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

Ladies and gentlemen, welcome to the Fourth Quarter 2024 Conference Call of OTP Bank. Please note that this conference will be recorded. [Operator Instructions] May I now hand you over to Laszlo Bencsik, Chief Financial and Strategic Officer. Laszlo, you may begin.

Thank you. Good morning or good afternoon depending where you are, and thank you for joining us today on OTP Bank's 2024 Annual Results Presentation. We are going to follow the usual format. So you have the presentation available on the website, which you can download or, alternatively, we are also showing it parallel to the con call. And I'm going to do hopefully short presentation, and then you will have a chance to ask your very valuable questions. So let's start on Page 2. The highlights have not changed so much. We updated them. So dominant position in Central Eastern Europe, leading position in 5 countries or kind of second position and 4x -- fourfold increase during the last 10 years through organic growth and altogether 14 acquisitions, actually 13 bank acquisitions and 1 portfolio purchase during the last 10 years. And this resulted in a portfolio which is 44% Eurozone plus ERM II, which is Bulgaria. By the way, the good news about Bulgaria, that there seem to be now an equivocal commitment from both sides, it seems, to introduce the euro from the first of January. So this is our strong assumption now that it's going to happen, and we are preparing heavily for that event and 76% within the EU. So a pretty diversified, and I think from a risk return perspective, optimal group setup. Profitability continued to be strong. A kind of minor decrease year-on-year if you adjust the '23 numbers. But nevertheless, I think there has been a much bigger adjustment in the cost of capital given the -- on the expected return given the normalization of the rate environment across the group, very strong liquidity position, very stable and strong capital position, as you can see from these numbers. And portfolio quality continued to improve to Stage 3 ratio year-on-year declined by 70 basis points to 3.6%, and we remain committed to ESG goals. On Page 3. You can see some more details regarding our financial performance. So the total profit exceeded HUF 1 trillion. So it's HUF 1.076 trillion. And if we adjust '23 with the clearly one-off impact of the 2 acquisitions, one we made which had positive contribution and the planned sale of the Romanian bank which had a negative contribution in '23, and then compared to that basis, the year-on-year improvement was 19%. And that resulted in this 23.5% return on equity, which is slightly less than the adjusted 24.9% in '23. But that's mostly because our leverage decreased. I think we are one of the least levered banks in Europe. Our leverage ratio is well above actually 10%. And as you -- and obviously, this is also reflected by -- or in the very high capital adequacy ratio. So I mean, this decline on return on equity is attributable mostly to the denominator, the increase in equity and the decrease in leverage. Net interest margin improved. So that was kind of one of the biggest improvements during '24. And this is, you will see later in the presentation, that this is almost exclusively due to the improvement in the Hungarian, the core Hungarian net interest margin. On top of the margin improvement, we also had loan growth of 9%. And these, together, contributed to roughly 17% increase in revenues and total cost growth of 11%. So operating ratios improved and the cost-to-income ratio, therefore, actually decreased to 41.3%, which is in a very record low in our kind of recent or not even so recent history. Risk cost rates were pretty much similar to the '23 level, the same ballpark. And as I said, the Stage 3 ratio actually decreased, went down to 3.6%. Now these good numbers, again Hungary last year, there's kind of increasing contribution coming from the improved margin. But overall, the structure of the group is such that most of the profit is coming from outside the country. So almost 70% was attributable to outside Hungary operations this year. Next page, you can see Page 4, the kind of P&L lines. And again, in '23, we acquired 2 banks, one was in January so that doesn't disturb so much the numbers. But the Ipoteka acquisition was actually at the end of the first half. Plus in '24 August, we sold one of our businesses, namely Romania. Therefore, there's some noise in these unadjusted numbers. If you adjust them, if we take out Uzbekistan from '23 and '24, so 2 years, and Romania from '23 and '24, then you actually have this year-on-year organic, so to say, FX-adjusted growth rates. And that is slightly less revenue growth, 15% compared to '17, which is the unadjusted growth. And profit after tax growth is only 10% in this -- if we look at the numbers from this perspective as opposed to almost 20% when we take into consideration the Uzbekistan acquisition, Ipoteka Bank and also the sale of our business in Romania. If you look on a quarterly basis on our numbers, which were not so much affected by acquisitions or divestitures and a kind of good 5% growth in terms of revenues. And I think the cost growth is seasonally as usually high but maybe not as high as seasonally than it used to be. And therefore, the cost-to-income ratio in the fourth quarter went up only to 42%. And in the previous quarter, third quarter, it was only 38%. So that shows that, I mean, the kind of level of improvement in our efficiency ratio is due to the last couple of years strong organic and inorganic growth rates. A few words about Hungary specifically and our core operations there on Page 5. Again, I think the most notable improvement here is in the net interest margin, went up kind of yearly average from 2.3% to 2.9%. It's a huge improvement. The two important factors here. One is that the rate environment went back to the range for which we kind of optimize the balance sheet, so to say, or the asset liability position. You may remember that beginning of '23 first half, the rate environment in Hungary was about 18%. And a few years ago, maybe 4 years ago, it was more like 30, 50 basis points, so an almost increase. But now we are back to 6.5%, which is well within our -- kind of within the range for which we optimize the balance sheet impact. So this is a convenient rate environment in a sense for us. And therefore, the net interest margin kind of went back to the levels where it used to be before this extreme rate hike. The other kind of very unique and actually very negative development was between mid-'22 to mid-'23. You might remember in that period, retail deposits actually declined in Hungary, which was unheard of. It has been unheard of for the last 35 years in Hungary. And in just in 1 year in the market, there is more than 10% decline. Our market share went up, but nevertheless, our volumes went down as well. And that was obviously very negative for our NIM in Hungary. But that also recovered starting from the second half of '23. And actually, '24, we serve a quite healthy Hungarian retail deposit growth. So that factor as well kind of recovered and contributed to improved margins in Hungary. Unfortunately, these special levies and policy costs, so to say, in Hungary remained quite elevated and the even were -- kind of worse news is that -- which we already talked about, that this year, we are going to pay even more than last year. These numbers, we were informed -- I mean, the transaction tax was increased. The tax rates were increased last summer, '24 summer. And the windfall tax was also extended last year into this year. So unfortunately, we have to increase our contributions -- extra contributions to the budget this year. There is this kind of other one-off, this HUF 112 billion which only appeared in Hungary. This is really an accounting kind of number when we finalized the merger, when we concluded the merger in Slovenia, we had to mark-to-market increase the book value of the investment of the previous -- the first acquisition, SKB Bank in Slovenia. And that increase in the valuation of that asset created a one-off result, which only appeared in the Hungarian book. So that was obviously during the consolidation. It cancels out. So this is something you have to correct, I think the Hungarian numbers, in order to have a clear picture. Two more important kind of items to understand. The Hungarian profitability development, where the fair value adjustment on the subsidized products in Hungary and the impairment on the Russian bonds, which we have in the Hungarian books. We have not implemented core actions. So this adjustment or adjustments -- so the adjustments' adjusted number is HUF 270 billion, doesn't include these two items, the HUF 23 billion plus and the minus HUF 34 billion. But nevertheless, these were kind of meaningfully material numbers in this mark-to-market kind of value adjustment, fair value adjustment