is the threshold for growth or contraction. And car sales in July actually that exceeded what we saw last year. In Ukraine and Romania, what is promising that's the evolution of retail trade, which held up really well. And in Romania, the construction sector showed a surprisingly strong resilience. So that's it on my side. And now I leave the floor to risk-related issues.

Welcome, everybody. This is Gyorgy Kiss-Haypal, Chief Risk Officer of OTP Bank. And I would like to draw your attention to Page 27. So let me tell you more details about our first half total credit loss of HUF 130 billion. So this Page 27 shows HUF 116 billion on the right -- on the top right side. That is the loss provision for loans on book. And in the P&L, there's an additional HUF 14.2 billion other risk cost, adding up to this HUF 130 billion. Other risk cost being provisions for off-book items and legal resources. So -- but before adding further color on this risk cost number, let me share information on actual portfolio deterioration trends. Our first half 90-plus formation was HUF 83 billion. You can see it on this page in the top left, the same sizes in 2019 total figure. 54% of this amount was realized in May and June, meaning January to April numbers, so normal trends of 90-plus figures. And May in June show actual COVID impact on our transitions. As you see on Page 15 -- as you saw on Page 15, the major OTP countries moratorium participation rates are all lower than 20%, apart from the 2 opt-out countries, Hungary and Serbia, meaning that portfolios could potentially worsen, and delinquency can appear, accounts can roll, if there is actual portfolio deterioration. This was the case in Russia, Bulgaria and Croatia. All of these resulting from a temporary deterioration on their respective unsecured consumer books. These 3 countries and the subsidiaries there make up 72% of this HUF 83 billion first half 90-plus new volume, with Russia loan taking 40% share of this first half amount. Corporate books, mortgage books have not yet realized actual 90-plus or Stage 3 worsening in general, only DSK and mainly Croatia, being the exceptions. They saw some 90% increase in corporate. In case of DSK and Russia, we already see improvement in ROE rates and collection efficiency, early ROE rates resembling precrisis levels already. Croatia was a bit more and has been a bit more difficult this time around in this field. Pages 28, 29 and 30 review the structure and further details on our provision. So let me break down this HUF 130 billion first half total risk cost for you. We estimate roughly HUF 20 billion of this HUF 130 billion as regular normal expected portfolio deterioration. And HUF 110 billion is COVID-related, either already realized in 90-plus, which is actually the minor impact or forward-looking Stage 1 and Stage 2 reserving, a little bit more than 70% of this HUF 110 billion in the first half. HUF 85 million -- HUF 80 million, HUF 85 million of this amount -- of this HUF 110 billion was booked in Q1 and roughly HUF 25 million was in Q2. So 1/4 of this, say, COVID impact was booked in the second quarter and 3 quarters were booked in the first quarter. The actual composition of this COVID impact actually changed a bit between the quarters. Now in the first quarter, majority of the impact came from 2 sources: one, consumer Stage 1 coverage keys increased. That was one of the key reasons; and the second is substantial share of the corporate book reclassified to Stage 2, whereas Stage 2 keys also increased slightly, but this as formally mentioned, reclassification was the key cause in corporate reserve book-ups. This corporate was more than around 60% responsible for the first quarter increase in the Stage 1-related non-retail coverage fee increases, around 40% responsible for the Q1 COVID impact. In the second quarter, however, Stage 1 keys themselves did not initiate major reserve book-ups. I refer to the macroeconomic assumptions and scenarios and its weights and also because we allocated now more larger shares of the portfolios to Stage 2. The increase of reserving in non-retail segments came from -- in the second quarter came from the unsecured consumer portfolios, resulting from mainly higher Stage 2 keys and larger Stage 2 volumes. And also higher Stage 3 reserving as a result of higher Stage 3 percentages in Russia, Bulgaria and Croatia. This unsecured consumer risk cost increase was 70%, responsible for the second quarter book-up in total. On the other hand, corporate reserving levels in the second quarter were not changing. OTP has performed a detailed review of its corporate book again in the second quarter. Reviewing the industrial distribution, see Page 28, and potential signs for increased credits. We have found that our first quarter exercise was adequate, actually removing some of the corporates from the Stage 2 as the actual situation was found healthier. And although corporate Stage 2 keys -- reserve keys moderates were increased in the quarter further, Stage 2 ratio of the corporate book decreased, so leveling out the impact of the key changes altogether. So that was the brief summary of the quarter and the first half changes regarding this cost composition and impact.

