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

Dear ladies and gentlemen, welcome to the OTP Bank's Second Quarter and First Half 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. Good afternoon or good morning, depending where you are. And thank you very much for joining us today on this very nice summer day. [ I can see, with the press ], we really appreciate that you have taken the time to listen to us at this time of the year. The presentation, as usual, is available on the website and has been available for more than an hour. So hopefully, you've been able to download it, but we also share it during the presentation and the conf call. I'll try to better restrain myself than usual and give a relatively succinct presentation of the recent results, and then obviously, we can do a Q&A session. It will be more -- probably more interesting. But nonetheless, start with Page 2. Maybe we can go to that page, sure. Okay. Wonderful. So I think, I mean, the glass is either half full or half empty, depending from which angle you want to look at this. If you look at the total profit after tax and the year-on-year development, then we are 80% minus compared to last year. And this -- but if you look at the adjusted profit after tax, but including the risk cost increase in Russia and Ukraine during -- due to the war, then we are actually in 2%-plus. So considering the -- and including the negative business impact of the war in Russia and Ukraine on the risk cost and on other factors, in the P&L, actually, group level, we managed a year-on-year increase, the adjusted profit by 2%. So that's the kind of good side of the story. The not-so-good side of the story is that during the first half of this year, there has been -- there have been excessive, quite excessive one-offs. And part of them were related to the increased policy burdens in the format of excessive taxes, one-off taxes, and this introduction of the -- or continuation of the price cap on variable mortgages in Hungary, which is other than in terms of after tax, almost HUF 100 billion one-offs negative, and then another kind of close to HUF 100 billion came to other ramifications of the war in Ukraine, outside Ukraine and Russia, namely the impairment we had to book on the Russian government bonds we are holding in Hungary and in Bulgaria, plus the goodwill write-off we had to do related to our Russian asset. So huge negative one-offs in the first half, but the underlying, without one-off, performance, I think quite respectable despite the fact that we have this very special situation, very dramatic situation in Ukraine and the related situation in Russia. Now looking closer to the quarterly development of profits. Maybe we can go back to the previous one. So yes, as you can see, the profit after tax, including all the one-offs, including this large special tax on OTP in Hungary, we made actually HUF 76 billion after-tax profit in the second quarter, which is a great improvement compared to the loss in the first. And again, the adjusted number, HUF 162 billion, I think that's quite decent, and that's obviously far bigger than we have ever done in any quarter. And the year-on-year, this is like 25% up compared to last year. So maybe we can move now to the next slide, and Page 3. I mean these are the group results, including Russia and Ukraine. First of all, I actually point out that exchange rate movements have been huge, especially second quarter this year. So if you compare first quarter to second quarter numbers, in HUF nominal terms as we present them in the -- in our reports, you may not get the full picture because the HUF weakened, I mean, to almost every currency, except the hryvnia which weakened a lot, and the ruble appreciated huge compared to first quarter. So in fact, if you want to understand the dynamics here, we would rather have to look at the quarter-on-quarter FX-adjusted and year-on-year FX-adjusted ratios, which are kind of presented on the right side of the chart. And the -- so basically, this rather strong improvement in quarter-on-quarter results from adjusted profit terms, HUF 89 billion, to HUF 162 billion, was basically due to 3 reasons. One is the much lower risk cost. We provisioned much less, you will see in Russia and Ukraine, so it went down from HUF 73 billion to HUF 32 billion. HUF risk cost, the FX impact, which is quite substantial. And I mean, FX-adjusted, a 3% increase quarter-on-quarter on operating profit. So that's roughly the picture. And again, I think it's important always to take into consideration the large exchange rate movements, which do have an impact on our numbers. Going to the next slide, which presents the group results without Russia and Ukraine. And I think this is kind of important to show these numbers, especially because we articulated our expectations after the first quarter based on these sets of numbers, so without Russia and Ukraine, and it obviously does make sense, I think, to continue to talk about these 2 parts of the group separately. So if you just look at group performance without Russia and Ukraine, it was actually flat quarter-on-quarter. And the risk cost impact here was actually reversed. So we had less write-back then in the first quarter, and we had some improvement in operating profit, 3%, quarter-on-quarter. If you look at the yearly, I mean, development, then total income line, 18% up year-on-year, FX-adjusted. And that's roughly the speed with which we are growing our loan book. So -- and this is not surprising because the net interest margin, and in general, revenue margins, is close to being flat compared to last year. So basically, income growth is driven by organic volume growth and business growth, and that was roughly in this kind of 17%, 18% compared to last year. Important line is the cost line. And year-on-year, we had 11% cost growth, operating expenses, which actually created a positive operating jaw, and operating profit grew 26% organically. Now obviously, this operating expense line is the line where we will be strongly under pressure, and we will have a headwind in the coming periods given the very high level of inflation and especially in Hungary, the impact of the weak exchange rate on some of the cost elements. So this is going to be a challenging part. Now the adjusted ROE without Russia and Ukraine, actually better than originally expected, at 23%. And we kept the guidance kind of being around the last year level, but certainly, the first half performance was better than last year. Cost-to-income ratio improved again due to this positive operating jaw. And the risk cost rate was positive for first half this year and might be actually closer to where we were last year for the entire course of the year, but we will see. Now specifically, Russia and Ukraine, a few highlights. In Russia, operationally, the situation is stable, and we are gradually ramping up retail lending, so the usual POS, mass market, POS loans and cross-sold credit cards and the cash loans. And despite the large volume decline that we saw, actually the new volumes started to build up, and it does seem to be a quite profitable, sustainable business even in the current environment in Russia, whereas our corporate volumes drastically dropped. So you will see that corporate loans, which