on the subsidized loans. In '24, it was HUF 23 billion plus, which was actually a much lower number, as you can see than what we did in the -- in '23. And again, in '23, it did not appear as an adjustment either. But the kind of uplift coming from this fair value adjustment was much less in '24 than in '23. And plus, we had this negative item due to the encouragement of our supervisor in Hungary, which we agreed with because we always like to be more conservative on provisioning than less conservative. We increased provisions for the Russian bonds, and the impact of that was HUF 34 billion negative last year. Two words about the segment's performance in Hungary. Retail did very well. Especially retail lending was strong. So mortgages' contractual amounts more than doubled compared to '23. I mean, we see '23 was a rather kind of low number. But nevertheless, the recovery was faster and potentially stronger than we originally expected. And the other good news was that despite actually quite high basis in '23, there was a further 65% growth in the contractual amounts of cash loans. And this is a quite profitable product. And the good news is that we managed to increase our market share in this cash flow segment, close to 50%, which is, I think, a very formidable achievement. And in the meantime, we continued to increase our market share in retail deposits. And again, in Hungary, that's the other quite profitable product, retail deposits, because the rates -- interest rates are actually quite low on this. Corporate, I mean, this was one of the issues back in '23 that there was not much corporate loan demand, and loan volumes actually declined in '23. Now '24 and especially the last quarter, as you will see, in the detailed volume dynamics pages, started to increase. So it seems that we have a trend, a changing -- a point of the turnaround in the overall trend of this segment. The total Hungarian numbers did not increase last year because we had one loan which we paid back -- where the client actually paid back, which was not to Hungarian clients, it was a Slovenian one and quite a large exposure which was paid back. But if we adjust with that, then actually we had 5% growth last year in corporate loans which is, again, a very positive development and hopefully will continue into next year and this positive trend will last. And at the same time, we managed to slightly improve our market share in corporate -- in loans to Hungarian corporates. As you can see, it was 19.5%, the second highest closing level ever. After this short summary about the Hungarian situation, let's have a look at the foreign, outside Hungary operations and their results. And as you can see, in terms of profit contribution improvement and, most importantly, ROEs tend to be quite positive. So we have the Eurozone or quasi-Eurozone countries at the top, Bulgaria, Slovenia, Croatia. And given the cost of capital in the kind of Eurozone countries, and the risk profile is quite admirable levels of return on equity. Serbia did again very well after '23, '24 was a very strong year. So we have strong growth and the new kind of strategic focus on deposit collections and transactions and so on and so on. So this seems to pay out. Uzbekistan, 30% return on equity. Obviously, the rate environment here is much higher and the cost of equity is much higher. But nevertheless, this from our perspective is a quite good number given that this was the first year -- first full year after the acquisition. And already in the first year after the acquisition, we made 30% ROE despite the fact that we had strong operational challenges. We had to work very hard to improve the operational, especially IT environment in the bank in order to make it capable to service the very high level of volumes, which are potentially possible given the strong demand in the market, especially consumer loans. So these results we achieved despite of the fact that we had to -- kind of we had to rein in or kind of limit in a way our lending activities in consumer loans because of these operational weaknesses, which we managed to improve after a lot of extra cost and extra investments actually. So we are starting this year with a much better level of operational capabilities and I expect kind of a step up in our ability to sell new consumer loans. And hopefully, there will be another step up somewhere in the second half of this year. And then I think we will fully -- by then, we will have fully catched up with -- caught up with the kind of service leaders in the market. Ukraine again did very well despite the 55% corporate rate. Just like in '23, in '24, the corporate tax rate was doubled from 25% to 50% at the end of the year. By the way, if you look at the quarterly numbers, you will see that due to this, and only due to this, actually Ukraine was negative because we had to book this additional tax for the entire year in the last quarter, fourth quarter. And even our smaller businesses have been doing reasonably well or actually quite well, close to or above 20% ROEs, Montenegro, Albania, Moldova. Well, if we look into NII improvement. Again, 20% FX adjusted. A very strong growth in Hungary, as you can see. But potentially more interesting is the NIM, the net interest margin development, as you can see on the following page. In fact, if you compare the quarters to the last period from '23 with the last period of '24, the margins are remarkably similar. So this year-on-year improvement actually happened back during '23. So most of the margin improvement actually happened between the first quarter and the last quarter of '23. And during '24, the margin has been pretty stable with some kind of internal changes, some -- the factors changed or the different margins. There were some further improvement in Hungary, as you can see. Whereas primarily in the European countries, Bulgaria, Slovenia, Croatia, but I would add here kind of Montenegro as well to some extent and even Serbia, where quite sizable shares of the volumes are in euro denomination, we see a margin erosion. And that's due to the lower euro rate environment. So this is -- these are the kind of two major factors. One is kind of gradual improvement in Hungary in margins; and on the other hand, the headwind and pressure on the euro-related part of the business. And the two and a kind of favorable composition effect given the higher growth rates in the higher-margin countries. So all this kind of three factors together resulted in a pretty flat year kind of fourth quarter year-on-year group margin level of 4.27%. The following page further illustrates this. On Page 11, you can see that if we compare the '23 average margin to the '24 average margin, almost all of the improvement came from Hungary, the Hungarian core. But again, that improvement actually happened between the first quarter and the last quarter, the fourth quarter in Hungary in '23. So the during -- in fact, during the '24, there was quite much smaller change as you saw on the previous page. In terms of sensitivity in rates, there was a further small decline in the euro sensitivity. So now it's around EUR 90 million annual NII in case of 100 basis point decline in the euro rate. Now technically, this number will probably not go so much lower. So it's likely that it's going to stabilize at this level. Also because we are less concerned given the last few weeks developments, especially the last week development about the risk of the euro rate to drastically collapse, I think that risk has decreased given the new initiatives while we see across Europe. And we believe that's fundamentally a good thing. HUF rate sensitivity remains quite low. So it's almost -- it's kind of immaterial, around this 6.5% level where, I mean, structurally, obviously higher is marginally better than lower at these levels. Page 12. You can see the performing loan development, 9%. '23, we had 6%, so considerable improvement compared to last year. And I think almost each country is a very positive story. In fact, it's Slovenia where we -- where the loan portfolio didn't grow. But to be honest, the most profitable consumer loans actually grew 10% and the much, much less profitable corporate portfolio declined. Margin -- corporate margins are very, very, very tight in Slovenia. And in Uzbekistan, still at the beginning of the year, we had some corporate loan migration to Stage 3 bucket and, therefore, the performing loan volume declined. So therefore, overall, we have a decline here. And despite some growth in consumer loans, again, this is not the full potential of the market. We had to somewhat limit our growth -- organic growth in consumer loans in Uzbekistan. Having said that, mortgage growth was reasonably strong. But going back to the kind of higher growth market. Hungary mortgages, especially 13%, very strong dynamics again year-on-year. New production growth was more than 2x. Consumer grew 10%. That's also okay. And then we have Bulgaria, very