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

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

Thank you. Thank you very much. Good morning or good afternoon depending where you are, and thank you very much for joining us today for OTP's Group 2020 Annual and Last Quarter Interim Report Presentation. We're going to proceed as usual. So there's a presentation I'm going to go through, which is available on the website. So hopefully, you've been able to download it, but you can also follow it on the screen now that we use Zoom. And then after the presentation, we will open the floor for questions and we will be able to answer them. So let's start with the presentation itself. Some highlights -- yes. So if we try to capture the highlights of 2020, it was an extraordinary year. I mean a very, very strange year and a very challenging year. And we believe that we have managed to meet these challenges in a positive way as much as it was possible. The return on equity, I think we believe that in -- at least in European banking comparison remained quite strong despite the fact that it actually decreased. And what I think we believe very important is that the operating income grew in this difficult environment. Most importantly, the bank remains stable and operationally sound and enabled all times to service our clients despite a difficult COVID environment. And not just there, but we actually accelerated digitalization and innovation, in general, and continued as if nothing happened, our integration efforts and more about this later. In this environment, we actually managed to grow almost 10%. So the organic FX-adjusted loan growth was 9%. And again, this is a slowdown compared to the previous 3 years that we had, but given the nature of the environment, I think it's a strong number. And then very important that despite precipitous declines in GDPs across the group, in fact, loan quality remains stable and our Stage 3 and 90 days plus due ratios, in fact, improved, and our capital position improved as well. Now let me go more deeper in the -- or if you go deeper into the numbers, then our accounting and adjusted profits dropped -- adjusted dropped by 26% and accounting by 37%. Why operating profit actually increased year-on-year 5%? And the reason behind lower bottom line numbers, the reason was higher risk costs. So we had 4x higher risk costs last year than in '19. I will show you that this risk cost, again, was not due to portfolio delinquencies or increasing nonperforming loans but basically higher provisions on performing. On Stage 1 and Stage 2 portfolios, we increased substantially provisioning. So it's not a loss. It's basically a forward-looking conservative reserve where we piled up last year. Again, return on equity was 13% adjusted. Unadjusted accounting was almost 11%, 10.9%. So I think that's still higher than cost of capital in this difficult environment. So we are quite happy to present these numbers. Now if you look at the one-offs, then this extraordinary year brought with it an extraordinary new line in the one-offs, a negative one. And this is the adjustment, which we had to do because of the moratoriums, which were introduced. And this is primarily coming from the Hungarian one. You probably remember that the structure is such that we can accrue unpaid interest, but we cannot have interest on accrued unpaid interest. And therefore, the net present value of these loans actually decreased. And this net present value decrease is why we had to book in 2020. Now in fact, this is going to come back. Again, accounting-wise, so it's just a time value problem. Accounting-wise, we're going to have the same nominal income. This is just -- it was just shifted into the future. And then the last couple of years was -- were -- I mean, one of the key factors was the acquisitions. And during the acquisitions, we always have acquisition costs, either positive or negative. In '19, it was actually positive due to the bad loans we recognized. But in 2020, all in, it is a HUF 7 billion negative. In fact, the last quarter was actually positive because we released the provision what we made the year before at the end of '19 for the expected sale of our Slovakian bank, which we concluded in November last year. And at the end, there was no need for this additional provision. So the core part of this acquisition effect is actually the cost of the integration projects with them. And then this HUF 28 billion, which was related to the moratorium one-off effect, actually HUF 10 billion -- or almost HUF 11 billion came during the fourth quarter because that was the time when the Hungarian structure was expanded -- extended by another 6 months with the same condition. If you look at the P&L line, there's a lot to tell about this chart. And maybe just a few highlights. So yes, overall, operating profit without one-offs increased 5%. But part of the story is actually the acquisition impact. So not all the acquired banks were fully part of our financial years in '19. Therefore, on year-on-year basis, it's had a positive impact that in 2020, they were present full year in the group plus there was an FX impact as well. So if you take this out, then actually operating profit declined by 6%. So if you look at the composites of this, in terms of the income lines, I think it's a very good news that we actually managed to stabilize the net interest income, despite the fact that the net interest margin declined by 12%. So year-on-year, it went down from 4.12% to 3.61% percent, and that's a 12% decline. But at the same time, volumes, loan volumes, grew 9% and deposits grew 13%. So basically, volume growth counterbalanced the negative impact of NIM decline. And then there was altogether a 4% negative in fees and commissions, but this line is directly linked to the COVID situation. So especially in Russia, where we -- most of the business is generated from physical POS lending in retail outlets, and then obviously, last year was difficult for physical retail sales. So therefore, volumes were lower and then the fees were lower as well. And in countries like Croatia, Montenegro and Albania, where the countries themselves and their revenues are dependent strongly on tourism, obviously, again, last year was not a good year. But in this line, I think it's reasonable to expect once the COVID situation is over. Let me go back to the kind of previous level of normal growth, which should be around the level of the nominal to GDP around these countries. The good kind of indicators are here, both for net interest income and net fees and commissions. In fact the fourth quarter was positive 2% and 13%, which hopefully shows the future and where we are going. Costs 2% increase altogether, again, without acquisitions and FX adjusted. I think that's quite reasonable given that actually inflation was relatively strong in these countries. The cost-to-income ratio somewhat increased to 54.1%, but I think it's much more relevant here to look at the cost-to-asset ratio, which actually decreased by -- from 3.31% at 2.9%, so 13% decrease in the ratio, and that is in sync with the NIM decrease. So what we have is a fast-expanding balance sheet where -- which is negative for the NIM, but also if you measure operational efficiency by the size. It's bad compared to the size of the balance sheet of the bank, than actually, we had a quite good year last year. And then, obviously, risk costs, which was much higher than last year that was an important factor. If you look at the quarterly distribution of the risk cost, the fourth quarter -- I mean, in the third quarter, we had hardly any risk costs and the fourth quarter was a big jump up, and there are various reasons for that; I mean, most importantly, that we had the second wave. So when we closed the third quarter in early October, we were not expecting a second wave to come. And then the second wave came in November-December, new lockdowns, and then the Hungarian moratorium was extended and so on and so on. So we -- and in general, I mean, whenever if you look back in the last couple of years, you can also see a kind of year-end increase in risk cost because year-end, we always try to do everything we can within the constraints for accounting and tax rules to be as conservative as allowed by these regulations, and this is what we did at year-end. I mentioned that -- I mean, parallel to the decent numbers, we -- operationally as well, we believe we did quite well, given the huge challenges. So obviously, we did everything last year, and we continue to do everything to protect our clients and our colleagues from the negative potential effects of the virus. And we have spent considerable amount of money. So in the group level, there were HUF 7.5 billion, additional cost of the -- for COVID protection and also for helping where we could, right, I mean, in the forms of different donations to health care institutions in various countries across the group. Now besides this effort, which was extraordinarily and that was related to the COVID situation, we continued with our transformation program. So we continued the organizational transformation, the agile organization development, primarily in Hungary. We continued with our digital transformation, which will be covered on the coming slide. But remaining on this slide, we actually are adapting to the situation, as you have all done, and we have all done globally. Obviously, within a few weeks, really, and I mean in 1 or 2 weeks, we managed to turn the entire headquarter operation basically across the group into home office. So that's a great credit to our IT people, and I think it's a very good kind of test. It was a very good positive task for our IT operational strength and performance that we managed to do that without having any problem in this regard. And also, importantly, in this challenging operational environment, we managed to continue; and on time, on budget finished the planned merger. So we, first, last year finished the merger in Bulgaria, at the end of April, beginning of May, when there was total lockdown. So that was done from home office, cross-border, basically, without any problems really. And then we did Montenegro in December. And Serbia, the second Serbian integration process is still ongoing. And as originally planned, we expect to conclude that to finish it in the second quarter this year. And then we very successfully integrated the new countries to the group as well: Slovenian, Albanian and Moldova, these are the new countries who joined during the course of '19. And on top of that, we even sold one entity in November. We sold our Slovakian business to KBC, and so we divested that operation. A few words about digital and digital development. So primary focusing on Hungary because if you wanted to show the whole picture of the group management, it'd have been a very long presentation, but just a few numbers here. Well, we are very happy as how SmartBank, our mobile operation with 1.3 million active user is developed. And just to remind you, it's a country less than 10 million people. So these are the active user numbers. We have a new -- a completely new app, a completely user interface and the feedback is very good. Digital channels transactions, obviously, increased a lot and the number of digitally active clients. And then we continued, even accelerated our digital developments in Hungary but also in other countries. So that's group-wide basically. So there is -- so in a way -- I mean, the whole COVID situation is tragic and seriously negative, overall, in many aspects, but if we -- but I think we could actually find at least one dimension in which it benefits us and the economy and clients, and that's the acceleration of digital adaptation. So we certainly accelerated our digital developments, but also our clients and their client behavior adapted or kind of speeded up their adapt ion and use much more digital than the non-digital. Turning back to the numbers and the overall profit of the group, then obviously, we had negative numbers everywhere. And this is primarily due to -- typically due to the increased risk costs. Potentially the only country where risks did not increase or the risk stayed and didn't increase, it was Russia. So in Russia, you are quite, I think, conservative with hindsight maybe even too conservative with our risk approach. We cut back on sales, and obviously, demand dropped seriously. So you will see that Russia was the only country where we actually had a serious negative loan growth, volumes contracted, and therefore, revenues contracted. But the risk of [indiscernible] itself did not change. So in Russia, the decline was primarily due to the lower volumes and also margin decline. I mean, total revenue margin declined by 9% from 17.5% to 16%. In all other cases, basically, the negative growth is due to the fact that we had higher risk costs. Turning to total income. Next slide. Year-on-year, 5% growth. Again, that's quite good. Again, this includes the impact of acquisitions. So it's not exactly apples-to-apples, but if we go line by -- and also the FX changes had an impact. So in most of -- so for the countries where it did -- we actually have 2 numbers, so where either the FX or acquisition or both had an impact. We included 2 numbers, and the right numbers on the right side provide the full picture. So here, I think the most -- the biggest growth, as you can see, was in fact in Romania, and I think that's -- this is really in line with our strategy. And on the previous slide, you saw that Romanian profit was not very strong last year and it declined. But in terms of growth, it was quite strong. And this is volume growth and revenue growth and also cost growth. The reason behind this is very deliberate and cautious because we -- when our second attempt to acquire a bank failed, we decided to start a very aggressive organic growth strategy. So we tried to organically grow the bank. And there's -- obviously, there's a temporary sacrifice we have to make on the profitability side in order to grow market share and the bank itself. Otherwise, typically, outside Hungary, we had negative numbers adjusted. And in Hungary, we actually had 5% growth, which is driven by the very strong volume dynamics. If you go to the components of total income, the first item is the net interest income. We try to provide you with some background information on this slide and try to explain what happened. I think this Hungarian 9% growth, again, very good 4% growth in the last quarter, and also you can see Romania here being very strong. And the only country where we had kind of strong negative was basically Russia, which, as I said, was driven both by lower volumes and also lower margins. In general, the margin compression was an issue. It was continued to be an issue last year. Basically, in each and every country, we had lower net interest margin linked to the low interest rate