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

Dear, ladies and gentlemen, welcome to the First Quarter 2021 Conference Call of OTP Group. This conference will be recorded. [Operator Instructions] May I now hand you over to Laszlo Bencsik, Chief Financial and Strategic Officer. Laszlo, the floor is yours.

Thank you. Good afternoon or good morning, depending where you are. Thank you very much for joining us today for the 2021 First Quarter OTP Group Interim Results Presentation Conference Call. I promised my colleagues to be relatively short in the overall presentation. As far as I understand, we have received some gentle feedback that I'm sometimes too ambitious. So I will focus on a couple of slides, maybe less than 10. Just to highlight some messages, which we consider particularly important. The presentation, what we use, is on the website. It was uploaded at 1:00 p.m. Central European Time. So hopefully, you have been able to look at it. But we are also showing it on the screen while I'm talking. So let's start on Page 4, maybe, which shows the P&L, the major P&L lines for the group. And there are some remarks, which are worth making. Obviously, we had a good quarter, almost as good as the third quarter last year. And that was driven by risk cost primarily, obviously. So if you look at the last 5 quarters, the risk cost dynamics. The first quarter of last year was quite high with this HUF 92 billion. And then it went somewhat lower, close to HUF 40 billion second quarter. And then the third quarter was really low. And therefore, we actually achieved last year third quarter historic high profit level. And in the first quarter, last quarter last year, we also provisioned more. Now all these provisions last year were related to kind of forward-looking expectations, IFRS 9 methodology, not actual credit losses, but we identified were more like anticipations of potential future losses, which so far have not really manifested. And therefore, we -- in the first quarter, we didn't provision much, because there was no need. So if we look at the 90 days plus due developments or the Stage 3 ratio or the 90 days past due ratios, they were improved and did not deteriorate. There is no reason to further provision. Putting aside the risk was part of the story. I think the most important number here is the operating profit year-on-year adjusted growth rate. And there are a couple of adjustments, which we made here, first one for FX exchange rates. And then you probably remember, last year, we divested Slovakia in the -- during the fourth quarter. So that introduces some noise if you want to compare year-on-year quarters. Plus we made kind of classification methodology change in Hungary relating to operating expenses. There was HUF 4.4 billion equivalent of local taxes, which we pay in Hungary quarterly, roughly this amount, and it's roughly HUF 16 billion, HUF 17 billion per year, so it's quite a big amount. And it has been so far -- it used to be in operational expenses. It's clearly a tax based on revenues, not on profit, but revenue tax. And it's paid on local municipality level. And we learned now that we have changed auditors. By the way, we have now Ernst & Young. So the figures that you see here are audited figures -- no, we -- sorry, for Hungary, it's audited. And for the group, it's -- we have an audit review. So reviewed numbers by the new auditor, Ernst & Young. And they kind of drawn our attention to the fact that other banks in Hungary typically account for this local tax as corporate tax. It's very Hungarian-specific, so we don't have that in any other country. So therefore, we reclassified it. So if you make these 2 adjustments, then we end up with a 13% operating profit without one-offs growth year-on-year using the first quarter as a benchmark. And I think this is quite a good result, given the difficulties that we have all had during the last year that despite the COVID situation and the economic contraction, substantial economic contraction in some of the countries where we operate. All in all, we managed to increase our operating results by more than 10%. It was 13%. So I think this is quite remarkable, and we are quite happy to see it and especially, because this was primarily driven by revenue growth. Revenues grew 8%. And each revenue line, including net interest income, grew and also net fees, which is also remarkable, given the margin compression in case of the NII and the drop in business activity and transaction volumes during the COVID situation, which had a negative impact [indiscernible]. The next slide I think I should talk a little bit more about is Page 8 about margins. So we have had this long story of margin compression. So for many years now, we've experienced quarter-on-quarter, year-on-year compression in margins. And we -- when we talked about our expectations regarding this year net interest margin, we said that it may continue to decline. And indeed, if you look at year-on-year expectations, the last year, the annual net interest margin was 3.61%. And if we compare to this number, it's -- it was very, very likely that the annual number for this year will be lower. However, what happened during the first quarter compared to the last quarter last year, fourth quarter, margin actually increased, not by 5, but by 4. I mean these are rounding problems here, but -- so basically 4 basis points, primarily driven by margin increase in Hungary, which was then driven by the end of this temporarily lower APR of newly disbursed consumer loans last year, they jumped up to their kind of market levels; and also the moratorium-related adjustments, negative adjustments, which we made last year, gradually come back to NII over the course of the duration of the portfolio. So then that was also lifting up the margin. So the question is whether this situation will continue over the course of the year or not. And my short answer would be that we don't know exactly. So there are a lot of factors at work here. And if all the factors account for our benefit, then we can imagine a scenario where there will not be further quarterly decline in margin. But again, this would be a kind of lucky best scenario. And due to the very intense price competition, it is quite possible that we will see further slight decrease in margins. Let's move to volumes, Page 9, quarterly world volume dynamics. Given again that we had, in the first quarter, the second wave of the -- end of the second wave and the first half of the third wave of the virus in most of the countries where we operate, so operationally and in terms of COVID-related restrictions and the negative ramifications on the economy, this was still a very much negatively affected period. Despite all of these headwinds, we managed to grow the portfolio 2% just in one quarter. Hungary was particularly strong with 3%. And within Hungary, consumer loans, 7%. Part of this was this baby shower loan, this baby loan. But if you just look at market-based cash flows, their volumes grew 4.8%, so almost 5% quarterly growth in market-based cash flows in Hungary, which is quite a good number. And housing loan growth wasn't astronomical, but in fact, if we look at new submissions of loan applications, then year-on-year, if you compare this quarter with the first quarter last year, then the increase was 35% in terms of housing loan applications by clients. Russia remained negative, but this is seasonal. So in previous years without COVID, we had seen similar low growth in the first quarter, even in the second quarter. And this is the country where we expect the biggest recovery, the strongest adjustment in the trajectory of portfolio growth. We may remember that last year, Russian volumes declined by 11%. Like all those according to expectations, then the second half of this year, we should see a very robust growth in our Russian volumes, maybe more than 20%. And in the other countries, we expect