strong on the retail front. Croatia, again very strong on the retail front. Serbia, very strong. Montenegro, very strong. And in fact, we kind of restarted lending or refocused our activities to lending in Ukraine and from -- albeit from a low basis. But already last year, we achieved 20% loan growth in consumer. In retail, it was 50%. And Albania, after the merger, which was completed at the end of '23, in '24, we kind of 100% refocused on our kind of business activities, clients and sales. And that resulted in this close to 20%. If you look at the quarterly growth rates, there is -- actually we see that in one quarter, loan volumes grew 3%. So that means that there is some acceleration in the rate of growth. So this kind of 9% annual growth accelerated during the course of the year, and the fourth quarter was actually 3%, just quarterly growth. If we look at deposits, Page 14. You can see that overall deposit growth was 6%, and that pretty much kept our net loan-to-deposit ratio flat year-on-year. So overall, for the whole group, it's 74%, as you can see at the bottom of the table. And well, from a profitability point of view on a group level, probably the single most important driver was this 10% growth in Hungary. So this is potentially the most important indicator across all the numbers where we have described profitability within the group. And that was a very welcome return to the previous old trend after, again, this ditch in second half '22 and first half of '23. I think it's worth mentioning Serbia, 17%, and Uzbekistan, Ipoteka, 48%. Both of these countries -- I mean, in Serbia back in 2021 year-end, the net loan-to-deposit ratio was 135%. And this has gone down to 96%. And at the same time, profitability improved considerably. So that -- again, this is the strategic refocusing there, which I mentioned, more of transactions accounts, salary clients and fee revenues, which resulted in a much healthier balance of deposits and loans and made this a self-sustaining business and also actually contributed positively to profitability. And in Uzbekistan, close to 50% growth. You probably remember that when we acquired this bank and even kind of end of the first quarter last year, so just a year ago, the loan-to-deposit ratio was closer to 300%, more than 280%. And this has come down to 178%. Again, this is healthy and very much welcomed development. Not so much on a quarterly basis here, but if we go to Page 16. Fee income, above 10% growth. Actually, it's 13%. Strong across the board. I think it's a very healthy, in general, trend we're quite happy about. Other income, not much growth. In fact, Page 17, flat year-on-year. Again, this is mostly to this fair value adjustment. As I mentioned when I talked about the Hungarian business, the fair value adjustment in Hungary on the subsidized loan was considerably less in '24 than '23, and that resulted in other income decrease, as you can see, quite substantial decrease in Hungary. But all the other kind of units in the group managed to almost counterbalance that, including the one-off impact coming from the sale of our business in Romania. Operating costs, 11% growth, which is, I think, a pretty good achievement actually given that inflation is still strong. But more importantly, wage inflation was last year still strong. And obviously, we have been growing also fast and in some countries like, I mean, Uzbekistan, namely, we have strong investments into the operations of the bank. So that was another factor, which increased somewhat the costs. Risk cost, Page 19, somewhat potentially higher, and certainly the fourth quarter was higher than what was expected by market participants. But this was not so much the credit risk. It was more the other risk. So the credit risk cost and the credit risk cost rate was, as you can see, almost flat last year. But the increase came from this kind of other risk cost, namely the provisioning for the Russian bonds, which in '24 altogether in Hungary and in Bulgaria was HUF 43 billion. I mean, that actually increased the amount of provisions behind these loans to almost HUF 100 million. So it's HUF 98 billion provisions. This is -- I mean, in a good scenario, if sanctions are lifted on the Russian sovereign debt, then potentially these provisions could be partially or entirely released. So that's a potential upside. But obviously, that's a big if. And there was another kind of larger one-off provisioning in Serbia to one specific client at the end of the year. Close to HUF 14 billion risk cost was attributed to this exposure. Other than that, more or less, kind of stable environment, obviously, in countries like -- where we had strong growth like in Russia, we had to increase provisions. And likewise, Bulgaria has strong volume growth, resulted in some -- in a kind of meaningful level, I would say. Provisioning 40 basis points I wouldn't say is high, but it's certainly higher than the previous year's rather negative levels. All in all, if you look at portfolio quality for the whole group, there is improvement. So the Stage 3 ratio went down from 4.3% to 3.6%, which is positive. And if you take out the kind of high provisioning level and high Stage 3 ratio level of countries Ukraine, Russia, Uzbekistan, then the ratio for year-end was actually lower than 3% without these 3 countries. There's one negative trends -- or negative event, so to say. It's not a trend, it's just an event. On the first -- fourth quarter, last quarter, there was an increase in the Stage 3 ratio primarily driven by Slovenia and Bulgaria. In both of these countries, we adjusted the IFRS 9 models and the methodologies to somewhat more conservative. The expectation of our colleagues is that these increases in Stage 2 volumes are not going to migrate or are not expected to migrate into Stage 3. So that's more a kind of more conservative view on the existing level of risk in the portfolio. Coverage ratios remain strong, as you can see, where the biggest differences can be observed between the different banks, it's the performing loans, right? So Stage 1 and Stage 2 loans provisioning and coverage levels. It's close to 2% for us and some of our competitors are much, much lower levels. And even if you take out provisions from this, the countries where we have higher level of coverage like Russia, Ukraine, Uzbekistan, the remaining part of the group which is just Central Eastern Europe, 1.4%. And performing loans coverage is typically 2x or even much more than our typical competitors. Capital, Page 21. We closed the year with 18.9% common equity Tier 1 and Tier 1 ratio, and the MREL ratio went up to 30%. So I think very comfortable levels of capital. Having said that, there are some items we have to consider in order to have the full picture. As you can read on this page, the last bullet point in the right lower corner explains the impact of Basel IV implementation starting from January 1, '25. And as you can see, the impact was 85 basis points. That's the decline in the common equity Tier 1 and Tier 1 ratios from end of December to 1st of January due to regulatory changes, namely, the implementation of Basel IV. So this is going to be reflected in the first quarter numbers. There's another expected remaining Basel IV impact, another 1.7% potential increase in risk weighted assets. But this is going to impact the numbers only in 2030, so 5 years from now. Having said that, the expected -- if this -- if we had to implement everything now on 1st of January, there would have been an additional 1.7% increase in our RWA, which translates into 30 basis point potential decline in common equity Tier 1. So that would be the kind of fully loaded immediate Basel IV impact, 85, which we actually realized and plus 30. And there's another element here, which may not be on the page but you can see in our report, that we still have a transitional factor here, an uplift coming from the transitional measures. And that's 40 basis points. And these transitional measures will phase out during this year. So the year-end numbers this year will include another 40 basis point negative. So -- I'm sorry if it's too complicated, but what I wanted to say that the kind of fully loaded impact of Basel IV, what happened 1st of January; and additional one, which is going to happen in 2030, plus the existing transitional measures phasing out during this year, this kind of fully loaded effect would be 155 basis points negative. So the kind of fully loaded number year-end last year was 17.35% compared to the 18.9%, which was actually the reported fact. You can also see here on this page, it's probably better explained in a way visually, the drivers behind the increase last year. And by far, the biggest impact was coming from the profit -- eligible profit. And obviously, that includes the proposed dividend payment, so those are deducted from these numbers, and 3.2 percentage points coming from profit. And then there was this uplift from the