Thank you Gyorgy. And this concludes the formal part of the presentation and the session. And now I would like to open the floor for questions. So please.

[Operator Instructions] The first question is from Hai Thanh Le Phuong from Concorde.

So I have 2 questions on Hungary actually. The first one would be on NIM. Because if I recall the first quarter, you were rather optimistic on the NIM development also because of the BUBOR. And I know that since then, it came back, but it would be helpful, like what is your outlook for second half of the year? That would be my first question. And the second one, touching the moratoria question, as you said so, if I understood it correctly, you would expect this to be on a case-by-case basis like an -- or a client moratorium one, right?

So regarding the margin in Hungary, yes, the BUBOR is somewhat lower than we expected when we talked last time, but it is still higher than last year. And we don't expect further -- so I mean probably the flattish margins in Hungary would be the best guess. It can hover around the second quarter numbers. In terms of moratorium, again, what I said was that it very much depends on the economic environment. If the bounce back is strong, if our macro experts are right and we see a strong comeback next year in terms of GDPs, then there's no reason to extend any moratoria. Even in that scenario, we will have to have specific client-to-client restructuring programs. I mean -- but should the recession linger on longer and be deeper than we expect, then it might be actually a good solution to extend moratoria. It's not necessarily Hungary, but in other countries where it was set for a shorter period of time.

The next question is from Simon Nellis, Citigroup.

It's a new era talking about [indiscernible] Zoom. Just on the acquisition effect, the over almost HUF 7 billion, most of that's integration costs, I think. Is that right? And going forward, what number should we expect for kind of ongoing integration costs?

This goes in line with the integration projects that we have. So in the second quarter, we finished the Bulgarian one. It was quite heavy on the Bulgarian side. Now this is -- this is done. So a smaller number coming potentially in the third quarter from Bulgaria. And where we still have ongoing projects, it's Montenegro and Serbia. This is the kind of integration projects expenses, but we have certain other lines of items here, which will stay with us longer. And this is basically the amortization of certain badwill elements, which we had to book when taking over these banks. So that is going to stay with us longer, but that's a smaller number.

So just thinking about this, it'll be a smaller number next quarter, but still a material?

Yes.

[Audio Gap] number again, but ongoing. So can you remind us what that regular amortization is? I think it was around HUF 1.5 billion or HUF 2 billion a quarter, is that right?

We have to check.

Okay. And my second question...

It was less than HUF 1 billion in the second quarter.

It was. Okay. And then just a question on the dividend. Just so I'm clear on your messaging. [Audio Gap] you're going to definitely pay out the 2019 -- you definitely pay out the 2019 proposed dividend. And then maybe something on top of that, depending on the earnings of 2020 and the outlook. Is that fair?

We have a commitment to pay dividends. And we would like to pay more than what was put aside for 2019. And pay a fair amount up to 2020 as well. But the overall amount obviously depends on all these factors, which we listed. So the environment, the actual profit what we'll make this year, the regulatory and supervisory expectations and so on and so on.

The next question is from an attendee joined via phone. [Operator Instructions]

This is Gabor Kemeny from Autonomous Research. A couple of things. First one is on the net interest income. How do you think about your NII outlook in the second half of the year? You talked about a couple of margin headwinds, which persist in the next few quarters. But on the other hand, you see economic activity and loan growth lending recovering. Is it like possible to -- that you will see some NII decline in the next few quarters? And the other question is a follow-up on capital distribution. It's -- I understand that you will only decide about the dividend, let's say, later stage next year. How do you think about share buybacks in the meantime? You now have this refined capital ratio, CET1 ratio target. And it seems that you have a few capital tailwinds coming through in the second half. How much -- how do you think about the leeway to do more buyback?