environment and typically very strong growth in deposits. So typically, loan-to-deposit ratios declined. The group level ratio declined to 76%. But also that's typical for each country. And the yield on excess liquidity is actually quite low. So this -- and in a couple of countries, Russia, Ukraine, there were rate cuts. So from a margin point of view, it was a difficult year. And that you can see in the coming slides, next slide, you see that during the fourth quarter, last quarter, we had another decline in the net interest margin down to 3.43%, and it's primarily driven by the phenomenal volume growth in deposits, by the way, so it was -- while NII actually increased. So there's this kind of contradiction in a way that we see declining margin, but at the same time, NII's grow because of this very strong growth on the deposit side, and we do make extra money on additional deposits, but the margin on additional deposits is obviously less. Or the margin contribution generated by additional deposits is typically less than the existing average net interest margins because the yield on financial assets is very low. Now we have some -- I mean, this year, we believe it's going to be a mix. So first of all -- I mean, just today, Ukraine increased 50 bps, the reference rate. There might be rate hike in Russia, which has started to see first in the U.S., which then spread kind of globally longer end of the yield curve to increase. So maybe there can be some structural change in this one, but we will see. But certainly, last year was characterized by gradually decreasing margins quarter-by-quarter, and the last quarter was not an exception, so it happened also during the fourth quarter. Going to volume dynamics. This slide explains the fourth quarter volume growth, performing loan volume growth, and it was 3%. I mean, we had to adjust here. The 0 is including the sales of the Slovakian Bank. So at the beginning of the fourth quarter, we still had the Slovakian Bank at the end of the fourth quarter. At the end of the year, it was no longer in our books. So if you adjust with this, then actually, in one quarter, we had 3% volume growth of loans across the group and some countries continued to be very strong: Hungary, 4%; Ukraine, 8%; Serbia, 3%; and we were very happy to see Russia being strong, so in just one quarter through 9%. So finally, the trend turned around in the fourth quarter and part of the volumes we lost during the 3 quarters we recovered. Now just to remind you, this actually happened during the second wave. So the second wave of the virus hit at least the CEE countries, not so much Russia and Ukraine but the Central European countries were hit by the second wave, around November and certainly in December. And even in this environment, we had this very strong growth rate, which is -- which was actually the strongest growing, fastest-growing quarter out of the 4 quarters last year. If you look at the entire year, the year-on-year numbers, in terms of performing loan growth, and again, we adjusted with the Slovakian Bank, divestiture then it was 9%, which is quite a solid number given, again, the environment. Obviously, volume growth was -- performing loan volume growth was boosted by the different moratoriums. And especially in Hungary and Serbia, this was actually quite substantial because in these 2 countries due to the nature of these moratoriums that they were opted out to clients who did not want to participate had to request not to be part of the moratoriums. In these 2 countries, we had relatively high levels of participation rates and also not surprisingly high-growth rates as well. But even without these effects, it is quite strong in Bulgaria, Serbia, Romania, 13%; Croatia, despite the difficult environment, 6%. And I think this is quite typical what we saw in Croatian that consumer lending declined, but mortgage and corporate lending continued to be strong. In fact, if you look at the mortgage line, the horizontal mortgage line, across the group, mortgage loans grew 10%. And in each country, it's growing and growing. So this is a very peculiar situation that despite this large negative GDP growth in the countries where we operate, mortgage lending continued as if nothing happened, it even accelerated typically, which reinforces our belief that this is just -- that the COVID situation is just temporarily negative external to the economy effect, more kind of natural-disaster-type of situation than a fundamental economic problem. And that is also reflected in corporate lending in most of the countries. So if you look at deposits, I mentioned before that the fourth quarter was very strong. And as you can see here, just in one quarter, deposits grew 6%; and like Hungary, 10% just in one quarter. But across the group, this is quite strong. And that shows the -- again, the continuously high and increasing liquidity in these markets, which is definitely a good thing, and credit to the monetary policies of each of these countries because high level of liquidity has these economies to get through this temporary situation, negative situation, where we are. If you look at the entire year, then deposit growth was 13%, and -- across the group, highest in Hungary, certainly, in terms of volume. So if you look at the year-on-year change, in Hungary alone we had HUF 0.2 trillion increase, and the net deposit to loan gap increased to HUF 4.3 trillion. So this is the amount by which we have more deposits than loans. So this is -- and this is, again, increased a lot during last year. And in fact, each country was positive, except Russia, where we deliberately decreased the deposit volumes in line with the declining loan volumes. We obviously don't want to pay high cost for funding in the form of deposits if we can't use them to -- for our lending activities, and Russia has self-funded services. This was a kind of deliberate strategic decision to do. And the other country where we had negative deposit growth was Montenegro. Montenegro is very unique from a monetary situation point of view because they adopted the euro without being the member of the Eurozone. So it's very specific, and they had less revenues due to the sluggish tourism season during the summer. Leaving the net interest income part, we have a slide about net fee income. As I said, especially in countries which are dependent on tourism, like Croatia and Montenegro, Albania, we had a strong decline in fee revenues and also in Russia, where fee revenues are typically generated by the insurance commissions, where we get when we sell insurance products together with our consumer loans. So this is -- so there was a strong decline in Russia. But these numbers are very much linked to the COVID situation, and we should recover once the COVID situation is not so prevalent. As you can see, in the example of Russia, for instance, the last quarter, fourth quarter, net fee income actually grew 8%. And as you saw it on the previous slide, this was the first quarter last year when volume started to grow in Russia. I think the good thing is that despite of the COVID situation, actually, fee income growth was solid in Hungary, so we have 3% growth, all in, which is actually quite by the decent number given the environment what we have. Going to other income, this is obviously, that's the smallest income line, and as usual, this is others. There's a lot of noise in it, as usual. The Hungarian number dropped in a sizable way due to, well, 2 factors basically that we had less security: gains and also that we reclassified the non-OTP kind of purchased, non-performing loans from third parties and the revenues related to them in our work unit we'll reclassify them into risk costs, and therefore, there is a structural difference as well. And the others -- the other others that the last line on this slide that's related to typically other Hungarian and most of it, more than half of this decline, was due to lower revenues of our real estate developments for small units that we have in Hungary. Now leaving the revenue side, we -- there's one slide about the cost, operational costs, and the trajectory during last year. So again, we have to kind of separate out the impact of the acquisitions and also the FX exchange rate changes as a sizable impact here, so we have to adjust with that as well, and then we get to this year-on-year 2.4% growth. And obviously, the biggest contributor nominally was Hungary with HUF 14 billion, a 6% growth. But this was primarily related to 3 factors, actually, HUF 15 billion was accounted due to 3 factors: one was increasing depreciation by HUF 8 billion year-on-year. And that is just related to the investments that we made during the previous 4 years into IT and into digital development. So it is inevitable, and it's not necessarily negative, it's actually positive. It shows the -- that we are investing heavily into innovation and into developing our services, digital services, primarily to our clients. So that is coming through the increasing depreciation line. And then we had to pay HUF 3 billion more for regulatory. And that's basically related to the growth of our balance sheet and many kind of regulatory fees are linked to the size of the bank, and we were growing fast. So that was related to that. And the third item here, HUF 4 billion additionally, that's part of the HUF 7.5 billion, which I mentioned at the beginning group level in Hungary fighting the COVID situation and also giving donation to health care institutions was altogether HUF 4 billion extra. So in fact, the year-on-year nominal growth was pretty much explained by these 3 numbers. And for instance, personnel expenses did not grow at all last year. And then we have countries like Serbia, where we continue to show the cost synergies, to manifest the cost synergies after the first acquisition or as a result of the first acquisition we made. We had a strong growth of cost in Romania. But again, this is in line with the revenue growth and in line with our strategy there that we want to organically grow, and we are investing in developing and growing the bank, the capacities of the bank and the capabilities of the bank to organically, and that's reflected in the slide. Now there are some further synergies to be expected from acquisitions. First of all, in Montenegro, we concluded the merger at the end of last year in December. And despite the fact that also last year, we had a 5% decline in acquisition and FX-adjusted operational cost, there's more cost synergy to be expected this year. And more importantly, we are going to conclude our second and much bigger merger, in fact, in Serbia, in the second quarter this year, and we expect substantial further synergies coming from that acquisition starting from the second half of this year and leading into next year. A few words about Hungary just given that this is our biggest market and still -- especially last year, it was -- its contribution to overall profits even here increase. I mean, first of all, probably you have gotten used to the fact that policy-wise, the Central Bank and the government has been very active during the last 10 years, and that didn't change last year. So I believe they actually were quite fast and quite -- and reacted very well to the situation and did everything what they could in order to mitigate the negative effects of the COVID situation. So there's actually a very long list of government measures and also Central Bank measures, which were aimed at bolstering the economy, providing liquidity, providing support, providing subsidies to retail and corporate entities. And I think the fact that eventually the Hungarian GDP declined was much less than originally anticipated. It's primarily due to these measures. I strongly believe that these measures were needed and were very successful. And the fact that we ended up with only 5% GDP decline last year. And then despite the surging third wave in Hungary at the moment, we still expect more than 5% GDP growth for this year. Now if you look at how we performed in this environment related to our retail clients, just the usual metrics we have on this slide. Again, I mentioned that mortgage lending was very strong across the group. And just looking at Hungary, 15% year-on-year growth in new disbursement. So this is not volume. This is not affected by the moratorium. The new production of mortgage loans increased 15% year-on-year, and we achieved 32% market share. So we managed to further consolidate and improve our market share in mortgages, which is very good. We have been -- we remain extremely active in distributing the different subsidies and subsidized structures to the retail client. So for instance, the family home program subsidy, cash flow -- I mean, consumer loans, this is volume growth -- this is -- so volume growth is 15%, but again, this is somewhat positively affected by the moratorium. And savings market share, we are around 33%, which is actually the same level where we are in mortgages. Baby loans that we mentioned, which started back in '19, continued to be very strong last year. You see the quarterly contractual amounts, and then they actually kept quite high. So now -- I mean, end of the year, we had more than HUF 450 billion -- close to HUF 470 billion volumes from this subsidized loan product, retail loan product. And as you can see, our market share in this product is more than -- remained higher than 40%. So we are kind of overrepresented in this product, and we see that generally. So whenever there's a policy -- a new policy structure, we tend to be the first to be able to provide it to the clients, be it retail or corporate clients, and we always put our full effort and muscle behind this and make our large physical and digital networks available for distributing these products. So that's very obvious from these numbers. Just as well as the different structures in corporate, so the corporate performance was again quite strong. And this is -- I mean, the driver here, the underlying driver was the Central Bank's funding for growth -- grow program, the new program, which targets to distribute HUF 2.5 trillion funding for Hungarian corporates, primers, medium and small corporates. And as you can see, our micro and small company loans, year-on-year, increased 55%. So we were very strong in participating in that structure. We have more than 27% market share in this structure. And in fact, our overall market share in corporate lending increased to 16.6%. So this long trend in the last 10 years, trend of increasing market share in corporate lending, continued last year. And by now, we are clearly the biggest corporate lenders in the country. And so that's -- these were the kind of a few highlights and glimpses of our performance in Hungary. And let me kind of turn to the risk part and portfolio quality. And there's only a few numbers I'd like to talk about here. And it's very clear that the nonperforming