selling of the Romanian business. We are more or less hedged from a capital perspective on the FX impact. So the net impact was 0. And then risk-weighted assets, this 9% performing loan volume growth year-on-year consumed 1.1 percentage point of the common equity Tier 1 ratio and then some other smaller impacts. So that's the total decomposition of the change. Liquidity. We can see our liquidity ratios here. 270% liquidity coverage ratio. That basically technically means EUR 19 billion equivalent of liquidity buffer above the 100% minimum LCR requirement, so quite comfortable. And you see the call rate profile to the remaining calls. We have done actually calls already during the year, a quite moderate HUF 276 million coming and HUF 1.1 billion coming next year. So it's a relatively modest maturity profile, what we have. We issued in January a very successful Tier 2 instrument in dollar, as you can see on this page. And we may issue in the second half of the year a further MREL-eligible, potentially senior preferred bonds. But this is not yet decided and sure it will depend on the business dynamics and other numerical factors. So after talking about the past, maybe a few words about what we expect in the future. Overall, our expectations tend to be optimistic. And in almost all of the countries where we operate, we expect GDP growth to accelerate. And for Hungary, we put the government expectation, which is 3.4%. Typically, market participants expect and project less, around 2.5%. But even if it's 2.5%, it's considerably more than the 0.5% what we had last year and the actual recession that we had in '23. So no matter who you look at and listen to, the expectation is that economic activity is going to accelerate. Bulgaria actually, we got the -- just today the latest number came out, the official number came out for '24. And that was much more than market expectations. So the Bulgarian GDP growth last year was 2.8%. The fourth quarter was actually very strong. So we probably have to upgrade our expectations probably to the range of 3.5%, 4%. And again, Bulgaria finally firmly expected to join the Eurozone, which we believe is going to be very positive for the country beginning of next year. But in all the other markets, we see potential improvements, maybe except Uzbekistan, which is a slight slowdown. But the slowdown is to 5.8%, which is still a very admirable level of growth rate. So overall, we expect improvements in the operating environment. And this expectation does not include major changes in the environment. And I think the kind of major changes we expect to be -- if they happen, to be definitely positive. In fact, our expectation is that much sooner than later, we expect to see an end to the war in Ukraine and settlement there. And that overall can have a very, very substantial positive impact, but, primarily on Ukraine obviously, but also in the countries in Central Eastern Europe, which would be close and potentially participating in the strong expected development and investments in Ukraine. And I mean, most likely as well the kind of war discount, which was priced into our valuation when the war started in '22 with also considerably further decline. So in any case, that would be a very positive development. And there's another potential positive impact here. We started to accelerate actually during this week. And that is we finally passed the realization. We see some signs -- or actually our interpretation of the development in Europe is that it seems that Europe is finding its way back to realizing and recognizing its own interest and maybe even act up on its own interest, which is certainly a very positive development and can fundamentally turn around the expectations and the story about core Europe. So that's a potential third positive impact from a resolution and settlement in Ukraine. Page 24, our formal guidance. As you can see, again, we expect a somewhat better operating environment. And therefore, the expectation regarding loan growth is that it's going to be somewhat higher than what we had in '24. So we expect higher performing loan growth than 9%. I think it's fair to expect more or less stable margin. It has been quite stable actually during the course of '24, and we have same expectations for '25. Cost-to-income ratio might somewhat decline. I mean, we still expect strong kind of -- especially wage inflation to continue. Portfolio quality, again, especially if we talk about the loan portfolio quality, it seems to be stable. And we don't expect strong deterioration here or worsening compared to what we saw last year. And altogether, again, we seem to be on a higher leverage this year than last year. And certainly increasing equity volumes, so this may lead to somewhat lower return on equity numbers. And our current proposal for dividends is HUF 270 billion, which is a substantial increase compared to what we paid last year. Last year, remember, we paid HUF 150 billion. But this is -- there will be a Board of Directors meeting in March, which is going -- and that forum is going to decide about the formal proposal to the shareholders through our AGM. That formal proposal will appear with all the other AGM materials on the 3rd of April. Finally, we included some specific language regarding capital matters. And first one is related to buybacks. We did 2 -- we have done actually 3 rounds of buybacks starting from beginning of last year, two last year and already one this year. Each of them were HUF 60 billion. And this process may continue, and it's also subject to regulatory approval, obviously. And this is what we kind of can say about this or want to say on this. And we'll continue to announce these specific buyback packages once they are approved by the National Bank. Since we have still -- despite these buybacks, the accumulated amount shares is still quite low. So we decided not to formally address the issue of -- or the opportunity to call or not call back these shares or cancel or not cancel these shares. So that remains open and we are not making a proposal on this, this time. In terms of capital adequacy targets, we -- I mean, it's a difficult kind of topic because we operate on a much higher level than the regulatory requirements. And from a modeling perspective or a fact-based analysis perspective, there's no real reason to keep these high levels, right? The reason we are tempted to be -- to have this somewhat higher buffers than -- or more -- much more higher buffers than would be warranted is due to the fact that we want to be considered -- continue to be considered well capitalized. And that consideration is typically established on comparison with others, with our peers. So we think that the best way to approach this -- the optimal level of capital adequacy, is not so much compared to the actual regulatory requirements but more to the comparable banks to us. So compared to them, we want to look or be considered as well capitalized and strongly capitalized. And that usually is established on a common equity Tier 1 and Tier 1 ratio basis. So that's a kind of anchor for us where others are. In terms of allocation of capital, clearly, first priority is organic growth, profitable organic growth, where we continue to explore potential value-creating M&A opportunities. There's nothing new about this. We have been doing this for the last 35 years. And altogether -- 25 years, sorry, last 25 years. And altogether, we acquired actually 25 banks during this period, 14 during the last 10 years. But in this 25-year period, there was almost -- we had 9 years where we didn't buy anything between 2006 and '15. So it can easily happen that despite our efforts to find these value-creating opportunities for a number of years, we may not find any. And that's perfectly fine and okay from our perspective. So we don't feel to be pressured to do acquisitions just for the sake of acquisitions. In terms of utilization of AT1 or additional Tier 1, and this is -- structurally, we haven't used this instrument for a long time. And this is what we label as a kind of reserve for potential higher or bigger acquisition opportunities. So the size of the bucket at the moment is now roughly, it's close to HUF 500 billion. And the unfilled part of the Tier 2 bucket is another HUF 100 billion. So altogether, these two, HUF 600 billion. That's EUR 1.5 billion. That's our kind of fundamental reserve for potential larger acquisitions. So should there be a larger opportunity where we could only pay with using these instruments, we would use these instruments to their full extent. So that's -- these are some thoughts on capital and capital strategy, as such. And with this, and final stage disclaimers, and I think it's particularly important given that we actually shared with you -- on Page 26, we shared with you our expectations regarding this year. So read the disclaimers. And with this, I'd like to finish the presentation and invite you to ask your questions.