was -- which were actually a small portfolio anyway, now we are 50%, 5-0-percent, down. So in fact, we adjusted the -- further the operating model, and now we really only focus on this kind of mass market, consumer retail lending and pretty much given up corporate lending, where we -- it's just extremely selective, but technically, it's kind of 0. And that actually resulted in a profit in the second quarter. Obviously, we did not have to create further kind of excessive provisions because the portfolio quality remained quite stable. So we haven't seen any unusual deterioration in portfolio quality. And we also reversed most of the kind of tax asset, deferred tax asset write-off. What we did in this, we were kind of maybe too conservative after the first quarter regarding these tax assets. So we have kind of booked them back. And therefore, you can see this big kind of change in the corporate tax in Russia. But if you look at the first half, corporate taxes were kind of in line with kind of the usual performance. Now Ukraine, again in Ukraine, we booked quite substantial risk costs. And even with these risk costs, we had positive kind of plus-0 performance and which has been kind of bolstered by the rate hike. So the deposit rate, National Bank deposit rate, is 25% now. And that means that even if our loans are going back down and repaid, and we have relatively subdued and limited new lending, we can actually maintain a decent net interest income level just by collecting deposits and placing them in the Central Bank. So that pretty much operationally, or kind of P&L-wise, stabilizes the bank and seems to be able to provide a decent operating profit, which can certainly absorb a relatively high level of risk cost without making the bank loss-making. So that's the trajectory, where we are at the moment. And in a kind of reasonably optimistic scenario, this can continue. But it's very, very difficult to have any clear vision on where the situation can develop in Ukraine, it is immediately linked -- directly linked to the war situation in the country, and whether that abates or exacerbates makes the difference in terms of having 0 or slightly positive quarterly results or having another negative or more than 1 negative quarter in Ukraine. Whereas in Russia, it's -- as far as we understand the situation, the expectation is that, from now on, we are going to make okay levels of profits with a smaller balance sheet, which focuses on this kind of consumer lending, retail business activity. If we kind of broaden our view to the picture to the other group members, then I think the -- actually, the story is quite positive. So most of the foreign subsidiaries have been doing very well. Bulgaria is doing really nicely. I mean profits, quarterly, up 27%; yearly, 12%. Croatia has been doing phenomenal. So it's really, I think, the bank, the market, the macro environment, they are joining the Eurozone, the country has been upgraded by rating agencies, the tourism is very strong, so from every angle, they are doing quite well, and we are very optimistic. Serbia, in this difficult environment, I think that macro- and policy-wise, they have been navigating quite well, and this reflects in our results. So year-on-year, 41% increase in profit. So this seems solid and strong. Slovenia, 22% annual increase in profits. I mean this is a country where we are very keen to and very motivated to finally close the acquisition. Hopefully, this is going to happen before the end of September, and then we can get into possession of NKBM and then start the merger and create, hopefully, a substantial uplift to our Slovenian nominal profits and also to the returns that we [indiscernible]. Romania, we -- again, moderate profit but in line with this kind of progressive organic growth strategy, what we have there. Montenegro, we had that operational problem during the, I mean, the winter period and then we, at the same time, we have now a new management, so a CEO, and the management team is partially revamped, so I'm actually quite positive that the bank has taken an even better direction than before. Albania, very strong performance. I mean they, I mean, almost doubled their profit year-on-year. And the country is really in a very interesting situation. They are almost self-sufficient in terms of energy. And it's hydro-based. So it's not carbon-related. And somehow, the whole economic environment started to make sense there, and there's a rapid development. So we are quite happy with Albania, and we are even happier that we just finished -- closed an acquisition there, which is obviously not a big bank, neither in the -- when compared to the group nor even compared to the Albanian market. But nevertheless, it makes a very good addition to our activities there and helps to increase the market share of the bank by 50%. So this is kind of meaningful for our presence in Albania despite the fact that on the group level it's not a big difference. Moldova, Moldova is in a very difficult geopolitical situation. There's a strong recession there in the country. The IMF is there. Very high-rate environment, very high inflation, enormous current account deficit. So this is a country which is in a difficult situation. And I think the good news is that despite this being a relatively recent acquisition, I mean, in this difficult country, is still making profits. I mean obviously, profits are lower by almost 40% than last year, but it's still positive, contributing to the group. Hungarian leasing, Merkantil doing quite well, fund management doing okay. And then we have Russia, Ukraine, but we talked about that story before. I mentioned the acquisitions. So we nicely picked this Alpha Bank process in Albania. It's done. And the last one in the pipeline, hopefully will, as I just mentioned, hopefully will happen by the end of September. We seem to be in the final phase to -- before we receive the answer from ECB primarily and also from the local competition authorities. If we dive into somewhat, but I'm not going to dive deeper into these lines, but net interest income development. And I think here, it's important again to look at the FX-adjusted numbers. So wherever we have these percentage changes year-on-year or quarter-on-quarter, we typically have 2 numbers, except Hungary. The second number is the FX-adjusted one and even directionally, they can be very different. For instance, in Russia, quarter-on-quarter, in Hungarian foreign terms, we had NII went up by 22%. But in ruble terms, it actually went down by 17%. So these numbers, I mean, the FX-adjusted numbers seem to be much more reliable than the unadjusted. And then fundamentally, I think it's true that in most cases, again, except Russia and Ukraine, which are special ones, is the underlying volume dynamics, which drive NII. And in some cases, we have seen changes in the net interest margin, some improvement in Hungary, but most important, but kind of declining in Slovenia, for instance, and some decline in Serbia. So it's a kind of mixed picture and group level more or less flat. Talking about NIM, Page 9 is the quarterly change, and there was some improvement in Hungary. Finally, there's a small filtering in of the rate environment, is that despite the kind of structure of the balance sheet, which