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

Dear ladies and gentlemen, welcome to the OTP Group First Quarter 2022 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 for joining us today on OTP's 2022 first quarter investor call. We presented our numbers. And as you can see, on Page 2 -- maybe we can move to there to the presentation. Yes. So overall, we booked a quarterly loss. So the accounting profit after taxes out of the group was actually negative, which is a rather rare event. But I think circumstances are also quite special and rare. So we tried to as much as possible preemptively react and reflect the deteriorated expectations in Ukraine and Russia due to the war. And that's reflected in the, first of all, stand-alone Ukrainian and Russian results, which were negative. Altogether, in Russia, we booked minus HUF 27 billion, in Ukraine, minus HUF 34 million equivalent. But on top of that, we've made certain adjustments necessary to reflect the values of these entities and also related to instruments which are associated with Russia, namely the Russian bonds we've outside Russia in Hungary and in Bulgaria to a small extent. And as you can see on this chart, we booked HUF 122 billion one-off adjustments. Part of it was kind of recurring "usual" adjustment by the special bank tax. But these 2, the impairment on the Russian bonds in Hungary and Bulgaria, which is clearly a one-off related to the kind of initially -- or book -- or kind of nominal value of HUF 100 billion, half equivalent of ruble bonds, which, I mean, to be frank, we don't quite understand to a full extent the current legal status of these bonds. Certainly, they are not freely tradable and there's not much market for them, and also it's kind of unclear whether they are already in a technical default or not or whether they will be. So we took a kind of conservative approach, obviously, with the approval of our auditor to actually assume that these loans -- these bonds are in default, and therefore, PD-1. So we apply it in LGD and we also have for the AFS portfolio made a mark-to-market revaluation, which had an impact on capital. On top of this, we also had another effect, which is reflected in the capital. And overly, in the net value, the net book value, these bonds went down from HUF 100 billion to HUF 40 billion, half equivalent. Now the other big one-off here is the goodwill write-off related to the Russian bank. We acquired this entity in 2006. And I'm sure you -- many of you remember, at those times it was quite common to buy assets well above book, and we did that. And therefore, there was an initial goodwill. But this time, it was clear that we had -- that the kind of valuation of the franchise changed in a way that we had to write off this goodwill. It obviously does not have an impact. So it doesn't have an impact on the regulatory capital, because goodwill has already been deducted from regulatory capital. But it does have an impact on the P&L, and also it has an impact on the kind of accounting equity of the book. And then there were 2 more kind of usual lines which go up and down depending on what happens in the group. One is the acquisitions, which was a kind of usual quarterly negative. And the other one was the evaluation of the OTP Mor. share swaps. This kind of bigger amount is related to the fact that dividend expectations -- or actually dividend payments changed a lot compared to the previous expectations. For instance, in case of OTP, after '21, we only -- I mean, the AGM decided to pay only HUF 1 billion out of the last year results. And in case of Mor., there is one big dividend payment. So that kind of required an adjustment to the -- a fair value adjustment of this structure. Now adjusted profit after tax was HUF 88.6 million, which again lower than last quarter or year-on-year. But it's solely due to the fact that we had losses, as I said, in Ukraine and in Russia. I will show in a bit more detail on this. I mean, we decided to kind of split -- to have a view that we split the group into Russia, Ukraine and the rest of the group. And that's probably a good way to approach these numbers. Now looking at capital. Our capital adequacy somewhat declined during the first quarter. It went down to 16.2%. Common equity Tier 1, this is still almost like 2x the capital requirement, being 8.8%. So very comfortable. On this slide, you can see the kind of quarterly changes, which had an impact on the capital -- regulatory capital, also on risk-weighted assets. And obviously, here, the overall loss, the fair value adjustment of the AFS portfolios. And here, I'm not just talking about the Russian bonds, but also typically Hungarian bonds, which had a negative mark-to-market valuation on the small portfolio which we keep in AFS. Plus, risk-weighted assets increase. And this was partially due to volume growth. But also the largest bank to increasing risk weights, especially, in Ukraine, but also in Russia. Due to the downgrades of the ratings of these countries, we had to increase kind of standard risk weights for these portfolios, which kind of substantially contributed to the kind of credit risk-weighted asset growth, which was part of this HUF 544 billion half increase in the credit risk-weighted asset, what you see on the chart. So going forward. Well, this is a slide which kind of tried to show the magnitude of the exposure to Russia and Ukraine. This is what we started to show you when we talk about the year-end numbers in the previous occasion when we presented. And the change is mostly related during one quarter, to the kind of lower right corner 2 boxes, where you can see the consolidated capital effect. This is the total impact of writing off the Ukrainian bank and the Russian bank -- or kind of separately. And this scenario, we don't expect to happen. We consider this very unlikely and very kind of low probability and extreme bad scenario. But this includes the write-off of the group funding and also the capital. And then we have the bonds, the Russian bonds, which are outside Russia. And the book value of this went down due to these changes that I just explained. We also adjusted, too, the much smaller portfolio in Russia in terms of Russian books. But here, the market is really split, because these Russian bonds are tradable and can be traded with a kind of relatively small discount in Russia, as opposed to the situation outside Russia, where it's really questionable whether they are tradable and it's also even more questionable whether any payment to these bonds can go through the global -- primary U.S. -- kind of payment system. And therefore, technically, Russia cannot service these bonds according to the original structure. Now if you look at the next page, you can see that overall, despite high provisioning, the Stage 3 ratio did not increase. It actually decreased. And this, obviously, includes Russia and Ukraine. So what we can say that at the end of the first quarter, but also at the end -- I can tell you at the end of April, we did not see material worsening in the portfolios, neither in Russia or in Ukraine and nowhere else. So this is -- the acts of provisioning and the additional risk cost we created are all based on worsening forward-looking expectations, and I kind of expect loss numbers. We believe we remain kind of conservative or became even more conservative given the extra provisioning we did in the first quarter. And if we kind of compare ourselves to various banks which are either present in Russia and Ukraine, like Raiffeisen Bank being very, very present in Russia, Ukraine and also Belarus, and UniCredit being very strong in Russia, if you compare the performing coverages to these banking groups and we compare kind of our numbers, including Russia, Ukraine, 2.4%, we seem to be higher. And if you