marginal improvement and actually acceleration of lending activity. Some countries, it might be quite regressed, which were not so strong so far due to the improving economic conditions and the kind of petering out of the COVID-related restructurings. So 2% in loan growth. And if you go to deposit growth to Page 11, it was actually 3% on a quarterly basis. And nominally, it was even -- the difference is obviously much bigger. So I mean HUF 250 billion more or almost HUF 30 billion more deposit growth than the loan growth. So this last quarter was typical, in a sense, of the last 5 quarters that loan growth -- that deposit growth nominally was much stronger than loan growth. And therefore, excess liquidity further increased. This will help to turn around second half of this year. And hopefully, second half, we are going to see larger nominal loan growth than deposit growth. And then we slowly again start to kind of improve and build back the efficiency of our balance sheet. Okay. Maybe a few words about net fee income, 13. Here what you can see is that, okay, year-on-year, we had 5% FX-adjusted net fee income growth without the divest -- I mean the divested OBS, the Slovakian bank. And here what you see is a very mixed picture. So some countries, Hungary, Bulgaria, we're growing quite fast. And then you can see some negative numbers here. And then I think it means -- I mean the overall 5% is not bad, but it could have been better if some countries were not kind of laggards and not have actually negative growth. And then let's have a look at this. So we have Croatia and Montenegro with minus 3% and minus 17%. Obviously, in these 2 countries, they have a very large exposure to tourism, and typically, transactional revenues are related to tourism, tourist industries, tourists spending money, ATM withdrawals, et cetera. And this did not happen during the course of basically last year, and that had an impact on the first quarter as well. So in these 2 countries, I think we believe it's quite reasonable to expect improvement once the COVID situation is over. And then in Serbia, it was just a technical reclassification, which happened in the first quarter this year. So that was -- without that technical change, it was actually positive. And then we have Russia where, again, it was the biggest negative nominally, the year-on-year change. And that is purely due to the loan volumes, the new loan generation, which is still lower than last year. And we typically generate fee income in Russia when we sell new consumer loans and we also sell insurance products and we get the commission. So that's a large part of our revenue suite in Russia. And as soon as volume growth turns around here and starts to increase, again, we believe it's reasonable to expect fee income to grow as well. So all in all, again, I think 5% growth in this environment year-on-year is not bad, but it could have been better if these countries were not underperforming. And once they do, they come back to normal performance after the COVID restrictions are over, then hopefully we will see even higher growth rates. Maybe a few words about operating cost, Page 15. Overall, if we do adjustments to the divestment of Slovakia, FX and this kind of HUF 4.4 billion I mentioned, the reclassification of local taxes, then the year-on-year growth of first quarter was 3%, which is, I mean, I think, quite okay. And then here, as well, you can see some negative numbers. We have actually managed to decrease the cost base. And it's primary Bulgaria, Serbia, Montenegro and Croatia. And these are the 4 countries where we have done mergers during the last 3, 4 years. It started with Croatia and then Serbia and then Bulgaria and then Montenegro. And the last one -- the latest happened in Serbia just over the last weekend. It was very successful. All of these were on time, on budget. And as you can see, in each case, we still have some -- or still had or still have some cost savings manifested. It's Serbia where we should see further cost synergies to manifest due to the last acquisition what we did. And the last line where you see here this growth in the first quarter levels just related to a consolidation of financial institutions, which used to be out of the consolidation which we acquired last year. Okay. So Maybe 19, Page 19. I mentioned the Serbian merger, which was done successfully on time, on budget. And in fact, this is the third merger which we finished during the COVID situation. So just to remind you, last year, end of April, we finalized the merger in Bulgaria just in the middle of the COVID lockdowns, where we had very serious lockdowns. And back last year, in December, we did the Montenegrin merger. And now we finished the merger in Serbia. And with this, we actually completed the integration and merger process of the second wave, this last bunch of acquisitions, what we have made, the SocGen assets plus the [ MVG ] assets in Serbia. So now all the merger processes are over. And with this last action, we actually created a bank in Serbia, which has the largest loan volumes. So this is the largest bank by loan volumes in terms of market share. By assets, we are #2, but actually deposits are not making huge returns on it. So we are quite happy to have a leading position in landing volumes. And the good thing is that actually, even during this merger process, we managed to substantially improve and increase our volumes, as you can see on this chart and also our market shares actually in Serbia. So despite being busy with the merger during this period, we managed to increase our market shares as well, which is, I mean, a huge credit to all our colleagues who were on this in Serbia and brought together this fantastic performance. Maybe next slide, Page 20, the loan book. Again, not much happened in terms of stage migration or credit portfolio quality change. Therefore we didn't provision much, as you know. And in fact, the Stage 2 ratio remained stable. And the provisioning levels also remained more or less stable. And as you can see on this chart, we believe that we are very conservatively provisioned in terms of Stage 1 and Stage 2 loans, the performing loans compared to some other banking groups. So we believe that there's a lot of reserve here in case our optimism related to the future is manifesting, which is unlikely by the way. Finally, maybe a few words about the macro situation and expectations regarding to the macro situation, Page 24. I mean, across the countries where we operate, we expect a very robust economic recovery once the COVID situation is over. And we expect this to be over by the end of the second quarter. Maybe some countries will come out faster and some countries somewhat slower. But by the third quarter, we expect all of these countries to be out of the negative effects of the COVID-related restrictions. And therefore, we expect a very robust economic growth period to start with high consumption, high labor demand, increasing wage inflation, increasing inflation in general. And in this environment, we expect new investments to start and new capacities to be built, therefore, strong kind of investment cycle to start. And that is -- again, that's true for pretty much all the countries where we operate. Especially -- I mean if we talk about the timing, it's maybe worth noting that Hungary is the most advanced in terms of the vaccinations in Europe. So we have vaccinated more than 40%. It's like 43% of the population in Hungary has received the first jab. So Hungary is quite in the forefront of vaccination. And we pretty soon should reach a level where this kind of herd immunity kicks in, and then we can safely operate without strong restrictions. So in a nutshell, it was what to -- what I intended to present. But I'm very sure that we have a lot of questions, which we will have time to answer. So please, I'd like to ask my colleague to open this floor for questions.

