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

Ladies and gentlemen, welcome to the second quarter 2024 conference call of OTP Bank. Please note that this call will be recorded. [Operator Instructions] May I now hand you over to Laszlo Bencsik, Chief Financial and Strategic Officer. Laszlo, the floor is open.

Thank you. Good morning or good afternoon depending where you are. And thank you for joining us today on OTP Group quarterly stock exchange report related conference call. Especially thank you for joining us today when it's kind of mid-summer. And I'm sure there are, on Friday afternoon, so there might be other potential opportunities to spend your time. So thank you for deciding to listening to this presentation and Q&A. So starting the story on Page 3 of the presentation, which is kind of, you can see it and it's also available on the website, so you can download it as usual. The half year profit was HUF 508 billion consolidated after tax, which I mean, bottom line wise is less than the first half of last year, but first half of last year was boosted by the two acquisitions which were concluded in the first and second quarters of last year, and both of them happened with the badwill and therefore close to HUF 180 billion kind of one-off we booked in the first half of last year. Now, if we take this number out from the base and the year-on-year improvement was actually 28% of the after-tax profit. Second quarter was strong, I mean, as well, 12% quarter-on-quarter increase partially due to lower regulatory charges, as you probably remember the whole for -- we accounted for the bank tax and the special bank tax for the entire year in the first quarter, and some other supervisory fees and charges as well outside Hungary. So that kind of had an impact on the base as well on a quarterly basis. In a year-on-year comparison, the kind of biggest improvement happened in the net interest margin. First half of last year was still characterized by this very excessive part of the period last year, close 18% level external rate environment, which did not help our margins. So we especially in Hungary had a lower than usual net interest margin that normalized by the end of last year. And since then, it has been made more or less stable around this kind of 4.3% level. We, after the closing of the first half, at the end of July, we concluded the transaction of selling our Romanian business after 20 years of ownership. And the financial, the kind of final financial impact of that transaction will obviously will be seen in the third quarter this year, namely the gain on the capital ratios. So you can expect, I mean, on a pro forma basis, because obviously we don't know how the balance sheet is going to look like at the end of the third quarter, but if we like, let's say, assume that the sale had happened at the end of the second quarter, then you can see on this page the potential impact improvement on the common equity tier one and capital adequacy ratios. So in the range of 56 and 61 basis points. So this is what you can expect to happen, or kind of in ballpark numbers to happen at the end of the third quarter. If you look at the PLL lines then I think the most important one is probably this 20% increase in operating profit year-on-year first half without the effect of acquisitions and without FX changes as well. So just a kind of baseline comparable business activity year-on-year generated 20% more operating profits organically. And again, this is to some extent driven or to a large extent actually driven by improvement in margins. I'm sure you notice the somewhat higher risk cost in the second quarter. We are not kind of used to these levels of numbers on a quarterly basis, HUF 46 billion. But part of that, or actually most of it is related to events which are not so much connected to the daily activities. And if we had not changed our methodology starting from this year, we would have shown part of -- two items from this HUF 46 billion as one-offs, namely the increased provisions on the Russian bonds in Hungary and in Bulgaria. We started to do that in '22. And in '22 it was a one-off adjustment item. And the other one is the impact of the extension of the rate caps in Hungary by another 6 months. And these together had a almost 30 billion half equivalent impact. But I mean, I'm going to explain it later on when, when we have a slide about base cost. But again, out of this HUF 46 billion, roughly HUF 30 billion, the close HUF 30 billion is related to items which under the old methodology we used to have would've been one-off items. Going briefly into the Hungarian story, which is still our biggest member or contributor, single contributor to the group results. I mean, all in all in terms of after-tax profit, the Hungarian kind of banking activity contribution was 28% and still by far the largest, but nevertheless in terms of sharing the total declining part. So the same story is being told on this slide, slide 5, a big improvement in that interest margin year-on-year compared the first half of last year. And that resulted in a strong improvement in earnings. And on top of the improvement in margins, we had less kind of regulatory charges in the first half of this year than last year. In the kind of right bottom corner, you see the special levies and other charges in Hungary. And here we compare the first half last year to this year. So last year they amounted to HUF 138 billion first half this year only HUF 97 billion, which is still a huge number by the way, but at least lower than last year first half. The other kind of -- we kind of explained part of these kind of one-offs non-recurring items here on the left lower slide of the slide especially the impairment on the Russian bonds in the -- again, the -- which kind of are held by Hungarian entity and also the impact of this [indiscernible] in Hungary. My usual two slides about the Hungarian retail and corporate activities. Hungarian retail lending accelerated especially mortgage lending. And you might remember that last year we had a relatively modest growth in mortgages, only 4% in a whole year. Now, this year, only in the second quarter, we grew 4% volume-wise in mortgages. And if we compare the total new contractual amount, so basically new business generation first half this year to first half last year, then the increase was 2.6x last year volumes. Obviously last year was very low after a quite strong '22 number, '23 first half kind of dropped like 50%. But it does seem to be a kind of fast recovery from the last year debt in new mortgage generation. And the other segment of the retail market, consumer loans is also strong. Last year this segment actually grew quite strongly. 