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

Dear ladies and gentlemen, welcome to the OTP Bank Second Quarter 2023 Conference Call. This conference will be recorded. [Operator Instructions] May I now hand you over to Laszlo Bencsik, Chief Strategic and Financial Officer. Laszlo, please go ahead.

Thank you. Thank you for joining us today. Good morning, and good afternoon, depending where you are in this kind of mid-summer occasion. As usual, we have the presentation available here and also on the website. And I'm going through the pages in a rather swift manner and then we will have a Q&A session. So starting on Page 2, the quarterly results and half-year results for this year. Obviously, it's an all-time record and by a huge margin. And this extraordinary performance was kind of supported partially by one-offs, as you can see. So in the second quarter '23, we had almost HUF 100 billion adjustments, one-off items. And during the course of the first 6 months. These were more than HUF 100 billion. So we still keep -- have the special tax of financial institutions and the normal tax, and there is another interest rate cap extension as negative, but these negatives were by far counterbalanced or superseded by positives related to the 2 acquisitions which we have concluded during the first 6 months, first in February, NKBM in Slovenia and then in during Ipoteka-Bank in Uzbekistan both of these banks, acquisitions, entail badwill and therefore, we kind of starting -- when we included them in our consolidated reports, there's a subsequent positive one-off effect. And that is in a huge contrast with last year first 6 months, where actually, we had more than HUF 200 billion negative items related to the direct effects of the war -- of the Russian-Ukraine war and also to the negative measures, I mean, from our perspective, at least of the Hungarian government. So all in all, this big movement in the adjustments resulted partially in this large year-on-year and quarter-on-quarter improvement. But if you look at the adjusted profit after tax, it's also a record high number boosted by some one-offs, which I'm going to talk about later on, but mostly driven by low-risk costs, portfolio quality in general is stable and good, and macro expectations keep improving, therefore, IFRS 9 provisioning is less or even in some cases, we can release provisions due to better macro expectations. I think a notable number on this slide is the ROE -- adjusted ROE 28.4%, which is much higher than last year. And therefore, as you will see at the end of the presentation, we kind of modified our original expectations for this year where we had expected similar ROE -- adjusted ROE to last year. Now it's quite likely that this number is going to be bigger for the course of the year. Slight increase in net interest margin on the group level year-on-year and some improvement in the cost-to-income ratio. If you look at the balance sheet -- sorry, the P&L lines in more detail. And again, there's quite some noise here because of the 2 acquisitions, which happened in the first and second quarters this year. And therefore, it's worth looking at when we look at the differences between the time periods to look at the without acquisition rates -- growth rates and also, we have seen some strong movements in FX rates. So therefore, we usually look at the FX adjusted without acquisition numbers. So operating profit year-on-year for 6 months, up 30%. Strong income dynamics and somewhat still, I mean, strong but less than income growth. Increase in expenses, we are in a high inflation environment, especially in Hungary. In the core business Hungarian inflation peaked at 26%. So this is very high inflation environment where cost growth is also strong, not just income growth. But all in all, we managed to increase operating profit 30% without acquisitions. And on this slide, you can see the risk cost number, it was pretty much 0 for the first 6 months of this year, which is in the stark contrast with the minus HUF 105 billion we provisioned last year when the war started and we had the expectation that there will be direct and indirect negative ramifications, regarding the portfolio quality, of the war. But those negative expectations have not manifested, portfolio quality is quite stable. It is quite stable also in Russia and Ukraine, which are primarily affected by the war and also quite stable across the group. Going forward talking about Hungary and the core performance. Here, there's quarterly improvement, but if you look at the first 6 months of this year and compare it to last year, there's still a decline, more than a 30% decline, and this is primarily coming from the net interest margin being less, and I will kind of elaborate more on this and the drivers behind the declining net interest margin. Cost to income also worsened, and this is partially due to the tighter revenue margins, but also cost to assets slightly increased due to the high inflation environment -- exceptionally high inflation environment in Hungary. Adjustments wise and one-off items wise, last year, first 6 months was heavily impacted by the kind of war-related losses and write-offs and the negative is -- was a much smaller number this year, but still negative coming from the windfall tax and the special bank tax and the interest rate cap extension. When we look at the other group members, it's a pretty positive picture in almost every -- well, in every case, we improved the profit after tax compared to last year. ROE numbers are quite respectable levels. And even in Ukraine and Russia, especially if you look at Ukraine, we have the highest ROE in the entire group coming from Ukraine and countries like Moldova, where you would not expect such a good performance, it was churning out more than 30% ROE first half of this year. You can also note in this page, the increase in Slovenia last year for 6 months, it was HUF 10 billion, this year, it's HUF 54 billion, and that's because we included the contribution from NKBM, starting from February. Uzbekistan the latest acquisition, Ipoteka-Bank, P&L-wise, it's not yet included, but we consolidated the balance sheet as of -- in the second quarter numbers. So the P&L contribution, we don't see yet coming from Ipoteka-Bank. This is going to appear starting from the third quarter this year. Now I'd like to point out here a very significant development in the group and taking a kind of bird's eye view and a more kind of strategic look at what happened during the last couple of years regarding OTP as a whole. And as you can see, we have gone through tremendous growth trajectory, I mean, we -- since 2016, we have almost tripled the size of the group and that's very close to EUR 100 billion total balance sheet and part of that was obviously organic growth, but there was a large contribution from the acquisitions that we have made. The flags here represent the euro -- the acquisition, when we acquired a new