[Operator Instructions] The first question is from Andrzej Nowaczek, HSBC.

I have a couple of questions. First, can you talk a bit about the Hungarian loan moratorium? The participation rate seems to have dropped somewhat, but that's probably because of strong loan growth, right? So how do you gauge what will happen after this ends in June, July? What are the metrics to look at here?

Indeed, I mean, maybe we can go to the slide where we had -- indeed, the number dropped, so yes, at 32% -- that's 32% of the gross loans. And as you rightly pointed out, it -- typically, this number moves because of the overall portfolio, so the denominator increases. So what we -- the experience from other countries where the participation rate was much less than Hungary, but where the moratorium ended already back last year during the COVID situation, so not in this dynamic economy growth environment, but we expect to be there by July. But during -- or in the middle of the COVID situation. So in Bulgaria, the Stage 3 ratio out of those clients who exited the moratorium is less than 3%. In Romania, it's 5%. And we only see higher numbers in Croatia and in Montenegro, which were hit hardest by the whole COVID situation due to their large exposure to the tourism industry. So in these countries, it's like 8%, 9%. And -- but again, in these countries, the participation ratio was much smaller, between 5% to 10%. And out of this 5% to 10% when the moratoriums ended, between 3% to 8%. 8% to 9% actually ended up in Stage 3. So if you assume that in these countries where the participation ratio was much smaller, actually the kind of more exposed or higher credit risk clients entered the moratorium in the first place, and they ended up with these ratios. Then I think it's fair to assume that in Hungary, we should not see higher than probably other -- like in Bulgaria or Romania, 3% to 5% with moratoriums, which were between 6% and 10% of total portfolios. I can't imagine that numbers will be higher in Hungary, when, in Hungary, first of all, a much bigger kind of participation rate we have and the timing of the moratorium ending it will be in the middle of a kind of huge rebound in economic activity. Therefore, it should be kind of low single digit, the actual default rates of the moratorium volumes in Hungary based on formal logic and the experience what we have in other countries where the moratorium already ended.

And then in that context and given the low amount of loan loss provisions in Q1, why didn't you revise your cost of risk guidance?

I mean -- because we believe that it's going -- the cost of risk this year should be less than last year.

Materially less presumably?