is, I mean, we have these massive fixed assets in our portfolio, which revamped the short-term impact of the rate hikes to manifest in higher NII. But [ this will then ], in a couple of years, we are going to have this [ and flow with our ] high-rate environment. A lot is related in the NIM change to Russia. Actually, if you just look at Russia's stand-alone net interest margin in rubles, then it declined 4 basis points. But then the overall NII in Russia shrunk and that actually had an impact on kind of the composition of the group margin, so to say. So the contribution to group level margin declined because the share of the Russian business declined, and that was actually negative because overall, the Russian margin is higher than the group average. So that's the others, minus 7, mostly coming from this one. And then in the FX effect, again, most of it is coming from Russia and the appreciation, huge appreciation of the ruble compared to the first quarter and again, having this kind of higher, increasing share due to the FX impact. So basically, the OTP Russia stand-alone, the FX effect and others, they are all related to Russia, they are only kind of taken into 3 parts. And other than that, Ukraine slightly improved and Hungary slightly improved. Okay. So looking at volumes, quarterly loan growth volumes. We had a very strong quarter at 3%, or 5% without Russia and Ukraine because Russia and Ukraine were strongly negative, 10% and -- Ukraine, 10%, Russia, 11% minus. But the rest of the group did really well, I mean, 5%, and this is not annualized. Obviously, this is just 1 quarter. Hungary was a strong rebound. You might remember, first quarter, it was 0 because -- mostly because of the consumer loans being negative due to this kind of windfall payment to our retail clients by the government. And -- but then second quarter was 6%, which is one of the strongest in the group, but all the other countries did quite well, I think, 4%, 5%, 6% growth quarterly basis in the bigger markets. Especially, corporate was a strong driver. And in many cases, this is driven by working capital loans increase, or quite an increase in the utilization of the working capital loan credit line. So what we see, that a lot of corporates are stocking, increasing their stocks, right? So they're buying stuff, they increase their working capital and the kind of [ the -- have these ] raw materials and so on. This is obviously in anticipation of raw material or parts price increase, but was even the kind of the -- I mean, the ready products' volumes increase because they have produced for kind of reserves in order to -- in anticipation of future price increases. So we do experience that. And obviously, this is not going to last forever, right? So this is probably a temporary 1 or 2 quarters situation, but that gave a big boost in many of the countries to our corporate loan growth volumes. Looking at the first 6 months, year-to-date performance. Without Russia and Ukraine, 8%, and this is obviously stronger than what we originally expected. So therefore, if you read our guidance, this is the line where we made changes. So previously, we said that we expected around 10% performing loan growth without Russia and Ukraine. Now we are more inclined to say that it is going to be probably more than 10%. It can be actually materially more than 10% if unless there's an unexpected development there. And again, I mean, the same pattern more or less, so around 10%, 8% to 10% growth in most of the countries for the first half. And in some countries, we have quite an interesting environment. And for you -- those of you who are from the Eurozone, it might be not -- you might kind of get used to it. But for us, this is strange to see that we have very high inflation rate, Bulgaria, Croatia, Slovenia, Montenegro around 15% inflation and still a very low rate environment. So it means that cost of loans remain low, especially compared to the level of inflation and the level of wage inflation. So that means that even in this -- it can happen, I think, this kind of high inflationary environment in these Eurozone or quasi-Eurozone countries, maybe loan volume -- I mean, loan demand might stay actually quite strong. Whereas in countries where the rate environment has increased a lot, namely Hungary. I mean, that's the kind of highest increase in our -- except, obviously, Ukraine, which is a 25% rate, but that's a different story, and also Moldova, which is close to 20%. So these are except those specific situations. Obviously, the Hungarian rate increase has been quite material. So -- and this is going to naturally impact loan demand. And therefore, the expectation is that there will be less kind of loan growth in Hungary unless more subsidized rate products come and structures come. I mean there has been -- there have been some positive developments on that front. So you probably heard that the baby loan program has been extended by another year to the end of next year and the Széchenyi Card program which is primarily an SME loan facility, refinanced and subsidized rate by [indiscernible], that continues and that is somewhat -- has been somewhat extended. So this is the right time for these subsidized structures to come in place, and we will see how much is going to come and how much -- to which extent they are going to moderate the otherwise inevitable decline in demand for new loans. Deposit development. I mean, quarterly, 1% and for the first 6 months, next slide, 5%. So the kind of deposit growth slowed down somewhat. I mean it hasn't been in our focus, obviously, and even our liquidity is not in our focus. But what -- very important is the Ukrainian and Russian situations. I think it's important to note that both of these countries' deposits have been growing despite the fact that we are very liquid and the liquidity situation improved a lot in these 2 countries, given the huge decline in loan volumes year-to-date. We are not kind of hunting for these deposits, they are coming to us, and I think that's a very strong -- very positive feedback, that even in these very distressed situations, clients trust us maybe even relatively more than some other banks in countries where we are not big. So in Russia, we are tiny and in Ukraine as well, we are one of the smaller banks. So this is not that we are kind of major players in these countries, but there must be some other reason. Fee income. Year-on-year, 15% growth. Again, this is more or less in line with the overall kind of growth of the -- on the kind of group activities and lending. In some countries, it was stronger, Hungary, Bulgaria. Obviously, Ukraine, Russia year-on-year, it's negative which is not surprising even in this situation. And there's some quarterly noise as well. Typically in Hungary, the first quarter is -- there are one -- negative one-offs, therefore, usually the kind of growth in the second quarter is bigger than usual, but there's nothing fundamentally new here to mention. Page 15, other income. Again, there's some noise here, especially in Hungary, between the first and second quarters. So especially related to swaps, I mean, ruble swaps, positive first quarter and negative in second quarter. That difference explains kind of half of this quarterly change. But I think if you look at the -- and also the year-on-year development is mostly explained by technical one-offs in the base. Again, there's not so much new story here other than typically technical changes in the base or in the recent periods. Operating costs. So far, okay. But obviously, this is something to be watched because in this, again, high inflationary environment, we are exposed to these cost pressures, right? I mean wage inflation, high energy prices. Banking is not a kind of energy-intensive business, but we do have utility costs, they're going up, and especially the Hungarian forint weakening is causing increase in kind of real estate rental fees and the IT cost. That's so far so good. So again, positive operating jaws, but we will -- this is going to be a strong focus, obviously, in the future to try to moderate cost growth despite the fact that inflation is very high all around us in every country. In terms of capital, liquidity, there's not much development other than you probably heard that we kind of issued a green senior preferred bond. This was our reintroduction to the market. I think last time we issued a senior bond was somewhere in 2006, so kind of 16 years ago. And it may not have been the best time to start issuing bonds again, but we are obviously under pressure from the regulator to fulfill the increasing MREL requirements. Therefore, we had to start this, and it was quite expensive, 5.5%. Or well, expensive is relative because, in fact, we were one of the very few financial institutions from the region who managed to issue anything in this quarter or in this period, last couple of months, actually it happened in July, so after June. And we have seen higher coupons with similar-rated banks from the region. So in that perspective, even the pricing was kind of okay, but this is certainly a very different environment in terms of cost of wholesale funding. But despite the liquidity situation, it's not so much a choice to do this. This is a regulatory requirement, and we will continue, in the [ last ] 1.5 years especially, to come to issue new primarily senior bonds to eventually fulfill the requirements. The -- there was a lot of movement in the capital and in the risk-weighted assets due to -- maybe if we go back to the previous page [ just to comment ], is this -- again, the exchange rate, FX rate change related -- changes in the -- in our capital base and in our risk-weighted assets was quite big, right? So you see the first lines in -- I mean, HUF 313 billion increase in the capital and HUF 1.4 trillion increase in the risk-weighted assets due to the FX rate changes. And this is just that we kind of -- there's this natural hedge more or less in the group balance sheet or in the group capital adequacy. And I mean, as risk-weighted assets grow due to weaker HUF, the relevant capital -- regulatory capital increases as well. So the FX changes -- FX rate changes explained quite a bit of the changes in the capital base and in the risk-weighted assets. In terms of coverage and then portfolio quality, again, not so much change. Obviously, due to the increase in -- especially in Russia, there was some increase in Stage 3 ratios due to the declining overall portfolio. Likewise in Ukraine, some increase, but it's not underlying so much. So it's just because the performing -- the total loan volumes declined, and therefore, the ratios somewhat increased. So that caused the increased quarter-on-quarter [ variables ] like 10 basis points, so it's not big. And I think in terms of level of coverage, we remain to be typically higher than some of our regional competitors. Usual 3 slides. Well, Hungary specific performance. I think one factor here is important. And if you look at -- into the analyst tables, which are in Excel format on the website, you actually can spot it that, for instance, mortgage demand for the market-based structures dropped substantially in the second quarter. So that we do see. And despite strong new mortgage generation and strong new applications, most of the strong -- the strongness is basically explained by the subsidized green housing loans and demand for that. And for the kind of market-based structures, the demand, I mean, it's just not surprising, already dropped significantly. That means that if there's no further subsidized structure coming from the state, then it's likely that the mortgage lending -- Hungarian mortgage lending in general will slow down. I think that's an important message to make. Corporate loans were quite strong, again, related primarily to this working capital loan volume increase, which is related to the usage of the credit lines, our [ clients' credit lines ]. ESG remains a strong focus overall. And again, the bond, what we issued in July, was a green bond, so which was our -- not just our first senior bond for 16 years, but it was the first ever green bond. And actually, there was a quite positive investor reception to the structure. And I think we have done a lot in this, I mentioned, during the last couple of years, and we will continue to focus our efforts on the E, S and G factors parallel. Finally, a few words about expectations. I mean certainly, the second quarter was rather more positive than we originally expected, so to say. And that suggests some -- at least short-term limited optimism, I think. And we only decided to reflect it in the loan volume expectations. So again, without Russia and Ukraine, group level loan growth, we expect to be over 10% as opposed to previously expected to be around 10%. So now this, well, this suggests and reflects the 8% year-to-date performance. So it's not hard to imagine that it's actually going to be more than 10%. I think it's still likely that net interest margin will remain stable. It slightly increased year-on-year, might be some, slight more increase but not material. Cost efficiency improved. We're happy about that. Risk cost ratio, again, first half, it was actually positive. Or now, I mean, it's always a problem with this kind of -- whether the risk cost ratio is positive or negative. So we had write-backs and without the Russia, Ukraine portfolio, first half. So therefore, the ratio is better than last year. We will see. I mean we don't -- I mean, these are quite small numbers, either positive or negative compared to the size of the group. So at that level, it's kind of hard to be very specific about the forecast. I think the best kind of guess is that it's going to be the whole year, going to be at the level of last year, the risk cost ratio still. And profitability, again, this kind of adjusted, without Russia, Ukraine, number, first half was much -- was actually markedly better than the last year, but we kind of remain cautious in our guidance. And around last year can mean that it can be kind of higher than last year. So Russia, I already told you that what we expect kind of moderate profits but profits to come from our Russian business and Ukraine is, I mean, it's just impossible to forecast what exactly is going to be the quarterly performance there. It is 100% dependent on the -- how the war situation develops. So that was the kind of presentation on my side. And I'm sure you have very, very good questions to ask, and then we'll try to answer them in meaningful ways. So please open the floor for questions.