bank in a given country. Now this resulted in a strong shift in the composition of the group whereas Hungary used to be 60%, 70% of the group profits and in many other metrics like total loan portfolio and such, today, actually, the profit contribution is around 30% and the foreign operations now outweigh the Hungarian one, especially so the Eurozone countries or the FESA Eurozone countries like Bulgaria, which is about to introduce the euro. Their size increased such that they represent today, 40% of the total loan book of the group. So that's a fundamental kind of growth in overall size, but also internally, there has been a shift in the composition of the group Hungary -- contribution of Hungary shrunk and the rest grew, especially the Eurozone countries. A few thoughts about the new market in our group, for the new country in our group, Uzbekistan, it's a 36 million habitant -- people country, growing very fast. So it's a very positive demographics country with median age being 30 years. So it's a young and fast-growing population, relatively low GDP per capita, but growing rapidly, high level of education and schooling system. So we have trained workforce in there and kind of leadership strongly committed to market reforms and improving the wellbeing of the country and the people in the country. So this is a country, in our view, on a very, very positive trajectory where there's a lot of room to grow from a low base and a very clear intention by leadership of the country to develop in general and also in particular, regarding the banking sector. So if you look at the bank, what we acquired, it's the #5 bank in the market. It's the smallest of the 4 or 5 large state-owned banks with 7.7% market share and this bank was the first in the expected series of bank privatization. So we were the first buyer of a state-owned bank. And the size, if you look at by total assets or loan book, it's certainly not -- it doesn't look like a game changer for the whole group, kind of 4% share within the total. But in terms of growth potential and in terms of profit potential, I believe that actually it's going to have a much bigger role and share in our future story than just a pure loan book or total asset size of the operation. A few words about Russia, Ukraine, in both countries operation is stable, profitability high. In Russia, the consumer loan portfolio started to grow, we still don't serve corporates with loans. And in Ukraine, we still continue to see a decline in overall loan volumes. In Russia last year, we paid back all the group funding. So there's this kind of a small amount of sub debt outstanding, whereas Ukraine is still -- the gross intergroup funding, despite the fact that they actually keep more of their excess liquidity in Hungary and what -- the funding line to the leasing company in Ukraine but nevertheless, the kind of gross amount is still there. Provisioning continued in Ukraine. So we are close to 15% -- sorry, close to 25% and total provisions to total gross loans coverage level. So that includes performing and nonperforming loans together. So this is quite a kind of comfortable and conservative level of provisioning we believe especially because, again, portfolio quality seem to stabilize. And we continue to quantify the worst-case scenario of potential impacts on our capital. So in case of Russia, it's 46 basis points, writing off the entire operation, the potential negative impact declined primarily because of the exchange rate. So the HUF value of the equity in Russia declined due to the lower -- due to the weaker ruble rate, whereas in Ukraine, the potential loss somewhat increased. That's due to the fact that we are piling up retained earnings, capital keeps increasing in Ukraine, and therefore, the potential loss from writing the whole thing off is also there. I mean this is, I mean, just a tactical remark. I mean, we certainly don't expect in either of the countries this negative scenario. We actually -- certainly in Ukraine see a large strategic potential once the country is -- the kind of rebuilding of the country starts and returning to normal happens, we expect further increases, especially in lending activity. Again, profitability is highest in the group. And historically also high. Whereas in Russia, we are kind of having this very narrow focus of activities, just doing consumer-lending, point of sales loan driven consumer lending, we even discontinued recently dollar transfers. So that's -- we are not providing that service anymore to our clients. So we even kind of narrowed down with another big step, the type of operations, what we do in Russia. Next page about revenues, but probably more interesting is to go into the kind of different types of revenues. So maybe if you look at net interest income, next page. We tried to kind of explain the bigger movements on a quarter-on-quarter or year-on-year basis, and there was an improvement in Hungary, but that was mostly driven by technical or one-off items and also some calendar effects. So without that, we still have had a negative NII growth slightly in Hungary, whereas all the Eurozone or euro-related countries, you see even on a quarterly basis, strong improvement, and that's due to the kind of increasing rate environment and us benefiting from the higher rate environment. On the following page, you see the net interest margin numbers. And this trend is very clear, again, in most of the foreign subsidiaries, we see improvement and we also see a quarter-on-quarter improvement in Hungary, but again, this improvement was mostly due to this kind of one-offs -- technical one-offs. And maybe next slide might be helpful to you to understand the driving forces, the levers behind Hungarian NII and the net interest margin. And on this page, we tried to kind of describe the reasons behind our decompose the different factors behind the decline of NII and subsequently the NIM in Hungary year-on-year. So here, we compare '22 second quarter to '23 second quarter. And as you can see, there is a HUF 17 billion decline in the NII, and there was a 64-basis point decline in the NIM. And here on the slide, you see the sources of this, the different factors, having impact. And the biggest one by far is the mandatory reserves and the changes of the mandatory reserve rules. Last year, second quarter, the ratio was 1%, and they paid market rates on this level of reserves. Now this 1% was increased to 10% in 2 steps, and 75% of it, of the total base is only 13% when the kind of overnight rate in the second quarter this year was 18% and then 25% since April there was 0 base. So this is huge, the impact just on 1 quarter. So this quarter-on-quarter difference -- year-on-year -- sorry, this year-on-year difference between the second quarter, HUF 23 billion negative impact here just coming from the mandatory reserves. Now the second kind of biggest negative was the acquisitions. When we do acquisitions, we -- the Hungarian bank, the