I think that's fair, correct to assume, yes.

Okay. And then quickly just one other thing. I noticed the number of employees in Hungary is rising again. What is it due to? And what is the outlook for salary increases and bonuses in Hungary and across the platform?

It's the increasing economic activity. I mean we are extremely busy. I mean if you go back -- I mean maybe we can share these 2 slides, Hungary, one on corporate and one on retail. I mean this is corporate. So you just go to the corporate. So corporate lending, in fact -- I mean just the first quarter -- no, this is retail. If you go to corporate, so just in one quarter, first quarter this year, micro and small company loans increased 14% due to this Funding for Growth Go! program, where we basically issued almost HUF 600 billion loans. I mean this is -- these are smaller loans, right? Huge work, huge operational work. And if you go back to the retail slide on 16, again, I mean, this is -- I mean, applications, we accepted 35% more mortgage applications, housing loan applications first quarter this year than first quarter last year. So that's a massive growth of activity. So that's the, more or less, the reason behind the FTE growth or the fact that it's not getting less. In terms of wage dynamics, I think it's fair to expect, again, high, maybe even double-digit level of wage inflation coming back quite soon. We -- even today, the labor market is relatively tight, unemployment levels are low. And once the heat will be on, second half of the year, I expect January inflation to go up, but wage inflation will be, for sure, higher and stronger than the CPI, which is going to, again, generate pressure on the Hungarian kind of efficiency and -- but actually, if you look at our cost-to-income ratio, group level in first quarter, it was 51.2%. And obviously, if you want to compare it to previous quarters, then you have to adjust back with this HUF 4.4 billion, which we didn't classify. So if you make that adjustment, then on group level, it was 52.7%, right? And the Hungarian gross-to-income ratio was -- first quarter, was 50.5%. So this -- I mean these are not bad numbers, right, in such a low rate environment and lower net kind of revenue margin environment.

The next question is from Anna Marshall, Goldman Sachs.

So a couple of questions from me, please. Firstly, on the outlook, I have noticed that basically you've removed the outlook slide from the presentation. And I appreciate that you have already commented on kind of some elements like cost of risk or margin trajectory. But generally, is there anything else you can comment on the other elements of the previous outlook? Do you expect kind of more positive, less positive dynamics there? So this is my first question. And then the second one on M&A. So you said that you've completed the merger processes that you initiated before. How does the picture look like going forward? And in particular, can you comment on the kind of attractiveness of some of the kind of markets that have been mentioned in your press?

Well, in terms of outlook, I mean, we did not put the slide, because we haven't changed the outlook. So we -- basically we made 5 statements. First of all, that the ROE may be higher this year than last year. I mean based on the first quarter -- I mean I think it becomes -- I mean I think it's a very valid statement that it may be like this. And in the first quarter, we made the adjusted ROE was more than 18% and the accounting ROE was almost 15%. And you probably remember that we accounted for the entire bank tax for the whole year in Hungary. So therefore, typically the accounting result of the group is lower in the first quarter. And then we said that we expect around similar levels of loan growths like last year. Last year, we had 9%. Again, here, I think the first quarter result of 2% is actually quite positive and quite supporting to believe that, indeed, it will be at least as much as last year, given this narrative, what we have that we expect the loan growth to materially accelerate second half of this year, especially in places like Russia. Net interest margin, again, the outlook was that it may continue to decline. And I said today that it will definitely -- or most -- I mean we still expect it to decline on a year-on-year basis. Quarter-on-quarter, it's another story. There are many factors here. And if everything goes extremely well, then it may actually not decrease further on a quarterly basis. Risk costs, as I said, we said that we expected this year to be lower than last year. We continue to expect that. And then we said that the cost-to-asset ratio may be lower this year than last year. Last year, we had 2.9%. The first quarter was 2.63%. Again, if we make this adjustment with the local taxes, then it's 2.71%. So I think it seems possible that we can get to this level. So that's the outlook. So no change basically. I mean we could have like -- I mean -- so no change in general. I think -- I mean the first quarter results made these statements what we made when we presented the last year results even more probable, I think. The second question was related to M&As. Indeed, we have completed the mergers. So we kind of digested this -- the last wave of acquisitions, and now they are firmly rooted in the group structure and the organization and churning out efficiently returns. So we're very happy. And I think -- and it's such as the IT mergers and the system changes and the processes and organizations. But I think also culturally, we managed to integrate these entities in a positive way, in a way that we -- OTP itself improved and reached a higher level by combining our strengths with the strengths of other organizations and actually creating something more than the 2 previous units. So I think we have gained a lot also in terms of knowledge, culture, approach, diversity, which is I think -- which are extremely important for future success. And indeed, we are -- we feel quite ready to continue and do further acquisitions and do the very difficult job of integrating and merging further banks into the group. But we are, obviously -- our intention is not -- a loan is not enough, so we need assets, good assets for sale, and we need buyers who agree with -- or sellers who agree with our assessment of the values of assets. And we are working on these stories. And we -- as always, we refrain from commenting press releases or by -- or I mean -- or something appearing in the press. So excuse me, I won't make specific comments on any of these. Other than that, we are working hard on various opportunities as we speak.