loan ratios did not deteriorate. On the opposite, they actually improved. As you can see, the group diversity Stage 3 ratio continued to decline year-on-year and reached 5.7%. The 90 days plus due ratio, which is not on this slide, but that as well continued to decline, and it reached 3.8%, so less than 4% year-end. So where then if -- where is this -- or where did this 4x bigger provisioning and risk costs come from then or came from last year? And the answer is that it came from increasing the coverage on performing loans. So Stage 1 and 2 -- Stage 2 loans are, by definition, the performing, Stage 3 non-performing. And as you can see, Stage 3 coverage, actually slightly decreased, but Stage 1 and 2 coverage. So provisioning on performing loans increased from 1.6% to 2.4%. And this is -- this increase is the reason behind the higher risk cost. So -- and this -- it makes it very clear that what happened last year, which has increased substantially the provision coverage on a performing loan volumes, which adds a forward-looking provisioning and a point conservative one, I would say. And to what extent conservative? And the small comparison on this chart might help you to gauge it. So this shows the performing loan coverage, so the Stage 1 and 2. So provisions to Stage 1 and 2 loans divided by Stage 1 and 2 loan volumes. So this is the owned provisions of non-performing loans. And as you can see, we have 2x, 3x more, even 4x more provisions on performing loans than some other groups who are active in the region. Now obviously, the picture is still not crystal clear and somewhat obscured by the fact that we had moratoriums across the countries last year. And in some countries, it was actually quite substantial and strong, and therefore, had an impact on portfolio qualities, or at least, potentially had an impact on when problems manifest. First of all, I have to say that I do believe that moratoriums are the right tool to use in this situation. So what we have here, again, is not -- what we had last year and still have is not a fundamental economic situation, and it's not a fundamental economic recession. It's a natural disaster, so to say, an external event, which should have a temporary impact. So it makes actually a lot of sense on the policy level to implement moratoriums. And during the time when this temporary negative external element manifest, actually you have a moratorium and therefore, don't force clients to default. And once this external force is no longer there, we expect a very safe economic rebound, therefore, a substantial improvement in credit quality and credit growth and support clients, therefore, they should be able to continue to pay. Now obviously, the Hungarian policymakers have taken this approach to quite -- kind of, to the extreme, in a way that it's a structure which is all out. So by default, everyone, all corporate and retail clients, are -- were part of the moratorium unless they asked not to be part of the moratorium. And also it was originally for 9 months, but then it was extended by another 6 months. Forget this expansion, I think it's quite understandable because it was based -- it was done when it was clear that the second wave of the COVID disaster arrived to Hungary. And given now that we have actually a third wave, it does make a lot of sense that the moratorium was extended. Now we have name -- and typically, in all the other countries, first of all, where there were moratoriums, which is, for instance, in Russia, there was one, but it was tiny; and in Ukraine, there wasn't at all. The more surprising, I think, positively that we have such a good quality -- credit quality in Ukraine, and this is obviously due to our colleagues there who worked -- who have been able to build up a very resilient portfolio in Ukraine. But typically, the other countries implemented moratoriums, which were extended, also typically, but within the context what was created by the [ NY ] EBA saying that -- and ECB that unless the moratorium was longer than 9 months, it did not trigger the forborne status. Therefore, it did not trigger Stage 2 classification. So typically, with the exception of Hungary, all the other countries contained their moratorium extensions below 9 months. So client -- on a client level, despite the fact that moratoriums were extended in other countries, on a client level, it could not be longer than 9 months. Therefore, actually, the numbers for the other countries dropped considerable, especially Serbia. So if you remember, Serbia, it was very high. Serbia was close to -- even higher than the Hungarian level after the second quarter. But here, it's down to 0. So the early experience is actually quite positive regarding the quality of clients who exit these moratoriums. So year-end, for instance, in Serbia, less than 3% of the clients who exited the moratorium ended up in Stage 3. And in Bulgaria, where we had a much lower volume, it was 2%. So 2% of clients who exited the moratorium ended up in Stage 3. And it's only higher in Croatia, close to 9%. But in Croatia, whenever there's an additional extension of the moratorium after the first one, even if it's below 9 months, there, we have to classify it as Stage 3. So actually, we are quite optimistic in -- regarding the outcome of the Hungarian moratorium in a way that by the end of June, we should be -- I mean, first of all, the level of vaccination is quite already -- at least, compared to other European countries, is quite high, and it's accelerating fast. You probably heard that Hungary is also using Chinese and Russian vaccines on top of the vaccines, which are provided by the Central EU procurement. So vaccination is accelerating fast, and I believe it's reasonable to expect that by the end of the second quarter, we will reach a very high level of vaccination in Hungary. Therefore, by June, I believe we should be able to open up the economy and be more or less back to normal. And therefore, the second half of this year should be very strong in economic activity. And if we end the moratorium in that environment, then we expect actually very low levels of Stage 3 migration. After exiting the moratorium, we don't expect this to be higher than 5%, it should actually be rather lower given the experience in other countries where we have so far. Okay. There's a flavor -- caveat here that, obviously, the year-end figures made just the early harbinger of potential problems in the other countries because the time elapsed was not quite enough to manifest all the potential problems, yes. Now fourth quarter risk costs were much higher than the third quarter, lower than the first, but much higher than the third. And what happened here that we increased coverages, and we increased -- the way to increase the performing coverage was to increase Stage 2 ratios. And part of it was related to the Hungarian situation, where because these loans, who are in the moratorium, are longer than 9 months, by the book, there's -- there should be a forborne flag on these loans, and they should be either classified as -- at least, classified as Stage 2. Except that the Central bank gave a guidance that this Stage 2 treatment can be avoided if the revenues of these clients did not decline more than 15%, or in case of retail clients, if they have at least savings of more than 1 year amount of the loan servicing. And in case of corporates, it's basically a one-off, 1-by-1 classification and assessment as a result of monetary. This is important because actually the new guidelines by the Central Bank were not applicable to year-end. They are applicable to the end of the first quarter. Now we believe that despite the fact that we use a different methodology, we use our internal rating, but we did increase Stage 2, and we believe that we are more or less in sync -- we were more or less in sync with these new requirements, a new guidance of the Central Bank already at the end of last year, at least in terms of volumes of Stage 2 volumes. Okay. So just a slide, there's not much which changed in the following slide. This just shows the composition of our loan book in terms of the different sectors, depending on their perceived susceptibility to the crisis, the perceived vulnerability to the COVID situation, so I don't think I should elaborate long on this. There's one slide about capital ratios, the common equity tier 1 ratio year-end was 15.4%. We kind of listed the different factors here, which had an impact on this quarter-on-quarter. There were some regulatory changes with some regulatory easing and benefits, especially the treatment of IT softwares as intangibles. And also, we divested the Slovakian Bank, so that had a small positive impact. Finally, probably the slide which interests you most, our assessment of last year and potential outlook for this year. So last year, we talked about 3 numerical numbers ratios. One was the ROE. We expect materially higher than 10% return of adjusted -- adjusted return on equity. And it was -- the fact was 13%, the actual number; and even the accounting number was higher than 10%, it was close to 11%. The risk cost -- credit risk cost rate, we guided for less than 135, we ended up 115. And in terms of loan growth, we said it -- we expected this to be material, 7%, it ended up 9%. So we actually delivered on these expectations quite well, I believe. Now when we watch these things for this year -- we decided not to give very specific numeric numbers yet. But directionally, we feel quite confident about these statements what we put here. So we expect the return of equity to be better than last year, primarily driven by, which is point number four, lower risk costs. So we expect the risk cost nominally, not just the risk of trade but also the nominal risk cost to be less this year than last year. And this, we believe, is going to be the strongest driver in a potentially higher return on equity number. Also, most probably the difference between the adjusted and non-adjusted return on activity should be less because we certainly don't expect further extension of the moratorium. And therefore, the last year booked one-off negative due to the moratorium in Hungary and then the extension in moratorium should not manifest this year. In terms of loan growth, we -- all in all, we expect some roughly around the same level of growth what we had last year. And in terms of net interest margin, this is -- this continues to be a difficult part. Having said that, the -- and a very recent development is rather positive on that. I mean, thinking about -- I mean, inflation is picking up, especially in U.S., long-term yields increased. We had rates increase in Ukraine. There should be one in Russia as well. So hopefully, slowly the -- at least this is extremely low external rate environment is turning around and that should be positive. But it may not be as positive this year to break -- to be able to break this long trend of negative development of margins. And in line with the net interest margin potential decline, potentially cost-to-asset ratio can improve should this strong volume growth in -- especially in deposits, which is the basic driver behind asset growth continue. Overall, the macro expectation what we have is that we expect a very strong growth environmental start in the second half of this year. As short term, it's going to be difficult. It's very clear. CE countries seem to enter this third wave, especially Hungary, we have a very high increase of COVID cases recently, and therefore, strong -- lockdowns are implemented starting from next week, but this should be kind of short-term and temporary. So it may have an impact for the next month. But in fact, the recovery can be even stronger afterwards. And certainly with this very effective and all high-scale vaccination, especially in Hungary, where we see the situation should turn around, quite rapidly and fundamentally, during the next 2, 3 months. Dividend. The National Bank, in line with EU regulators, extended the dividend payment ban and they gave a guidance, which is interpreted in a way that we are not even allowed to make conditional dividend payment decision. So there will not be decisions on the dividend payments on the AGM due to the regulatory requirements. Nevertheless, we included in our regulatory capital, we decreased the regulatory capital with an amount of HUF 119 billion, which comes from 2 factors: one is the number, which we have said that we had put aside after '19, and this is the HUF 69.44 billion; and on top of that, based on the formula given by the commission's regulation, we calculated a number for 2020 and that's based on the regulation. And these together, 2 numbers, added up to HUF 119 billion. Now this is actually a level which is in line with the management's thinking. So if there were no dividend payment backed by the National Bank, this would be the number which we suggested for the AGM. And then -- so technically, just as last year, there will be an opportunity potentially to pay dividend advance, the Board of Directors can make that decision. So we will either pay this HUF 119 billion as an advanced payment of dividends this year, or if not, then we'll pay this out next year, plus an additional amount, obviously, after '21. So this -- the intention of the management is to pay out this amount up to '19 and '20. It's only the timing, which is not certain at the moment, but sooner or later, it's going to happen. And then that's an important remark that given our capital position and assuming this amount of dividend to be paid out, where we continue our efforts to find value-creating acquisition targets and pursue acquisitions, which drive value for shareholders. As a final remark and concluding this presentation about the AGM. The emergency situation in Hungary was extended until the 23rd of May. This was done on the 8th of February by the government. And then this means -- or by the Parliament. And this means that exactly the same manner as it happened last year, there cannot be an AGM physically done, unless before the date of the AGM, which -- original date, which was 16th of April, they actually withdrew the emergency situation. Now unfortunately, that is quite unlikely given the current surge in COVID cases in Hungary. So the most likely course of event is that we are going to conduct these important governance events the same way they were done last year. And this is actually governed by the Government Decree 2020/502 (sic) [ Government Decree No. 502/2020 ]. So the details are there, but it's basically the same process what we had last year. So there's a disclaimer, obviously, which you should definitely take into consideration when you draw your conclusions from this presentation. And finally, we reached a stage where I'd like to open the floor for questions. So please indicate if you want to have to ask a question and then I'll answer your question, and we do our best to answer them.