core requires these assets. And these -- the investments into these new acquisitions become noninterest-bearing assets and therefore have a negative impact on NII. So here, we just quantified the impact of NKBM acquisition in the first quarter on our second quarter NII and this HUF 13 billion less NII in case of the core. The third negative was deposits. Deposits declined so year-on-year, they went down in Hungary by HUF 500 billion. And there is -- part of that is retail and part of that is corporate, especially in our retail deposits, we have a quite big margin and any decline in deposits is negative from an NII and NIM perspective, so another HUF 11 billion year-on-year impact. And then the new papers that we had to print in order to achieve the MREL targets part beginning of next year. [ Net scenario ] item, is just negative impact on our Hungarian NII as the issuing entity given the single point-of-entry approach, what we have is the Hungarian bank. And we have not yet provided these MREL funds to the subsidiaries. So this kind of waterfall impact of distributing the MREL funds in the group has not so much happened because this only have to be done by year-end. So this is also quite negative for the Hungarian earnings. And the factor which we have talked about before that we have large, we have a surplus of fixed assets, especially because of the kind of actions of the government and making them fixed is actually quite small in the NII. Now we also have positives. Obviously, I mean loan growth, positive. We opened strategic euro short position in February to hedge the investments into Euro assets, primarily the NKBM equity investment and also Slovenia and Croatia. So this might be helpful if you want to kind of understand the deeper level, the potential developments and drivers behind our Hungarian NII. Some -- maybe some more detail would be warranted here to explain the deposit dynamics. So if you look at the following page, yes, Hungarian inflation, the peak was actually close to 26%. And at the same time, retail government bond yields were quite high and provide I mean, even if -- some of them are even inflation adjusted. So the expected rate on these retail bonds is much higher than the actual one, here what we have on the slide. Now these 2 have a major impact on retail savings. So first of all, people use up their deposits at banks to -- because they kind of save less and spend more due to inflation. And retail government bonds and in other investment funds have attracted a lot of retail savings. So if you look at these kind of numbers, again, comparing the second quarter year-on-year, overall retail savings increased in the market by 12%. But within this bank deposits declined by 11% and government bonds and retail investment funds increased quite substantially. So what happened in OTP, if we go to the following page, as you can see pretty much similar trends took place. Retail deposits declined 9%, this 9% decline is less than the market decline. So in fact, our market share increased by almost 1 percentage point in the year to 41.8%. But nevertheless, retail deposit volumes declined, and this is obviously quite costly business development for us because this is by far the highest margin product that we have at the moment with the current rate levels. Now obviously, the big question is how long this process is going to continue. You will see the kind of recent numbers in terms of deposit volumes. We believe that we have been through the worst. So in terms of kind of adjustment to the new norm in this kind of higher inflation environment, has already happened and as inflation drops down and the potential forward-looking yield expectations on retail government bonds decline, we are quite hopeful that this trend will slow down and then the decline of retail deposit slows down, but this is something to be seen. And clearly, this is one of the kind of most important factors when we think about future potential revenues of the -- even on the whole group level. Okay. So going forward, volume-wise. So loan growth across the group slowed down, especially in Hungary, where we have the highest inflationary environment. Now these quarterly growth figures are somewhat kind of not misleading, but they actually include the impact of the moratorium. So these are kind of performing loan volume growth numbers and the moratorium ended last year and some after 6 months performing previously moratorium-related lines are reclassified into performance. So we had some improvement coming from that angle there. Besides Hungary, Bulgaria, doing well, Croatia doing well, Ukraine continues to decline and Moldova continues to decline. If you look at the year-to-date data on the loan volumes, you see that overall we have 3% growth in the first 6 months without acquisitions. If we also include acquisitions, then the growth rate was actually 18%, which is including NKBM and Ipoteka-Bank. So after this kind of 3%, 6-months figure, we believe that we might get actually close to or around 5% growth rate for the whole year. Therefore, then we will talk about the expectations. This is a line where we somewhat positively revised our previous guidance. If we go to deposits and quarterly deposit dynamics, you can see here, in Hungary, we have this negative. This is what I told about. Again, financially, the retail decline has quite a painful impact but also corporate deposits declined in the second quarter and it's not just in Hungary, but in some other countries, but it's obviously a quite price-sensitive segment. And in corporate deposits we are pricing -- actually, we are providing high interest rates typically. Now fee income increased healthy, I would say, 14% without acquisitions year-on-year growth. And the second quarter was particularly strong. There are no particular one-offs here. This is basically a strong performance partially driven by the high inflationary environment. I mean, transactions volumes increase and therefore, fee-related income increases. So it's another strong performance. Other income, there's an item here which we need to talk about in the second quarter in Hungary, the reevaluation of the subsidized retailers in Hungary, namely CSOK, the mortgage product and baby loans, consumer loans, where the subsidies are linked to a benchmark, which -- or a number which includes the benchmark multiplied by 1.3. And therefore, we actually have to -- we have to mark-to-market them. And this was on a quarterly basis, slight negative last year, but this year, due to the strong downward shift of the yield curve, there was a one-off ad fee fair value adjustment positive we have had to account for. And that's HUF 34 billion, which is considerable from a kind of a quarterly revenue perspective of the whole group even. Obviously, this can kind of -- it's a one-off, but it can continue, should the yield curve continue to move downward. And on the opposite direction, if it moves upward, and it