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

This is Máté Nemes from UBS. I have 2 of these, firstly on net interest margin. I just like to refer back to your comments on competitive pressure in some markets on net interest margin. I'm just wondering if you could give us a bit more color on which countries? And perhaps which markets do you see the most pressure that could influence really group NIM? And this in the context of obviously some positive developments on monetary policy rates in some jurisdictions like Ukraine and Russia. That's the first question. And the second question is on Hungary, mortgage lending specifically. On Slide 16, you're showing that OTP's market share in mortgage loan contractual amounts declined slightly in Q1. And it seems like this is really the first time for a long while. I'm just wondering if you could kind of comment on the reasons for that. Are you seeing any, let's say, irrational behavior in the market from some of your competitors perhaps to pick up volume? Or are there any specific reasons for that?

Yes. Okay. So price competition in different countries. Clearly, the most competitive environment, from our perspective, are the ones which are either in the Eurozone or FESA Eurozone countries or kind of joining the Eurozone, especially Slovenia. I mean, as you can see on this slide, this is the lowest net interest margin country. Slovenian corporate loan pricing, from our perspective, is really -- is getting to a territory which we find hard to understand, so to say, why our competitors are going to those levels. And Bulgaria started to continue to experience this margin pressure and very high competition. I mean Bulgaria last year joined ERM II, and they're moving closer and closer to joining the Eurozone. So I think our kind of Eurozone-based competitors already consider it Eurozone and [indiscernible]. So we see quite margin decline there as well. Now on the other side, just as you mentioned, in Russia, Ukraine, where the rate environment started to increase and where we have rate hikes and inflation pressure, it seems that the margin environment is somewhat more accommodating. So I think these are the 2 kind of ends of the spectrum: on one hand, Russia and Ukraine, which are now seeing somewhat better from a margin perspective; and then Bulgaria and Slovenia, on the other hand, which is fiercely competitive and declining. And the mortgage market share -- can we go to that slide on Hungary, maybe 16, I think? I would not try to read into this any kind of tremendously meaningful story. So it's still quite high. And disbursement, in our case, is lower in the first quarter. This is partially due to the fact that the December, November was weak due to the -- I mean the restrictive measures regarding the second wave of the COVID situations. But then the first quarter was extremely active in terms of new applications, as you can see here, 35%. So -- and then -- and some of the new -- so what happened that the new subsidized structures kicked in and also the VAT decreased for new residential developments and this new subsidy type for refurbishments. And I think what happened that our clients kind of waited and they postponed their real estate kind of purchasing and mortgage applications from the third quarter -- from the last -- fourth quarter last year when already these new measures were known, but not yet introduced. And they actually made the applications in the first quarter, benefiting more from the subsidized structures. And in general, whenever we talk about subsidized structures and trying to use them, we typically have a much higher market share -- I mean a good proxy to that is the -- on the second -- following Page 17, you see our market share from the -- it's not housing loan, but it's the most prominent subsidized structure at the moment. As you can see, we have 44%, 45% market share from baby loans, much higher than our overall market share. So maybe this somewhat explains the first -- end of first quarter somewhat lower volume market share. But I don't -- and this -- it doesn't mean that they're losing ground in that all.

[Operator Instructions]

This is Olga Veselova from Bank of America. My first question is about potential provision releases. You say that you have provisioned quite a bit last year. You didn't see major reasons to add provisioning now. Do you think there is -- there can be a situation for potential releases in the next quarters? And if yes, then in which regions or segments you anticipate to see that? This is my first question. The second question is about the fiscal stimulus in Hungary. Earlier this year, you mentioned there was a new program launched in Hungary, lending for renovation. How substantial this program currently is? Or is it still small? Is it a nice addition to the programs in which are already in operation? And do you think this will evolve into something material over time? This is my second question. And my third question is about your cost outlook. You mentioned you anticipate higher CPI and also some wage inflation in the regions over time. So can you possibly quantify your expected cost growth this year, maybe even next year or at least trajectory? Do you think it will be mid-single digits, higher, lower?