16% was the annual growth last year. And this segment kept growing. So in the first 6 months this year for 4% growth so the kind of growth rates somewhat slowed down, but now we have a much larger base than at the beginning of last year. Plus if you look at kind of new volume generation, new volume generation, new contractual amounts in the first half year of this year, were more than 60% higher than first 6 months last year. The corporate story is somewhat different. Still on a corporate market, especially mid and large corporate. We don't yet see clear signs of revival and the return of client loan demand. And we see some, albeit small growth in micro and small, which is primarily fueled by the still available subsidized products to this segment, mostly this Szechenyi Card MAX+ program which is available for micro, small companies. So in that segment, we see some increase in volumes and loan demand, but not much in mid and large corporate. Now, this kind of picture maybe not as polarizes in Hungary, but still applies to most of the region. So we typically see higher loan and demand in retail than in corporate across the countries in the CE region. In terms of profitability and actual net profit of -- net income of our foreign subsidiaries, foreign group members, I think across the board, quite strong performance in terms of nominal profits and in terms of return rates potentially with the exception of Romania which had only 2% return on equity in the first half of this year. But here the news is again that we actually concluded this transaction and divested this asset from the group. Looking into kind of the [indiscernible] lines across the kind of cross section within the group. And trying to understand a bit more there, development drivers and dynamics. Page 9 describes net interest income development year-on-year and quarter-on-quarter. And especially the year-on-year numbers where appropriate have been adjusted by the new acquisitions. So where you see actually two numbers, the second number is the without acquisition numbers. So all in all, I mean without the impact of acquisitions year-on-year net interest income in the first half of the year increased by 25 percent. And Hungary is obviously very strong. 50% year-on-year increase. Again, this is mostly attributable to the margin improvement compared to last year. And then we have the Eurozone or Eurozone related countries Slovenia, Croatia Montenegro, which uses the euro despite not being in the Eurozone and Bulgaria which is already in the [ RM2 ]. [indiscernible] for more than 20 years. So it's quasi Eurozone country in terms of rate environment, at least it is. And as you can see, strong 20-plus percent typical year-on-year improvements, which are again related to margin improvements as well. And, but in some countries obviously we have strong volume dynamics as well. Now one maybe surprising number here on this chart is the minus 6% in case of Uzbekistan Ipoteka on a quarterly-on-quarter basis. So the second quarter was 6% lower than the first quarter in terms of net interest income. Now this comes primarily from volume dynamics. In order to kind of pile up some liquidity for future expected loan growth, financing in local currency and partially just strategically to reduce the loan-to-deposit ratio, you will see that deposit growth is exceptionally strong. And at the same time, basically unrelated to this, but loan growth was quite modest, which is a big change compared to the second half of last year and the first quarter, especially in retail. And that's because we just sold so much loans in the previous quarters that we had to kind of slow down in a way, artificially our loan production in order to catch up with operations basically with the IT and organizational capabilities of servicing and managing these loans. So that's a temporary situation. And hopefully, we can kind of change back years to very high years in the kind of later part of this year, maybe fourth quarter, by then we should be able to address most of these operational weaknesses, so to say. So the market is still quite strong. So in a way, it said that we cannot keep pace with pace with it, but that's the reality at the moment. Margins on Page 10, more or less reflect the same trends, strong improvement in Hungary and in the euro-related countries. And in Uzbekistan, a decline in margins due to increase in deposits. And by the way, deposit rates increase as well. So that's how we managed to get more volumes in. So that actually resulted in lower margins. On Page 11, you see the kind of waterfall explanation of the quarter-on-quarter change in the net interest margin, which was rather small, altogether 3 basis points. More interesting on this slide, we put up the euro rate sensitivity and the off-rate sensitivity. I mean, these are assuming a shift -- a movement, a parallel shift in the yield curves, in the relevant yield curves and the kind of 12 months effect or impact of that yield curve shift on the NII theoretically, assuming a stable balance sheet or stable volumes. And in case of euro, this sensitivity decreased EUR 210 million per on an annual basis for 100 basis points shift downward obviously. So if the euro rate goes down, our NII goes down by EUR 110 million. And sure, you noticed that this is a smaller number that what we talked about a quarter before or 6 months before. So we are in the process of trying to moderate this interest rate risk primarily by buying fixed euro assets but also through [ IRSS ]. But it's still a meaningful and potentially negative situation since the -- obviously the expectation is that euro rates will decline and therefore part of this NII decline, at least on a kind of pro forma basis is going to manifest. In case of the half rate, as similar to the previous 2 periods, we kind of reached the -- previous period, we reached a rate environment