In terms of NII, I mean, we -- I talked about 2 composites of it: one is the volume overall, we expect 7% growth for this year. In the first half, it was 2%. So that means that volume growth should be visible in the second half, so that's positive for NII. And I said a slight potential further erosion in the margin. And then I leave you with this. So -- I mean your imagination, whether this is somewhat increasing or flat or somewhat decreasing. Regarding buybacks, we have a very specific approved amount and time line from the regulator. And this is related to our employee share program, the compensation program what we run. So we are buying these shares in order to fill up this structure because we have to actually park the shares there for a considerable amount of time in order for them to be used up for actual compensation policy. So this is -- so there's a definite time line and a definite amount, which we have approval from the regulator. And we don't disclose this in order not to influence the markets. And -- but I mean there's still some potential here. We will continue, but we won't disclose how long and how much.

The next question again is from an attendee joined via phone. [Operator Instructions]

This is Anna Marshall from Goldman Sachs . So 2 questions, please. Firstly, on asset quality. Thank you so much for providing the outlook for this year. May check, what is your initial thinking on the trajectory going forward into 2021, 2022, not specific numbers but just up or down? And also, could you please remind us what is your normalized [ through ] the cycle cost of risk now, following the changes in group strategies due to -- group structure due to acquisitions? So that was my first topic and the second topic on the cost. So you've indicated that you have a slowdown in cost trajectory this year. Could you provide some sort of an indication of how much is related to temporary and kind of automatic factors related to lower activity? And how much is some -- kind of more sustainable decline? And do you plan any kind of medium-term strategies for cost mitigation as a result of this crisis?

Should our macro forecast materialize, resource next year should be less than this year. If we have 4% to 6% GDP growth next year in the countries where we operate, risk should be less. That's definite. So in this scenario, we expect next year a lower risk cost. And we -- I mean we tend to usually try to provision in a kind of forward-looking basis and be conservative. So that -- and already what the provisioning -- what we are sitting on has been quite conservative. So there's no -- we don't think that there are kind of hidden holes in our portfolios and all that covered. So should the scenarios manifest in a way how we envisaged that this is we should have less risk cost next year. The new normal, that's difficult, right? We are in a volatile environment. So it's not about normal, it's about how deep we go this year and how high we'll be next year. And then from then on, we will look into a new future and see what's going on. In terms of costs, clearly, this is -- there are 2 factors here: one is that we try to realize the synergies after the acquisitions. And I kind of elaborated on that in Serbia, what we see -- or in Bulgaria, what we see. And the other factor is kind of general cost savings potentially, which we're also thinking about and trying to launch new programs to address that question.

The next question is again from attendee joined via phone. [Operator Instructions]

This is Olga Veselova from Bank of America. I have several questions. Before I ask them, thank you very much for giving us guidance and your detailed answers. My first question is some clarification to the reporting which you made. In the release, you said that credit institutions can use the modified criteria aimed at moderating the consequences of COVID pandemic until the end of 2021, the latest in Hungary. What exactly does this mean for you? And I understand that this regulatory change was made just recently at the end of July. My second question is about cost of risk. I noticed that in some regions, Croatia, Romania, cost of risk came very low in the second quarter, below levels which we wouldn't assume as normalized levels. Was this because you reassessed your macro parameters? Or did you feel that you overprovisioned in the first quarter? What was behind this drop -- material drop in cost of risk in this region? And also my third question is about borrowers in Hungary, which received a used payment moratorium. Do you have any sense how long -- how these borrowers will perform starting -- when the moratorium will be over? Or this is totally unclear now? Do you make any test -- stress test maybe? Any surveys there? So what's your feel on the performance of these borrowers?