compare to banks like Erste, which does not have Russian, Ukrainian operations, our portfolios and we compare our -- without Russia and Ukraine, performing Stage 1 and 2 coverages, then there's also kind of a difference. So we continue to believe that we remain reasonably conservative in provisioning, and this is something we try to continue to do in the future as well. But rolling a bit more into the details of the P&L and looking at the adjusted profit after tax, there are some -- I think some questions to be discussed on this slide. I think one interesting on: Why the tax was so high -- why the effective tax rate was so much higher than usual level? Now obviously, it's also related to Russia and Ukraine. Despite having losses in Russia and Ukraine, we have not created deferred tax assets. So we did not assume a recognizable tax shield on these losses. And on top of that, we have kind of written off the deferred tax assets which we still have related to Russia in our books. It doesn't mean that it's impossible in the future or it won't happen that we can actually materialize at some point these kind of tax shields or deferred tax assets. It's just the prudent way to reflect these numbers. In line with the goodwill write-off related to Russia, we decided to also write-off the deferred tax asset. So the corporate tax increase, what you see here, is related basically to these Russian and Ukrainian activities and the very conservative treatment of deferred tax assets for these 2 countries. I think the other very obvious number to look at is the risk cost. We booked as much risk cost in the first quarter, almost exactly as we did last year. And obviously, you will see that most of it -- or that all of this was related to Russia and Ukraine, because for the rest of the group, we actually released provisions. And then going forward. You can see the kind of per country division of our contributions to the adjusted profit after tax. Hungary was strong. But basically, in Hungary, Croatia, Serbia, Slovenia and also in the leasing company in Hungary, we released provisions in the first quarter. What happened exactly was that we went through this exercise that we -- we started from the assumption that -- the COVID situation basically ended after the first quarter. By then, there were no restrictive measures present in any of the countries where we operate. So we assumed that basically COVID itself is not going to have negative further impact. And therefore, we started to release the extra provisioning, which we still kept year-end last year for COVID reasons -- and we kept it at the end of last year because COVID was very much present here in this part of the world at the end of the year, last year, and there were still certain restrictions on economic activity and the kind of social activities. So at that time, it seemed quite reasonable to maintain these levels. But by the end of the first quarter, it lost its relevance. So in a way, we partially released these provisions. But at the same time, parallel to this, we also looked at the kind of worsening GDP growth expectations. And here I'm primarily talking about outside Russia and Ukraine. And because the recent expectations at the end of the first quarter were worse than what we had before the war broke out year-end last year, we had to update our models. And because of the deterioration of the kind of GDP expectations, we had to create additional provisions. So what happened was that we released a big part of the COVID-related provisions, previously created back in '22, and then either released them or reallocated them to IFRS 9 provisions related to worsening GDP expectations. And the result of this exercise was different country by country. In some countries, it resulted, actually, in further provisioning, like in Bulgaria. But in some countries, namely Hungary, Croatia, Serbia, Slovenia and also in leasing in Hungary, it did result in some provision release. The biggest one happened actually in Hungary. So this kind of -- these differences in the risk was somewhat -- kind of positively affected some countries and obviously had very negative impact in Russia and Ukraine. Talking about this -- I think the next slide is potentially the most meaningful to talk about the group at the moment, because I don't think it makes much sense to talk about the group as one entity. I think we have to slice it into 3. And one is the group without Russia and Ukraine. And this is where we pretty much have normal operations. COVID over, inflation is high and GDP growth is somewhat slowing down compared to last year. But I mean, fundamentally, we have a kind of reasonably business as usual environment. And therefore, the numbers kind of reflect this situation. And also, we were able to provide you with a reasonably detailed guidance on these numbers. And I think somewhat reasonably optimistic guidance on this part of the group. Now Russia is very different. There is a very special situation in Russia. There is no war, but the war has a huge impact on Russia, especially through the sanctions. And our kind of GDP expectation for this year is around 8%. So we calibrated the IFRS 9 models accordingly, and that resulted in an additional provisioning need. So we created HUF 33 billion equivalent of additional risk cost. And that resulted in this HUF 27 million quarterly loss in Russia. Again, if you look at the portfolio of Russia, we don't really see signs of deterioration. What we see is the kind of lower volumes and lower volume growth, but not so much deterioration. And therefore, we actually think that this is probably conservative enough. And if there's no further substantial change in the -- in how the environment develops compared to what we expect, then it might be -- or, well, it could be or maybe that we won't have any losses for the future quarters in Russia and we actually expect positive contribution. Ukraine, bigger risk costs, HUF 49 billion. Obviously, a war situation, which is very dramatic. And I mean, as I told you last time when we talked about the fourth quarter results -- clearly, our colleagues have been working heroically to maintain the bank, maintain the services of the bank and serve our clients and protect the value of the franchise. And I mean, 80% of the branches are open, all the services are on. We even restarted selectively lending. But despite this, we had to provision strongly. And then, we had kind of 2 approaches. One is we did a bottom-up review of the portfolio and looked at each and every exposure where it was physically -- I mean, where the client is and where the assets are. And depending on the impact of the war, either direct or indirect impact on these exposures, we classified them to different categories and provisioned them accordingly and moved them to Stage 2 accordingly. And on top of that, we applied an IFRS 9 kind of forward-looking provisioning, increasing coverage levels. Here, the GDP trajectory assumption was 30% decline this year and a very kind of rapid rebound next year, resulting in roughly 10% net decline in 2 years in GDP levels. Now if you look at the group without Russia and Ukraine and the kind of performance indicators, first quarter, adjusted ROE was actually quite strong, coming from positive risk cost. So as I said in the kind of without Russia, Ukraine, this exercise of kind of freeing up COVID-related provisions and creating new IFRS 9 forward-looking provisions based on the GDP expectations resulted in a net positive number, it was HUF 9 billion. So obviously, these are high ROE and strong adjusted profit of HUF 150 billion, which is like more than 50% up quarter-on-quarter, was strongly bolstered by the positive risk cost. But if you look at the operating profit line, this was also strong, 15% quarterly growth, which is -- I