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

Can you hear me?

Yes. Loud and clear.

Just 2 questions from my side. The first one would be on your rate sensitivity to euro rates. So I think in the previous call, you said it would be around HUF 3 billion for every 10 bps. So shall we translate the first 50 bps of euro rate hikes to impact your interest income accordingly and how you see further rate hikes would impact this line? And my second question would be on the agricultural moratorium that was introduced recently in Hungary for agriculture companies. And I was wondering if you could tell us what is the exposure in Hungary for that sector in your loan book.

Yes, indeed. So the answer for the first question is yes. So the -- I mean, the 50 basis points rate hike we have seen so far should translate into 5 times HUF 3 billion. And there, it's the kind of forward-looking sensitivity is even higher. So it's roughly EUR 10 million per 10 basis points, is HUF 4 billion in [ current terms]. And the difference is because now we are in the positive territory. So I mean, we -- in some cases, we could not have -- we didn't have negative reference rates. Therefore, up until it went up to 0, in some cases, there were no increase in, actually, in loan rates. I mean these are typically corporate contracts and they differ in countries and by clients. So it's not kind of overall, but we have quite a lot of contracts which work in a way that the kind of reference rate could not go below 0 in the pricing according to the contract. And so far these -- the rates of these lines have not changed. But from now on, they will. So that somewhat increases the sensitivity here. The loan book, which can be impacted, total is HUF 250 billion. And to be honest, we -- plus, there's another HUF 50 billion off-balance sheet credit line. So if you take the on- and off-balance sheet to [ mandates ], like HUF 300 billion, which is not a -- it's not a huge portfolio, it's pretty much impossible to tell how many clients we -- so it's not a -- it's an opt-in structure. So it's not automatic that clients participate. And clients will have to decide first half of September. Obviously, we will try to communicate to these clients, and we are very hopeful that these clients will actually approach us and discuss problems if they have any. There has been a strong drought in Hungary. It's really strong, and some special crop production is strongly affected. So yes, some producers experienced troubles, but it is certainly not across the sectors. So hard to [indiscernible], we don't have a good number, how much participation we should see here.