So indeed, the Central Bank came out with guidance how to treat portfolios in Hungary. But this was not reflected yet in our second quarter numbers. They even came up with a set of macro indicators, which they suggest us to use. But this came actually later than our -- we closed our books in Hungary, so we have not yet incorporated them. Cost of risk drop, yes, in some countries -- I mean we were quite aggressive in provisioning in the first quarter, and then we made adjustments in the second quarter, depending on the situation in each country. And that resulted in a much lower risk cost. We don't -- I mean, per se, we don't observe material worsening of portfolios, with a few exceptions. There are exceptions in consumer loans in Russia, Bulgaria, to some extent, in Croatia, where April, May, were -- we saw actually worsening, but June already came back. So if you look at the fundamental characteristics of the portfolios, then this is okay, right? And where -- and most of the provisioning in the first and the second quarter was on a forward-looking basis. And in some cases, there was not much required or remaining in the second quarter. Credit quality of borrowers in Hungary under the moratorium, this is under close inspection. So we do monitor these portfolios. Obviously, they're corporate clients, it's easier. But also the retail clients, we monitor their account activity and so on and so on. So try to get early indicators of their portfolio quality. And so far, it's quite -- I mean we don't see any irregularities or we don't see much impact coming from the overall situation, yet. It's probably too early to say. And the fact that the GDP drop doesn't mean that people lost their jobs. So -- because that's the -- in retail, this is the most important indicator, the employment level and so on and so on, which tells you how much really these clients are at risk. So so far not much observed in terms of fundamental worsening, but we keep our eye on these portfolios and follow the trends and provisioned accordingly. So if we see deterioration in portfolios, then we increase provision coverage. And we -- and therefore -- I mean we try to react fast to these situations.

Could I just come back to your first answer? This modified criteria, will they help you to deliver a better cost of risk than without this criteria? And is this why you guide the drop on cost of risk in the second half? Or this regulation almost doesn't matter because you just follow IFRS 9, not the local regulatory standard?

We haven't based our guidance on this very specific regulatory guidance. And it's IFRS -- I mean it creates more room, but this was not the basis of the guidance we have given.

The next question is again from attendee joined via phone. [Operator Instructions]

It's Sam Goodacre here from JPMorgan. I've got a couple of questions. The first one is about the moratoria programs. Are there any jurisdictions across the portfolio where clients have started to exit these support programs? And if so, what are you experiencing in terms of the asset quality trends of those clients who have exited? And then the other question is about your Hungarian business, and specifically, the fact you are steadily taking share in mortgage new business for the past 3 years now. Can you give us a bit of color as to what sort of players you are taking share from? And what, more broadly, is the competitive dynamic like in that market?

I answered the second question. The first one I will give to Gyorgy here, Head of Risk. It's -- from all over the place, basically. So it's not that we have one player losing big market share, and we're taking up. So we are getting bits and pieces from everywhere in terms of market share. Related to the ends of moratoria, I give the mic to Gyorgy to elaborate on this?

Thank you, Laszlo. So obviously, there are people voluntarily removing themselves from the moratoria. And the reason why they do that because they actually are conscious of their financial stability and they decide to pay. So that happens. There was only one case in Serbia where a whole program ended in July. And for a month, there was no moratoria in Serbia. Starting from August, there is another one, which is actually an opt-in version for 2 months. Now for 30 days, these people who came out, obviously, we had the opportunity to review them -- our current knowledge of the portfolio for 30 days at the people who are paying almost accordingly to the previous portfolio in these 30 days. So there was no surprise at all from the people coming out of the moratoria on Serbia.

Okay. And actually, I did have a third question. In terms of your cost of risk guidance for the remainder of this year, you've obviously said that it will be significantly lower than the first half and sequentially lower than 2Q. So the risk cost rate that is left for the third quarter and fourth quarter, do you include, within that outlook, any forward-looking macro assumption changes? Or is the second half all about an actual deterioration or migration through the staging?

The macro -- I mean it's -- basically it's very technical, right? It's 12 months ahead. I mean fourth quarter is ahead, that's the window where we have to look at. As we -- as that window progresses, we are getting better and better quarters if we -- if you look at our micro forecast. Indeed, there's -- if that was your question, just coming from the technical nature of the methodology, what IFRS 9 means, it means that this window is moving and as the window moves more to next year from this year, we see, in that window, increase and improvement in economic environment, at least that's our forecast. On the other hand, at the same time, we should actually see more and more intrinsic worsening of the portfolio, especially in countries where there's no moratorium or where there's low participation level in moratoria, for instance, Bulgaria, is such. So in those -- therefore, there's an expected underlying worsening of the portfolio. So these 2 factors together add up to our forecast for the risk cost for the second half of the year.