think it's -- obviously, there's a seasonality in cost. I mean the fact that the first quarter cost was lower than last quarter is not necessarily surprising. But the fact that total income grew 3% in this quarter for this part of the group, I think this is okay. And very importantly, performing loan growth for this part of the portfolio was 3%. If you look at kind of P&L line, Page 9. NII declined. And that might be kind of surprising given the increasing rate environment. And the decline comes from 2 countries: one is Russia, where maybe it's not so much a surprise, right, given that -- primarily because of decline in volumes, that's what happened. You will see that we had in Russia 7% quarter-on-quarter decline in the loan portfolio. And based on that, it may not be surprising that we had like minus 6% growth in NII. Might be somewhat more surprising that we have this kind of minus 4%, HUF 4 billion in Hungary. And in the next slide, we kind of try to provide some more details, some more flavor on this decline. Because not just NII went down, but obviously kind of group level -- and OTP Core net interest margin also declined. So in this -- I mean, this is the composition. As you can see, the group level decline was primarily due to Hungary, but the secondary force was Russia again, not surprising, and that might continue to happen. So looking at what happens in Hungary. I think that's an important question to answer. I mean, this very rapid quarter-on-quarter rate increase had an impact, a negative impact on our swaps. So there was a swap revaluation result, which was negative. It shouldn't recur so much. So that's potentially a one-off. We don't expect similar to happen in the second quarter. And then there were some other effects. So the kind of corporate and micro, small loans gradually repriced. So there was a kind of upside coming from there, an NII increase and margin -- positive margin contribution. Whereas, retail loans, which are almost all fixed -- I mean, we have 80% of mortgages fixed, but the remaining 20% is also under the rate cap and kind of 90% of the consumer loan portfolio is fixed. Plus here, the composition effect is negative because the growing -- we still have a kind of fast-growing part of the baby loan program, which is kind of lower rate than the rest, and obviously, very profitable, but lower rate. And plus, as you will see, we actually had 2% decline in consumer loans in the first quarter this year in Hungary due to the fact that retail clients received a one-off windfall of revenues. There was a personal income tax rebate. So they received back their personal income tax, which they paid last year if they had kid up until a certain cap, up until the average kind of tax payment. And therefore, it actually reduced the -- people early repaid their consumer loans, but even more importantly, there was an automatic reduction in the overdraft -- in the use over-the-draft kind of volumes. So as people had this one-off, the overdraft facilities they use up disappeared -- or they were paid back, rather. And then we had some gain in financial assets, including the higher return on the National Bank deposits. But this was mitigated by the higher cost of corporate deposits, which tend to increase. So we have basically increasing corporate deposit rates and then we have -- and we kind of placed them into these 2 financial assets, and there's some gain there. So that's overall positive. And the other effect was basically that we had much, much more deposit growth than loan growth. So this is kind of -- plus, we had large repo deals, which inflated somewhat the balance sheet. So this is kind of balance sheet inflation, which is a negative impact on the NIM itself, not so much on the NII, by the way. So all in, we believe that this quarter-on-quarter negative NII development, HUF 4 billion, that was a one-off event primarily due to the swap revaluation results, and we expect increase and improvement in NII in the second quarter. How exactly it's going to translate on the margin depends on the kind of balance sheet growth impact or the kind of retail, especially, deposit growth and repo facility growth. Volume-wise -- it's important to see that -- I mean, overall, we have 3% growth. And if we take out Russia and Ukraine, without Russia and Ukraine, we also had 3% growth for the rest of the group. When -- Hungary was actually 0. So again, that's another unique feature of this quarter. But unlike the last 5 years when Hungary was one of the highest-growing countries in terms of performing loan growth, was actually 0. And that 0 is primarily due to the fact -- due to this minus 2% consumer loan growth, which -- I mean, you can see and I kind of explained why it happened. We don't expect this to continue or repeat. Therefore, we expect for the remaining quarters of this year, consumer loans to start to grow again. Mortgage growth and corporate growth was there, but somewhat lower. And I will give some more detail on mortgages because, here, the situation actually is somewhat more complicated. We had very high level of applications with a relatively low level of disbursements. I'm going to kind of explain this, what happened. Now in Ukraine we had plus 5%, which was -- I mean, it just reflects that in January, February we had fabulous 2 months, and then the war came. And obviously, we are not going to have further volume growth or we don't expect further volume growth rather in Ukraine for the remaining part of the year. Russia was already negative in the first quarter, and this is going to continue. So most likely, the Russian portfolio will continue to decline together with the Ukrainian for the remaining part of the year. And then the rest of the portfolio is pretty strong. And again, these are just quarterly growth rates: Bulgaria, 6%; Montenegro, Albania, 6%; Slovenia 5%; and Serbia, Croatia, 4%, 4%; Romania, 4%. So these are very robust growth rates. And honestly, we don't see -- we don't expect this -- I mean, I don't think you can annualize these, and everyone expects some slowdown potentially second half of the year, maybe already second quarter. But so far, we have not seen that. So April remained quite strong. And despite this kind of general expectation that there should be some slowdown in terms of loan growth trajectory, so far we did not experience that or have not experienced that. And by this, I kind of mean also April, which we can see that. Now in terms of deposit growth, it was, again, I mean, very robust, quarter-on-quarter 4% and 7% in Hungary. And given that in Hungary we have kind of 50% loan-to-deposit ratio and the fact that loans were not growing and deposits grew 7% in one quarter, obviously, that kind of describes this inflation of the balance sheet I just referred to, which is actually -- it is profitable, especially the retail one, the 5% you see here, because now the kind of short-term instruments or the kind of 1 week National Bank deposit rate is 6.4%. So there's a healthy margin on these retail deposits, right? And corporate deposits also quite strong and very liquid. So there's a lot of liquidity in the market. And the rest of the group, I mean, it's more up and down depending on how they price deposits and how much you need deposits. But I think the important part here: you can see in Russia, Ukraine, it's actually increased. There's a lot of extra liquidity coming into these 2 banks. And now we are really pricing down our deposits in Ukraine. We are first time ever lower than Sberbank in terms of deposit rates, and we continue to cut down and deposits keep coming in. So this is -- it's actually a kind of previously unknown situation for us and some kind of positive aspect in this overall very dire and sad situation what we have in Russia and Ukraine. Net fee income. Again, it