where the kind of 100 bps change would not have a material impact on the expected NII for the next year. So we are pretty much at a low, very low interest straight risk situation related to the half part of the book. Now volume trends, as we -- as I kind of started to talk about this. So as you can see, in the second quarter, overall, volume dynamics improved compared to the first quarter. So the first quarter grew by 2%, second quarter 3% altogether. And therefore, we ended up having 5% growth in the first 6 months. And this was one of the parameters in which we gave some guidance at the beginning of the year. We said that we expected better volume dynamics this year in loans than last year. Last year, in the full year was 6% growth. So this year, in the first half, we already achieved 5%. So I think we can be fairly optimistic to expect that -- this 6% which we had last year will be surpassed this year. So it's an overall improvement compared to last year. And even if you look between the quarters, the second quarter seem to be stronger than the first quarter, especially in countries like Bulgaria, Croatia, Serbia, Albania, Montenegro, we see 4%, 5% overall volume growth just in 1 quarter. So these are not annualized numbers. Obviously these are quarter-on-quarter numbers. We are very happy to see that in Ukraine, after a relatively long period of decline in loan volumes, we managed to restart lending again. We see demand, which is justifiable and makes sense from a perspective. So we started to reignite our lending activities to some extent, albeit from a very low base, obviously in Ukraine, but in 1 quarter we achieved 11%. And here you can see this kind of Uzbekistan situation. Ipoteka only 2% quarterly growth in consumer loans and mortgages, which is much lower than what we were used to in the previous 3 quarters since we started to own the bank last year at the end of the second quarter. And in Hungary, again, strong, as you can see, 2% consumer loan growth and 4% mortgage growth in the second quarter and corporate sale negative. So this is something I talked about before. Okay, Page 13, I covered, and then it leads us to deposit dynamics, which is, again, very positive, especially in Hungary. You may remember that last year, one of our biggest problem was the decline of retail deposits overall on the Hungarian market. So this is specific to OTP. Actually, the decline was less in our case than in the market. But nevertheless, it was very painful. In 1 year, between the mid-'22 to mid-'23, retail deposits declined by 10% roughly in our case. And that had a huge impact, huge negative impact on the margin, given that we don't pay much not just us, most of the banks in Hungary, don't pay much interest on retail deposits. Now this trend has changed, and this is crucially important for the future development of our earnings in Hungary. So the first 6 months retail deposits grew 5%, in the second quarter 2%. So that seems to be now a well-established new trend. And the other number which is interesting on this slide is the, I think, the strong growth in Ipoteka 17% in just 1 quarter. So this is kind of the developments I described earlier. Now leaving net interest income behind, we reached on Page 16, the net fee income details. Fee income growth without the impact of the acquisitions was 14% year-on-year. And here you can see the per-country numbers, Hungary 13% year-on-year, 16% quarter-on-quarter. The quarter-on-quarter in other countries as well, quite strong, especially in those countries where -- which are more kind of tourism-dominated or where tourism is strong. There we usually have the seasonality that the first quarter is much slower than the second quarter, plus some repricing also happened, especially in Hungary, we adjusted our fee prices in March this year, given the [indiscernible] inflation last year in the country there was also possible. The other kind of strong increase happened in Hungarian fund management, more than 50% -- almost 60% growth year-on-year in fee income. And this is just related to the surge in the asset under management in the high rate environment fund assets under management in feed on the market and for our asset management company, which is by far the largest one in Hungary as well. So this is also kind of structural change. Other income, now the other income line is heavily again affected by the fair value adjustment, we always have to -- we have to mark-to-market part of our assets, namely the subsidized housing loans and the baby loans. And this exercise results in fair value adjustments up and down depending on the kind of shape shifts of the yield curve. So it's not just the increase or the decrease or the shift. It's also the shape of the yield curve effect the fair value adjustment. And last year, it was a big positive number. For the whole year, it was around HUF 80 billion and part of that was in the first half. This year, in the second half we had HUF 6 billion positive, but the first quarter was actually negative. So I mean, so far this year, it's plus 0, the impact of this fair value adjustment of these loans. And in the second quarter we received HUF 10 million dividends from the shares that we own at more -- the more shares that we own, sorry. That's the Hungarian oil company. You may remember that we have a share swap. We [indiscernible] I mean, almost, I mean, more than 10 years for sure, 12, 13 years, and we benefit from the dividends paid by more on these shares. The cost dynamics, cost dynamics was 10% year-on-year with our acquisitions. Hungary was 6%, and this is, I think, an important development that we managed to slow down the Hungarian cost increase and despite a very high inflation which we still had last year in Hungary. And then Bulgaria, relatively high growth, but this is related to the very dynamic business activity and transformation work what we do there. In case of Slovenia, 19% year-on-year growth organically, but this is -- and I mean, Slovenia is to be worse because we expect to conclude the merger of NKBM and SKB are 2 banks in Slovenia, very soon. So during this quarter we intend to -- we plan to finalize the merger. And then after that, we expect cost synergies to be realized there. So hopefully, when we kind of next year, we look into the