The next question is coming from Mate Nemes from UBS.

I have a question about client behavior, post lockdowns. Obviously, in March, April, part of May plans to hire [indiscernible] digital channels and good active -- situation in general. I'm just wondering if you could talk a little bit about their behavior in June, July. What have you experienced? Did the usage of these digital channels remain at the previous levels? Or we're actually -- clients started going back to the branches and preferred in-person service?

Indeed, that's exactly what happened. So we have seen increasing usage of the digital channels. So for instance, registration for SmartBank, which is the mobile application, increased 10% during April, May, compared to the January, February levels. And then afterwards, in June, July, remains higher by 5%, 6%. So -- and then, for instance, many transfers -- again, there, we saw roughly 20% increase during the lockdown period and roughly 10% increase remained with us. So I mean utility bills payments online increased 4, 5x. And there as well, we see this to remain at that level. So, yes, what happened is that there's a one-off increase in usage of digital channels. And afterwards, there's a change in behavior at [indiscernible] towards using digital.

And just a follow-up on this. So after despite the digital channel usage is still elevated, it sounds like -- does that give you perhaps more scope actually to accelerate the, say, medium- or long-term shift for digital? Perhaps, also, if you could talk about the cost implications of this?

Fundamentally, yes, I think the answer is. So -- and I don't think it's just banking in every industry. I think there's a strong push towards digital, as customer behavior changes because the customers are forced to use more digital in a way during the lockdown. So therefore, this is quite normal. I'm not sure to which extent it actually results in lower cost because the problem with digital is that it always involves IT and a lot of IT developments, and they are not cheap typically. So I wouldn't say that because of higher level of digital, now we are going to experience short-term large cost savings. It sort of means that the arena, the competition for clients shifts more to the digital part. And the quality and level of digital services matters even more than it used to. So I think that's important. And it obviously opens up kind of new avenues and makes participants more -- even more aware of the importance of digital developments, and I think it means that we have to spend even more in digital developments in order to stay in the forefront of competition. So yes, the trend is clear, and it has been accelerated. And I don't think this is going to result in short-term cost savings, per se.

The next question is coming from an attendee joined via phone. [Operator Instructions]

This is Robert Brzoza from PKO BP Securities. I have one question regarding the outlook for lending in Russia because what we have seen was a significant decline in the loan book outstanding in Russia. My question is about your risk-taking attitude there because actually, the household lending continued to go on pretty well. And how much of the decline was due to your own decision to refrain from granting loans? And how much was due to the circumstances? I mean, shopping malls closures, et cetera? And what would be your expectations now for the point of sales lending? Would it bounce back sharply once the -- more or less the spending and economy normalizes? So please, if you could provide more detail on the outlook for lending there.

The answer is yes. It's bouncing back, and it has been due to technicalities. I mean, yes, on point of -- sales points we're closed, more or less. Obviously, we also kind of rethought our risk criterias and have some tightenings, but it was basically due to the nature of the situation there that we could not sell POS loans, and there was no demand. And that demand has come back and it's ongoing, so we have it. So yes, we expect the Russian operation to bounce back.

[Operator Instructions] As there are no further questions, I hand back to the speakers.

Thank you very much. Thank you for participating in this conference call. Thank you for the very good questions. I wish you all the best. I mean we are still amidst difficult times, and I'm sure you all are trying to cope with them wherever you are. I wish you good health. Hopefully, a nice vacation for the remaining part of the summer. And then we will hopefully see you back or hear you back when we have the next interim report somewhere 6th of November, my colleagues tell me. So that's going to be the next reporting day. Till then, good luck, all the best. Bye-bye. Thank you.

Thank you for your attendance. The second quarter 2020 conference call has been concluded. You may disconnect.