can turn into negative. And since we are talking about rather sizable volumes here, more than HUF 800 billion in baby loans and more than HUF 400 billion volumes in the subsidized mortgage structure, or -- sorry not mortgage but housing loan structure. So these are -- this can kind of materially impact the earnings as well in the future. On operating costs, -- and we have -- in 3 cases, we have kind of larger year-on-year growth numbers in Hungary, it's 24%, mostly driven by personnel expenses, which grew 40% year-on-year. That's quite a substantial amount. And here, the labor market is very tight, and we are trying to be very competitive to attract the best talent. And therefore, we increased wages into stages last year in September and this year in March, and they obviously reflect in the personnel expenses. In Bulgaria, this 22% is distorted by the accounting of the supervisory fees in the first quarter. Without that, if we accrue them as we used to do, then this 22% growth would have been only 7%. And in Albania, the new acquisition, which came into our group in last year in August, increased the cost. So that's -- here, the increase is purely due to the fact that due to that acquisition. Capital, capital situation. Despite a sizable acquisition of IPOTEKA in the second quarter, the capital ratios improved. So as you can see, the common equity Tier 1 ratio improved by 80 basis points. And that's due to, obviously, of the strong profit and retained earnings increase coming from the quarterly profits. We continue to issue MREL bonds. So we had a $500 million issuance in May. And then in June, we did a private placement of $110 million. And we expect to do another benchmark Euro deal during the course of this year in order to get to the -- to fulfill the requirements of next year. And here, one news which we announced yesterday. Yesterday, we received the preliminary Shrank documentation from the Central Bank. They did the supervisory review, and they initially proposed 120% Shrank ratio, which is 5 percentage points lower than what we have this year. This is a kind of preliminary number. But if it happens that this ease is somewhat or kind of MREL issuance needs during the course of this year. European stress test was done by EBA, the usual bi-annually exercise. And as usual, we came out quite successful. So we are #4, if you measured by the kind of change in common equity Tier 1 ratio over a 3-year period of the stress scenarios. So 1 of the best banks or the most stable and resilient banks according to the stress test in Europe is OTP. Again, this is quite in line with our expectations. And we're kind of seeing type of result that we had had before on the stress tests. We are not just resilient in terms of our capital situation, but also continue to be relatively conservative in provisioning. You see the coverage ratios compared to some other banks, while the stage 3 ratio continues to decline. So it's well below 4.2 -- 5%, even including Russia and Ukraine. And without Russia and Ukraine, it's only 3.4%. So we are getting quite far from this kind of 5% magical level, below which banks are not considered high NPL. A few more thirds as usual on Hungary, without going too much into details, it's clear that mortgage lending is much less active than it used to be due to the high rate environment. I mean, disbursements stand by 40% year-on-year applications down by 2/3 year-on-year. Some of -- I mean, it's positively surprisingly -- actually, consumer lines continue to grow even in this environment. And year-on-year, we have 8% growth. And in this segment, we continue to strengthen our market share and it even exceeded 41% in terms of cash flows. I already talked about retail deposit, so our retail deposit market share continues to increase. In corporate, large corporate volume growth basically stopped, but micro small corporates continue to grow with similar pace to last year due to this kind of subsidized program, which still exists Széchenyi Card MAX+ in the Baross Gábor program, which are still available for micro-small corporates. We continue to focus on ESG targets and recently sustained analytics improved somewhat the scoring of the group. So there's some small improvement there, which we're quite happy to see. And we continue to keep this into a strong focus. Now a bit talking about the future and expectations. The -- if you look at the macro environment, actually, this year, seems to be much better than we expected. And even these numbers seem to be quite conservative for me, regarding 23 and 24, outside Hungary, talking to our banks and management teams in each of the countries. Typically, macro expectations even for this year are stronger than what we have here. And the slowdown happens compared to last year, but not so much. And for instance, the touristic season seems to be very strong in countries of Croatia, Montenegro, Albania, Bulgaria, where they have a sizable contribution to Ural GDP. Unfortunately, Hungary is -- I mean, the most likely scenario is that we're going to stay in a recession for the remaining of the year and then come out of it only next year and kind of start to catch up to the neighboring countries. But in general, labor markets are quite tight. Everywhere is unemployment. Rates remain low. And therefore, credit quality is good, and inflation moderates quite fast, typically in all countries, including Hungary as well. I mean, we just saw the recent data coming out yesterday, and it was actually lower than market expectations shows. We continue to believe that year-end year-on-year inflation will be substantially lower than 10%. The recent expectation is actually lower than 7% for year-on-year numbers. In terms of formal management guidance, and two, we are kind of modifying the previous statements on 2 lines, basically. One is the growth of expected growth of performing low volumes. Previously, we said that we expected kind of less than 5% low-single-digit numbers of growth rate. Now after having 3% growth in the first 6 months, and again, operating environment is marginally improving in the second half of the year, we believe that we can reach 5% year-on-year FX-adjusted performing loan volume growth, obviously, without acquisition. So this is just organic. And the other line is the ROE. For it, we kind of originally said that maybe ROE can be similar to last year number, somewhere around 18%, 19%. And I'm talking here about adjusted ROEs. After having 27%, 28% in the first 6 months and credit portfolios remaining strong, it's quite likely -- and our current expectation is that the risk constraint will be lower than last year. Cost-income ratio might be somewhat better. And therefore, overall, we can have a better ROE substantially exceeding last year level for the whole year. Now with this, I'd like to conclude the presentation, the formal presentation, and I'm sure you have very good questions to ask. So please open the floor for questions.