year-on-year development, of course, we will be able to identify the positive impact of cost synergies being manifested. Just like we can see in case of Albania, as you can see, it's minus 15% year-on-year for 6 months, and this is due to the fact that we concluded the merger in Albania close to the end of last year, in November, early December, and we already realized most of the cost synergies during the first 6 months of this year. Now risk costs, again this is an unusually high number, minus -- I mean, HUF 46 billion of risk cost in 1 quarter. I mean, whereas in previous quarters, we were more used to 0 or kind of even plus numbers. Again, if you look at the content of this number, most of these HUF 46 billion manifested in Hungary, HUF 39 billion. And that HUF 39 million includes, on the other risk cost line, the HUF 22 billion provision for the Russia bonds what we have in Hungary. Altogether, probably it's an interesting information. So the total volume of what we earn of Russia sovereign bonds is HUF 28 billion. And including this latest provisioning, we provisioned 57% on this. So the net value is HUF 56 billion. Most of these bonds are in the Hungarian books, some of them in the Bulgarian one. Now out of this HUF 128 billion notional amount, HUF 110 billion has not [indiscernible] its maturity. And actually, these bonds are paying regular coupons. So we received regular coupon payments for these bonds. Therefore, I mean this kind of high level of provisioning might be surprising, but certainly, there are difficult to identify levels of risk related future payments and ultimate repayments of these still outstanding bonds, therefore, in line with the expectations from the Hungarian Central Bank as supervise we increase provisioning on these exposures. Now if the situation doesn't change, so if it continues as it is, we will continue to receive coupon payments and hopefully also full repayment of these bonds might be expected. And in that good scenario obviously most of these provisions will be written back. But that is difficult to foresee and certainly at risk. And therefore I think it was a prudent conservative decision to increase provisions on these exposures. But this is certainly not related to any normal business activity what we have within the group. The other item, which is included in this Hungarian risk cost is this HUF 5.6 billion provision which actually appears among risk cost and not other risk costs for the extension of the interest rate cap on the variable mortgages in Hungary, which is now 10% of our total mortgage volumes in the country. The remaining part, so the remaining roughly HUF 9 billion is related to coming from basically for corporate exposures, which we classified from Stage 2 to Stage 3, not all the HUF 9 billion, but roughly kind of HUF 6 billion, HUF 6.5 billion. So the most of this is related to for corporate exposure. In overall credit quality in terms of Stage 3 ratio, the group level was stable quarter-on-quarter. Hungary increased. As I mentioned, we increased -- we moved certain corporate exposures, a handful of them from Stage 2 to Stage 3. And therefore, the Hungarian Stage 3 ratio increased and Stage 2 ratio decreased. And given the size of the Hungarian portfolio, it had actually visible impact on the group level as well. As you can see, I mean, that's behind the stage to decrease more or less. Coverage levels have not materially changed. On Page 21 you see the development of our capital ratios, common equity Tier 1 went up to 17.4%. Capital adequacy ratio actually decreased 10 basis points. And this is due to the fact that we repaid the Tier 2 subordinated bonds what we issued back in 2019. So they became callable and we called them. It was HUF 500 million. So that disappeared from our subordinated capital, so therefore had a negative impact on the ratio. Nevertheless, due to the very high level of common equity Tier 1 is still a comfortable level of capital ratio. Here you can see the -- on this page as will the kind of water flow component of the change in the common equity Tier 1 ratio, which improved 180 basis points during the period -- no 80. And 170 basis points was the impact of the profits after kind of deductible dividends, and that kind of shows the property generation or capital generation capacity of the bank just in 6 months. On Page 22, liquidity remains strong. We did a couple of issuances during the course of this year. Senior preferred MREL eligible bonds in order to maintain our MREL adequacy, given the paying back of the Tier 2 bonds and also we paid back another senior preferred bond that matured in the second quarter. Actually didn't mature. Sorry, there was a call date for this rather [indiscernible]. In terms of expectations for the rest of the year, this year, from the perspective of the external environment does seem to be better and improved compared to last year. This is very obvious from the macro parameters we observe, and we believe that the rest of the year should continue to be supportive. Therefore, we look optimistically in the future [indiscernible]. Eventually, the only kind of missing part from an almost full picture is corporate loan demand growth, which is rather muted, especially in Hungary, but also in the other CE countries it's relatively slow. So that's the kind of next lever what we are looking for, what we are waiting for a recovery in corporate loan demands. Looking into our management guidance on the last page, we pretty much maintain the expectations what we formulated at the beginning of the year. And the only exception is the net interest margin where we believe that it's high time to acknowledge much better performance what we originally expected. Originally guided for similar net interest margin on a group level to last year, that was 3.9%. Now the first 6 months is more closer to 4.3%, and that's primarily due to, I would say, 2 factors. One is that the euro rate environment remains higher longer than we originally expected, and the other one is the preferable developments in Hungary and retail deposits, which has a strong impact on our NIM, especially in Hungary, but also for the whole group. So that was it more or less a formal presentation. I'm sure you have very exciting and interesting questions. So please ask them.