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

I have a couple of questions. The first one would be on interest -- can you hear me?

Yes. We can hear you well.

Excellent. I have three questions, please. The first one is on rate sensitivity, specifically in your businesses. It's helpful to get your estimate on the short-dated sensitivity. I was wondering if you could talk a little bit about the euro businesses' sensitivity to higher long-end yields by a steeper yield curve, just on the back of what we are witnessing in the past couple of days. Is that mainly through the longer-dated part of your rate hedges or fixed-rate securities portfolios? And then secondly, if you can, in any way, quantify this for us. That's the first question. And then the second one...

Sorry -- excuse me, I'm sorry, I had to log out and in because my speaker was not working. So may I ask you to repeat the question? I'm sorry.

Absolutely. So I was asking about the euro business and specifically the sensitivity -- interest rate sensitivity to the higher long-end yields, a steeper yield curve, in essence, just building on the back of what you are witnessing in the past couple of days. First of all, is there any way for you to quantify this for us? And secondly, what is this mainly through, the longer-dated part of your euro rate hedges or fixed-rate securities portfolio? If you can talk a little bit about the channel here. The second question would be on potential tariffs. I wanted to check whether potential tariffs are impacted or reflect in any way in your GDP growth scenarios or your Stage 2 provisioning as of today? And if not, is there any way to get a sensitivities on this one? And the last question is on dividends and capital allocation. It's very helpful to get this additional slide, Slide 25. You also mentioned that it is possible that you will not find suitable M&A targets for an extended period. In that case, how long are you willing to tolerate quite elevated CET1 ratios even after Basel IV impact just given the fact that you're generating something around 400 basis point gross capital build organically before distributions? And even on a net basis, you're looking at roughly a good 50, 100 basis point build just based on your targets. So it seems like you're building capital organically quite fast. How long are you willing to wait for M&A? And what would be your decision process around higher distributions?