[Operator Instructions] The first question is from Gabor Kemeny of Autonomous Research.

Hello. Can you hear me?

Yes. Very well.

Great. My first question is on loan growth. And you mentioned in the report that the Hungarian debt moratorium had an artificial positive impact on growth because of the payment freezes. Would you be able to comment on the magnitude of this? And when you guys post stable loan growth this year, shall we assume that the pickup in the underlying loan demand will offset the impact of the moratorium in '21? And then secondly, you mentioned that loan -- that margins are coming down, but that NII is still growing. Can you elaborate a bit about this in Hungary, specifically, how you see the NII growth outlook going into '21? And the final question would be how you think about achieving positive operating jaws this year, meaning that your ability to grow revenues more than costs?

Yes. I mean, the answer to the last question is actually quite straightforward. As we expect the operating results, so revenues minus costs, to continue to increase as they did last year. So that's definitely the case despite the fact that we expect margin decline. As far as Hungarian NII. Yes, I mean, Hungarian NII should as well grow in terms of net interest margin. In case of Hungary, we may actually get to the point when it's not going down so much further compared to, let's say, the last quarter last year. Just let me remind you that last year, in Hungary, the reference rate actually increased a lot. So we started the year with BUBOR being at 13 basis points and then when the COVID situation hit, it increased rapidly. At some point, it was even higher than 100 for very short time. And then we ended up second half of the year to hover around 75. So that in itself had a positive impact on NII. So the -- numerically, just because of this BUBOR increase, we expect the NII in Hungary to be HUF 17, 1-7, billion higher. So -- but then -- I mean, namely in itself is more driven by deposit growth actually than anything else, longer, and it's not necessarily actually negative if deposits grow more, and therefore, NIMs go somewhat lower. But yes, definitely, in Hungary, we expect NII increase this year compared to last year, as it did happen in 2020, as well. So last year, we had a growth as well. In terms of moratorium, I mean, the estimation is that it had roughly 5% impact on volume growth. So without the moratorium, the volume growth in Hungary would have been 5 percentage points less, right? Now in case of Hungary, actually, the moratorium was extended this year until the first -- end of the first half of the year. So -- and -- okay, last year, it was just -- it was 9 months this year, it's 6 months, but still it is there, and this is substantial. And in fact, outside Hungary, the only country where it was material, the impact of the moratorium, was Serbia. All the other countries, it was typically between 0% and 10%, right? So -- and only for a short period of time. So really the bulk of the volume impact on the group loan growth was coming from Hungary. And in case of the Hungarian growth, it contributed roughly 5%, 5 percentage points. So yes, going back to your question, we assume that this macro scenario, which I just tried to kind of depict, that we do expect a very active and fast-growing second half. We expect the bounce back, the recovery after the COVID situation, to be very strong. And that should manifest in a substantial increase for consumer loan demand, definitely, and also corporate, especially investment loans and project loans. Not so much change compared to the trajectory of last year in mortgages because, again, mortgages was really strong last year despite the COVID. So mortgages should continue to do somewhat better, but not substantially better, but we do expect a very different picture, especially in consumer lending starting from the second half of this year.