[Operator Instructions] The first question is for Gabor Kemeny.

My first question is on buybacks. I mean your current program is coming to an end. How do you think about launching a new one? And are you planning to cancel the shares, which you have bought back? The other question would be a broader one on your capital deployment plans. If you can share your latest thoughts, please. Now on a pro forma basis, your CET1 ratio is approaching 18%, and you are clearly generating enough profits to support your balance sheet growth. So what is the latest on M&A versus distributions? And the final question will be on the financial transaction tax, please. You offered this useful guidance on the 2024 impact from the [indiscernible] taxes, how do you see the effect of all these in 2025? I guess we saw some news on SME fee hikes. I saw today something about raising mortgage rates to 8%. So it would be helpful if you could give us a sense on what the bottom line impact might be from these measures.

Very pertinent questions indeed, thank you. Buybacks. Indeed we are reaching the end of the previous program, which is started in February. And this is obviously something which we consider. So we give a careful consideration to this question or opportunity. At this event or time, allow me not to say more. I think we will continue the practice which we have done before, namely that we announced buy back around on the day when we have -- if we have an approval for a tranche of buybacks, right? So I can't say really more than this. As a tool, this is obviously part of our -- of the universe that we kind of consider as a strong element of our capital strategy, our capital deployment plan as you phrased it. But as you rightly said, this has to be put into perspective and with the -- together with the potential acquisition opportunities. So we are trying to navigate optimally in this field between dividends, buybacks and, first of all, organic growth because organic growth is priority and organic growth started to kind of strengthen. Again, last year, we had 6% growth for the whole year this year already in the first 6 months, loan volume growth was 5%. So now organic growth is becoming a strong and very well [indiscernible] obviously factor in this equation. So first priority organic growth, and then we continue to actively look at value-creating acquisition opportunities as we have done during the last 20 years, and they may or may not come. And depending on whether they do come or don't come, we can obviously return more to shareholders in the form of dividends and buybacks. So that's more or less the kind of fuller picture, which has not changed. It continues to be our kind of high-level thinking about capital allocation. In terms of what volumes exactly and when, again, we stick to our previous practice, so we will announce further actions when they become effective. Cancellation, you also asked about this. That's a bit more complicated process. We need shareholders' approval for that. So we need a shareholders' meeting, an AGM to approve any cancellation of shares. So I think we are -- I say in the next kind of early as this can happen is next year, April to have a decision about this. This, we have not so much considered so far. You probably very well know that we have not ever canceled any share. On the other hand, more importantly, we have never ever issued new shares since the IPO in '95-'96. So the same share count since then, same number of shares. So that's something, obviously, we will kind of consider and think about, but not -- this is not something imminent to consider actually due to the kind of more complicated approval process and also due to the fact that after this buying back this HUF 60 billion, we have roughly 1.5% treasury shares of the total share count, which is not yet a huge amount, I would say. So maybe it makes more sense for us to accumulate and then address the question of canceling or not canceling them. Transaction tax for next year, indeed we told that for this year [indiscernible] increase the impact of the increase of the parameters of the transaction tax, translate into HUF 25 billion more transaction tax for the remaining part of this year. Well, this is for 6 months. So you can imagine that the increase for the whole year next year will be at least double plus the volume impact coming from the higher volume of transactions. So this is a substantial amount. We are not allowed to pass this through to clients for retail clients this year. There's no rule against passing it through to corporate clients. And indeed, we are just following the practice of our competitors who started to pass this on to their corporate clients. So we are going to do that where we started to do that as well, like for the other banks. I mean, how much we can pass on to next year to retail will depend obviously on the kind of competitive pricing situation and the competitive moves of our competitors in the country, which I cannot foresee.

The next question is from Mate Nemes, UBS.

I have 3 questions, please. The first one is on Bulgaria. There, I think you flagged that clearly there is still an ongoing restructuring at the bank happening. There are certainly some sites you're seeing branches, I think, down 5% quarter-on-quarter. Costs are still around HUF 25 billion of in the second quarter. I'm just wondering if you could give us some indication here what the time line is and what sort of decline we should expect in the cost base, i.e., how much of restructuring costs are in there? And then what is the savings that you expect as a result? The second question would be on corporate loan growth. I'm just wondering if you could talk a little bit about the potential recovery of volume growth, not only in Hungary, but perhaps across the entire region. What would be the preconditions for a sustained pickup here? And the last question would be the -- on the Russian bonds. Could you comment on the remaining maturity of these bonds? And also what could trigger further increase on coverage of these bonds?

Bulgaria, I'm sorry if I use the word restructuring. That's probably not the right it's more transformation. And this transformation really started when we brought Soc Gen Bulgaria back in '19 and the [indiscernible] the merger. Since then, we have been in permanent transformation, so to say. And I think we are kind of building a very more a very competitive bank. It's not about cost reduction or cost cutting in a way. I mean actually, cost efficiency is extremely good. If you look at the cost-to-income ratio of Bulgaria or if you look at the return on equity in Bulgaria, the current one, we make 22% return on equity. And this is a quasi-eurozone country. Last year it was 24%. Capital requirements are extremely high due to being supervised by ECB directly and the Bulgarian National Bank as an additional layer, they keep on piling up capital requirements on us. So we have actually the highest capital requirement and therefore, very low leverage in Bulgaria. And despite of that, we make this 20%-plus ROE. And if you look at kind of growth, last year, loan volumes grew 20% in Bulgaria, right? This was the highest by far in CE. And then potentially, I think the highest in -- across Europe, I don't think there are very many banks growing organically. I mean, big systemic banks. We have -- I mean, we have the largest loan volume in Bulgaria. So 20% last year. And in the first half of this year, it's 88%. Again, I think, quite strong. So yes, so it's a very rapid, strong growth, which is very profitable. So we're quite happy with all the ratios, including operational efficiency. But what we do in order to maintain these dynamics and assure that the bank will excel in terms of performance in the future mid-long term, we are transforming more or less everything, right? I mean, only part of this is visible for the outside because we do a lot of work on improving our digital channels, for instance, we changed the mobile bank, the Internet bank and this is going to come to the market at the end of the year. There will be a huge improvement compared to what we have, we basically do process reengineering in a way that we try to digitalize everything end-to-end front to back, change the organizational kind of -- it's agile, but it's a kind of advanced agile approach, while we have and a lot of other stuff, I mean not to mention the fact that since October 2020, we have been under the direct supervision of ECB because Bulgaria entered the single supervisory mechanism. And we are a systemic bank there, but we don't belong -- our Bulgarian bank belongs to the OTP Group, which is, as a group supervised by the Hungarian supervisor, Hungarian National Bank and not by ECB. All the other systemic banks in Bulgaria on the group level are supervised by ECB. So there's not much kind of local presence there from ECB, unlike in our case, where we have a kind of daily, very fruitful actually, work with ECB and has been quite an exciting story so far to bring -- to change the bank the way it operates according to their requirements as well. And at the same time, achieve these levels of growth and profitability. So it's not about cost saving and it's not about fixing a problem. It's about further transformation to create the best platform for future high performance in Bulgaria. Corporate loan growth sustained pickup. That's difficult. I mean ultimately, corporate activity in Central Eastern Europe is closely related to core European economic development in general and corporate activity in general. So here, we are to a large extent in the hands of Germany, Austria and in general core Europe. And I wish I could say that I'm very optimistic on the development potential of core Europe, I'm not. So that means that I think that -- I mean it is a general problem for Europe, obviously, and it is somewhat a problem for CE. But the good thing is that CE has other levers. There's still convergence. There's still local demand, which is strong and still lots of FDI coming to the region, especially due to this kind of supply chain arrangement as capacities move back to closer to Europe and then also in case of Hungary especially we see a bunch of investors from Asia bringing in substantial FDI. So I think CE has the better positioning than core Europe in terms of growth potential, but a stronger underlying driver behind this is still and will be in a future the performance of core Europe. And I mean, kind of we might have different views on that. I'm not very optimistic, to be honest. But I hope I will be proved wrong. So we expect gradual improvement in -- from a low base, albeit. So the second half, we expect to be better in corporate lending than the first half. But to be honest, I don't know when we can get back to double-digit corporate loan growth across the region in corporate. That may not happen during the next 6 months. Your third question was -- sorry.