was quarter-on-quarter negative. But if you look at the sources of this negative development, one is the fund management. I mean, fund management had a bonus payment. So they got a performance bonus in the first quarter, and they always receive at year-end. And we don't know how much it's going to be. This is usually very seasonal. So this minus 2 in the fund management is due to that. And Russia was negative due to the low level of disbursements of new loans. But other than that, actually, it was quite strong. You see Hungary, plus 8%; Bulgaria, plus 6%; Croatia, plus 6%. So if you take out Russia, Ukraine and you take out fund management in terms of fees and commissions, it was a strong quarter, and we continue to expect strong performance for the rest of the year. And there, in other income, there was some noise. Other income line was quite high. But here, there were different kind of technical items and a one-off gain. But really, there was this minus 8% negative and the base effect plus 6%, which kind of net out. Really, one-off was this kind of trading -- or treasury gain on Russian derivative positions, HUF 9 billion. That's a one-off. I mean that was a result of the kind of volatility and the direction of the volatility during this period. And I don't think we are going to repeat them. So there's kind of this kind of one-off element in the other income line, maybe of HUF 200 million. Costs. I mean, so far, okay. But obviously, this is something to be watched. Quarter-on-quarter, there's a big decline, but that's due to the seasonality and usually seasonally high fourth quarter. I mean, during the year, we expect strong pressure here due to high inflationary environment almost everywhere. But as we've said, we are kind of committed to try to maintain the efficiency ratios at least at the level of last year. Now maybe very few sentences about Hungary, a bit more granularity on the loan growth potential. Here, I think what's important is this kind of applications for mortgages, because mortgage growth was not very strong. Year-on-year, it was still strong, 23% year-on-year growth. But what really was strong is the new applications. And maybe if we just kind of jump to the next page, you can see that this new structure in Hungary, the Green Home program, which is --it's a subsidized structure for new developments and subject to very strict environmental requirements to be fulfilled. And there was a huge application, quite huge application level in the first quarter. And these loans were not yet disbursed. Disbursement amounts where, you can see, like 10% of the applied and contracted volumes. That means that this creates a kind of back book, which will appear in the disbursed amounts throughout the course of the year and maybe longer. So that's just to suggest to you that there's some kind of reserve here at least in the mortgage growth numbers. But kind of cash flow was weak, the cash loan growth and consumer loan growth, due to this kind of one-off windfall revenue to households. And the baby land disbursement continued. So that -- I mean, it continues till the end of this year. But still strong and we have high market share. And again, despite some changes in the structure, it's still very profitable. Corporate was rather not very active in this way. I think corporates, again, are waiting -- in a somewhat waiting mode to see in terms of new investments where the trajectory of the situation is going to lead. So there's some -- I think maybe on the corporate level, there might be a somewhat bigger slowdown, at least in Hungary, than we originally expected. But all in, it still grew 1% in the first quarter. And then ESG remains a very important priority for us. We continue to work on these goals and strategies. And the final page is related to the guidance. And we kind of carefully worded some changes here and there. As you can see -- and again, it's primarily the -- without Russia and Ukraine part of the group where we can be, I think, more specific and where, hopefully, these sentences have kind of higher probability and higher relevance. I mean, we actually applied slight changes here and there to the wording, which kind of have some message or some information value. Again, based on the kind of first quarter 3% growth, where Hungary was unusually muted due to this one-off event, we think that it's possible to have an annual performing loan growth close to 10%. Net interest margin on kind of year-on-year basis should be quite similar. Here, again, there will be some improvement in Hungary, as I already kind of highlighted. But the real positive sensitivity now is to the euro rates. So should the euro rate environment increase and should that kind of filter through the other kind of proxy Eurozone or quasi Eurozone countries like Bulgaria and Croatia, what we have in the group then, then there's some tangible benefit expected from the euro rate increase. And to be very specific, we expect kind of every 10 basis point increase in the euro rate environment to be equivalent of HUF 2.8 billion half annual NII for the group. So there's some material sensitivity to the rates here. Cost efficiency, again, we try to be at least as good as last year despite the fact that inflation is strong and there are strong inflationary pressures and credit costs. I mean, in our last indication here, we kind of expected somewhat higher level, maybe around 40 basis points. Now we seem to be more optimistic on this line after the first quarter and what we see in the second quarter coming. So in a kind of reasonably okay scenario, we can be around last year level, which was kind of 19, 20 basis points. And if all this goes through, then we should be able to achieve similar ROE that we did last year, at least 18% for this non Russia and Ukrainian part of the group, adjusted ROE, obviously, because -- I mean, with this very high one-offs what we already booked in the first quarter, obviously, there will be different -- bigger difference between reported and adjusted numbers. And having said that, we plan to conclude 2 acquisitions pretty soon in the -- hopefully, in the second quarter. And there might be some -- I mean, obviously, they will have also some impact on the -- even P&L impact depending on how we -- how much -- how the purchase price allocation actually happens and comes out. As I said, in Russia, to our best estimate and understanding, we don't expect further losses for this year. Ukraine is -- I mean, Ukraine is extremely difficult to predict, and kind of swift positive turnaround of events can substantially improve expectations. On the other hand, there are worse scenarios than what we kind of imagine, and they are almost as possible. But even if we proceed on this trajectory what we kind of depicted here, just from the technical features of IFRS 9, meaning that if volumes move from Stage 1 to Stage 2, then we have to switch from 1 year expected loss to lifelong expected loss. There will be additional provisioning needs. How much? It's actually quite hard to tell. And then for both entities, we have a strong assumption for growing concern and we don't see -- I mean, we talked about this kind of deconsolidation scenario last time. But I think the probability of these scenarios is less at least coming from an economic rationale. So we really don't see this to happen in Russia from an economic rational perspective, and we are quite hopeful that this is not going to happen in Ukraine as well, and we actually believe that it won't. So these scenarios we consider very low probability and very unlikely. But to be frank, they be might -- they might do so. So then, disclosure. As usual, please take those into consideration. And then I think we can open the floor for questions and answers. So please, if you have any, ask your questions.