Yes. Steeper euro curve, I mean, yes, obviously, we can model this. I don't know the kind of sensitivity of the -- I don't know, 5- and 10-year point moves up by, I don't know, 50 bps, and what exactly the impact. And it's a kind of -- it's complex because then, obviously, the short -- I mean, there's an immediate potential impact if you reprice the entire portfolio. But we have typically the euro assets, fixed assets, what we brought, they are in the hold-to-maturity portfolio. So we are not going to mark-to-market them, right? So the kind of P&L impact in case of yield curve steepening is not going to manifest in the short-term profits. Obviously, you could still recalculate, if we were to buy or replace the entire portfolio, what would be the immediate negative impact and the potential positive. But given that we also have, that we -- that the sensitivity is directionally different, right? If the long end goes up, then the immediate effect is potentially negative. But our earnings expectations are positive, right? Because the long end goes up because we expect the rate environment in the future to be higher, right, than our previous expectation. So if we were to do actually a modeling of our earnings for the next 10 years, then I'm not so sure whether the impact would be positive or negative. I would rather say positive, right? So in general, in a higher rate environment, within given boundaries, we tend to do better long term than in a lower rate environment. So if you look at the long enough time frame, then we do better in a higher rate environment. That's very clear. Tariffs, and that's incredibly difficult question what you asked, a relevant one but incredibly difficult. Even keeping track of just the actual tariff rates and customs rates in different countries, U.S. customs is difficult. The potential impact, again, very difficult. And I mean historically, the experience is obviously very negative with tariffs. And we certainly don't believe that you can increase wealth overall by increasing tariffs. It's quite the opposite. So therefore, we still struggle actually to fully believe that we are going to live in a world where tariffs between strong trading partners and strong political -- politically aligned -- geopolitically aligned strong trading partners are going to be very high. It is still a difficult thing to digest. So in a way, yes, they include in general terms. But technically, this is not a doomsday scenario, right, where we're going to have 25% tariffs in all global trade, which would result in an overall global GDP downward adjustment and potential other very, very negative ramifications. So this is clearly not the kind of worst-case scenario, what we showed here. This is our likely -- these are our expectations for this year, assuming certain level of impact coming from the taxes -- the higher tariffs with not kind of fully destructive scenario. And to now -- our clients are typically not exporters to the U.S. We are typically not financing the large European multinationals. And therefore, on a client level, specific client level, actually the potential exposure to these tariffs is reasonably low. The trade links and especially in our client base are fundamentally domestic or related to core Europe. Your third question, the targeted level of common equity Tier 1 and Tier 1 and how many -- how much dividends we're going to pay. We don't -- the intention is not to kind of pile up large reserves, capital reserves, other than what needed is to -- again, to be considered well capitalized. So I think if you just look at our comparable kind of regionally active banking groups, I don't know, Erste, Raiffeisen, UniCredit, Intesa, KBC, look at their Tier 1 ratio. We potentially want to look better and higher somewhat in Tier 1 ratio terms. And we don't know how much -- I mean, this Basel IV impact, we don't know how much they're going to be impacted. But even at the end of this year, I don't -- we are not -- we don't want to keep much more capital than what needed is for that level of Tier 1, right, which fulfills this kind of target or desire to remain to be considered very well capitalized. And the specific reserves for potential larger acquisitions, as again we said on this page, they are the unutilized alternative Tier 1 and Tier 2 buckets.

The next question is from Gabor Kemeny, Autonomous.

A few questions from me, please. The first one is on your net interest margin guidance. Would it be possible to split this out. How you expect the NIM to develop in Hungary and how are you expect the foreign business? Specifically in Hungary, you point out that the development of retail deposits is a big lever of the NIM. And we actually saw the retail deposits going up in the fourth quarter. So what is the chance that we will see a further NIM expansion at OTP core? And my other set of questions would be around again on capital deployment. Just staying with the buybacks, I mean, you managed to complete the first buyback of the year, actually, yes, was approved early in the year very quickly. Can you help us size the scope for share buybacks for this year? And maybe you can touch on what was the logic around paying a premium for a relatively larger block of shares back in February? My last is a broader question and actually a follow-up to your previous comments on running with a higher capital ratio for possibly longer. Shall we think about this as an ROE drag longer term? So in other words, is it a kind of base case that we will see a lower ROE again next year because of leverage falling? Or do you see any different scenarios?

Yes. Again, the NIM, and I think -- and essentially, last year was again interesting and kind of a good guidance for what can happen during this year. So again, if you compare the margin the fourth quarter '23, which was on Page 10 actually, to fourth quarter '24, on the group level, it was stable. Hungarian margin improved somewhat, not a lot, right? 19 basis points. And in most of the other banks and especially the euro-driven banks, there was some decline. And in fact, this can continue. So something like that, we expect to continue into this year. So maybe some improvement -- further improvement in Hungary just -- I mean, based on what you just mentioned, increasing retail deposits and potentially further compression in the euro-related margins across the group. And these two plus the composition effect may be higher growth in countries with higher margins, for instance, Uzbekistan or Ukraine potentially, can further contribute positively to the NIM. Buyback, I mean, we decided to provide you with this guidance. And really, I don't feel comfortable telling more because we kind of carefully worded these sentences. So what we can say, that we may continue to buy back during the course of this year. And if we do and if we receive an approval from the National Bank, we'll announce that tranche on the day when we receive the approval. And excuse me not to elaborate on the potential size and so on and so on. We were not prepared to give numeric guidance on the potential size of the scope of potential future buybacks. But I mean, maybe you can infer something from what we have done, right? But that's just -- so the guidance is just. Again, we are -- our leverage ratio is above 10% and it's, I mean -- which is, I mean, it's double the European requirement. This is not optimal, certainly. And this -- and we don't want to -- so the intention is not to again sit on unnecessary levels of capital. And once we see how others cope with Basel IV and the impact on them is and I think we will have a clear picture, and then we will again follow our competitors. I mean, an ideal environment our competitors should go down by a couple of percentage points. To be honest, I don't understand this, why European banks tend to have a competition who has a higher capital ratio. We are still kind of small compared to the large banking groups in Europe, especially in terms of size, but profit is getting there. And we are labeled as potentially higher risk, which may or may not be true. But therefore, we are certainly not the anchors, right? So we don't believe that we are the benchmarks for other European groups when they consider where to position their capital ratios. We may get there in a few years. But today, we are clearly not a benchmark. So we have to adapt and adjust to others. And to be honest, I struggle to understand why the European banking sector is so much above the regulatory expectations. I don't understand this.