The next question is from Máté Nemes, UBS.

I have 3 questions, please. The first one is on market shares in Hungary. I can't help to notice, but essentially in all products and segments, you're showing growing market share, be it in mortgage loans, cash loans or on the corporate side. I'm just wondering if you could give us a sense why that might be. Is that basically the willingness to continue supplying credit where some other banks are holding back? Is that due to pricing or if there's any other factor? That's the first question. The second one would be on intragroup funding to Russia and on Ukraine as well. I just noticed that in HUF terms, we've seen an increase [indiscernible]. Can you just confirm that this is simply due to the Hungarian forint depreciating versus the ruble and the hryvnia, and there is no actual increase in local currency funding terms. And the third question is on Ukraine. You mentioned that currently, you're seeing strong deposit inflows and you're placing this at the Central Bank at very high short-term rates, money-market rates. Can you give us a sense what portion of your NII is coming from these deposits placed at the Central Bank in Ukraine? And perhaps also how much is cash and how much is accrual on the NII side currently?

Yes. I'm just writing down the questions, not to forget, sir. Okay. So Hungarian market share increased. In retail, it's basically a composition result. Maybe we can go to the slides, Page 19 now. Let me go to Page -- thank you. So we always have higher market share from subsidized products, you might remember, sir, baby loans, and we had like more than 40% market share. Actually, it's on the following page. So our baby loan market share, as you can see, it has been always been above 40%. [ If we go now ], also, the green housing loan, which is a subsidized product, we have a much bigger market share in this subsidized product than in general. And what happened, if you go back to the previous page, what happened in the second quarter, that both in consumer loans and in mortgages, in retail, the market rate-based normal products, volumes declined, new volumes, right? And a much larger share of new production was coming from subsidized products. And in these subsidized products, we have always had much higher market share than in other products. So it's not that we have done something differently. It's just the demand structure changed and we happen to be stronger on the market in the subsidized products, and the demand increased in subsidized products and decreased substantially in the nonsubsidized products. So that's the explanation. And these are very kind of low risk. I mean these green housing loan, I mean, it's 2.5%, right, max, for a 10-years fixed or [ whatever it is, even more ], right? So this is -- and it's a gift more or less for the terms you can take in, in this environment. I mean if they put the money, I mean, [ they can't ] because they have to buy, obviously, a real estate from this money. But if they anyway had the money and take this loan and put into a government bond, they earn kind of whatever, 7% or 6%, right? So this is -- these are actually quite kind of low-risk products. So that's the reason in retail. And in corporate, actually, the increase was rather -- is kind of smaller, in terms of market share. And it's more like this trend, right? We have seen this trend for many years in corporate, that we have an increasing share -- market share in corporate loans. And that, kind of the market share increases, actually slowed down sort of in this year compared to last year and previous years. So again, there's nothing kind of specific or extraordinary there. And we do have this same phenomenon in the corporate as well, especially SME. On this slide, on the right lower corner, you can see that, for instance, the Széchenyi Card Go! program, which is a subsidized scheme, a refinance scheme, quite attractive, we have 37% market share, right? And our overall market share in corporate loans is 14-point -- is 19.2%. So -- and obviously, in this higher-rate environment, the new demand is much stronger in the subsidized -- for the subsidized products than for the nonsubsidized products, so a kind of similar change here. So it's not that we are more relaxed than others and less conservative. I don't know how conservative others are, but I think we are conservative. Now in terms of funding Russia and Ukraine, I can confirm that the increase is only due to the fact that we have a weaker HUF rate compared to ruble. In fact, I mean, our Russian entities should pay back a substantial part of this funding. The problem is that they are not allowed to pay back or they can only -- if they were to repay, early repay these loans, they could -- this number -- the amounts could go only to this [ C ] account, which is kind of trapped in Russia, so it doesn't make any sense. So we -- and the same in Ukraine, it's not possible to pay back the cross-border, the maturing group credit. But nevertheless, I mean, in case of Ukraine, actually, their placement in the group increases. So the net funding is actually going down, not that it matters a lot, but that's what happens. So yes, it's not -- we have not increased our funding to any of these entities from the group. Cash accrued ratio is, I think, the second quarter, the accrued part in the NII was 18%. And our -- the share of -- and we have like 12%, 15% of our assets in Central Bank deposits at the end of the second quarter, and this is going to increase.