[Operator Instructions] The first question is from Máté Nemes, UBS.

I have 3 questions, please. The first one is on the NII drop in Hungary. Thank you for the additional details on slides -- Slide 10, I believe. You mentioned the 29 basis point NIM decline that was caused by the lower swap result. Could you confirm whether this impact is here to stay or at least could partially reverse in the coming quarters? Then the second question is on Ukraine and NII in Ukraine specifically. Could you give us a sense of what percentage of clients are actually servicing their loan installments? And what portion of NII recognized in Ukraine? Is it actually cash and was it accrual? One of your peers reporting this week actually mentioned surprisingly high number of clients paying were willing to pay their installments given the horrible situation in the country. So I'm just wondering if you could give us a sense of how this looks like in your portfolio. And the last question is on the Russian government bond exposures, the HUF 102 billion or HUF 40 billion on net basis from Slide 4. Could you tell us the RDBAs on those Russian bonds?

Okay. So NII drop in Hungary, the swap -- as I said, we don't expect this to repeat. So this kind of -- actually, it was like HUF 12 billion quarter-on-quarter minus difference. So there was, I mean, kind of -- NII terms, it was HUF 12 billion the difference on the swap results from one quarter to another. And we don't expect this negative to repeat. So it was more or less a one-off due to the -- I mean, unless, obviously, we see another next 6 months, although there's going to be as much movement in the kind of rates as we've seen during the last 6 months, which I think that's quite unlikely. I mean, in Ukraine, basically, we have an overall moratorium. So no one is obliged to pay. And despite this 60%, 62% of clients do pay voluntarily. It's higher in corporate and in car loans and somewhat lower in consumer loans. So car loans almost 80% is paying voluntarily. Risk-weighted assets of the Russian bonds. I think -- I mean, the bonds which are in Hungary, Bulgaria, they are in -- I mean, in technical default according to our categories. So I think it's kind of 100% for the remaining. So it's PD-1 and then we have an LGD. And the risk weight here is this 100%. 40 -- we have a much smaller portfolio in Russia, and there, the risk weight increased, I think, 250 due to the rating. And here -- for us, it's very confusing. And actually, we don't quite -- we don't fully understand the real status of these bonds. Certainly, the same bonds in Russia, in our Russian banks are traded with some discount tradable, and there doesn't seem to be any kind of -- much issue around them. But those who are not in Russia, the bonds -- it's pretty unclear what they're actually status is and what type of payment can be received or cannot be received on these bonds. And we actually could not find out even for the bonds which are -- which we don't have, but those famous bonds which had to pay coupons a month ago. And then apparently, as far as we understand, the Russians actually initiated the payments, but it's not clear for us whether it has gone through the kind of global financial intermediaries, primarily the American banks. So here, we are somewhat in the dock, right? We decided, again, with a strong view from our auditors to consider them in the fold. But to be honest, we are quite happy if we receive rubles for these bonds and then we exchange them to dollars. And that's how the situation seems to be resolved in Russia. We had corporate bonds, dollar bonds, which were paid in ruble. And we could convert the rubles same day without loss. So there was no loss on these bonds. So honestly, I don't know what's going to happen, but I think we have been sufficiently conservative here. My personal opinion is that we are not going to have these losses on these bonds. So it's kind of unlikely to actually materialize these losses on these bonds. And they mature in kind of [ 2025 ], [ '26 ], [ '27 ]. So they are actually longer maturity.

The next question is from Gabor Kemeny, Autonomous Research.

My first question is about Russia, please. Can you talk a bit more about your assumption that Russia is not going to be loss-making going forward? I mean, I recall in the previous 2014, '15 crisis the loss is spread out for a lot longer, I think, maybe for 2 years. And it sounds like this time you expect a much deeper recession than what was in 2014, '15. And a related question. Now that you are showing very limited walkaway costs from Russia, how do you think about the pros and cons of withdrawing from Russia? And yes, my other question is on the provision guidance, which you now guide for 20 basis points for the group ex Russia, Ukraine. I think it's down from around 40 basis points, which you estimated around the AGM. What has really changed? And if you could comment on how much of the overlay provisions, macro overlay provisions do you have currently?