[Operator Instructions] The next question is from Simon Nellis, Citigroup.

I was hoping you could just help me out with the capital walk in the fourth quarter. Did you deduct the new buyback, I think the HUF 60 billion, from CET1? And also, I guess, there is a large dividend deduction in the quarter. But it seems like your core Tier 1 went up more than earnings once adjusted for these items. So just wondering what's driving that? And then also on the risk-weighted asset growth, it was 5% in the quarter. Why was it so strong? I think loan growth was below that. That's my first question.

Wow. No, the buyback -- the recent buyback was approved in January. So that was certainly not deducted. The dividend deduction increased because previously we used a much lower number, which was this -- there's this European regulation. If a bank doesn't have a formal approved dividend policy, then you have to deduct the previous whatever years. So there was this increase in the expected dividend payments and therefore the deduction from capital due to the fact that now we have a management proposal actually which is formal. Risk-weighted assets growth, I mean, loan growth was actually 3%, right, in 1 quarter. And this is like FX adjusted. And so maybe the FX component was contributing to somewhat higher than the performing loan growth. And other than that, I don't know. I don't know other factors. FX was probably between the HUF -- I think the HUF rate weakened pretty much, like 3%, 4%, during the last quarter. And that obviously translates into higher HUF-denominated risk-weighted assets. So I think the difference between the 3% loan growth and the 5% was probably coming from this.

Okay. My other question is on Serbian risk cost. You flagged some issues with, I think, a large corporate client. If you could elaborate a bit on that.

I mean, due to bank secrecy, I obviously cannot name the client.

Is this not linked, I guess, to the political unrest there or the...

No, it's not related at all to the political unrest. But it's related to other more geopolitical considerations, I would say.

So do you think you'll have to continue provisioning on that exposure?

Fundamentally, no.

And then just maybe last on M&A. So the transaction in the Baltic markets, is that pretty much off the table now? Or what's the latest on that?

Yes. I think enough time has passed since the -- actually more than that it's fair to say what you -- I think your assessment is fair.

The next question is from Gabor Bukta, Concorde Securities.

I have a question regarding the windfall tax in Hungary for 2025. So you're guiding around HUF 54 billion in windfall tax. So another HUF 54 billion may be deductible this year. And I'm just wondering how much Hungarian government bonds have been purchased so far?

Yes. We believe we have fulfilled the criteria to qualify for the full -- for the reduction in the windfall tax. So this number, HUF 54 billion expected payment, reflects the current situation.

So does it mean that the bond portfolio was lifted by around HUF 500 billion in notional value?

Yes.

The next question is from Mehmet Sevim, JPMorgan.

I have a couple of questions, please. Just on Hungary, do you see risk for any additional government measures this year considering this is the reelection year or anything else, any signals that you can share with us? Secondly, just on Bulgaria. You mentioned the Eurozone entry hopefully from the 1st of Jan next year. What sort of impact should we expect from that? I think maybe a bit positive on the liquidity side because the reserve requirements, maybe, I don't know, negative on fees. How should you -- how would you see the developments there next year following the Eurozone entry? And maybe thirdly, just the buyback that you did earlier this year. This is already completed. Is that fair to assume? So it seems like it went a lot faster than the other two that you did earlier in the year. So could you give us any color on that front?

Policy measures, we hope not. Having said that, this is not something where we -- it's not in our hands, right? There are two initiatives, what we heard about for potential proposals from the government. One is that they want to consolidate the deposits of the municipalities and they want the treasury to keep those. And that can potentially reduce our municipality deposits in Hungary. There are discussions at the moment about this proposal between the Banking Association and the Minister of Finance. If it happens, it is negative. It is marginally negative. It wouldn't be a huge impact but it is clearly negative. The other one is the Minister of Finance started to talk about last 2 days that the fee levels are potentially high for banking in Hungary, which is, I mean, yes, the transaction tax is also uniquely high. So there's some obviously truth in that, that compared to the other countries in the region, the clients pay more for transactional services. But there are these excessive, huge especially transaction-related levies where we have to pay. So that's the reason, obviously. So there might be some discussion about that as well. And again, this is potentially a negative risk but there's nothing concrete. So it's really fresh, the last 2 days, which is -- there was just a comment from the Minister. There might be some discussions again in the Banking Association regarding this. Indeed, I mean, I think -- I don't want to deny that this is a risk. Policy risk is potentially one of the biggest is across the group, and it's, I think, specific to Hungary or specifically concentrated around Hungary, I would say. Eurozone entry in Bulgaria, I mean, the primary impact, as you just said, the reserve requirement is going to go down to the European level, to 1%, which is -- and that's going to be a kind of one-off positive. But I think we expect a more fundamental positive impact here. And that is related to the overall business climate and business development. If you take the Croatian example, that -- I mean, the impact of the Eurozone and the euro accession was quite positive. And we are talking, I mean, really accelerated the growth. The risk profile improved considerably. Investments increased. Market sentiment improved. So I think people still don't see the potential upside here in the -- and we are certainly fundamentally more optimistic on the impact than people in Bulgaria, to be honest. So I mean, yes, there will be a one-off positive which will be mitigated by somewhat lower revenues because we lose the FX conversion margin. But the positive impact from the lower reserve requirement will be bigger. But beyond that, the overall expectation which should kind of manifest over a number of years is a much higher and more positive trajectory for the country overall. Don't forget that the leverage in Bulgaria is extremely low. The debt to GDP ratio is around 25%. And once they are in the Eurozone, I think they can start developments which should have been done -- infrastructural developments in the country which should have been done during the last 20 years and has not been. So I see a big upside there next 3 to 5 years. Yes. The buyback was completed. We did a one bigger transaction. Plus, I mean, to be honest, we are very happy to see the share price much higher than a year ago. But that also means that the same amount we spend much faster than we spent last year. So that actually creates more in terms of -- in nominal volume, nominal kind of value-wise, more buyback potential, so to say, or opportunity, right, because we don't so much want to move the market. So it's kind of neutral buyback amount can be a much bigger one than a year ago when the share price was lower.