Okay. I mean it may happen that we will release provisions. I think it's maybe too early to talk about this. First, we should see what we expect to happen right at the end of the COVID-related restrictions. So if we are right, then, for instance, in Hungary, we expect no further restrictions starting from June. And hopefully, the tourist season will be very strong in the countries, which were hit hard last year like Croatia and Montenegro. Having said that, they already lost the preseason. So that we already know that they lost the preseason. So April, May, even June may not be too strong. But July, August, and hopefully, the post season after season, turnout will be strong in these countries. And if all goes very well and there's no further wave of the virus, a new version of the virus and so on and so on, then I think there is -- it can happen that we will end up releasing provisions. But -- I mean what you see today as provision levels, they reflect our best judgment and based on the models and our discussions with the auditors. We always tend to be conservative and, we are not going to give this up. So we believe that's the right approach to be always on the conservative side as much as possible, given the different accounting and tax regulations. But within this context, if all goes well, yes, I mean, there's a potential. But it's too early to count on that or kind of forecast it for sure. The lending for construction just started, so this is quite new. And again, this is one of the reasons why I think applications were lower in the fourth quarter. And therefore, actually new loans were -- generation was somewhat less in the first quarter. And then applications jumped up in the fourth quarter, because people were waiting for that. It is a meaningful volume around -- I mean the loan -- the new volumes we expect are around HUF 50 billion for this year, but we will see. But it's important. Cost situation, in general, cost growth. I mean -- first of all, we have this 3% year-on-year growth with all the adjustments in an environment, which is somewhat muted or moderate in terms of cost development actually, because wage inflation was not strong during this period. So I would be surprised to see lower levels of cost growth than this. So certainly, if anything, cost trajectory should be somewhat higher than what we have seen last year. Having said that, cost -- again, we are not in a cost-cutting mode. So it's really a very active growing period, what we expect to happen, which is then -- I mean, in itself, how much costs grow is not a good proxy. It's more like cost-to-asset or cost-to-income ratios which matter. And in terms of cost-to-asset ratio, which is independent of the margin development, and therefore, we just started to use that more. We expect -- we said that we expected improvement year-on-year. And indeed, if this kind of strong economic activity kicks in, and hopefully, revenue growth would be strong, then I think the cost efficiency ratio should, if anything, improve despite whatever cost growth we are going to see. In general, we are going to have a higher inflation environment, that's what we believe. And that should have an impact on the revenue side as well.

[Operator Instructions]

This is Robert Brzoza from PKO BP Securities. I have the following questions. Number one, you are mentioning in your report that the first-time consolidation of the other subsidiaries in Hungary, taken together with the improvement in the equity consolidated entities, added about HUF 4 billion to the quarterly net profit. And my question is should we think of it as a one-off or a new additional run rate contribution to the net profit of the group? Question number two is about cost of risk. You're commenting that the first Q recoveries at OTP Factoring were lagging previous quarters because of the upward revaluation of Factoring claims, which was performed in the 4Q '20. Essentially, you recognized some future expected recoveries already in the 4Q. So the question being, is the new level of the recoveries seen at OTP Core perhaps plus this HUF 1 billion reclass into other income, should it be sought as a new run rate compared to the HUF 9 billion of recoveries generated in the third and the fourth Q of '20? And question number three, on the technical impact, the HUF 2.5 billion attributed to the loan repayment moratorium on the NII, my question is, what will happen after the moratoria expire? What would be the potential impact on the NII? And finally, question number four, I was reading that there is a potential to -- for the government to cut, by 2 percentage points, the employers' contribution -- share of the social contribution in Hungary. Would you expect that to happen? And if so, when? And would it help you to keep the cost -- the labor cost in Hungary growth at a more maybe lower level than you discussed during the conf call? Or you haven't included this in your guidance yet?

Wow. Okay. So starting from the first one, this first quarter -- yes, I mean, these are 2 very independent events what happened. So we included into the consolidation a new entity. It's an agro business, which we acquired last year. And it has an impact on other income, because it's sort of total revenues classified as other income. So there was a close to HUF 2 billion positive line on the other income side, and there was roughly HUF 2 billion on contribution to the cost. The overall profit was relatively small in the first quarter coming from this entity. But these 2 gross lags, the revenue and cost lags, will stay with us. So that's not structural. Now the other one, which we said that was the result of entities, which were equity consolidated. These are basically evaluations coming from our kind of private equity-type investments. We have funds. We have investments fund. We have a digital fund. We have a VC fund. We have a private equity fund. And they do generate quite good returns. And there was just kind of appreciation of the value of one of these funds and the assets in the funds. So that was -- it's more of a one-off. It's not going to happen every quarter, but it's -- in a sense, but I mean, structurally, this is going -- we expect them to contribute substantially. I mean, they have actually quite good returns. So time-to-time, we expect from them meaningful profit contributions. So in a way, it's one-off that -- this part in a sense that it's not going to be repeated every quarter, but it's not one-off in a sense that it's not -- it is actually -- we expect further gains coming from these portfolios in the future, but maybe not regularly or quarterly.

Okay. The Factoring...