Very comprehensive. Just a small follow-up, the HUF 17 billion NII tailwind from the higher BUBOR, is this -- have we -- is this what you expect in '21 relative to 2020? Or have we already seen most of this benefit coming through your NII?

Okay. Good question. So the benefit for last year was 9.5%. So 9.5% positive is already part of the base, right? So we had 9.5% last year, and we have 17% this year, right? So the year-on-year difference is not 17%, yes, it's just whatever 7.5%.

Next question is from Anna Marshall, Goldman Sachs.

Two questions from my side, please. Firstly, to follow up on the loan growth question. So you've described the Hungarian situation in quite a detail. But how do you see generated spread of growth across the group? And not just by countries but also within countries in terms of the lending mix, so do you expect the [indiscernible] in Hungary basically is where consumer lending and corporate growth should pick up? And my second question is on your strategic projects. I've seen some comments on the press regarding M&A. So I just wanted to ask you to elaborate on the comments in terms of the potential new markets as well as the potential economy in Hungary?

So for the loan dynamics across the group, maybe it's worth going back to the chart where we had the year-on-year loan growth last year facilitate this [indiscernible] yes, that one. Okay. So Hungary 17% was last year, and again, out of this 17%, roughly 5 percentage point was due to the moratorium. But again, the moratorium continues into this year. So there will be an uplift of some, I mean, less than 5%, but maybe 3, 4 percentage points. And then all the subsidized structures in the Central Bank programs continue into this year. Actually, there's a new one, it's the new subsidized refurbishment loan, which is just starting. And there's another one, which is new -- this -- so there are new structures coming on a policy front, which should boost lending. But Hungary, consumers should be even stronger than this 15% we had last year. Bulgaria was not very strong last year except mortgages. That I don't think we will have a much higher growth rate in mortgages than [indiscernible], but certainly, consumer loan growth should restart in Bulgaria in second half of this year, definitely, and also corporate as well. Likewise, Croatia. I mean, Croatia, consumer was negative, it should pick up. I don't expect higher than 15% corporate, but certainly, consumer lending should pick up. Serbia is very strong last year with a sizable impact from the moratorium. We estimate it to be somewhat less, maybe 4 or 4.5 percentage points potential uplift in Serbia coming from a moratorium last year. And there, it won't be there. So potentially, Serbia will be somewhat less in terms of growth this year than last year. Slovenia should pick up, I mean, especially on the corporate side. And also consumer, we had 9 -- 10% negative consumer loan growth last year. This should turn into positive this year. Romania should continue to grow. There, the moratorium impact was quite small. Ukraine was strong last year. There's an interesting development in potential restarting mortgage lending in local currency. So that has something to be watched in Ukraine as a new phenomenon. And second half, there can be higher consumer loan growth. Certainly, Russia should be very different. Russia was -- I mean, this is short -- as usual, a short-term consumer loan focusing on physical distribution channels because, all in all, actually, consumer loan volumes in Russia grew last year, and we contracted, but that's because we -- of the peculiar nature of our point of sales dominant presence in Russia. But just to remind you, the last quarter, fourth quarter, we grew 9%. And -- in Russia, 6% was the consumer growth. So I very much hope that we are going to have double-digit growth in Russia, all in, this year as supposed to double-digit decline last year. And Montenegro, again, second half of the year should be much stronger, assuming that the tourist season will already be relatively strong. And Albania and especially Moldova extremely strong last year. It's more a kind of competitive situation in Moldova because the other banks have their very specific big difficulties, and we were only one of the few banks who continued lending, and therefore, our market share increased considerably. Yes. So that's more or less a picture across the board. And M&As, yes, the Chairman made some comments. He said that -- he said in the morning on the press conference that we continue to pursue acquisitions. We continue to try to find ways to do value-creating acquisitions for our shareholders. And there are 3 countries what we are looking at the moment seriously. So when we actually have processes ongoing, and out of these 3, one is in the current portfolio -- in the current -- in one of the current countries, who are not -- and he was -- he did not specify what the other 2 were, so I won't do that as well. I'm sure you were going to ask, but I'm not going to tell. So we have some very promising and interesting prospects, I think and so we are excited about that, too.

And then just a quick follow-up on that last question. So is this something that could potentially be visible this year? Or it's more of a story for next year?

Yes. Out of the 3, I mean, 2 actually can manifest, I think, quite possibly this year.

The next question is from Kian Huat Lim.

Congratulations on your very good results. I've got 2 questions over here. The first question regarding the moratorium, you described the impact on loan growth to be about 5%. Can we also understand about how such moratorium affect your computation of NIM? How are the deferred interest payment considered when you come up with your NIM figures? So that's my first question. The second question is that we know that in the fourth quarter, there's a certain risk cost and almost all of that came from subsidiaries. Can we understand more about how the risk cost being set when it comes to the different geographies? I mean, along the same line, we observed that the coverage ratios, in particular, the Stage 2 coverage ratio actually has dramatically increased across most geographies, except for OTP core in Hungary. So that is more or less stable. But everyone -- everywhere else, we see that the coverage ratio actually has gone up meaningfully. May I know is this due to a regulatory guideline? Or is this due to your internal model that motivates you to be doing this?

Okay. The moratorium -- the impact of the moratorium on NIMs. There is, in fact, no -- in NII, you don't see an impact because the impact was in the one-offs. So this -- the adjustment, which was HUF 28 billion minus that's where we recognize as the negative impact on the NIM, basically. And -- but it's not a loss. It's -- in a way, it's a kind of provision, which is going to -- which we're going to reduce when we present the NII numbers in Hungary in the future. So -- in fact, despite the fact that it should have a negative impact on NIM because there's no interest on the -- so the capital -- the accrued -- the capital -- there's no interest on the capitalized the accrued interest, right? Which is technically should lead to a negative NIM impact. But this is actually counterbalanced or corrected by the one-off loss we booked. So this forward-looking NIM difference and NII difference was realized already not last year as a one-off item. I don't know whether it's clear or not because it's quite technical.

I see. Can I also ask that because the moratorium has increased some -- the loan book somewhat than it otherwise would have been, would that also have an impact of artificially lowering the NIM?

Again, it's -- basically, no. It won't go over the NIM because we are going to book higher revenues, interest revenues, than what we recognize. And we will compensate that with this negative amount what we booked last year. So this difference in the future in the expected net interest income, the negative difference due to the NIM decline due to the fact that there's no interest on the capitalized, on the accrued interest payments, is compensated by this -- in the NII, and therefore, in the NIM in this one-off loss what we did last year.

Understood.

Okay. So now -- in fact, this -- so the coverages, right? So indeed, in Hungary, we increased the Stage 2 ratio and the Stage 2 coverage decreased. But that -- they go in line because it's actually done on an individual account basis. So it's a very granular model what we have. And the -- and there was -- and the new volumes, which we classified as Stage 2 were less risky than the previously classified loans as Stage 2, and therefore, required less provision coverage. Therefore, all in all, the coverage on Stage 2 did not increase. In fact, it slightly declined. Now in Hungary, we made this quite large reclassification, partially due to the fact that -- well, mostly due to the fact, in fact, of the extension of the moratorium. And anticipating the fact that, "Okay, if according to -- if there were no other guidelines from the Central Bank, starting from 1st of January, we should classify the entire moratorium portfolio in Hungary as forborne, Stage 2 or Stage 3, but at least Stage 2 because these loans are more than 9 months in the moratorium." Now the Central Bank made a -- came out with a new guidance that it doesn't have to happen for all loans, but only for those loans were for inter-business retail, where the income to the client declined more than 15% or where there's not enough saving for client to cover at least 1 year loan servicing costs. And we tried to create -- I mean, we used our internal models, where we tried to calibrate it in a way to more or less fulfill the criteria, at least on a level of the Stage 2 volumes, overall, set by the Central Bank. So therefore, we don't expect a major movement in the Stage 2 ratio at the end of the first quarter, where pro forma these new guidelines from the Central Bank has to be implemented.

Yes, that's clear. But can you also provide some color on why -- how about for the other subsidiaries for the foreign entities, why is there an increase in -- a sudden increase in risk costs in the fourth quarter? And at the same time, we observed that their coverage ratios are meaningfully higher compared to the same time last year?