Well, there are 2 differences, 2 big differences to 2014 and '15. One is the quality of the portfolio and the nature of the portfolio. I strongly believe that we have a much, much stronger portfolio today than we used to have. It turned out in '14, '15 that the -- primarily the credit card portfolio was -- there were serious issues with that portfolio, right? So it was -- and yes, we learned from these mistakes that were made there in '12, '13, '11, and substantially -- very substantially improved our risk management in Russia. So this is just a much more resilient and better managed portfolio. That's one difference. The other difference is that -- I mean this -- I mean what we booked in the first quarter in terms of actual risk cost and loss, I mean, we booked HUF 27 billion, right? I mean this is the total loss that we expected for this year, right? I mean, in 2014, '15, we didn't have IFRS 9. So it took longer for the risk cost to manifest, right? If you kind of think back to '14 first quarter, we didn't create upfront provisions, right? It took much longer for the losses to manifest. Here -- this is -- I mean, we don't see -- I mean, if we look at the actual portfolio quality and the delinquencies and everything, there's not much there to see. It's not at all visible that this portfolio is going to materially deteriorate from what we have seen so far, right? So this is -- everything we provision -- I mean, on top of the usual in Russia is this kind of forward-looking IFRS 9, which if we were back to the accounting regime in '14, where there was no IFRS 9, then this HUF 27 billion loss would manifest probably during 4, 5, 6 quarters. So we really -- I mean this is the change in the IFRS methodology. This kind of front-loaded nest of risk costs. So I think these are the 2 big differences, right?

No, I hear you. Maybe just one follow-up on this. I think in 2014, '15, we were looking at more like HUF 200 billion half of provisions over that 2-year period. So that was just materially higher than what you had in Q1. That's what made me think about the outlook.

I'm sure. I can see. I mean, Russia -- in '14, we had 15 -- HUF 14.5 billion loss. And in '15, we had HUF 20 billion loss. So that's like HUF 35 billion losses in 2 years. Here we kind of -- in one quarter we had HUF 27 billion. Now there's always this kind of normal level of risk cost. So there's a normal level of risk cost, which comes anyway, right? So it doesn't mean that we created all the risk cost for the next 2 years. But maybe we have actually recognized the kind of -- the one-off loss for this year, at least, right? And given that in '14, we had 15% -- HUF 15 billion loss or less, it actually makes sense, right, I think. Now I mean -- your second question: the strategic conclusion. We are open, right? We are open to any discussion, and we have some discussions. But unless we are obliged to do so, we don't want to fire -- sell something and destroy value. I mean it would not help anyone. It wouldn't help our investors. It wouldn't help Ukraine if we gave a big kind of gift to Russia or Russian investors leaving an asset there for nothing. So this we -- on our own, we wouldn't do it, right? But we keep our eyes open and we consider different scenarios. But at the moment, from an economic perspective, we don't see the rationale to do anything kind of -- to do under -- I mean we don't consider this as a situation where we have to do something immediately, disregarding the cost and the potential value, destruction to shareholders. Having said that, we obviously comply with every regulation and sanction and very careful. And the type of lending we do in Russia is directed to low-income retail clients, point of sales loans. So we will see. But it's -- we are less concerned about that, right? We're much more concerned about the people in Ukraine and how the situation there gets resolved as soon as possible, because I think that's much more concerning. What changed since the AGM? Yes. I mean we did this exercise, right? We run the models. We're run the -- and now we run them kind of in a very detailed manner. And we upgraded all the GDP expectations and everything. And that exercise provided us the confidence to actually say that -- and seeing the first quarter number, this positive HUF 15 billion release, this gives us the confidence to tell you that maybe it's going to be only 20 basis points. And the difference is that we have actually done a very, very detailed exercise. And we made the booking of these provisions exactly based on these calculations. I mean we don't so much have -- I mean we do have -- I mean, in Russia and Ukraine, I think it's meaningful to talk about overlays. In terms of the rest of the group, we don't have overlays as such. All the provisions are allocated to each and every exposure. So we don't have kind of overlay numbers floating around not being allocated anywhere. So this has been a very detailed modeling exercise and allocation of provisions, and the provisions are allocated to each and every exposure. So we don't so much have overlay. In general, wherever we can be, we try to be more conservative. Obviously, these -- the IFRS 9 approach, I mean, a, you have to have a view about the future, which is, by definition, is not correct. B, based on that view, you have to build models and you have to build in certain parameter scenarios into the models. And there's always a lot of room for judgment, right: more conservative, less conservative and so on and so on. So we tend to -- we try to continue to be more conservative than less conservative. And in general, that approach, results, as an outcome, a seemingly higher level of provisioning than our -- than other banks do in the region, right? So from this we inferred that probably we are more conservative. But it's not that we have a half a month which kind of floats there as an overlay. In Russia, Ukraine, it's different. Obviously, in Russia, Ukraine, this kind of -- due to -- almost the -- I mean the entire access provision compared to business as usual in Russia and Ukraine, again, is related to expectations which have not manifested. And then I don't know how you call them, overlay or just IFRS 9 provisioning. I don't know.

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

This is Andrzej Nowaczek, HSBC. I have 3 questions, please. One -- I'm sorry, I have to ask a follow-up question on the Ukraine NII. Can you please explain the accounting for loans under moratorium? You classify them as Stage 2, and I think there was a grace period till end April. But then the NII accrued in Q1 [indiscernible] some spike in March. What could the NII be more or less in Q2?

Okay. So in March and April, there was a kind of general moratorium, but only kind of 38% by volume clients used that moratorium. So more than 60% actually paid voluntarily. And then starting from May -- it's not an overall moratorium. It's case by case. So in the retail, we do it based on the income of the clients. So it's more automatic. And in corporates, it's case by case. But this is going to be the second quarter. So obviously, that does not have much impact on the -- so we will talk about -- I think about this in detail when we talk about the second quarter numbers. Up until -- so starting from end of February up until the end of May, we had an overall moratorium and roughly 40% of the net interest income has been accrued, but not collected. And 60% actually flew in as cash. So that was the number for these 2 months. And we have not -- at the end -- looking at the kind of end of quarter number, the classification to Stage 2 was not kind of one-on-one equivalent to whether they pay or don't pay in the moratorium. It was more like where these -- where the client is, where the business of the client is, where the collateral is in the country and what else we know of the client. And based on that basis, kind of corporate case by case and retail basically by location. This is going to evolve, I think, the approach and the methodology after the second quarter. So we will provide more clarity. But again, for the part of the first quarter, which we reported here, is basically March, right, 1 month -- and kind of also February, because those who actually paid end of February, we provided them a moratorium. So kind of half of March NII. And then, roughly 40% of this was just accrued and not collected. Is that more clear or...