It was on the Russian bonds.

Yes, the bonds, yes. In maturity, yes. I mean, it will sort to mature next year and then it's the -- starting from next year, the next 2, 3 years. That's the kind of gradually or kind of more or less evenly distributed. If the current situation changes negatively, then either because of the legal environment or in terms of the current, I mean, stopping the payments in for of the coupons or something like that. I'm sure we'll have to revisit the situation. But to be honest, my feeling today is that we are quite conservatively provisioned. And if the current situation persists, then it might happen that a big chunk of these provisions, what we created so far might be released.

The next question is from Simon Nellis, Citi Group.

I was hoping you could elaborate a bit more on the interest rate sensitivity. I mean in one quarter, the euro interest rate sensitivity went down by HUF 30 million for each 100 basis point rate cut. So do you think you can bring that down further going forward? And I guess the analysis is kind of on a static balance sheet. Are there any -- as you change the balance sheet, I guess that's my question is as you change the balance sheet can you further reduce that sensitivity? And then on the Hungarian margin, at what level of Hungarian rates would you actually start seeing pressure on your Hungarian margin? And what is your rate view for Hungary? And then I have a few other more technical questions. So maybe let's take that one first.

Yes, I mean, the sensitivity decreased because we brought fixed assets, fixed securities, euro-denominated, and we made some IRS kind of deals, which further reduce this. Having said that, that's more -- that's less important in this case or less of a useful tool because it's difficult to kind of make them a kind of hedge accounting subject to hedge accounting. Therefore, big volumes with -- of IRS would imply big swings in earnings if there's mark-to-market event. So we don't want to do them in big volumes. So it's basically buying fixed securities euro-denominated. And it's a fixed balance sheet in a sense that it's fixed for the next 12 months, right? So this is not the same balance sheet. So the quarterly change includes the impact of changes in the balance sheet during that quarter, right? And fixed balance sheet means that it's fixed at the end of the second quarter this year and what would be the NII impact if the yield curve shifted 1st of July by 100 basis points. So that's how we calculate that. The expectation is that it can be further reduced, yes. So the direction is that it will be further reduced maybe not with the same big steps, maybe smaller quarterly steps, but the direction should be for smaller amounts for the future. Hungarian margin, again, it's less the interest rate itself now, which matters. It's much more the deposit volumes, retail deposit volumes, especially in the stability of retail deposit rates, very important. Those are actually much more important variables for us than the rate itself, unless the rate goes down to 0, right? So that's -- but that's unlikely. But if it's like 6%, 5%, it's still the same environment. Now 2%, 3%, it kind of -- it's getting to a different range. But again, it is much more important that we have a kind of healthy and kind of normal growth of retail deposits in the future and then that the retail deposit rates are not going to change on the market in the future. So these are potentially much more important factors. And then the other thing is that again, there's a lot of noise in the Hungarian net interest margin coming from the fact that it's not just a bank, it's also the holding entity of the entire group. Therefore, a lot of kind of liquidity, which is related to operating the group is flowing through the Hungarian entity. That's one thing. The other thing is that all the investments into the whole group are held at the Hungarian bank, and there's another interest bearing. And if we have another big acquisition, that's going to very naturally have another negative impact on the Hungarian NIM. And then recently this large issuance of, from our perspective, very expensive bonds, MREL eligible bonds, again, most of the negative impact of those bonds manifested in the Hungarian entity. So those are the other factors which need to be taken into consideration, and that makes the whole picture rather more complicated. That it's not just the Hungarian activities and business-related impact what we have included in the Hungarian margin, but all -- everything else which comes from the fact that we are holding entity as well for the entire group. And now the entire group is a much bigger size than the Hungarian entity. Yes, so that was a rather long answer.

That's very helpful. Yes, my technical questions are, you mentioned the expectation for financial transaction tax next year. Can you give us some hints on what you think the windfall profit tax will be, I guess it's difficult because we don't know the exact calculation, but I guess you have some preliminary kind of ideas of what the government is thinking.