The next question is from Gabor Kemeny, Autonomous Research.

A couple of questions on Hungarian asset quality. First, please is -- I mean, the economy is slowing and the utility price freezes are being phased out. How do you think about the provision outlook in Hungary in this environment? And how do you capture this in your guidance of stable risk costs admittedly from a fairly benign H1 starting point? And the other question is, how do you think about a more negative macro scenario and in particular, Russian gas cutoff? Potentially, how would that impact your provision outlook? And my last question would be on Russia. You had a comment earlier today that you might consider a sale. What options do you see to potentially work around the government decree banning the sale of foreign assets?

Yes. So I mean, certainly, the developments, the high inflation and especially the excessive energy costs is negative. No question about that. And it's going to have a negative impact on our risk cost and portfolio policy. How negative, I mean, that's actually very difficult to tell. And I mean, again, we made this guidance, that we expect a similar risk cost rate this year to last year. And last year, we had some kind of risk cost for the whole group. And this year, so far, except Russia, Ukraine, we had a write-back. So I mean, the fact that we expect kind of a similar level to last year still means that there will be more risk costs, second half than first half. And I'm talking about without Russia, Ukraine because Russia, Ukraine, hopefully, will be less. Now in the case of Hungary, I mean, risk costs are kind of very positive, right? So I mean, these first 6 months, we had positive HUF 19 billion. Last year, first 6 months, we had positive almost HUF 8 billion. I think this is not going to continue long. So probably, we will start to see periods with normal kind of risk cost, which means kind of negative risk cost. I think [ where ] this positive risk cost is abnormal, and that's due to the fact that kind of 2 years ago, we made these large provisions for COVID-related problems and COVID-related problems did not happen at all. So we have still kind of reserves. And kind of slowly, we decided to release these reserves. But now we have another problem, which might be more material than the COVID impact was, because COVID was rather kind of -- we were scared and provisioned, and everyone was kind of negative 2 years ago. But at the end, basically, the situation turned to very positive, but at least, I mean, in terms of portfolio qualities and banking kind of sector results. What happens now, it's -- I think it's extremely difficult to tell. And in a, I mean, in a scenario where there's no gas, no Russian gas at all coming to Europe, I mean, that's a rather dire scenario. And not just to Hungary, it's across Europe, especially Germany, some other CEE countries, which are heavily dependent on Russian gas. I think it's very, very difficult to kind of capture the magnitude of the problems we are going to have. I think if that happens, then we will have strong policy measures, not just in Hungary, but across Europe because this is not something which can be left to the market to be solved, I think, a situation if that happens. And I don't know to quantify that, honestly. Very certainly negative. I think a kind of a complete [ cut, stop ], of Russian gas, and that's certainly a tough scenario. And I don't know how we're going to cope with that if that happens. But we also have to remember that this is a political decision. So this is related to the war and related to the sanctions which have been imposed due to the war. And if there's no gas, then this is the counter-sanction to the sanctions which were kind of triggered by the military actions and the war. So this is not something fundamentally economic, [ that we have now ], it's not a fundamental supply-demand imbalance, it's just a -- it is a political decision. And I think I can only hope that political decisions will be wise on both sides, right? If they're not, then kind of irrationality and tit-for-tat, the negative spiral continues, then we might have actually strong problems. And these problems will not be specific to Hungary or the region, but certainly more, at least more on the European level. Sorry, what was the last question? It was related to -- yes, Russia, right, okay, yes, sorry. So I don't know. I mean there was this presidential decree that foreign banks, foreign assets cannot be sold. Now every presidential decree can be overwritten by presidential decisions. So I'm not sure if technically it's possible for the Russian President to give a kind of one-off approval. So we haven't -- I mean, we haven't digested this so much. So again, we started the process to explore if there's interest for the asset, and I can confirm that there is local interest for the asset. Obviously, it is unclear to which extent meaningful discussions can continue in this situation, whether potential interested parties, Russian parties, want to engage in a more meaningful and more detailed conversation and process given this ban because it's not just that we cannot sell, but they are not allowed to buy, right? So I don't know. So this is -- it broadly -- so it does definitely, at least, slows down the process, and it has slowed down the process. We, I mean, we remain open to this, and we continue to explore strategic opportunities. Having said that, if we just -- if we kind of just look at the economic fundamentals of the situation, as I said, we will stabilize the operation. Actually, it's self-funded, it's profitable. It focuses on the segment, which is, I think, the least sensitive politically. It's just a kind of mass market retail or even below mass market retail clients we have. We stopped corporate lending. We are tiny, by the way, in Russia. So we are number, I don't know, 50 or 40, whatever, bank. So -- but it's still sensitive politically, and we understand that. Having said that, we have regional competitors who are top 10, right? And still, they are making enormous profits in Russia. So put it this way, we are going to monitor what they do with their assets and how they tackle the situation, and then, I think, that will be a guidance for us as well given that we are tiny compared to them and we are not serving state-owned or corporate clients in Russia. We are only serving kind of low mass market retail clients when they buy, whatever, a microwave oven or a TV or something like that. So I think it's a kind of different profile and much smaller. But we do keep our eyes open and continue to try to explore this, the different strategic alternatives.