Yes. My other question is on -- it's just a general question. What are your thoughts on the likelihood of a recession in Europe? And how do you think this affects GDP?

A general recession in Europe?

Yes. Well, anything bad other than Russia and Ukraine?

I think it's bad enough. I mean, our GDP expectations for -- at least for the countries where we operate are actually not -- I mean, Hungary, surprisingly, we expect 4.5%, for instance, for this year. And we actually revised it upwards based on the numbers what we see for the first couple of months of the year. So basically, first quarter, first 4 months, we already almost have this slight growth, right? There was so much growth in the second half of last year and the first quarter this year that even if there's kind of little growth in the remaining part of the year, second half, the overall growth rate would be quite decent. Bulgaria, we expect 2.5%; Slovenia, almost 5%; Romania, close to 2%; Croatia, higher than 3%; Serbia, higher than 3%, Montenegro, close to 4%; Albania, 3.5%; Russia, Ukraine negative, and also Moldova negative. I mean Moldova is in a difficult situation. Now there -- I mean the situation can deteriorate. But the negative scenarios we see are related to the war, right, and related to the sanctions as a reaction to the war. So it depends how far and fast the sanctions go. I mean, obviously, high inflation due to energy prices, due to food prices. And I think this is difficult enough. I mean, I hope we can kind of collectively cope with this situation in a good way on the European level. And honestly, I -- personally, I rather see upside. I mean, I know that the kind of recent mood is that it's going to be a very long kind of protected war situation in Russia. But I think we still hope to conclude this relatively swiftly, and then a very robust kind of rebuilding activity can start in Ukraine. And these external threats usually create a kind of sense of purpose and unity. And I think this is something Europe badly needed, kind of purpose and unity. And personally, I hope that this is going to strengthen and give a new kind of storyline for Europe. And I think that, that can be quite positive.

Yes. On that note, so you think those new funds will be unfrozen?

Sorry?

The implication of what you just said, we'd hope that the new funding will be flowing back to...

For Hungary, yes. So yes. I mean, if you talk about specifically about Hungary, there are 2 issues which need to be addressed and resolved. One is the -- one is obviously the EU funds and the availability of EU funds, which is a must. The scenario without EU funds would be very dire. And therefore, I don't think this is really a likely one. From reading the communication of the government and people from the government related to this topic, they all -- they have always -- they have been saying that they don't see an obstacle to agree. So there seems to be a commitment on the Hungarian side to get an agreement. And certainly, it is an economic necessity, I believe. The other one is the budget deficit. So the -- I mean, we had an election budget last 6 months or 9 months and there was some serious overspending, and that has to be amended and that has to be amended promptly. But it's not undoable. So it's -- especially, if they start early, then it seems manageable, right? So these 2 need to be fixed. That's very clear.

And then lastly, very quickly, can you confirm HUF 29 billion of Sberbank resolution charges will be booked in Q2?

28, yes. Now that's the gross amount what we have to pay out. I strongly hope that the net amount will be much less. And it depends on how much they can sell the assets of Sberbank for. And these are pretty good assets. The actual net amount we book might be 0 -- so it can be between 0 and 20 -- and minus 28%. And my guess is that it's going to be much closer to 0 than to minus 28%.

The next question is from [ Ophelia Ramberger ].

If I understood correctly, you mentioned at some point that you are going to conclude in the second half of this year 2 M&A transactions. One would be the Slovenian Nova. What will be other one?

It's the Alpha Bank in Albania. And maybe I was not clear. I wanted to say second quarter, not the second half.

Second quarter?

Yes.

Okay. And do you see further appetite for potential M&A transactions if there are good opportunities on the market?

Yes, appetite we have. Good opportunities, we don't.

The next question is from Alan Webborn, Societe Generale.

On that basis, is the -- is sort of Uzbekistan sort of not going to happen now? Or is it still waiting for -- to see the dust clearing and things to calm down? That was the one question. And then just as a little point of detail, actually. In Romania and Montenegro, you refer to operational risk events in Q2, increasing provisions in both countries. I just wondered what an operational risk event was.

Now Uzbekistan is on hold from our perspective. So we talked to the seller that we remain interested, but in this situation we are not in a position to make a commitment as such until we see how the war situation and the ramifications in Russia and Ukraine play out. Now obviously, the seller doesn't have any legal obligation to wait for us. So if they decide to sell, then they sell. But if they do wait and if the situation improves drastically in Ukraine, and primarily in Ukraine, then we would like to go back to this. So we still see the potential. We obviously -- I mean, it's complex. And given the recent events, it's even more complex. But the fundamental rationale, I think, it's still there. Again, it's on hold and -- and I can't -- I mean, there's not more to say really on this.

So what I'm asking is, therefore -- is therefore everything on hold other than the 2 acquisitions that you're expecting to complete? So this isn't a specific Uzbekistan issue or...

No, no. We have...

Because we're talking about...