Okay. We had, for instance, in -- there is also a big jump in Stage 2 ratios in Slovenia and in Albania. Now this is due to the fact that in these 2 countries, we implemented the group standards in the fourth quarter. I mean, these are 2 countries which we acquired and also in -- which we acquired in -- back in '19. And actually, when we do an acquisition, we have to net out Stage 2 and Stage 1 provisions. So only Stage 3 provisions can stay. And then after a year, so 4 quarters, we have to write them back, that's the accounting rule for acquisitions, right? Because we have to recognize these assets at their fair value. And Stage 1 and 2 provisions are meaningless in terms of fair value, right? Because this is -- accounting-wise, this is not part of fair value. So this is -- so therefore, that was the big increase in the fourth quarter in Slovenia because we acquired this bank in the fourth quarter in '19. And we kind of rolled back these provisions there and implemented in full scale the group methodology. The same happened in Albania. We implemented the full group methodology in Albania at year-end. Now coverage ratios, yes, they are different. So they -- so there are some outliers like Russia, right? In Stage 2 provision -- Stage 2 coverage in Russia is 43%. That's clearly an outlier. Because in Russia, the nature of the portfolio is short-term granular consumer loans. And we -- and due to -- and there's no moratorium there -- and this is very much based on a migration maintenances. So we pretty well understand -- and this is business as usual, more or less. So in Russia, again, the risk of rate in Russia did not increase so much. So what we have coverage increase at Stage 2. But in itself, this is just kind of more as business as usual. And then Ukraine was higher than the others, but this is something you would expect. And then the rest is basically moving between 6% and 9%, 10%. And they are very specific model level reasons for each of them and somehow go in line with the ratio of the Stage 2 -- with the level of the Stage 2 ratio. So typically, when in a country, you have a -- we have a higher Stage 2 ratio, then the coverage on Stage 2 is less because we classify more into Stage 2, but -- so this Stage 2 is actually quite diverse portfolio and different loans, individual loans, can have very different levels of provisions in Stage 2 depending on their individual internal rating. So when there's a rating category deterioration, we put those loans -- and it's still not Stage 3, we put those lens into Stage 2, but that level of deterioration can be quite different. And typically, when we have a larger Stage 2 ratio, pick, let's say, Croatia, and Croatia is 14.7% the ratio, right, and the coverage is only 5.7%. In Serbia, the Stage 2 ratio, 8.6%, coverage is higher, it's 8.5%. So it means that in Croatia, we classify more loans, more loans deteriorated, but marginally -- but the deterioration level was not as strong as the previous volumes. And therefore, -- actually, for instance, coverage declined in Croatia. So this is a -- it gets actually very complicated. These are enormously big models based on individual loans. So first of all, the classification is based on individual loans. And based on individual client behavior, typically, these are behavioral client scores, which change the Stage 1 to Stage 2. And then depending on that behaviors for decline, there's a different level of PD increase -- or expected loss increase and this is different by product and country. And then even the overall coverage ratios can change depending on the expectation of the economic environment development in that given country. So it's a bit complex. So to be honest, there's not much historical experience to this Stage 2. How it behaves? What it means? It can mean very different thing for each bank. Therefore, actually, when -- if we can go to that slide, maybe where we have the Stage 1 and 2 coverages. So we concluded that most probably the best number to look at is Stage 1 and 2 coverage. So we have performing loans and non-performing loans. Nonperforming loan definition is quite clear, right, the Stage 3. And this is -- the definition of Stage 3 is actually quite similar to the previous non-performing loan definition. So that's okay. And it's reasonably -- and coverage on Stage 3 is reasonably stable. And it's easy to benchmark different banks with -- on this level. And that's what you see on this slide. And yes, I mean, numbers range between 47 to 65. I mean -- but when we go to Stage 2 individual coverage and Stage 2 ratios themselves, they're very different. If you look at different banks, it is not -- for the shape of space, we did not include the slide today, but in fact, we have a slide which compares different banks, Stage 2 ratios and coverages, and it's a very different picture. The only thing which is similar is the -- typically the Stage 2 ratios increased 2x, 3x last year for most of the banks, except KBC. I don't know what KBC does because for them it's actually flat. But typically, Erste, Raiffeisen and UniCredit, Intesa, you see 2x or 3x -- typically 2x for the higher Stage 2 ratios at the end of 2020 compared to 2019. But Stage 2 coverages are very different and Stage 1 coverages are very different. So therefore, we actually find it quite useful to combine the Stage 1 and 2 portfolio. This is performing by definition. And look at the level of provisioning of that portfolio, and this is what you see on that slide compared to some other banks who are active in the region. I think these are the good numbers if you want to come -- start from a high level to try to understand the level of provisioning and conservatism of different banks, but this is a fairly new metrics. And actually, last year was extremely challenging, I think, for all banks, to -- how to use a model the changes where we had because, frankly speaking, all these forward-looking expected loss models, economic models used past data, and we did not have during the last 20 years as long as typically these data to expand the natural disaster. So we had economic recessions, and typically, these models were built on those environment, and all of a sudden, we were hit with a very different external event, which created impact quite unexpected results, namely that we had huge magnitude of negative GDP growth across countries and portfolio quality, at least measured in terms of nonperforming ratios remain quite stable, which -- I mean, I'm sure none of the original models had these outcomes based on the previous 10, 15 years data, which they were built on. So I don't know where -- to which extent I answered your question. So some -- I mean, the big changes I can tell you why they happened and how, but it's just -- I mean, Stage 2 ratios and Stage 2 coverages, that's a very -- it's actually very complicated. And I'm sure it's very complicated for all banks. First of all, the classification of Stage 2 and also the provision levels, the expected losses what we assigned to them.

Yes. Sure. I mean, it's very detailed, and clearly, it's quite complicated. But if I may just add on just a bit, which is, why are we seeing that risk costs for the fourth quarter concentrated in the subsidiaries, but basically nothing for Hungary?

Because we said that we created more and longer in the previous quarters. So we just reallocated the provisions. I mean, we -- in Hungary, that's what primarily happened. We decreased Stage 1 coverage and we decreased Stage 2 coverage and we increased stage 2 ratio. So in a way, in Hungary, I mean, to be frank with you, we have the most sophisticated models in Hungary. That's where we have the longest time series, that's where we have the most reliable data, most granular data. So we can do the best quality modeling on the Hungarian portfolio. So we did -- that was the first one where we -- which we did already at the end of the second quarter. So this is just -- yes. And we just allocated it differently at the end of the year, more or less.

The next question is from Andrzej Nowaczek, HSBC.

Can you hear me?

Yes.

Great. My question is on the new house renovation subsidies. Can you try to quantify what the impact could be on volumes and profits this year and next? And also in this context, is the demand for other subsidized loans, like baby loans, likely to slow? So do you see this new house renovation scheme as a tool which can just maintain the momentum? Or will it have an incremental positive effect on your loan growth and profits in Hungary?

We expect around HUF 50 million, HUF 60 billion additional volume from this refurbishment plan. And as you can see from the baby loan, it's quite persistent. So there will be some -- we have one slide there. Can we go there? Baby loans? Yes. So yes, I mean, there's some decline, but it's not a big one. So I mean -- new production will be somewhat less this year, maybe HUF 20 billion, HUF 30 billion less than last year in baby loans.

Okay. So that extra -- I think at one point, you mentioned 3% to 4% extra growth in Hungary. That is not necessary to come from those new products? It's just the economic growth momentum improving, right?

Yes. I mean the subsidized structures continue this year. So the year-on-year, they may not make a big difference between -- I mean, yes. I mean maybe the baby loans actually may decline more than just 2030. So -- but certainly, this new refurbishment loan should kind of counterbalance the decline in the new baby loan volumes. But -- so therefore, from a subsidized products point of view, there shouldn't be a major difference between this year and last year. But yes, I mean, fundamentally, we expect bigger economic activity, much more consumption in the second half of next year and new investments starting. Yes.

The next question is from an attendee joined via phone.

Hello? Can you hear me?

Yes. I can hear you well.

This is [indiscernible] Securities. I have a few quick questions. I've noticed that in a number of locations, be it Bulgaria or Serbia, you have modified the parameters of your risk model. And I'm wondering whether -- if there are, possibly in the future, maybe next year, any macroeconomic top-down scenario under which you would potentially reverse those, as I understand, more conservative parameters, which you put into the model? So that's the first question. And second, when I'm comparing the sector -- banking sector in Hungary, the new volumes, the new production on mortgages against the -- reported by the Duna House [indiscernible] (02:08:55) house volumes of transacting on the housing market, I'm seeing actually that volumes of transactions are rising over the recent couple of months, whereas the volume of new loan production is actually going down on an annual basis. And I'm wondering whether you are experiencing this as well? And what could be the potential explanation for that and the outlook in this regard? And my third question would be, if you could -- if you could repeat the default rate, the approximations that you have given during your presentation for the exposures, which came out of moratoria in few of the countries where you operate?

So starting from backward, what I said was it -- in Bulgaria, the volumes which ramped to Stage 3 after the moratorium, it was roughly 2% of the moratorium volumes. In Serbia it was around 3%. And then that -- we definitely expect less than 5% in Hungary also the moratorium volumes. Reverse in models. Yes, I mean there's a potential for strong provision reversals, starting from the second half of this year, in our view. In order this to happen, there has to be a strong economic rebound. And our view is that this is actually going to happen and last for a couple of years where we expect a fast-growing strong environment starting from the second half of this year. And if that comes true, then there won't be much -- and it's going to have 2 implications. One, there will be very small increase in Stage 3 ratio. So out of the current Stage 2, actually only a very small portion will migrate to Stage 3. And the other one is that this -- the high provision levels -- the increased level of provisions, which we've created for performing loans, Stage 1 and 2, this 2.4%, there will not be any reason to keep them at that level. So at the end of '19, we had them at 1.6%, right? So I mean, theoretically, if all goes well, and we are turning into a very dynamic economic growth period also characterized by increasing inflation environment and inflation is actually good for credit quality, typically because income of clients increases, but they're -- and they learn kind of the real value of their loans [indiscernible]. So yes, it can happen that we will have sizable provisions. So provisions across the banking sector, I suppose, in Europe and globally as well, if things go according to plan. And the COVID -- negative economic impacts of the COVID situation seems to be there. Okay. In terms of kind of monthly sale -- new production disbursement of mortgage housing loans in Hungary, in fact, last year, the peak was in September. And in fact, November and December was slightly lower, was actually quite materially lower new production in November and December compared to, let's say, August, September and October. And then -- but just to remind you that actually lockdown started to -- partial lockdowns started from November, the second week of November. So there's a curfew and everything. So this might have a negative impact. Recent data is actually very strong. So February was quite strong in terms of -- as far as I know, by -- in terms of transactions on the retail real estate market. I don't know whether this answers your question.