[Operator Instructions] The first question is from the analyst of Concorde Securities.

Just 2 topics for me to discuss. The first one would be, it is very useful to see how Hungarian margins -- improved or not improved or developed in the previous quarter or this quarter. But my question would be, like what is the deposit beta in the countries, mostly euro countries where OTP was very strong? So I guess it's Bulgaria and Croatia. That would be pretty useful for me. And the second topic would be on dividends, because I can see that it's -- you provisioned like HUF 70 billion for dividends. And this is not an indication from the management. But then, could you give us some kind of indication throughout the year? Because it is quite clear that you have very strong results. You have quite a good capitalization, so this should not be a problem. And are you still in favor of cash dividends instead of share buybacks?

Yes. Deposit beta in -- retail deposit beta in Bulgaria, Croatia, Slovenia, very low. Retail deposits hardly repriced. In corporate, beta is much higher in the larger, the corporates and as we go towards institutional corporates, it gets actually quite close to even one. But for retail, it's remained very low. And obviously, that's a big question, Mark, whether it is -- this is going to stay like that or it's just -- it has not just happened yet. And obviously, it depends on our -- on the kind of competitive behavior of -- of our competitors. Dividends is too early. It's too early to talk about that. I mean, this is the -- it has -- the deduction what we applied here is according to the kind of -- this kind of European standard. We haven't -- we haven't discussed dividend payments and the magnitude of potential dividends yet in the management team. We usually do that at closer to the end of the year or after the end of the year when we have the full picture. But as we said, I mean, certainly, the results over exceeded our expectations already, and hopefully, that the rest of the year will be strong as well. So I hope there will be room for more dividends. I mean, regarding dividends versus share buybacks, again, this is something which has not been yet -- that the answer discussed in the management team. But if we continue to perform as we do, this is something we will address obviously, and I let you know, obviously, there is a...

The next question is from Gabor Kemeny, Autonomous Research.

Laszlo. A couple of questions from me, please. The first one is on the core NII. I agree that these are very useful slides on the NII walk. Can you walk us through the outlook for the second half? I would be interested in the magnitude of the potential increase in your Hungarian NII in an environment of falling rates, please. . And the other question I have is if you could comment on your M&A pipeline, please, particularly on Poland, any interest there? I'm asking this in the context of a fairly large asset being up for sale.

That's always a problem, when we kind of provide detail -- recently than we are asked to, to be very detailed in the expectations. But look, maybe we can go back to that page. Thank you. Some of these stay with us, I mean, there's another acquisition IPOTEKA, which is going to have a similar impact. So it's going to grow the interest -- noninterest-bearing assets kind of quarterly potential impact from that is like HUF 1 billion. So it's not big. We did new MREL bonds. So this kind of this MREL impact is going to continue on a marginal level to be there because in the second quarter, we did new insurances, which already partially impacted the second quarter. And as I said, we will probably have at least 1 more or probably have 1 more benchmark issuance, which is -- again, this is kind of expected to be slightly negative. And there's a big positive expected there. So if we -- so the Hungarian National Bank started to decrease the overnight rate by 1 percentage point per month. And it's already down to 15%, and we expect it to continue. And by year-end, we expect the overnight rate and the base rate together to be below 10%. And as previously discussed, our sensitivity in this range, so in the kind of in between 13% and 18% range, is roughly HUF 14 billion, HUF 15 billion annualized NII per percentage point. So if you say that there might be like 5 percentage point difference in the rate environment between the second quarter and the fourth quarter, then the quarterly impact, then the kind of NII uplift could be HUF 18 billion, right? So let's say, the expected rate development scenario separates variable results in HUF 18 billion-plus NII in the fourth quarter compared to the second quarter. So that's the kind of big plus. And then there's also lending activities, a few billion coming from new lending activity. So all in all, potentially kind of HUF 20 billion-plus, and then some minus regarding to IPOTEKA and to the new MREL issuance. Now the big unknown is this deposit line here, right? How deposit volumes are going to evolve for the remaining part of the year, especially retail deposits were -- which are quite high margins. So if you go to the -- maybe to the deposit quarterly change slide -- Yes. As you can see, in 1 quarter, there was minus 2% deposit change. And overall, deposits declined in Hungary by more than HUF 400 billion. Now if this continues like this, which I think is unlikely, so we actually expect this trend to slow down and the decline to slow down as inflation goes lower and the rate environment declines and economic activity picks up. Having said that, this is the unknown territory. And whereas we have a relatively strong view on the rate environment development and its potential impact, we have a much less strong view on the potential kind of deposit trajectory development. In a good scenario, it has -- it's going to have a small negative impact, but in the best scenario, it can even come to balance the positive impact coming from the lower rate environment. So I hope this was detailed enough. In terms of M&A pipeline, we have been quite busy. We just finished 2 big acquisitions. We keep our eyes open, and we certainly look into every meaningful opportunity in the countries where we operate and kind of around more opportunistically. But I don't have anything to share concretely on this dimension at the moment.

Thank you. All very clear. Just to quickly recap on NII. So if I understood correctly, around HUF 100 billion annualized upside from rates and volumes? Then some minor negative from IPOTEKA-MREL, and then the unknown is the deposit side. Is this roughly fair?

Yes.

The next question is from Mikhail Butkov from Goldman Sachs.

Good day. Thank you very much for the presentation, and congratulations on the results. My first question is on cost of risk and asset quality. So you have recorded quite exceptionally strong results in the second quarter of this year and then the first quarter. But one would probably agree that it is -- these levels are not those which can be named normalized levels of the cost of risk. So the question which I could have is about to some extent about the guidance for the second half of the year and the next year. So how much of the buffers are accumulated from the last years and the coverage? Do you have to keep -- to allow yourself to keep this level of cost of risk at this whole level for a couple of additional quarters? Maybe -- what maybe are the main factors which you take into account when you consider either it's -- but is there a potential to allow some additional releases of provisions and reserves for -- or it is already -- deserves to get some more normalized level of cost of risk? Then the second question which I have is on the loan growth. Following the first few rate cuts, do you see any acceleration already in the demand for loans from your clients, either on the retail side or on the corporate side? And basically, do you think that in the next year when rates will go down to single-digit area, there will be some recovery to the historical levels of lending growth potential or it can take some time? And maybe if you could provide some color on the one-offs, which you expect in the second half of the year. Thank you very much.