As you rightly said, it's difficult. The only indication that we -- which was actually communicated by the government that they want to collect at least as much as they collect this year. And after the, assuming this 50% discount that everyone can apply that then this year they will collect roughly HUF 130 billion from the whole sector in terms of the extra profit tax. That's what their expectation, the government's expectations. So all in all, may be a similar number for next year. And this year, we -- I mean, our extra profit tax payments are quite volatile. So to say in '22, we paid HUF 75 billion. By the way, '22 was the year when the Hungarian operation was loss-making. So due to all the impact of the war, right, I mean all the extra provisions we had to make and the write-offs we had to make. So the tax base of this extra profit tax, actually, '22 was a big negative number, right? And despite of that, we paid HUF 75 billion. And then HUF 23 million we paid HUF 41 million. And this year, if you assume the 50% discount, then we're going to pay HUF 6.5 billion. Due to the fact that this year, corporate -- extra profit tax is actually calculated based on the '22 before tax numbers, which in our case were actually negative and OTP Bank was a big negative. And then there are other entities which pay this extra profit tax, like the mortgage bank, our work at [indiscernible] Merkantil Bank, our car leasing company and they pay. So the reason we are paying at all this year is that these entities are paying. So that's where the HUF 6.5 billion comes from, assuming that we can reduce the HUF 13 billion to HUF 6.5 billion by buying government bonds, which we have, right? So Nellis, and then the other thing they said that they will move the tax base from '22 to '23 profits. Now the total banking sector profits from '22 to '23 before tax without dividends grew 4x. So they will have to change something in the ratio as well. And as you said, I mean we just don't know how they're going to calculate the actual payment. What we know that, all in all, they want to collect at least a similar amount and -- than they plan to collect this year. And that in order to have this 50% discount or reduction in the tax payment, we will have to increase not just the long duration government bond volumes, but the overall Hungarian government bond volumes as well, and it's going to be the first 11 months average volume year-on-year growth. And for both the total volume and for the kind of longer maturity volumes as well, we have to demonstrate growth and 10% of that average volume growth we can deduct from the tax payment. And it can be maximum 50% deduction. And this 160 is assuming 130 for the whole sector assumes this 50% deduction or discount for the tax payment for the whole sector. So I don't know how much we are going to pay from this 130 for the whole sector next year. Probably more than the...

Probably more than -- yes, that's what I was going to say.

Probably more than the 6.5. That's very, very likely.

Okay. And then just one last quick one on the financial transaction tax. The numbers you're giving, that's gross before any mitigation, right? So you could mitigate that through passing on some of it to corporate clients.

Yes, yes, yes. This is tax payments...

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

This betas [indiscernible] from PKO BP Securities. I have 2 actually, one or the cost of risk. From what I recall, OTP factoring usually contributed positively in the amount of between HUF 15 billion to HUF 20 billion per quarter positively in terms of provisioning releases. Has there been such positive contribution in the second Q as well? Or if not, has anything changed with regard to the second half of '24? So that's question number one. The other one is related to migration out of Stage 2 into Stage 3 exposures in Hungary in the corporate segment. Could you please give us possibly more color whether it was concentrated in a specific sector or it was more coincident spread among different sectors?

There hasn't been any kind of change in terms of -- or kind of one-off change or any extraordinary change in the contribution of the factoring entity to the workout entity in Hungary to the group in terms of recoveries. The only difference is that this is an ever-decreasing number due to the fact that there's not much new production in terms of nonperforming lots. So -- and this is a very good situation that quarter-on-quarter, they have less and less work to do, so to say, in a way of -- at least in terms of new inflows. Therefore, this is a structurally declining amount. But this kind of, you might say, unusually high risk cost in Hungary was not due to the fact that the contribution of factoring in Hungary, our workout unit was less than originally expected or anything like that, right? And we continue -- I mean, it basically comes from the fact that we continue typically to recover more from Stage 3 loans, nonperforming loans than what we provisioned when they become Stage 3. And again, this reflects our conservative approach and a very good work with our colleagues in the worked unit do. Indeed, this increase in Stage 3 in Hungary or migration from Stage 2, it was -- it happened due to 4 companies. One was in the construction sector and other one is an agricultural one. The other 2 I don't even know. So no, it doesn't seem to be concentrated to a specific sector, and it's not -- we don't interpret this as a sign of some structural change in the quality of the Hungarian loan book or the underlying economic situations of our clients or kind of systemic deterioration. I mean it's more like if you don't have any defaults for years, then I mean, statistically, sometimes they do happen. And one of these 4 was actually a more sizable one. But it was already in Stage 2. So we followed the situation kind of closely and it was a known kind of [indiscernible] problem. So it was not something which kind of jumped out of the cupboard or something like that, surprisingly. So this is a situation we have identified some time ago as a potentially problematic one.

The next question is from Mehmet Sevim, the analyst of JPMorgan Securities. [Operator Instructions]

I had just 3 questions, please. One on -- coming back to the Russian government bond coverage. I just wanted to understand what has triggered that increase in coverage at this point exactly. Was it just the Central Bank asking you? And if yes, on what grounds? Given from what I understood from your comments, not much has changed in the expectations for the quality of that portfolio. Secondly, also continuing with Russia, it seems the business is growing at an accelerated rate now. Loans are up 13% there quarter-on-quarter almost 40% year-on-year. So I was just trying to understand the strategy there a bit better and how you're balancing the business opportunities with the wider concerns are growing so fast? And where you would see the growth in the second half of the year and maybe next year, if there's anything you can share on that, that would be very helpful. And one final follow-up also on the buyback. And specifically, you obviously said that you'd like to update us once you have the approval by the Central Bank, if you ask for a new one. And I would assume you'd apply for a new one once the current one concludes. So could you share any qualitative information on the approval process by the Hungarian Central Bank? Specifically, how long does the process usually take? What's the view on buybacks in general now, especially if you ask for a bigger one? That would be very helpful.