Useful color. Just one small follow-up. Can you remind us how much overlay provisions do you have as of now? And how much -- you mentioned, I think, some releases in Q2. If you could quantify that as well.

I mean in Hungary, in Q2, we -- kind of the risk cost was plus HUF 18 billion, right? So I mean, that's -- in overlay, I don't know what an overlay means. In fact, I mean, sometimes it happens that you have situations when you create provisions based on kind of expert judgment maybe more than on models. [ We could ], but in our case, everything is model-based, right? And the models and the -- so we don't quite -- I mean, we don't have an overlay which we just put there, right, based on no data, right? So for Russia and Ukraine, we do have models and the provisioning is model-based. And our models for the rest of the group suggested that the -- that we needed less provisions than what we originally thought we would need under a stressed COVID scenario, right? So the COVID situation officially has stopped to negatively influence our business activities in the first quarter. So we have adjusted our models according to that, and that resulted in lower provisions in some countries. So I don't know. I mean I think this overlay, from a kind of accounting point of view, we cannot really -- it's not very meaningful because you can only provision or release provisions based on some underlying rationale, and that rationale has to be either related to some client -- observed client activity or change in client activity or the ability to pay or a specific economic model you had for the expected risk cost for the future. We don't have an overlay, which is somewhere outside this framework hanging overall. I mean so we don't have that. And I don't know how others can have that, if that's what you mean.

No despair, but what I meant was the provisions you created during the COVID crisis, given your macro assumptions back then, which you have not yet released even though the macro situation, let's say, turned out to be more favorable than you had assumed. But it sounds like there's not much of that.

We have released them, and we reallocated them. Partially, we released them, and that's what you see. Partially, we reallocated them. Or then all of a sudden, there's another reason to provision more and to be kind of less optimistic or pessimistic for the future. And that's the current economic environment, which has obviously deteriorated. So it was that -- I mean, yes, the COVID reason ceased to exist, but now there's another kind of negative scenario we have to take into consideration. We calculated the 2. There is a difference. The difference we released, and we have a new one now. So that's the situation.

The next question is from Alan Webborn, Societe Generale.

Can you hear me?

Yes.

Do you think that in terms of the way your, the government of Hungary, is managing its budgetary needs and so on is rational in terms of how it's working with the banking sector? I mean, for example, we look across to Poland, and it doesn't really look as if the reaction of the authorities at the moment is particularly rational. Whereas, in your case, you've been slapped with a 2-year extra bank levy, but at the same time, there are like big subsidized loan programs, which from what you said today seem to be supporting volumes. But these programs surely must now be made more and more expensive for the government to maintain. And I wonder do you feel confident that when like the government says it will maybe continue these support programs for some time, that you can rely on that. Or are we actually faced with a fairly important risk, that these loan programs get withdrawn and until rates come down, you could have quite a sharp contraction in lending as a result. I just wonder how you feel that that's working and what you feel about the development of Hungary, given the fact that you've got this takeaway with one hand and give back with the other. I'd be interested in more of your view on that. And in terms of your own reaction to the new bank levy, I mean, are you able to do anything in terms of commercial policy to take something back? Or is that just something that's not really within the spirit of how the relationship is moving for Hungary? And then in terms of Ukraine, were you positively surprised by the lower level of risk costs in the second quarter? Was there anything specific, better collateral, better collection, that pushed that forward? I mean I hear what you say in terms of it's not very foreseeable, but I think we were positively surprised to see Ukraine back at breakeven in Q2.

The first question is actually quite difficult to answer. I think it's clear that it's unusual what -- how the policy environment works in Hungary. There seemed to be a lot more intervention than kind of usual, I think, than the usually expected level, put it this way, in general in Europe. But this is not a new phenomenon, right? I mean it started back in 2010. First, it was negative. So we got the bank tax and the forced conversion, early repayment of mortgages and so on and so on. And somewhere, the tide turned around in 2015, when politically, growth became the primary target. And since then, we have seen a deluge of different subsidized products for retail, for corporate, in various forms from the Central Bank and from the government. And it's clear that we have benefited from these. And given our strong franchise and kind of ubiquitous presence in the country, we plan to have higher share of these kind of subsidized products than the kind of normal products. So relatively speaking, we probably gained more than some other banks in these structures. And then, time to time, we got these hits, right? And I don't know where the right balance is or whether the balance is actually taken by anyone...