Okay. Can I just ask if you have an indication of the size of those municipality deposits in your balance sheet? And can I assume these are all in current account?

No, no, they are not. These are not very cheap deposits. So these are not like Hungarian retail deposits. That's actually very competitive market. There are few competitors but they are very fierce. So the total amount is close to HUF 500 billion. But they are not kind of taking away the entire amount. So it's the -- again, this is kind of fluid and there's a discussion on this between -- at the moment actually between the Banking Association and the government. So in a bad case scenario, by -- and it's going to be implemented in the last quarter in the fourth quarter. So they kind of announced this now but it's going to be implemented from October. Therefore, the impact, if any, will be relatively modest on this year. And we may potentially lose by the end of this year, fully implemented, HUF 250 million, HUF 300 billion of municipality deposits.

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

It's Jovan from BHF ODDO. If you can hear me just a question maybe on loan growth outlook breakdown by country for 2025. I mean, you mentioned 9% the targeted level. So what would you expect maybe particularly from key countries' perspective like Slovenia, Hungary, but also Bulgaria, Croatia, Serbia? And which kind of outlook for corporate business have you baked in, in your target?

Okay. So last year, we had 9% growth and the guidance is that this year might be somewhat higher. I mean certainly, corporate, we expect to be stronger this year than last year. In some countries like Hungary, Slovenia, even Bulgaria, we're not very strong or rather weak in terms of corporate demand. And in Hungary, the last -- only the last quarter, the fourth quarter started to show some signs of demand. So certainly, in this market, some improvement, we expect. Having said that, we don't expect major improvements. So I don't -- so don't expect to double our last year 9% growth. So we are not talking about that, right? There can be marginal improvement compared to the 9% that we had last year. And indeed, this is our expectation. But this is more kind of across the board and includes, for instance, Uzbekistan where consumer lending should grow much more than the 8% last year. So definitely in Uzbekistan, we expect acceleration. Also in Ukraine, we expect continuous stronger growth. It's from a low base and on the group level is a small amount. But in terms of growth rate, there's some acceleration expected there. Overall, certainly, Slovenia. Slovenia was not strong last year. Again, corporate margins were low and we were busy with the merger. We finished the merge at the end of August, and we have a new CEO joining us in a month. So in a way, we were busy last year with the merger, which went -- which was very, very successful, on time, on budget approved by ECB and so on. And we are waiting for a very talented new CEO to join us quite soon. So I mean, it's not just the market. It's also, from our perspective, we expect more agility and business focus this year than what we projected last year. But the rest of the countries should either continue as they have done last year or kind of marginally somewhat improve given the marginally somewhat better operating environment expectations that we have.

[Operator Instructions] The next question is from Beata Fojcik.

Can you hear me now?

Yes.

This is Beata Fojcik from an S&P Global Market Intelligence. I wanted to ask for your outlook on your Russian business because I saw in the presentation that Russia did very well in terms of [ REO ], lending growth, deposits. And if the sanctions, and I know this is a big if, but if the sanctions are lifted, do you expect further strong growth in the country? And also, my other question would be if the sanctions are lifted in Russia, would you consider adjusting the business model in the country, for example, going back to corporate lending or maybe increasing the number of branches and basically bolstering up your business in the country?

We don't speculate on this, to be honest. So that's not in our focus at the moment. We try -- we are trying to do the best what we can do in the current very difficult environment in a way. And that is basically a threefold kind of strategy. Primary most important one is to fulfill every rule and regulation, especially sanctions. And then again we stopped a number of activities, among them corporate lending. So we reduced the scope and then we tried to reduce our exposure as much as we can. And in our understanding, the only way to reduce your exposure is by taking money out. So we have been -- our bank has been paying dividends, and altogether, RUB 42 billion has been paid during the last 2 years in ruble. And this, we try to continue to do. And if the environment changes, then we will look around and assess that environment. We don't -- I don't want to fantasize, right? Because this is something we don't know. And I think it's too early to think about that. In a way, I think we are doing now what we -- what this bank has been always strong doing. And that is basically consumer lending. And the fact that we discontinued corporate lending actually helped the institution to focus its resources and activities and management attention to 100% consumer lending. And that is doing actually very well. So I don't feel particular urgency, even if sanctions are lifted, to go back to corporate lending. I don't think we will ever be a major bank in Russia. So that's not where -- and they're -- so this consumer lending business, that's what we -- that's what the bank is good at and has been good at and serving retail clients. And I mean, we are actually very happy that during these difficult years, the last couple of years, the bank achieved a remarkable advancement and improvement in digital services. So now, I don't know, 70% to 80% of the sales are purely digital and they really caught up with the rest of the market, which is quite advanced in terms of digital services to retail. So I think this is -- if anything, this is probably the most strategic development there, too fast to improve our digital capabilities and retail banking service levels. And really, we don't spend our time and energy on figuring out what to do in a scenario which we don't know. But hopefully, I mean, the situation will improve and then we will have more options and more possibilities. And the valuation of the business, what we have there, might improve. And in itself, those are good things. Is that okay as an answer?

Yes.

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

Okay. Thank you very much. Thank you for your interest. Thank you for participating on this call, and thank you for your very good questions. I hope you will join us during our next location in early May when we present the first quarter results. And until then, I wish you all the best, and goodbye.

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