Yes, I understand. Okay. So no, not everything is on hold. But -- so we actually have 3 small discussions or processes at the moment where we are involved. But Uzbekistan is not so much the kind of initial price, but the commitment -- the equity commitment there and the -- that's kind of sizable. And also the -- if we were to do that, obviously. So it's a much bigger kind of step and really a step outside our comfort zone. It doesn't mean that we stop doing everything else. So at the moment, we are actually working on 3 competitors in Uzbekistan, are the small opportunities. And as I just said, I mean, we do -- we have not lost our appetite. Whenever something comes interesting, we are -- we will look into. Now Montenegro, Romania, these are very different and both are very unfortunate. In Montenegro, our internal controls revealed a kind of, I have to say, illicit activity in the bank, which caused a loss for the bank and loss for clients. We reimbursed the clients totally and took kind of appropriate measures and reported it to authorities and started procedures. So that's basically thrown. It's actually localized and -- so we believe that we kind of fully uncovered this situation, and the impact is fully reflected in the first quarter -- end of first quarter numbers. Romania, it's a very different -- that's another fraud. But it's basically -- it's a corporate case, where we did everything according to the book. And there's a dispute whether the person who acted representing a certain corporate client actually had the right to represent the corporate client despite the fact that all the documents which were presented to us, in our understanding, we're valid. It's a legal case. In this case, we don't -- we believe we have not done anything which we could have done better. And it's kind of a -- really one transaction, the corporate transaction. In the Montenegrin case, it was an internal fraud, unfortunately, which we ourselves investigated, identified and took very immediate and very strong measures. But unfortunately, we could not stop the losses and we had to reimburse the clients. But...

I guess the question is in terms of your own internal control. Inevitably, as a group, you've expanded significantly over a long period. And I think you've shown us that in terms of whether it is integrating new businesses, you're good at that. And I guess seeing 2 issues with fraud attached, however they're done, in a single quarter, does it make you reflect on the regulatory -- the internal control processes that you have across the group to make sure these things don't happen, reputational and everything else.

Well, of course, they do, yes. I mean, whenever we have an operational risk event, we institutionally draw conclusions. And it has -- I mean both of these cases that has happened, right -- or have happened. So we strengthened our kind of level of defenses on a local level, and we try to draw as much conclusion for improving group general practices as well. I don't -- I think it's just pure coincidence that these 2 happened in the same quarter. So there's no -- really, there's no -- the 2 cases are as different as 2 events like this can be. And it happened in completely disconnected markets in a way. So it's just pure coincidence that they happened in the same quarter. And thanks God, these type of events happen quite rarely. So it's not that every quarter we have this kind of event.

[Operator Instructions] There's a question from Máté Nemes.

I just had a follow-up question on Ukraine still. You mentioned that your macro assumptions assume about a 30% drop in GDP this year and a similar rebound next year and the general provisions or IFRS 9 provisions are obviously predicate on this scenario. And I appreciate it is incredibly difficult to give sensitivities here. But how would the provisioning needs broadly change if that rebound next year was significantly lower, let's say, 10%? Could you give us some sense on that?

I mean, directionally, we would need more provisions. Losses would be higher. But to give -- yes, we can run the models, right? So I mean, numerically, we can calculate anything. This scenario, I don't have it by -- in front of me. But it takes like -- thanks, [ Karl ]. We have this kind of -- for the whole group, we have a centralized database, where everything is there on a kind of individual exposure level basis, and we can run these models in relatively -- in kind of -- in an hour maybe or even less. So this is -- we can calculate these numbers, and it's possible. I don't have it in front of them (sic) [ me ]. I mean, the range of potential losses is actually very broad. And it's not just the actual GDP impact. Well, take a scenario which is quite bad, but at the moment seems possible: that Russia occupies, I don't know, Eastern and Southern Ukraine permanently. So how do you account for that fact, right, in terms of Ukraine and GDP? So even the definition here is difficult, right? Because that part of the country is then lost to Ukraine (sic) [ Russia ]. We would not be able to do any activity there. We wouldn't want to as well probably, right? But we were not allowed. So there's this technical event, right? If kind of territorial control is lost permanently over a part of Ukraine, then, technically, I guess that GDP content is lost. And we also have to -- immediate sanctions would kick in, so we would have to write-off those portfolios. That would be a one-off loss, right? So I don't know how you can reconcile that with this IFRS 9 models. That's the other thing. I mean we run this IFRS 9 models because that's what we need to do. But you should not forget that these IFRS 9 models were developed based on a kind of normal cyclical changes in GDP. And I think the COVID situation was very clear, and I think it proved very clearly and obviously that the IFRS 9 models simply don't work in situations which are not kind of cyclical economic cycles, right? But kind of one-off external events -- like in 2020, we had a virus, which the implication was very large GDP contraction in 2020, right? And a very large rebound last year. And I think it was not just our experience that the IFRS 9 provisioning what we made in 2020 was actually not needed. So these -- and forecasted losses by the model based on GDP changes despite GDP changing according to expectations, the losses didn't manifest, right? It's just because these models have not been developed for these scenarios. They are -- they fit to this kind of long-term economic cycles: advance when GDP goes up, and there's a recession and then -- so when there's a war, that's completely different. So I -- maybe I shouldn't say that, but I have strong doubts how well the IFRS 9 models actually can capture these type of situations. And that doubt I have is based on the experience what we and other banks had during the COVID situation. So therefore, what we actually do in Ukraine and where I have much more confidence in is really a bottom-up approach, where we look at each and every corporate client and classify them given where they operate, what they do. And also, we try to develop kind of geography and war and kind of level of impact by the war rating metrics, where we classify retail portfolios as well and try to create a bottom-up stage classification, which quarter-by-quarter reflects the actual situation. And I think this is actually more reliable. But obviously, it's hard to do in a forward-looking basis, right? We don't know how exactly this -- what the bottom-up approach will result in 1 or 2 or 3 quarters. So we can calculate what you asked for and we can send you the number. But honest -- I mean I wouldn't draw too much conclusion from that. It can be somewhat misleading, I would even say, right?

I agree with you. I think some of these models are certainly not fit for accurately reflecting, let's say, forward-looking risks in a disruptive or not ex book type of normal cyclical scenario. So I hear you.

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

Thank you very much. Thank you for participating. Thank you for your interest. Thank you for your very good questions. I wish you all the best, good health, nice weekend. And I hope you will join us next time when we report the second quarter numbers. I believe it's on the kind of first week of -- first Friday of August, somewhere on the 5th of August. So hopefully, can welcome you back then. Till then, all the best, and goodbye.

Thank you for your participation. The first quarter 2022 conference call is closed now.