Right now I think this is a relevant question. And indeed, if you just look at the specific situation of these bonds, nothing has changed other than they kind of paid another quarter of coupons. I mean I think there are different ways to interpret the situation and the potential future risk of the situation becoming better or worse. And our supervisor took a particularly conservative approach regarding this, and they may be right. So we are not against conservative provisioning approaches. So we understood their position and we agreed with their position, and therefore we provision more. But you are right that, I mean, nothing new and especially nothing negative new information appeared specifically related to these bonds. And the overall developments in the geopolitical global situation and the war itself and the potential outcomes and ramifications. To what extent they change, for whom, that's another topic. But again, we basically discussed it with the supervisor again, and we agreed that the more conservative approach was something we could completely accept. And therefore, we provision more. Having said that, in a reasonably good scenario, it might happen that we will be able to release these provisions, which will be a good news. But again, we might have to provision more. So this -- it's difficult to -- I mean there's no scientific method kind of to exactly calculate the right level of provisions. It's not like having a big, I don't know, mortgage volume, which you have observed for 20 years, and then you can pretty much reasonably well forecast the credit quality development. Russian strategy, first of all, I mean, the first goal and our first priority to comply with every rule and regulation which is applicable to this entity in Russia into our activities in Russia. So that's by far the most important strategic goal, so to say, including all the compliance and ALM-related requirements. Beyond that, when the war started, we decided to limit the scope of our activities to activities which are potentially the least problematic in a geopolitical situation like this. So we immediately stopped corporate lending. And since the beginning of the war, our corporate loan volumes have gone down by 85%, and they will continue to amortize. We are not giving you corporate loans. And then more than a year ago we stopped all dollar transactions. Other banks continue to provide to their clients dollar transactions. And they just -- as far as I know, they very recently started to talk about stopping them. So we did that more than a year ago. Last year, we also limited euro-denominated transactions to counterparties within Europe. We reduced the number of branches by almost 40%. We reduced the number -- the headcount by 25%. And then overall, we tried to reduce our exposure -- and the most -- I think the most relevant measure of exposure is the equity, the assets, the financial assets would get stuck in Russia because there are capital controls. And altogether, the foreign-owned banks still have like 9.5 billion equivalent of, or something like that, equivalent of equity. In Russia, we have 800 million out of that. So ours is like 8% of the total equity stock in Russia. One of our kind of business objectives is to reduce the exposure. And that first we did in '22, we managed to pay back all the funding, which we used to provide to our Russian entity. So RUB 11 billion group funding was paid back in '22. And then last year, the bank paid RUB 13.5 billion dividend and this year, RUB 13.6 billion has been approved. And strategically, this is -- this is probably from our perspective, the third important element. So fulfill our requirements limit the scope of activities to the kind of lease-sensitive ones. And in our case, this is just doing very basic plain vanilla consumer lending. And even within that, the kind of most plain vanilla point of sales loan. So this is kind of low mass market activity, and we are [indiscernible] in Russia, our loan market share is 18 basis points, so from any perspective we are not important. So on the lending side, we do this. And on the deposit side, we collect -- we allow deposit placements. I mean there's no legal way to limit deposit placements of clients in Russia. And this is actually quite profitable business given the rate environment in the country. I mean it was just the central bank rate was recently increased from 16% to 18%. And deposits are actually exposure to -- towards us, right, not for us to clients in Russia. So again, kind of limit the scope of activities and then kind of get back as much equity as possible. And so far, again, we managed to pay from Russia, RUB 27 billion. That's close to 50% of the equity what we had when the war started actually. Obviously, we pay a withholding tax. That's 15% withholding tax on that. So this is the gross amount, and we receive 15% less. So that's more or less the approach what we have, right, trying to reduce exposure by taking money out from the bank. And in order to do that, we obviously need to have a level of activity in the country. We need to remain active as a bank in order to get approval for these dividends. And that activity, we limit a lot in terms of scope. We don't do corporate lending, we don't do mortgages. We only do this kind of mass market consumer lending, and even that is a very small size compared to the Russian market itself. Buyback. Again, I didn't -- the only thing I said about future buybacks is that -- was that -- that it's part of our kind of capital management tool set and it's something we have considered before and we did, and we will continue to consider, but there's no guarantee that we do that or not do that. And obviously there's no guarantee whether we get an approval or we don't get an approval should be applied for, right? I mean, when we last time applied in January for this 60 billion buyback that was approved. And obviously, whenever we apply, we have to provide a detailed business plan, a detailed capital plan and answer questions. So there's usually quite a thorough kind of analysis by the Central Bank before they give any approval for a buyback or a similar equity transaction. But they are very kind of rational and sensible. So usually, we have a similar understanding of situations.

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

Thank you very much. Thank you for joining us again on this warm summer Friday afternoon. I'm sure many of us are before holidays. So if you are like that, I wish you a very happy holidays, have a good rest. And if not, then anyway, just enjoy the rest of the summer, and I invite you back to join us when we present our third quarter results. It should be, I think, on the 8th of November. So hope to see you or hear you back then. Thank you again. Goodbye.

Thank you for your participation. The second quarter 2024 conference call is closed now.