Yes, Factoring recoveries and the one-off appreciation we made last year. So -- I mean there's a small -- yes, I mean, it has some effect, but not a big one. And actually, it's like -- and there was a structural change as well. We reclassified HUF 1 billion to other income from risk costs. But, if you -- still -- we still expect quite a robust recovery coming from the Factoring volumes. And the first quarter was actually better than what we planned. And the -- these value adjustments, which we made last year, doesn't have a big material impact on the recoveries that we are going to book this year. So indeed, we made this one-off adjustment. But the impact for this year recoveries is, accounting-wise, is not that big. And that means actually that we may do, in the future, further adjustments in the value of these volumes in Factoring. Then you had an NII -- yes, so this NII increase due to the moratorium. I mean we accounted for -- when the moratorium was announced at the end of, I mean, the fourth quarter, we accounted for this one-off net present value loss. And that actually -- and now -- and this net present value loss is kind of spread over the duration of these loans. So the positive NII impact is -- so this kind of one-off negative is going to be less and less, and we account -- we book an NII positive number to compensate for that, and that should be there for the duration of the loan. So -- and this has been already done for this expansion of the moratorium. So there's no further impact expected actually. So you won't see much when the -- in NII when the moratorium ends. The social -- and the social contribution percentage, it has decreased. Now this is actually the fourth year, I think, that it decreases. It has decreased actually in steps over the last couple of years. And yes, there's some further decrease. At the moment, it's 17.5%. I think it came down from something like 20%. So it has already kind of came down quite materially. And the further the decreases, I'm afraid, may not be quite strong. So pretty much the current level, I think, overall is something to expect, especially now that -- actually if you look at the budget deficit, it sort of exploded last year and also this year. And even for next year, the newly accepted budget includes kind of 6% budget deficit. But it's kind of a special period from the kind of EU perspective that temporarily, they allow member states to run much higher deficit than the kind of 3% expected. I think next year may be the last one where they accept that. So some kind of fiscal adjustments will need to be done after next year. And therefore, I don't think there will be a lot of room to further decrease this kind of social contributions.

The next question is from Simon Nellis, Citigroup.

Actually my first question would be on Stage 2 loans. I see that they've gone down for most divisions, but there was a big jump at Merkantil. If you could talk about Stage 2 loan developments generally and Merkantil in particular. Maybe I'll go one-by-one. It makes it easier maybe for you.

Merkantil, yes, I mean, this new requirement -- the requirements by the Central Bank, we applied for OTP Core at the year-end, but not in Merkantil, so that was the kind of -- so the Merkantil, we apply the requirements of the Central Bank only at the end of the first quarter. So...

So it's kind of a catch-up of what you did.

That was the real expectation. So in the rest of the -- I mean the rest of the Hungarian book actually did it earlier than we were supposed. So that's the rationale behind the Merkantil increase. The fact that the OTP Core, so the other non-Merkantil Hungarian loan book Stage 2 decrease is also because of the denominator is growing, right? So we have a growing Stage 1 portfolio.

Okay. And then why generally elsewhere have stage 2 been -- loans been going down? It's not migration to Stage 3. So is it just improving ratings? Or what's happening?

I'm looking at the numbers. In Romania, there is some decrease. But there also, the Stage 3 ratio decreased. And then there's a small increase in Serbia, 30 basis points in Stage 2. So actually there's no -- yes, okay. It's Croatia where we had a decrease, yes. Croatia was the other country where we had a Stage 2 decrease. And it's due to the fact that, you'd probably remember, there was an earthquake, right, in the first quarter in Croatia -- in part of Croatia. And it was actually quite severe in certain parts of Croatia. And we actually classified loans from that region to Stage 2 year-end, just to be on the safe side because of the impacts of the earthquake. But really there wasn't much problem manifesting from this portfolio. So at the end of the first quarter, we put most of these loans back to Stage 1, because we have not experienced kind of fundamental deterioration. So as far as I can see, it's just kind of Hungary Core, where we had decrease, and it's Croatia where we had decrease, which is materially in Stage 2.

And what is the right level of Stage 1 and Stage 2 provisioning coverage, do you think, in a more normalized environment? I think you kind of hinted that it was around 1.6%, the level that you had at the end of 2019. Is that still valid? Or what's your thought there?

I mean that's a quite new territory, so to say, so the whole Stage 1 and Stage 2 classification. And also can we go to that slide maybe, where we have this -- so this is a quite -- this is something new. The old IFRS 9 was basically introduced in '19. And then already in '20, there was a huge shock, right, to the system and to the -- enormous challenge for the methodology. And this was nothing, but -- it was, not at all, a normal kind of cyclical economic recession. It was a very specially ramped, what happened during the COVID. So therefore, it was an extreme challenge for the models, which were obviously built on kind of normal economic cycles and the impact on portfolio quality. I think it's very difficult. So we started with 1.6%. But whether 1.6% was the right one or not, maybe our competitors are right, when they have just 0.5%, right?

Okay. So it's still...

I think we will only know when we are through 2 economic cycles. So maybe in 15 years, we will know quite well how much it should be, right?

Yes. Yes. Okay. Just 2 other quick ones. The effective tax rate going forward for OTP Core, I think, was 16% because of the tax change. Is that the likely ongoing kind of effective tax rate going forward?