Okay. Asset quality, again, I mean, fundamentally, asset quality is driven by the kind of portfolio migrations and -- and portfolio migrations are very low, and the portfolio quality is very -- is quite stable. So we -- and if we look at the economic fundamentals and the operating environment, I don't see a reason why it should change. I mean the macro trajectories look positive, I mean, even exceeding expectations. So I mean, obviously, kind of big tickets kind of -- on kind of individual tickets is -- are difficult to foresee, and they might kind of happen. But on a kind of portfolio level, I just don't see portfolio quality deterioration coming in the near future or even meet future. That's 1 driver. The other driver is the IFRS 9 provisions, which are forward-looking. And once the operating environment and the macro environment expectations improve, we have to somewhat release provisions. And this is very kind of automatic. So this is kind of in a sense that it's model-driven. So we have the macro assumptions and expectations and then the models kind of provides certain release or additional provision need. And again, looking at the improving trend of the macro environment, there might be kind of further release of some provisions related to that. But that kind of conservativism compared to our peers, we would like to keep. So it doesn't mean that we kind of want to have a major release of provisions on change of methodology. This is not on the table at all. So I mean, if all goes well, and then the third factor in risk cost is the volume growth, right? One of the reasons why we have such a low risk cost is that there's not much more new volume growth. We -- again, in the new IFRS framework, we actually have to provision after every new loan when we issue the loan. I mean, that means the higher volume growth, the higher risk cost. If the volume growth is lower, the risk cost is low. So that's another factor which kind of contributes to this lower risk costs that we had seen in the first half. But all in all, the factors which affected the the first half, in my opinion, will continue into the second half. So maybe we will have kind of similar type of environment and maybe not kind of 0 levels, but certainly low levels of provisions. Loan growth, I guess you referred to Hungary because where we -- indeed, we see a strong drop in -- and especially the expectation regarding the rate environment is a strong drop even during the course of this year, in line with the kind of inflation normalization. In mortgages, we believe it will take longer for the market to recover and demand to come back. Consumer loans -- the drop in -- again, consumer loans kept growing, right, with a lower rate than they used to, but still a positive growth. And I think consumer loans will be kind of faster to recover and reach kind of previous levels of growth rates, and mortgages will take longer, potentially a couple of years to recover fully. But there might be positive surprises there as well. Now in terms of one-offs, this is a share swap kind of adjustment or fair value adjustment. It will kind of reverse in the second half as the -- as more is going to pay the dividends. And the question about the rate caps, whether they will continue into next year, we believe that in -- that, again, by year-end, the reference rate might be well below 10% or below 10%. And then certainly, the SME caps lose their relevance. And we are quite hopeful that the -- at least for mortgages, they will increase the level of the cap from 2% to closer to the market level, so maybe, I don't know, around 5%. And that means that there might be another negative one-off related to the rate caps if they are extended for mortgages, but hopefully, that number will be much, much smaller than we have seen so far for 2 reasons. One is that, hopefully, the level of the cap will be higher than the current in those, and because the reference benchmark rates will be lower, the actual difference can be even further lessened. So maybe another kind of fourth quarter negative line on the rate caps but with a much smaller number than what we have seen before.

The next question is from Mate Nemes, UBS.

I have 2 questions, please. The first one is on costs. Clearly, you're still seeing quite high underlying cost growth year-on-year, but I think on a sequential basis, the trends look somewhat better. I was wondering if you could talk a little bit about the expected seasonality and expected drivers and moving parts in the cost base in the second half of the year. Should we expect a pickup, a typical pickup towards year-end? Or this is not necessarily something that you would count on this year? The second question is on Russia. I think you're still considering strategic options in the country. Could you update us on the assessments? Are you talking to interested parties? Are you considering a potential spin-off? And also do you see a possibility about upstreaming dividend from the entity?

For seasonality, there might be some but not material fourth quarter. So there's always some items, which tend to pile up year-end, but this shouldn't be a big number. Russia strategic options, well, we continue to look for options, but it looks still very difficult to execute and especially to realize a fair deal and to realize the fair value of investment in case of a divestiture. So this is -- this, we consider very problematic and outright banned by local authorities. Dividends, we are hopeful. So we are working on upstreaming dividends, and we are quite hopeful that it's going to indeed happen. So there's some positive development on that side. And for sure, we continue to kind of narrow the scope of activities, what we provide, and we, again, discontinued international dollar transfers, which is obviously a controversial business to do in Russia, albeit extremely profitable. And as we know, in our understanding, some of our competitors continue to provide that business for Russian corporates, but we discontinued that. So that's another, I think, big step in narrowing the scope of activities and really keeping the focus only on this kind of mass market retail consumer lending profile, what we have there.

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

This is Olga Veselova from Bank of America. Before I ask my questions, I wanted to thank you for the detailed explanation of your materials, including the composition of Hungarian NII. That really answers a lot of questions, and there is a great help. My first question is about capital allocation. This combination of very solid ROE and muted loan growth brings back the question about what's your future strategy on capital allocation. Do you want to allocate anything that is above 15% CET1 into M&A? Or do you want to preserve capital given that there is this uncertainty around Russia and Ukraine? So that would be a great help to understand what's your big picture view on how to use capital the next years. My second question is again on Hungary and again on loan growth. Loan growth can be held by lower interest rates, but also partly, it was driven by state subsidized schemes. And my question is do you see capacity for the state to keep expanding subsidized lending schemes in the next year or years. My third question is why did you have provision release in Russia. And my last question is about normalized cost of risk. Could you please remind us your normalized cost of risk for the group but also maybe separately for Uzbekistan? And I know you gave us some numbers historically, but there are new parts in the situation. You have added 2 big banks due -- [ 2 big ] subsidiaries and also Russia, Ukraine still remain in the perimeter of the group. It would be great to hear what's your updated view on normalized cost of risk for the group.