The next question is from attendee joined phone. I opened the line. [Operator Instructions]

This is Olga Veselova from Bank of America. I have 3 remaining questions. One is about dividends. I appreciate the [indiscernible] about the booked dividend for 2020, which you will pay once you are allowed to pay. Given that before COVID, you were following the progressive dividend strategy, do you think that this new booked [indiscernible] can be the basis for future payments or we should rather view this booked payment as exceptional given that it's for a couple of years? So do you think this is a new basis or a spike and then we will turn to normality? My second question is about your sensitivity to higher rates. Could you please remind us your sensitivity to the yield curve for BUBOR currently in Hungary? And also, my third question is about cost. You mentioned that you are increasing spending on digital, which is great. In total, could you help us understand how much percentage point this adds to your annual growth cost? And I'm more interested, of course, in 2021 and going forward rather than about 2020.

Okay. So the dividend. This HUF 119 billion, this is for 2 years. This is for '19 and '20. So close to -- if you round it out, then HUF 70 billion is after '19 and HUF 50 billion is after '20. And we had a decline in profit, in after-tax profit of 37% between '19 and '20. So in a way, it's a spike. But -- because it's like -- it covers 2 years, right? So the -- but if you say that HUF 70 billion is behind -- is attributable to the results in '19, then HUF 50 billion is attributable to the result of '20. First of all this -- the decline is proportional to the decline in accounting and adjusted profit. So I mean we haven't formulated any view on what we would pay or suggest to pay after '21. But given the guidance that the ROE should improve, both adjusted and the unadjusted, and we continue to accumulate equities. So therefore, it suggests that we should have higher after-tax profit this year than last year. So it makes sense that we should pay more after this year than the HUF 50 billion we were paying for last year. How much more? I don't know. But in a way, it's not a spike. It's just 2 years together paid in one amount. And the second year was lower profit than the first year. So the attributable dividend payment is less. So that's the logic. Sensitivity to BUBOR. So for an additional 10 basis points, we expect HUF 1.7 billion NII sensitivity on an annual basis. So if there's another -- from the current 75 basis points BUBOR, if there's 10 basis point increase, then this should translate into HUF 1.7 billion more NII in Hungary. I can also give you the euro rate sensitivity, so the -- should the euro rate increase from -- by 10 basis points, the annual impact would be HUF 2.4 billion half. So we actually have a higher sensitivity to euro rate at group level, obviously, then to the -- for the BUBOR. Having said that, I think there's more chance for the BUBOR to go up somewhat than the euro rate, but who knows. And your third question was related to -- I think I mentioned it during the presentation. So that -- in fact, the investments in digital can be captured in 2 ways: one is the increased headcount and personnel expenses, but that happened back in '16, '17 and '18. So from '19 to '20, we did not really increase further the IT -- number of IT people. And therefore, if you look at our personnel expenses in Hungary, they did not grow. And we don't -- so that already happened, that's already part of the base, so to say. And the other way that it manifests is the increase in depreciation because the actual investment -- so the CapEx investment, you don't see in our numbers. So that comes in subsequent years through increasing depreciation. And as I said last year, in Hungary, there was an HUF 8 billion increase in depreciation. And this contributed actually much more than 50% of the cost increase in Hungary last year. And there will be further increase in depreciation this year and next year. So basically, these digital development in terms of higher cost base manifest in higher depreciation, and that's going to continue to increase next year and next year as well.

That's perfect, very clear answers. On the last one, can I clarify, this more intense spending on the digital is in Hungary only? Or in other countries, [indiscernible] and spend more now than before?

I mean, in a way, we try to -- in the first stage, it has mostly happened in Hungary because we are developing group level solutions, which we first implement in Hungary and then plan to roll out to subsidiaries. And there's a very strong internal development content in internal -- so there's less license implication here. So the second stage when we roll this out into the subsidiaries, there will be an impact on cost. So cost will be somewhat higher, but not as much as in the first phase. In the first phase, we started the development in Hungary. We are developing the new applications, which we are going to implement then in the subsidiaries, which will involve some higher costs, and we just started that. So this phase actually started last year, and it does involve somewhat higher cost, but not as much higher as the first phase was expensive.

The next question is from Alan Webborn form Societe Generale.

Just 2 more, if I may. Firstly, on Russia, [indiscernible], clearly, the margin has been coming down and came down again in 4Q. Rates are probably not going to go up very much, if at all, in 2021. Maybe a little bit, but not much. Do you think sort of rates of the margin has bottomed out in Russia? Or do you think it will go down further? And is it simply related to the trend in interest rates? Or is there something structural going on? And maybe a slightly broader question on Russia. You've talked a lot today about the benefits of digitalization and looking for something positive to say about the crisis that we've all been going through, but it does make point-of-sale look rather superfluous in yesterday's format. I mean, do you think that the Russian business, as it stands, with this focus on point-of-sale really is fit-for-purpose in an increasingly digitalized world? I'd be interested in your view on that and whether the Russian business needs to be adjusted further? And then the other point was -- I mean, the message I think you're giving to us today is that, yes, the next couple of months could be a little bit uncertain because we don't know about COVID and closed economies and so on. But you seem quite convinced of a big macroeconomic pickup in the second half, really without any scarring. And therefore, your -- you seem to be quite prepared to open your loan books, grow, and you're not too worried about asset quality when that happens. Are there, within your sphere, within your geographies, any areas that you're more concerned about scarring and the longer-term effects of the crisis than others?

Russia NIM. Well, yes, I agree. We expect some increase in the rate environment, but not very high. So maybe 25, 50 basis points increase. Part of the NIM decrease last year was indeed structural. So if you can go to this year-on-year volume change slide again, 13, I guess. Okay, so you can see here there was an overall decline of 11%, but consumer declined much more in corporate. And obviously, there's a huge margin difference between consumer and corporate. So the margin is excessively more on consumer lines than on corporate lines. So part of this margin decrease what we experienced last year was indeed structural. And when, hopefully, this growth can turn around this year, and we see, again, growing consumer loan volumes, higher rates than corporate, and that can be positive for margins. You are also quite, I think, to the point in terms of our difficulties in Russia. Indeed, it is structural. So to be very honest, when we acquired the bank in 2006, and the bank had a very strong business line in physical point of sales loans, we were, at that time, anticipating that maybe for another 5, 7 years, this can be a good business, but then may fade away and 15 years after it's still there. And yes, it was hit more than the rest of the market, but still -- but you are right that most of -- I mean, the -- this is not the product of the future. Physical POS is not the product of the future, not just in Russia, but nowhere. I mean if you -- I mean if you look at -- I think China is a good example in that respect because if you look at the last 3, 4 years, what happened in China and how successful just 5 years ago home credit was with its huge physical POS franchise in China and how much difficult is -- they have last year when the market migrated almost I mean substantially into digital and primarily just mobile-based applications. So yes, the future is more and more digital. And this is going to happen in Russia as well. And indeed, the acceleration in digital actually structurally makes the situation more difficult for us in Russia. This is not something new. So we -- again, we have been aware of this since we brought the bank that at some point, this is not going to be anymore such an attractive market or at least the growth potential of that segment might not be so big. So I mean, in fact, 2 years ago, we launched a number of new strategic initiatives. And we continue to try to diversify and find out new ways of revenue growth. For instance, we -- it's apparently quite successfully. It started to grow in car lending last year. So this is something we are developing. Obviously, we are trying very hard to catch up with our competitors in terms of our digital services. And again, Russia is not as advanced in terms of digital as China, but I think -- I mean, considerably more advanced than actually Europe. So if you look at Tinkoff and Sberbank and then what they do and how they do it, it's really a quite sophisticated environment, and we have to be very competitive in digital as well. And then we have various other initiatives. So it's a bouquet of like 10 different initiatives that we are working on in order to create the future growth platform for our Russian bank. I mean, regarding the macro expectation, I mean, it -- I mean, for us, it seems rational, right? I mean this -- and that once this COVID is over. And -- okay, the vaccination is somewhat slower in Europe than it should be. But if you look at the U.K., you look at Israel, and if you look at -- I mean Hungary, in 1 month, though an enormous growth in the percentage of vaccinated people. So it's really -- I mean, this weekend, they want to vaccinate 400,000 people just in 2 days, which is like 4% of the population. So this is -- it's -- it can be actually quite fast, if done well. And once we reach 60%, 70% of vaccination, then the kind of -- the systemic lockdowns should not be any more necessary. And then I'm sure everyone will -- during summer, I mean, if people will be able to travel, they will. I mean, everyone. And there'll be a big surge in tourism, a big surge in travel. Everyone will start to buy new clothes and things like that. And so this is -- I think the only potential threat to the scenario is if there's a new version of the virus, which is -- for which the currently developed vaccines are not effective. I think then we have a big problem. So -- and there's -- honestly, I'm not a scientist. So I don't know what the -- what's the probability of that. And if that happens, how fast a new vaccine can be developed. But if that happens, then it can be a serious problem. And if we have another summer with lockdowns and so on, and then ultimately, at some point, it can turn into kind of negative expectations of the economic players and financial sector problems and kind of classic economic recessionary situation. But so there is a possibility of a negative scenario, but honestly, I'm certain, this is not the probable case because at the moment, as far as I know, we don't have a version of the virus, which is -- which cannot be affected by the current vaccinations. Therefore, the current vaccination should work. And there's acceleration in vaccination and by the third quarter, by June, July, at least in Hungary, and I hope in most of the EU countries, we will have a very high level of vaccinations. And this is going to be more or less over in terms of real economic impact, real impact on how we live. I mean, the virus will be with us, and we may have to be vaccinated every year or what -- something like that. I don't know. But the economic impact should -- negative economic impact should not be there. And people will want to consume, will want to travel, will want to go out, will want to consume. And therefore, there will be a huge surge in demand. Inflation will go up. Investments will start but will be bottleneck, so people will invest and projects will start. So there will be a surge in economic activity. I think it's almost -- I mean, unless there's a new version of the virus, which is resistant to the vaccines, I think it's pretty much inevitable. And then the big question is how long it's going to last, right? It's 1 year, 2 years, 3 years, 5 years, whatever. And whether it will be overheated and how the monetary and fiscal policies will react and so on and so on. But that's another story. So honestly, I don't know. I can't answer it. I mean, this is something we have to -- we will talk about a year from now. If we have like 6 months, very strong growth, very strong economic rebound in the second half of this year. And then a year from now, we will talk about overheating and so and so on and the potential risk of that and how -- what policy responses will be there. But I mean, from -- I don't know, no answer. But [indiscernible]