Yes.

And my other one is just on this treasury share swap, the loss, I guess, that was driven by the fact that your dividends are restricted, right?

Yes. Yes.

So what has to happen -- basically, once you're allowed to pay dividends, that could reverse. So that would be maybe a fourth quarter event?

Yes. Once this ban on dividend payments is lifted, even if we don't pay dividends in that period, this can be -- because this is just a valuation, right? So that's valuation-based. We had to take out this year, because -- I mean it's just -- I mean -- yes, once the restriction is over, this should turn back.

Okay. But for the next couple of quarters, it will remain negative?

I mean it will remain as -- there won't be further negative numbers. So I don't think there will be a material number coming in second or third quarter. Or actually third quarter, it can, because end of September, we -- okay, yes. So there shouldn't be much in the second and third quarter. And if the ban is lifted, as it should by end of September, then the fourth quarter, more or less this demand should come back automatically, because then we can again count on this amount to be paid out as a dividend.

[Operator Instructions]

This is [indiscernible]. Seeing that there are no further questions, I decided to maybe ask one more. It's about the Funding for Growth Scheme. Do you have any expectations regarding the volumes of this program in the following quarters? Do you think that the first quarter was rather a peak in lending? And -- or is it -- is this rate of lending of new corporate lending sustainable for at least a year or so?

I mean the -- so far -- I mean if you talk about the whole market, basically, HUF 2 trillion was already kind of used up from a total volume of HUF 3 trillion, so 2/3 of the total program, as it is defined. I mean, obviously, I don't know what the intentions of the Central Bank are. I mean, obviously, there's a chance that they further increase the overall size of the program. Originally started from HUF 1.5 trillion and today it's HUF 3 trillion. So they have already increased it gradually. But I don't know whether they will further increase or no. Roughly -- I mean, last year, we -- again, we talk about the market, roughly there is -- like per week, there was like HUF 50 billion new loans issued under this refinancing program. This year, it's already somewhat lower. So it's back to kind of HUF 30 billion per week new loan issuance. So we already see a kind of decrease in the weekly or monthly amounts of loans generated under this refinancing scheme. And so far, the banking sector is 2/3 of the total program. I think it's reasonable to assume that for the rest of the year, the current level of planning activity can continue. And then I think if I were the Central Bank, I would kind of consider the program subject to the economic growth and economic recovery, what we see in the second half of the year, obviously, up to a certain level of -- if you reach a certain level of GDP growth and economic activity increase and investment intensification, then there will be less and less need for this specific program to continue. But it's up to the Central Bank. And so far, they have been -- they have kept on increasing the program overall scale when we kind of were getting plus the limits of it.

[Operator Instructions] The next question is from Gabor Kemeny, Autonomous Research.

Just a quick one from me on fee income, which was growing, I think, in the mid-single digits in the first quarter. I think you previously talked about fees growing in the -- at the rate of the nominal GDP as a run rate. Is this guidance still valid? And when do you think we are heading towards those levels?

Yes. I mean -- well, look, I mean, year-on-year, we grew again 5%. And given that we had a recession during this period and we had inflation, I mean, the blended inflation in the group was probably around 2%, 3%. So in fact, during last year, overall, we grew more than the nominal GDP in these countries. But that was a very exceptional year. And I kind of tried to explain why we did not grow actually more than what we did. And it was specifically -- well, one specific issue in Serbia, which was a reclassification. So as you see on this slide, we -- one item we reclassified from fee income to cost. So that was just one technical item. But more importantly, Russia specifically had a big decline. And that's a material amount where we generate typically in Russia for fee income. And fee income generation in Russia is not so much linked to transactions, because we are not really a transactional bank, but the generation of new consumer loans, especially, I mean, POS loans. And that was not going well last year. So we had a year-on-year 11% decline in volumes. And therefore it's not surprising that actually the fee income declined. And then we have Montenegro and Croatia where we had lower levels of transactions, transaction revenues due to lack of tourist activity. So if these countries recover, so if tourism recovers and Russian volume growth kicks in, in second half of this year, then we should get to kind of high -- higher single-digit numbers. And then that -- and we should -- we are actually able to -- I mean, if we -- again -- I mean last year was the exception because we had recessions and a relatively low inflation, and we had 5% growth. I mean, this year, obviously, especially second half, we will have very high GDP growth levels and growing inflation. So it might happen that for a short period, maybe nominal GDP growth can be higher than net fee income growth. But if we look mid-term, I think this assumption still holds that roughly nominal inflation for us.

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

Thank you very much. So thank you for joining us today. Thank you for your very good questions. I wish you all the best. Take care of yourself. I hope we will have -- we'll soon see the end of the COVID situation and life can go back to normal. Have a very nice weekend and be well. Thank you. Bye-bye.

Thank you for your participation. And the first quarter 2021 conference call is closed now.