Yes. Okay. So again, the second quarter was very strong and even exceeded our expectations, and after the first quarter, the Common Equity Tier 1 ratio was 14.4%. And I think few people expected it to be about 15% after the second quarter. So -- and we need -- and the trajectory indeed looks quite promising in -- but we haven't kind of digested that internally. So again, as I said answering one of the previous questions, we have not kind of structurally addressed the question of excess capital and at what level we would kind of start -- I mean, what level of dividends, what level we should start kind of maybe buying back shares and what to put aside for M&A. These are very valid questions, and this is -- we are going to address these in the near future internally, but this has not happened yet. But this is a problem, which is kind of nice to have, right? And certainly, this is somewhat earlier. We knew that this was coming, and we knew that we had to kind of [ realize these ] positive developments in the future. But it came somewhat earlier than we originally expected, which is obviously very good. Now M&As, I mean, it's -- M&As are difficult to plan, right, because it's great to have excess capital for potential acquisitions, but if there's nothing for sale, which you want to buy or not at a price, which you consider realistic or attractive, then there's not much you can do. So -- but we continue to keep our eyes open for sure. Loan growth...

Apologies. Before we move on, can I just check on this? Do you envisage potential M&A outside of CEE? Is it possible?

Like it's certainly not in the focus, and I can't think of anything at the moment really. So what do you have in mind?

Well, there are more banks for privatization in Uzbekistan.

I see. No, we just brought this one. Again, I think this is way too early. Indeed, last week, they announced that they were going to continue the process and I think even named the potential next one. We like Uzbekistan, and then the more we know, the more we like the opportunity there. On the other hand, there's a lot of work to do. So we need to transform this kind of state on -- previously state-owned organization into a modern kind of digitally driven commercial bank. And we know exactly what to do, but I mean, there's a lot to do. And we have a very strong management team already, and we try to provide every support that we can. But nevertheless, it's going to be a lot of work. But the rewards seem to be quite high as well. I'm not in a position to comment on these questions. But certainly, we are very happy with what we have brought and what we see as an opportunity there. These questions, again, we will address in due course of time. And certainly, the good performance of the group and the faster than originally expected capital accumulation provides more opportunities and more choice, right, in itself. This is very good, but we still have to work it out. Yes. Certainly, we are not -- what we are not going to do -- like I don't think we are going to buy a big Western European bank or something like that, so this is -- so there's less appetite on that front. It would be wonderful to buy more in the countries where we are present in CEE, some countries which we really like to further grow even through acquisitions, but obviously, it's always a question of what available sale is. So your second question was loan growth and versus subsidized structures. Indeed, you are very right that the previous growth was partially fueled by the subsidized structures. I mean the baby loan program is still on. It would be great to have another green housing loan program. It's not there yet, and I'm not sure there will be or not, but demand would be and in structure, it would be great. But you are also right that budgets constraints are stronger in the kind of foreseeable future than they used to be a couple of years ago. So the room for maneuvering and for providing subsidized structure is potentially somewhat less for the state and for the Central Bank than there used to be a couple of years ago. And that's going to have a somewhat negative impact on potential loan growth. But again, consumer lending seems strong even at these levels of rate environment and as the rate environment declines, we are hopeful that recovery of consumer loan growth will be quite fast, especially when we see real wages growing again potentially close to the end of this year but certainly for next year and retail consumption, which was actually kind of declining. Rates has been declining recently. Hopefully, it will come back to a meaningful growth next year. So consumer lending, we are very reasonably optimistic. As I said, mortgage lending recovery will take longer, potentially couple of years, and maybe we are going to have less subsidized structures there as you referred to. But nevertheless, [ to check that ] it should be positive, so in terms of kind of loan growth dynamics, we should see improvement. In consumer, we might reach kind of previous levels soon. In mortgages, it will take longer. Now Russian provision release, I mean, again, it's IFRS 9 driven primarily. So we always take this kind of 1-year forward-looking window and the operating environment using the macro forecast figures, and we plug them into the models, what we have, and then the macro fundamentals keeping proving. Typically, we release provisions due to the models or coming from the models. And in Russia, we particularly -- kind of we're delaying in a way this release and then we try -- we use kind of conservative approaches to the models to delay it as much as possible, but we kind of lost further reasons, and we just kind of follow the models as they are. So it's basically due to improving macro expectations and also due to strong portfolio quality. So the staging has improved and portfolio migration is very low. Actually, we have probably best ever portfolio quality in the consumer lending book, and corporate pretty much disappeared. So -- and there was a kind of a small kind of technical one-off release due to the Euroclear clearing house and the bonds there, what we created provisions, we released some because we got ruling that they will be paid, but that was a kind of smaller item. Normalized cost of risk, that's difficult. I mean, if you continue to have such a -- I mean, to be frank, I don't anymore know what the normalized cost of risk is because, I mean, certainly, it was not a big crisis, but it was certainly a considerable worsening of the external operating environment last year and this year compared to previous years. I mean -- and now I'm putting aside Russia and Ukraine but just the CEE countries. And last year, the CEE countries' risk profile continued to be as good as in -- it used to be in previous years. So it seems that the portfolio is what we have -- seem to be quite resilient, too, and in a way, structurally potentially lower risk than what we used to have. In -- I think we still need to work on that to understand the implications of this, but -- and it's -- I think it's related to overall penetration levels still being low. It's related to the job markets being tight and unemployment not going up and despite high inflations, wage inflations to be strong as well or just kind of good policy measures. I don't know. But I think kind of risk constraint surprised and positive last year and this year. And the additional provisions we created especially for Russia-Ukraine last year, they were not warranted, right? The portfolio quality is, even in those 2 countries were -- I mean, in Ukraine, we have a war and a huge war in the country, and despite of that, it's remarkable, the resilient portfolios we have. So I think these recent developments -- I mean if you want to draw a conclusion, then one conclusion might be that probably the risk profile of Central Eastern Europe beyond loan books might be more similar to Western European risk profiles than we have thought. And that means potentially structurally lower kind of normalized, if you wanted, risk constraint for the portfolios in these countries. Certainly, it helps a lot that we don't have FX loans. I think FX retail loans historically turned out to be difficult, especially if they were not in the FX currency, which was anyway related to the economy like Swiss franc or dollar or things like that. But this is something to be seen. And once you are through this kind of macro adjustment, what happened due to the war last year and this year in CEE countries, I think we will have to put some time into maybe reflecting it in our models and expected risk models because, certainly, what we have seen is better what we kind of originally had expected.