The next question is from Simon Nellis, Citigroup.

Just a quick question for me. Can you remind us of the outlook for acquisition effects this year? And I guess in a related question, can you elaborate on the synergies that you're still extracting from M&A? I mean, can we see another year of basically flat costs in Bulgaria because of the acquisition you made, I guess, now a year ago? And in Serbia, should we expect some material cost synergies to come through?

In Bulgaria, we are -- in terms of cost synergies, there's still some still 50, 70 people we plan to optimize, so to say. And we actually started a very a very ambitious new strategic transformation program. When we acquire a new bank and we have a merger, we have a saying that merge first, improve later. So when we have a merger, it typically takes 1.5 years. And for that 1.5 years, there's not much other than development, which can be done. So whenever we do a merger, we always have in mind when the merger -- and then we start an improvement project. And this is quite large-scale work what we do now in Bulgaria, a pretty comprehensive strategic transformation program. You probably noticed that we have a new CEO there. So our former CEO, Mrs. [ Marino ], who had retired after more than 40 years, very successful career in the bank. And we have now Mr. [indiscernible] as the CEO. He used to be the CEO for the last I think, 6, 8 years in Ukraine. So a very good performance of the Ukrainian bank, which we saw last year, in the previous couple of years, was kind of made possible by him and the team, which he led in Ukraine, and now he moved to Bulgaria last autumn. So we had quite a comprehensive strategic transformation program. And they will have strong results, I believe, especially in terms of growth, market share capture and service development and client service development and so on and so on. In terms of the cost itself, I hope that we are not going to increase the cost in Bulgaria. In a good scenario, we can have some a small further decrease in an inflationary environment. So in a sense, I mean, in a kind of growing bank. So yes, there's some more to expect in Bulgaria. In terms of Serbia, we pretty much extracted the potential savings from the first acquisition, and it was quite substantial. So if you look at -- usually, there are 2 ways to look at it. One is to -- as a percentage of the combined entity or the percentage of the smaller entities. So the cost savings are to realized inflation, taking into consideration inflation as percentage of the smaller entity in Serbia, as the result of the first acquisition, was actually 70%. So we took out 70% of the smaller bank's cost base in Serbia after the first acquisition. And that was already in the numbers last year. But then we have another merger, which we should finish in the second quarter. And this is a bigger bank than what was required in the first phase. So that we should see next year, the impact, and also this year. So this year, there might be a kind of low single-digit decline in Serbian costs. And next year, there should be actually a double-digit decline in costs. And we also expect cost synergies to be realized in Montenegro, which is from a kind of group perspective, is small, but in terms of percentage there, it can be actually quite visible.

Okay. And just one last question on M&A. Maybe I missed this, but the 3 targets that you're looking at, are they all in existing markets? Or are you looking at new markets?

Okay. As the Chairman said in the morning, during the press conference, after the 3 countries, 1 is in our current markets, and the 2 are in new markets.

[Operator Instructions] There is a question from an attendee joined via phone. [Operator Instructions]

Yes. This is Mate Nemes from UBS. I have 2 quick follow-up questions, please. One is on provisioning approach for the first half of '21. So after the significant migration to Stage 2 that we saw last year and the increase on Stage 2 coverage or as a combined Stage 1 -- Stage 2 coverage, shall we now expect really individual assessments and then case-by-case provisioning rather than the further management overlays despite some of the additional lockdown measures that were put in place? That's the first question. And the second one is a follow-up on acquisitions. Can you just share with us how do you think about excess capital available for acquisitions now? In the past, you flagged the 12% to 18% CET1 range that you feel comfortable the banks can move in. Is the 12% lower band relevant number here?

Overlays. We did not actually apply many overlays at the end of last year. It was -- that was -- the only way we...

Yes, there was...

We applied some floors. So in some countries, we applied floors, PD floors based on expert judgment. That we did. But the models are everywhere kind of granular base and bottom-up BLL. So we didn't -- we don't have this kind of big portfolio level overlays, which are not substantiated with detailed individual loan level models. The only kind of overlay type, which you could -- I mean, it's not an overlay, but which -- you could kind of call as an overlay is in some countries we introduced floors. And that -- in order to reflect a kind of conservative approach where we -- I mean, based on -- to some extent, it is expert judgment, and it was well documented and discussed in detail with the auditor -- actually with 2 auditors because now, by the way, we are rotating. So Deloitte who has been our auditor for a very long time has to rotate [Audio Gap] I mean, we have -- we talked about 2 things today. Why is that -- there's a guidance or a kind of expectation, put it this way, that risk costs this year should be lower than last year. And how much lower? If this economic scenario, what I just described, manifests and the second half of this year is really that positive, then it can be substantially lower. The other thing I said was that due to the extension of the moratorium in Hungary by another 6 months. Basically, the loans in the moratorium, the time they spend in the moratorium exceeds the 9 months, which will see the kind of European-level guidance that the lowest 9 months moratorium participation, there's no forborne trigger. And therefore, there's no automatic Stage 2 migration. But the Hungarian moratorium, it stands over 9 months. And therefore, could actually trigger automatically a Stage 2 migration, but it does not because the Hungarian Central Bank came up with a guidance where they specified under which circumstances retail and corporate loans do not have to be classified as Stage 2 despite the fact that they continue to participate in the moratorium. And what I said was that more or less what we did year-end in Hungary, in anticipation of these requirements by the Central Bank, are numerically on a portfolio level, more or less in line with what should happen at the end of the first quarter according to the National Bank's expectation. I mean in plain language, it means that just because of this, there shouldn't be further large increase -- further increase in Stage 2 ratios as far as we understand today. Well, unless there's a material deterioration in the expectations regarding the environment or something unexpectedly negative to happen, I mean there's -- we don't feel further need to exercise further conservatism in creating more provisions. Sorry, you had another question regarding acquisitions, but I didn't quite fully...

Yes. That definitely helps. The other question was on excess capital that...

Yes, yes, I remember. Okay. So yes, we have not changed that 12% to 18% kind of guidance, which we created. So technically, we can go down to 12%. Actually, there's even more room because now temporarily, the capital requirements were reduced because the -- as you can see on this chart, the other systemically important buffer, which used to be 2%, this was reduced to 0% for last year and this year. And next year it's going to be 50 basis points. And in 2 years, it's going to be 1 basis point. So today, we don't have alternative Tier 1 capital elements. So for us, the common equity Tier 1 requirement is really the Tier 1 requirement. So therefore, the current common equity Tier 1 requirement equals the Tier 1 requirement, which is 9.6%, including the [indiscernible] ratio. So we have 15.4%, and the requirement is 9.6%. So there's a lot of room here. And if we went down to 12%, temporarily, it would be still much higher than the requirement. I'm not saying -- and I'm not suggesting we are going down to 12%, but we could, right?

As there are no further questions, I hand back to the speaker.

Thank you very much. Thank you for the many questions and very good questions you had. I mean, it's really a very kind of substantial discussion, I think, what we had. So thank you for your interest. Thank you for participating. Thank you for your very good questions. Wish you all the best, good health. I think that's the most important for the last phase of this virus situation to remain healthy. And then I hope to see you and talk to you, if not sooner than during our next quarterly report, which is going to be somewhere in May. Usually, it's -- I don't know the exact date, but early May. So thank you, again, your participation. All the best. Be healthy. Take care of yourself. Thank you very much.

Thank you for your participation. The fourth quarter 2020 conference call is closed now.