Yes. That's great. Can I just check on the Russian asset quality? You mentioned that it's actually very solid. I thought Russia has been expanding criteria of borrowers who can apply to banks for debt forgiveness. Do you have such borrowers at all or these are usually not your clients?

These are not our clients.

The next question is from Michal Konarski, mBank.

Can you hear me now?

Yes.

Yes, perfect. Sorry for that. Just a quick question about Russia. Just quite recently, press reported that Russia is planning to introduce windfall profit tax. And from what we've learned, actually, OTP probably could be subjected. So the question is do you have any preliminary calculation what would be the impact of such a windfall profit tax. And is it any meaningful number or not?

I hope they are not going to introduce windfall profit tax. No, we don't have preliminary calculation.

The next question is from Mehmet Sevim, JPMorgan.

Just one follow-up to my colleague's earlier question on NII sensitivity. Your guidance for sensitivity was HUF 15 billion for each percentage point until rates reach 13%, as you explained earlier, Laszlo. So could you please give us any indication of sensitivity for rates below 13%, if possible, maybe at least for the cuts that you're expecting by the year-end? And then on the drivers of NIM decline at core, I just wanted to follow up again on this euro open position given the 33 basis point impact there, which looks quite big. Just for me to fully understand, if you could please repeat what that is exactly, that derivatives instrument for hedging purposes. If so, does it have an expiration date? Could that positive impact reverse at some point? Any color would be very helpful.

It's HUF 7 billion approximately, the NII sensitivity below 13%. And this -- it's a hedging position. It's an investment hedge, so -- and it's an open position, a short euro position, and we have a positive carry here. So it's by quarter, right? We have this positive carry by quarter at the level of the half rate and the euro rate in the second quarter. So the HUF 14 billion is a positive carry. It's not a one-off revaluation. And it's a hedging position, so there's no P&L impact.

1okay. That's very helpful and clear. And if I may squeeze just one more and that's on Ipoteka and the consolidation. I see that the total amount of deposits that were consolidated looks somewhat smaller than what the bank itself reported earlier this year. So I just wanted to check what happened at the consolidation, if there were any adjustments. Or are these just organic outflows? And then maybe more broadly on the funding position there. Can I ask how comfortable you are there with very high LDR? Given the very strong growth profile, maybe what will be the funding strategy there going forward? Will you change? Or will you try to gather more deposits? Or will you be relying on the state funding programs, et cetera? Any color there would be very helpful as well.

Deposit points, I'm not aware of kind of declines. We did a PPA, and we assume -- we did adjustments on the kind of asset and liability side based on the customer values. I'm not aware of this being negative. So I don't have an immediate question -- answer to that. In terms of loan-to-deposit ratio, yes, it's high. And we definitely will continue to rely on the state-subsidized structures for the current of the current portfolio for sure, and the current refinancing structures will continue. And if there will be any further subsidized program, we definitely want to be part of that game. So yes, I mean, these kind of subsidized state programs, we want to participate. If you -- I mean, the loan-to-deposit ratio, if you actually take out the refinance part, so the subsidized funding, then the loan-to-deposit ratio without this is like 200%, which is still high but not as high as including the state-funded structures. And certainly, one of the strategic kind of goals is to reduce the loan-to-deposit ratio and to increase deposit volumes, especially retail deposits.

[Operator Instructions] Yes, there is a question from Simon Nellis, Citigroup.

A quick one from me. Just on Romania, if you could update us on how the sale is going and any thoughts on where you deploy that capital?

The process of exploring potential demand is in progress, right? So this -- the process is ongoing. We have received indicative offers, and we are in the process of -- or the potential interested parties are in the process of generating binding offers, and once we receive them, we will make a decision whether selling or not selling the asset. There seem to be strong interest for the asset, so that's sort of the positive.

And in terms of if you do sell it, the capital distribution, I mean, would you be looking to increase the dividend payout maybe a bit?

It's a very relative -- relevant question. Look, given the timing of potential transactions, at best, we can get to an SBA signing stage kind of closer to the end of the year. And then regulatory approval process can be quite a lengthy one. In -- Slovenia took almost 2 years, so I hope it won't take that long. But it will take quite some time. So I'm afraid this question will be practical -- we want to be practical -- yes, kind of...

Okay. I'll save it.

But don't forget it because [ it's important ].

I'll save it for next year.

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

Thank you very much. Thank you for attending this conf call middle of summer when all of us would probably rather be on vacation, so that's highly appreciated. Thank you for the good questions. I wish you all the best, and I hope you will join us in November when we present the third quarter numbers. Thank you very much. Bye-bye.

Thank you for your participation. The second quarter 2023 conference call is closed now.